Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

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

 

**FOR THEQUARTERLY PERIOD ENDED DECEMBER 31, 2008**

 

| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**FOR THETRANSITION PERIOD FROM           TO           **

 

**COMMISSION FILE NUMBER: 000-53042**

 

**OTTERTAIL AG ENTERPRISES, LLC**

(Exactname of registrant as specified in its charter)

 

| **MINNESOTA**                                                    | ** ** | **EIN 41-2171784**                  |
|------------------------------------------------------------------|------------|-------------------------------------|
| (State  or other jurisdiction  of incorporation or organization) |       | (IRS  Employer  Identification No.) |

 

**24096 - 170th AvenueFergus Falls, MN 56537-7518**(Address of principal executive offices)

 

**(218) 998-4301**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days.

Yes  x No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filter or a smaller reporting company. See the definition of “largeaccelerated filer, accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large  accelerated filer  o | Accelerated  filer  o | Non-accelerated  filer  o                 | Smaller  Reporting Company  x |
|----------------------------------|----------------------------|------------------------------------------------|------------------------------------|
|                             |                       | (Do  not check if a Smaller Reporting Company) |                               |

 

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

o Yes x No

 

As of February 13,2009, the Company has outstanding 23,944,000 Class A Membership Units.

 

 

 

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OTTERTAIL AG ENTERPRISES, LLCFORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDEDDECEMBER 31, 2008

 

TABLE OF CONTENTS

 
|                                                                                                 | **Page** |
|------------------------------------------------------------------------------------------------------|----------|
| PART I —  FINANCIAL INFORMATION                                                            | 1        |
| Item 1. Condensed Financial Statements  (Unaudited)                                             | 1        |
| Balance Sheets                                                                                       | 1        |
| Statements of Operations                                                                             | 2        |
| Statements of Cash Flows                                                                             | 3        |
| Condensed Notes to Unaudited Financial  Statements                                                   | 4        |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 15       |
| Disclosure  Regarding Forward-Looking Statements                                                     | 15       |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  | 21       |
| Item 4. Controls and Procedures                                                                      | 21       |
| PART II —  OTHER INFORMATION                                                               | 22       |
| Item 1. Legal  Proceedings                                                                           | 22       |
| Item 1A. Risk  Factors                                                                               | 22       |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 | 23       |
| Item 3.  Defaults Upon Senior Securities                                                             | 23       |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         | 24       |
| Item 5. Other  Information                                                                           | 24       |
| Item 6.  Exhibits                                                                                    | 24       |
| SIGNATURES                                                                                           | 25       |
| Exhibit Index                                                                                   | 26       |
| Section 302  Certification                                                                      |     |
| Section 906  Certification                                                                      |     |

 

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**PART I— FINANCIAL INFORMATION**

Item 1. — CondensedFinancial Statements (Unaudited)

 

**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSED BALANCE SHEETS

 
| ** **                                              | ** ** | **December 31, 2008** | ** **  | **September 30, 2008** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|-------------|----------------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**                 | ** **  | ** **                       | ** ** |
| **ASSETS**                                              |       |                            |        |                             |       |
| **Current Assets**                                      |       |                            |        |                             |       |
| Cash and equivalents                                    |       | $                               | 1,543,803   |                             | $          | 1,920,972 |   |
| Restricted cash                                         |       | 174,930                         |        | 635,286                          |       |
| Accounts receivable                                     |       | 1,786,140                       |        | 2,657,721                        |       |
| Inventory                                               |       | 4,877,795                       |        | 5,761,323                        |       |
| Prepaid expenses and other                              |       | 1,314,048                       |        | 366,322                          |       |
| Total current assets                                    |       | 9,696,716                       |        | 11,341,624                       |       |
| **Property and Equipment**                              |       |                            |        |                             |       |
| Land and land improvements                              |       | 4,388,517                       |        | 4,388,517                        |       |
| Buildings                                               |       | 941,836                         |        | 941,836                          |       |
| Office equipment                                        |       | 141,203                         |        | 141,203                          |       |
| Plant and process equipment                             |       | 108,989,740                     |        | 108,963,404                      |       |
|                                                    |       | 114,461,296                     |        | 114,434,960                      |       |
| Less accumulated depreciation                           |       | (5,496,362                      | )           | (3,678,591                       | )          |
| Net property and equipment                              |       | 108,964,934                     |        | 110,756,369                      |       |
| **Other Assets**                                        |       |                            |        |                             |       |
| Restricted cash - debt service reserve                  |       | 2,601,078                       |        | 2,638,895                        |       |
| Debt issuance costs, net of amortization                |       | 1,496,476                       |        | 1,556,272                        |       |
| Total other assets                                      |       | 4,097,554                       |        | 4,195,167                        |       |
| **Total Assets**                                        |       | $                               | 122,759,204 |                             | $          | 126,293,160 |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                |       |                            |        |                             |       |
| **Current Liabilities**                                 |       |                            |        |                             |       |
| Additional revolving loan                               |       | $                               | 6,000,000   |                             | $          | 4,034,349 |   |
| Accounts payable                                        |       | 1,214,236                       |        | 702,661                          |       |
| Construction payable                                    |       | 20,046                          |        | 20,046                           |       |
| Construction payable- related party                     |       | 255,500                         |        | 255,500                          |       |
| Derivative instruments                                  |       | —                          |        | 10,088                           |       |
| Accrued interest and other                              |       | 355,405                         |        | 841,822                          |       |
| Accrued purchase commitments                            |       | 441,542                         |        | 3,600,000                        |       |
| Current maturities of long-term debt                    |       | 80,330,731                      |        | 3,014,310                        |       |
| Total current liabilities                               |       | 88,617,460                      |        | 12,478,776                       |       |
| **Long-term debt, net of current maturities**           |       | —                          |        | 77,323,865                       |       |
| **Commitments and Contingencies**                       | ** ** | **—**                      | ** **  | **—**                       | ** ** |
| **Members’ Equity, 23,944,000 units  outstanding** |       | 34,141,744                      |        | 36,490,519                       |       |
| **Total Liabilities and Members’ Equity**          |       | $                               | 122,759,204 |                             | $          | 126,293,160 |   |

 

Notes to Unaudited CondensedFinancial Statements are an integral part of this Statement.

 

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**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSED STATEMENTS OF OPERATIONS

 
| ** **                                                       | ** ** | **Three Months  Ended** | ** ** | **Three Months**                  | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| ** **                                                       | ** ** | **December 31,  2008**  | ** ** | **Ended  December 31, 2007** | ** ** |
| ** **                                                       | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)**                        | ** ** |
|                                                             |       |                         |       |                                   |       |
| Revenues                                                         |       | $                            | 25,531,288 |                                   | $          | — |   |
|                                                             |       |                         |       |                                   |       |
| Cost of sales                                                    |       | 25,811,166                   |       | —                                 |       |
|                                                             |       |                         |       |                                   |       |
| Lower of cost or market adjustment                               |       | 441,542                      |       | —                                 |       |
|                                                             |       |                         |       |                                   |       |
| Gross Loss                                                       |       | (721,420                     | )          | —                                 |       |
|                                                             |       |                         |       |                                   |       |
| Professional fees                                                |       | 174,318                      |       | 111,723                                |       |
| General and administrative                                       |       | 374,862                      |       | 332,674                                |       |
| Total operating expenses                                         |       | 549,180                      |       | 444,397                                |       |
|                                                             |       |                         |       |                                   |       |
| **Operating Loss**                                               |       | (1,270,600                   | )          | (444,397                               | )          |
|                                                             |       |                         |       |                                   |       |
| **Other income (expense)**                                       |       |                         |       |                                   |       |
| Loss on derivatives                                              |       | —                       |       | (1,342,712                             | )          |
| Interest expense                                                 |       | (1,091,753                   | )          | (12,537                                | )          |
| Interest income                                                  |       | 11,328                       |       | 105,615                                |       |
| Total other income, net                                          |       | (1,080,425                   | )          | (1,249,634                             | )          |
|                                                             |       |                         |       |                                   |       |
| **Net Loss**                                                     |       | $                            | (2,351,025 | )                                      | $          | (1,694,031 | ) |
|                                                             |       |                         |       |                                   |       |
| **Weighted Average Units Outstanding — Basic  and Diluted** |       | 23,929,500                   |       | 23,930,739                             |       |
|                                                             |       |                         |       |                                   |       |
| **Net Loss Per Unit — Basic and Diluted**                   |       | $                            | (0.10      | )                                      | $          | (0.07 | ) |
|                                                                  |            |                              |            |                                        |            |  |  |  |

 

Notes to Unaudited CondensedFinancial Statements are an integral part of this Statement.

 

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**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSED STATEMENTS OF CASH FLOWS

 
| ** **                                                            | ** ** | **Three Months Ended  December 31,  2008** | ** ** | **Three Months Ended  December 31,  2007** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                            | ** ** | **(Unaudited)**                                           | ** ** | **(Unaudited)**                                           | ** ** |
| **Cash Flows from Operating Activities**                              |       |                                                      |       |                                                      |       |
| Net loss                                                              |       | $                                                         | (2,351,025 | )                                                         | $          | (1,694,031 | ) |
| Adjustments to reconcile net loss to net  cash used in operations:    |       |                                                      |       |                                                      |       |
| Depreciation                                                          |       | 1,817,771                                                 |       | 7,409                                                     |       |
| Amortization of debt financing costs                                  |       | 59,796                                                    |       | 11,177                                                    |       |
| Lower of cost or market adjustment                                    |       | 441,542                                                   |       | —                                                    |       |
| Unit-based compensation                                               |       | 2,250                                                     |       | 3,991                                                     |       |
| Unrealized loss on derivative instruments                             |       | —                                                    |       | 865,278                                                   |       |
| Change in assets and liabilities:                                     |       |                                                      |       |                                                      |       |
| Accounts receivable                                                   |       | 871,581                                                   |       | —                                                    |       |
| Interest receivable                                                   |       | —                                                    |       | (23,236                                                   | )          |
| Inventory                                                             |       | 441,986                                                   |       | (2,159,645                                                | )          |
| Prepaid expenses and other                                            |       | (947,726                                                  | )          | (2,137,208                                                | )          |
| Derivative instruments                                                |       | (10,088                                                   | )          | (1,147,357                                                | )          |
| Accounts payable                                                      |       | 511,575                                                   |       | 202,270                                                   |       |
| Accrued purchase commitments                                          |       | (3,158,458                                                | )          | —                                                    |       |
| Accrued interest and other                                            |       | (486,417                                                  | )          | (406,786                                                  | )          |
| Net cash used in operating activities                                 |       | (2,807,213                                                | )          | (6,478,138                                                | )          |
|                                                                  |       |                                                      |       |                                                      |       |
| **Cash Flows from Investing Activities**                              |       |                                                      |       |                                                      |       |
| Capital expenditures                                                  |       | (26,336                                                   | )          | (1,091,355                                                | )          |
| Payments for construction in process                                  |       | —                                                    |       | (21,398,764                                               | )          |
| Net cash used in investing activities                                 |       | (26,336                                                   | )          | (22,490,119                                               | )          |
|                                                                  |       |                                                      |       |                                                      |       |
| **Cash Flows from Financing Activities**                              |       |                                                      |       |                                                      |       |
| Payments for long-term debt                                           |       | (7,444                                                    | )          | —                                                    |       |
| Change in restricted cash                                             |       | 498,173                                                   |       | 703,993                                                   |       |
| Payments for debt issuance costs                                      |       | —                                                    |       | (900                                                      | )          |
| Proceeds from line of credit                                          |       | 1,965,651                                                 |       | —                                                    |       |
| Proceeds from construction loan                                       |       | —                                                    |       | 28,057,381                                                |       |
| Net cash provided by financing activities                             |       | 2,456,380                                                 |       | 28,760,474                                                |       |
|                                                                  |       |                                                      |       |                                                      |       |
| **Net Decrease in Cash and Equivalents**                              |       | (377,169                                                  | )          | (207,803                                                  | )          |
| **Cash and Equivalents — Beginning of Period**                   |       | 1,920,972                                                 |       | 4,611,317                                                 |       |
| **Cash and Equivalents — End of Period**                         |       | $                                                         | 1,543,803  |                                                      | $          | 4,403,534 |   |
|                                                                  |       |                                                      |       |                                                      |       |
| **Supplemental Disclosure of Cash Flow  Information**                 |       |                                                      |       |                                                      |       |
| Interest paid, net of capitalized $733,000  at December 31, 2007 |       | $                                                         | 1,568,750  |                                                      | $          | 1,359 |   |

 

Notes to Unaudited CondensedFinancial Statements are an integral part of this Statement

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

**NOTE 1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*Basis of Presentation*

 

The accompanying unaudited condensed interim financials have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission.  Certain informationand footnote disclosures normally included in annual financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted as permitted by such rules andregulations.  These financial statementsand related notes should be read in conjunction with the financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K,filed with the Securities and Exchange Commission on January 13, 2009.

 

In the opinion of management, the interim financial statements reflectall adjustments considered necessary for fair presentation.  The adjustments made to these statementsconsist only of normal recurring adjustments. The results reported in these condensed interim financial statementsshould not be regarded as necessarily indicative of results that may beexpected for the entire year.

 

*Nature of Business*

 

Otter Tail Ag Enterprises, LLC, a Minnesota limited liability company(the “Company”) was organized with the intentions of developing, owning andoperating a 55 million gallon per year capacity dry-mill ethanol plant nearFergus Falls, Minnesota (the “Plant”). The Company was in the development stage until March 2008, when theCompany commenced operations.

 

*Accounting Estimates*

 

Management uses estimates and assumptions in preparing these financialstatements in accordance with generally accepted accounting principles.  Those estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  Significant estimates include the valuationof inventory, future purchase commitments and the allowance for doubtful accounts.Actual results could differ from those estimates.

 

*Revenue Recognition*

 

The Company sells ethanol and related products pursuant to marketingagreements.  Revenues from the productionof ethanol and the related products are recorded when the customer (themarketing companies as further discussed in Note 8) has taken title and assumedthe risks and rewards of ownership, prices are fixed or determinable andcollectability is reasonably assured. The Company’s products are sold FOB shipping point.

 

In accordance with the Company’s agreements for the marketing and saleof ethanol and related products, marketing fees and commissions due to themarketers are deducted from the gross sales price as earned. Marketing feesremitted by the Company are presented net in revenue.  Commissions were approximately $133,000 forthe three months ended December 31, 2008. No commissions were paid for the same period ending December 31,2007.

 

*AccountsReceivable*

 

Credit terms are extended to customers in the normal course ofbusiness.  The Company performs ongoingcredit evaluations of its customers’ financial condition and, generally,requires no collateral.

 

Accounts receivable are recorded at their estimated net realizablevalue.  Accounts are considered past dueif payment is not made on a timely basis in accordance with the Company’scredit terms.  Accounts considered

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is basedon historical experience, its evaluation of the current status of receivables,and unusual circumstances, if any.  At December 31,2008, the Company was of the belief that such amounts would be collectible andthus an allowance was not considered necessary. It is at least possible this estimate will change in the future.

 

*Restricted Cash*

 

The Company maintains cash accounts set aside for requirements as partof the capital lease financing agreement. At December 31, 2008 and September 30,2008, the total of these accounts was approximately $2,800,000 and $3,300,000,respectively.

 

*Inventories*

 

Inventories consist of raw materials; work in process and finishedgoods.  Corn is the primary raw materialand along with other raw materials, is stated at the lower of average cost ormarket.  Finished goods consist ofethanol, dried distiller grains and modified wet distiller grains, and arestated at the lower of cost or market, on a first-in, first-out basis.

 

*Property and Equipment*

 

Property and equipment is stated at cost.  Depreciation is provided over an estimateduseful life by use of the straight line depreciation method. Plant maintenanceand repairs are expensed as incurred; major improvements and betterments arecapitalized.  The Company initiated Plantoperations in March 2008 and began depreciating the plant at thattime.  Depreciation is computed using thestraight-line method over the following estimated useful lives:

 
| Land  improvements           |   | 15-20 years |
|------------------------------|--------|-------------|
| Buildings                    |   | 10-40 years |
| Office  equipment            |   | 5 years     |
| Plant  and process equipment |   | 10-20 years |

 

*Long-livedAssets*

 

Long-lived assets, such as property, plant, and equipment, andpurchased intangible assets subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. If circumstances require along-lived asset be tested for possible impairment, the Company first comparesundiscounted cash flows expected to be generated by an asset to the carryingvalue of the asset. If the carrying value of the long-lived asset is notrecoverable on an undiscounted cash flow basis, impairment is recognized to theextent that the carrying value exceeds its fair value. Fair value is determinedthrough various valuation techniques including, but not limited to, discountedcash flow models, quoted market values and third-party independent appraisals.

 

*DerivativeInstruments*

 

The Company accounts for derivatives in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”).SFAS No. 133 requires the recognition of derivatives in the balance sheetand the measurement of these instruments at fair value.

 

In order for a derivative to qualify as a hedge, specific criteria mustbe met and appropriate documentation maintained.  Gains and losses from derivatives that do notqualify as hedges, or are undesignated, must be recognized immediately inearnings.  If the derivative does qualifyas a hedge, depending on the nature of the hedge, changes in the fair value ofthe derivative will be either offset against the change in fair value of thehedged assets, 

 

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** **

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

liabilities, or firm commitments through earnings or recognized inother comprehensive income until the hedged item is recognized inearnings.  Changes in the fair value ofundesignated derivative are recorded in revenue or cost of goods sold based onthe commodity being hedged, when the Plant is in operations.  While the Company was in development stagethe changes in the fair value of derivatives were recorded in other income orexpense.

 

Additionally, SFAS No. 133 requires a company to evaluate itscontracts to determine whether the contracts are derivatives.  Certain contracts that literally meet thedefinition of a derivative may be exempted as “normal purchases or normalsales.”  Normal purchases and normalsales are contracts that provide for the purchase or sale of something otherthan a financial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business.  Contracts that meetthe requirement of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133, and therefore, arenot marked to market in our financial statements.

 

*Fair Value of Financial Instruments*

 

The carrying value of cash and equivalents, restricted cash,receivables, derivative instruments, and payables approximates their fairvalue.

 

It is not currently practicable to estimate the fair value of the debtfinancing.  Because these agreementscontain certain unique terms, covenants, and restrictions, as discussed in Note6, there are no readily determinable similar instruments on which to base anestimate of fair value.

 

*Environmental Liabilities*

 

The Company’s operations are subject to environmental laws andregulations adopted by various governmental entities in the jurisdiction inwhich it operates.  These laws requirethe Company to investigate and remediate the effects of the release or disposalof materials at its location. Accordingly, the Company has adopted policies, practices and proceduresin the areas of pollution control, occupational health, and the production,handling, storage and use of hazardous materials to prevent materialenvironmental or other damage, and to limit the financial liability, which couldresult from such events.  Environmentalliabilities are recorded when the liability is probable and the costs can bereasonably estimated.  No liabilitieswere recorded at December 31, 2008 or September 30, 2008.

 

*Net Income (Loss) per Unit*

 

Basic net income (loss) per unit is computed by dividing net income bythe weighted average number of members’ units outstanding during theperiod.  Diluted net income per unit iscomputed by dividing net income by the weighted average number of members’units and members’ unit equivalents outstanding during the period.  As of December 31, 2008, the effects of 4,500unit equivalents are excluded from the computation of diluted units outstandingas their effects would be anti-dilutive, due to the Company’s net loss for theperiod ended December 31, 2008.  Asof December 31, 2007, the Company had 34,500 Unit equivalents outstanding,relating to outstanding Unit options and unvested restricted Units.

 

*Recently Issued Accounting Pronouncements*

 

In March 2008, the FASB issued SFAS No. 161, (“SFAS 161”),Disclosures about Derivative Instruments and Hedging Activities, an amendmentof FASB Statement No. 133.  SFAS 161applies to all derivative instruments and non-derivative instruments that aredesignated and qualify as hedging instruments pursuant to paragraphs 37 and 42of SFAS 133 and related hedged items accounted for under SFAS 133.  SFAS 161 requires entities to provide greatertransparency through additional disclosures about how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for under SFAS 133 and its related interpretations, 

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

and how derivative instruments and related hedged items affect anentity’s first fiscal year that begins after November 15, 2008.  The Company currently plans to adopt SFAS 161during its 2010 fiscal year.  BecauseSFAS 161 requires enhanced disclosures but does not modify the accountingtreatment of derivative instruments and hedging activities, the Companybelieves the adoption of this standard will have no impact on its financialposition, results of operations, or cash flows.

 

**NOTE 2.  GOING CONCERN**

 

The Company incurred net losses of $8.7 million for the year ended September 30,2008, and has incurred net losses of $2.4 million as of December 31, 2008.Based on the Company’s operating plan, its existing working capital is notsufficient to meet the cash requirements to fund the Company’s plannedoperating expenses, capital expenditures, and working capital requirementsthrough September 30, 2009 without additional sources of cash and/or thedeferral, reduction or elimination of significant planned expenditures.

 

The Company operated half of fiscal year 2008 in development stage,therefore having substantial operating expenses with limited income; theoriginal projected loss for fiscal 2008 was an operational loss of $1.8million. Commodity prices were a significant influence on the viability of theCompany achieving its financial objectives, and record high prices during thesummer that coincided with the Company’s first full production quarter aftercommissioning and performance testing led to operational losses in the quarter,which was also its last quarter of the fiscal year. This major commodity (corn)is influenced by external factors beyond the Company’s control which lead tohigher than normal market pricing.  Tosecure product for fiscal 2009, the Company executed a number of forwardpurchase contracts. The global financial situation caused major reductions incommodity prices, leaving a shortfall between contract and present marketvalue. Not only did the market influence the Company’s input costs, but alsooutput prices. This gave rise to a situation whereby the Company hadcommitments that it was required to honor but could not obtain the requiredreturn to justify its carrying value. In recognition, the Company has recordedan amount to reflect its best estimate between then present market value andthe future realization (See Note 4).  At December 31,2008 the Company has drawn the maximum amount available on their line of creditand is in default of its financing agreements (See Note 6).

 

These factors raise substantial doubt about the Company’s ability tocontinue as a going concern. The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern.This basis of accounting contemplates the recovery of the Company’s assets andthe satisfaction of liabilities in the normal course of business.

 

The Company’s short-term plan to address the expected shortfall ofworking capital is to generate additional funds through a combination ofraising equity by having a planned voluntary capital campaign, along with arenegotiating and restructuring of the Company’s debt.  The Company’s long-term plan includesevaluating improved technologies to either earn additional revenue or reduceoperating costs. If the Company is unsuccessful in raising additional funds orrevenues from any of these sources or restructuring its debt, it will defer,reduce, or eliminate certain planned expenditures. The Company will continue toconsider other funding sources. There can be no assurance that the Company willbe able to obtain any sources of funding on acceptable terms, or at all.

 

If the Company cannot obtain sufficient additional funding in theshort-term, it may be forced to restructure or significantly curtail itsoperations, file for bankruptcy or cease operations. The consolidated financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or amounts and classification ofliabilities that might be necessary should the Company be forced to take anysuch actions.

 

**NOTE 3.  MEMBER’S EQUITY**

 

In February 2009, the Company filed aregistration statement with the state of Minnesota for an intrastate offeringof our units for a maximum of 36 million Class A units at a cost of $0.50per unit. This offering is limited to residents 

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

of the state of Minnesota. A subscriber isrequired to purchase a minimum of 12,500 units ($6,250). The offering willexpire one year from the effective date of the offering.  The offering has not yet been declaredeffective.

 

**NOTE 4.  INVENTORY**

 

 Inventory consists of the following at:

 
| ** **       | ** ** | **12/31/08** | ** ** | **9/30/08*** |   |
|------------------|------------|--------------|------------|--------------|--------|
| Raw materials    |       | $            | 1,121,717  |         | $      | 2,075,474 |   |
| Work in progress |       | 1,858,319    |       | 1,999,300    |   |
| Finished goods   |       | 1,504,348    |       | 1,294,635    |   |
| Spare parts      |       | 393,411      |       | 391,914      |   |
| Total            |       | $            | 4,877,795  |         | $      | 5,761,323 |   |

 

----

* Derived from audited financial statements.

 

In the ordinary course of business, the Company enters into forwardpurchase contracts for its commodity purchases and sales. At December 31,2008, the Company has forward corn purchase contracts to purchase approximately218,000 bushels costing approximately $1,300,000through June 2009. At September 30, 2008, the Company had forward corn purchasecontracts to purchase approximately 2,775,000 bushels costing approximately$14,000,000 through June 2009.

 

Currently, some of these contract prices are above current marketprices for corn.  Given the decliningethanol price, upon taking delivery under these contracts, the Company wouldnot be able to recover the above market value cost incurred.  Accordingly, the Company recorded an accrued loss on these purchase commitmentsaggregating to approximately $442,000 for the period ended December 31, 2008 and approximately$3,600,000 for the fiscal year ended September 30, 2008. The loss was recorded in lower of cost or market adjustments on thestatement of operations.  The amount ofthe loss was determined by applying a methodology similar to that used in theimpairment evaluation with respect to inventory.  Given the uncertainty of future ethanolprices, this loss may or may not be recovered, and further losses on the outstandingpurchase commitments and inventory could be recorded in future periods.

 

**NOTE 5.  DERIVATIVE INSTRUMENTS**

 

In order to reduce the risk caused by market fluctuations, the Companyhedges its anticipated corn and natural gas purchases by entering into options,futures contracts, and swap agreements. These contracts are used with theintention to fix the purchase price of the Company’s anticipated requirementsof corn and natural gas in production activities. The fair value of thesecontracts is based on quoted prices in active exchange-traded orover-the-counter markets. The fair value of the derivatives is continuallysubject to change due to changing market conditions. The Company does notformally designate these instruments as hedges and, therefore, records inearnings adjustments caused from marking these instruments to market on amonthly basis.

 

At December 31, 2008, the Company has no derivative instruments.For the period ended December 31, 2008, the Company recorded realizedlosses on derivative instruments of approximately $234,000 and are included incost of goods sold in our statement of operations. At September 30, 2008the Company recorded a net liability of approximately $10,000, which included aliability of approximately $77,000 and cash of $67,000.

 

**NOTE 6.  BANK FINANCING**

 

Short-term debt consists of the following at:

 

8

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 
| ** **                                    | ** ** | **12/31/08** | ** ** | **9/30/08*** | ** ** |
|-----------------------------------------------|------------|--------------|------------|--------------|------------|
| Construction and Term Loan, see terms below   |       | $            | 35,000,000 |         | $          | 35,000,000 |   |
| New Markets Tax Credit Loan, see terms  below |       | 19,175,000   |       | 19,175,000   |       |
| County capital lease, (Note 5)                |       | 26,010,000   |       | 26,010,000   |       |
| Equipment financing                           |       | 145,731      |       | 153,175      |       |
| Total short-term debt                         |       | $            | 80,330,731 |         | $          | 80,338,175 |   |
|                                          |       |         |       |         |       |
| Revolving line of credit, see terms below     |       | $            | 6,000,000  |         | $          | 4,034,348 |   |

 

----

* Derived from audited financial statements.

 

The loans described below are subject to credit agreements with variousfinancial and non-financial covenants that limit distributions, require minimumdebt service coverage, net worth and working capital requirements, and securedby all business assets.

 

The Company was in violation of financial covenants as of September 30,2008. The Company failed to meet tangible net worth requirements and reportingrequirements as of September 30, 2008. As of September 30, 2008, the financing agencies have waived thecompliance with the tangible net worth ratio and reporting requirements throughOctober 1, 2009. All the Company’s long-term debt has been reclassified ascurrent maturities of long-term debt as of December 31, 2008 because theCompany is in default of their loan agreements. The Company has not made interest payments since December 31, 2008on the County capital lease and February 1, 2009, interest payments on theNew Market Tax Credit loans and the construction and term loans.  The Company doe not expect to be able to paythe principal payment on the County capital lease which is due in February.

 

*New Market Tax Credit Loan*

 

In March 2007, the Company entered into the agreement with MMCDCNew Markets Fund II, LLC (“NMF”) for the amount of $19,175,000. The Company hasguaranteed it will be in compliance with the program over the tax creditrecapture period from September 2007 until September 2014. The NMFloan is divided into two portions: a term loan of $14,480,500 (the “Term Loan”)and subordinated note for $4,694,500 (the “Subordinated Note”). The Term Loancontains a provision in which the Company must make interest only payments onthe 6th day of the first month following the initial advancement, August 2007,until the 85th month. On the sixth day of the 85th month and continuing for anadditional 48 months, the Company shall pay the amortized unpaid principaltogether with the accrued interest. The interest rate shall be calculated usingthe Wall Street Journal daily money rate (base rate) plus 1.0%, totaling 5.00%and 6% at December 31, 2008 and September 30, 2008, respectively.

 

The Subordinated Note for $4,694,500 carries a fixed interest rate of2.514%. On the first day of each month following the initial advance, August 2007,interest only payments will be made until September 2014, when a principalpayment of $400,000 is required.

 

*Construction and Term Loan*

 

In March 2007, the Company entered into an agreement with a lenderfor the construction financing.  Thefinance commitment has two phases; the construction loan (the “ConstructionLoan”), followed by the term loan (the “Construction Term Loan”), termrevolving note (the “Construction Term Revolving Note”), and a revolving lineof 

 

9

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Table of Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

credit loan (the “Revolving Line of Credit Loan”). Conversion to theConstruction Term Loan occurred on June 1, 2008.

 

*Construction Loan*

 

The Construction Loan provides for borrowings up to $35,000,000 duringthe construction of the plant.  TheCompany made interest payments during the construction phase at the LIBOR plus3.15%.  Interest was paid quarterly inarrears on the first day of January, April, July and October. Atcompletion of the Plant, the loan converted into the Construction Term Loan andConstruction Term Revolving Loan.

 

*Construction Term Loan*

 

Upon satisfactory completion of the Plant a portion of the ConstructionLoan converted to the Construction Term Loan, totaling $29,000,000. Theinterest rate was reduced to LIBOR plus 2.95% on the Construction Term Loan,which totaled 4.57% at December 31, 2008 and 5.41% at September 30,2008.  The agreement includes an optionto convert a portion of the Construction Term Loan to a fixed rate loan. TheCompany is required to make interest payments only on the 1st of day of eachmonth for the first six months followed by 114 principal installments of$254,386 plus accrued interest beginning six months following substantialcompletion, which was determined to be June 1, 2008, payable in full in June 2018.In addition to the scheduled payments, the Company will make additionalprincipal payments equal to 65% of the Company’s excess cash flow not to exceed$2,000,000 per fiscal year and an aggregate total of $8,000,000.  As part of the financing agreement, thepremium above LIBOR may be reduced to 2.65% based on attaining certainfinancial ratios.

 

The financing agreement requires an annual servicing fee of$20,000.  The Company is initiallypermitted to make distributions up to 40% of net income.  For fiscal 2008 and thereafter, the Companymay make distributions which exceed 40% of net income as long as the Companyhas made the required excess cash flow payments and maintained the requiredfinancial covenants.  The financingagreement contains certain prepayment fees in the first three years of thescheduled payments. The Company is also required to obtain and maintainfinancial ratios on an annual basis.

 

*Construction Term Revolving Note*

 

The amount of the Construction Term Revolving Note that converted tothe Term Revolving Note upon satisfactory completion of the Plant was$6,000,000. The Company is required to pay interest on the principal advancesmonthly at the LIBOR rate plus 2.95% which totaled 4.57% at December 31,2008 and 5.41% as of September 30, 2008. The purpose of this loan is for cash and inventory management purposes.

 

*Revolving Line of Credit Loan*

 

The Company also has a Revolving Line of Credit Loan with the samelending institution that provided construction financing for up to$6,000,000.  The Company is required topay interest on the principal advances monthly at the LIBOR rate plus 2.95%which totaled 4.57% at December 31, 2008 and 5.41% as of September 30,2008.  The purpose of this loan is forgeneral and operating expenses. The maturity of the line of credit is 364 days fromcommencement, or March 29, 2009, on the maturity date the principal andany outstanding accrued interest will be due. The Company pays a commitment feeof 0.35% on the unused portion of the line of credit, payable quarterly inarrears. The interest rate is equal to LIBOR plus 2.95% if the Company’stangible owner’s equity (defined as tangible net worth plus subordinated debtdivided by total assets) is less than or equal to 60% or to LIBOR plus 2.65% ifthe tangible owner’s equity is greater than 60%.  As of December 31, 2008 and September 30,2008, $6,000,000 and $4,034,348 were advanced against the line of credit,respectively.

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

*Equipment Financing*

 

In April 2008, the Company entered into two equipment financingagreements with an unrelated party through 2013.  Payments range from approximately $700 permonth to approximately $2,500 per month with interest rates ranging from 4.56%to 5.5%.

 

**NOTE 7.  LEASES**

 

*County Capital Lease*

 

In April 2007, the Company entered into a long term equipmentlease agreement with Otter Tail County, Fergus Falls, Minnesota (the “County”)in order to finance equipment for the Plant (the “Capital Lease”).  The Capital Lease has a term from May 1,2007 through November 2019. The County financed the purchase of equipmentthrough Subordinate Exempt Facility Revenue Bonds Series 2007A totaling$20,000,000, General Obligation Tax Abatement Bonds Series 2007B totaling$5,245,000, and Taxable General Obligation Tax Abatement Bonds Series 2007Ctotaling $765,000 (collectively the “Bonds”).

 

Under the Capital Lease with the County, the Company started makingpayments on May 25, 2008 and on the 25th of each month thereafter.  Until May 25, 2008, interest was beingpaid through the interest reserve fund included in restricted cash. The CapitalLease payments correspond to the interest of 1/6 the amount due on the bonds onthe next interest payment date. Capital Lease payments for principal start in November 2009in an amount equal to 1/6 principal scheduled to become due on the correspondingbonds on the next semi-annual principal payment date. The Company is expectedto make lease payments of principal and interest that correspond to theprincipal and interest the County will pay on the General Obligation Bonds Series 2007Band 2007C.  Interest payments werefinanced through an interest reserve recorded as restricted cash until paymentsbegan. The Company is expected to make Capital Lease payments that correspondto 1/6 the amount of interest payable due on the bonds on the following February 1or August 1 and principal amounts equaling 1/12 of the principal due onthe following February 1. The Company has guaranteed that if such assessedlease payments are not sufficient for the required Bond payments, the Companywill provide such funds as are needed to fund the shortfall. The Capital Leasealso includes an option to purchase the equipment at fair market value at theend of the lease term.

 

The Company failed to make basic payments on the County capital leaseas of December 31, 2008, which caused the Company to default on thecapital lease.  Accordingly, the capitallease has been reclassified to current maturities of long-term debt.

 

*Operating Leases*

 

In February 2008, the Company entered into an operating leaseagreement for 70 railroad cars for a minimum period of 36 months. The leaseagreement shall continue for successive one month terms until terminated byeither party providing a 30 day written advance notice to the other.  The Company will pay $600 per car per month,which may be adjusted according to the terms defined in the agreement. The termof this lease began in April 2008.

 

In April 2008, the Company entered into an operating lease forequipment.  The Company is generally responsible for maintenance, taxes,and utilities for leased equipment.  The term of the lease is for fiveyears with monthly payments of $338.

 

In September 2007, the Company entered into an easement agreementfor a permanent easement for certain parcels of land.  Under the terms of the agreement, the Companyagreed to pay a sum of $2,000, paid December 2007 and increasing annuallyat 5% for twenty-five years, up to a maximum of $6,500.  In addition to the cash, the parties alsoreceived 3,000 member units, issued as of December 31, 2007.

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

In October 2006, the Company entered into a land lease for theconstruction and certain activities related to the operation and maintenance ofrail track.  Under the terms of thisagreement, the Company agreed to pay $4,200 as base rent and increasingannually at 3% thereafter.  Either partycan terminate this agreement giving at least 30 day’s written notice.

 

At December 31, 2008, future minimum lease payments under theCounty Capital Lease are as follows:

 
| 2009                                                                            |   | $          | 2,566,000  |   |
|---------------------------------------------------------------------------------|--------|------------|------------|--------|
| 2010                                                                            |   | 3,506,000  |       |
| 2011                                                                            |   | 3,527,000  |       |
| 2012                                                                            |   | 3,515,000  |       |
| 2013                                                                            |   | 3,491,000  |       |
| After 2013                                                                      |   | 22,165,000 |       |
| Total                                                                           |   | $          | 38,770,000 |   |
| Less amount representing interest                                               |   | 12,760,000 |       |
| Present value of minimum lease payments  included in current maturities of debt |   | $          | 26,010,000 |   |

 

**NOTE 8.  COMMITMENTS AND CONTINGENCIES**

 

*Marketing Contracts*

 

In February 2008, the Company entered into a marketing agreementwith an unrelated party for the marketing, sale and delivery of all bulk gradedried distiller grain with solubles (DDGS) the Company is expected toproduce.  The Company will receive payment for the products sold based ona percentage of the actual sales price as defined in the agreement.  Theinitial term is for three years commencing as of the startup of production andwill continue until terminated by either party providing a 90 day advancewritten notice.

 

In February 2007, the Company entered into a procurement agreementwith an unrelated party for the purchase of corn. The term of this agreementshall be for five years followed by an automatic renewal term of one yearunless terminated by either party giving 90 days advanced written notice. Aprocurement fee shall be paid on a per bushels basis during the term of thecontract. The contract also provides for additional third-party storage in thelocal surrounding area for a minimum of two turns per year. In January 2009,this contract was amended changing the procurement fee structure.

 

In July 2006, the Company entered into a marketing agreement forthe sale and marketing of all the ethanol the Company expects to produce. TheCompany agrees to pay a fixed fee per gallon of ethanol sold for certainmarketing, storage and transportation costs, which will be included in cost ofgoods sold. The initial term of the agreement shall be for 12 months beginningthe first day of the month the Company ships ethanol and will be automaticallyextended for an additional 12 months unless either party gives a 90 day advancewritten notice of termination.

 

In January 2008, the Company entered into a marketing agreementwith an unrelated party to purchase wet distillers grains and solubles theCompany is expected to produce. The agreement commences on completion andstart-up of operations of the plant and continues for two years. The agreementwill remain in effect thereafter unless a 90 day advance written notice isprovided by either party.

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

*Natural Gas*

 

The Company has an agreement to purchase a minimum of 2,700 decathermsof natural gas transportation per day through May 31, 2011 at market priceplus $0.015 per decatherm of natural gas.

 

*Management Agreements*

 

In May 2006, the Company entered into an agreement with anunrelated party to manage the Company’s supply of natural gas. The term of theagreement continues through April 30, 2011, and shall continue on a yearto year basis thereafter until terminated by either party giving 60 dayswritten advance notice. The Company also executed a sale and purchase agreementwith the unrelated party for natural gas. Either party may terminate theagreement by providing a 30 day advance written notice. The Company is alsorequired to hold a certificate of deposit for the benefit of the supplier in theamount of $775,000.

 

**NOTE 9. UNIT BASED COMPENSATION**

 

*Employment Agreements and Restricted Units*

 

In October 2008, the Company and the Chief Executive Officer andPlant Manager agreed upon the termination of their employment agreements,effective October 31, 2008. Both former employees will receive paymentequal to two months base salary, restricted stock issuance of 2,500 and 1,000which would have vested on January 1, 2009 based on their employmentagreements, and continued health benefits through December 31, 2008. TheChief Executive Officer and Plant Manager forfeit the remaining profitsinterests and stock options available under their employment contracts. TheCompany has appointed its Chief Financial Officer to serve as Chief ExecutiveOfficer (CEO) and its Operations Manager to serve as Production Manager.  The CEO signed a new employment contract on December 1,2008.  In the contract the Companygranted the CEO 10,000 Class A member units which will vest at varyingrates through December 31, 2010.

 

**NOTE 10. FAIR VALUE**

 

Effective January 1, 2008, the Company adopted Statement ofFinancial Accounting Standard No. 157, Fair Value Measurements (SFAS 157),and Statement of Financial Accounting Standard No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*(SFAS 159).  SFAS 157’s requirements forcertain nonfinancial assets and liabilities recognized or disclosed at fairvalue on a nonrecurring basis are deferred until fiscal years beginning after November 15,2008 in accordance with FASB Staff Position 157-2 (FSP 157-2).

 

SFAS 157 defines fair value, outlines a framework for measuring fairvalue, and details the required disclosures about fair value measurements. Theadoption of SFAS 157 did not have a material effect on the Company financialposition, results of operations, or cash flows for the quarter ended December 31,2008.

 

SFAS 159 permits the Company to irrevocably choose to measure certainfinancial instruments and other items at fair value. Except for those assetsand liabilities which are required to be recorded at fair value the Companyelected not to record any other assets or liabilities at fair value, aspermitted by SFAS 159.

 

Fair value is defined as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date in the principal or most advantageousmarket. The Company uses a fair value hierarchy that has three levels ofinputs, both observable and unobservable, with use of the lowest possible levelof input to determine fair value. Level 1 inputs include quoted market pricesin an active market or the price of an identical asset or liability. Level 2inputs are market data, other than Level 1, that are observable either directlyor indirectly. Level 2 inputs include quoted market prices for similar assetsor liabilities, quoted market prices in an inactive market, and otherobservable information that can be corroborated by market 

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

**December 31, 2008 and 2007**

 

data. Level 3 inputs are unobservable and corroborated by little or nomarket data. The Company uses valuation techniques in a consistent manner fromyear-to-year.

 

The following table provides information on those assets andliabilities that are measured at fair value on a recurring basis.

 
| ** **                                                                 | ** ** | **December 31, 2008**                                                | ** **                                      |
|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|-------------------------------------------------|
| ** **                                                                 | ** ** | **Fair Value Carrying  Amount in the Balance  Sheet** | ** **                                      | ** ** | ** ** |
| ** **                                                                 | ** ** | ** **                                                                     | **Fair Value Measurement Using** | ** ** |
| ** **                                                                 | ** ** | ** **                                                                     | **Level 1**                                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                                     |       |                                                                           |                                            |   |   |   |   |   |   |
| Money market funds (included in restricted  cash and debt service reserve) |       | $                                                                              | 2,776,008                                       |   | $ | 2,776,008 |   | $ | — |   | $ | — |   |
| Certificates of deposit (included in cash  and equivalents                 |       | $                                                                              | 787,930                                         |   | $ | — |   | $ | 787,930 |   | $ | — |   |
| Total                                                                      |       | $                                                                              | 3,563,938                                       |   | $ | 2,776,008 |   | $ | 787,930 |   | $ | — |   |

 

The fair value of the money market funds is based on quoted marketprices in an active market. The Company determines the fair value of thecertificates of deposits using information provided by the issuing bank, whichincludes discounted expected cash flows of the certificates.

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

We prepared the followingdiscussion and analysis to help you better understand our financial condition,changes in our financial condition, and results of operations for the threemonth period ended December 31, 2008, compared to the same period of theprior fiscal year. This discussion should be read in conjunction with our interimcondensed financial statements and notes included in Item 1 of Part 1of this Quarterly Report, and the audited financial statements and notesthereto and Management’s Discussion and Analysis contained in our Annual Reporton Form 10-K for the fiscal year ended September 30, 2008.

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Reportcontains forward-looking statements within the meaning of Section 21E ofthe Exchange Act. Forward-looking statements are all statements other than statementsof historical fact, including without limitation those statements that areidentified by the words “anticipates,” “believes,” “continue,” “could,” “estimates,”“expects,” “future,” “hope,” “intends,” “may,” “plans,” “potential,” “predicts,”“should,” “target,” and similar expressions, and include statements concerningplans, objectives, goals, strategies, future events or performance, andunderlying assumptions (many of which are based, in turn, upon furtherassumptions) and other statements that are other than statements of historicalfacts. From time to time, the Company may publish or otherwise make availableforward-looking statements of this nature, including statements containedwithin this Item 2 — “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

 

Forward-looking statementsinvolve risks and uncertainties, which could cause actual results or outcomesto differ materially from those expressed.  The Company’s expectations,beliefs and projections are expressed in good faith and are believed by theCompany to have a reasonable basis, including without limitation, management’sexamination of historical operating trends, data contained in the Company’srecords and other data available from third parties. Nonetheless, the Company’sexpectations, beliefs or projections may not be achieved or accomplished. Forward-looking statements are subject to known and unknown risks anduncertainties, including those risks described in “Item 1A - Risk Factors”of our Annual Report on Form 10-K for the fiscal year ended September 30,2008, as updated in Part II, Item 1A of this Quarterly Report.

 

Any forward-lookingstatement contained in this document speaks only as of the date on which thestatement is made, and the Company undertakes no obligation to update anyforward-looking statement or statements to reflect events or circumstances thatoccur after the date on which the statement is made or to reflect theoccurrence of unanticipated events. New factors emerge from time to time, andit is not possible for management to predict all of the factors, nor can itassess the effect ofeachfactor on the Company’s business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statement. All forward-lookingstatements, whether written or oral and whether made by or on behalf of theCompany, are expressly qualified by the risk factors and cautionary statementsin this Quarterly Report, including statements contained within “Part II,Item 1A — Risk Factors,” and in the Company’s Annual Report on Form 10-Kfor the fiscal year ended September 30, 2008, and include the following:

 
|   | · |   | Our  ability to renegotiate the terms of our senior debt agreements and/or obtain  waivers from our lenders to avoid any or all of our lenders exercising their  default remedies on agreements of which we are currently in default; |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                  |
|   | · |   | The  availability and adequacy of our cash flow to meet its requirements,  including payment of loans;                                                                                                                                |
|   |   |   |                                                                                                                                                                                                                                  |
|   | · |   | Economic,  competitive, demographic, business and other conditions in our local,  regional and national markets;                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                  |
|   | · |   | Effect  of foreclosure sales in the industry;                                                                                                                                                                                         |

 

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|   | · |   | Changes  in the availability and price of corn;                                                                                                                                    |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                               |
|   | · |   | Changes  in the availability and price of natural gas;                                                                                                                             |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Changes  in the environmental regulations that apply to our Plant operations;                                                                                                      |
|   |   |   |                                                                                                                                                                               |
|   | · |   | The  occurrence of certain events causing an economic impact in the agriculture,  oil, or automobile markets;                                                                      |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Lack  of transport, storage, and blending infrastructure preventing ethanol from  reaching high demand markets;                                                                    |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Changes  and advances in ethanol and other renewable fuels production technology;                                                                                                  |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Changes  in interest rates or the availability of credit, and limitations and  restrictions contained in the instruments and agreements governing our  indebtedness;               |
|   |   |   |                                                                                                                                                                               |
|   | · |   | The  results of our hedging transactions and other risk mitigation strategies;                                                                                                     |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Our  ability to retain key employees and maintain labor relations;                                                                                                                 |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Our  ability to develop diverse revenue streams;                                                                                                                                   |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Our  ability to implement additional financial and management controls, reporting  systems and procedures and comply with Section 404 of the Sarbanes-Oxley  Act, as amended; |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Changes  or developments in laws, regulations, tariffs or taxes in the ethanol,  agricultural or energy industries;                                                                |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Competition  in the ethanol industry and excess capacity in the industry;                                                                                                          |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Litigation  against us or any third party suppliers;                                                                                                                               |
|   |   |   |                                                                                                                                                                               |
|   | · |   | The  loss of any license or permit;                                                                                                                                                |
|   |   |   |                                                                                                                                                                               |
|   | · |   | The  lack of a public market for our membership units and restrictions on unit  transfer;                                                                                          |
|   |   |   |                                                                                                                                                                               |
|   | · |   | The  loss of our Plant due to casualty, weather, mechanical failure or any  extended or extraordinary maintenance or inspection that may be required; AND                          |
|   |   |   |                                                                                                                                                                               |
|   | · |   | Changes  in our business strategy, capital to support capital improvements and  development.                                                                                       |

 

*Summary*

 

Otter Tail Ag Enterprises,LLC, a Minnesota limited liability company (the “Company,” “Otter Tail,” “we,” “our,”or “us”), owns and operates a nameplate 55 million gallon annualproduction plant of undenatured ethanol in Fergus Falls, Minnesota (the “Plant”).

 

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**Liquidityand Capital Resources**

 

*Overview*

 

As of December 31,2008, we had total assets of approximately $123,000,000 consisting primarily ofcash, restricted cash, accounts receivable, inventory, financing costs andproperty, plant, and equipment.  As of December 31, 2008, we hadcurrent liabilities of approximately $89,600,000 consisting primarily ofaccounts payable, line of credit, and outstanding debt.   All of our long-term debt, consisting ofapproximately $77,000,000 of bank debt financing and capital lease financingfor the construction of the Plant, has been reclassified as current maturitiesof long-term debt, because we were in default as of February 1, 2009 onour capital lease with Otter Tail County, Fergus Falls, Minnesota (the “County”)for failure to make basic payments (defined as payments equal to the aggregateamount of principal and interest outstanding on the bonds issued by the Countyin conjunction with the capital lease), and we have failed to make interestpayments specifically on the Subordinate Exempt Facility Revenue Bonds Series 2007Abonds since December 31, 2008.  Wehave also not made interest payments on the MMCDC New Markets Fund II, LLC (“NMF”)Tax Credit Loans.  In addition, as of February 15,2009, we were in default under our Master Loan Agreement with Agstar FinancialServices, P.C.A. (“Agstar”) for failure to pay principal and interest due.  We are working with Agstar to secure apayment waiver for this principal payment until June 2009.  Under the terms of our respective agreementswith Agstar, NMF and the County, the lenders may exercise any or all defaultremedies against us, including but not limited to acceleration of alloutstanding unpaid principal amounts. For more information on these defaults, and the remedies available toAgstar, NMF and the County, please see our current report on Form 8-Kunder Item 2.04 as filed with the SEC on February 18, 2009.

 

For the three months ended December 31,2008, cash used in operating activities was approximately $2,800,000, cash usedin investing activities was approximately $26,000 and cash provided byfinancing activities was approximately $2,500,000.

 

Wecommenced operations of our Plant in June 2008.  Total cash flow fromthe project following operational commencement of the project has beenimpacted by many factors including, but not limited to, the final cost of theproject, timing of commencement of operations, the speed of ethanol productionduring the start-up phase, as well as energy and corn prices. As of December 31,2008, we had completely drawn on our revolving line of credit with Agstar inthe amount of approximately $6,000,000, and are restricted on drawing on theour revolving line of credit in any additional amounts.

 

Also,based on the our operating plan, we believe our existing working capital willnot be sufficient to meet the cash requirements to fund our planned operatingexpenses, capital expenditures, and working capital requirements through thefiscal year ending September 30, 2009 without additional sources of cashand/or the deferral, reduction or elimination of significant plannedexpenditures.  Assuming no deterioration in margins between corn andethanol prices, we estimate that we will require approximately an additional$6,500,000 to fund our planned operating expenses, capital expenditures, andworking capital requirements through the end of fiscal year 2009.  In addition, we failed to meet tangible networth and reporting requirements in violation of certain financial covenants,but the financing agencies have waived the compliance with these ratios throughOctober 1, 2009.  See Note 2 in our footnotes to our financialstatements for more information on the sufficiency of existing capital to meetour cash requirements and our ability to operate as a going concern.  Finally, as provided above, we are currentlyin default on our Master Loan Agreement with Agstar, our tax credit loans withNMF, and our capital lease with the County. We are working with our lenders to restructure our loan agreements.

 

We willattempt to raise additional capital through an offering of our units.  In February 2009, we filed aregistration statement with the state of Minnesota for an intrastate offeringof our units to existing members who are residents of Minnesota and otherMinnesota residents.  The offering is fora maximum of 36 million of our units at a per-unit cost of $0.50. Eachsubscriber is required to purchase a minimum of 12,500 units in theoffering.  The offering will open for oneyear from the effectiveness of the registration statement, or at such othertime as determined by our Board of Governors.

 

***Short-term Debt Sources***

 

We have a revolvingpromissory note with Agstar for up to $6,000,000.  We are required to payinterest on the principal advances monthly at the LIBOR rate plus 2.95%, whichtotaled 4.57% at December 31, 2008 and 5.41% as of September 30,2008.  The purpose of this loan is for general and operating expenses. The maturity of this line of credit is 364 days from commencement; on the loanmaturitydate, theprincipal and any outstanding accrued interest

 

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will be due.  We pay acommitment fee of 0.35% on the unused portion of the revolving promissorynote.  As of December 31, 2008 and September 30, 2008,$6,000,000 and $4,034,348 were advanced against the line of credit,respectively.

 

***Long-Term Debt Sources***

 

We have entered into twoloan agreements and one capital lease agreement for financing of thePlant.  The total loan commitment is $60,000,000 and the capital lease is$26,010,000, and both are described further below.  All of our long term debt described below hasbeen reclassified as current maturities of long-term debt, because we are indefault on our Master Loan Agreement with Agstar for failure to make requiredprincipal and interest payments, our tax credit loans with NMF for failure tomake required interest payments, and our capital lease with the County forfailure to make required basic payments equal to the aggregate amount ofprincipal and interest outstanding on County bonds, entitling Agstar, NMF andthe County to exercise any and all default remedies against us, including butnot limited to acceleration of all outstanding unpaid principal amounts.  For more information on these defaults, andthe remedies available to Agstar, NMF and the County, please see our currentreport on Form 8-K under Item 2.04 as filed with the SEC on February 18,2009.

 

We entered into a senior debt financing agreement for a constructionloan of $35,000,000 from Agstar, which includes a term and revolving loan(collectively, the “Construction Loan”).  We made interest payments duringthe construction phase at the LIBOR plus 3.15%. Interest was paid quarterly in arrears on the first day of January,April, July and October. At completion of the Plant, the loan convertedinto the Construction Term Loan and Construction Term Revolving Note.

 

 The Construction Loan convertedto a term loan (the “Construction Term Loan”) and term revolving loan on June 1,2008, totaling $29,000,000. The interest rate was reduced to LIBOR plus 2.95%on the Construction Term Loan, which totaled 4.57% at December 31, 2008and 5.41% at September 30, 2008. The agreement includes an option to convert a portion of theConstruction Term Loan to a fixed rate loan. We are required to make interest payments only on the 1st of day of eachmonth for the first six months followed by 114 principal installments of$254,386 plus accrued interest beginning six months following substantialcompletion, which was determined to be June 1, 2008, payable in full in June 2018.In addition to the scheduled payments, we will make additional principalpayments equal to 65% of our excess cash flow not to exceed $2,000,000 perfiscal year and an aggregate total of $8,000,000.  As part of the financing agreement, thepremium above LIBOR may be reduced to 2.65% based on attaining certainfinancial ratios.

 

Commitment fees of $20,000were charged at the time of conversion and will be charged annually thereafter.

 

The maximum amount of the Construction Loan that could be converted tothe term revolving loan is $6,000,000 (the “Revolving Loan”).  The amountof the Construction Term Loan that did convert to the Revolving Loan was$6,000,000. We are required to pay interest on the principal advances monthlyat the LIBOR rate plus 2.95% which totaled 4.57% at December 31, 2008 and5.41% at September 30, 2008.  Thepurpose of this loan is for cash and inventory management.

 

On March 30, 2007, weentered into a loan arrangement with NMF for the amount of $19,175,000 (the “NMFLoan”).  The tax credit period of the NMF Loan is from September 2007to September 2014.  The NMF Loan is divided into two portionsincluding a term loan of $14,480,500, which we shall make interest onlypayments on beginning the 6th day of the first month following the initialadvancement until the 85th month.  On the 6th day of the 85th month andcontinuing for an additional 48 months we shall pay the amortized unpaidprincipal together with the accrued interest.  The interest rate shall becalculated using the Wall Street Journal daily money rate (base rate) plus 100basis points, totaling 5.00% and 6% at December 31, 2008 and September 30,2008, respectively.  In addition there is a subordinated loan note for$4,694,500 which will carry an interest rate of 2.514%.  On the 1st day ofeach month following the initial advance, which occurred in August 2007,we are required to make interest only payments until September 2014 whenwe are required to make a principal payment of $400,000.  We are currently in default under our NMFLoan for failure to make required interest payments.

 

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***Capital Lease***

 

In April 2007, weentered into a long term equipment lease agreement (the “Equipment LeaseAgreement”) with the County in order to finance equipment for the Plant (the “CapitalLease”).  The Equipment Lease Agreement has a term from May 1, 2007through November 2019. The County financed the purchase of equipmentthrough Subordinate Exempt Facility Revenue Bonds Series 2007A totaling$20,000,000, General Obligation Tax Abatement Bonds Series 2007B totaling$5,245,000, and Taxable General Obligation Tax Abatement Bonds Series 2007Ctotaling $765,000 (collectively, the “Bonds”).

 

Under the Equipment LeaseAgreement with the County, we started making payments on May 25, 2008 andhave and will make payments on the 25th of each month.  Payments forprincipal start on November 25, 2009 in an amount equal to 1/6 principalscheduled to become due on the corresponding Bonds on the next semi-annualprincipal payment date. We also make Capital Lease payments of principal andinterest that correspond to the principal and interest the County pays on theGeneral Obligation Bonds Series 2007B and 2007C.   We pay Capital Lease payments that correspondto 1/6 the amount of interest payable due on the Bonds on February 1 or August 1of each year and principal amounts equaling 1/12 of the principal due each February 1. We have guaranteed that if such assessed lease payments are not sufficient forthe required Bond payments, we should provide such funds as are needed to fundthe shortfall.  The Capital Lease also includes an option to purchase theequipment at fair market value at the end of the lease term.  We are in default under the Capital Lease forfailure to make required basic payments.

 

***Results of Operations for the Three Ended December 31, 2008 and December 31,2007***

 

**Results ofOperations**

 

***Revenues***

 

Our revenues wereapproximately $25,500,000 for the three months ended December 31,2008.  We had no revenues during thethree months ended December 31, 2007. The increase in revenues from the three months ended December 31,2008 compared to the three months ended December 31, 2007 is due to thePlant beginning to produce ethanol in March 2008. Prior to March 2008,including the entire quarter for the three months ended December 31, 2007,the Company was in the developmental stage.

 

***Cost of Sales***

 

Our cost of sales wereapproximately $25,800,000 for the three months ended December 31,2008.  Our cost of sales as a percentageof revenues is 101% for the three months ended December 31, 2008.  Wehad no cost of sales for the three months ended December 31, 2007, as webegan producing ethanol during March 2008.  The high cost of salesrelative to revenues is a function of the spread between high corn prices andlow ethanol prices during the three months ended December 31, 2008, andthe effect of our derivative instruments and lower of cost or market valuation.

 

***Operating Expenses***

 

Our operating expenses wereapproximately $550,000 for the three months ended December 31, 2008. Compared to the three months ended December 31, 2007, our operatingexpenses increased by approximately $100,000, or 24%.  These increases areprimarily due to the Plant becoming operational as of March 2008 as wellas professional and consulting fees.  For the three months ended December 31,2008, our material operating expenses were: 1) approximately $370,000related to general and administrative expenses; 2) and approximately$170,000 related to professional fees. Some major factors impactingprofessional fees for the three months ended December 31, 2008 were ITsupport and legal and accounting fees for SEC filings.  In the three months ended

 

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December 31, 2007, ourmaterial operating expenses were: 1) approximately $330,000 related togeneral and administrative expenses; and 2) approximately $110,000 forprofessional fees.

 

The following table showscash flows for the three month periods ended December 31, 2008 and 2007:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **December 31, 2008**  | ** ** | **December 31, 2007**  | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                  | ** ** |
| **Cash Flows used in Operating Activities** |       | (2,807,214                       | )          | (6,478,138                       | )          |
| **Cash Flows used in Investing Activities** |       | (26,336                          | )          | (22,490,119                      | )          |
| **Cash Flows from Financing Activities**    |       | 2,456,380                        |       | 28,760,474                       |       |

 

***Cash Flow Used in Operations***

 

The net cash flow used inoperating activities for the three months ended December 31, 2008decreased approximately $3,700,000 over that for the three months ended December 31,2007.  The use of cash flows in operatingactivities was the result of the spread between ethanol and corn prices causingus to incur losses for the first quarter of fiscal 2009.  As disclosed above, we believe our existingworking capital will not be sufficient to meet the cash requirements to fundthe our planned operating expenses for the remainder of fiscal 2009.

 

***Cash Flow Used in Investing Activities***

 

Cash used for investingactivities decreased by approximately $22,500,000 for the three months ended December 31,2008 compared to the three months ended December 31, 2007, primarilybecause construction of the Plant was complete as of the end of fiscal 2008,and construction-related payments significantly decreased during the firstquarter of fiscal 2009.

 

***Cash Flow From Financing Activities***

 

Since our inception, we havegenerated significant cash inflows from bank financing arrangements and memberequity contributions.  Proceeds for the three months ended December 31,2008 from our bank financing arrangements decreased by approximately$26,300,000 compared to the bank proceeds for the three months ended December 31,2007.  This is primarily due to the proceeds from our construction loanbeing fully utilized as of the end of fiscal 2008.

 

**CriticalAccounting Estimates**

 

Our most critical accountingpolicies, which are those that require significant judgment, include valuationof derivative instruments and inventory. An in-depth description of these canbe found in our Annual Report on Form 10-K for the year ended September 30,2008. Management has not changed the method of calculating and using estimatesand assumptions in preparing our condensed financial statements in accordancewith generally accepted accounting principles.  There have been no changesin the policies for our accounting estimates for the three months ended December 31,2008.

 

**Off-BalanceSheet Arrangements**

 

We have not entered into anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat are material to investors.

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to the impactof market fluctuations associated with commodity prices and interest rates asdiscussed below.  We have no exposure to foreign currency risk, as all ofour business is conducted in United States Dollars.  We use derivativefinancial instruments as part of an overall strategy to manage marketrisk.  We use cash, futures and option contracts to hedge changes to thecommodity prices of corn and ethanol. We do not enter into these derivativefinancial instruments for trading or speculative purposes, nor do we designatethese contracts as hedges for accounting purposes pursuant to the requirementsof Statement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and HedgingActivities*.

 

**InterestRate Risk**

 

We expect to be exposed tomarket risk from changes in interest rates on our existing debtfacilities.  Exposure to interest rate risk results from holding ourcredit agreements.

 

We used debt to finance asignificant amount of our expenditures in the year ended September 30,2008 and in the three months ended December 31, 2008.  Theseagreements will expose us to market risk related to changes in interest rates.

 

**CommodityPrice Risk**

 

Effective April 8, 2008, we closed the majority of all derivativepositions.  At December 31, 2008, wehave no derivative instruments that expose us to commodity price risk. For theperiod ended December 31, 2008, we recorded a realized loss ofapproximately $234,000.  We recorded an accrued loss on our firmpurchase commitments related to corn aggregating to approximately $442,000 for the period ended December 31,2008 and approximately $3,600,000 for the fiscal year ended September 30,2008.  At September 30, 2008 the Company recorded a net liability ofapproximately $10,000, which included a liability of approximately $77,000 andcash of $67,000.  There were noderivative instruments as of December 31, 2007.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

Under the supervision and with theparticipation of our management, including our chief executive officer/chieffinancial officer, we have conducted annual evaluation of the effectiveness ofthe design and operation of our disclosure controls and procedures, as definedin Rules 13a-15(e) and 15d-15(e) under the Securities andExchange Act of 1934, as of the end of the period covered by this report.  In our Evaluation of Disclosure Controls andProcedures filed with our Annual Report on Form 10-K for the year ended September 30,2008, we reported that the Company’s disclosure controls and procedures are notyet fully effective to provide reasonable assurance that: (i) informationrequired to be disclosed by the Company in reports that it files or submits underthe Securities Exchange Act of 1934 is accumulated and communicated to theCompany’s management, including the chief executive officer/chief financialofficer as appropriate to allow timely decisions regarding required disclosureby the Company; and (ii) information required to be disclosed by theCompany in reports that it files or submits under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms.  During the quarter ended December 31,2008, we continued to design enhancements to our controls, including thefollowing:

 
| · |   | Implementing  a search for a full-time controller or CFO with appropriate U.S. GAAP and SEC  experience;                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Establishing  and implementing a detailed timeline for review and completion of financial  reports to be included in our Forms 10-Q and 10-K; and                    |
| · |   | Employing  the use of appropriate supplemental SEC and U.S. GAAP checklists in  connection with our closing process and the preparation of our Forms 10-Q and  10-K. |

 

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Asa result of these material weaknesses, which were not remediated as of December 31,2008, we have concluded that our disclosure controls and procedures were noteffective as of December 31, 2008. The implementation of the remediation plan described above has beeninitiated and will continue through the first half of fiscal 2009 and possiblybeyond. The material weakness will not be considered remediated until theapplicable remedial procedures are tested and management has concluded that theprocedures are operating effectively. Management recognizes that use of ourfinancial resources will be required not only for implementation of thesemeasures, but also for testing their effectiveness and may seek the assistanceof an outside service provider to assist in this process.

 

Ifwe are not able to implement controls to avoid the occurrence of materialweaknesses in our internal control over financial reporting or disclosurecontrols in the future, then we might report results that are not consistentwith our actual results and we may need to restate results that will have beenpreviously reported.

 

***Changes in Internal Controls***

 

Therehas been no change in our internal control over financial reporting (as definedin Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during ourmost recently completed quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART II— OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A.RISK FACTORS**

 

In addition to the otherinformation set forth in this report, including the important information underthe heading “Disclosure Regarding Forward-Looking Statements,” you shouldcarefully consider the “Risk Factors” discussed in our Annual Report on Form 10-Kfor the fiscal year ended September 30, 2008. “Risk Factors” areconditions that may cause investment in our Company to be speculative orrisky.  In addition to those RiskFactors, the Company is aware of the following risk factors for that weidentified during the three months ended December 31, 2008:

 

*We have defaulted on our capitallease with Otter Tail County and other loan agreements with our senior lendersand our lenders may declare all amounts of principal and interest dueimmediately.*

 

We were in default as of February 1,2009 on our capital lease with the County for failure to make basic payments(defined as payments equal to the aggregate amount of principal and interestoutstanding on the bonds issued by the County in conjunction with the capitallease), and we have failed to make interest payments specifically on theSubordinate Exempt Facility Revenue Bonds Series 2007A bonds since December 31,2008.  We have also failed to make interestpayments on the NMF Tax Credit Loans, rendering us in default under ourConstruction and Term Loan Agreement with NMF. In addition, as of February 15, 2009, we were in default under ourMaster Loan Agreement with Agstar for failure to pay principal and interestdue.  We are working with Agstar tosecure a payment waiver for this principal payment until June 2009, andwith NMF and the County on any and all restructuring options.  Under the terms of our respective agreementswith Agstar, NMF and the County, the lenders may exercise any or all defaultremedies against us, including but not limited to acceleration of alloutstanding unpaid principal amounts.  Inthe event that any of our lenders determines to exercise their respectivedefault remedies, we would likely be forced to proceed with a bankruptcy,liquidation, reorganization, or other winding down of the businessaffairs.  For more information on thesedefaults, and the remedies available to Agstar, NMF and the County, please seeour current report on Form 8-K under Item 2.04 as filed with the SEC on February 18,2009.

 

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*We anticipate needing to raiseadditional capital to meet our short-term needs, and may be unsuccessful indoing so.*

 

We will require significantcapital for a number of expenditures, including financing operations, payingindebtedness, and implementing our restructuring plan. We believe that much ofthis capital must come from sources outside of available cash flows from ouroperations.  There is no guarantee thatwe will be successful in raising enough capital from outside sources toadequately fund our operations and other short-term needs.  In the event that we are unable to obtainenough capital, we may be forced to proceed with a bankruptcy, liquidation,reorganization, or other winding down of the business affairs. Even if we areable to obtain additional debt financing, we may not be able to do so uponfavorable terms. Alternatively, if we seek additional equity financing in thefuture, the ownership of our current members will be diluted. In order toattract investors, we may also have to offer equity at prices lower than theUnits offered hereby.

 

* We currently have equipment repairs that willcause us to stop production for a limited time and we may be required to makeother unscheduled maintenance or repairs to continue operations.*

 

As of the filing date ofthis quarterly report on Form 10-Q, we have equipment repairs andequipment cleaning that will cause us to stop production for an estimate of atleast two (2) days.  We will bereplacing equipment that is currently under warranty.  However, we may have other unscheduledmaintenance and repair obligations in the future that may or may not be coveredby warrant and, other than routine maintenance; we cannot predict whatequipment may need maintenance and repair, how much such maintenance and repairmay cost, and how long we would have to stop production to perform suchmaintenance and repair.

 

*Given the current condition ofthe Company and the ethanol market generally, it is unlikely that we will makeany distributions in the near future.*

 

Our obligations to ourcreditors restrict our ability to make any distributions at this time, or atany time in the next year.  We may onlymake distributions in the event that we have positive cash flow.  We have not had a positive cash flow sinceearly 2008.  Positive cash flow and cashdistributions are not assured in the future, and we are not now, and may neveragain be, in a position to make such distributions. Whether we are able togenerate sufficient cash flow from our business to make distributions tomembers will depend on numerous factors, including:

 
|   | · |   | Required principal and  interest payments on any debt and compliance with applicable loan covenants  which will reduce the amount of cash available for distributions; |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                   |
|   | · |   | Our ability to operate our  plant at full capacity which directly impacts our revenues;                                                                                |
|   |   |   |                                                                                                                                                                   |
|   | · |   | Adjustments and amounts of  cash set aside for reserves and unforeseen expenses; and                                                                                   |
|   |   |   |                                                                                                                                                                   |
|   | · |   | State and federal  regulations and subsidies, and support for ethanol generally which can impact  our profitability and the cash available for distributions.          |

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

Please seeNote 6 to our condensed unaudited financial statement notes in Part I,Item I of this quarterly report on Form 10-Q and our current reporton Form 8-K under Item 2.04 as filed with the SEC on February 18,2009 for information regarding defaults on our existing loan and capitallease agreements.

 

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**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

OurAnnual Meeting of members was held on February 12, 2009. Of the 23,944,000units outstanding and entitled to vote at the meeting as of January 26,2009, 12,332,164 units were present, either in person or by proxy. Thefollowing describes the matters considered by the members at the AnnualMeeting, as well as the results of the votes cast at the Annual Meeting.

 

Proposal1: To elect three (3) governors to hold office for a term of three yearsor until their respective successors have been elected and shall qualify.

 
| **Nominees**        | ** ** | **Votes**                | ** ** | ** **              | ** ** |
|---------------------|------------|--------------------------|------------|-------------------------|------------|
| Gregory  Smith      |       | For:  Against:  Abstain: |       | 6,219,166  0  6,112,998 |       |
| John  Anderson      |       | For:  Against:  Abstain: |       | 6,219,166  06,112,998   |       |
| Jonathan  Piekarski |       | For:  Against:  Abstain: |       | 6,271,666  6,060,498    |       |

 

JerryLarson, Lee Rogness, Mark Ellison, Hans Ronnevik, Ed Mehl, Philip Deal, GeraldRust and Ronald Tobkin continued their respective terms as governors after theAnnual Meeting.

 

Proposal2: To ratify and approve the appointment of Boulay, Heutmaker, Zibell &Co., P.L.L.P. as our independent auditors for the fiscal year ending September 30,2009.

 
| **Votes**  | ** ** | ** ** |   |
|------------|------------|------------|--------|
| ** ** | ** ** | ** ** |   |
| For:       | ** ** | 6,324,166  |   |
|       | ** ** |       |   |
| Against:   |       | 0          |   |
|       |       |       |   |
| Abstain:   |       | 6,007,998  |   |

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

See Exhibit Indexfollowing the signature page of this report.

 

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**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                          | OTTER TAIL AG ENTERPRISES,  LLC |
|-------------------------------|---------------------------------|
|                          |                            |
| Date: February 20,  2009 | By:                             | /s/ Anthony Hicks |
|                          |                            | Anthony Hicks |
|                          |                            | Chief Executive Officer  and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 

**OTTER TAIL AG ENTERPRISES, LLCFORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2008**

 
| 31.1*  |   | Certification  by Chief Executive Officer and Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and  15d-14 of the Securities Exchange Act of 1934). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                          |
| 32.1*  |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                           |

 

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*    Filedherewith.

 

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