ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
There is no public trading market for our units. We have created a private qualified online matching service in order to facilitate trading of our units, however; as of the date of this report no trades have been completed on our private qualified online matching service. Our online matching service consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units. We do not receive any compensation for creating or maintaining the matching service. We do not become involved in any purchase or sale negotiations arising from our qualified matching service. In advertising our qualified matching service, we do not characterize Iowa Renewable Energy as being a broker or dealer in an exchange. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the online matching service. We do not use the bulletin board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements. We have no role in effecting the transactions beyond approval, as required under our amended and restated operating agreement, and the issuance of new certificates. So long as we remain a public reporting company, information about the Company will be publicly available through the SEC’s filing system. However, if at any time we cease to be a public reporting company, we will continue to make information about the Company publicly available on our website. No sales of our units have been completed under our qualified online matching service.
Unit Holders
As of September 30, 2010, we had approximately 614 unit holders of record.
Distributions
We have not declared or paid any distributions on our units. Our board of directors has complete discretion over the timing and amount of distributions to our unit holders. However, our second amended and restated operating agreement requires the board of directors to endeavor to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability in a timely fashion.
Equity Compensation Plans
We do not have any equity compensation plans under which equity securities of Iowa Renewable Energy are authorized for issuance.
Sale of Unregistered Securities
We did not make any sales of equity securities that were unregistered during the fiscal year ended September 30, 2010.
Repurchases of Equity Securities
Neither we, nor anyone acting on our behalf, has repurchased any of our outstanding units.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statements Regarding Forward Looking Statements
Throughout this report, we make “forward-looking statements” that involve future events, our future performance, and our future operations and actions. In some cases, you can identify forward-looking statements by the use of words such as “may,” “should,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” “believe,” “expect” or “anticipate” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results may differ from these forward-looking statements for many reasons, including the following factors:
Continuing decrease in the demand for biodiesel;
Failure to comply with loan covenants contained in our financing agreements;
Our ability to continue to export our biodiesel;
The continued imposition of tariffs or other duties on biodiesel imported into Europe;
Loss of the blenders tax credit again in 2012;
WMG’s ability to market our product and procure feedstock;
Actual biodiesel and glycerin production varying from expectations;
Economic consequences of the domestic and global economic downturn and the on-going financial crisis;
Availability and cost of products and raw materials, particularly soybean oil, animal fats, natural gas and methanol;
Changes in the price and market for biodiesel and its co-products, such as glycerin;
Our ability to market and our reliance on third parties to market our products;
Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as:
•
national, state or local energy policy;
•
federal and state biodiesel tax incentives;
•
the RFS or other legislation mandating the use of biodiesel or other lubricity additives; or
•
environmental laws and regulations that apply to our plant operations and their enforcement;
Total U.S. consumption of diesel fuel;
Fluctuations in petroleum and diesel prices;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in our business strategy, capital improvements or development plans;
Results of our hedging strategies;
Competition with other manufacturers in the biodiesel industry;
Our ability to generate free cash flow to invest in our business and service our debt (and the flexibility of our lender in regards to our debt);
Our liability resulting from litigation;
Our ability to retain key employees and maintain labor relations;
Changes and advances in biodiesel production technology;
Competition from alternative fuels and alternative fuel additives;
Our ability to generate profits; and
Other factors described elsewhere in this report.
We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from those we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Our plant is currently blown down and winterized, which we decided to do in response to our plant shut-down. Our plant is not currently operational and we anticipate it will take us two to three weeks to bring the plant back online in the event we again start producing biodiesel. We began producing biodiesel on July 10, 2007. After obtaining independent testing of our biodiesel to certify that our biodiesel meets the American Society for Testing and Materials (ASTM) standards, we began shipping our first lot of 7,200 gallons of biodiesel on July 12, 2007. The plant was operating at full capacity until the end of September 2007, with only minor temporary shut downs for maintenance and a weather-related power outage. Since the beginning of October 2007, we have only been operating to produce biodiesel to satisfy existing contracts for the sale of our biodiesel and have not been producing biodiesel for speculation. This has allowed us to avoid excess inventory, but also, resulted in several plant shutdowns. During the fourth quarter of fiscal year 2010 and the first quarter 2011, we did not operate our plant.
From October 1, 2009 through September 30, 2010 we produced approximately 2,300,000 gallons of biodiesel, which is only approximately 7.7% of our plant’s capacity. We anticipate operating the plant at increased levels during our fiscal year 2011, given the RFS2 800 million gallon requirement for 2011; however, our ability to operate depends upon many factors outside of our control, such as the demand for biodiesel, price for biodiesel, cost of feedstock, and timing for obligated parties to begin purchasing biodiesel under the RFS2. We do not however, anticipate speculatively producing biodiesel in the next 12 months. Therefore, if demand does not increase such that we can obtain contracts for the same amount of biodiesel that we produced during our fiscal year 2010, then we may operate at a lower production rate than during our fiscal year 2010. In addition, we have been experiencing liquidity difficulties since beginning our operations and if these conditions do not improve, or get worse, during our fiscal year 2011 then we will likely operate our plant at lower levels than we did during our fiscal year 2010.
Plan of Operations for the Next 12 Months
Plant Operations
We expect to spend the next 12 months engaging in the production of biodiesel and glycerin at our plant, if the reinstatement of the biodiesel tax credit is sufficient to stimulate demand for biodiesel and our marketer is able to obtain contracts for our biodiesel. Our plant is fully operational and we were previously actively producing biodiesel at our plant, although we have not operated during our last quarter of fiscal year 2010.
Results of Operations
Comparison of Fiscal Years Ended September 30, 2010 and September 30, 2009
The following table shows the results of our operations and the percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal years ended September 30, 2010 and September 30, 2009.
Our operating results generally reflect the relationship between the price of biodiesel and the costs of feedstocks used to produce our biodiesel. Because biodiesel is used as an additive or alternative to diesel fuel, biodiesel prices are strongly correlated to petroleum-based diesel fuel prices. Historically, the price of biodiesel has fluctuated with the price of diesel fuel. In addition, the price of biodiesel is generally influenced by factors such as general economic conditions, the weather, and government policies and programs. Surplus biodiesel supplies also tend to put downward price pressure on biodiesel. Additionally, prices for diesel and the costs of feedstock, including soybean oil or animal fats, have been volatile and such fluctuations in the cost of feedstock may significantly affect our financial performance. Our results of operations will benefit when the margin between biodiesel prices and feedstock costs widens and will be harmed when this margin narrows. The biodiesel industry experienced very high feedstock costs during the summer of 2008, without corresponding increases in biodiesel prices, thereby causing profit margins to be small or nonexistent. In 2010, the biodiesel industry has seen significant volatility in feedstock costs with prices for biodiesel dropping as well, given the excess capacity and low demand. We expect that feedstock prices will rise as more certainty enters the biodiesel industry with the extension of the biodiesel tax credit through December 31, 2011, an additional year under the RFS2, and clearer expectations of the mandates. In addition, our revenues are also impacted by the intensely competitive nature of our industry; the extensive environmental laws that regulate our industry; possible legislation at the federal, state and/or local level; and changes in federal biodiesel tax incentives.
Revenues
Revenues from operations for the fiscal year ended September 30, 2010 totaled $9,234,866 compared with $29,132,604 for the fiscal year ended September 30, 2009. Included within our total revenues for the fiscal year ended September 30, 2010 and 2009 are approximately $187,632 and $3,226,067 respectively, in incentives we received or which were receivable from certain federal government programs for the sale of our biodiesel. Revenues in fiscal year 2010 were approximately a third of the revenues in fiscal year 2009. The decrease in revenues was due primarily to decreased production and sales volume of biodiesel, glycerin, fatty acids and soapstock. The decrease in production volume was due to lack of demand and contracts for our biodiesel due in large part to the uncertainty surrounding the federal tax credit and slow implementation of RFS2.
Lower biodiesel prices in fiscal 2010 compared to fiscal 2009, combined with a decrease in biodiesel sales volume, contributed to the lower total revenues in fiscal year 2010 as compared with fiscal year 2009. Average biodiesel sale prices during most of the year ended September 30, 2010 trended downward from the average biodiesel sale prices we experienced in the same period in 2009. The average biodiesel sale price we received for the year ended September 30, 2010 was approximately 2.0% lower than our average biodiesel sale price for the comparable period in 2009.
Because biodiesel is primarily used as an additive to petroleum-based diesel, biodiesel prices have generally correlated to diesel fuel prices. Diesel prices have climbed over the past several years reaching record highs of over $4.70 per gallon in July 2008, but have since trended downward, as oil prices have plummeted and the U.S. economic downturn and credit crisis have contributed to a decrease in demand for fuel in general. According to the Energy Information Administration, average retail prices for No. 2 Ultra Low Sulfur Diesel peaked at over $4.70 per gallon in July 2008, but have since dropped to approximately $3.23 per gallon as of early December 13, 2010. Biodiesel prices have followed a similar trend, peaking in the summer of 2008 and declining thereafter. Nonetheless, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. For example, the price for soy B100 biodiesel in Iowa averaged approximately $4.52 per gallon for December 21, 2010, according to the Iowa Department of Transportation’s report. However, according to the same report, No. 2 diesel fuel prices as of December 21, 2010 averaged approximately $2.56 per gallon, which is lower than the price per gallon for B100 biodiesel. The premium of biodiesel prices over diesel prices could cause a reduction in the demand for biodiesel. Through most of fiscal year 2008, biodiesel prices steadily increased and were well above historical highs and, therefore helped, to a certain extent, to offset high input costs, such as soybean oil. However, we expect that a continued drop in biodiesel prices without a corresponding decrease in the cost of feedstock and other inputs will cause the profit margin on each gallon of biodiesel produced to continue to be small to nonexistent, which could result in significant losses. Due to the volatility of the global economic conditions and commodities markets, it is uncertain whether biodiesel prices and input costs will continue to decrease or whether they will rebound to the higher prices experienced in the summer of 2008.
Based on historical trends, we anticipate that seasonal demand for biodiesel will decrease in the fall and winter months when blenders have typically decreased their biodiesel blend percentages due to cold flow concerns. Such decrease in demand could cause downward pressure on biodiesel sale prices. We anticipate the RFS2 will increase demand for biodiesel; however, while the 2011 obligated party requirement is 800 million gallons under RFS2, we are still several months away from realization of that requirement. Our financial condition may be negatively affected by decreases in the sales price of biodiesel. This is especially true during periods when feedstock costs for soybean oil and animal fats are relatively high, causing our profit margins to decrease even further.
We also believe that the U.S. and global economic downturn and the financial crisis that led to a collapse of a variety of major U.S. financial institutions and the federal government’s passage of a bailout plan may also place downward pressure on the demand for fuel, including biodiesel. These factors have caused significant upheaval in the financial markets and economy of the U.S., as well as abroad. Credit markets have tightened and lending requirements have become more stringent. Commodity markets have tumbled as a result of the recent economic turmoil, causing oil and other commodity prices to drop significantly. We expect that these conditions may lead to a decline in biodiesel demand and it is uncertain for how long and to what extent these financial troubles may negatively affect biodiesel demand in the future.
Excess production capacity in the biodiesel industry could make it difficult for us to market our products at profitable prices. The Biodiesel Magazine website estimates that current total biodiesel production capacity of existing plants as of December 12, 2010 was about 2.83 billion gallons per year, which is up from approximately 1.92 billion gallons per year as of September 2007. The Biodiesel Magazine website also estimates that plants under construction and expansion as of December 12, 2010 could add another 386 million gallons to U.S. biodiesel production capacity, for a total annual production capacity of 3.22 billion gallons. Despite these significant increases in production capacity, the National Biodiesel Board estimates that only 545 million gallons of biodiesel were produced in 2009. Many biodiesel plants do not operate at full capacity due in part to the fact that total production capacity significantly exceeds demand. If the demand for biodiesel does not grow at the same pace as increases in supply, we expect the price for biodiesel to decline in the long-term.
Our average sales price for glycerin in our fiscal year 2010 was less than in our fiscal year 2009. These lower sales prices were in conjunction with us selling significantly less glycerin in our fiscal year 2010, because we produced less biodiesel in our fiscal year 2010 due to decreased demand for biodiesel, which meant we had less of our primary co-product, glycerin, to sell.
We expect our results of operations to benefit from federal and state biodiesel supports and tax incentives. Biodiesel has generally been more expensive to produce than petroleum-based diesel and, as a result, the biodiesel industry depends on such incentives to be competitive. Changes to these supports or incentives, or continued instability with the same, could significantly impact demand for biodiesel. The most significant of these are the biodiesel blender’s credit and the RFS2. See “BUSINESS - Government Regulation and Federal Biodiesel Supports.”
We are highly dependent upon WMG for the successful marketing of our products. We do not have our own sales force and we do not have any other agreements or relationships with feedstock suppliers. If WMG breaches the agreement or does not have the ability, for financial or other reasons, to market all of the biodiesel and glycerin we produce, we will not have any readily available means to sell our biodiesel. Any loss of our relationship with WMG could have a significant adverse impact on our revenues.
Cost of Goods Sold
The primary components of cost of goods sold from the production of biodiesel are raw materials (soybean oil, animal fats, corn oil, methanol and other chemicals), energy (natural gas and electricity), labor and depreciation on process equipment. Our business is sensitive to feedstock costs. The cost of feedstock is the largest single component of the cost of biodiesel production, typically accounting for 70-90% of the overall cost of producing biodiesel. Any fluctuation in the cost of feedstock will alter the return on investment that our members receive. Changes in the price or supply of feedstock are subject to and determined by market forces and other factors over which we have no control, such as crop production, carryout, exports, government policies and programs, and weather. Because biodiesel prices are strongly correlated to diesel fuel prices, the biodiesel industry is unlike many other industries where finished product prices are more strongly correlated to changes in production costs. This characteristic of the biodiesel industry makes it difficult for biodiesel producers to pass along increased feedstock costs and, therefore, increases in feedstock costs can significantly affect our ability to generate profits.
Cost of goods sold for our products for the year ended September 30, 2010 was $12,070,190, which is less than half that of cost of goods sold for the year ended September 30, 2009, which was equal to $29,795,410. The decrease is primarily attributed to our lowered production rate. As a percentage of revenues, our cost of goods sold increased from fiscal year 2009 to fiscal year 2010, which were 102.28% and 130.70%, respectively. This increase was due primarily to fixed costs being spread over significantly reduced sales volumes.
Our average soybean oil costs per pound for the year ended September 30, 2010 were approximately 2.0% higher than soybean oil costs for the year ended September 30, 2009. Conversely, animal fat costs per pound for the year ended September 30, 2010 were approximately 11.0% lower than animal fat costs for the fiscal year ended September 30, 2009. In fiscal year 2010, we also utilized approximately 1.5 million pounds of corn oil feedstock, which is consistent with the minimal amounts of corn oil used in fiscal year 2009.
In order to minimize cost of goods sold, we anticipate that if we begin to again produce biodiesel, we will attempt to utilize lower-cost feedstocks such as animal fats and corn oil in place of higher-cost feedstocks such as soybean oil. In fiscal year 2009, approximately 80% of the feedstock used in our biodiesel production was animal fats and 20% was soybean oil. In fiscal year 2010, by comparison, approximately 14.0% of feedstock used in biodiesel production was animal fats, and approximately 86.0% was soybean oil.
In addition, natural gas has recently been available only at prices exceeding historical averages. We expect continued volatility in the natural gas market. Global demand for natural gas is expected to continue to increase, which may further drive up prices. Any ongoing increases in the price of natural gas will increase our cost of goods sold.
Commodity prices have been extremely volatile over the recent years, increasing by historic proportions in the summer of 2008. Soybean costs fell to $11.20 per bushel in November 2010, down from a high of approximately $13.30 per bushel in July 2008, according to the USDA’s December 2010 Oil Crop Outlook Report. Soybean oil prices have followed a similar trend, which according to the USDA’s December 2010 Oil Crop Outlook Report, average soybean oil prices reached a peak of approximately 62.43 cents per pound in June 2008, but have come down to a price of 47.62 cents per pound in November 2010. The decrease in soybean oil prices is likely due to the rapid changes in the global economy. The USDA National Weekly Ag Energy Round-Up Report indicates that as of December 10, 2010, soybean oil prices in Iowa are approximately 49.90 to 51.15 cents per pound, which is up from the price range of 35.59 to 38.15 cents per pound one year ago. The USDA forecasted that 2010/11 soybean oil prices would range from 45 to 49 cents per pound. Accordingly, based on recent trends, management expects that cost of goods sold on the basis of a per-gallon of soybean oil-based biodiesel sold may increase from levels experienced in fiscal year 2010. However, management still expects that prices may remain volatile through fiscal year 2011. It is uncertain to what extent and for how long domestic and global economic conditions may exert downward pressure on the cost of soybean oil and other commodities. Because it takes more than seven pounds of soybean oil to make a gallon of biodiesel, price fluctuations can have a significant affect on our profit margin on each gallon of biodiesel produced and sold. Soybean crushing, soybean acres planted, and weather conditions could increase volatility in the soybean oil market. Animal fats prices have also increased significantly, although they still remain lower than soybean oil prices.
Like soybean oil prices, animal fat costs also peaked in the summer of 2008. Although animal fat costs did not reach prices as high as soybean oil prices in the summer of 2008, animal fat costs nonetheless increased well above their historical average. The prices for animal fats tend to move in relation to the price of other feedstocks such as soybean oil. Accordingly, as soybean oil prices increase, animal fat costs will also likely increase and vice versa. According to the USDA’s December 2010 Oil Crop Outlook report, lard and edible tallow prices for November 2010 were estimated at 37.32 cents and 41.75 cents per pound, respectively, which are mixed changes from their prices of 52.82 cents and 38.61 cents per pound, respectively, in July 2008. Management expects that prices may remain volatile throughout fiscal year 2011, as domestic and global economic conditions and commodities markets may affect input prices, including animal fats.
Based on recent trends of soybean oil and animal fat costs, we expect that cost of goods sold on a per-gallon basis may increase from levels experienced in fiscal year 2010. In addition, management still expects that prices may remain volatile through fiscal year 2011. We will attempt to utilize feedstocks that provide us with the greatest margins on the sale of our biodiesel. Nonetheless, even if feedstock costs drop, decreases in the price at which we may sell our biodiesel and glycerin in the future could still result in low profit margins, which could have an adverse affect on our net income.
We experienced a $29,615 net loss during the year ended September 30, 2010 related to our derivative contracts, which is a decrease from the $560,099 net gain recognized during the fiscal year ended September 30, 2009. We enter into option contracts to reduce the risk caused by market fluctuations of soybean oil and home heating oil. The contracts are used to fix the purchase price of our anticipated requirements of soybean oil in production activities and to manage exposure to changes in biodiesel prices. The fair value of the derivatives is continually subject to change due to the changing market conditions. As the value of soybean oil and home heating oil fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing and changes in value of derivative instruments relative to the cost of the commodity being hedged.
Operating Expenses
Operating expenses for the year ended September 30, 2010 totaled $887,187, which is lower than operating expenses of $1,421,907 for the same period in 2009. This decrease is largely due to reduced operations brought about by reductions in staff and elimination of nonessential expenditures to preserve cash resources. Operating expenses as a percentage of revenues increased from fiscal year 2009 to fiscal year 2010, at 4.88% and 9.60% respectively. The increase in operating expenses as a percentage of revenues is primarily due to the reduced overall sales volume. We expect that our operating expenses for fiscal 2011 will remain fairly consistent if average plant production levels remain consistent.
Other Income (Expenses)
Our other income and expenses for the fiscal year ended September 30, 2010 was interest expense of $1,109,649 and interest and other income of $460,104, compared to an interest expense of $1,272,475 and interest and other income of $36,579 in 2009. In 2010, other income included, $100,000 related to the forgivable grant portion of the Iowa Department of Economic Development (IDED) loan /grant, $280,000 in Advanced BioFuels Producer Credit funds, a $70,000 education grant from Kirkwood Community College, and with the remainder representing interest income. The interest expense represents interest and amortization costs. The decrease in interest expense was primarily the result of a decrease in our outstanding borrowings and a decrease in our average interest rates.
Changes in Financial Condition
The following table highlights the changes in our financial condition from September 30, 2009 to September 30, 2010:
Current Assets. Current assets totaled $1,233,887 at September 30, 2010 down from $5,749,294 at September 30, 2009. The decrease during this period is a result of a decline in accounts receivable and a decline in inventory on hand. The decline in these two key indicators is the result of a lack of sales activity.
Current Liabilities. Total current liabilities totaled approximately $27,769,336 at September 30, 2010, down slightly from $31,016,570 at September 30, 2009. This decrease was due largely to the payment on our term loan and with the scale back of operations, the Company is incurring less expenses resulting in the reduction of accounts payable and accrued expenses.
Members’ Equity. Members’ contributions at both September 30, 2010 and September 30, 2009 were equal to $23,165,422. Total members’ equity as of September 30, 2010 was $7,909,325, down from $12,281,381 as of September 30, 2009. The decrease in total members’ equity is due to the current year loss. The loss is the result of the low level of sales experienced in fiscal year 2010 and the lower sales price received for the Company product sold. The low level has resulted in an inability to cover the fixed costs and interest expense incurred annually by us.
Liquidity and Capital Resources
Cash Flow from Operating Activities. Net cash flow provided by operating activities for the year ended September 30, 2010 totaled $2,044,225 compared to $4,039,052 for the year ended September 30, 2009. This was due to the increased loss incurred in fiscal year 2010 compared to prior fiscal year and the overall decline in working capital components. The decline is the result of the decline in sales.
Cash Flow from Investing Activities. Net cash flow provided by investing activities for the year ended September 30, 2010 totaled $454,634, of which $470,830 was for reductions in restricted cash balances due to it being used to make interest payments on the term debt and $16,196 used for capital expenditures for the purchase of computers and computer software. The term loan agreement allows for the use of the debt service reserve to make interest payments. As part of the agreement with our lender, during the period in which we have forbearance, principal payments are deferred and the interest payments are being pulled from the restricted cash. Capital purchases were necessary following the termination of the management agreement with REG. While aligned with REG under the management agreement, we used the REG computer operating system for operations and financial reporting. At the termination of the management agreement, we were required to acquire our own operating software as well as replace a number of computers owned by REG.
Cash Flow from Financing Activities. Net cash used in financing activities for the year ended September 30, 2009 totaled $2,668,847, which was primarily a payment on the term debt made prior to the agreement discussed in Note 4 to the Financial Statements.
Short-Term and Long-Term Debt Sources
In October 2006, we closed on our $34,715,000 debt financing with Marshall Bankfirst Corporation. Marshall Bankfirst Corporation has since been seized by the FDIC and our loan agreement is now held by MLIC as successor lender. The financing provided for a $29,715,000 term loan, with an interest rate during construction (the first 14 months following loan closing) of 0.75% over the Prime Rate as of the effective date reported in the Money Rates column of The Wall Street Journal. Our construction loan converted to a term loan in February 2008.
The term loan imposes various covenants upon us which may restrict our operating flexibility. We are subject to several ratios in the term loan which may limit how we allocate our sources of funds. The term loan imposes a negative covenant on distributions which may restrict our ability to distribute earnings to our members. The term loan also requires us to obtain MLIC’s permission prior to making any significant changes in our material contracts with third-party service providers.
We executed a mortgage in favor of MLIC creating a first lien on substantially all of our assets, including our real estate, plant, all personal property located on our property and all revenues and income arising from the land, plant or personal property for the loan and credit agreements discussed above.
On September 2, 2010, we executed a Third Amendment and Note Modification with MLIC (the Amendment Documents). The purpose of the Amendment Documents are to modify our term loan. The Amendment Documents provide that MLIC shall forbear until February 1, 2011 from exercising its remedies under the term loan and that MLIC shall waive until February 1, 2011 the Company’s compliance with certain covenants and ratios of the Term Loan.
The Amendment Documents also modify the payment and interest terms of the term loan. From October 1, 2010 and on the first day of each month thereafter through February 1, 2011, the Company shall pay MLIC all accrued interest then due.
Beginning on March 1, 2011, regular monthly principal and interest payments based upon the remaining term of the original amortization period of ten years shall resume in accordance with the original terms of the term loan. Beginning on March 1, 2011, we shall also pay the accrued interest on the principal payments that have been deferred until such deferred payments have been paid in full. On September 5, 2011, the principal payments that were otherwise due on August 1, 2010 through December 1, 2010 shall be due and payable. In addition, on September 5, 2011, the remaining unpaid principal balance of the term loan, together with all accrued but unpaid interest, shall be due and payable in full.
The Amendment Documents also modify the interest rate under the term loan. Under the Amendment Documents, interest shall begin to be calculated as 6% over LIBOR. Beginning six months from the first day of the full month after the date of the execution of the Amendment Documents, and every six months thereafter, the LIBOR margin shall be adjusted in accordance with the below schedule, which is based upon the number calculated by dividing our total debt (including both secured and unsecured obligations) by our earnings before interest, taxes, depreciation and amortization (“Company’s Leverage Ratio”).
Also on September 1, 2010, we entered into a loan agreement and related documents for a $6,000,000 revolving line of credit with MLIC as the lead lender (the Line of Credit). The funds from the Line of Credit will be used for the production of biodiesel at our plant and up to $400,000 of the funds may be used by us for risk management to hedge biodiesel.
We made standard representation and warranties under the Line of Credit, including, but not limited to: agreeing not to amend its articles of organization, operating agreement or similar governing document; agreeing not to merge, consolidate, sell transfer or assign substantial parts of its business without prior approval of MLIC; and sell or assign any accounts receivable without prior approval of MLIC.
In addition, we are required to maintain certain financial ratios and covenants, including, but not limited to: net tangible worth of $7,000,000; and we agreed not to purchase or redeem our units, declare or pay any dividends, except dividends payable solely in units, make any distributions to members or set aside any funds for any such purpose, without the prior written approval of the MLIC.
Upon the occurrence of an event of default, the Line of Credit shall become due and payable immediately. Events of Default include, but are not limited to: nonpayment of any principal or interest; breach by us which goes uncured for fifteen (15) days after notice under the Line of Credit or any of the term loan Documents of the Company; misrepresentation by us in the Line of Credit documents; insolvency; determination by MLIC that its position is insecure for any reason, and such insecurity is not cured by us within ten (10) day of notification; and acceleration or default by us on other debts.
Any funds disbursed to us under the Line of Credit shall be repaid to the MLIC, along with interest, by May 31, 2011. Interest under the loan shall be variable, based on 12% above the current thirty (30) day LIBOR rate. As of September 30, 2010 the Company has not accessed the Line of Credit.
We shall make payments to MLIC beginning on the first day of the first month following the first advance under the Line of Credit and on the first day of each month thereafter. We shall make such monthly payments in an amount equal to all accrued, but unpaid interest on the Line of the Credit. On May 31, 2011, we shall make one payment in the amount of all unpaid principal and interest. In addition, we shall pay MLIC a monthly administrative fee of $3,000, with the first administrative fee to be paid contemporaneously with the execution of the Line of Credit and each administrative fee to be paid on the first day of each month thereafter. The administrative fees shall be paid regardless of whether there is a balance under the Line of Credit. We shall be allowed to borrow, prepay and re-borrow under the Line of Credit until May 31, 2011, however, all advances are subject to the sole discretion of MLIC and MLIC is not obligated to make any advance.
Grants and Government Programs
We entered into a loan with the Iowa Department of Economic Development for $400,000. This loan is part of the Iowa Department of Economic Development’s Value Added Program and $100,000 of the loan is forgivable and the $300,000 principal amount does not bear interest. The balance at September 30, 2010 was $65,000. The $100,000 forgivable portion was forgiven in October 2009. We recently requested and were granted a six month waiver on payments. This waiver will begin in January 2011 and as a result of this waiver, interest will be at 6.0% when we again begin making payments.
In addition, on May 14, 2007 we entered into a Railroad Revolving Loan and Grant Program Agreement with the Iowa Department of Transportation (IDOT) for an amount of up to $168,000 (or 13.3% of the cost for the railroad project, whichever is less) and a loan amount of up to $132,000 (or 10.5% of the cost for the railroad project, whichever is less). Interest on the loan amount is at 3.67% per year for five years. The balance at September 30, 2010 was $250,061 of which $82,061 is required to be repaid to the IDOT.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses.
Revenue Recognition
Revenue from the production of biodiesel and its co-products is recorded when title transfers to customers. Biodiesel and its co-products are generally shipped FOB from the plant.
Derivative Instruments and Hedging Activities
Accounting Standards Codification (ASC) Topic No. 815, Derivatives and Hedging Activities, or ASC 815, requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain derivative contracts may be exempt under ASC 815 as normal purchases or normal sales, which are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. At this time, our forward contracts related to the purchase of soy oil are considered normal purchases and, therefore, are exempted from the accounting and reporting requirements of ASC 815.
Commodity Price Risk Protection
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as soybean oil, and finished products, such as biodiesel, through the use of derivative instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, they do not qualify for hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of goods sold. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
During the year ended September 30, 2010, the losses on our derivative instruments relating to certain commodities, including soybean oil and heating oil, was a realized loss of $96,377 and a change in unrealized gain of $66,762 for a net loss of $29,615. The realized loss was recorded, but the transaction was offset by a sales price tied to heating oil. We realized gain of $560,099 during the year ended September 30, 2009, which consisted of an unrealized loss of $131,903 for a realized gain of $692,002. The unrealized portion of any hedging loss is subject to change with market fluctuations and may be offset by future higher-priced biodiesel sales.
There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of soybean oil or biodiesel. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. As we move forward, additional protection may be necessary. As the prices of these hedged commodities move in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for the Company.
Impairment of long-lived assets
We review long-lived assets, including property, plant and equipment, for impairment in accordance with ASC Topic 360-10, “Property, Plant, and Equipment”. Asset impairment charges are recorded for long-lived assets when events and circumstances indicate that such assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying amounts. If estimated future undiscounted cash flows are not sufficient to recover the carrying value of the assets, an impairment charge is recorded for the amount by which the carrying amount of the assets exceeds its fair value. Fair value is determined by management estimates using discounted cash flow calculations. The estimate of cash flows arising from the future use of the asset that are used in the impairment analysis requires judgment regarding what we would expect to recover from the future use of the asset. Changes in judgment that could significantly alter the calculation of the fair value or the recoverable amount of the asset may result from, but are not limited to, significant changes in the regulatory environment, the business climate, management’s plans, legal factors, commodity prices, and the use of the asset or the physical condition of the asset.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Members
Iowa Renewable Energy, LLC
We have audited the accompanying balance sheets of Renewable Energy, LLC as of September 30, 2010 and 2009, and the related statements of operations, members’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Iowa Renewable Energy, LLC as of September 30, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 6 to the financial statements, the Company has suffered losses from operations and has experienced significant increases in the input costs of its products. This has created liquidity issues and caused the Company to be in violation of its bank debt covenants. There is no assurance that such violations will be waived and substantially all debt is due in September 2011 which, together raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 6. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
December 29, 2010
Iowa Renewable Energy, LLC
Balance Sheets
September 30, 2010 and 2009
See Notes to Financial Statements.
Iowa Renewable Energy, LLC
Statements of Operations
Years Ended September 30, 2010 and 2009
See Notes to Financial Statements.
Iowa Renewable Energy, LLC
Statements of Changes in Members’ Equity (Deficit)
Years Ended September 30, 2010 and 2009
See Notes to Financial Statements.
Iowa Renewable Energy, LLC
Statements of Cash Flows
Years Ended September 30, 2010 and 2009
See Notes to Financial Statements.
Iowa Renewable Energy, LLC
Notes to Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa Renewable Energy, LLC (the Company), located in Washington, Iowa, was formed in April 2005 to pool investors to build a biodiesel manufacturing plant with an annual capacity of 30 million gallons. The Company was in the development stage until July 2007, when it commenced operations. See Note 6 for discussion of management’s plans for current operations.
Significant accounting policies:
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of credit risk: The Company’s cash balances are maintained in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Cash and cash equivalents: The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Restricted cash: Includes deposits to custodial accounts held by our lender. Debt service reserve: Commencing one month following the conversion date, the Company shall make monthly deposits to a debt service reserve until such time as the balance equals $1,319,265. Monthly deposits shall consist of not less than one-third of all available monthly projected EBITDA. Capital improvements reserve: Commencing one month after the conversion date, the Company shall make deposits into an account held by the Lender. The fund will be used to fund capital improvements. During the term of the loan, the capital improvements reserve must be maintained at $125,000. As part of the Line of credit agreement, discussed in Note 4 below, the Lenders will defer principal payments and pull interest payments from the debt service reserve. The lenders began taking interest payments from the debt service reserve in June of 2010. The balance in the debt service reserve at September 30, 2010 is $728,555 while the Capital Improvements reserve stands at $1,733.
Accounts receivable: Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on historical experience and current economic conditions. The Company had no sales in the final quarter of the year. All outstanding accounts receivable were collected prior to the end of the period.
The Company’s policy is to charge simple interest on trade receivables past due balances; accrual of interest is discontinued when management believes collection is doubtful. Receivables are considered past due based upon payment terms set forth at the date of the related sale. The Company had no receivables accruing interest at September 30, 2010 or 2009.
Inventory: Inventory is valued at the lower of cost or market using the first-in, first out (FIFO) method. Inventory consists of the following as of September 30, 2010 and 2009:
Iowa Renewable Energy, LLC
Notes to Financial Statements
Organizational costs and startup costs: The Company expenses all organizational and startup costs as incurred.
Property and equipment: Property and equipment is stated at cost. Depreciation of such amounts commenced when the plant began operations. Depreciation is computed using the straight-line method over the following estimated useful lives:
Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized.
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of the future undiscounted cash flows are less than the carrying amount of the asset. The amount of the loss is determined by comparing the fair market values of the asset to the carrying amount of the asset. No loss has been recorded during the years ended September 30, 2010 or 2009.
Financing costs: Deferred financing costs associated with the construction and revolving loans and the $34,715,000 construction loan (Note 4) include expenditures directly related to securing debt financing. These costs are being amortized using the effective interest method over the 6-year term of the related debt agreement. Deferred financings costs associated with the Company’s line of credit are being amortized using the effective interest method over the 6 month term of the related agreement. Accumulated amortization as of September 30, 2010 and 2009 was $418,586 and $296,695, respectively.
Derivative instruments: The Company has entered into derivative contracts to hedge its exposure to price risk related to forecasted soybean oil purchases and forecasted biodiesel sales. These derivative contracts are to be accounted for under Accounting Standards Codification (ASC) Topic No. 815, Derivatives and Hedging. ASC 815 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction.
Although the Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings. The following amounts have been included in cost of goods sold for the years ended September 30, 2010 and 2009:
Revenue recognition: Revenue from the production of biodiesel and related products is recorded upon transfer of the risks and rewards of ownership and delivery to customers. Interest income is recognized as earned.
Iowa Renewable Energy, LLC
Notes to Financial Statements
Federal incentive payments and receivables: Revenue from federal incentive programs is recorded when the Company has sold blended biodiesel and satisfied the reporting requirements under the applicable program. When it is uncertain that the Company will receive full allocation and payment due under the federal incentive program, it derives an estimate of the incentive revenue for the relevant period based on various factors including the most recently used payment factor applied to the program. The estimate is subject to change as management becomes aware of increases or decreases in the amount of funding available under the incentive programs or other factors that affect funding or allocation of funds under such programs. The blenders credit expired on December 31, 2009 and only in December 2010 was it extended for 2011 and made retroactive for 2010 No sales after the first quarter included Federal Blenders Incentive.
Cost of sales: The primary components of cost of sales from the production of biodiesel products are raw materials (soybean oil, animal fats, hydrochloric acid, methanol, sodium methylate, and chemicals), energy (natural gas and electricity), and labor. Cost of sales detail for the years ended September 30, 2010 and 2009 is as follows:
Shipping and handling costs: Shipping and handling costs are expensed as incurred and are included in the cost of sales.
Income taxes: The Company is organized as a limited liability company which is accounted for like a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, the Company’s earnings and losses are included in the income tax returns of its members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.
(Loss) per unit: Loss per unit has been computed on the basis of the weighted average number of units outstanding during each period presented.
Fair value of financial instruments: The estimated fair value of financial instruments was determined by reference to various market data and other valuation techniques as appropriate. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short maturity of these financial instruments. The carrying value of the debt also approximates fair value as the interest rate reprices when market interest rates change. The fair values of the derivate instruments are based on quoted prices in active exchange-traded or over-the-counter markets.
The Company follows the guidance set forth in ASC Topic 820 for assets and liabilities recognized at fair value on a recurring basis. ASC 820 establishes a framework for measuring fair value and requires enhanced disclosures about assets and liabilities carried at fair value.
Iowa Renewable Energy, LLC
Notes to Financial Statements
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as commodity derivative contracts listed on the Chicago Board of Trade.
Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
Level 3 - Significant inputs to pricing have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2009. There were no assets or liabilities recognized at fair value on September 30, 2010. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
The Company enters into various commodity derivative instruments, including forward contracts, futures, options and swaps. The fair value of the Company’s commodity derivatives is determined using unadjusted quoted prices for identical instruments on the applicable exchange in which the Company transacts. When quoted prices for identical instruments are not available, the Company uses forward price curves derived from market price quotations. Market price quotations are obtained from independent energy brokers, exchanges, direct communication with market participants and actual transactions executed by the Company. Market price quotations for certain inputs are generally readily obtainable for the applicable term of the Company’s outstanding commodity derivative instruments and, therefore, the Company’s forward price curves for those locations and periods reflect observable market quotes.
Note. 2 Major Customer and Related Party
Iowa Renewable Energy, LLC entered into a marketing agreement with Renewable Energy Group (REG), where REG makes efforts to market and sell all of the biodiesel produced. Sales to REG for the years ended September 30, 2010 and 2009 were approximately $9.0 million and $25.9 million, respectively. Related accounts receivable from REG as of September 30, 2010 and 2009 were none and approximately $1.1 million, respectively.
Iowa Renewable Energy, LLC also entered into procurement and management agreements with REG to supply IRE with feedstocks and chemical inputs necessary for production and to manage operations.
Fees under this agreement are based on the number of biodiesel gallons produced and in addition the agreement provides for payment of a yearly bonus based on the Company’s net income. Total fees expensed under the agreement for the years ended September 30, 2010 and 2009 were $131,151 and $541,932, respectively.
On April 3, 2009 the Company received a written notice of termination from REG due to changes in the biodiesel market since the original agreements were signed. Therefore the current agreements expired on June 30, 2010.
Iowa Renewable Energy, LLC
Notes to Financial Statements
On January 29, 2010, the Company and WMG Services LLC (WMG) entered into a Management Services Agreement (Agreement). The Agreement provides that WMG will provide certain facility administration services; accounting services; and marketing, sales, feedstock sourcing and logistic services for the Company in exchange for a monthly asset utilization fee and a monthly performance fee. These fees are determined on a sliding fee scale tied to production. The Agreement commenced July 1, 2010 (Effective Date). The Agreement shall continue for a term of twenty-four (24) months from the Effective Date. Thereafter, the Agreement shall automatically renew for additional successive terms of twelve (12) months, unless either party gives ninety (90) days notice of its desire not to renew. The Agreement may also be terminated for a failure to cure a material breach of the Agreement thirty (30) days after receipt of notice of the breach, or for a change of control. Through September 30, 2010 the Company did not incur any expenses under this agreement.
Note 3. Members’ Equity
The Company was formed on April 14, 2005 to have a perpetual life. The Company has one class of membership unit with each unit representing a pro rata ownership interest in the Company’s capital, profits, losses and distributions. Income and losses are allocated to all members in proportion to units held.
The Company was initially capitalized by 12 members of the original board of directors, contributing an aggregate of $240,000 for 480 units. The Company was further capitalized by 78 members contributing an aggregate of $2,440,000 in exchange for 4,880 units. These units were issued pursuant to a private placement memorandum, limited to Iowa residents in which the Company offered a maximum of 6,000 units at a cost of $500 per unit for a maximum offering of $3,000,000, with all funds collected being considered at-risk capital. Each investor was required to purchase a minimum of 50 units for $25,000, with the option to purchase additional units in increments of one unit for $500 thereafter up to a maximum purchase by a single investor of 100 units for $50,000. Additionally, a total of 500 units were issued to the members of an entity related to the Company through common ownership in exchange for project development services provided pursuant to a consulting agreement. The private placement memorandum for the seed round offering was closed on November 30, 2005.
In April 2006, the Company issued an Iowa registered offering of membership units. The intrastate offering was set for a minimum of 17,595 membership units up to a maximum of 25,095 units for sale at $1,000 per unit, for a minimum offering amount of $17,595,000 and a maximum offering amount of $25,095,000. The minimum purchase requirements were 25 units for a minimum investment of $25,000. The Company began the intrastate offering on April 17, 2006 which was completed on May 1, 2006. A total of 19,371 membership units were issued to 508 members amounting to $19,371,000 of gross proceeds.
In November 2006 the directors exercised 1,100 units at $500 per unit. 100 units were unexercised and expired. In accordance with the Loan agreement, referenced in Note 4 below, the options funds were used for construction contract obligations prior to the initial draw on the loan in December 2006.
Note 4. Long-Term Debt
Long-term debt consists of the following as of September 30, 2010 and 2009:
(A)
On October 26, 2006, the Company entered into a $34,715,000 construction-term loan agreement which was used to complete the biodiesel project. The loan consisted of two phases: a “construction phase” where the Company made periodic requests for fund advances to meet construction obligations and at the completion of construction, the loan converted to a “senior debt instrument.” Previously, the note bore interest at prime plus .25% and was due in monthly principal and interest payments of $373,000. The loan is secured by substantially all assets of the Company. The Company violated the debt covenants and on April 2, 2009 received a written notice of default from the lender. In conjunction with the line of credit discussed below, the Lender has agreed until February 1, 2011 to allow the Company to defer principal payments on the term debt, interest payments related to the term loan will be charged against the debt service reserve fund, and the Company has been granted a forbearance on the covenant requirements of the term loan, specifically, section 5.02 (m)-(q). In place of the covenants, the Company has additional reporting requirements which accelerate their monthly reporting and provide additional cash flow information to the lender. While this does represent additional external reporting the information provided is data that is currently captured and reported internally. The forbearance also accelerates the maturity date for the entire loan to September 5, 2011 and increases the interest rate to 6.0% plus the one month LIBOR rate in effect two New York Banking Days prior to the beginning of each calendar month (6.26% as of September 30, 2010). New York Banking Days is defined as any day other than Saturday or Sunday that a commercial bank is open for business in New York, New York. The LIBOR margin will be adjusted every six months based on a schedule set in the agreement based on the Company’s leverage ratio at that time.
Iowa Renewable Energy, LLC
Notes to Financial Statements
Cash payments for long-term debt are as follows:
On September 2, 2010 the Company entered into a short-term line of credit where MLIC Asset Holdings, LLC, Federation Bank, and Washington State Bank will provide up to a $6.0 million revolving line of credit to be used for the purchase of raw materials. The line of credit term is for a six month period with formal maturity at May 31, 2011. At the maturity date any unpaid principal and accrued interest of the line of credit must be paid. The interest rate to be charged on the line of credit will be an annual rate equal to 12.0% plus the one month Libor rate in effect two New York Banking Days prior to the beginning of each calendar month. New York Banking Days is defined as any day other than Saturday or Sunday that a commercial bank is open for business in New York, New York.
Iowa Renewable Energy, LLC
Notes to Financial Statements
Note 5. Lease Commitment and Other Contingencies
The Company leases a copier under a long-term operating lease that will expire in February 2011. The lease requires payments of $275 per month plus applicable taxes, therefore minimum lease payments under this operating lease for future years is $1,377 during the year ending September 30, 2011.
The European Union is currently leveling tariffs on biofuels exported from the United States due to subsidies paid on biofuels. These tariffs went into effect March 13, 2009. In July 2009, the European Commission decided to extend these tariffs beyond their initial July 2009 expiration date until 2014. The Company will likely face increased competition for sales of its biodiesel and international demand for its product will likely decrease as a result of these tariffs. If any governmental supports are modified or permanently removed and decreased demand for the Company’s biodiesel results, its profitability will be reduced. Because biodiesel has historically been more expensive to produce than diesel fuel, the biodiesel industry has depended on governmental incentives that have effectively brought the price of biodiesel more in line with the price of diesel fuel to the end user. These incentives have supported a market for biodiesel that might not exist without the incentives. The most significant of these incentives for biodiesel is the blenders’ tax credit which provides a $1.00 tax credit per gallon of pure biodiesel, or B100, to the first blender of biodiesel with petroleum based diesel fuel. The blenders’ tax credit expired on December 31, 2009 and only in December 2010 was it extended for 2011 and made retroactive for 2010.
Note 6. Going Concern Matters and Management Plans
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Through September 30, 2010, the Company has generated accumulated losses of $15,256,097, has experienced significant volatility in its input costs and undertaken significant borrowings to finance the construction of the biodiesel plant. The loan agreements with the Company’s lender currently contain covenants that require a minimum ratio of current assets to current liabilities (working capital ratio), minimum debt coverage, fixed charge coverage ratios and a minimum level of equity. The Company is not in compliance with certain of these covenants at September 30, 2010 and it is projected that the Company will fail to comply with one or more of the loan covenants throughout fiscal 2011. Failure to comply with these loan covenants constitutes an event of default under the Company’s loan agreements which, at the election of the lender, could result in the acceleration of the unpaid principal loan balance and accrued interest under the loan agreements or the loss of the assets securing the loan in the event the lender elected to foreclose its lien or security interest in such assets. Furthermore, the loan agreements have been amended such that all principal and interest is due and payable no later than September 5, 2011 and there is no assurance that the Company will be able to secure financing at that time. These issues raise doubt about whether the Company will continue as a going concern.
Beginning January 1, 2010, following the expiration of the Federal Blender’s Credit, the Company went into a “warm shut down” status. In this status, the Company maintained a minimal crew and has used the period to perform maintenance on the plant while selling remaining inventory on the “spot market.” The warm shut down has allowed the Company to reduce expenses and preserve cash; however the low sales level has not covered the reduced cost. The Company is hopeful that the reinstatement of the biodiesel tax credit and the demand created by RFS2 will create sufficient product demand for the Company to resume biodiesel production. Meanwhile, the Company has been in communication with its lender as to the steps it needs to take to resolve this situation. The Company’s ability to continue as a going concern is dependent on the Company’s ability to comply with the loan covenants, the lender’s willingness to waive any noncompliance with such covenants and the Company’s ability to refinance the debt at its maturity date of September 5, 2011. As discussed in Note 4 above, the Company has secured an operating line of credit for $6.0 million. The line of credit is restricted to the purchase of raw materials to be used in the production of biodiesel with a small set aside that can be used for hedging activities. In addition to the line of credit, the Company has secured from its lender forbearance through February 1, 2011 from exercising their remedies under the term loan document with regard to the existing defaults.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
McGladrey & Pullen, LLP is our independent registered public accounting firm at the present time. The Company has had no disagreements with its auditors.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, including our chief executive officer (the principal executive officer), Michel Bohannan, along with our chief financial officer (the principal financial officer), J. William Pim, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010. Based on a review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
Management’s Report on Internal Control over Financial Reporting
Our management, including our chief executive officer and our chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Generally Accepted Accounting Principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2010. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, our management concluded that, as of September 30, 2010, our integrated controls over financial reporting were effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the Frank-Dodd Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers form the management report requirement.
Changes in Internal Control Over Financial Reporting
Our management, consisting of our chief executive officer and our chief financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred as of September 30, 2010 and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference to the definitive proxy statement for our 2011 annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2010 fiscal year. This proxy statement is referred to in this report as the 2011 Proxy Statement.
The information required by this Item is incorporated by reference to the 2011 Proxy Statement.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS.
The information required by this Item is incorporated by reference to the 2011 Proxy Statement.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to the 2011 Proxy Statement.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to the 2011 Proxy Statement.
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of, or are incorporated by reference into, this report:
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.