SOUTH DAKOTA SOYBEAN PROCESSORS LLC - Quarter Report: 2007 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

For the quarterly period ended June 30, 2007

 

For the transition period from                 to

COMMISSION FILE NO. 000-50253

SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

(Exact Name of Registrant as Specified in its Charter)

 

100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071

(Address of Principal Executive Offices)

(605) 627-9240

(Registrant’s Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes  o   No  o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  On August 14, 2007, the registrant had 30,419,000 capital units outstanding.

PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements

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SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006
Condensed Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2007 and 2006 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2007 and 2006 (unaudited)
Notes to Condensed Consolidated Financial Statements

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

We have reviewed the condensed consolidated balance sheet of South Dakota Soybean Processors, LLC (the “Company”), as of June 30, 2007, and the related condensed consolidated statements of operations and cash flows for the three-month and six-month periods ended June 30, 2007 and 2006, respectively.  These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of South Dakota Soybean Processors, LLC as of December 31, 2006, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 21, 2007, we expressed an unqualified opinion on those financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

	/s/ Gordon, Hughes & Banks, LLP
August 10, 2007
Greenwood Village, Colorado

 

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SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30,			December 31,
		2007			2006
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	9,159		$	8,316,766
Trade accounts receivable, less allowance for uncollectible accounts of $26,000		19,799,997			15,954,577
Inventories		19,917,055			15,813,795
Margin deposits		1,391,727			922,207
Prepaid expenses		431,893			596,968
Total current assets		41,549,831			41,604,313
PROPERTY AND EQUIPMENT		53,052,786			52,623,024
Less accumulated depreciation		(28,252,846		)	(27,096,622		)
Total property and equipment, net		24,799,940			25,526,402
OTHER ASSETS
Investments in cooperatives		4,264,438			4,267,749
Equity investment in unconsolidated affiliate		4,270,078			3,887,382
Notes receivable - members		460,042			479,130
Patents, net		6,100,466			6,289,475
Other, net		16,856			15,921
Total other assets		15,111,880			14,939,657
Total assets		$	81,461,651		$	82,070,372

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS – continued

		June 30,			December 31,
		2007			2006
		(Unaudited)
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Excess of outstanding checks over bank balance		$	4,078,585		$	4,346,087
Current maturities of long-term debt		913,698			947,931
Note payable - seasonal loan		13,883,648			—
Accounts payable		858,239			1,215,204
Accrued commodity purchases		11,065,800			20,901,664
Accrued expenses		2,102,697			2,206,437
Accrued interest		190,965			35,286
Total current liabilities		33,093,632			29,652,609
LONG-TERM LIABILITIES
Long-term debt, less current maturities		13,203,823			11,906,363
Deferred compensation		116,473			101,592
Total long-term liabilities		13,320,296			12,007,955
COMMITMENTS AND CONTINGENCIES
TEMPORARY EQUITY, net of subscriptions receivable of $6,098 and $219,705 as of June 30, 2007 and December 31, 2006, respectively, consisting of 604,750 Class A units		1,219,402			1,005,795
MEMBERS' EQUITY Class A Units, no par value, 30,419,000 units issued and outstanding		33,828,321			39,404,013
Total liabilities, temporary equity and members' equity		$	81,461,651		$	82,070,372

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND 2006

		Three Months Ended June 30:						Six Months Ended June 30:
		2007			2006			2007			2006
NET REVENUES		$	59,976,616		$	53,289,632		$	111,518,770		$	116,125,280
COST OF REVENUES
Cost of product sold		49,926,017			41,942,388			92,806,403			94,051,954
Production		3,795,241			3,720,703			7,787,188			7,994,420
Freight and rail		4,703,206			4,578,282			8,931,934			9,845,556
Brokerage fees		69,864			70,159			140,407			135,419
Total cost of revenues		58,494,328			50,311,532			109,665,932			112,027,349
GROSS PROFIT		1,482,288			2,978,100			1,852,838			4,097,931
OPERATING EXPENSES
Administration		891,468			1,040,811			1,871,879			1,908,373
OPERATING PROFIT (LOSS)		590,820			1,937,289			(19,041		)	2,189,558
OTHER INCOME (EXPENSE)
Interest expense		(531,269		)	(165,459		)	(805,577		)	(520,731		)
Other non-operating income		875,276			640,615			1,592,526			904,601
Patronage dividend income		19			—			49,240			148,153
Total other income (expense)		344,026			475,156			836,189			532,023
INCOME BEFORE INCOME TAXES		934,846			2,412,445			817,148			2,721,581
INCOME TAX EXPENSE (BENEFIT)		—			2,308			(7,160		)	2,308
NET INCOME		$	934,846		$	2,410,137		$	824,308		$	2,719,273
BASIC AND DILUTED EARNINGS
PER CAPITAL UNIT		$	0.03		$	0.08		$	0.03		$	0.09
WEIGHTED AVERAGE NUMBER OF
UNITS OUTSTANDING FOR
CALCULATION OF BASIC AND
DILUTED EARNINGS PER
CAPITAL UNIT		30,419,000			30,419,000			30,419,000			30,419,000

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND 2006

		June 30,			June 30,
		2007			2006
OPERATING ACTIVITIES
Net income		$	824,308		$	2,719,273
Charges and credits to net income not affecting cash:
Depreciation and amortization		1,388,924			1,744,109
Gain on equity method investments		(382,696		)	(95,216		)
Non-cash patronage dividends		(24,611		)	(74,076		)
Change in current assets and liabilities		(18,379,134		)	6,273,523
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES		(16,573,209		)	10,567,613
INVESTING ACTIVITIES
Purchase of investments		—			(420,120		)
Retirement of patronage dividends		27,922			—
Patent costs		(29,008		)	(37,315		)
Purchase of property and equipment		(445,380		)	(258,701		)
NET CASH (USED FOR) INVESTING ACTIVITIES		(446,466		)	(716,136		)
FINANCING ACTIVITIES
Change in excess of outstanding checks over
bank balances		(267,502		)	(668,488		)
Net proceeds from seasonal borrowings		13,883,648			—
Distributions to members		(6,400,000		)	—
Decrease (increase) in member loans		232,695			(10,049		)
Proceeds from long-term debt		1,300,000			—
Principal payments on long-term debt		(36,773		)	(1,420,872		)
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES		8,712,068			(2,099,409		)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(8,307,607		)	7,752,068
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		8,316,766			75,556
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	9,159		$	7,827,624
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest		$	649,898		$	568,809

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -     BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The financial statements of and for the periods ended June 30, 2007 and 2006 reflect, in the opinion of management of South Dakota Soybean Processors, LLC (the “Company”, “LLC”, “we”, “our”, or “us”), all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year due in part to the seasonal nature of some of the Company’s businesses. The consolidated balance sheet data as of December 31, 2006 has been derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. The effects of all intercompany accounts and transactions have been eliminated.

These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2006, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2007.

Use of Estimates in the Preparation of Financial Statements

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 at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Reclassifications

Reclassifications have been made to the June 30, 2006 financial information to conform to the current period presentation. These reclassifications have no effect on previously reported net income or members’ equity.

NOTE 2 -     INVENTORIES

		June 30,			December 31,
		2007			2006
Finished goods		$	1,345,970		$	4,288,113
Raw materials		18,509,122			11,478,020
Supplies & miscellaneous		61,963			47,662
Totals		$	19,917,055		$	15,813,795

 

NOTE 3 -     NOTES PAYABLE – SEASONAL LOAN

The Company has entered into a revolving credit agreement with CoBank, which expires September 1, 2007. The purpose of the credit agreement is to finance the inventory and accounts receivable of the Company. The Company may borrow up to $22,400,000. Interest accrues at a variable rate (7.75% at June 30, 2007).  Advances on the revolving credit agreement are secured and limited to qualifying inventory and accounts receivable, net of accrued commodity purchases.  There were advances outstanding of $13,883,648 and $0 at June 30, 2007 and December 31, 2006, respectively.

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SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 -     NOTE GUARANTEE

On March 6, 2007, we became a guarantor of a loan between State of South Dakota Department of Transportation and the Brookings County (South Dakota) Regional Railway Authority. On March 6, 2007, the State of South Dakota Department of Transportation agreed to loan the Brookings County Regional Railroad Authority a total sum of $1.81 million for purposes of making improvements to the railway infrastructure near our soybean processing facility in Volga, South Dakota. The interest rate on the loan is 4.857% per year. Principal and interest payments are due annually, with the first payment due on October 1, 2008 and the final payment due at maturity in October 2017. In consideration of this unsecured loan, we agreed to guarantee to the State of South Dakota Department of Transportation the full loan amount, plus interest.  This guaranty, however, will become a direct obligation of ours in October 2008, when we will be responsible for paying the above-described principal and interest payments on an annual basis.

NOTE 5 -     MEMBER DISTRIBUTION

On March 1, 2007, the Company distributed $6,400,000 ($0.21 per outstanding capital unit) to its members.

NOTE 6 -     CONTINGENCIES

From time to time in the ordinary course of our business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes. We carry insurance that provides protection against general commercial liability claims, claims against our directors, officers and employees, business interruption, automobile liability, and workers’ compensation claims. Except as described below, we are not currently involved in any material legal proceedings and are not aware of any potential claims.

On June 9, 2003, USSC was served with notice that it had been named as a defendant in a breach of contract suit filed in circuit court of Cook County, Illinois. The plaintiff, William Blair & Co., LLC, claims that it is entitled to a commission on the Company’s purchase of USSC’s stock in 2003 based on a broker agreement between USSC and William Blair. In the broker agreement dated October 15, 2001, USSC retained William Blair to render investment banking services in connection with a potential private placement or sale by USSC. William Blair’s claim for damages against USSC is for $684,000, but USSC strongly denies that William Blain is entitled to such damages.  The matter was tried to the court in early 2007.  As of August 14, 2007, the Company is awaiting the outcome.

On June 7, 2005, the Company received notification from the Securities and Exchange Commission (“SEC”) that the Company’s filings were under review. During the course of the review, the SEC requested additional information about the Company’s change in auditors for the audit of its financial statements for the year ended December 31, 2004 as disclosed in the Company’s 8-K filing dated January 18, 2005. After considering such information, management determined that the independence of the audit firm, Eide Bailly LLP, with respect to its audit of financial statements for the year ended December 31, 2003 was compromised and decided to have the financial statements for that period reaudited.  As a result, in the latter part of 2005 the Company’s Board of Managers engaged Gordon, Hughes, & Banks LLP to reaudit the financial statements for the year ended December 31, 2003. The re-audit produced an unqualified opinion and there was no effect on previously reported net income or member’s equity. During early 2005, prior to receiving notice of the SEC review, the Company solicited investors through an S-1 registration statement which included the 2003 audit opinion letter from Eide Bailly LLP and the audited financial statements for the year ended December 31, 2003.  Because the independence of Eide Bailly was compromised for that period, the registration statement did not meet the requirements of federal securities law. The financial statements included in the Company’s periodic reports for

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SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

such periods, as amended, are now compliant with the independent auditor requirements of applicable securities law, but there remains a possibility that claims could be made against the Company relating to the inclusion in the offering materials of the original audit opinion letter. As of June 30, 2007 and December 31, 2006, the Company has not recorded a provision for this matter, as management believes the likelihood of claims being asserted by investors in the offering is remote under FAS 5. Management believes that any liability the Company may incur would not have a material adverse effect on its financial condition or its results of operations.  Due to the circumstances described above, the Company has recorded the net proceeds received to date, reduced by an amount that no longer qualifies as a possible claim under federal and state securities laws, as temporary equity in the accompanying consolidated balance sheets.  Amounts recorded as temporary equity totaled $1,219,402 and $1,005,795 as of June 30, 2007 and December 31, 2006, respectively, consisting of 604,750 Class A capital units.

F-8

Item 2.                                                       Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The information in this quarterly report on Form 10-Q for the three-month and six-month periods ended June 30, 2007, (including reports filed with the Securities and Exchange Commission (the “SEC” or “Commission”), contain “forward-looking statements” that deal with future results, expectations, plans and performance, and should be read in conjunction with the consolidated financial statements and Annual Report on Form 10-K for the year ended December 31, 2006.  Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions. Forward-looking statements involve numerous assumptions, risks and uncertainties.  Actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements.  Factors that could cause actual results to differ materially from the forward-looking statements are identified in our Form 10-K for the year ended December 31, 2006.

We are not under any duty to update the forward-looking statements contained in this report, nor do we guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

Executive Overview and Summary

South Dakota Soybean Processors, LLC (“we,” “us,” “our” or the “Company”) owns and operates a soybean processing plant, a soybean oil refinery, and a bio-based polyurethane production facility in Volga, South Dakota. We produce four principal products: crude soybean oil, soybean meal and hulls, partially refined and bleached oil, and, through our majority owned subsidiary, Urethane Soy Systems Corporation (USSC), a bio-based polyol product called Soyol™. We also offer and provide construction,

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management and consulting services to soybean processing facilities, and our facilities serve as a registered delivery point for the Chicago Board of Trade’s (CBOT) soybean oil futures’ contract program where we receive a storage payment for oil that is delivered and stored through the program.

We generated a net income of $0.9 million for the three months ending June 30, 2007, compared to $2.4 million for the same three-month period in 2006, which is a reduction of $0.20 per bushel processed. The reduction in net income was primarily attributable to a decrease in the soybean oil basis and a 5.4% reduction in the volume processed. Slightly offsetting the decrease was a $235,000 increase in non-operating income.

We view the soybean oil component of the soybean crushing margin to be an element that will influence our future strategy. The renewable energy potential of soybean oil has kept the CBOT soybean oil contract values high relative to soybeans and soybean meal. Soybean oil currently accounts for approximately 45% of the crush margin compared to a long-term average of 36%.  At the same time, the soybean oil supply is growing due to stagnant-to-weaker demand for domestic soybean oil, a result of the health focus on trans fat. These relationships will continue for the foreseeable future to be a variable in managing our margins.

Our future objective is to focus on delivering high quality products and services at the lowest possible cost, and adding value by investing in the development of new applications for our products in the plastics and energy fields. We will continue to expend capital to fund the operations of USSC. In addition, we are encouraged by an announcement made in July from Ford Motor Company stating that USSC’s SoyolTM will be the first soybean oil based polyol incorporated into the automotive seating industry.  Ford will be utilizing our product in their 2008 Ford Mustang. We also plan to further diversify by entering the fats and oil renewable fuel industry in some capacity, a growing industry spurred by our nation’s need to decrease its reliance on foreign petroleum supplies.

RESULTS OF OPERATIONS

Comparison of the three months ended June 30, 2007 and 2006

		Quarter Ended June 30, 2007					Quarter Ended June 30, 2006
					% of					% of
		$			Revenue		$			Revenue
Revenue		$	59,976,616		100.0		$	53,289,632		100.0
Cost of revenues		(58,494,328		)	(97.5	)	(50,311,532		)	(94.4	)
Administrative expenses		(891,468		)	(1.5	)	(1,040,811		)	(2.0	)
Other income (expense)		344,026			0.6		475,156			0.9
Income tax (expense) benefit		—			0.0		(2,308		)	—
Net income (loss)		$	934,846		1.6		$	2,410,137		4.5

 

Revenue – Revenue increased $6.7 million, or 12.5%, from the second quarter of 2006 to the second quarter of 2007. The increase in revenues was primarily due to increases in the average sales price of soybean meal and oil, as well as an increase in the sales volume of refined soybean oil.  The average sales prices of soybean meal and oil increased 13.4% and 27.6%, respectively, in the second quarter of 2007 compared to the same period in 2006.  Higher corn prices sparked by increased demand from the ethanol industry served to lift prices of many agricultural commodities, including soybeans and soybean-based products. During the second quarter of 2007, the sales volume of refined soybean oil increased by

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9.1% compared to the same period in 2006, as demand increased due to a 250% increase in biodiesel production in the United States over the last 12 months.

Gross Profit/Loss – During the second quarter of 2007, we generated a gross profit of $1.5 million, compared to $3.0 million in the second quarter of 2006.  The decrease in gross profit was primarily attributed to a decrease in soybean oil basis. The decrease in soybean oil basis was due to a combination of high CBOT soybean oil prices and an increase in the U.S. soybean oil supply. The high CBOT price was attributed to the growing renewable energy industry, and the increase in U.S. soybean oil supply was due to new trans-fat labeling, which continues to reduce domestic human consumption.

Administrative Expense – Administrative expense, including all selling, general and administrative expenses, decreased $149,000, or 14.3%, for the second quarter of 2007, compared to the same period in 2006.  This decrease was primarily the result of a decrease in personnel expenses in 2007.

Interest Expense – Interest expense increased by $366,000, or 221.1%, for the second quarter of 2007, compared to the same period in 2006.  This increase was due to higher debt levels resulting from elevated soybean prices, increased quantity of inventory and member distributions.  On June 30, 2007, we had outstanding debt of $28.1 million, compared to $14.5 million on June 30, 2006.

Other Non-Operating Income – Other non-operating income increased by $234,000, or 36.6%, for the second quarter of 2007, compared to the same period in 2006.  The increase was primarily due to increases in oil storage income and in the value of our investment in Minnesota Soybean Processors (MnSP).

Net Income/Loss – The $1.5 million decrease in net income from the second quarter of 2006, compared to the same period in 2007, was primarily attributable to, as discussed above, a decrease in gross profit, offset by an increase in sales and non-operating income.

Comparison of the six months ended June 30, 2007 and 2006

		Six Months Ended June 30, 2007					Six Months Ended June 30, 2006
					% of					% of
		$			Revenue		$			Revenue
Revenue		$	111,518,770		100.0		$	116,125,280		100.0
Cost of revenues		(109,665,932		)	(98.3	)	(112,027,349		)	(96.5	)
Administrative expenses		(1,871,879		)	(1.7	)	(1,908,373		)	(1.6	)
Other income (expense)		836,189			0.7		532,023			0.4
Income tax (expense) benefit		7,160			0.0		(2,308		)	—
Net income (loss)		$	824,308		0.7		$	2,719,273		2.3

 

Revenue – Revenue decreased $4.6 million, or 4.0%, for the six-months ended June 30, 2007, compared to the same period in 2006. The decrease in revenues was primarily due to a decrease in the sales volume of crude soybean oil.  During the six months ended June 30, 2006, we registered warehouse receipts with the CBOT for approximately 94.7 million pounds of crude soybean oil, increasing sales revenue by approximately $22.3 million. In 2007, we did not register any warehouse receipts with the CBOT.

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The decrease in sales volume of crude soybean oil was slightly offset by increases in the average sales price of soybean meal and oil.  The average sales prices of soybean meal and oil increased by 10.8% and 25.4%, respectively, in the six-months ended June 30, 2007, compared to the same period in 2006.  Higher corn prices sparked by increased demand from the ethanol industry served to lift prices of many agricultural commodities, including soybeans and soybean-based products.

Gross Profit/Loss – During the six months ended June 30, 2007, we generated a gross profit of $1.9 million, compared to $4.1 million during the same period in 2006.  The decrease in gross profit was attributed to a decrease in soybean oil basis. The decrease in soybean oil basis was due to a combination of high CBOT soybean oil prices and increased soybean oil supply. The high CBOT price was attributed to the growing renewable energy industry, and increased soybean oil supply was due to new trans-fat labeling, which continues to reduce domestic human consumption.

Administrative Expense – Administrative expense, including all selling, general and administrative expenses, remained relatively unchanged for the six-months ended June 30, 2007 and 2006.

Interest Expense – Interest expense increased by $284,000, or 54.7%, for the six months ended June 30, 2007 compared to the same period in 2006.  This increase was due to higher debt levels resulting from elevated soybean prices, increased quantity of inventory, higher accounts receivable due to elevated soy-based product prices, and member distributions.  On June 30, 2007, we had outstanding debt of $28.1 million, compared to $14.5 million on June 30, 2006.

Other Non-Operating Income – Other non-operating income increased by $688,000, or 76.0%, for the six-months ended June 30, 2007, compared to the same period in 2006.  The increase was primarily due to increases in oil storage income and in the value of our investment in MnSP.

Net Income/Loss – The $1.9 million decrease in net income during the six months ended June 30, 2007, compared to the same period in 2006, was primarily attributable to, as discussed above, a decrease in gross profit, slightly offset by a decrease in administrative expenses and an increase in other non-operating income.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash provided by operations and borrowings under our two lines of credit which are discussed below under “Indebtedness.” On June 30, 2007, we had working capital, defined as current assets less current liabilities, of approximately $8.5 million and a current ratio, defined as current assets divided by current liabilities of 1.26 to 1, compared to working capital of $7.8 million and a current ratio of 1.28 to 1 on June 30, 2006.

		2007			2006
Net cash (used for) provided by operating activities		$	(16,573,209	)	$	10,567,613
Net cash (used for) investing activities		(446,466		)	(716,136		)
Net cash provided by (used for) financing activities		8,712,068			(2,099,409		)

 

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Cash Flows from Operations

The decrease in cash flows from operating activities between the six months ended June 30, 2007 and the same period in 2006, was primarily attributed to decreases in accrued commodity purchases and net income and increases in inventory and accounts receivable. Higher commodity prices encouraged farmers during the second quarter to sell us soybeans and price their previously delivered soybeans, resulting in a 61% increase in soybean inventory and a 47% reduction in our accrued commodity purchases. Likewise, higher commodity prices resulted in a 24% increase in our accounts receivables.

Cash Flows from Investing Activity

The decrease in cash flows used for investing activities between the six months ended June 30, 2007 and the same period in 2006 was primarily attributed to a decrease in the purchase of investments.  In May 2006, we were required to make a unit retain investment in MnSP of approximately $420,000 after MnSP’s members voted to require shareholders to invest $0.30 per share of Class A preferred stock. No unit retain investment has been required by MnSP in 2007. This decrease in investing activities was slightly offset by an $187,000 increase in purchases of property and equipment for our facilities.

Cash Flows from Financing Activity

The increase in net cash provided by financing activities between the six months ended June 30, 2007 and the same period in 2006, was principally due to a $15.1 million (net of principal payments) increase in debt in 2007, offset by $6.4 million in distributions paid to members. During the first six months of 2007, we used $15.1 million in proceeds from long-term debt and seasonal borrowings to finance an increase in inventory, reduce accrued commodity purchases, and distribute $6.4 million to our members.

Our cash flows from operations and revolving debt are expected to continue to be sufficient to meet our expected capital and liquidity requirements for the foreseeable future.

Indebtedness

We have two lines of credit with CoBank, our primary lender, to meet the short and long-term needs of our operations. The first credit line is a revolving long-term loan. Under the terms of this loan, we may borrow funds as needed up to the credit line maximum, or $13.2 million, and then pay down the principal whenever excess cash is available. Repaid amounts may be reborrowed up to the available credit line. The available credit line reduces by $1.3 million every six months until maturity on March 20, 2013, except the reduction is waived for September 2007 and March 2008. Beginning in September 2008, the reduction will continue and payments are required if our principal balance outstanding exceeds our then available credit line.  The final payment at maturity is equal to the remaining unpaid principal balance of the loan. We pay a 0.50% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan was $13.2 million as of June 30, 2007 and 2006.

The second credit line is a revolving working capital loan that expires on September 1, 2007.  The primary purpose of this loan is to finance inventory and receivables. The maximum available under this credit line is $23 million which was increased to this amount on June 6, 2007 under an amendment to our Master Loan Agreement with CoBank.  Borrowing base reports and financial statements are required monthly to justify the balance borrowed on this line.  We pay a 0.25% annual commitment fee on any funds not borrowed; however, we have the option to reduce the credit line during any given commitment period listed in the agreement to avoid the commitment fee. The principal balance outstanding on the working capital loan was approximately $13.9 million as of June 30, 2007, compared to $0 as of June 30, 2006.

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Both CoBank loans are set up with a variable rate option. The variable rate is set by CoBank and changes weekly on the first business day of each week. We also have a fixed rate option on both loans allowing us to fix rates for any period between one day and the entire commitment period. The annual interest rate on both the working capital and revolving term loans as of June 30, 2007 was 7.75%, compared to 8.05% as of June 30, 2006. Both CoBank loans are secured by substantially all of our assets and are subject to compliance with standard financial covenants and the maintenance of certain financial ratios. We were in compliance with all covenants and conditions with CoBank as of June 30, 2007 and as of the date of this filing.

We also have other long-term contracts and notes totaling approximately $0.9 million, with a weighted average annual interest rate of 4.4% as of June 30, 2007. These arrangements include a no interest $621,000 long-term note payable to the other USSC shareholders relating to our purchase of their tendered shares in USSC.  The obligation is secured by the purchased shares.  We made principal payments of $37,000 and $121,000 on these additional long-term obligations during the six months ended June 30, 2007 and 2006, respectively.

Out indebtedness is expected to increase in 2008 as a result of improvements to our facility’s railway infrastructure.  We are currently guaranteeing a $1.81 million loan between the State of South Dakota Department of Transportation and the Brookings County Regional Railway Authority.  This guaranty, however, will become a direct obligation of ours beginning in 2008, at which time we will begin making principal and interest payments directly on an annual basis.  For further details of this transaction, please see “Off-Balance Sheet Financing Arrangements-Guaranty” below.

OFF BALANCE SHEET FINANCING ARRANGEMENTS

Except as described below, we do not utilize variable interest entities or other off-balance sheet financial arrangements.

Guaranty

On March 6, 2007, we became a guarantor of a loan between State of South Dakota Department of Transportation and the Brookings County (South Dakota) Regional Railway Authority. On March 6, 2007, the State of South Dakota Department of Transportation agreed to loan the Brookings County Regional Railroad Authority a total sum of $1.81 million for purposes of making improvements to the railway infrastructure near our soybean processing facility in Volga. The interest rate on the loan is 4.857% per year. Principal and interest payments are due annually, with the first payment due on October 1, 2008 and the final payment due at maturity in October 2017. In consideration of this unsecured loan, we agreed to guarantee to the State of South Dakota Department of Transportation the full loan amount, plus interest.  This guaranty, however, will become a direct obligation of ours in October 2008, when we will become responsible for paying the above-described principal and interest payments on an annual basis.

Lease Commitments

We have commitments under various operating leases for rail cars, various types of vehicles, and lab and office equipment.   Our most significant lease commitments are the rail car leases we use to distribute our products.   We have a number of long-term leases with GE Capital and Trinity Capital for hopper rail cars and oil tank cars.  The total lease expense under these arrangements was approximately $1.0 million for both six-month periods ending June 30, 2007 and 2006.  The hopper rail cars earn

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mileage credit from the railroad through a sublease program which totaled $0.8 million and $1.0 million for the six-month periods ending June 30, 2007 and 2006, respectively.

In addition to rail car leases, we have several operating leases for various equipment and storage facilities.  Total lease expense under these arrangements was $41,000 and $53,000 for the six-month periods ending June 30, 2007 and 2006, respectively.  Some of our leases include purchase options; however, none are for a value less than fair market value at the end of the lease.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Management continually evaluates these estimates based on historical experience and other assumptions we believe to be reasonable under the circumstances.

The difficulty in applying these policies arises from the assumptions, estimates, and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.

Of the significant accounting policies described in the notes to the financial statements, we believe that the following may involve a higher degree of estimates, judgments, and complexity:

Commitments and Contingencies

Contingencies, by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred, as well as in estimating the amount of the potential expense.  In conformity with accounting principles generally accepted in the United States, we accrue an expense when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Inventory Valuation

We account for our inventories at estimated net realizable market value. These inventories are agricultural commodities that are freely traded, have quoted market prices, may be sold without significant further processing, and have predictable and insignificant costs of disposal. We derive our estimates from local market prices determined by grain terminals in our area. Processed product price estimates are determined by the ending sales contract price as of the close of the final day of the period. This price is determined by the closing price on the Chicago Board of Trade, net of the local basis. Changes in the market values of these inventories are recognized as a component of cost of goods sold.

Long-Lived Assets

Depreciation and amortization of our property, plant and equipment is provided on the straight-lined method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

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Long-lived assets, including property, plant and equipment and investments are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Considerable management judgment is necessary to estimate undiscounted future cash flows and may differ from actual.

We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying value may not be recoverable.  Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. We measure the carrying amount of the asset against the estimated undiscounted future cash flows associated with it.  Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized.  The impairment loss would be calculated as the amount by which the carrying value of the asset exceeded its fair value.  The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.  The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated.  These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

Accounting for Derivative Instruments and Hedging Activities

We minimize the effects of changes in the price of agricultural commodities by using exchange-traded futures and options contracts to minimize our net positions in these inventories and contracts. We account for changes in market value on exchange-traded futures and option contracts at exchange prices and account for the changes in value of forward purchase and sales contracts at local market prices determined by grain terminals in the area. Changes in the market value of all these contracts are recognized in earnings as a component of cost of goods sold.

Item 3.                    Quantitative and Qualitative Disclosures About Market Risk.

Commodities Risk & Risk Management. To reduce the price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight or options futures contract) on a regulated commodity futures exchange, the Chicago Board of Trade.  While hedging activities reduce the risk of loss from increasing market prices of soybeans, such activities also limit the gain potential which otherwise could result from significant decreases in market prices of soybeans.  Our policy is generally to maintain a hedged position within limits, but we can be long or short at any time.  Our profitability is primarily derived from margins on soybeans processed, not from hedging transactions.  Management does not anticipate that its hedging activity will have a significant impact on future operating results or liquidity.  Hedging arrangements do not protect against nonperformance of a cash contract.

At any one time, our inventory and purchase contracts for delivery to the plant may be substantial.  We have risk management policies and procedures that include net position limits. They are defined by commodity, and include both trader and management limits.  This policy and procedure triggers a review by management when any trader is outside of position limits.  The position limits are reviewed at least annually with the Board of Managers.  We monitor current market conditions and may expand or reduce the limits in response to changes in those conditions.

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Foreign Currency Risk.  We conduct essentially all of our business in U.S. Dollars and have no direct risk regarding foreign currency fluctuations. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of and demand for U.S. agricultural products compared to the same products offered by foreign suppliers.

Interest Rate Risk.  We manage exposure to interest rate changes by using variable rate loan agreements with fixed rate options.  Long-term loan agreements can utilize the fixed option through maturity; however, the revolving ability to pay down and borrow back would be eliminated once the funds were fixed.

Item 4.                    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.                    Legal Proceedings.

 From time to time in the ordinary course of our business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual dispute. Currently, we are not involved in any legal proceeding that we believe is material. In the event we become involved in a legal proceeding, we carry insurance that provides protection against general commercial liability claims, claims against our directors, officers and employees, business interruption, automobile liability, and workers’ compensation claims.

Item 1A. Risk Factors.

During the quarter ended June 30, 2007, there were no material changes to the Risk Factors disclosed in Item 1A. to Part I of our 2006 Annual Report on our Form 10K.

Item 2.                    Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.                    Defaults Upon Senior Securities.

None.

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Item 4.                    Submission of Matters to a Vote of Security Holders.

Board of Managers.  On June 26, 2007, we held our annual meeting of members in Brookings, South Dakota.  At the meeting, Marvin Hope, Delbert Tschakert, Ardon Wek, Paul Barthel, Dean Christopherson, Randy Tauer and Wayne Enger were elected to the Board of Managers. Alan Christensen, David Driessen, Dan Feige, Ronald Gorder, Kent Howell, James Jepsen, Jerome Jerzak, Robert Nelsen, Robert Nelson, Maurice Odenbrett,  Greg Schmieding, Corey Schnabel, Lyle Trautman,  and Gary Wertish will remain on the board until their terms expire, they are reelected, or their earlier death, resignation or removal.

VOTE TABULATION FOR BOARD OF MANAGER NOMINEES

Nominee		For		Abstentions
District One
Marvin Hope		Unanimous
District 2
Laron Krause		9
Delbert Tschakert		11
District 3
Ardon Wek		Unanimous
District 4
Paul Barthel		Unanimous
District 5
Dean Christopherson		Unanimous
District 6
Randy Tauer		Unanimous
District 7
Wayne Enger		23
Rodney Skalbeck		7

Amended and Restated Operating Agreement.  Our members also approved at the annual meeting of members on June 26, 2007 an Amended and Restated Operating Agreement by adopting amendments to Section 6.2 and 13.2. Specifically, Section 6.2(c) was partially amended and Sections 6.2(d) and 13.2(c) were added to the Company’s operating agreement. The amendments were adopted by 95% of the members voting on the matter.

The amendments provide that, effective June 26, 2007, our board of managers has the authority and discretion to issue distributions of cash, or assets upon liquidation, to persons who were members or former members of our predecessor cooperative between 1998 and 2002 and who were subject to qualified patronage made through written notices of allocations during this period.

Prior to approval of the amendments, our operating agreement required that all distributions be made in proportion to each member’s ownership percentage of the Company.  In addition, upon a liquidation of the Company after payment of all debts and obligations of the Company, our assets were required to be subsequently distributed to the members ratably in proportion to the credit balances in their respective capital accounts.

Item 5.           Other Information

None.

Item 6.           Exhibits

See Exhibit Index.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		SOUTH DAKOTA
		SOYBEAN PROCESSORS, LLC
Dated:  August 14, 2007
		By	/s/ Rodney Christianson
			Rodney G. Christianson
			Chief Executive Officer

 

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EXHIBIT INDEX

TO

FORM 10-Q

OF

SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

Exhibit Number		Description
3.1(i)		Articles of Organization (1)
3.1(ii)		Operating Agreement, as amended (2)
3.1(iii)		Articles of Amendment to Articles of Organization (3)
4.1		Form of Class A Unit Certificate (4)
10.1		Amendment to Master Loan Agreement dated June 6, 2007
31		Rule 13a-14(a)/15d-14(a) Certification
32		Section 1350 Certification

 

(1) Incorporated by reference from Appendix B to the information statement/prospectus filed as a part of the issuer’s Registration Statement on Form S-4 (File No. 333-75804).

(2) Incorporated by reference from the same numbered exhibit to the issuer’s Form 10-K filed on April 15, 2005.

(3) Incorporated by reference from the same numbered exhibit to the issuer’s Form 10-Q filed on August 14, 2002.

(4) Incorporated by reference from the same numbered exhibit to the issuer’s Registration Statement on Form S-4 (File No. 333-75804).

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