SOUTH DAKOTA SOYBEAN PROCESSORS LLC - Quarter Report: 2009 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
|
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended March 31, 2009
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
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)
|
South
Dakota
|
46-0462968
|
|
|
(State
of Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
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
ý
No
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):
|
o Large
Accelerated Filer
|
o Accelerated
Filer
|
o Non-Accelerated
Filer
(do
not check if a smaller reporting company)
|
ý Smaller
Reporting Company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes ý No
|
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 No
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 May 14, 2009, the registrant had
30,419,000 capital units outstanding.
PART
I – FINANCIAL INFORMATION
|
Item
1.
|
Financial
Statements
|
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2009 AND 2008
- 2
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
Index to
Financial Statements
|
Page
|
|
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
4
|
|
FINANCIAL
STATEMENTS
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December
31, 2008
|
6
|
|
Condensed
Consolidated Statements of Operations for the three-month periods ended
March 31, 2009 and 2008 (unaudited)
|
8
|
|
Condensed
Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 2009 and 2008 (unaudited)
|
9
|
|
Notes
to Condensed Consolidated Financial Statements
|
10
|
- 3
-
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 March 31, 2009, and the related condensed
consolidated statements of operations and cash flows for the three-month period
ended March 31, 2009. These interim financial statements are the
responsibility of the Company’s management.
We
conducted our review 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 review, 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, 2008, 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 24, 2009, 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, 2008, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Eide
Bailly LLP
May 8,
2009
Greenwood
Village, Colorado
- 4
-
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 statements of operations and cash flows for
the three-month period ended March 31, 2008 of South Dakota Soybean Processors,
LLC (the “Company”). These interim financial statements are the
responsibility of the Company’s management.
We
conducted our review 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 review, 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.
Gordon,
Hughes & Banks, LLP
May 6,
2008
Greenwood
Village, Colorado
- 5
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
March
31,
|
||||||||
|
2009
|
December
31,
|
|||||||
|
(Unaudited)
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 150 | $ | 9,332 | ||||
|
Trade
accounts receivable, less allowance for
|
||||||||
|
uncollectible
accounts of $170,000
|
17,053,334 | 18,939,727 | ||||||
|
Inventories
|
17,517,893 | 22,621,675 | ||||||
|
Margin
deposits
|
2,395,442 | — | ||||||
|
Prepaid
expenses
|
425,198 | 544,105 | ||||||
|
Total
current assets
|
37,392,017 | 42,114,839 | ||||||
|
PROPERTY
AND EQUIPMENT
|
54,590,917 | 54,344,281 | ||||||
|
Less
accumulated depreciation
|
(31,526,515 | ) | (31,038,838 | ) | ||||
|
Total
property and equipment, net
|
23,064,402 | 23,305,443 | ||||||
|
OTHER
ASSETS
|
||||||||
|
Investments
in cooperatives
|
8,126,337 | 8,055,962 | ||||||
|
Notes
receivable - members
|
148,898 | 148,898 | ||||||
|
Patents
and other intangible assets, net
|
5,549,561 | 5,640,572 | ||||||
|
Total
other assets
|
13,824,796 | 13,845,432 | ||||||
|
Total
assets
|
$ | 74,281,215 | $ | 79,265,714 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
- 6
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
CONDENSED
CONSOLIDATED BALANCE SHEETS – continued
|
March
31,
|
||||||||
|
2009
|
December
31,
|
|||||||
|
(Unaudited)
|
2008
|
|||||||
|
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Excess
of outstanding checks over bank balance
|
$ | 3,087,797 | $ | 2,408,396 | ||||
|
Current
maturities of long-term debt
|
2,850,000 | 819,017 | ||||||
|
Note
payable - seasonal loan
|
7,832,213 | — | ||||||
|
Accounts
payable
|
923,850 | 1,117,600 | ||||||
|
Accrued
commodity purchases
|
12,940,058 | 25,174,258 | ||||||
|
Margin
deposit deficit
|
— | 252,281 | ||||||
|
Accrued
expenses
|
1,930,098 | 1,890,668 | ||||||
|
Accrued
interest
|
80,246 | 88,281 | ||||||
|
Total
current liabilities
|
29,644,262 | 31,750,501 | ||||||
|
LONG-TERM
LIABILITIES
|
||||||||
|
Long-term
debt, less current maturities
|
9,300,000 | 9,300,000 | ||||||
|
Deferred
compensation
|
109,554 | 107,405 | ||||||
|
Total
long-term liabilities
|
9,409,554 | 9,407,405 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
TEMPORARY
EQUITY, net of subscriptions receivable of
|
||||||||
|
$2,259,
consisting of 70,750 Class A capital units
|
140,491 | 140,491 | ||||||
|
MEMBERS'
EQUITY
|
||||||||
|
Class
A Units, no par value, 30,419,000 units issued and
|
||||||||
|
outstanding
|
35,086,908 | 37,967,317 | ||||||
|
Total
liabilities, temporary equity and members' equity
|
$ | 74,281,215 | $ | 79,265,714 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
- 7
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
NET
REVENUES
|
$ | 60,957,712 | $ | 87,268,414 | ||||
|
COST
OF REVENUES
|
||||||||
|
Cost
of product sold
|
55,347,159 | 74,754,435 | ||||||
|
Production
|
3,970,800 | 4,278,858 | ||||||
|
Freight
and rail
|
3,739,710 | 4,635,565 | ||||||
|
Brokerage
fees
|
51,884 | 73,035 | ||||||
|
Total
cost of revenues
|
63,109,553 | 83,741,893 | ||||||
|
GROSS
PROFIT (LOSS)
|
(2,151,841 | ) | 3,526,521 | |||||
|
OPERATING
EXPENSES
|
||||||||
|
Administration
|
1,400,441 | 1,534,489 | ||||||
|
OPERATING
PROFIT (LOSS)
|
(3,552,282 | ) | 1,992,032 | |||||
|
OTHER
INCOME (EXPENSE)
|
||||||||
|
Interest
expense
|
(239,405 | ) | (729,829 | ) | ||||
|
Other
non-operating income
|
553,211 | 548,058 | ||||||
|
Patronage
dividend income
|
358,367 | 247,080 | ||||||
|
Total
other income (expense)
|
672,173 | 65,309 | ||||||
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
(2,880,109 | ) | 2,057,341 | |||||
|
INCOME
TAX EXPENSE (BENEFIT)
|
300 | — | ||||||
|
NET
INCOME (LOSS)
|
$ | (2,880,409 | ) | $ | 2,057,341 | |||
|
BASIC
AND DILUTED EARNINGS (LOSS)
|
||||||||
|
PER
CAPITAL UNIT
|
$ | (0.09 | ) | $ | 0.07 | |||
|
WEIGHTED
AVERAGE NUMBER OF UNITS
|
||||||||
|
OUTSTANDING
FOR CALCULATION
|
||||||||
|
OF
BASIC AND DILUTED EARNINGS
|
||||||||
|
(LOSS)
PER CAPITAL UNIT
|
30,419,000 | 30,419,000 | ||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
- 8
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net
income (loss)
|
$ | (2,880,409 | ) | $ | 2,057,341 | |||
|
Charges
and credits to net income (loss)
|
||||||||
|
not
affecting cash:
|
||||||||
|
Depreciation
and amortization
|
645,155 | 641,204 | ||||||
|
(Gain)
loss on sales of property and equipment
|
9,737 | — | ||||||
|
Non-cash
patronage dividends
|
(125,428 | ) | (123,540 | ) | ||||
|
Change
in current assets and liabilities
|
(7,933,047 | ) | (8,317,422 | ) | ||||
|
NET
CASH (USED FOR) OPERATING ACTIVITIES
|
(10,283,992 | ) | (5,742,417 | ) | ||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Proceeds
from investments in cooperatives
|
— | 420,120 | ||||||
|
Retirement
of patronage dividends
|
55,052 | 376,516 | ||||||
|
Patent
costs
|
(26,997 | ) | (40,299 | ) | ||||
|
Proceeds
from sales of property and equipment
|
12,431 | — | ||||||
|
Purchase
of property and equipment
|
(308,273 | ) | (21,046 | ) | ||||
|
NET
CASH (USED FOR) FROM INVESTING ACTIVITIES
|
(267,787 | ) | 735,291 | |||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Change
in excess of outstanding checks over
|
||||||||
|
bank
balances
|
679,401 | 980,682 | ||||||
|
Net
(payments) proceeds from seasonal borrowings
|
7,832,213 | 6,357,764 | ||||||
|
Distributions
to members
|
— | (2,337,246 | ) | |||||
|
Decrease
(increase) in subscriptions receivable
|
— | 7,213 | ||||||
|
Proceeds
from long-term debt
|
2,030,983 | — | ||||||
|
Principal
payments on long-term debt
|
— | (1,267 | ) | |||||
|
NET
CASH FROM FINANCING ACTIVITIES
|
10,542,597 | 5,007,146 | ||||||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(9,182 | ) | 20 | |||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
9,332 | 9,247 | ||||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 150 | $ | 9,267 | ||||
|
SUPPLEMENTAL
DISCLOSURES
|
||||||||
|
OF
CASH FLOW INFORMATION
|
||||||||
|
Cash
paid during the period for:
|
2009
|
2008
|
||||||
|
Interest
|
$ | 247,440 | $ | 512,558 | ||||
|
Income
taxes
|
$ | — | $ | — | ||||
- 9
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The
financial statements as of and for the periods ended March 31, 2009 and 2008
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,
2008 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, 2008, included in the Company’s annual
report on Form 10-K filed with the Securities and Exchange Commission on March
31, 2009.
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.
Recent
Accounting Pronouncements
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee
Insurance Contracts (“SFAS 163”), which requires that an insurance
enterprise recognizes a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation. SFAS 163 also clarifies how SFAS 60, Accounting and Reporting by
Insurance Enterprises, applies to financial guarantee contracts,
including the recognition and measurement to be used to account for premium
revenue and claim liabilities. It also requires expanded disclosures
about the financial guarantee insurance contracts. Adoption of SFAS
163 is required for fiscal years beginning after December 15, 2008, except for
some disclosures about the insurance enterprise’s risk management activities,
which are required the first period beginning after the issuance of
Statement. Except for those disclosures, earlier adoption of SFAS 163
is not permitted. The implementation of SFAS 163 has not had any
impact on the Company’s consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 157-4 (“FSP FAS 157-4”), Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability has Significantly
Decreased and Identifying Transactions That Are Not Orderly and FSP No.
FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”), Recognition and Presentation of
Other-Than-Temporary Impairments. These two FSPs were issued
to provide additional guidance about (1) measuring the fair value of financial
instruments when the markets become inactive and quoted prices may reflect
distressed transactions, and (2) recording impairment charges on investments in
debt instruments. Additionally, the FASB issued FSP No. FAS 107-1 and
APB 28-1 (“FSP FAS 107-1”), Interim Disclosures about Fair Value
of Financial Instruments, to require disclosures of fair value of certain
financial instruments in interim financial statements. These FSPs are
effective for financial statements issued for interim and annual reporting
periods ending after June 15, 2009. The Company does not anticipate
the adoption of these FSPs will have a material impact on the Company’s current
financial position or results of operation.
(continued
on next page)
- 10
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Reclassifications
have been made to the March 31, 2008 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
|
2009
|
2008
|
|||||||
|
Finished
goods
|
$ | 8,501,778 | $ | 5,960,820 | ||||
|
Raw
materials and other
|
9,016,115 | 16,660,855 | ||||||
|
Totals
|
$ | 17,517,893 | $ | 22,621,675 | ||||
The
Company has entered into a revolving credit agreement with CoBank, which expires
February 1, 2010. The purpose of the credit agreement is to finance the
inventory and accounts receivable of the Company. On March 23, 2009, the Company
amended its Master Loan Agreement. Under the amendment, the Company
may borrow up to $40 million. Interest accrues at a variable rate (3.26% at
March 31, 2009). Advances on the revolving credit agreement are
secured and limited to qualifying inventory and accounts receivable, net of any
accrued commodity purchases. There were advances outstanding of
$7,832,213 and $0 at March 31, 2009 and December 31, 2008,
respectively. The remaining available funds to borrow under the terms
of the revolving credit agreement are approximately $31,692,000 as of March 31,
2009.
The
Company is in violation of one of its loan covenants as of March 31,
2009. The loan covenants with CoBank require the Company to maintain
a minimum working capital of $9.0 million. At March 31, 2009, working
capital was approximately $7.8 million. In March 2009 CoBank granted
a waiver of this working capital requirement by lowering the requirement to $7.5
million until August 31, 2009, at which time the minimum will increase back to
$9 million.
NOTE
4 - 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
January 31, 2007, the Company was named as a defendant in a lawsuit filed
in the U.S District Court for the District of Minnesota, along with other
individual defendants, including the Company’s chief executive officer,
commercial manager, and two Board members. The plaintiffs, Transocean Group
Holdings PTY Ltd. and Transocean Global Biofuels PTY Ltd., of Sydney, Australia
(“Transocean”), allege that the Company breached a heads of agreement with
Transocean dated April 28, 2006. The heads of agreement concerned the
potential development and operation of a biodiesel refinery through a company
called High Plains Biofuels, Inc., to be owned by the Company and Transocean as
shareholders. Transocean alleges that the individual defendants breached
fiduciary duties to High Plains Biofuels. Transocean is seeking relief for its
expectation damages which is
unknown at this time. Based upon their investigation of the facts
surrounding the case, management believes that Transocean’s allegations are
meritless and are vigorously defending the action. The Company filed
an answer to Transocean’s complaint on September 17, 2007. Transocean
filed an amendment complaint on January 18, 2008 to which the Company filed an
answer on February 7, 2008. The Company also filed a motion for
summary judgment on January 15, 2009, and oral arguments are scheduled for May
20, 2009. No trial date has been set for this
lawsuit. Management cannot provide, however, any assurance that the
Company will be successful in disposing of the case or that any costs of
settlement or damages would not be material if they are unable to get the case
dismissed.
(continued on next page)
- 11
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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
March 31, 2009 and December 31, 2008, 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 $140,491 as of March 31, 2009 and December 31, 2008,
consisting of 70,750 Class A capital units.
NOTE
5 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In
March 2008, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which requires enhanced
disclosures about how these instruments and activities affect the entity’s
financial position, financial performance and cash flows. The standard requires
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. It also provides more information about an entity’s
liquidity by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes to enable
financial statement users to locate important information about derivative
instruments. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. As SFAS 161 is
only disclosure related, it did not have an impact on our financial position,
results of operation or cash flows.
In the
ordinary course of business, the Company enters into contractual arrangements as
a means of managing exposure to changes in commodity prices. The
Company’s derivative instruments primarily consist of commodity futures,
options and forward contracts. Although these contracts may be
effective economic hedges of specified risks, they are not designated as, nor
accounted for, as hedging instruments. These contracts are recorded
on the Company’s consolidated balance sheets at fair value as discussed in Note
6, Fair Value of Financial Instruments.
(continued on next page)
- 12
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of
March 31, 2009 and December 31, 2008, the value of the Company’s open futures,
options and forward contracts was approximately $(2,802,950) and $1,362,559,
respectively.
|
Balance
Sheet
|
Asset
Derivatives
|
Liability
Derivatives
|
||||||||
|
Classification
|
March
31, 2009
|
March
31, 2009
|
||||||||
|
Derivatives
not designated as
|
||||||||||
|
hedging
under SFAS 133:
|
||||||||||
|
Commodity
contracts
|
Current
Assets
|
$ | 1,729,793 | $ | 4,532,743 | |||||
During
the three months ending March 31, 2009, net realized and unrealized losses on
derivative transactions were recognized in the consolidated statement of
operations as follows:
|
Location
of Net Loss
|
||||||||
|
Recognized
in
|
Net
Gain (Loss)
|
|||||||
|
Earnings
on
|
Recognized
on
|
|||||||
|
Derivative
Activities
|
Derivative
Activities
|
|||||||
|
Derivatives
not designated as hedging
|
||||||||
|
under
SFAS 133:
|
||||||||
|
Commodity
contracts
|
Cost of Sales
|
$ | (1,366,008 | ) | ||||
The
Company recorded a gain of $4,389,608 in cost of goods sold related to its
commodity derivative instruments for the three months ended March 31,
2008.
NOTE
6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (“SFAS 157”), which provides a comprehensive framework for
measuring fair value and expands disclosures which are required about fair value
measurements. Specifically, SFAS 157 sets forth a definition of fair
value and establishes a hierarchy prioritizing the inputs to valuation
techniques, giving the highest priority to quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable value
inputs. The adoption of this statement had an immaterial impact on
the Company’s financial statements. SFAS 157 defines the hierarchy 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 equities listed on the New York Stock Exchange and
commodity derivative contracts listed on the Chicago Board of Trade
(“CBOT”).
|
|
|
·
|
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 in Level 2 are
typically either comparable to actively traded securities or contracts, or
priced with models using highly observable inputs, such as commodity
prices using forward future prices.
|
|
|
·
|
Level
3 – Significant inputs to pricing that are unobservable 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 complex and
subjective models and forecasts used to determine the fair value of
financial transmission
rights.
|
(continued on next page)
- 13
-
SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following table sets forth financial assets and liabilities measured at fair
value in the consolidated balance sheets and the respective levels to which fair
value measurements are classified within the fair value hierarchy as of March
31, 2009:
|
Fair
Value as of March 31, 2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
equivalents
|
$ | 150 | $ | — | $ | — | $ | 150 | ||||||||
|
Inventory
|
$ | (516,657 | ) | $ | 15,904,024 | $ | — | $ | 15,387,367 | |||||||
|
Margin
deposits (deficits)
|
$ | 2,395,442 | $ | — | $ | — | $ | 2,395,442 | ||||||||
The fair
value of the Company’s long-term debt approximates the carrying
value. The interest rates on the long-term debt are similar to rates
the Company would be able to obtain currently in the market.
The
Company enters into various commodity derivative instruments, including futures,
options, swaps and other agreements. The fair value of the Company’s
commodity derivatives is determined using unadjusted quoted prices for identical
instruments on the Chicago Board of Trade (“CBOT”). The Company
estimates the fair market value of their finished goods and raw materials
inventories using the market price quotations of similar forward future
contracts listed on the CBOT and adjusts for the local market adjustments
derived from other grain terminals in our area.
- 14
-
|
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
period ended March 31, 2009, (including reports filed with the Securities and
Exchange Commission (the “SEC” or “Commission”), contains “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, 2008.
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, 2008.
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
Our core
business and primary source of income generation is our soybean processing plant
located in Volga, South Dakota. We process approximately 27 million bushels of
soybeans annually to produce approximately 600,000 tons of high protein soybean
meal and 300 million pounds of crude soybean oil. Our
production represents approximately 1.5% of the total soybean processing
capacity in the United States. In addition to our processing plant, we operate a
soybean oil refinery in Volga where we produce partially refined soybean oil.
The partially refined soybean oil is sold to customers in the food, chemical and
industrial sectors. Under certain market conditions we may issue warehouse
receipts for crude oil according to the terms and conditions of the CBOT soybean
oil contract. Other activities that generate income are our
investment in Minnesota Soybean Processors (MnSP), as well as through management
and consulting agreements.
- 15
-
Soybean
processing is basically a commodity driven business and is cyclical in nature.
Our industry is dependent on the annual soybean crop production (supply side)
and world economic growth (demand side for food). Soybean processing is a highly
consolidated industry with four companies in the U.S. controlling 84% of the
soybean processing industry and 68% of the soybean oil refining capacity for
food applications. We compete in this industry by producing high quality
products and operating a highly efficient operation at the lowest possible
cost.
In
efforts to increase the value of the products we produce, we continue to invest
in our subsidiary, USSC, for the research, marketing and development of
soy-based polyol and soy-based polyurethane systems. For the three months ended
March 31, 2009, USSC achieved a substantial improvement in its gross margin per
unit sold compared to the same period of 2008; however, it continues to operate
at a loss.
In terms of overall operations between
periods, we generated a net loss of $2.9 million for the quarter ended March 31,
2009, compared to a net profit of $2.1 million for the same period in 2008, a
decrease of $5.0 million or $0.75 per bushel processed. Profits decreased
primarily due to a reduction of $5.7 million in gross margin. Lower margins were
caused by a decrease in revenues of $3.07 per soybean bushel between periods,
while production costs only decreased by $2.22 per bushel between periods.
Factors contributing to this result include reduced demand domestically for our
products due to the high price of soybeans and soybean products in 2008, a
struggling biodiesel market, declining world economic activity, the global
financial crisis, and a tight and declining domestic and international soybean
supply. These lower margins were partially offset by a $1.0 million
decrease in interest, energy and administrative expenses.
We
anticipate that our results of operations for the remainder of 2009 could look
similar to the first quarter ended 2009, at least until the 2009 harvest. Tight
soybean supplies and economic uncertainty, domestically and internationally,
will continue to contribute to price volatility in the commodity and petroleum
markets. An effective use of risk management and operating prudently will likely
be our best tools for handling these challenges.
Comparison
of the three months ended March 31, 2009 and 2008
|
Quarter
Ended March 31, 2009
|
Quarter
Ended March 31, 2008
|
|||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||
|
$
|
Revenue
|
$
|
Revenue
|
|||||||||||||
|
Revenue
|
$ | 60,957,712 | 100.0 | $ | 87,268,414 | 100.0 | ||||||||||
|
Cost
of revenues
|
(63,109,553 | ) | (103.5 | ) | (83,741,893 | ) | (96.0 | ) | ||||||||
|
Administrative
expenses
|
(1,400,441 | ) | (2.3 | ) | (1,534,489 | ) | (1.7 | ) | ||||||||
|
Other
income (expense)
|
672,173 | 1.1 | 65,309 | 0.1 | ||||||||||||
|
Income
tax (expense) benefit
|
(300 | ) | 0.0 | — | — | |||||||||||
|
Net
income
|
$ | (2,880,409 | ) | (4.7 | ) | $ | 2,057,341 | 2.4 | ||||||||
- 16
-
Revenue – Revenue decreased
$26.3 million, or 30.1%, for the first quarter of 2009 compared to the same
period in 2008. The decrease in revenues is primarily due to
decreases in the average sales price of soybean meal and oil as well as the
volume of soybean oil sales. The average sales prices of soybean meal
and oil decreased 9.6% and 33.9%, respectively, in the first quarter of 2009
compared to the same period in 2008. The principal cause for this
decrease is the reduction in the price of crude petroleum oil and its refined
products, which has been the primary driving factor for changes in our prices
the last few years. In addition to the decrease in sales price of
meal and oil, we experienced a 27.1% decrease in the volume of soybean oil sales
during the first quarter of 2009 compared to the same period in
2008. The decrease in volume of soybean oil sales is attributed to
changes in customer demand. Reduced sales volume of refined and
bleached soybean oil to ACH Foods, our primary customer for soybean oil the last
several years, has required us to seek an expanded customer base for our soybean
oil. However, the needs of this new customer base, particularly in
the biodiesel industry, have fluctuated dramatically as the market contends with
price volatility and uncertain demand. We expect this fluctuation to
continue for the near future.
Gross Profit/Loss – For the
first quarter of 2009, we generated a gross loss of $2.2 million compared to a
gross profit of $3.5 million for the first quarter of 2008. The $5.7
million change in gross profit (loss) is primarily attributed to lower crush
margins and a 7.8% decrease in the volume of soybeans crushed. Due to a 40-50%
decrease in commodity prices since the summer of 2008, as well as the USDA
projecting a tight soybean carryout for 2008-2009, soybean suppliers have become
reluctant sellers to us. This reluctance has increased the cost of purchasing
soybeans for the crushing process and, therefore, lowered our crush
margins. Offsetting in part this decrease in gross profit is a
decrease in production costs of $0.3 million for the first quarter of 2009
compared to the same period in 2008. Production costs decreased between periods
primarily due to decreases in energy and personnel costs.
Administrative Expense –
Administrative expense, including all selling, general and administrative
expenses, decreased $134,000, or 8.7%, for the first quarter of 2009 compared to
the same period in 2008. Approximately 87% of this decrease is due to
a decrease in professional fees, and 10% is due to a decrease in our operating
expenses associated with USSC. These decreases in administrative
expenses are partially offset by an increase in bad debt expense during the
first quarter of 2009 compared to the first quarter of 2008.
Interest Expense – Interest
expense decreased 67.2% for the first quarter of 2009 compared to the same
period in 2008. This decrease is due to lower debt levels resulting
from lower soybean prices, inventory quantities and accounts receivable, as well
as lower interest rates on our senior debt. The average debt level
during the first quarter of 2009 is approximately $18.1 million compared to an
average debt level of approximately $47.6 million during the same period in
2008. The annual interest rate on our senior debt is 3.26% and 4.75%
as of March 31, 2009 and 2008, respectively.
Other Non-Operating Income –
Other non-operating income remained constant for the first quarter of 2009,
compared to the same period in 2008.
Net Income/Loss – The $4.9
million decrease in net income for the first quarter of 2009, compared to the
same period in 2008, is primarily attributable to a decrease in gross profit,
partially offset by decreases in administrative and interest
expenses.
- 17
-
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
March 31, 2009, we had working capital, defined as current assets less current
liabilities, of approximately $7.7 million, compared to working capital of $9.5
million on March 31, 2008. Working capital decreased between periods
primarily due to a decrease in net income. Despite this decrease, we anticipate
for the foreseeable future having sufficient cash flows from operations and our
revolving debt to fund working capital, cover operating expenses and capital
expenditures, and meet debt service obligations.
A summary
of our cash flow from operating, investing and financing activities for each of
the three-month periods ended March 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Net
cash (used for) operating activities
|
$ | (10,283,992 | ) | $ | (5,742,417 | ) | ||
|
Net
cash (used for) provided by investing activities
|
(267,787 | ) | 735,291 | |||||
|
Net
cash provided by financing activities
|
10,542,597 | 5,007,146 | ||||||
Cash
Flows from Operations
Cash
flows from operations are generally affected by commodity prices and the
seasonality of our business. These commodity prices are affected by a wide range
of factors beyond our control, including weather, crop conditions, drought, the
availability and the adequacy of supply and transportation, government
regulations and policies, world events, and general political and economic
conditions. The increase in cash flows used for operating activities is
primarily attributed to a decrease in net income during the three months ended
March 31, 2009 compared to the same period in 2008.
Cash
Flows from Investing Activity
The $1.0
million decrease in cash flows from investing activities between the three
months ended March 31, 2009 and the same period in 2008 is primarily attributed
to decreases in the amount received from our investments in MnSP and CHS,
Inc. 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 members to
invest $0.30 per share of Class A preferred stock. During the three months ended
March 31, 2008, MnSP repaid these unit retains to us and other
members. In addition, during the same three-month period ended March
31, 2009, we received $55,000 from the retirement of patronage dividends by CHS
compared to $377,000 during the same period in 2008.
Cash
Flows from Financing Activity
The
increase in cash flows from financing activities between the three months ended
March 31, 2009 and the same period in 2007 is principally due to a $3.5 million
increase in seasonal and long-term borrowings and a $2.3 million decrease in
distributions paid to members. During the first quarter of 2008, we distributed
approximately $2.3 million to our members compared to no distributions during
the first quarter of 2009.
- 18
-
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 $11.9 million, and then pay down the
principal whenever excess cash is available. Repaid amounts may be
borrowed up to the available credit line. Prior to an amendment of our Master
Loan Agreement with CoBank on March 23, 2009 (see below), the available credit
line was scheduled to be reduced by $1.3 million every six months until maturity
on March 20, 2013, except the reduction was waived by CoBank for September 2007
and March 2008. Beginning in September 2008, the reduction continued
and payments are required if our principal balance outstanding exceeds our then
available credit line. The final payment at maturity will be 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 is $11.9 million and $13.2 million as of
March 31, 2009 and 2008, respectively. There is no remaining
commitment available to borrow on the revolving term loan as of March 31,
2009.
The
second credit line is a revolving working capital loan that matures on February
1, 2010. The primary purpose of this loan is to finance inventory and
receivables. The maximum available under this credit line is $40
million. 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 on the
working capital loan is approximately $7.8 million and $29.8 million as of March
31, 2009 and 2008, respectively.
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
revolving term and working capital loans is 3.26% and 4.75% as of March 31, 2009
and 2008, respectively. 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.
On March
23, 2009 we amended our Master Loan Agreement with CoBank. Under this
amendment, CoBank agreed to waive the $1.3 million semi-annual credit line
reduction scheduled for March 20, 2009, thus extending the maturity of the
revolving term loan from March 20, 2013 to September 30, 2013. In
addition, CoBank modified our financial covenant regarding the payment of
distributions to our members. While the loan agreement with CoBank is
in effect, we may not declare or issue distributions to members in excess of 50%
of our consolidated net income of the prior fiscal year without prior written
consent from CoBank.
We were
in violation of one of our loan covenants with CoBank as of March 31, 2009. The
loan covenants with CoBank require us to maintain a minimum working capital of
$9.0 million. At March 31, 2009, we had working capital of
approximately $7.8 million. As part of the amendment to our Master
Loan Agreement in March 2009, CoBank granted a waiver of this working capital
requirement by lowering the minimum to $7.5 million until August 31, 2009, at
which time the minimum will increase back to $9.0 million.
We also
have another long-term note payable totaling $250,000, with an annual interest
rate of 15.0% as of March 31, 2009. We made principal payments of $0 and $1,000
on these other long-term obligations during the three months ended March 31,
2009 and 2008, respectively.
- 19
-
OFF
BALANCE SHEET FINANCING ARRANGEMENTS
Except as
described below, we do not utilize variable interest entities or other
off-balance sheet financial arrangements.
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, Trinity Capital, and AIG Rail
Services for hopper rail cars and oil tank cars. Total lease expenses under
these arrangements are approximately $0.5 million for each of the three-month
periods ended March 31, 2009 and 2008. The hopper rail cars earn mileage
credit from the railroad through a sublease program, which totaled $0.4 million
for each of the three months ended March 31, 2009 and 2008.
In
addition to rail car leases, we have several operating leases for various
equipment and storage facilities. Total lease expense under these arrangements
is $53,000 and $37,000 for the three-month periods ended March 31, 2009 and
2008, respectively. Some of our leases include purchase options, none of which,
however, are for a value less than fair market value at the end of the
lease.
RECENT
ACCOUNTING PRONOUNCEMENTS
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee
Insurance Contracts (“SFAS 163”), which requires that an insurance
enterprise recognizes a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation. SFAS 163 also clarifies how SFAS 60, Accounting and Reporting by
Insurance Enterprises, applies to financial guarantee contracts,
including the recognition and measurement to be used to account for premium
revenue and claim liabilities. It also requires expanded disclosures
about the financial guarantee insurance contracts. Adoption of SFAS
163 is required for fiscal years beginning after December 15, 2008, except for
some disclosures about the insurance enterprise’s risk management activities,
which are required the first period beginning after the issuance of the
Statement. Except for those disclosures, earlier adoption of SFAS 163
is not permitted. The implementation of SFAS 163 has not had any
impact on our consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 157-4 (“FSP FAS 157-4”), Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability has Significantly
Decreased and Identifying Transactions That Are Not Orderly and FSP No.
FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”), Recognition and Presentation of
Other-Than-Temporary Impairments. These two FSPs were issued
to provide additional guidance about (1) measuring the fair value of financial
instruments when the markets become inactive and quoted prices may reflect
distressed transactions, and (2) recording impairment charges on investments in
debt instruments. Additionally, the FASB issued FSP No. FAS 107-1 and
APB 28-1 (“FSP FAS 107-1”), Interim Disclosures about Fair Value
of Financial Instruments, to require disclosures of fair value of certain
financial instruments in interim financial statements. These FSPs are
effective for financial statements issued for interim and annual reporting
periods ending after June 15, 2009. We do not anticipate the adoption
of these FSPs will have a material impact on our current financial position or
results of operation.
- 20
-
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. We
continually evaluate 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 U.S, 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 (CBOT), net of the local basis, for the last
three business days of the period and the first two business days of the
subsequent period. 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.
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.
- 21
-
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 CBOT. While hedging activities reduce the risk of loss from
changing market prices, such activities also limit the gain potential which
otherwise could result from these significant fluctuations in market prices. 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. We do not anticipate that
our 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 our facility
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.
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.
- 22
-
|
Item
4T.
|
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 controller 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 March
31, 2009 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. Except as described
below, we are not currently involved in any material legal proceedings and are
not aware of any potential claims.
On
January 31, 2007, we were named as a defendant in a lawsuit filed in the
U.S. District Court for the District of Minnesota, along with other individual
defendants, including our chief executive officer, Rodney Christianson,
commercial manager, Tom Kersting, and Board member, Dan Feige, and former board
member, Rodney Skalbeck. The plaintiffs, Transocean Group Holdings PTY Ltd. and
Transocean Global Biofuels PTY Ltd., of Sydney, Australia (“Transocean”), allege
that we breached a heads of agreement with Transocean dated April 28,
2006. The heads of agreement concerned the potential development and
operation of a biodiesel refinery through a company called High Plains
Biofuels, Inc., to be owned by us and Transocean as shareholders.
Transocean alleges that the individual defendants breached fiduciary duties to
High Plains Biofuels. Transocean is currently seeking restitution damages, the
value of which is uncertain and disputed at this time. Based upon our
investigation of the facts surrounding the case, we believe that Transocean’s
allegations are meritless, and we are vigorously defending the action. We filed
answers to Transocean’s complaint on September 17, 2007 and amended complaint on
February 7, 2008. We also filed a motion for summary judgment on January 15,
2009, and oral arguments are scheduled for May 20, 2009. We cannot
provide, however, any assurance that we will be successful in disposing of the
case or that any costs of settlement or damages would not be material if we are
unable to get the case dismissed.
|
Item 1A.
|
Risk
Factors.
|
During
the quarter ended March 31, 2009, there were no material changes to the Risk
Factors disclosed in Item 1A (Part I) of our 2008 Annual Report on Form
10-K.
- 23
-
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
None.
|
Item
3.
|
Defaults
Upon Senior Securities.
|
None.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
|
Item
5.
|
Other
Information
|
None.
|
Item
6.
|
Exhibits
|
See
Exhibit Index.
- 24
-
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:
May 14, 2009
|
|||
|
By
|
/s/
Rodney G. Christianson
|
||
|
Rodney
G. Christianson
|
|||
|
Chief
Executive Officer
|
|||
- 25
-
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 March 23, 2009.
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
|
32.1
|
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
8-K filed on June 28, 2007.
(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).