Table ofContents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE**

**COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-Q**

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

 

**FORTHE QUARTERLY PERIOD ENDED MARCH 31, 2009**

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

 

**FORTHE TRANSITION PERIOD FROM           TO          **

 

**COMMISSIONFILE NUMBER: 000-53042**

 

**OTTERTAIL AG ENTERPRISES, LLC**

(Exact name of registrantas specified in its charter)

 

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

 

**24096 -170th Avenue**

**FergusFalls, MN 56537-7518**

(Address of principalexecutive offices)

 

**(218)998-4301**

(Registrant’s telephonenumber, including area code)

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filter or asmaller reporting company. See the definition of “large accelerated filer,accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange 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 mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes xNo

 

As of May 15, 2009, the Company has outstanding23,944,000 Class A Membership Units.

 

 

 

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OTTER TAIL AGENTERPRISES, LLC

FORM 10-Q QUARTERLYREPORT FOR THE QUARTER ENDED

MARCH 31, 2009

 

TABLE OF CONTENTS

 
| ** **                                                                                                         | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I —  FINANCIAL INFORMATION                                                                          |       | 2        |
| Item 1. Condensed Financial Statements  (Unaudited)                                                           |       | 2        |
| Balance Sheets                                                                                                     |       | 2        |
| Statements  of Operations                                                                                          |       | 3        |
| Statements  of Cash Flows                                                                                          |       | 5        |
| Condensed Notes to Unaudited Financial Statements                                                                  |       | 6        |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                |       | 15       |
|             Disclosure Regarding Forward Looking Statements |       | 16       |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                                |       | 21       |
| Item 4T. Controls and Procedures                                                                                   |       | 22       |
| PART II —  OTHER INFORMATION                                                                             |       | 22       |
| Item  1. Legal Proceedings                                                                                         |       | 22       |
| Item  1A. Risk Factors                                                                                             |       | 23       |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                               |       | 24       |
| Item 3. Defaults Upon Senior Securities                                                                            |       | 24       |
| 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.— CONDENSED FINANCIAL STATEMENTS** (Unaudited)

 

**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSED BALANCESHEETS

 
| ** **                                             | ** ** | **March 31, 2009** | ** **  | **September 30, 2008** | ** ** |
|--------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                             | ** ** | **(Unaudited)**         | ** **  | ** **                  | ** ** |
| **ASSETS**                                             |       |                    |        |                        |       |
| **Current Assets**                                     |       |                    |        |                        |       |
| Cash and equivalents                                   |       | $                       | 430,812     |                        | $          | 1,133,041 |   |
| Restricted cash                                        |       | 968,464                 |        | 1,423,217                   |       |
| Accounts receivable                                    |       | 2,253,402               |        | 2,657,721                   |       |
| Inventory                                              |       | 3,209,437               |        | 5,761,323                   |       |
| Prepaid expenses and other                             |       | 1,444,478               |        | 366,322                     |       |
| Total current assets                                   |       | 8,306,593               |        | 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                          |       | (7,315,856              | )           | (3,678,591                  | )          |
| Net property and equipment                             |       | 107,145,439             |        | 110,756,369                 |       |
| **Other Assets**                                       |       |                    |        |                        |       |
| Restricted cash - debt service reserve                 |       | 2,601,819               |        | 2,638,895                   |       |
| Debt issuance costs, net of amortization               |       | —                  |        | 1,556,272                   |       |
| Total other assets                                     |       | 2,601,819               |        | 4,195,167                   |       |
| **Total Assets**                                       |       | $                       | 118,053,851 |                        | $          | 126,293,160 |   |
| **LIABILITIES AND MEMBERS’ EQUITY**               |       |                    |        |                        |       |
| **Current Liabilities**                                |       |                    |        |                        |       |
| Additional revolving loan                              |       | $                       | 6,000,000   |                        | $          | 4,034,349 |   |
| Accounts payable                                       |       | 508,938                 |        | 702,661                     |       |
| Construction payable                                   |       | —                  |        | 20,046                      |       |
| Construction payable- related party                    |       | 254,564                 |        | 255,500                     |       |
| Accrued interest and other                             |       | 1,519,407               |        | 851,910                     |       |
| Accrued purchase commitments                           |       | 168,422                 |        | 3,600,000                   |       |
| Current maturities of long-term debt                   |       | 80,129,336              |        | 3,014,310                   |       |
| Total current liabilities                              |       | 88,580,666              |        | 12,478,776                  |       |
| **Long-term debt, net of current maturities**          |       | —                  |        | 77,323,865                  |       |
| **Commitments and Contingencies**                      | ** ** | **—**              | ** **  | **—**                  | ** ** |
| **Members’ Equity, 23,944,000 units outstanding** |       | 29,473,184              |        | 36,490,519                  |       |
| **Total Liabilities and Members’ Equity**         |       | $                       | 118,053,851 |                        | $          | 126,293,160 |   |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF OPERATIONS

 
| ** **                                                       | ** ** | **Three Months  Ended** | ** ** | **Three Months  Ended** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
| ** **                                                       | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**         | ** ** |
|                                                             |       |                    |       |                    |       |
| Revenues                                                         |       | $                       | 22,699,033 |                    | $          | 60,369 |   |
|                                                             |       |                    |       |                    |       |
| Cost of sales                                                    |       | 24,014,296              |       | 408,301                 |       |
|                                                             |       |                    |       |                    |       |
| Lower of cost or market adjustment                               |       | 168,422                 |       | —                  |       |
|                                                             |       |                    |       |                    |       |
| Gross Loss                                                       |       | (1,483,684              | )          | (347,932                | )          |
|                                                             |       |                    |       |                    |       |
| Professional fees                                                |       | 190,763                 |       | 174,680                 |       |
| General and administrative                                       |       | 389,102                 |       | 399,607                 |       |
| Total operating expenses                                         |       | 579,864                 |       | 574,287                 |       |
|                                                             |       |                    |       |                    |       |
| **Operating Loss**                                               |       | (2,063,549              | )          | (922,219                | )          |
|                                                             |       |                    |       |                    |       |
| **Other income (expense)**                                       |       |                    |       |                    |       |
| Interest expense                                                 |       | (1,114,911              | )          | —                  |       |
| Impairment on financing costs                                    |       | (1,496,476              | )          | —                  |       |
| Interest income                                                  |       | 6,376                   |       | 56,029                  |       |
| Total other income (expense), net                                |       | (2,605,012              | )          | 56,029                  |       |
|                                                             |       |                    |       |                    |       |
| **Net Loss**                                                     |       | $                       | (4,668,560 | )                       | $          | (866,190 | ) |
|                                                             |       |                    |       |                    |       |
| **Weighted Average Units Outstanding — Basic and  Diluted** |       | 23,944,000              |       | 23,925,000              |       |
|                                                             |       |                    |       |                    |       |
| **Net Loss Per Unit — Basic and Diluted**                   |       | $                       | (0.20      | )                       | $          | (0.03 | ) |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSED STATEMENTS OFOPERATIONS

 
| ** **                                                       | ** ** | **Six Months Ended**    | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
| ** **                                                       | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**         | ** ** |
|                                                             |       |                    |       |                    |       |
| Revenues                                                         |       | $                       | 48,230,321 |                    | $          | 60,369 |   |
|                                                             |       |                    |       |                    |       |
| Cost of sales                                                    |       | 50,267,002              |       | 408,301                 |       |
|                                                             |       |                    |       |                    |       |
| Lower of cost or market adjustment                               |       | 168,422                 |       | —                  |       |
|                                                             |       |                    |       |                    |       |
| Gross Loss                                                       |       | (2,205,103              | )          | (347,932                | )          |
|                                                             |       |                    |       |                    |       |
| Professional fees                                                |       | 365,081                 |       | 286,403                 |       |
| General and administrative                                       |       | 763,964                 |       | 732,282                 |       |
| Total operating expenses                                         |       | 1,129,045               |       | 1,018,685               |       |
|                                                             |       |                    |       |                    |       |
| **Operating Loss**                                               |       | (3,334,148              | )          | (1,366,617              | )          |
|                                                             |       |                    |       |                    |       |
| **Other income (expense)**                                       |       |                    |       |                    |       |
| Loss on derivatives                                              |       | —                  |       | (1,342,712              | )          |
| Interest expense                                                 |       | (2,206,664              | )          | (12,537                 | )          |
| Impairment on financing costs                                    |       | (1,496,476              | )          | —                  |       |
| Interest income                                                  |       | 17,703                  |       | 161,644                 |       |
| Total other expense, net                                         |       | (3,685,437              | )          | (1,193,605              | )          |
|                                                             |       |                    |       |                    |       |
| **Net Loss**                                                     |       | $                       | (7,019,585 | )                       | $          | (2,560,222 | ) |
|                                                             |       |                    |       |                    |       |
| **Weighted Average Units Outstanding — Basic and  Diluted** |       | 23,944,000              |       | 23,923,995              |       |
|                                                             |       |                    |       |                    |       |
| **Net Loss Per Unit — Basic and Diluted**                   |       | $                       | (0.29      | )                       | $          | (0.10 | ) |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                            | ** ** | **Six Months Ended  March 31, 2009** | ** ** | **Six Months Ended  March 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                            | ** ** | **(Unaudited)**                           | ** ** | **(Unaudited)**                           | ** ** |
| **Cash Flows from Operating Activities**                                                              |       |                                      |       |                                      |       |
| Net loss                                                                                              |       | $                                         | (7,019,585 | )                                         | $          | (2,560,222 | ) |
| Adjustments to reconcile net loss to net cash used in operations:                                     |       |                                      |       |                                      |       |
| Depreciation                                                                                          |       | 3,637,265                                 |       | 18,552                                    |       |
| Amortization of debt financing costs                                                                  |       | 59,796                                    |       | 64,049                                    |       |
| Impairment of debt financing costs                                                                    |       | 1,496,476                                 |       | —                                    |       |
| Lower of cost or market adjustment                                                                    |       | 168,422                                   |       | —                                    |       |
| Unit-based compensation                                                                               |       | 2,250                                     |       | 7,487                                     |       |
| Unrealized loss on derivative instruments                                                             |       | —                                    |       | 442,755                                   |       |
| Change in assets and liabilities:                                                                     |       | —                                    |       |                                      |       |
| Accounts receivable                                                                                   |       | 404,319                                   |       | (60,369                                   | )          |
| Grant receivable                                                                                      |       | —                                    |       | (187,500                                  | )          |
| Interest receivable                                                                                   |       | —                                    |       | 11,379                                    |       |
| Inventory                                                                                             |       | 2,383,464                                 |       | (4,690,492                                | )          |
| Prepaid expenses and other                                                                            |       | (1,078,156                                | )          | (3,895,327                                | )          |
| Derivative instruments                                                                                |       | —                                    |       | (832,493                                  | )          |
| Accounts payable                                                                                      |       | (214,706                                  | )          | 1,516,529                                 |       |
| Accrued purchase commitments                                                                          |       | (3,431,578                                | )          | —                                    |       |
| Accrued interest and other                                                                            |       | 667,497                                   |       | (411,583                                  | )          |
| Net cash used in operating activities                                                                 |       | (2,924,534                                | )          | (10,577,224                               | )          |
|                                                                                                  |       |                                      |       |                                      |       |
| **Cash Flows from Investing Activities**                                                              |       |                                      |       |                                      |       |
| Capital expenditures                                                                                  |       | (26,336                                   | )          | —                                    |       |
| Payments for construction in process                                                                  |       | —                                    |       | (37,359,805                               | )          |
| Net cash used in investing activities                                                                 |       | (26,336                                   | )          | (37,359,806                               | )          |
|                                                                                                  |       |                                      |       |                                      |       |
| **Cash Flows from Financing Activities**                                                              |       |                                      |       |                                      |       |
| Payments for long-term debt                                                                           |       | (208,839                                  | )          | —                                    |       |
| Change in restricted cash                                                                             |       | 491,830                                   |       | 679,289                                   |       |
| Payments for debt issuance costs                                                                      |       | —                                    |       | (899                                      | )          |
| Proceeds from line of credit                                                                          |       | 1,965,651                                 |       | —                                    |       |
| Proceeds from construction loan                                                                       |       | —                                    |       | 46,934,381                                |       |
| Net cash provided by financing activities                                                             |       | 2,242,914                                 |       | 47,612,771                                |       |
|                                                                                                  |       |                                      |       |                                      |       |
| **Net Decrease in Cash and Equivalents**                                                              |       | (707,956                                  | )          | (324,259                                  | )          |
| **Cash and Equivalents — Beginning of Period**                                                   |       | 1,138,768                                 |       | 4,611,317                                 |       |
| **Cash and Equivalents — End of Period**                                                         |       | $                                         | 430,812    |                                      | $          | 4,287,058 |   |
|                                                                                                  |       |                                      |       |                                      |       |
| **Supplemental Disclosure of Cash Flow Information**                                                  |       |                                      |       |                                      |       |
| Interest paid, net of capitalized of $0 and $2,595,717 at  March 31, 2009 and 2008, respectively |       | $                                         | 1,568,750  |                                      | $          | 12,537 |   |
|                                                                                                  |       |                                      |       |                                      |       |
| **Supplemental Disclosure of Noncash Operating,  Investing and Financing Activities**                 |       |                                      |       |                                      |       |
| Units issued for line of land and construction                                                        |       | $                                         | —     |                                      | $          | 6,000 |   |
| Construction costs included in accounts payable                                                       |       | $                                         | 254,564    |                                      | $          | 6,182,314 |   |
| Financing costs paid with debt proceeds                                                               |       | $                                         | —     |                                      | $          | 17,296 |   |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement

 

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**OTTERTAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIALSTATEMENTS**

**(UNAUDITED)**

**March 31,2009 and 2008**

 

**NOTE1.  SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Basis of Presentation*

 

The accompanying unaudited condensed interimfinancials have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in annual financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof 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 audited financial statements forthe year ended September 30, 2008, contained in the Company’s AnnualReport on Form 10-K for the fiscal year ended September 30, 2008, filedwith the Securities and Exchange Commission on January 13, 2009.

 

Inthe opinion of management, the interim financial statements reflect alladjustments 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*

 

OtterTail Ag Enterprises, LLC, a Minnesota limited liability company (the “Company”)was organized with the intentions of developing, owning and operating a 55million gallon per year capacity dry-mill ethanol plant near Fergus Falls,Minnesota (the “Plant”).  The Company wasin the development stage until March 2008, when the Company commencedoperations.

 

*Accounting Estimates*

 

Managementuses estimates and assumptions in preparing these financial statements inaccordance 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 valuationon inventory and long-lived asset impairment analysis.  Actual results could differ from thoseestimates.

 

*Revenue Recognition*

 

The Company sells ethanol and related productspursuant to marketing agreements. Revenues from the production of ethanol and the related products arerecorded when the customer (the marketing companies as further discussed inNote 7) has taken title and assumed the risks and rewards of ownership, pricesare fixed or determinable and collectability is reasonably assured.  The Company’s products are sold FOB shippingpoint.

 

In accordance with the Company’s agreements for themarketing and sale of ethanol and related products, marketing fees andcommissions due to the marketers are deducted from the gross sales price asearned.  Marketing fees remitted by theCompany are presented net in revenue. Commissions were approximately $132,000 for the three months ended March 31,2009.  No commissions were paid for thesame period ending March 31, 2008.

 

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*Accounts Receivable*

 

Credit terms are extended to customers in the normalcourse of business.  The Company performsongoing credit evaluations of its customers’ financial condition and, generally,requires no collateral.

 

Accounts receivable are recorded at their estimatednet realizable value.  Accounts areconsidered past due if payment is not made on a timely basis in accordance withthe Company’s credit terms.  Accountsconsidered 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 March 31,2009, 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 forrequirements as part of the capital lease financing agreement and for naturalgas contracts. At March 31, 2009 and September 30, 2008, the total ofthese accounts was approximately $3,600,000 and $4,000,000, respectively.

 

*Inventories*

 

Inventories consist of raw materials; work in processand finished goods.  Corn is the primaryraw material and along with other raw materials, is stated at the lower ofaverage cost or market.  Finished goodsconsist of ethanol, dried distillers grains and modified wet distillers grains,and are stated 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-lived Assets*

 

The Company tests long-lived assets or asset groupsfor recoverability when events or changes in circumstances indicate that theircarrying amount may not be recoverable. Circumstances which could trigger areview include, but are not limited to: significant decreases in the marketprice of the asset; significant adverse changes in the business climate orlegal factors; accumulation of costs significantly in excess of the amountoriginally expected for the acquisition or construction of the asset; currentperiod cash flow or operating losses combined with a history of losses or aforecast of continuing losses associated with the use of the asset; and currentexpectation that the asset will more likely than not be sold or disposedsignificantly before the end of its estimated useful life. (See Note 9)

 

Recoverability is assessed based on the carryingamount of the asset and its fair value which is generally determined based onthe sum of the undiscounted cash flows expected to result from the use and theeventual disposal of the asset, as well as specific appraisal in certain instances.An impairment loss is recognized when the carrying amount is not recoverableand exceeds fair value. 

 

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*FairValue of Financial Instruments*

 

The carrying value ofcash and equivalents, restricted cash, receivables, and payables approximatestheir fair value.

 

It is not currentlypracticable to estimate the fair value of the debt financing.  Because these agreements contain certainunique terms, covenants, and restrictions, as discussed in Note 5, there are noreadily determinable similar instruments on which to base an estimate of fairvalue.

 

*EnvironmentalLiabilities*

 

The Company’s operationsare subject to environmental laws and regulations adopted by variousgovernmental entities in the jurisdiction in which it operates.  These laws require the Company to investigateand remediate the effects of the release or disposal of materials at itslocation.  Accordingly, the Company hasadopted policies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit the financialliability, which could result from such events. Environmental liabilities are recorded when the liability is probableand the costs can be reasonably estimated. No liabilities were recorded at March 31, 2009 or September 30,2008.

 

*NetIncome (Loss) per Unit*

 

Basic net income (loss)per unit is computed by dividing net income by the weighted average number ofmembers’ units outstanding during the period. Diluted net income per unit is computed by dividing net income by theweighted average number of members’ units and members’ unit equivalentsoutstanding during the period.  At March 31,2009 and 2008, the effects of 12,600 and 14,500, respectively, restricted unitsare excluded from the computation of diluted units outstanding as their effectswould be anti-dilutive, due to the Company’s net loss for the period ended March 31,2009 and 2008. 

 

**NOTE 2.GOING CONCERN**

 

TheCompany incurred net losses of $8.7 million for the year ended September 30,2008, and has incurred net losses of approximately $7.0 million for the sixmonth period ended March 31, 2009. Based on the Company’s operating plan, its existing working capital isinsufficient 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.

 

TheCompany operated half of fiscal year 2008 as a developmental stagecompany.  As a result, the Company hadsubstantial operating expenses with limited income; the loss for fiscal 2008was an operational loss of $4.7 million including $4.6 million loss from anadjustment for lowerof cost or market related to corn inventory and purchase commitments. Commodity prices significantly influenced the viability of the Companyachieving its financial objectives, and record high prices for corn during thesummer of 2008, which coincided with the Company’s first full productionquarter after commissioning and performance testing, led to operational lossesin the last quarter of the fiscal year. This major commodity, corn, was influenced by external factors beyondthe Company’s control which led to higher than normal market pricing.  To secure product for fiscal 2009, theCompany executed a number of forward purchase contracts.  The global financial crisis that began in2008 caused major reductions in commodity prices, leaving a shortfall betweencontract value and present market value. The market negatively impacted not only the Company’s input costs, butalso its output prices.  This gave riseto a situation whereby the Company had supply commitments that it was requiredto honor but could not obtain the required sales return to justify its carryingvalue.  In recognition, the Company hasrecorded an amount to reflect its best estimate between then present marketvalue and future

 

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realization (See Note4).  As of March 31, 2009, theCompany has drawn the maximum amount available on their line of credit (SeeNote 5). As the Company’s lines of credit are at the maximum, we currently haveno other source of available funding other than cash generated from dailyoperating activities.

 

Thesefactors raise substantial doubt about the Company’s ability to continue as agoing concern.  The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  Thisbasis of accounting contemplates the recovery of the Company’s assets and thesatisfaction of liabilities in the normal course of business.

 

On March 20, 2009, the Company entered into aforbearance agreement (the “Forbearance Agreement”) with AgStar FinancialServices, P.C.A (the “Senior Lender,” or “AgStar”), which requires the SeniorLender to forbear from pursuing certain remedies available to them until April 30,2009, which is the end of the forbearance period (the “Forbearance Period”).  The terms of the Forbearance Agreementrequire the Company to pay the current principal due as well as all accruedinterest at the end of the Forbearance Period. At that time, if the Company is unable to pay the amounts due asrequired under the Forbearance Agreement, Senior Lender may (1) declare adefault under the loans and (2) consent to remedial action taken bysubordinate lenders, and may provide notice of default and/oracceleration.  If Senior Lender declaresa default under the loans or consents to remedial action by others of ourcreditors, it is likely that we will be unable to continue our operations andwill have to file for bankruptcy. Presently, the Company is negotiating with Senior Lender to extend theForbearance Agreement whilst seeking a more permanent solution.  If we are unable to reach a mutuallysatisfactory agreement this will raise serious doubts about the Company’sability to continue as a viable business.

 

TheCompany’s plan to address the expected shortfall of working capital is togenerate additional funds through a combination of raising equity through aplanned voluntary capital campaign, and renegotiating and restructuring theCompany’s debt.  The Company’s long-termplan includes evaluating improved technologies to either earn additionalrevenue or reduce operating costs.  Ifthe Company is unsuccessful in raising additional funds or revenues from eitherof these sources, it will defer, reduce, or eliminate certain plannedexpenditures.  The Company will continueto consider other funding sources.  Therecan be no assurance that the Company will be able to obtain any sources offunding on acceptable terms, or at all.

 

Ifthe Company cannot obtain sufficient additional funding in the short-term, itmay be forced to restructure or significantly curtail its operations, file forbankruptcy or cease operations.  Theconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of recorded asset amounts or amounts andclassification of liabilities that might be necessary should the Company beforced to take any such actions.

 

**NOTE3.  MEMBER’S EQUITY**

 

InFebruary 2009, the Company filed a Minnesota registered offering for amaximum of 36 million Class A units at a cost of $0.50 per unit.  The offering has not yet been declaredeffective by the Minnesota Department of Commerce.  The offering is limited to residents of thestate of Minnesota.  If declaredeffective, each subscriber would be required to purchase a minimum of 12,500units ($6,250), and the offering would expire one year from the effective date.

 

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**NOTE 4.INVENTORY**

 

Inventories consist ofthe following:

 
| ** **       | ** ** | **March 31, 2009** | ** ** | **September 30, 2008** | ** ** |
|------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **       | ** ** | **(unaudited)**         | ** ** | ******                      | ** ** |
| Raw materials    |       | $                       | 681,925    |                        | 2,075,474  |   |
| Work in progress |       | 1,277,946               |       | 1,999,300                   |       |
| Finished goods   |       | 852,991                 |       | 1,294,635                   |       |
| Spare parts      |       | 396,575                 |       | 391,914                     |       |
|             |       |                    |       |                        |       |
| Total            |       | $                       | 3,209,437  |                        | 5,761,323  |   |

 

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**Derived from audited financial statements.

 

Inthe ordinary course of business, the Company enters into forward purchasecontracts for its commodity purchases and sales.  As of March 31, 2009, the Company hasforward purchase contracts to purchase approximately 120,000 bushels costingapproximately $750,000 through June 2009. As of September 30, 2008, the Company has 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 market prices for corn.  Given the declining ethanol price, upontaking delivery under these contracts, the Company would not be able to recoverthe above market value cost incurred. Accordingly, the Company recorded a loss on these purchase commitmentsaggregating to approximately $168,000 for the six month period ended March 31,2009 and approximately $3,600,000 for the fiscal year ended September 30,2008.  The loss was recorded in lower ofcost or market adjustments on the statement of operations.  The amount of loss was determined by applyinga methodology similar to that used in the impairment evaluation with respect toinventory.  Given the uncertainty offuture ethanol prices, this loss may or may not be recovered, and furtherlosses on the outstanding purchase commitments and inventory could be recordedin future periods.

 

**NOTE5.  BANK FINANCING**

 

Short-term debtconsists of the following at:

 
| ** **                                   | ** ** | **3/31/2009** | ** ** | **9/30/2008*** | ** ** |
|----------------------------------------------|------------|---------------|------------|----------------|------------|
| Construction and Term Loan, see terms below  |       | $             | 34,806,138 |           | $          | 35,000,000 |   |
|                                         |       |          |       |           |       |
| New Markets Tax Credit Loan, see terms below |       | 19,175,000    |       | 19,175,000     |       |
|                                         |       |          |       |           |       |
| County capital lease, (Note 6)               |       | 26,010,000    |       | 26,010,000     |       |
|                                         |       |          |       |           |       |
| Equipment financing                          |       | 138,198       |       | 153,175        |       |
|                                         |       |          |       |           |       |
| Total short-term debt                        |       | $             | 80,129,336 |           | $          | 3,014,318 |   |
|                                         |       |          |       |           |       |
| Total long-term debt                         |       | $             | —     |           | $          | 77,323,865 |   |
|                                         |       |          |       |           |       |
| Revolving line of credit, see terms below    |       | $             | 6,000,000  |           | $          | 4,034,348 |   |

 

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* Derived from auditedfinancial statements

 

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The loans described below are subject to creditagreements with various financial and non-financial covenants that limitdistributions, require minimum debt service coverage, net worth and workingcapital requirements, and secured by all business assets.

 

The Company was inviolation of financial covenants as of September 30, 2008.  The Company failed to meet tangible net worthrequirements and reporting requirements as of September 30, 2008.  As of September 30, 2008, the financingagencies have waived the compliance with the tangible net worth ratio andreporting requirements through October 1, 2009.  All the Company’s long-term debt has beenreclassified as current maturities of long-term debt as of December 31,2008, because the Company was in default of their loan agreements.  The Company has not made interest paymentssince December 31, 2008, on the County capital lease and February 1,2009, on the New Market Tax Credit loans and the construction and termloans.  The Company did not pay theprincipal payment on the County capital lease which was due in February.  For the six month period ended March 31,2009, impairment of financing costs was recogninzed totaling approximately$1,496,000.  No impairment was recognizedduring the six month period ended March 31, 2008.

 

On March 20, 2009, the Company entered into aForbearance Agreement with the Senior Lender which requires that the SeniorLender not pursue certain remedies available to them until April 30, 2009,which is the end of the Forbearance Period. The terms of the Forbearance Agreement requires the Company to pay thecurrent principal due as well as all accrued interest at the end of theForbearance Period.  At that time, ifunable to pay the amounts due after the Forbearance Period as required underthe Forbearance Agreement, the Senior Lender may (1) declare a defaultunder the loans and (2) consent to remedial action taken by subordinatelenders, and may provide notice of default and/or acceleration.  If the Senior Lender declares a default underthe loans or consents to remedial action by others of our creditors, it islikely that we will be unable to continue our operations and will have to filefor bankruptcy.

 

*New Market Tax Credit Loan*

 

In March 2007, theCompany entered into an agreement with MMCDC New Markets Fund II, LLC (“NMF”)for the amount of $19,175,000. The Company has guaranteed it will be incompliance with the program over the tax credit recapture period from September 2007until September 2014. The NMF loan is divided into two portions: a termloan of $14,480,500 (the “Term Loan”) and subordinated note for $4,694,500 (the“Subordinated Note”). The Term Loan contains a provision in which the Companymust make interest only payments on the 6th day of the first month following the initialadvancement, August 2007, until the 85th month. On the sixth day of the 85th month and continuing for an additional 48months, the Company shall pay the amortized unpaid principal together with theaccrued interest. The interest rate shall be calculated using the Wall StreetJournal daily money rate (base rate) plus 1.0% totaling 4.25% and 6% at March 31,2009, and September 30, 2008, respectively.

 

The Subordinated Notefor $4,694,500 carries a fixed interest rate of 2.514%. On the first day ofeach month following the initial advance, August 2007, interest onlypayments will be made until September 2014 when a principal payment of$400,000 is required.

 

*Construction Term Loan*

 

Upon satisfactory completion of the Plant a portion ofthe Construction Loan converted to the Construction Term Loan, totaling$29,000,000.  The interest rate wasreduced to LIBOR plus 2.95% on the Construction Term Loan. The agreementincludes an option to convert a portion of the Construction Term Loan to afixed rate loan. The Company is required to make interest payments only on the1st ofday of each month for the first six months followed by 114 principalinstallments of $254,386 plus accrued interest beginning six months followingsubstantial completion, payable in full in June 2018. In addition to thescheduled payments, the Company will make additional principal payments equalto 65% of the Company’s excess cash flow not to exceed $2,000,000 per fiscalyear and an aggregate total of $8,000,000. As part of the financing agreement, the premium above LIBOR may bereduced to 2.65% based on attaining certain financial ratios.

 

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The financing agreement requires an annual servicingfee of $20,000.  The Company wasinitially permitted to make distributions up to 40% of net income until fiscal2008.  For fiscal 2008 and thereafter,the Company may make distributions which exceed 40% of net income as long asthe Company has made the required excess cash flow payments and maintained therequired financial covenants.  Thefinancing agreement contains certain prepayment fees in the first three yearsof the scheduled payments. The Company is also required to obtain and maintainfinancial ratios on an annual basis.

 

*ConstructionTerm Revolving Note*

 

The amount of the Construction Term Revolving Notethat converted to the Term Revolving Note is $6,000,000. The Company isrequired to pay interest on the principal advances monthly at the LIBOR rateplus 2.95% which totaled 3.40% at March 31, 2009 and 5.41% as of September 30,2008.  The purpose of this loan is forcash and inventory management purpose.

 

*Revolving Line of Credit Loan*

 

The Company also has a Revolving Line of Credit loanwith the same lending institution for up to $6,000,000.  The Company is required to pay interest onthe principal advances monthly at the LIBOR rate plus 2.95%, which totaled3.40% at March 31, 2009 and 5.41% as of September 30, 2008.  The purpose of this loan is for general andoperating expenses. The maturity of the Revolving Line of Credit loan is 364days from commencement, on the loan maturity date the principal and anyoutstanding accrued interest will be due. The Company pays a commitment fee of0.35% on the unused portion of the revolving promissory note (the “RevolvingPromissory Note”), payable quarterly in arrears. The interest rate is equal toLIBOR plus 2.95% if the Company’s tangible owner’s equity (defined as tangiblenet worth plus subordinated debt divided by total assets) is less than or equalto 60% or to LIBOR plus 2.65% if the tangible owner’s equity is greater than60%. As of March 31, 2009 $6,000,000 was advanced against the line ofcredit.

 

The Term Revolving Note as well as the Term Note andthe Revolving Line of Credit Loan are subject to a Master Loan Agreement withvarious financial and non-financial covenants that limit distributions, requireminimum debt service coverage, net worth and working capital requirements, andsecured by all business assets.

 

*EquipmentFinancing*

 

In April 2008, the Company entered into twoequipment financing agreements with an unrelated party through 2013.  Payments range from $679 per month to $2,468per month with interest rates ranging from 4.56% to 5.5%.

 

**NOTE6.  LEASES**

 

Capital Lease

 

In April 2007, the Company entered into a longterm equipment lease 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 Companystarted making payments on May 25, 2008 and on the 25th of each monththereafter.  Until May 25, 2008,interest is being paid through the interest reserve fund included in restrictedcash. The Capital Lease payments correspond to the interest of 1/6 the amountdue on the bonds on the next interest payment date. Capital Lease 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-annual

 

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principal payment date.The Company is expected to make lease payments of principal and interest thatcorrespond to the principal and interest the County will pay on the GeneralObligation Bonds Series 2007B and 2007C. Interest payments were financed through an interest reserve recorded asrestricted cash. The Company is expected to make Capital Lease payments thatcorrespond to 1/6 the amount of interest payable due on the Bonds on thefollowing February 1 or August 1 and principal amounts equaling 1/12of the principal due on the following February 1. The Company hasguaranteed that if such assessed lease payments are not sufficient for therequired Bond payments, the Company will provide such funds as are needed tofund the shortfall. The Capital Lease also includes an option to purchase theequipment at fair market value at the end of the lease term.

 

The company failed to make basic payments on theCounty Capital Lease as of December 31, 2008, which caused the Company todefault on the Capital Lease. Accordingly, the Capital Lease has been reclassified to currentmaturities of long-term debt.

 

# ***Operating Leases***

# ** **

In February 2008, the Company entered into anoperating lease agreement for 70 railroad cars for a minimum period of 36months. The lease agreement shall continue for successive one month terms untilterminated by either party providing a 30 day written advance notice to theother.  The Company will pay $600 per carper month, which may be adjusted according to the terms defined in the agreement.The term of this lease began in April 2008.

 

In April 2008, the Company entered into anoperating lease for equipment.  The Company is generally responsible formaintenance, taxes, and utilities for leased equipment.  The term of thelease is for five years with monthly payments of $338.

 

In September 2007, the Company entered into aneasement agreement for 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 cash, the parties alsoreceived 3,000 member units, issued as of December 31, 2007.

 

In October 2006, the Company entered into a landlease for the construction and certain activities related to the operation andmaintenance of rail track.  Under theterms of this agreement, the Company agreed to pay $4,200 as base rent andincreasing 3% thereafter.  Either partycan terminate this agreement giving at least 30 days written notice.

 

**NOTE 7.  COMMITMENTS AND CONTINGENCIES**

 

*Marketing Contracts*

 

InFebruary 2008, the Company entered into a marketing agreement with anunrelated party for the marketing, sale and delivery of all bulk grade drieddistillers grain with solubles (DDGS) the Company is expected to produce. The Company will receive payment for the products sold based on a percentage ofthe actual sales price as defined in the agreement.  The initial term isfor three years commencing as of the startup of production and will continueuntil terminated by either party providing a 90 day advance written notice.

 

InFebruary 2007, the Company entered into a procurement agreement with anunrelated party for the purchase of corn. The term of this agreement shall be for five years followed by an automaticrenewal term of one year unless terminated by either party giving 90 daysadvance written notice.  A procurementfee shall be paid on a per bushels basis during the term of the contract.  The contract also provides for additionalthird-party storage in the local surrounding area for a minimum of two turnsper year.  In January 2009, thiscontract was amended changing the procurement fee structure.

 

InJuly 2006, the Company entered into a marketing agreement for the sale andmarketing of all the ethanol the Company expects to produce.  The Company agrees to pay a fixed fee pergallon of ethanol sold for certain marketing, storage and transportation costs,which will be included in cost of goods sold. The initial term of the

 

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agreement operated for 12 months beginning thefirst day of the month the Company shipped ethanol and was automaticallyextended for an additional 12 months.  Itwill continue to be automatically extended for additional 12 month periodsunless either party gives a 90 day advance written notice of termination.

 

InJanuary 2008, the Company entered into a marketing agreement with anunrelated party to purchase wet distillers grains with solubles the Company isexpected to produce.  The agreementcommenced on completion and start-up of operations of the Plant and continuesfor two years.  The agreement will remainin effect thereafter unless a 90 day advance written notice is provided byeither party.

 

*Natural Gas*

 

TheCompany has an agreement to purchase a minimum of 2,700 dekatherms of naturalgas transportation per day through May 31, 2011 at market price plus$0.015 per dekatherm of natural gas.

 

*Management Agreements*

 

InMay 2006, the Company entered into an agreement with an unrelated party tomanage the Company’s supply of natural gas. The term of the agreement continues through April 30, 2011, andshall continue on a year to year basis thereafter until terminated by eitherparty giving 60 days written advance notice. The Company also executed a sale and purchase agreement with theunrelated party for natural gas.  Eitherparty may terminate the agreement by providing a 30 day advance writtennotice.  The Company is also required tohold a certificate of deposit for the benefit of the supplier in the amount of$775,000.

 

**NOTE 8. FAIR VALUE**

 

SFAS157 defines fair value, outlines a framework for measuring fair value, anddetails the required disclosures about fair value measurements.  The adoption of SFAS 157 did not have amaterial effect on the Company financial position, results of operations, orcash flows for the quarter ended March 31, 2009.

 

SFAS159 permits the Company to irrevocably choose to measure certain financialinstruments and other items at fair value. Except for those assets and liabilities which are required to berecorded at fair value the Company elected not to record any other assets orliabilities at fair value, as permitted by SFAS 159.

 

Fairvalue is defined as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date in the principal or most advantageous market.  The Company uses a fair value hierarchy thathas three levels of inputs, both observable and unobservable, with use of thelowest possible level of 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 2 inputs are market data, other thanLevel 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market pricesfor similar assets or liabilities, quoted market prices in an inactive market,and other observable information that can be corroborated by market data.  Level 3 inputs are unobservable andcorroborated by little or no market data. The Company uses valuation techniques in a consistent manner fromyear-to-year.

 

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Thefollowing table provides information on those assets and liabilities that aremeasured at fair value on a recurring basis.

 
| ** **                                                                 | ** ** | **March 31, 2009**   | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                 | ** ** | **Fair Value Carrying**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | **Amount in the Balance** | ** ** | **Fair Value Measurement Using** | ** ** |
| ** **                                                                 | ** ** | **Sheet**                 | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level_3** | ** ** |
| Assets                                                                     |       |                      |       |   |   |   |   |   |   |
| Money market funds (included in restricted cash and debt service  reserve) |       | $                         | 2,776,811  |   | $ | 2,776,811 |   | $ | — |   | $ | — |   |
| Certificates of deposit (included in restricted cash)                      |       | $                         | 793,472    |   |   |   | 793,472 |   |   |   |
| Total                                                                      |       | $                         | 3,570,283  |   | $ | 2,776,811 |   | $ | 793,472 |   | $ | — |   |

 

The fair value of themoney market funds are based on quoted market prices in an active market.

 

TheCompany determines the fair value of the certificates of deposits usinginformation provided by the issuing bank, which includes discounted expectedcash flows of certificates.

 

**NOTE 9. LONG-LIVED ASSETS**

 

In2008, the Company completed construction of its ethanol production facilities,with installed capacity of 55 million gallons per year The carrying value ofthese facilities at March 31, 2009 was approximately $107.1 million. Inaccordance with the Company’s policy for evaluating impairment of long-livedassets in accordance with SFAS No. 144, management has evaluated thefacilities for possible impairment based on projected future cash flows fromoperations of these facilities. Management has determined that the undiscountedcash flows from operations of these facilities over their estimated usefullives exceed their carrying values, and therefore, no impairment has beenrecognized at March 31, 2009. In determining future undiscounted cashflows, the Company has made significant assumptions concerning the futureviability of the ethanol industry, the resolution of financing violations, thefuture price of corn in relation to the future price of ethanol and the overalldemand in relation to production and supply capacity. If the Company wererequired to compute the fair value in the future, it may use the work of aqualified valuation specialist who would assist it in examining replacementcosts, recent transactions between third parties and cash flow that can begenerated from operations. Given the recent completion of the facilities in2008, replacement cost would likely approximate the carrying value of thefacilities. However, there have been recent transactions between independentparties to purchase plants at prices substantially below the carrying value ofthe facilities. Some of the facilities have been in bankruptcy and may not berepresentative of transactions outside of bankruptcy. Given thesecircumstances, should management be required to adjust the carrying value ofthe facilities to fair value at some future point in time, the adjustment couldbe significant and could significantly impact the Company’s financial positionand results of operation. No adjustment has been made in these financialstatements for this uncertainty.

 

**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Weprepared the following discussion and analysis to help you better understandour financial condition, changes in our financial condition, and results ofoperations for the three and six month periods ended March 31, 2009,compared to the same periods of the prior fiscal year.  This discussion should be read in conjunctionwith our

 

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interimcondensed financial statements and notes included in Item 1 of Part 1 ofthis Quarterly Report, and the audited condensed 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**

 

ThisQuarterly Report contains forward-looking statements within the meaning of Section 21Eof the Exchange Act.  Forward-lookingstatements are all statements other than statements of historical fact,including without limitation those statements that are identified by the words “anticipates,”“believes,” “continue,” “could,” “estimates,” “expects,” “future,” “hope,” “intends,”“may,” “plans,” “potential,” “predicts,” “should,” “target,” and similarexpressions, and include statements concerning plans, objectives, goals,strategies, future events or performance, and underlying assumptions (many ofwhich are based, in turn, upon further assumptions) and other statements thatare other than statements of historical facts. From time to time, the Company may publish or otherwise make availableforward-looking statements of this nature, including statements containedwithin “Item 2 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations.”

 

Forward-lookingstatements involve risks and uncertainties, which could cause actual results oroutcomes to differ materially from those expressed.  The Company’s expectations, beliefs andprojections are expressed in good faith and are believed by the Company to havea reasonable basis, including without limitation, management’s examination ofhistorical operating trends, data contained in the Company’s records and otherdata available from third parties. Nonetheless, the Company’s expectations, beliefs or projections may notbe achieved or accomplished. Forward-looking statements are subject to known and unknown risks anduncertainties, including those risks described in “Item 1A — Risk Factors” ofour 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.

 

Anyforward-looking statement contained in this document speaks only as of the dateon which the statement is made, and the Company undertakes no obligation toupdate any forward-looking statement or statements to reflect events orcircumstances that occur after the date on which the statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible formanagement to predict all of the factors, nor can it assess the effect of eachfactor 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-looking statements, whetherwritten or oral and whether made by or on behalf of the Company, are expresslyqualified by the risk factors and cautionary statements in this QuarterlyReport, including statements contained within “Part II, Item 1A — RiskFactors,” and in the Company’s Annual Report on Form 10-K for the fiscalyear ended September 30, 2008, and include the following:

 

·                  Ourability to renegotiate the terms of our senior debt agreements and/or obtainwaivers from our lenders to avoid any or all of our lenders exercising theirdefault remedies on agreements of which we are currently in default;

 

·                  Theavailability and adequacy of our cash flow to meet our requirements, includingpayment of loans;

 

·                  Economic,competitive, demographic, business and other conditions in our local, regionaland national markets;

 

·                  Effectof foreclosure sales in the industry;

 

·                  Changesin the availability and price of corn;

 

·                  Changesin the availability and price of natural gas;

 

·                  Changesin the environmental regulations that apply to our Plant operations;

 

·                  Theoccurrence of certain events causing an economic impact in the agriculture,oil, or automobile markets;

 

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·                  Lack of transport, storage, and blending infrastructurepreventing ethanol from reaching high demand markets;

 

·                  Changes and advances in ethanol production technology;

 

·                  Changes in interest rates or the availability of credit,and limitations and restrictions contained in the instruments and agreementsgoverning our indebtedness;

 

·                  Theresults of our hedging transactions and other risk mitigation strategies;

 

·                  Our ability to retain key employees and maintain laborrelations;

 

·                  Our ability to develop diverse revenue streams;

 

·                  Our ability to implement additional financial andmanagement controls, reporting systems and procedures and comply with Section 404of the Sarbanes-Oxley Act, as amended;

 

·                  Changes or developments in laws, regulations, tariffs ortaxes in the ethanol, agricultural, or energy business

 

·                  Competition in the ethanol industry and excess capacity inthe 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 andrestrictions on unit transfer;

 

·                  The loss of our Plant due to casualty, weather, mechanicalfailure or any extended or extraordinary maintenance or inspection that may berequired; AND

 

·                  Changes in our business strategy, capital to supportcapital improvements and development

 

*Summary*

 

Otter Tail Ag Enterprises, LLC, a Minnesota limitedliability company (the “Company,” “Otter Tail,” “we,” “our,” or “us”), owns andoperates a nameplate 55 million gallon annual production plant of undenaturedethanol in Fergus Falls, Minnesota (the “Plant”).

 

**Liquidity and Capital Resources**

 

*Overview*

 

As of March 31, 2009, we had total assets ofapproximately $118,000,000 consisting of primarily cash, accounts receivable,inventory, financing costs and property, plant and equipment.  As of March 31, 2009, we had currentliabilities of approximately $88,600,000 consisting primarily of accountspayable, our line of credit, and outstanding debt.  All of our long-term debt, consisting ofapproximately $80,100,000 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.

 

On March 20, 2009, we executed a forbearnanceagreement (the “Forbearance Agreement”) with Agstar, in which Agstar—beginningon February 1, 2009 and ending on the earlier of an Event of Default (asdefined in the Master Loan

 

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Agreement with Agstar) or April 30, 2009 (the “ForbearancePeriod”)—agrees to forbear from exercising its rights and remedies under itsloan documents, and further agrees that it will not consent to the undertakingof any remedial action by our other lenders. For more information on the Forbearance Agreement, please see ourcurrent report on Form 8-K under Item 1.01 as filed with the SEC on March 26,2009.

 

For the six months ended March 31, 2009, cash used inoperating activities was approximately $2,900,000, cash used in investingactivities was approximately $26,000 and cash provided by financing activitieswas approximately $2,200,000.  Inaddition, as of March 31, 2009, we had completely drawn on our revolvingline of credit with AgStar in the amount of approximately $6,000,000, and arerestricted on drawing on our revolving line of credit in any additionalamounts.

 

Based on our operating plan, we believe our existingworking capital will not be sufficient to meet the cash requirements to fundour planned operating expenses, capital expenditures, and working capitalrequirements through the fiscal year ending September 30, 2009 withoutadditional sources of cash and/or deferral, reduction or elimination ofsignificant planned expenditures. Assuming no deterioration in margins between corn and ethanol prices, weestimate that we will require approximately an additional $8,000,000 to fundour planned operating expenses, capital expenditures, and working capitalrequirements 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 ourfootnotes to our financial statements for more information on the sufficiencyof existing capital to meet our cash requirements and our ability to operate asa going concern.  Finally, as providedabove, we are currently in default on our Master Loan Agreement with AgStar,our tax credit loans with NMF, and our capital lease with the County.  While we did execute a Forbearance Agreementwith Agstar on March 20, 2009 that covered existing defaults as of thatdate, the Forbearance Period expired on April 30, 2009.  Thus, Agstar may exercise any and all rightsexisting under the terms of our Master Loan Agreement, including but notlimited to declaring all of our debt immediately due and payable.

 

We will attempt to raise additional capital through anoffering of our units.  In February 2009,we filed a registration statement with the state of Minnesota for an intrastateoffering of our units to existing members who are residents of Minnesota andother Minnesota residents.  The offeringhas yet to be declared effective by the state. The offering is for a maximum of 36 million of our units at a per-unitprice of $0.50.  Each subscriber isrequired to purchase a minimum of 12,500 units in the offering.  The offering will open for one year from theeffectiveness of the registration statement, or at such other time asdetermined by our Board of Governors.

 

**Short-term Debt Sources**

 

We have a revolving promissory 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 3.40% at March 31, 2009 and 5.41% as of September 30,2008.  The purpose of this loan is forgeneral and operating expenses.  Thematurity of this line of credit is 364 days from commencement; on the loanmaturity date, the principal and any outstanding accrued interest will be due.  We pay a commitment fee of 0.35% on the unusedportion of the revolving promissory note. As of March 31, 2009 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 two loan agreements and one capitallease agreement for financing of the Plant. The total loan commitment is $60,000,000 and the capital lease is$26,010,000, and both are described below. All of our long term debt described below has been reclassified ascurrent maturities of long-term debt, because we are in default on our MasterLoan Agreement with AgStar for failure to make required principal and interestpayments, our tax credit loans with NMF for failure to make required interestpayments, and our capital lease with the County for failure to make requiredbasic payments equal to the aggregate amount of principal and interestoutstanding on County bonds, entitling AgStar, NMF, and the County to exerciseany and all default remedies against us, including but not limited toacceleration 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.  On March 20, 2009, weexecuted a Forbearance Agreement with Agstar for existing defaults under ourMaster Loan Agreement.  For

 

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more information on the Forbearance Agreement, please seeour current report on Form 8-K under Item 1.01 as filed with the SEC on March 26,2009.

 

We entered into a senior debt financing agreement for aconstruction loan of $35,000,000 from AgStar, which includes a term andrevolving loan (collectively, the “Construction Loan”).  We made interest payments during theconstruction phase at the LIBOR plus 3.15%. Interest was paid quarterly in arrears 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 Note.

 

The Construction Loan converted to a term loan (the “ConstructionTerm Loan”) and term revolving loan on June 1, 2008, totaling $29,000,000.  The interest rate was reduced to LIBOR plus2.95% on the Construction Term Loan, which totaled 3.40% on March 31, 2009and 5.41% at September 30, 2008. The Master Loan 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 day of each month for the first six monthsfollowed by 114 principal installments of $254,386 plus accrued interestbeginning six months following substantial completion, which was determined tobe June 1, 2008, payable in full in June 2018.  In addition to the scheduled payments, wewill make additional principal payments equal to 65% of our excess cash flownot to exceed $2,000,000 per fiscal year and an aggregate total of$8,000,000.  As part of the financingagreement, the premium above LIBOR may be reduced to 2.65% based on attainingcertain financial ratios.

 

Commitment fees of $20,000 were charged at the time ofconversion and are charged annually thereafter.

 

The maximum amount of the Construction Loan that could beconverted to the term revolving loan is $6,000,000 (the “Revolving Loan”).  The amount of the Construction Loan that didconvert to the Revolving Loan was $6,000,000. We are required to pay interest on the principal advances monthly at theLIBOR rate plus 2.95% which totaled 3.40% at March 31, 2009 and 5.41% at September 30,2008.  The purpose of this loan is forcash and inventory management.

 

On March 30, 2007, we entered into a loan arrangementwith NMF for the amount of $19,175,000 (the “NMF Loan”).  The tax credit period of the NMF Loan is fromSeptember 2007 to September 2014. The NMF Loan is divided into two portions including a term loan of$14,480,500, for which we make interest only payments beginning the 6th day of the first month following the initialadvancement until the 85th month.  On the 6th day of the 85th month and continuing for an additional 48months we pay the amortized unpaid principal together with the accruedinterest.  The interest rate iscalculated using the Wall Street Journal daily money rate (base rate) plus 100basis points, totaling 4.25% and 6% at March 31, 2009 and September 30,2008, respectively.  In addition, thereis a $4,694,500 subordinated loan which carries an interest rate of2.514%.  On the 1st day of each month following the initialadvance, which occurred in August 2007, we are required to make interestonly payments until September 2014, when we are required to make aprincipal payment of $400,000.  We arecurrently in default under our NMF Loan for failure to make required interestpayments.

 

**Capital Lease**

 

In April 2007, we entered into a long term equipmentlease agreement (the “Equipment Lease Agreement”) with the County in order tofinance equipment for the Plant (the “Capital Lease”).  The Equipment Lease Agreement has a term fromMay 1, 2007 through November 2019. The County financed the purchase of equipment through Subordinate ExemptFacility Revenue Bonds Series 2007A totaling $20,000,000, General ObligationTax Abatement Bonds Series 2007B totaling $5,245,000, and Taxable GeneralObligation Tax Abatement Bonds Series 2007C totaling $765,000(collectively, the “Bonds”).

 

Under the Equipment Lease Agreement with the County, westarted making payments on May 25, 2008 and make payments on the 25th of each month. Payments for principal start on November 25, 2009 in an amountequal to 1/6 principal scheduled to become due on the corresponding Bonds onthe next semi-annual principal payment date. We also make Capital Lease payments that correspond to 1/6 the amount ofinterest payable due on the Bonds on February 1 or August 1 of eachyear and principal amounts equaling 1/12 of the principal due each February 1.  We have guaranteed that if such assessedlease payments are not sufficient for the required Bond payments, we shouldprovide such funds as are needed to fund the shortfall.  The Capital Lease also includes an option topurchase the equipment 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.

 

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**Results of Operations for the Threeand Six Months Ended March 31, 2009 and March 31, 2008**

 

**Results of Operations**

 

**Revenues**

 

Our revenues were approximately $22,700,000 and $48,200,000for the quarter and six months ended March 31, 2009.  Our revenues were approximately $60,000 forboth the quarter and six months ended March 31, 2008.  The increase in revenues from the quarter andsix months ended March 31, 2008 is due to the Plant beginning to produceethanol in March 2008.  Prior to March 2008,the Company was in the developmental stage.

 

**Cost of Sales**

 

Our cost of goods sold were approximately $24,000,000 and$50,300,000 for the quarter and six months ended March 31, 2009, comparedto approximately $400,000 for both the quarter and six months ended March 31,2008.  Our cost of goods sold as apercentage of revenues were 106% and 104% for the quarter and six months ended March 31,2009, compared to 676% for both the three and six months ended March 31,2008.  The high cost of goods sold forthe quarter and six months ended March 31, 2009 is the result of high cornprices and tight margins for ethanol and corn that has significantly affectedthe ethanol industry as a whole.

 

**Operating Expenses**

 

Our operating expenses were approximately $580,000 and$1,100,000 for the quarter and six months ended March 31, 2009.  Compared to the three and six months periodsended March 31, 2008, our operating expenses increased by approximately$5,000 or 1% and $110,000, or 1%, respectively. For the three and six months ended March 31, 2009, our material operatingexpenses were 1) approximately $390,000 and $764,000, respectively, related tothe general and administrative expenses; 2) and approximately $191,000 and$365,000 respectively related to professional fees.  Some major factors impacting professional feesfor the three and six months period ended March 31, 2009, were legal andaccounting fees for SEC filings.  In thethree and six months ended March 31, 2008, our material operating expenseswere: 1) approximately $400,000 and $730,000 related to general andadministrative expenses; and 2) approximately $175,000 and $286,000 forprofessional fees.

 

The following tableshows cash flows for the six month periods ended March 31, 2009 and 2008:

 
| ** **                                | ** ** | **Six Months Ended**    | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **March 31, 2008** | ** ** | **March 31, 2008** | ** ** |
| ** **                                | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**         | ** ** |
| **Cash used in Operating Activities**     |       | (2,924,534              | )          | (10,577,224             | )          |
| **Cash used in Investing Activities**     |       | (26,336                 | )          | (37,359,806             | )          |
| **Cash provided by Financing Activities** |       | 2,242,914               |       | 47,612,771              |       |

 

**Cash Flows Used in Operations**

 

The net cash flow used in operating activities for the sixmonths ended March 31, 2009 decreased approximately $7,700,000 over thatfor the six months ended March 31, 2008. The use of cash flows in operating activities was the result of thespread between ethanol and corn prices causing us to incur losses for the firsttwo quarters of fiscal 2009.  Asdisclosed above, we believe our existing working capital will not be sufficientto meet the cash requirements to fund our planned operating expenses for theremainder of fiscal 2009.

 

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**Cash Flows Used in InvestingActivities**

 

Cash used for investing activities decreased byapproximately $37,300,000 for the six months ended March 31, 2009 comparedto the six months ended March 31, 2008, primarily because construction ofthe Plant was complete as of the end of fiscal 2008, and construction-relatedpayables significantly decreased during the first two quarters of fiscal 2009.

 

**Cash Flows From FinancingActivities**

 

Since our inception, we have generated significant cashinflows from bank financing arrangements and member equity contributions.  Proceeds from the six months ended March 31,2009 from our bank financing arrangements decreased by $45,300,000 compared tothe bank proceeds for the six months ended March 31, 2008.  This is primarily due to the proceeds fromour construction loan being fully utilized as of the end of fiscal 2008.

 

**Critical Accounting Estimates**

 

Our most critical accounting policies, which are those thatrequire significant judgment, include valuation of derivative instruments andinventory and impairment analysis of our long-lived assets.  An in-depth description of these can be foundin our Annual Report on Form 10-K for the year ended September 30,2008.  Management has not changed themethod of calculating and using estimates and assumptions in preparing ourcondensed financial statements in accordance with generally accepted accountingprinciples.  There have been no changesin the policies for our accounting estimates for the six months ended March 31,2009.

 

**Off-Balance Sheet Arrangements**

 

We have not entered into any off-balance sheet arrangementsthat have or are reasonably likely to have a current or future effect on ourfinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that are material to investors.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to the impact of market fluctuationsassociated with commodity prices and interest rates as discussed below.  We have no exposure to foreign currency risk,as all of our business is conducted in United States Dollars.  We use derivative financial instruments aspart of an overall strategy to manage market risk.  We use cash, futures and option contracts tohedge changes to the commodity 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 Statements of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and Hedging Activities*.

 

**Interest Rate Risk**

 

We expect to be exposed to market risk from changes ininterest rates on our existing debt facilities. Exposure to interest rate risk results from holding our creditagreements.

 

We used debt to finance a significant amount of ourexpenditures in the year ended September 30, 2008 and in the six monthsended March 31, 2009.  Theseagreements will expose us to market risk related to changes in interestrates.  All of our debt has beenreclassified to current maturity.  As of March 31,2009, we have approximately $86,100,000 in short-term debt, including our lineof credit, all of which is subject to variable interest rates.  A hypothetical 1% change in interest rates,from those in effect on March 31, 2009, would change our interest expenseby approximately $861,000 on an annual basis.

 

**Commodity Price Risk**

 

Effective April 8, 2008, we closed all derivativepositions except for purchase commitments entered into prior to September 30,2008.  No new purchase commitments havebeen entered into in fiscal year 2009. At March 31, 2009, we have no derivative instruments that expose usto commodity price risk.  For the periodended March 31, 2009, we recorded a realized loss of approximately$273,000 related to previously accrued purchase commitments.  We recorded an accrued loss on our firmpurchase commitments related to corn aggregating to approximately $168,000 forthe period ended

 

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March 31, 2009 and approximately $3,600,000 for thefiscal 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.

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

Under the supervision and with the participation of ourmanagement, including our chief executive officer/chief financial officer, wehave conducted an evaluation of the effectiveness of the design and operationof our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “ExchangeAct”), 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 submitsunder the Securities Exchange Act of 1934 is accumulated and communicated tothe Company’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 March 31, 2009,we continued to design enhancements to our controls, including the following:

 

·                  Implementinga search for a full-time controller or CFO with appropriate U.S. GAAP and SECexperience;

 

·                  Establishingand implementing a detailed timeline review and completion of financial reportsto be included in our Forms 10-Q and 10-K; and

 

·                  Employingthe use of appropriate supplemental SEC and U.S. GAAP checklists in connectionwith our closing process and the preparation of our Forms 10-Q and 10-K.

 

As a result of these material weaknesses, which were notremedied as of March 31, 2009, we have concluded that our disclosurecontrols and procedures were not effective as of March 31, 2009.  The implementation of the remediation plandescribed above has been initiated and will continue through the second half offiscal 2009 and possibly beyond.  Thematerial weakness will not be considered remediated until the applicableremedial procedures are tested and management has concluded that the proceduresare operating effectively.  Managementrecognizes that the use of our financial resources will be required not onlyfor implementation of these measures, but also for testing their effectivenessand may seek the assistance of an outside service provider to assist in thisprocess.

 

If we are not able to implement controls to avoid theoccurrence of material weaknesses in our internal control over financialreporting or disclosure controls in the future, then we might report resultsthat are not consistent with our actual results and we may need to restateresults that will have been previously reported.

 

***Changes in Internal Controls***

 

There has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) or 15d-15(f) ofthe Exchange Act) during our most recently completed quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None.

 

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**ITEM 1A. RISK FACTORS**

 

In addition to the other information set forth in thisreport, including the important information under the heading “DisclosureRegarding Forward-Looking Statements,” you should carefully consider the “RiskFactors” discussed in our Annual Report on Form 10-K for the fiscal yearended September 30, 2008.  “RiskFactors” are conditions that may cause investment in our Company to bespeculative or risky.  In addition tothose Risk Factors, the Company is aware of the following risk factors that wehave identified during the three months ended March 31, 2009:

 

*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 ourcapital lease with the County for failure to make basic payments (defined aspayments equal to the aggregate amount of principal and interest outstanding onthe bonds issued by the County in Facility Revenue Bonds Series 2007Abonds since December 31, 2008.  Wehave also failed to make interest payments of the NMF Tax Credit Loans,rendering us in default under our Construction and Term Loan Agreement withNMF.  In addition, as of February 15,2009, we were in default under our Master Loan Agreement with AgStar forfailure to pay principal and interest due. As of March 20, 2009 we secured a waiver agreement for our MasterLoan Agreement with AgStar beginning on February 1, 2009, and ending onthe earlier of an Event of Default (as defined below) or April 30, 2009(the “Forbearance Period”).  Under theterms of our respective agreements with AgStar, NMF and the County, the lendersmay exercise any or all default remedies against us, including but not limitedto acceleration of all outstanding unpaid principal amounts.  In the event that any of our lendersdetermines to exercise their respective default remedies, we would likely beforced to proceed with a bankruptcy, liquidation, reorganization, or otherwinding down of the business affairs. 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 more information on the ForbearanceAgreement, please see our current report on Form 8-K under Item 1.01 asfiled with the SEC on March 26, 2009.

 

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

 

We will require significant capital for a number ofexpenditures, including financing operations, paying indebtedness, andimplementing our restructuring plan.  Webelieve that much of this capital must come from sources outside of availablecash flows from our operations.  There isno guarantee that we will be successful in raising enough capital from outsidesources to adequately 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 are able to obtain additional debtfinancing, we may not be able to do so upon favorable terms.  Alternatively, if we seek additional equityfinancing in the future, the ownership of our current members will be diluted.

 

*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 our creditors restrict our ability tomake any distributions at this time, or at any time in the next year.  We may only make distributions in the eventthat we have positive cash flow.  We havenot had a positive cash flow

 

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since early 2008. Positive cash flow and cash distributions are not assured in the future,and we are not now, and may never again be, in a position to make suchdistributions.  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 andcompliance with applicable loan covenants which will reduce the amount of cashavailable for distributions;

 

·                  Our ability to operate our plant at full capacity whichdirectly impacts our revenues;

 

·                  Adjustments and amounts of cash set aside for reserves andunforeseen expenses; and

 

·                  State and federal regulations and subsidies, and supportfor ethanol generally which can impact our profitability and the cash availablefor distributions.

 

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

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

Please see Note 5 to our condensed unaudited financialstatement notes in Part 1, Item 1 of this quarterly report on Form 10-Qand our current report on Form 8-K under Item 2.04 as filed with the SECon February 18, 2009 for information regarding defaults on our existingloan and capital lease agreements.

 

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM6. EXHIBITS**

 

See Exhibit Index following the signature page ofthis report.

 

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**SIGNATURES**

 

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                    | OTTER TAIL AG ENTERPRISES, LLC |
|-------------------------|--------------------------------|
|                    |                           |
| Date: May 15, 2009 | By:                            | /s/ Anthony Hicks |
|                    |                           | Anthony Hicks |
|                    |                           | Chief Executive Officer and Chief Financial Officer |

 

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**EXHIBITINDEX**

 

**OTTERTAIL AG ENTERPRISES, LLCFORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2009**

 
| 10.1   | Forbearance Agreement  dated March 20, 2009, incorporated by reference to Exhibit 10.1 to  our current report on Form 8-K as filed with the SEC on March 26,  2009 (000-53042).          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                         |
| 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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*     Filed herewith.

 

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