10-Q 1 v318830_10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

(Mark One)

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

¨   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  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x    Yes      ¨    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):

 

¨  Large Accelerated Filer   ¨ Accelerated Filer   ¨  Non-Accelerated Filer
(do not check if a smaller reporting company)
  x 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         x 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 August 14, 2012, 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

 

June 30, 2012 and 2011

 

 

 

 

 

 

 
 

South Dakota Soybean Processors, LLC

 

Index to Financial Statements

 

 

 

  Page
   
Report of Independent Registered Public Accounting Firm 1
   
Financial Statements  
Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011 2
Condensed Consolidated Statements of Operations for the three-month and six-month periods ended
June 30, 2012 and 2011 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 2012 and 2011 (unaudited)
5
Notes to Condensed Consolidated Financial Statements 7

 

 

 
 

  

 

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, 2012, the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2012 and 2011. 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, 2011, 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 30, 2012, 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, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

Eide Bailly LLP

 

August 14, 2012

Greenwood Village, Colorado

 

 

1
 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Balance Sheets

 

 

 

   June 30,     
   2012   December 31, 
   (Unaudited)   2011 
Assets        
         
Current assets          
Cash and cash equivalents  $150   $150 
Trade accounts receivable   25,790,065    18,630,340 
Inventories   33,231,844    29,713,654 
Margin deposits   3,632,642    5,618,466 
Assets of discontinued division   376,688    889,739 
Prepaid expenses   711,532    828,291 
Total current assets   63,742,921    55,680,640 
           
Property and equipment   61,446,969    61,123,893 
Less accumulated depreciation   (35,576,256)   (34,725,584)
Total property and equipment, net   25,870,713    26,398,309 
           
Other assets          
Investments in cooperatives   8,197,832    7,870,663 
Notes receivable - members   147,056    147,675 
Other intangible assets, net   9,176    10,141 
Total other assets   8,354,064    8,028,479 
           
Total assets  $97,967,698   $90,107,428 

 

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

 

2
 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Balance Sheets (continued)

 

 

 

   June 30,     
   2012   December 31, 
   (Unaudited)   2011 
Liabilities and Members' Equity        
         
Current liabilities          
Excess of outstanding checks over bank balance  $6,233,803   $4,386,782 
Current maturities of long-term debt   2,600,000    605,001 
Note payable - seasonal loan   16,300,153    - 
Accounts payable   852,741    1,145,795 
Accrued commodity purchases   23,524,995    41,062,653 
Accrued expenses   1,659,105    1,455,734 
Accrued interest   323,079    278,666 
Liabilities of discontinued division   698    3,488 
Total current liabilities   51,494,574    48,938,119 
           
Long-term liabilities          
Long-term debt, less current maturities   12,900,000    14,200,000 
Deferred liabilities   169,954    47,972 
Total long-term liabilities   13,069,954    14,247,972 
           
Commitments and contingencies          
           
Members' equity          
Class A Units, no par value, 30,419,000 units issued and          
outstanding, net of subscriptions receivable of $2,259          
at June 30, 2012 and December 31, 2011   33,403,170    26,921,337 
           
Total liabilities and members' equity  $97,967,698   $90,107,428 

 

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

 

3
 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Statements of Operations (Unaudited)

For the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011

 

 

 

   Three Months Ended June 30:   Six Months Ended June 30: 
   2012   2011 (Restated)   2012   2011 (Restated) 
                 
Net revenues  $104,849,177   $98,839,629   $190,740,061   $198,726,099 
                     
Cost of revenues:                    
Cost of product sold   89,932,695    91,761,740    163,360,844    183,763,664 
Production   3,955,951    3,973,124    7,862,543    7,566,784 
Freight and rail   6,340,545    3,871,785    12,067,409    8,740,099 
Brokerage fees   120,157    127,637    226,487    209,773 
Total cost of revenues   100,349,348    99,734,286    183,517,283    200,280,320 
                     
Gross profit (loss)   4,499,829    (894,657)   7,222,778    (1,554,221)
                     
Operating expenses:                    
Administration   598,564    656,839    1,217,572    1,334,735 
                     
Operating income (loss)   3,901,265    (1,551,496)   6,005,206    (2,888,956)
                     
Other income (expense):                    
Interest expense   (424,035)   (184,469)   (769,267)   (632,766)
Other non-operating income   348,049    563,887    713,884    1,124,447 
Patronage dividend income   -    -    576,728    292,207 
Total other income (expense)   (75,986)   379,418    521,345    783,888 
                     
Income (loss) from continuing operations before income taxes   3,825,279    (1,172,078)   6,526,551    (2,105,068)
                     
Income tax expense   (1,000)   -    (1,000)   (300)
                     
Income (loss) from continuing operations   3,824,279    (1,172,078)   6,525,551    (2,105,368)
                     
Income (loss) from discontinued operations   (160,150)   (356,698)   (43,718)   (805,653)
                     
Net income (loss)  $3,664,129   $(1,528,776)  $6,481,833   $(2,911,021)
                     
Basic and diluted earnings (loss) per capital unit:                    
Income (loss) from continuing operations  $0.13   $(0.04)  $0.21   $(0.07)
Income (loss) from discontinued operations   (0.01)   (0.01)   (0.00)   (0.03)
Net income (loss)  $0.12   $(0.05)  $0.21   $(0.10)
                     
Weighted average number of capital units outstanding for                    
calculation of basic and diluted earnings (loss) 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.  

4
 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six-Month Periods Ended June 30, 2012 and 2011

 

 

 

       2011 
   2012   (Restated) 
Operating activities          
Net income (loss)  $6,481,833   $(2,911,021)
(Income) loss from discontinued operations   43,718    805,653 
Income (loss) from continued operations   6,525,551    (2,105,368)
Charges and credits to net income (loss) from continuing          
  operations not affecting cash:          
Depreciation and amortization   883,478    1,033,450 
Gain on sales of property and equipment   1,161    14,357 
Non-cash patronage dividends   (327,169)   (102,272)
Change in current assets and liabilities   (26,036,278)   6,849,135 
Net cash used for operating activities of continuing operations   (18,953,257)   5,689,302 
Net cash from (used for) operating activities of          
discontinued operations   375,271    (558,762)
Net cash (used for) provided by operating activities   (18,577,986)   5,130,540 
           
Investing activities          
Retirement of patronage dividends   -    76,585 
Decrease in member loans   619    - 
Proceeds from sales of property and equipment   -    5,734 
Purchase of property and equipment   (356,078)   (2,117,873)
Net cash used for investing activities of continued operations   (355,459)   (2,035,554)
Net cash used for investing activities of discontinued operations   91,272    (45,194)
Net cash used for investing activities   (264,187)   (2,080,748)
           
Financing activities          
Change in excess of outstanding checks over bank balances   1,847,021    202,420 
Net proceeds (payments) from seasonal borrowings   16,300,153    (5,170,467)
Proceeds from long-term debt   1,547,999    2,053,000 
Principal payments on long-term debt   (853,000)   - 
Net cash from financing activities of continuing operations   18,842,173    (2,915,047)
Net cash used for financing activities of discontinued operations   -    (134,745)
Net cash from (used for) financing activities   18,842,173    (3,049,792)
           
Net change in cash and cash equivalents   -    - 
           
Cash and cash equivalents, beginning of period   150    150 
           
Cash and cash equivalents, end of period  $150   $150 

 

  

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

 

5
 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Statements of Cash Flows (Unaudited) - continued

For the Six-Month Periods Ended June 30, 2012 and 2011

 

 

Supplemental disclosures of cash flow information        
Cash paid during the period for:  2012   2011 
         
Interest  $724,854   $695,537 
           
Income taxes  $-   $- 

 

6
 

 

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

 

Note 1 -           Principal Activity and Significant Accounting Policies

 

The financial statements as of and for the periods ended June 30, 2012 and 2011 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, 2011 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 Urethane Soy Systems Company (USSC), which is the Company’s wholly-owned subsidiary. The effects of all intercompany accounts and transactions have been eliminated. During 2011 the Company determined to discontinue operations of its polyurethane segment, including USSC, and put the assets and business up for sale. For all periods presented, amounts associated with the polyurethane segment have been classified as discontinued operations on the accompanying condensed consolidated financial statements.

 

These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2011, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a material impact on the Company’s financial condition or results of operations.

 

Reclassifications

 

Certain reclassifications have been made to the prior year’s financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or members’ equity.

 

Note 2 -           Correction of Prior Period

 

In 2011 the Company recorded all product sales upon shipment of the product regardless of the contract terms. Those contracts with terms of ‘FOB Destination’ should have been recorded upon the arrival of the product at the agreed-upon location. As a result of the Company’s evaluation of this error under SEC’s Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (SAB 108), the Company determined that this error was material to the condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2011. Consequently, the condensed consolidated financial statements for those periods were adjusted to reflect the correction of this error. In evaluating and determining the appropriateness of applying SAB 108 to this error, the Company considered materiality both quantitatively and qualitatively as prescribed by the SEC’s Staff Accounting Bulletin No. 99. The following table reflects the impact of the above error to the condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2011:

 

(Continued on next page)

7
 

 

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

   

   As Previously         
   Reported   Adjustments   Adjusted 
For the Three Months Ended June 30, 2011:               
Revenue  $98,556,064   $283,565   $98,839,629 
Cost of product sold   91,478,175    283,565    91,761,740 
Freight and rail   3,871,785    -    3,871,785 
Net loss   (1,528,776)   -    (1,528,776)
                
For the Six Months Ended June 30, 2011:               
Revenue  $198,846,380   $(120,281)  $198,726,099 
Cost of product sold   184,529,164    (765,500)   183,763,664 
Freight and rail   8,094,880    645,219    8,740,099 
Net loss   (2,911,021)   -    (2,911,021)

  

Note 3 -           Accounts Receivable

 

Accounts receivable are considered past due when payments are not received on a timely basis in accordance with the Company’s credit terms, which is generally 30 days from invoice date. Accounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any.

 

In general, cash is applied to the oldest outstanding invoice first, unless payment is for a specified invoice. The Company, on a case by case basis, may charge a late fee of 1 ½% per month on past due receivables.

 

The following table provides information regarding the Company’s allowance for doubtful accounts receivable of continued operations as of June 30, 2012 and December 31, 2011:

 

   June 30,   December 31, 
   2012   2011 
           
Balances, beginning of period  $-   $- 
Amounts charged (credited) to costs and expenses   -    (7,838)
Additions (deductions)   -    7,838 
           
Balances, end of period  $-   $- 

 

(Continued on next page) 

8
 

 

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

Note 4 -              Inventories

 

The Company’s inventories of continued operations consist of the following at June 30, 2012 and December 31, 2011:

 

   2012   2011 
           
Finished goods  $1,397,088   $11,274,989 
Raw materials   31,738,978    18,342,887 
Supplies & miscellaneous   95,778    95,778 
           
Totals  $33,231,844   $29,713,654 

 

Finished goods and raw materials are valued at estimated market value, which approximates net realizable value. In addition, futures and option contracts are marked to market through cost of revenues, with unrealized gains and losses recorded in the above inventory amounts. Supplies and other inventories are stated at the lower of cost, determined by the first-in, first-out method, or market.

 

Note 5 -           Property and Equipment

 

   2012     
       Accumulated       2011 
   Cost   Depreciation   Net   Net 
                 
Land  $443,816   $-   $443,816   $443,816 
Land improvements   294,461    (72,199)   222,262    231,541 
Buildings and improvements   16,464,268    (6,012,105)   10,452,163    10,657,620 
Machinery and equipment   42,495,017    (28,798,314)   13,696,703    13,671,639 
Company vehicles   32,929    (28,311)   4,618    12,443 
Furniture and fixtures   900,378    (665,327)   235,051    260,135 
Construction in progress   816,100    -    816,100    1,121,115 
                     
Totals  $61,446,969   $(35,576,256)  $25,870,713   $26,398,309 

 

Depreciation of property and equipment of continued operations amounts to $882,512 and $1,032,304 for the six months ended June 30, 2012 and 2011, respectively.

 

Note 6 -           Note Payable – Seasonal Loan

 

The Company has entered into a revolving credit agreement with CoBank, which prior to the amendment disclosed in Note 11, expired August 1, 2012. The Company may borrow up to $40 million under this agreement to finance inventory and accounts receivable. Interest accrues at a variable rate (4.60% at June 30, 2012). 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 $16,300,153 and $0 at June 30, 2012 and December 31, 2011, respectively. The remaining available funds to borrow under the terms of the revolving credit agreement are approximately $23,700,000 as of June 30, 2012.

 

(Continued on next page) 

9
 

 

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

Note 7 -           Long-Term Debt

 

   2012   2011 
         
 Revolving term loan from CoBank, interest at variable rates (4.85%          
 and 4.55% at June 30, 2012 and December 31, 2011,          
 respectively), secured by substantially all property and equipment.             
 Loan matures March 20, 2018.  $15,500,000   $14,805,001 
 Less current maturities   (2,600,000)   (605,001)
           
 Totals  $12,900,000   $14,200,000 

 

The Company entered into a Master Loan Agreement (MLA), which includes both the revolving term loan and the seasonal loan discussed in Note 6, with CoBank. Under the terms and conditions of the MLA, CoBank agreed to make advances to the Company for up to $15,500,000 on the revolving term loan. The available commitment decreases in scheduled periodic increments of $1,300,000 every six months starting September 20, 2012 until maturity on March 20, 2018. The principal balance outstanding on the revolving term loan was $15,500,000 and $14,805,001 as of June 30, 2012 and December 31, 2011, respectively. There were no remaining commitments available to borrow on the revolving term loan as of June 30, 2012.

 

Under this agreement, the Company is subject to compliance with standard financial covenants and the maintenance of certain financial ratios. The Company was in compliance with all covenants and conditions with CoBank as of June 30, 2012.

 

The minimum principal payments on long-term debt obligations are expected to be as follows:

 

For the twelve-month periods ending June 30:    
2013  $2,600,000 
2014   2,600,000 
2015   2,600,000 
2016   2,600,000 
2017   2,600,000 
Thereafter   2,500,000 
      
Total  $15,500,000 

 

Note 8 -           Derivative Instruments and Hedging Activities

 

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 9, Fair Value of Financial Instruments.

 

(Continued on next page) 

10
 

  

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

As of June 30, 2012 and December 31, 2011, the value of the Company’s open futures, options and forward contracts was approximately $(1,771,887) and $(3,235,056), respectively.

 

 

      Amounts As of June 30, 2012 
   Balance Sheet  Asset   Liability 
   Classification  Derivatives   Derivatives 
Derivatives not designated as hedging instruments:        
Commodity contracts    Current Assets  $9,067,338   $10,839,225 

 

       Amounts As of December 31, 2011  
   Balance Sheet  Asset   Liability 
   Classification  Derivatives   Derivatives 
Derivatives not designated as hedging instruments:        
Commodity contracts    Current Assets  $  6,118,915   $9,353,971 

 

During the three-month and six-month periods ended June 30, 2012 and 2011, net realized and unrealized gains (losses) on derivative transactions were recognized in the consolidated statement of operations as follows:

 

   Net Gain (Loss) Recognized on   Net Gain (Loss) Recognized on 
   Derivative Activities for the Three-   Derivative Activities for the Six- 
   Month Periods Ending June 30:   Month Periods Ending June 30: 
   2012   2011   2012   2011 
Derivatives not designated as hedging instruments: 
Commodity contracts
  $2,066,421   $1,031,501   $4,411,595   $(189,812)

 

 

The Company recorded gains (losses) of $4,411,595 and $(189,812) in cost of goods sold related to its commodity derivative instruments for the six-month periods ended June 30, 2012 and 2011, respectively.

 

Note 9 -           Fair Value of Financial Instruments

 

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, this guidance 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 ASC 820 had an immaterial impact on the Company’s financial statements. The three levels of hierarchy and examples are 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 Mercantile Exchange (“CME”).

 

 

(Continued on next page) 

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South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

·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.

 

The following tables set 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 June 30, 2012 and December 31, 2011:

 

   Fair Value as of June 30, 2012 
   Level 1   Level 2   Level 3   Total 
Financial assets:                    
Cash & cash equivalents  $150   $-   $-   $150 
Inventory  $(1,771,887)  $34,413,555   $-   $32,641,668 
Margin deposits  $3,632,642   $-   $-   $3,632,642 
Assets of discontinued                    
division  $-   $-   $376,688   $376,688 

 

                 
   Fair Value as of December 31, 2011 
   Level 1   Level 2   Level 3   Total 
Financial assets:                    
Cash & cash equivalents  $150   $-   $-   $150 
Inventory  $(3,235,056)  $32,633,988   $-   $29,398,932 
Margin deposits  $5,618,466   $-   $-   $5,618,466 
Assets of discontinued                    
division  $36,061   $-   $853,678   $889,739 

  

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 CME; therefore, the Company has recorded them in Level 1. In certain circumstances, the net value of these commodity derivative instruments could be negative. 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 CME and adjusts for the local market adjustments derived from other grain terminals in our area; thus, the Company considers these assets to be Level 2.

 

The assets of discontinued division represents a nonrecurring level 3 fair value measurement. The fair value measurements were based on management’s best estimate of fair market value, which includes comparisons to similar assets within the industry.

 

 

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South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

The Company has patronage investments in other cooperatives and common stock in a privately held entity. There is no market for their patronage credits or the entity’s common shares, and it is impracticable to estimate fair value of the Company’s investments. These investments are carried on the balance sheet at original cost plus the amount of patronage earnings allocated to the Company, less any cash distributions received.

 

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.

 

Note 10 -        Business Segment Information

 

The Company organizes its business units into two reportable segments: soybean processing and polyurethane. Separate management of each segment is required because each segment is subject to different marketing, production, and technology strategies. The soybean processing segment purchases soybeans and processes them in primarily three products: soybean meal, oil and hulls. The polyurethane segment manufactures a soy-based polyol, which is called Soyol®, and its resin system and sells them to the polyurethane industry. The segments’ accounting policies are the same as those described in the summary of significant accounting policies. Market prices are used to report intersegment sales.

 

Segment information for the three-month and six-month periods ended June 30, 2012 and 2011 are as follows:

 

   Soybean         
   Processing   Polyurethane   Total 
For the Three Months Ended June 30, 2012:               
Sales to external customers  $104,849,177   $53,988   $104,903,165 
Intersegment sales   -    -    - 
Depreciation and amortization   444,486    -    444,486 
Interest expense   424,035    -    424,035 
Segment income (loss)   3,824,279    (160,150)   3,664,129 
Segment assets   97,591,010    376,688    97,967,698 
Expenditures for segment assets   356,078    -    356,078 
                
For the Three Months Ended June 30, 2011 (restated):          
Sales to external customers  $98,839,629   $463,317   $99,302,946 
Intersegment sales   88,452    -    88,452 
Depreciation and amortization   548,039    55,769    603,808 
Interest expense   184,469    94,913    279,382 
Segment income (loss)   (1,172,078)   (356,698)   (1,528,776)
Segment assets   80,432,110    4,015,027    84,447,137 
Expenditures for segment assets   788,411    -    788,411 

 

 

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South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

   Soybean         
   Processing   Polyurethane   Total 
For the Six Months Ended June 30, 2012:               
Sales to external customers  $190,740,061   $461,931   $191,201,992 
Intersegment sales   1,089    -    1,089 
Depreciation and amortization   883,478    -    883,478 
Interest expense   769,267    -    769,267 
Segment loss   6,525,551    (43,718)   6,481,833 
Expenditures for segment assets   356,078    -    356,078 
                
For the Six Months Ended June 30, 2011 (restated):          
Sales to external customers  $198,726,099   $967,183   $199,693,282 
Intersegment sales   209,061    -    209,061 
Depreciation and amortization   1,033,450    111,909    1,145,359 
Interest expense   632,766    184,731    817,497 
Segment income (loss)   (2,105,368)   (805,653)   (2,911,021)
Expenditures for segment assets   2,117,873    -    2,117,873 

 

Due to a history of losses within the polyurethane segment, the Company is currently planning to exit the polyurethane industry. As of the date of this filing, the Company is currently researching every available option regarding its assets and its 100% ownership interest in USSC.

 

Note 11 -        Subsequent Event

 

Except for the event listed below, we evaluated all of our activity and concluded that no subsequent events have occurred that would require recognition in our financial statements or disclosed in the notes to our financial statements.

 

On July 23, 2012, the Company entered into an amendment of our loan agreements with CoBank. The amendment extended the maturity date of our seasonal loan from August 1, 2012 to August 1, 2013.

 

 

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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, 2012, (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, 2011.  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, 2011.

 

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 1.3% of the total soybean processing capacity in the U.S. In addition to our processing plant, we operate a soybean oil refinery in Volga where we refine the crude soybean oil for customers in the food, chemical and industrial sectors. In the second quarter of 2011, we completed construction of a deodorizer to our refinery, which allows us to produce and sell food-grade soybean oil and opens a new customer base for our products. Also, under certain market conditions we may issue warehouse receipts for crude soybean oil according to the terms and conditions of a Chicago Mercantile Exchange Group (CME) soybean oil contract.

 

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 approximately 84% of the soybean processing industry and approximately 75% 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 the six-month period ended June 30, 2012 we recorded a net income of $6.5 million largely due to improved soybean quality and meal demand. The quality of the local soybean crop from the 2011 harvest has been excellent, with the beans being very low in moisture, high in oil and protein content, and producing record yields for our facility. Demand for soybean meal has also increased in 2012 due to a reduction in the supply of distillers grains as a result of the recent decline in ethanol production. With the high price of corn, which is used to produce ethanol, and the relatively low price for petroleum, we expect distillers grains to continue to be a costly substitute to soybean meal. The price of canola meal, however, may decrease this fall due to a record crop, which may cause it to work its way into additional feed rations.

 

 

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While our improved results during the first six months of 2012 are encouraging, we remain cautious in our optimism about the next six months. We are concerned about the quality and quantity of soybeans of this fall’s harvest, largely because of drought conditions currently in the area which could significantly reduce the supply for processing. On July 16, 2012 the U.S. Department of Agriculture downgraded the quality of the U.S. soybean crop, rating 30% of the soybeans as ‘poor’ or ‘very poor’. In addition, commodity prices have substantially increased as a result of the drought which could reduce demand for our meal and oil products.

 

Despite our guarded optimism, we are pleased by the start of 2012. Our plant is performing well. We also are maximizing the quality of the beans through the hard work of our employees, and the addition of the deodorizer is contributing nicely to our bottom line.

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended June 30, 2012 and 2011

 

   Quarter Ended June 30, 2012   Quarter Ended June 30, 2011 (Restated) 
   $   % of
Revenue
   $   % of
Revenue
 
                 
Revenue  $104,849,177    100.0   $98,839,629    100.0 
Cost of revenues   (100,349,348)   (95.7)   (99,734,286)   (100.9)
Operating expenses   (598,564)   (0.6)   (656,839)   (0.7)
Other income (expense)   (75,986)   (0.1)   379,418    0.4 
Income tax expense   (1,000)   (0.0)   --    -- 
Income (loss) from continuing operations   3,824,279    3.6    (1,172,078)   (1.2)
Income (loss) from discontinued operations   (160,150)   (0.1)   (356,698)   (0.3)
                     
     Net  income (loss)  $3,664,129    3.5   $(1,528,776)   (1.5)

 

Revenue – Consolidated revenue increased $6.0 million, or 6.1%, for the second quarter of 2012, compared to the same period in 2011. The increase in revenues is primarily due to increases in sales volume of soybean meal and the average sales price of all soybean products (meal, oil, hulls and refined oil by-products). During the second quarter of 2012, we processed approximately 11.4% in additional soybeans than during the same period of 2011, which increased the amount of soybean products available to sell. The average sales price of our soybean products also increased approximately 6.8% in the three-month period ended June 30, 2012, compared to the same period in 2011. The increase in sale price is primarily due to the anticipation of a poor 2012 crop due to drought, which caused substantial price increases in many commodities including soybean meal, oil and hulls. The increase in revenue is partially offset by a decrease in sales volume of soybean oil due to a weaker demand for such oil from the biodiesel market. During the three-month period ended June 30, 2011, we purchased, refined and resold approximately 24 million pounds of soybean oil as a result of the strong demand at the time from biodiesel producers, compared to only 0.5 million during the same period in 2012.

 

Gross Profit/Loss – For the second quarter of 2012, we generated a consolidated gross profit of $4.5 million, compared to a $0.9 million gross loss for the same period in 2011. The $5.4 million improvement in gross profit is primarily attributed to improved soybean quality within our region and an improvement in demand for soybean meal. While much of the U.S. soybean processors are dealing with poor soybean quality due to a hard freeze early last fall, the locally-grown beans that we received, and continue to receive, were low in moisture, high in oil and protein content, and produced higher than historical yields. In addition to the improved soybean quality, demand for soybean meal has increased in the quarter ended June 30, 2012, compared the same period in 2011. As a result of a reduction in ethanol production, the supply of distillers grains, which is a substitute for soybean meal, has decreased, increasing the demand for soybean meal.

 

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Operating Expenses – Consolidated administrative expenses, including all selling, general and administrative expenses, decreased $58,000, or 8.9%, for the three-month period ended June 30, 2012, compared to the same period in 2011. The decrease is largely due to a reduction in personnel costs following the resignation of our former chief executive officer on March 28, 2011. Our new chief executive officer, Tom Kersting, who served previously as our commercial manager and had been employed with us since 1996, immediately assumed duties as chief executive officer but did not enter into any new compensatory plan as a result of his additional responsibilities.

 

Interest Expense – Interest expense increased to $424,000 during the three-month period ended June 30, 2012, compared to $184,000 in the same period in 2011. This increase is due to increased debt levels used for continuing operations resulting from increased inventory quantities and commodity prices. The average debt level during the three-month period ended June 30, 2012 is approximately $29.6 million, compared to $22.5 million for the same period in 2011. Similarly, interest rates on our seasonal and long-term loans increased during the second quarter of 2012, compared to the same period in 2011. As of June 30, 2012, the interest rate on our seasonal line of credit was 4.60%, compared to 4.19% as of June 30, 2011.

 

Other Non-Operating Income – Consolidated other non-operating income decreased $216,000, or 38.3%, for the three-month period ended June 30, 2012, compared to the same period in 2011. The decrease is primarily due to a decrease in oil storage income arising from our issuance of warehouse receipts on CME soybean oil contracts. We stored less oil on CME oil contracts in the three-month period ended June 30, 2012, because, after storing considerable oil in the three-month period ended June 30, 2011, the biodiesel market increased its demand for soybean oil during the second half of 2011. As a result, entities for which a CME contract was in effect began taking delivery on approximately half of the oil we had stored for the CME, thus reducing our oil storage income in 2012.

 

Income (Loss) from Discontinued Operations – In 2011, we decided to discontinue operations of our polyurethane segment, including our wholly-owned subsidiary USSC, and place the segment’s assets and business as available for sale. This decision was made primarily because of a history of significant operating losses. During the quarter ended June 30, 2012, we generated a loss of $160,000 within this segment, compared to $357,000 during the same period in 2011.

 

Net Income/Loss – We generated a consolidated net income of $3.7 million during the second quarter of 2012, compared to a consolidated net loss of $1.5 million during the same period in 2011. The $5.2 million improvement in net income is primarily attributable to an increase in gross profit associated with improved soybean quality within our region and an improvement in soybean meal demand.

 

Comparison of the six months ended June 30, 2012 and 2011

 

   Six Months Ended June 30, 2012   Six Months Ended June 30, 2011 (Restated) 
   $   % of
Revenue
   $   % of
Revenue
 
                 
Revenue  $190,740,061    100.0   $198,726,099    100.0 
Cost of revenues   (183,517,283)   (96.2)   (200,280,320)   (100.8)
Operating expenses   (1,217,572)   (0.6)   (1,334,735)   (0.7)
Other income (expense)   521,345    0.2    783,888    0.4 
Income tax expense   (1,000)   (0.0)   (300)   -- 
Income (loss) from continuing operations   6,525,551    3.4    (2,105,368)   (1.1)
Income (loss) from discontinued operations   (43,718)   (0.0)   (805,653)   (0.4)
                     
     Net  income (loss)  $6,481,833    3.4   $(2,911,021)   (1.5)

 

 

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Revenue – Consolidated revenue decreased $8.0 million, or 4.0%, for the six-month period ended June 30, 2012, compared to the same period in 2011. The decrease in revenues is primarily due to a decrease in sales volume of soybean oil due to a weaker demand for such oil from the biodiesel market. During the six-month period ended June 30, 2011, we purchased, refined and resold approximately 34 million pounds of soybean oil as a result of strong demand at the time from biodiesel producers, compared to only 0.8 million during the same period in 2012. The decrease in revenue is partially offset by increases in sales volume of soybean meal and the average sales price of soybean oil. During the first six months of 2012, we processed approximately 9.1% more soybeans than during the same period of 2011, which increased the amount of soybean products available to sell. The average sales price of our soybean oil also increased approximately 4.9% in the six-month period ended June 30, 2012, compared to the same period in 2011, largely due to an improvement in value of our soybean oil following the addition of the deodorizer to our refinery.

  

Gross Profit/Loss – We generated a consolidated gross profit of $7.2 million during the six-month period ended June 30, 2012, compared to a $1.6 million gross loss for the same period in 2011. The $8.8 million improvement in gross profit is primarily attributed to improved soybean quality within our region and an improvement in value of our soybean oil following the addition of a deodorizer in the second quarter of 2011. While much of the U.S. soybean processors are dealing with poor soybean quality due to a hard freeze early last fall, the locally-grown beans that we received, and continue to receive, were low in moisture, high in oil and protein content, and produced higher than historical yields. In addition to the improved soybean quality, demand for soybean meal has increased in the six months ended June 30, 2012, compared the same period in 2011. As a result of a reduction in ethanol production, the supply of distillers grains, which is a substitute for soybean meal, has decreased, increasing the demand for soybean meal.

  

Operating Expenses – Consolidated administrative expenses, including all selling, general and administrative expenses, decreased $117,000, or 8.8%, for the six-month period ended June 30, 2012, compared to the same period in 2011. The decrease is largely due to a reduction in personnel costs following the resignation of our former chief executive officer on March 28, 2011. Our new chief executive officer, Tom Kersting, who served previously as our commercial manager and had been employed with us since 1996, immediately assumed duties as chief executive officer but did not enter into any new compensatory plan as a result of his additional responsibilities.

 

Interest Expense – Interest expense increased by $137,000 during the six-month period ended June 30, 2012, compared to the same period in 2011. This increase is due to increased interest rates on our senior debt with CoBank. As of June 30, 2012, the interest rate on our seasonal line of credit was 4.60%, compared to 4.19% as of June 30, 2011.

 

Other Non-Operating Income – Consolidated other non-operating income decreased $126,000, or 8.9% for the six-month period ended June 30, 2012, compared to the same period in 2011. The decrease is primarily due to a decrease in oil storage income arising from our issuance of warehouse receipts on a CME soybean oil contract. We stored less oil on a CME oil contract in the six-month period ended June 30, 2012 because, after storing considerable oil in the six month period ended June 30, 2011, the biodiesel market increased its demand for soybean oil during the second half of 2011. As a result, entities for which a CME contract was in effect began taking delivery on approximately half of the oil we had stored for the CME, thus reducing our oil storage income in 2012. The decrease in other non-operating income is partially offset by increases in patronage allocations received from our associated cooperatives, including CoBank and Minnesota Soybean Processors.

 

Income (Loss) from Discontinued Operations – In 2011, we decided to discontinue operations of our polyurethane segment, including our wholly-owned subsidiary USSC, and place the segment’s assets and business as available for sale. This decision was made primarily because of a history of significant operating losses. During the six-month period ended June 30, 2012, we generated a loss of $44,000 within this segment, compared to a loss of $806,000 during the same period in 2011.

 

Net Income/Loss – We generated a consolidated net income of $6.5 million during the six-month period ended June 30, 2012, compared to a consolidated net loss of $2.9 million during the same period in 2011. The $9.4 million improvement in net income is primarily attributable to an increase in gross profit associated with improved soybean quality within our region and an improvement in soybean meal demand.

 

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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, 2012, we had working capital, defined as current assets less current liabilities, of approximately $12.2 million, compared to working capital of $5.8 million on June 30, 2011. Working capital increased between periods primarily due to an increase in net income and the restructuring of loans with CoBank in November 2011. In the restructuring, CoBank deferred a $1.3 million debt payment, which would have been due on March 20, 2012, until March 20, 2018. Based on our current operating plans, we believe that we will be able to fund our needs for the foreseeable future from cash from operations and revolving lines of credit.

 

A summary of our cash flow from operating, investing and financing activities for each of the six-month periods ended June 30, 2012 and 2011:

 

   2012   2011 
           
Net cash (used for) from operating activities  $(18,577,986)  $5,130,540 
Net cash (used for) investing activities   (264,187)   (2,080,748)
Net cash from (used for) financing activities   18,842,173    (3,049,792)

 

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 $23.7 million change in cash flows used for operating activities is primarily attributed to an increase in commodity prices and decrease in accrued commodity purchases in 2012, compared to 2011. During the six-month period ended June 30, 2012, we increased our inventory by $3.5 million, compared to a $19.2 million decrease during the same period in 2011, largely due to the steep increase in commodity prices. Commodity price rose because of a poorer South American crop than originally estimated and drought conditions straining most of the U.S.

 

In addition to the increase in commodity prices, accrued commodity purchases decreased by $17.5 million during the six months ended June 30, 2012, compared to $11.2 million during the same period in 2011. As a result of a large U.S. soybean crop in the fall of 2011 and the anticipation of a large South American crop, soybean prices decreased dramatically last fall. This decrease caused many of our soybean producers to sell soybeans to us last fall on our price-later program, presumably in hopes that soybean prices would increase in the future. During the six-month period ended June 30, 2012, soybean prices did in fact increase. This resulted in many producers locking in prices and requesting payment for soybeans previously delivered last fall. This increase in cash used for operating activities is partially offset by a $9.4 million improvement in net profit (loss) during the six months ended June 30, 2012, compared to the same period in 2011.

 

Cash Flows Used For Investing Activities

 

The $1.8 million decrease in cash flows used for investing activities is principally due to a decrease in the purchase of property and equipment in 2012, compared to 2011. We purchased $0.4 million in property and equipment in the six months ended June 30, 2012, compared to $2.1 million during the same period in 2011. In 2011, our purchase of property and equipment was higher because we were in the process of completing the construction of the deodorizer to our refinery, which was completed in the second quarter of 2011.

 

Cash Flows Used For Financing Activities

 

The $21.9 million change in cash flows from (used for) financing activities is principally due to an increase in short-term borrowings as a result of the increase in inventory and decrease in accrued commodity purchases, as noted above, during the six months ended June 30, 2012, compared to the same period in 2011.

 

 

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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 $15.5 million, and then pay down the principal whenever excess cash is available. Repaid amounts may be borrowed up to the available credit line. The available credit line is scheduled to be reduced by $1.3 million every six months starting on September 20, 2012 and ending at the credit line’s maturity on March 20, 2018. 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 is $15.5 million and $15.9 million as of June 30, 2012 and 2011, respectively. Under this loan, we have no available funds to borrow as of June 30, 2012.

 

The second credit line is a revolving working capital (seasonal) loan that matures on August 1, 2013. 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 outstanding on the working capital loan is $16.3 and $19.6 million as of June 30, 2012 and 2011, respectively. Under this loan, we have an additional $23.7 million in available funds to borrow as of June 30, 2012.

 

Both loans with CoBank 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 the revolving term loan is 4.85% and 4.44% as of June 30, 2012 and 2011, respectively. As of June 30, 2012 and 2011, the interest rate on the working capital loan is 4.60% and 4.19%, respectively. We were in compliance with all covenants and conditions under the loans as of June 30, 2012 and the date of this filing.

 

We also had another note payable totaling $250,000, with an annual interest rate of 5.0%. The principal balance on this note is $0 and $103,000 as of June 30, 2012 and 2011, respectively. We made principal payments totaling $0 and $135,000 on this obligation during the six-month periods ended June 30, 2012 and 2011, respectively.

 

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 for hopper rail cars and oil tank cars with GE Capital, Trinity Capital, Flagship Rail Services and GATX Corporation. Total lease expenses under these arrangements are approximately $1.1 million for each of the six-month periods ended June 30, 2012 and 2011. The hopper rail cars earn mileage credit from the railroad through a sublease program, which totaled $0.8 million and $0.7 million for the six-month periods ended June 30, 2012 and 2011, respectively.

 

In addition to rail car leases, we have several operating leases for various equipment and storage facilities. Total lease expense under these arrangements is $81,000 and $128,000 for the six-month periods ended June 30, 2012 and 2011, 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.

 

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Other Long-Term Commitments

 

We have a commitment under a Grain Storage and Transportation Agreement with H&I Grain of Hetland, Inc. (H&I). This agreement is for the handling, storage and transportation of soybeans to and from the H&I facilities located in DeSmet, Hetland, and Arlington, South Dakota, at established rates per bushel. The agreement provides for an annual minimum payment of $200,000 and expires on August 31, 2014. Expenses under this agreement were $502,000 and $314,000 for the six months ended June 30, 2012 and 2011, respectively.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 1 of our Financial Statements under Part I, Item 1, for a discussion on the impact, if any, of the recently pronounced accounting standards.

 

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 Mercantile Exchange (CME), net of the local basis, for the last two business days of the period and the first business day 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.

 

 

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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, as well as our forward purchase and sales contracts, using quoted exchange prices for identical instruments. 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 CME. 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.

 

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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 us in reports that we file or submit 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 to internal control over financial reporting during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls 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. We are not currently involved in any material legal proceeding and are not aware of any potential claims.

 

Item 1A. Risk Factors.

 

During the quarter ended June 30, 2012, there were no material changes to the Risk Factors disclosed in Item 1A (Part I) of our 2011 Annual Report on Form 10-K.

 

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

None.

 

Item 3.           Defaults Upon Senior Securities.

None.

 

Item 4.           Mine Safety Disclosures.

 

None.

 

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, 2012  
  By /s/ Thomas Kersting
    Thomas Kersting

 

 

 

 

 

 

 

Chief Executive Officer (Principal Executive Officer)

 

 

Dated:  August 14, 2012    
  By /s/ Mark Hyde
    Mark Hyde
    Chief Financial Officer (Principal Financial and Accounting 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   Revolving  Credit Loan Supplement dated July 23, 2012
31.1   Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2   Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1   Section 1350 Certification by Chief Executive Officer
32.2   Section 1350 Certification by Chief Financial Officer

 

(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 21, 2012.

(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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