Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.**

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

o   **Transition report pursuantto Section 13 or 15(d) of the Exchange Act of 1934.**

 

**For the transition period from          to          .**

 

**Commission File Number: 000-53202**

 

**HOMELANDENERGY SOLUTIONS, LLC**

(Exact name of registrant as specified in its charter)

 

| **Iowa**                                                        | ** ** | **20-3919356**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**2779 Highway 24, Lawler, Iowa,****52154**

(Address of principal executive offices)

 

**(563) 238-5555**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   x  Yes   o  No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   o  Yes   o  No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act:

 

| Large  Accelerated Filer  ̈ |   | Accelerated  Filer o         |
|--------------------------------------|--------|------------------------------|
|                                 |   |                         |
| Non-Accelerated  Filer  ̈        |   | Smaller  Reporting Company x |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  o  Yes  x  No

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: As of August 13, 2010, there were 91,445 units outstanding.

 

 

 

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Table of Contents

 

**INDEX**

 
| ** **                                                                                                     | **Page No.** |
|----------------------------------------------------------------------------------------------------------------|--------------|
| ** **                                                                                                     | ** **   |
| **PART I.     FINANCIAL INFORMATION**                                                      | **3**        |
| ** **                                                                                                     | ** **   |
| **Item 1.  Financial Statements**                                                                         | **3**        |
| **Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations** | **14**       |
| **Item  3.  Quantitative and Qualitative  Disclosures About Market Risk**                                 | **25**       |
| **Item 4T.  Controls and Procedures**                                                                     | **25**       |
| ** **                                                                                                     | ** **   |
| **PART II.  OTHER INFORMATION**                                                                           | **25**       |
| ** **                                                                                                     | ** **   |
| **Item  1.  Legal Proceedings**                                                                           | **25**       |
| **Item  1A.  Risk Factors**                                                                               | **25**       |
| **Item  2.  Unregistered Sales of Equity  Securities and Use of Proceeds**                                | **26**       |
| **Item  3.  Defaults Upon Senior Securities**                                                             | **26**       |
| **Item  4.  (Removed and Reserved)**                                                                      | **26**       |
| **Item  5.  Other Information**                                                                           | **26**       |
| **Item  6.  Exhibits**                                                                                    | **26**       |
| ** **                                                                                                     | ** **   |
| **SIGNATURES**                                                                                                 | **26**       |

 

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**PART I.     FINANCIALINFORMATION**

**Item 1.  Financial Statements**

 

**Homeland Energy Solutions, LLC**

** **

**Balance Sheets**

**June 30, 2010 and December 31, 2009**

 
| ** **                                                        | ** ** | **June 30, 2010** | ** **  | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                        | ** ** | **Unaudited**     | ** **  | ** **            | ** ** |
| **ASSETS**                                                        |       |              |        |                  |       |
| ** **                                                        |       |              |        |                  |       |
| CURRENT ASSETS                                                    |       |              |        |                  |       |
| Cash and cash equivalents                                         |       | $                 | 9,727,848   |                  | $          | 832,040 |   |
| Accounts Receivable                                               |       | 5,068,407         |        | 9,347,223             |       |
| Inventory                                                         |       | 6,198,499         |        | 6,273,488             |       |
| Due from broker                                                   |       | —            |        | 870,059               |       |
| Derivative instruments                                            |       | 31,863            |        | —                |       |
| Prepaid expenses                                                  |       | 1,112,296         |        | 1,889,834             |       |
| Other current assets                                              |       | 942,216           |        | 599,134               |       |
| Total current assets                                              |       | 23,081,129        |        | 19,811,778            |       |
| ** **                                                        |       |              |        |                  |       |
| PROPERTY AND EQUIPMENT                                            |       |              |        |                  |       |
| Land and improvements                                             |       | 22,471,580        |        | 22,471,580            |       |
| Buildings                                                         |       | 4,870,412         |        | 4,863,070             |       |
| Equipment                                                         |       | 129,764,896       |        | 129,209,097           |       |
| Construction in progress                                          |       | 1,604,142         |        | 1,230,695             |       |
|                                                              |       | 158,711,030       |        | 157,774,442           |       |
| Less accumulated depreciation                                     |       | 14,460,199        |        | 8,667,290             |       |
| Total property and equipment                                      |       | 144,250,831       |        | 149,107,152           |       |
|                                                              |       |              |        |                  |       |
| OTHER ASSETS                                                      |       |              |        |                  |       |
| Loan fees, net of amortization 2010 $494,767; 2009  $406,305      |       | 678,205           |        | 766,667               |       |
| Restricted cash                                                   |       | 10,326,527        |        | 10,256,026            |       |
| Utility rights, net of amortization 2010 $297,688;  2009 $184,293 |       | 2,064,670         |        | 2,578,065             |       |
| Total other assets                                                |       | 13,069,402        |        | 13,600,758            |       |
|                                                              |       |              |        |                  |       |
| TOTAL ASSETS                                                      |       | $                 | 180,401,362 |                  | $          | 182,519,688 |   |
|                                                              |       |              |        |                  |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                          |       |              |        |                  |       |
|                                                              |       |              |        |                  |       |
| CURRENT LIABILITIES                                               |       |              |        |                  |       |
| Accounts payable and accrued expenses                             |       | $                 | 3,641,526   |                  | $          | 5,619,270 |   |
| Derivative instruments                                            |       | —            |        | 238,125               |       |
| Due to Broker                                                     |       | 39,730            |        | —                |       |
| Current maturities of long-term debt                              |       | 7,412,141         |        | 6,795,116             |       |
| Total current liabilities                                         |       | 11,093,397        |        | 12,652,511            |       |
|                                                              |       |              |        |                  |       |
| COMMITMENTS AND CONTINGENCIES                                     |       |              |        |                  |       |
|                                                              |       |              |        |                  |       |
| LONG-TERM DEBT, less current maturities                           |       | 53,557,751        |        | 62,263,911            |       |
|                                                              |       |              |        |                  |       |
| MEMBERS’ EQUITY                                              |       |              |        |                  |       |
| Capital units, less syndication and offering costs                |       | 89,572,744        |        | 89,572,744            |       |
| Retained earnings                                                 |       | 26,177,470        |        | 18,030,522            |       |
| Total members’ equity                                        |       | 115,750,214       |        | 107,603,266           |       |
|                                                              |       |              |        |                  |       |
| TOTAL LIABILITIES AND MEMBERS’ EQUITY                        |       | $                 | 180,401,362 |                  | $          | 182,519,688 |   |

 

See Notes to Unaudited Financial Statements.

 

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**Homeland Energy Solutions, LLC**

**Statements of Operations (Unaudited)**

 
| ** **                                                                                            | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** | **Six Months**    | ** **  |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|-------------|
| ** **                                                                                            | ** ** | **Ended 6/30/10** | ** ** | **Ended 6/30/09** | ** ** | **Ended 6/30/10** | ** ** | **Ended 6/30/09** | ** **  |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| REVENUE, NET OF SHIPPING COSTS                                                                        |       | $                 | 55,629,916 |              | $          | 39,562,718        |       | $                 | 112,643,402 |   | $ | 39,562,718 |   |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| COSTS OF GOODS SOLD                                                                                   |       | 52,519,070        |       | 38,133,578        |       | 102,356,914       |       | 38,133,578        |        |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| GROSS PROFIT                                                                                          |       | 3,110,846         |       | 1,429,140         |       | 10,286,488        |       | 1,429,140         |        |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                                          |       | 564,278           |       | 150,199           |       | 1,134,895         |       | 1,366,736         |        |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| OPERATING INCOME                                                                                      |       | 2,546,568         |       | 1,278,941         |       | 9,151,593         |       | 62,404            |        |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| OTHER INCOME (EXPENSE)                                                                                |       |              |       |              |       |              |       |              |        |
| Interest expense                                                                                      |       | (536,271          | )          | (594,198          | )          | (1,131,967        | )          | (594,198          | )           |
| Interest income                                                                                       |       | 60,589            |       | 61,591            |       | 127,322           |       | 139,148           |        |
| Grant income                                                                                          |       | —            |       | 300,000           |       | —            |       | 300,000           |        |
|                                                                                                  |       | (475,682          | )          | (232,607          | )          | (1,004,645        | )          | (155,050          | )           |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| **Net income (loss)**                                                                                 |       | $                 | 2,070,886  |              | $          | 1,046,334         |       | $                 | 8,146,948   |   | $ | (92,646 | ) |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| Basic & diluted net income (loss) per unit                                                        |       | $                 | 22.65      |              | $          | 11.44             |       | $                 | 89.09       |   | $ | (1.01 | ) |
|                                                                                                  |       |              |       |              |       |              |       |              |        |
| Weighted average of units outstanding for the calculation  of basic & diluted net income per unit |       | 91,445            |       | 91,445            |       | 91,445            |       | 91,445            |        |

 

See Notes to Unaudited Financial Statements.

 

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**Homeland Energy Solutions, LLC**

 

**Statements of Cash Flows (Unaudited)**

 
| ** **                                                                                          | ** ** | **Six Months**     | ** ** | **Six Months**     | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                          | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                          | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| ** **                                                                                          | ** ** | ** **         | ** ** | ** **         | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                |       |               |       |               |       |
| Net income (loss)                                                                                   |       | $                  | 8,146,948  |               | $          | (92,646 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |               |       |               |       |
| Depreciation and amortization                                                                       |       | 5,994,766          |       | 2,972,052          |       |
| Unrealized (gain) on derivatives                                                                    |       | (269,988           | )          | (615,362           | )          |
| Asset impairment                                                                                    |       | —             |       | 480,875            |       |
| Change in working capital components:                                                               |       |               |       |               |       |
| Accounts receivable                                                                                 |       | 4,278,816          |       | (6,174,895         | )          |
| Inventory                                                                                           |       | 74,989             |       | (5,928,852         | )          |
| Due to (from) broker                                                                                |       | 909,789            |       | (613,112           | )          |
| Prepaid expenses and other assets                                                                   |       | 434,456            |       | (1,542,445         | )          |
| Accounts payable and accrued expenses                                                               |       | (977,038           | )          | 2,221,550          |       |
| **Net cash provided by (used in)  operating activities**                                            |       | 18,592,738         |       | (9,292,835         | )          |
|                                                                                                |       |               |       |               |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                |       |               |       |               |       |
| Refund of (payment for) utility rights                                                              |       | 400,000            |       | (400,000           | )          |
| Payments for equipment and construction in  progress                                                |       | (1,937,294         | )          | (25,419,970        | )          |
| **Net cash (used in) investing  activities**                                                        |       | (1,537,294         | )          | (25,819,970        | )          |
|                                                                                                |       |               |       |               |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                |       |               |       |               |       |
| Increase in outstanding checks in excess of bank  balance                                           |       | —             |       | 213,034            |       |
| (Increase) in restricted cash                                                                       |       | (70,501            | )          | (126,437           | )          |
| Proceeds from long-term borrowing                                                                   |       | —             |       | 41,223,898         |       |
| Payments on long-term borrowing                                                                     |       | (8,089,135         | )          | (180,000           | )          |
| **Net cash provided by (used in)  financing activities**                                            |       | (8,159,636         | )          | 41,130,495         |       |
|                                                                                                |       |               |       |               |       |
| **Net increase in cash**                                                                            |       | $                  | 8,895,808  |               | $          | 5,804,656 |   |
|                                                                                                |       |               |       |               |       |
| CASH AND CASH EQUIVALENTS                                                                           |       |               |       |               |       |
| Beginning                                                                                           |       | 832,040            |       | 44,599             |       |
| Ending                                                                                              |       | $                  | 9,727,848  |               | $          | 5,849,255 |   |
|                                                                                                |       |               |       |               |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                                   |       |               |       |               |       |
| Cash paid for interest                                                                              |       | $                  | 1,175,551  |               | $          | 1,113,290 |   |
|                                                                                                |       |               |       |               |       |
| SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND  FINANCING ACTIVITIES                                |       |               |       |               |       |
| Accounts payable related to construction in  progress                                               |       | $                  | —     |               | $          | 2,417,559 |   |
| Retainage payable related to construction in  progress                                              |       | —             |       | 238,125            |       |
| Interest capitalized                                                                                |       | —             |       | 817,183            |       |
| Insurance costs capitalized                                                                         |       | —             |       | 83,423             |       |
| Loan fee amortization capitalized                                                                   |       | —             |       | 58,974             |       |

 

See Notes to Unaudited Financial Statements.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

**1.****             ****NATUREOF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**

 

Nature of business:  Homeland Energy Solutions, LLC (an IowaLimited Liability Company) is located near Lawler, Iowa and was organized topool investors for a 100 million gallon ethanol plant with distributionthroughout the United States.  Inaddition, the company produces and sells distillers dried grains as byproductsof ethanol production.  Site preparationwas completed and construction began in November 2007.  Prior to commencing operations on April 4,2009, the Company was a development stage entity with its efforts beingprincipally devoted to organizational activities and construction activities.

 

Significant Accounting Policies:

 

Basis of Presentation:  The accompanying unauditedcondensed financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted as permitted by such rules and regulations.  These financial statements and related notesshould be read in conjunction with the financial statements and notes theretoincluded in the company’s audited financial statements for the year endedDecember 31, 2009, contained in the Company’s annual report on Form 10-K for2009.  In the opinion of management, theinterim condensed financial statements reflect all adjustments considerednecessary for fair presentation.  Theadjustments made to these statements consist only of normal recurringadjustments.

 

Accounting Estimates:  Management uses estimates andassumptions in preparing these financial statements in accordance with UnitedStates 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.  Actual results could differ from those estimates.

 

Revenue Recognition: Revenue from the sale of the Company’s products is recognized at thetime title to the goods and all risks of ownership transfer to thecustomers.  This generally occurs upon shipment, loading of the goods orwhen the customer picks up the goods. Interest income is recognized asearned.  Shipping costs incurred by theCompany in the sale of ethanol and distiller grains are not specificallyidentifiable and as a result, revenue from the sale of ethanol and distillergrains is recorded based on the net selling price reported to the Company fromthe marketer.

 

Inventories:  Inventories are generally valued at the lowerof cost (first-in, first-out) or market.  In the valuation of inventoriesand purchase and sale commitments, market is based on current replacement valuesexcept that it does not exceed net realizable values and is not less than netrealizable values reduced by allowances for approximate normal profit margin.

 

Long-Lived Assets:The Company reviews its property and equipment for impairment wheneverevents indicate that the carrying amount of the assets may not berecoverable.  If circumstances require a long-lived asset be tested for possibleimpairment, the Company first compares undiscounted cash flows expected to begenerated by an asset to the carrying value of the asset. If the carrying valueof the long-lived asset is not recoverable on an undiscounted cash flow basis,an impairment is recognized to the extent that the carrying value exceeds itsfair value. Fair value is determined through various valuation techniquesincluding discounted cash flow models, quoted market values and third-partyindependent appraisals, as considered necessary.

 

Derivative Instruments: The Company evaluates its contracts to determine whether thecontracts are derivative instruments. Certain contracts that literally meet the definition of a derivative maybe exempted from derivative accounting as normal purchases or normalsales.  Normal purchases and normal salesare contracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business.  Contracts that meetthe requirements of normal purchases or sales are documented as normal andexempted from the accounting and reporting requirements of derivativeaccounting.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

The Company enters into short-term cash, option andfutures contracts as a means of securing purchases of corn, natural gas andsales of ethanol for the plant and managing exposure to changes in commodityand energy prices.  All of the Company’sderivatives are designated as non-hedge derivatives for accounting purposes,with changes in fair value recognized in net income.  Although the contracts are economic hedges ofspecified risks, they are not designated as and accounted for as hedginginstruments.

 

As part of its trading activity, the Company usesfutures and option contracts through regulated commodity exchanges to manageits risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cashand futures contracts and options.

 

Realized and unrealized gains and losses related toderivative contracts related to corn and natural gas are included as acomponent of cost of goods sold and derivative contracts related to ethanol areincluded as a component of revenues in the accompanying financialstatements.  The fair values of contractsentered through commodity exchanges are presented on the accompanying balancesheet as derivative instruments.

 

Intangible Assets:  Intangible assets consist ofloan fees and utility rights.  Utilityrights consist of payments to electric and natural gas companies forconstruction in aid of electric and gas lines to the facility but the Companyretains no ownership rights to the assets. The loan fees are amortized over the term of the loan and utility rightsare amortized over 15 years or the anticipated useful life utilizing theeffective interest method and straight-line method, respectively. The usefullife was determined in part by the length of service agreements the Company haswith the utility companies as well as normal usage of such infrastructure.

 

Restricted Cash:  The Company has a restriction on a specificaccount with a bank that is restricted in use for the repayment of long-termdebt.  The balance in this account hasbeen treated as a non-current asset due to this restriction.

 

Net Income (Loss) per Unit:  Basic and diluted net incomeper unit is computed by dividing net income by the weighted average number ofmembers’ units and members’ unit equivalents outstanding during the period.There were no member unit equivalents outstanding during the periods presented;accordingly, the Company’s basic and diluted net income (loss) per unit are thesame.

 

Risks and Uncertainties:  The Company has certain risksand uncertainties that it will experience during volatile market conditions,which can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution ofethanol and distiller grains to customers primarily located in the UnitedStates. Corn for the production process is supplied to the plant primarily fromlocal agricultural producers and from purchases on the open market. Ethanol salesaverage approximately 84% of total revenues, while approximately 16% ofrevenues is generated from the sale of distiller grains and otherby-products.  Corn costs averageapproximately 70% of cost of revenues.

 

The Company’s operating and financial performanceis largely driven by the prices at which we sell ethanol and the net expense ofcorn. The price of ethanol is influenced by factors such as supply and demand,weather, government policies and programs, and unleaded gasoline and thepetroleum markets, although since 2005 the prices of ethanol and gasoline begana divergence with ethanol selling for less than gasoline at the wholesalelevel. Excess ethanol supply in the market, in particular, puts downwardpressure on the price of ethanol. Our largest cost of production is corn. Thecost of corn is generally impacted by factors such as supply and demand,weather, government policies and programs, and our risk management program usedto protect against the price volatility of these commodities.

 

The current U.S. economic condition has reduced thenation’s demand for energy.  In addition,the VEETC credit of $0.45 is set to expire in December 2010, creatingadditional uncertainty to the future of ethanol production.  The ethanol boom of recent years has spurredovercapacity in the industry and production capacity is currently exceeding theRFS mandates.  As such, the Company mayneed to evaluate whether crush margins will be sufficient to operate the plantand generate enough debt service.  In theevent crush margins become negative for an extended period of time, the Companymay be required to reduce capacity or shut down the plant.  The 

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

Company will continue to evaluate crush margins ona regular basis.  Based on the Company’soperating plan and the borrowing capacity, management believes it has thecapital to meet its obligations throughout the next twelve month period.

 

**2.****             ****INVENTORY**

 

Inventoryconsisted of the following as of June 30, 2010 and December 31, 2009.

 
| ** **      | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| Raw Materials   |       | $                 | 2,727,605  |                  | $          | 3,152,894 |   |
| Work in Process |       | 1,095,376         |       | 1,191,732             |       |
| Finished Goods  |       | 2,375,518         |       | 1,928,862             |       |
| Totals          |       | $                 | 6,198,499  |                  | $          | 6,273,488 |   |

 

**3.****             ****DEBT**

 

MasterLoan Agreement with Home Federal Savings Bank

 

OnNovember 30, 2007, the Company entered into a Master Loan Agreement withHome Federal Savings Bank (“Home Federal”) establishing a senior creditfacility with Home Federal for the construction of a 100 million gallonper year natural gas powered dry mill ethanol plant.  In return, the Company executed a mortgage infavor of Home Federal creating a senior lien on the real estate and plant and asecurity interest in all personal property located on Company property.  The Master Loan Agreement provides for(i) a construction loan in an amount not to exceed $94,000,000 (of whichup to $20,000,000 may be converted to a term revolving loan upon start-up ofoperations), and (ii)  a revolving line of credit loan in an amount not toexceed $6,000,000 (the foregoing collectively referred to as the “Loans”).

 

OnJuly 1, 2009 the Company converted the $94,000,000 construction loan with HomeFederal Savings Bank into a $74,000,000 term loan and a $20,000,000 termrevolving loan under the terms of the Master Loan Agreement and supplementsthereto.  The Company made monthly paymentsof accrued interest on the Term Loan from the date of conversion until sevenmonths later.  Beginning in the seventhmonth after conversion, or on February 1, 2010, equal monthly principalpayments in the amount of $616,667 plus accrued interest will be made.  All unpaid principal and accrued interest onthe term loan will be due on the fifth anniversary of such conversion.  The Company will have the right to convert upto 50% of the term loan into a Fixed Rate Loan with the consent of Home Federal.  The Fixed Rate Loan will bear interest at thefive year LIBOR swap rate that is in effect on the date of conversion plus 300basis points, or another rate mutually agreed upon by Homeland Energy and HomeFederal.  If the Company elects thisfixed rate option, the interest rate will not be subject to any adjustmentsotherwise provided for in the Master Loan Agreement.  The remaining portion will bear interest at arate equal to the LIBOR Rate plus 300 basis points.

 

TheCompany agreed to the terms of a $20,000,000 Term Revolving Loan which wasconverted on July 1, 2009 from the construction loan and has a maturity date offive years from the conversion date or July 2014.  Interest on the Revolving Term Loan shall accrueat a rate equal to the LIBOR Rate plus 300 basis points.  The Company will be required to make monthlypayments of interest until the maturity date of July 2014, on which date theunpaid principal amount of the Revolving Term Loan will become due and payable.

 

RevolvingLine of Credit Loan

 

Underthe terms of the Master Loan Agreement and the third supplement thereto, theCompany agreed to the terms of a Revolving Line of Credit Loan consisting of amaximum $6,000,000 revolving line of credit. The Revolving Line of Credit Loan became available on July 1, 2009 whenall conditions precedent to the Revolving Line of Credit Loan were met. Theaggregate principal amount of the Revolving Line of Credit Loan may not exceedthe lesser of $6,000,000 or the Borrowing Base. The Borrowing Base means, at any time, the lesser of: (a) $6,000,000; or(b) the sum of (i) 75% of the eligible accounts receivable, plus(ii) 75% of the eligible inventory. Interest on the Revolving 

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

Lineof Credit Loan shall accrue at a rate equal to the LIBOR Rate plus 300 basispoints.  The Company was required to makemonthly payments of accrued interest until the Revolving Line of Credit Loanexpired on June 30, 2010.  This line ofcredit was not renewed.

 

Ifthe Company fails to make a payment of principal or interest on any loan within10 days of the due date, there will be a late charge equal to 5% of theamount of the payment.  Balancesoutstanding on the term loan, term revolving loan and revolving line of creditas of June 30, 2010 and December 31, 2009, were $60,916,667, $0 and $0, and$69,000,000, $0 and $0, respectively. Amounts available on the term loan, termrevolving loan and revolving line of credit as of June 30, 2010 were $0,$20,000,000 and $6,000,000, respectively.

 

Covenants

 

Inaddition, during the term of the loans, the Company will be subject to certainfinancial covenants at various times calculated monthly, quarterly orannually.  Failure to comply with theprotective loan covenants or maintain the required financial ratios may causeacceleration of the outstanding principal balances on the loans and/or theimposition of fees, charges or penalties. Any acceleration of the debt financing or imposition of the significantfees, charges or penalties may restrict or limit the access to the capitalresources necessary to continue plant operations. As of June 30, 2010, theCompany was in compliance with all covenants. The Company made  a $5,000,000free cash flow payment on the term loan on April 22, 2010.

 

Uponan occurrence of an event of default or an event which will lead to thedefault, Home Federal may upon notice terminate its commitment to loan fundsand declare the entire unpaid principal balance of the loans, plus accruedinterest, immediately due and payable. Events of default include, but are not limited to, the failure to makepayments when due, insolvency, any material adverse change in the financialcondition or the breach of any of the covenants, representations or warrantiesthe Company has given in connection with the transaction.

 

**4.****             ****RELATEDPARTY TRANSACTIONS**

 

TheCompany purchased corn and materials from members of its Board of Directors whoown or manage elevators or are local producers of corn.  Purchases during the three and six monthsended June 30, 2010, totaled approximately $0 and $6,308,000, respectively, andduring the three and six months ended June 30, 2009 totaled approximately$4,097,000 and $4,510,000, respectively. We did not have any corn purchases from related parties during the threemonth period ended June 30, 2010 because an elevator which was previously arelated party, no longer qualifies as a related party.  We continue to purchase corn from thiselevator.

 

OnDecember 15, 2008, the Company entered into an agreement with Golden GrainEnergy, LLC, a member of the Company, for management services.  Pursuant to the Agreement, Homeland Energyand Golden Grain have agreed to share management services in an effort toreduce the costs of administrative overhead. Homeland Energy and Golden Grainhave agreed to split the compensation costs associated with each of theemployees covered by the Agreement. For the three and six months ending June30, 2010, the Company incurred net costs of approximately $76,000 and $183,000related to this agreement.  The cost forthe same period of 2009 related to this agreement were approximately  $103,000 and $225,000.

 

**5.****             ****COMMITMENTS,CONTINGENCIES AND AGREEMENTS**

 

*Ethanol,  Distiller’s grain,marketing agreements and major customers*

TheCompany has entered into a marketing agreement to sell all ethanol produced atthe plant to an unrelated party at a mutually agreed on price, less commissionand transportation charges.  As of June30, 2010, the Company has commitments to sell approximately 43,885,000 gallonsat various fixed and basis price levels indexed against exchanges for deliverythrough March 2011. We had approximately 15,370,000 gallons at a fixed pricelevel and approximately 28,515,000 at a basis price level.  Should the Company not be able to meetdelivery on these gallons in the future the Company will be responsible forpurchasing gallons in the open market. The Company has not incurred any losses due to non-delivery of productand anticipates that all contracts will be sufficient to cover costs in thefuture.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

TheCompany has entered into a marketing agreement to sell all distiller grainsproduced at the plant to an unrelated party at a mutually agreed on price, lesscommission and transportation charges. The agreement was renewed for another one year term on April 1, 2010.  The agreement calls for automatic renewal forsuccessive one-year terms unless 120-day prior written notice is given beforethe current term expires. As of June 30, 2010, the Company had approximately33,000 tons of distiller grains commitments for delivery through December 2010at various fixed prices. Should the Company not be able to meet delivery onthese tons in the future, the Company will be responsible for fulfilling thecommitment  in the open market.  The Company has not incurred any losses dueto non-delivery of product.

 

Approximate sales and marketing fees related to the agreements in placefor the three and six month period ending June 30, 2010 and 2009 are as followsbelow.

 

 
| ** **                      | ** ** | **Three Months  ended** | ** ** | **Six Months** | ** ** | **Three Months  ended** | ** ** | **Six Months** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------------|------------|-------------------------|------------|----------------|------------|
| ** **                      | ** ** | **June 30, 2010**       | ** ** | **ended**      | ** ** | **June 30, 2009**       | ** ** | **Ended**      | ** ** |
|                            |       |                    |       |           |       |                    |       |           |       |
| Sales ethanol                   |       | $                       | 46,648,000 |           | $          | 95,107,000              |       | $              | 32,814,000 |   | $ | 32,814,000 |   |
| Sales distiller grains          |       | 8,883,000               |       | 17,343,000     |       | 6,993,000               |       | 6,993,000      |       |
|                            |       |                    |       |           |       |                    |       |           |       |
| Marketing fees ethanol          |       | 397,000                 |       | 767,000        |       | 261,000                 |       | 261,000        |       |
| Marketing fees distiller grains |       | 164,000                 |       | 281,000        |       | 119,000                 |       | 119,000        |       |
|                                 |            |                         |            |                |            |                         |            |                |            |  |  |  |  |

 
| ** **                         | ** ** | **As of  June 30,  2010** | ** ** | **As of  June   30, 2009** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|
| Amount due from ethanol marketer   |       | $                         | 2,687,000  |                       | $          | 4,143,000  |       |       |       |       |   |   |
| Amount due from distiller marketer |       | 1,285,000                 |       | 1,321,000                  |       |       |       |       |       |       |
|                               |       |                      |       |                       |       |       |       |       |       |       |
|                                    |            |                           |            |                            |            |            |            |            |            |            |  |  |

 

At June 30, 2010, the Company had outstanding commitments for purchasesof approximately 9,774,000 bushels of corn at various prices through May 2011.

 

TheCompany has commitments for minimum purchases of various utilities such asnatural gas and electricity over the next 10 years which are anticipated toapproximate the following:

 
| 2010                          |   | $          | 1,975,000  |   |
|-------------------------------|--------|------------|------------|--------|
| 2011                          |   | 3,950,000  |       |
| 2012                          |   | 3,950,000  |       |
| 2013                          |   | 3,950,000  |       |
| 2014                          |   | 3,908,000  |       |
| Thereafter                    |   | 16,015,000 |       |
| Total anticipated commitments |   | $          | 33,750,000 |   |

 

**6.****             ****LEASEOBLIGATIONS**

 

During fiscal year 2009 and 2010 the Company entered into leases forrail cars, rail moving equipment and loading equipment with original terms upto 5 years.  The Company is obligated topay costs of insurance, taxes, repairs and maintenance pursuant to terms of theleases.  Rent expense incurred for theoperating leases during the three and six months ended June 30, 2010, was approximately $474,000 and $879,000 andfor the same periods in 2009 was approximately $459,000 and $459,000.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

At June 30, 2010 the Company had the following approximate minimumrental commitments under non-cancelable operating leases.

 
| 2010                    |   | $               | 1,060,000 |   |
|-------------------------|--------|-----------------|-----------|--------|
| 2011                    |   | 2,012,000       |      |
| 2012                    |   | 556,100         |      |
| 2013                    |   | 117,500         |      |
| 2014                    |   | 117,500  32,400 |      |
| Total lease commitments |   | $               | 3,895,500 |   |

 

**7.****             ****DERIVATIVEINSTRUMENTS**

 

The Company’s activities expose it to a variety of market risks,including the effects of changes in commodity prices.  These financial exposures are monitored andmanaged by the Company as an integral part of its overall risk-managementprogram.  The Company’s risk managementprogram focuses on the unpredictability of financial and commodities marketsand seeks to reduce the potentially adverse effects that the volatility ofthese markets may have on its operating results.

 

To reduce price risk caused by market fluctuations, the Companygenerally follows a policy of using exchange traded futures and optionscontracts to reduce its net position of merchandisable agricultural commodityinventories and forward cash purchase and sales contracts and uses exchangetraded futures and options contracts to reduce price risk.  Exchange-traded futures contracts are valuedat market price.  Changes in market priceof exchange traded futures and options contracts related to corn and naturalgas are recorded in costs of goods sold and changes in market prices ofcontracts related to sale of ethanol, if applicable, are recorded in revenues.

 

The Company uses futures or options contracts to fix the purchase priceof anticipated volumes of corn to be purchased and processed in a future month.  The Company’s plant will grind approximately40 million bushels of corn per year.  During the previous period andover the next 12 months, the Company has hedged and anticipates hedging between5% and 60% of its anticipated monthly grind.  At June 30, 2010, theCompany has hedged portions of its anticipated monthly purchases for cornaveraging approximately 23% of its anticipated monthly grind over the nexttwelve months.

 

Unrealized gains and losses on non-exchange traded forward contractsare deemed “normal purchases or sales” under authoritative accounting guidanceand, as amended and, therefore, are not marked to market in the Company’sfinancial statements. The fair value of the Company’s open derivative positionsare summarized in the following table as of June 30, 2010 and December 31,2009.

 
| ** **                                         | ** ** | **Balance Sheet   Classification** | ** ** | **Asset Fair   Value** | ** ** | **Liability Fair  Value** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Derivatives not designated as hedging instruments: |       |                               |       |                   |       |                      |       |
| Commodity Contracts at 6/30/10                     |       | Derivative  Instruments            |       | $                      | 31,863     |                      | $          | — |   |
|                                               |       |                               |       |                   |       |                      |       |
| Derivatives not designated as hedging instruments: |       |                               |       |                   |       |                      |       |
| Commodity Contracts 12/31/09                       |       | Derivative  Instruments            |       | $                      | —     |                      | $          | 238,125 |   |

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

The following table represents the amount of realized gains (losses)and changes in fair value recognized in earnings on commodity contracts for thethree and six months ending June 30, 2010 and for the same periods ending June30, 2009:

 
| ** **                                                              | ** **         | **Income Statement  Classification** | ** ** | **Realized  Gain (Loss)** | ** ** | **Unrealized  Gain (Loss)** | ** ** | **Total Gain  (Loss)** | ** ** |
|-------------------------------------------------------------------------|--------------------|--------------------------------------|------------|---------------------------|------------|-----------------------------|------------|------------------------|------------|
| Derivatives not designated as hedging instruments:                      |               |                                 |       |                      |       |                        |       |                   |       |
| Commodity Contracts for the three months ended  6/30/10                 |               | Cost of Goods Sold                   |       | $                         | 1,443,357  |                        | $          | 31,863                 |       | $ | 1,475,220 |   |
|                                                                    |               |                                 |       |                      |       |                        |       |                   |       |
| ·  Commodity  Contracts for the six months ended 6/30/10 |               | Cost of Goods Sold                   |       | $                         | 2,933,986  |                        | 31,863     |                   | 2,965,849  |   |
|                                                                    |               |                                 |       |                      |       |                        |       |                   |       |
| Derivatives not designated as hedging instruments:                      |               |                                 |       |                      |       |                        |       |                   |       |
| Commodity Contracts for the three months ended  6/30/09                 |               |                                 |       |                      |       |                        |       |                   |       |
|                                                                    | Cost of Goods Sold |                                 | $          | 941,766                   |       | 798,424                     |       | 1,740,190              |       |
|                                                                    |               |                                 |       |                      |       |                        |       |                   |       |
| Commodity Contracts for the six months ended 6/30/09                    |               | Cost  of Goods Sold                  |       | 1,135,112                 |       | 615,362                     |       | 1,750,474              |       |
|                                                                         |                    |                                      |            |                           |            |                             |            |                        |            |  |  |  |

 

**8.****             ****FAIRVALUE MEASUREMENTS**

 

Fair value is 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 determiningfair value, the Company uses various methods including market, income and costapproaches.  Based on these approaches,the Company often utilizes certain assumptions that market participants woulduse in pricing the asset or liability, including assumptions about risk and/orthe risks inherent in the inputs to the valuation technique.  These inputs can be readily observable,market-corroborated, or generally unobservable inputs.  The Company utilizes valuation techniquesthat maximize the use of observable inputs and minimize the use of unobservableinputs.  Based on the observability ofthe inputs used in the valuation techniques, the Company is required to providethe following information according to the fair value hierarchy.  The fair value hierarchy ranks the qualityand reliability of the information used to determine fair values.  Financial assets and liabilities carried atfair value will be classified and disclosed in one of the following threecategories:

 

Level 1: Valuations for assets and liabilities traded in active marketsfrom readily available pricing sources for market transactions involvingidentical assets or liabilities.

 

Level 2: Valuations for assets and liabilities traded in less activedealer or broker markets.  Valuations areobtained from third-party pricing services for identical or similar assets orliabilities.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

June 30, 2010

 

Level 3: Valuations incorporate certain assumptions and projections indetermining the fair value assigned to such assets or liabilities.

 

A description of the valuation methodologies used for instrumentsmeasured at fair value, including the general classification of suchinstruments pursuant to the valuation hierarchy, is set forth below

 

Derivative financial instruments:  Commodity futures and exchange-tradedcommodity options contracts are reported at fair value utilizing Level 1inputs.  For these contracts, the Companyobtains fair value measurements from an independent pricing service.  The fair value measurements considerobservable data that may include dealer quotes and live trading levels from theCBOT and NYMEX markets.

 

The following table summarizes financial assets and financialliabilities measured at fair value on a recurring basis as of June 30, 2010 andDecember 31, 2009, segregated by the level of the valuation inputs within thefair value hierarchy utilized to measure fair value:

 
| ** **                                                       | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                             |       |      |       |        |       |        |       |        |       |
| Current Asset, derivative financial instruments at  6/30/10      |       | $         | 31,863     |        | $          | 31,863      |       | —      |       | — |   |
|                                                             |       |      |       |        |       |        |       |        |       |
| Current Liability, derivative financial  instruments at 12/31/09 |       | 238,125   |       | 238,125     |       | —      |       | —      |       |
|                                                                  |            |           |            |             |            |             |            |             |            |  |  |

 

Certain financial assets and financial liabilities are measured at fairvalue on a nonrecurring basis; that is, the instruments are not measured atfair value on an ongoing basis but are subject to fair value adjustments incertain circumstances, for example, when there is evidence of impairment.

 

The Company considers the carrying amount of significant classes offinancial instruments on the balance sheets including cash, accountsreceivable, due from broker, restricted cash, other assets, accounts payable,accrued liabilities and variable rate long-term debt to be reasonable estimatesof fair value either due to their length of maturity or the existence ofvariable interest rates underlying such financial instruments that approximateprevailing market rates at June 30, 2010.

 

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Thisreport contains forward-looking statements that involve future events, ourfuture performance and our expected future operations and actions.  In some cases, you can identifyforward-looking statements by the use of words such as “may,” “should,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “will,”“hope,” “predict,” “target,” “potential,” or “continue” or the negative ofthese terms or other similar expressions.

 

Theseforward-looking statements are only our predictions and involve numerousassumptions, risks and uncertainties, including, but not limited to thoselisted below and those business risks and factors described elsewhere in thisreport and our other filings with the Securities and Exchange Commission.

 

·                  Our ability to satisfy the financial covenants contained in our creditagreements with our senior lender;

·                  Our ability to operate the ethanol plant profitably and maintain apositive spread between the price at which we sell our products and our raw materialscosts;

·                  Our ability to generate free cash flow to invest in our business andservice our debt;

·                  Volatility of corn, natural gas, ethanol, unleaded gasoline, distillersgrains and other commodities prices and availability;

·                  Changes in general economic conditions or the occurrence of certainevents causing an economic impact in the agriculture, oil or automobileindustries;

·                  Elimination of the tariff on imported ethanol;

·                  Changes in interest rates or the lack of credit availability;

·                  Changes in our business strategy, capital improvements or developmentplans;

·                  The results of our hedging transactions and other risk managementstrategies;

·                  Our inelastic demand for and the availability of corn, as it is the onlyavailable feedstock for our plant;

·                  Changes in the environmental regulations or in our ability to comply withthe environmental regulations that apply to our plant site and our operations;

·                  The effects of mergers, bankruptcies or consolidations in the ethanolindustry;

·                  Changes in federal and/or state laws including the Renewable FuelsStandard and VEETC, or the elimination of any federal and/or state ethanol taxincentives;

·                  Overcapacity within the ethanol industry;

·                  Changes in plant production capacity or technical difficulties in operatingthe plant;

·                  Changes and advances in ethanol production technology that may make itmore difficult for us to compete with other ethanol plants utilizing suchtechnology;

·                  Our ability to retain key employees and maintain labor relations;

·                  The development of infrastructure related to the sale and distribution ofethanol; and

·                  Competition in the ethanol industry and from alternative fuel additives.

 

Ouractual results or actions could and likely will differ materially from thoseanticipated in the forward-looking statements for many reasons, including butnot limited to the reasons described in this report.  We are not under any duty to update theforward-looking statements contained in this report.  We cannot guarantee future results, levels ofactivity, performance or achievements. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.  You should read this report and the documentsthat we reference in this report completely and with the understanding that ouractual future results may be materially different from what we currentlyexpect.  We qualify all of ourforward-looking statements by these cautionary statements.

 

**Available Information**

 

Informationabout us is also available at our website at*www.homelandenergysolutions.com*, under “Investor Relations — SECFilings,” which includes links to reports we have filed with the Securities andExchange Commission. The contents of our website are not incorporated byreference in this Quarterly Report on Form 10-Q.

 

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**Overview**

 

HomelandEnergy Solutions, LLC (referred to herein as “we,” “us,” the “Company,” “Homeland”or “Homeland Energy”) is an Iowa limited liability company.  Homeland was formed on December 7, 2005for the purpose of pooling investors for the development, construction andoperation of a 100 million gallon per year ethanol plant located near Lawler, Iowa.   We began producing ethanol and distillersgrains at the plant in April 2009. The ethanol plant is currently operating at a rate in excess of itsnameplate capacity of 100 million gallons.

 

Prior to April 2009, we installed theinfrastructure necessary to support plant operations and began operations.  We also obtained the permits required toconstruct and operate the plant. The total project cost was approximately $176million, which included construction of our ethanol plant and start-up ofoperations.  We financed the constructionand start-up of the ethanol plant with a combination of equity and debt.  We currently have 42 employees.

 

Our revenues are derived primarily from the sale ofour ethanol and distillers grains.  We marketand sell our products primarily in the continental United States through thirdparty marketers.  We have anEthanol Marketing Agreement with Green Plains Trade Group LLC (“GPTG”), whichis the ethanol marketing and distribution subsidiary of Green Plains RenewableEnergy, LLC (“GPRE”).  We have alsoentered into a Distillers Grains Marketing Agreement with CHS, Inc. (“CHS”),pursuant to which CHS purchases the distillers grains produced at our plant andsells them to its customers.

 

There have been a number of recent developments inlegislation that impacts the ethanol industry. One such development concerns the federal Renewable Fuels Standard(RFS).  The ethanol industry is benefitedby the RFS which requires that a certain amount of renewable fuels must be usedin the United States each year.  In February 2010,the EPA issued new regulations governing the RFS.  These new regulations have been calledRFS2.  The most controversial part ofRFS2 involves what is commonly referred to as the lifecycle analysis ofgreenhouse gas emissions.  Specifically,the EPA adopted rules to determine which renewable fuels providedsufficient reductions in greenhouse gases, compared to conventional gasoline,to qualify under the RFS program.  RFS2establishes a tiered approach, where regular renewable fuels are required toaccomplish a 20% greenhouse gas reduction compared to gasoline, advancedbiofuels and biomass-based biodiesel must accomplish a 50% reduction ingreenhouse gases, and cellulosic biofuels must accomplish a 60% reduction ingreenhouse gases.  Any fuels that fail tomeet this standard cannot be used by fuel blenders to satisfy their obligationsunder the RFS program.  The scientificmethod of calculating these greenhouse gas reductions has been a contentiousissue.  Many in the ethanol industry wereconcerned that corn based ethanol would not meet the 20% greenhouse gasreduction requirement based on certain parts of the environmental impact modelthat many in the ethanol industry believed was scientifically suspect.  However, RFS2 as adopted by the EPA providesthat corn-based ethanol from modern ethanol production processes does meet thedefinition of a renewable fuel under the RFS program.  Our ethanol plant was grandfathered into theRFS due to the fact that it was constructed prior to the effective date of thelifecycle greenhouse gas requirement and is not required to prove compliancewith the lifecycle greenhouse gas reductions. In addition, certain provisions of RFS2 as adopted by the EPA may disproportionatelybenefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced inBrazil, more competitive in the United States ethanol market.  If this were to occur, it could reduce demandfor the corn based ethanol that we produce.

 

In addition to RFS2 which included greenhouse gasreduction requirements, in 2009, California passed a Low Carbon Fuels Standard(LCFS).  The California LCFS requiresthat renewable fuels used in California must accomplish certain reductions ingreenhouse gases, measured using a lifecycle analysis similar to RFS2.  Management believes that this lifecycleanalysis is based on unsound scientific principles that unfairly disadvantagescorn based ethanol.  Management believesthat these new regulations may preclude corn based ethanol from being used inCalifornia.  California represents asignificant ethanol demand market.  If weare unable to supply ethanol to California, it could significantly reducedemand for the ethanol we produce.  Several lawsuits have been filed challengingthe California LCFS.

 

In addition to the tax incentives, United Statesethanol production is also benefited by a 54 cent per gallon tariff imposed onethanol imported into the United States. However, the 54 cent per gallon tariff is set to expire at 

 

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the end of the 2010 calendar year.  Elimination of the tariffthat protects the United States ethanol industry could lead to the importationof ethanol produced in other countries, especially in areas of the UnitedStates that are easily accessible by international shipping ports.  Ethanol imported from other countries may bea less expensive alternative to domestically produced ethanol and may affectour ability to sell our ethanol profitably.

 

Ethanol production in the United States is benefitedby various tax incentives.  The mostsignificant of these tax incentives is the federal Volumetric Ethanol ExciseTax Credit (VEETC).  VEETC provides avolumetric ethanol excise tax credit of 4.5 cents per gallon of ethanol blendedwith gasoline at a rate of 10% (total credit of 45 cents per gallon of ethanolblended which is 4.5 divided by the 10% blend). VEETC is scheduled to expire on December 31, 2010.  If this tax credit is not renewed, it likelywould have a negative impact on the price of ethanol and demand for ethanol inthe marketplace.

 

Demand for ethanol has been negatively affected bywhat is commonly referred to as the “blending wall.” The blending wall is anartificial cap on ethanol demand at approximately 13.5 billion gallons.  Currently, ethanol is blended withconventional gasoline for use in standard vehicles to create a blend which is10% ethanol and 90% gasoline.  Estimatesindicate that approximately 135 billion gallons of gasoline are sold in theUnited States each year.  Assuming thatall gasoline in the United States is blended at a rate of 10% ethanol and 90%gasoline, the maximum demand for ethanol is 13.5 billion gallons per year.  Management believes that current ethanolsupply is exceeding ethanol demand due to the effect of increased ethanolproduction and relatively stable ethanol demand due to the blending wall.  As the ethanol industry continues to approachthe blending wall, the imbalance between ethanol supply and demand mayincrease.

 

In order to expand demand for ethanol, the ethanolindustry has been pushing for an increase in the percentage of ethanol that canbe used in standard (non-flex fuel) vehicles. However, the automobile industry and some environmental groups have beenlobbying against the use of higher ethanol blends in standard vehicles.  Currently, the EPA is considering allowing ablend of 15% ethanol and 85% gasoline (called E15) for use in standardvehicles.  However, the EPA has delayedmaking a decision on E15 until late in 2010. The EPA has delayed a decision on E15 several times in the past and theEPA may continue to delay releasing a decision on the use of E15 in standardvehicles.  However, many in the ethanolindustry believe that due to restrictions the EPA is expected to impose on theuse of E15 in standard vehicles, such as only approving E15 for newer vehicles,the effect E15 may ultimately have on ethanol demand might be minimal.  Management believes that many gasolineretailers will refuse to provide E15 even if it is approved due to the factthat not all standard vehicles will be allowed to use E15 and the labeling requirementsthe EPA may impose likely will unfairly discourage consumers from usingE15.  In addition to E15, the ethanolindustry is pushing the use of an intermediate blend of 12% ethanol and 88%gasoline called E12.  Management believesthat E12 may be more beneficial to the ethanol industry than E15 because manybelieve that E12 could be approved for use in all standard vehicles.  Management believes this will make it easierfor retailers to supply E12 compared to E15.

 

Our ethanol plant became operational in early April 2009.  Therefore, our results of operations for thesix and three months ended June 30, 2009 only include operations for lessthan three months.  Accordingly, theinformation we provide regarding our results of operations should be consideredin light of the fact that the ethanol plant only operated for a portion of the2009 periods covered in this report.

 

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**Results of Operations for the Three Months Ended June 30,2010 and 2009**

 

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statement of operations forthe three months ended June 30, 2010 and 2009.  Because we did not begin operating the plantuntil early April 2009, our operating data for the three months ended June 30,2009 does not represent a full three month period.

 
| ** **                                   | ** ** | **Three Months Ended********June 30,****2010  (Unaudited)** | ** ** | **Three Months Ended********June 30,****2009  (Unaudited)** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **Income Statement Data**          | ** ** | **Amount**                                                       | ** ** | **%**                                                            | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                     |       | $                                                                | 55,629,916 |                                                             | 100.0      |   | $ | 39,562,718 |   | 100.0 |   |
|                                         |       |                                                             |       |                                                             |       |   |   |   |   |
| Cost of Goods Sold                           |       | 52,519,070                                                       |       | 94.4                                                             |       | 38,133,578 |   | 96.4 |   |
|                                         |       |                                                             |       |                                                             |       |   |   |   |   |
| Gross Profit                                 |       | 3,110,846                                                        |       | 5.6                                                              |       | 1,429,140 |   | 3.6 |   |
|                                         |       |                                                             |       |                                                             |       |   |   |   |   |
| Selling, General and Administrative Expenses |       | 564,278                                                          |       | 1.0                                                              |       | 150,199 |   | 0.4 |   |
|                                         |       |                                                             |       |                                                             |       |   |   |   |   |
| Operating Income                             |       | 2,546,568                                                        |       | 4.6                                                              |       | 1,278,941 |   | 3.2 |   |
|                                         |       |                                                             |       |                                                             |       |   |   |   |   |
| Other Income (Expense)                       |       | (475,682                                                         | )          | 0.9                                                              |       | (232,607 | ) | 0.6 |   |
|                                         |       |                                                             |       |                                                             |       |   |   |   |   |
| Net Income                                   |       | 2,070,886                                                        |       | 3.7                                                              |       | 1,046,334 |   | 2.6 |   |
|                                              |            |                                                                  |            |                                                                  |            |  |  |  |  |  |  |

 

***Revenues***

 

We generated significantly more revenue for thesecond quarter of 2010 compared to the second quarter of 2009, primarily as aresult of an increase in the amount of ethanol and distillers grains that wesold during the 2010 period.  The sale ofethanol and distillers grains is our only source of revenue.  For the second quarter of 2010, revenue fromethanol sales accounted for approximately 84% of our total revenue and distillersgrains sales accounted for approximately 16% of our total revenue.  By comparison, for the second quarter of2009, revenue from ethanol sales accounted for approximately 82% of our totalrevenue and distillers grains sales accounted for approximately 18% of ourtotal revenue.  Our revenue is presentedin our financial statements net of the shipping costs that are incurred intransporting our ethanol and distillers grains to the end customer.  These shipping charges are deducted by ourethanol and distillers grains marketers from the amounts realized on the saleof our ethanol and distillers grains.

 

During the second quarter of 2010, the average pricewe received for our ethanol was approximately 6% less than the average price wereceived during the second quarter of 2009. Management attributes this decrease in the average price we received forour ethanol during the secondquarter of 2010 compared to the same period of 2009 with lower corn prices andincreased ethanol supply during the 2010 period which negatively impactedethanol prices.  Ethanol prices tend toshift in relation to changes in the price of corn.  Further, as ethanol supply continues to comeup against the blend wall, which artificially caps demand for ethanol, ethanolprices are negatively impacted.

 

Management anticipates that ethanol prices will besteady to lower for the rest of our 2010 fiscal year as the ethanol industrycontinues to experience increased ethanol supply with stable ethanoldemand.  In order to maintain currentethanol prices, the ethanol industry must continue to expand ethanoldemand.  Management anticipates that theimplementation of higher blends of ethanol, such as E12, could increase demandfor ethanol provided these higher blends are available to be used by all standardvehicles.  However, if E12 or E15 areonly implemented for newer vehicles, such as has been suggested by the EPA,this could result in little or no increase in the use of ethanol which wouldnot result in the necessary ethanol demand increases.  We experience some seasonality of demand forethanol related to the summer driving season that management believes has apositive impact on ethanol prices. Further, many ethanol plants schedule a shutdown during the early fallmonths for maintenance and cleaning. This 

 

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typically leads to decreased ethanol productionduring that time which may positively impact the price of ethanol during ourthird quarter.

 

The average price we received for both our drieddistillers grains and wet distillers grains was lower for the second quarter of2010 compared to the second quarter of 2009. The average price we received per ton of dried distillers grains duringthe second quarter of 2010 was approximately 17% lower compared to the secondquarter of 2009.  The average price wereceived per ton of wet distillers grains during the second quarter of 2010 wasapproximately 17% lower compared to the second quarter of 2009.  Management attributes this decrease indistillers grains prices with lower corn prices and increased distillers grainssupplies.  As ethanol productionincreases, the amount of distillers grains that are produced alsoincreases.  Management believes thatdomestic supply of distillers grains has exceeded domestic demand which hasnegatively impacted distillers grains prices. However, distillers grains exports have recently increased which hassomewhat offset the negative effects of the saturation of the domesticdistillers grains markets.  The ethanolindustry primarily exports distillers grains to Mexico, China and Canada.  Management anticipates that distillers grainsprices will continue to follow corn prices. However, any decrease in export demand for distillers grains maynegatively impact the price we receive for our distillers grains.

 

The ethanol plant continues to produce ethanol anddistillers grains at a rate that is in excess of our nameplate production capacityof 100 million gallons per year. Management continues to fine tune the operation of the ethanol plant inan effort to increase the amount of ethanol and distillers grains that we canproduce and to increase production efficiency.

 

***Cost of Goods Sold***

 

Our two primary costs of producing ethanol anddistillers grains are corn costs and natural gas costs.   Our cost of goods sold was approximately94.4% of our total revenues for the second quarter of 2010.  Our cost of goods sold was approximately96.4% of our total revenues for the second quarter of 2009.  The average price we paid per bushel of cornduring the second quarter of 2010 decreased by approximately 13% compared tothe second quarter of 2009.  Managementattributes this decrease to favorable weather that we have experienced duringthe 2010 growing season.  However, in June 2010,the USDA issued revisions to its projected number of acres that are plantedwith corn and reduced the amount of corn carryover.  This had a negative impact on corn prices andresulted in a greater weather premium in corn prices.  This weather premium typically dissipatesduring the end of August and early September when we get closer toharvest time provided we do not experience unfavorable weather conditions.  As a result of this increased uncertaintyregarding corn supply, management believes that unfavorable weather conditionsor increased global demand could result in significant increases in corn pricesin a relatively short period of time.

 

The average price we paid per MMbtu of natural gaswas approximately 22% higher for the second quarter of 2010 compared to thesecond quarter of 2009.  Managementattributes this increase in natural gas prices with a more positive economic outlook.  However, natural gas supplies are comparableto last year so the increased natural gas prices are not necessarily related toactual increased natural gas demand. Management anticipates that natural gas prices will be lower during thethird quarter of 2010 as natural gas prices are typically lowest during August andSeptember.  Following the lows in August andSeptember, management anticipates increasing natural gas prices related toincreased demand for heating needs.  Wetypically experience premium natural gas prices during the winter months.  Further, management anticipates that naturalgas prices will continue to increase if global economic conditions continue toimprove.

 

During the second quarter of 2010, we experienced anapproximately $1.4 million realized gain and an unrealized gain ofapproximately $32,000 related to our corn and natural gas derivativeinstruments.  During the second quarterof 2009, we experienced an approximately $900,000 realized gain and anunrealized gain of approximately $800,000 related to our corn and natural gasderivative instruments.  For accountingpurposes, we recognize the gains and losses that result from changes in thevalue of our derivative instruments in cost of goods sold as the changes occur.  Our plant is expected to grind approximately40 million bushels of corn per year.  Weanticipate entering into risk management positions with respect toapproximately 5 to 60% of our annual corn needs.  As of June 30, 2010, we had riskmanagement positions in place for approximately 23% of our corn needs for thenext 12 months.  In addition, weanticipate entering into derivative instrument positions with respect to 

 

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approximately 2 to 5% of our annual natural gasneeds.  As of June 30, 2010, we hadrisk management positions in place for approximately 2% of our natural gasneeds for the next 12 months.

 

***Selling, General and Administrative Expenses***

 

Our selling, general and administrative expenseswere greater during the second quarter of 2010 compared to the second quarterof 2009.  Management attributes thisincrease with a reclassification of wages and benefits following our start-upin April 2009 that decreased the amount of selling, general andadministrative expenses during the second quarter of 2009.

 

***Other Income (Expense)***

 

Our other expense was greater for the second quarterof 2010 compared to the second quarter of 2009. We had grant income of $300,000 during the second quarter of 2009 whichoffset our interest expense during that period. We had no grant income during the second quarter of 2010.

 

**Results of Operations for the Six Months Ended June 30,2010 and 2009**

 

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statement of operations forthe six months ended June 30, 2010 and 2009.  The ethanol plant commenced operations inearly April 2009.  Therefore, theresults of our operations for the six months ended June 30, 2009 onlyrepresent approximately three months of operations compared to six monthsduring the 2010 period.

 
| ** **                                   | ** ** | **Six Months Ended********June 30,****2010  (Unaudited)** | ** **  | **Six Months Ended********June 30,****2009  (Unaudited)** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------|-------------|----------------------------------------------------------------|------------|
| **Income  Statement Data**                   | ** ** | **Amount**                                                     | ** **  | **%**                                                          | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                     |       | $                                                              | 112,643,402 |                                                           | 100.0      |   | $ | 39,562,718 |   | 100.0 |   |
|                                         |       |                                                           |        |                                                           |       |   |   |   |   |
| Cost of Goods Sold                           |       | 102,356,914                                                    |        | 90.9                                                           |       | 38,133,578 |   | 96.4 |   |
|                                         |       |                                                           |        |                                                           |       |   |   |   |   |
| Gross Profit                                 |       | 10,286,488                                                     |        | 9.1                                                            |       | 1,429,140 |   | 3.6 |   |
|                                         |       |                                                           |        |                                                           |       |   |   |   |   |
| Selling, General and Administrative Expenses |       | 1,134,895                                                      |        | 1.0                                                            |       | 1,366,736 |   | 3.5 |   |
|                                         |       |                                                           |        |                                                           |       |   |   |   |   |
| Operating Income                             |       | 9,151,593                                                      |        | 8.1                                                            |       | 62,404 |   | 0.2 |   |
|                                         |       |                                                           |        |                                                           |       |   |   |   |   |
| Other Income (Expense)                       |       | (1,004,645                                                     | )           | 0.9                                                            |       | (155,050 | ) | 0.4 |   |
|                                         |       |                                                           |        |                                                           |       |   |   |   |   |
| Net Income (Loss)                            |       | 8,146,948                                                      |        | 7.2                                                            |       | (92,646 | ) | 0.2 |   |
|                                              |            |                                                                |             |                                                                |            |  |  |  |  |  |  |

 

***Revenues***

 

Our revenue increased significantly for the sixmonth period ended June 30, 2010 compared to the same period of 2009.  This increase in revenue was primarily theresult of a significant increase in the amount of ethanol and distillers grainswe sold during the 2010 period.  Ourethanol plant was only operational for approximately three of the six monthsduring the 2009 period.  The averageprice we received per gallon of ethanol sold decreased by less than one percentduring the six months ended June 30, 2010 compared to the same period of2009.  However, the price we received perton of distillers grains decreased during the six month period ended June 30,2010 compared to the same period of 2009. The average price we received per ton of dried distillers grainsdecreased by approximately 17% for the six month period ended June 30,2010 compared to the same period of 2009. The average price we received per ton of modified/wet distillers grainsdecreased by approximately 13% for the six month period ended June 30,2010 compared to the same period of 2009.

 

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***Cost of Goods Sold***

 

Our cost of goods sold increased significantly forthe six month period ended June 30, 2010 compared to the same six monthperiod of 2009.  Due to the fact that wesignificantly increased our production of ethanol and distillers grains duringthe 2010 period, the cost of our raw materials increased significantly aswell.  In addition to the increasedquantity of corn and natural gas we purchased in order to increase our ethanoland distillers grains production, the average price we paid per bushel of corndecreased by approximately 11% for the six month period ended June 30,2010 compared to the same period of 2009. Further, our average price per MMbtu of natural gas during the 2010period was approximately 43% higher compared to the 2009 period.  Due to the fact that our production ofethanol and distillers grains increased so significantly, a comparison of therelative costs of goods sold during the two periods is not indicative of ourexpectations for future periods.

 

***Selling, General and Administrative Expenses***

 

We experienced a slight decrease in our selling,general and administrative expenses during the six month period ended June 30,2010 compared to the same period of 2009. Generally, due to the fact that we were in operation the entire 2010period, our selling, general and administrative expenses were higher during the2010 period.  However, our legal expenseswere significantly lower during the 2010 period and we had an asset impairmentof approximately $481,000 which was included in our selling, general andadministrative expenses during the 2009 period.

 

***Other Income (Expense)***

 

We experienced an increase in other expense for thesix month period ended June 30, 2010 compared to the same period of2009.  This increase was primarily theresult of a significant increase in interest expense during the 2010 periodalong with the fact that we had other grant income of $300,000 during the 2009period.  We experienced an increase inour interest expense during the 2010 period due to the fact that we were payinginterest on our Home Federal loans during the entire six month period.  During the first six months of 2009, we wereonly required to pay interest on our Home Federal loans once the ethanol plantbecame operational in early April 2009. Prior to that time, any interest that accrued on our Home Federal loanswas capitalized.  Therefore, we includedonly approximately three months of interest during the 2009 period in our otherexpense.

 

**Changes in Financial Condition for the Six Months Ended June 30,2010**

 

Weexperienced an increase in our current assets as of June 30, 2010 comparedto December 31, 2009, primarily due to a significant increase in theamount of cash we had on hand.  Weexperienced an increase in the amount of cash we had on hand at June 30,2010 compared to December 31, 2009 as a result of the continued profitableoperation of the ethanol plant.  Inaddition, we experienced a significant decrease in the value of our accountsreceivable at June 30, 2010 compared to December 31, 2009 due totiming issues related to when our finished products are shipped.  We ship a significant amount of our productsby unit trains which can hold a significant amount of our finishedproducts.  If these unit trains areshipped at the end of our fiscal quarter and we have not yet been paid by ourmarketers, we experience an increase in our accounts receivable.  We had approximately $870,000 due from ourcommodities broker at December 31, 2009 related to favorable derivativeinstrument positions we had in place at that time, and no amount due from ourcommodities broker at June 30, 2010. We experienced a decrease in our prepaid expenses at June 30, 2010compared to December 31, 2009 as a result of a natural gas deposit refundwhich we received in April 2010.

 

Weexperienced a decrease in the total value of our property and equipment at June 30,2010 compared to December 31, 2009, primarily due to an increase in theaccumulated depreciation of our buildings and equipment.  We had approximately $1.6 million inconstruction in progress at June 30, 2010 related to an efficiencyimprovement project that has been ongoing.

 

Weexperienced a decrease in our other assets at June 30, 2010 compared to December 31,2009 as a result of our continuing amortization of our loan fees and utilityrights, somewhat offset by interest income that accrued on our restricted cashaccount with Home Federal.

 

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Weexperienced a decrease in our current liabilities at June 30, 2010compared to December 31, 2009, primarily due to a decrease in our accountspayable at June 30, 2010 compared to December 31, 2009.  This decrease in accounts payable was relatedto the fact that many of our corn suppliers seek to defer payments until afterthe end of their tax years on December 31. This typically results in increased accounts payable at the end of ourfiscal year.  This decrease in ouraccounts payable was somewhat offset by an increase in the current portion ofour long-term debt at June 30, 2010 compared to December 31,2009.  We commenced making principalpayments on our long-term debt in February 2010.  As a result, the current portion of ourlong-term debt at December 31, 2010 only included approximately 11 monthsof principal payments compared to a full 12 months at June 30, 2010.  The total amount of our long-term debt waslower at June 30, 2010 compared to December 31, 2009 as a result ofour continuing debt service payments and the $5 million free cash flow paymentwe made early in the second quarter of 2010.

 

**Liquidity and Capital Resources**

 

Our primary sources ofliquidity are cash from our operations, our $20 million term revolving loan andour $6 million line of credit.  However,on June 30, 2010, our $6 million line of credit expired.  Our lender has indicated that we can renewthis line of credit but management has decided not to renew this loan at thistime.  These credit facilities aredescribed in greater detail below under “Short-Term and Long-Term Debt Sources.”  As of June 30, 2010, we had $26 millionavailable pursuant to the revolving loan and revolving line of credit, whichwas reduced to $20 million after June 30, 2010 when our $6 million line ofcredit expired.  In addition, we hadapproximately $9.7 million in cash and equivalents at June 30, 2010.  Based on financial forecasts performed by ourmanagement, we anticipate that we will have sufficient cash from our currentcredit facilities and cash from our operations to continue to operate theethanol plant at capacity for the next 12 months.  We do not anticipate seeking additionalequity or debt financing in the next 12 months. However, should we experience unfavorable operating conditions in thefuture, we may have to secure additional debt or equity financing for workingcapital or other purposes.

 

Thefollowing table shows cash flows for the six months ended June 30, 2010and 2009:

 
| ** **                                           | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2010**                          | ** ** | **2009** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                                 | 18,592,738 |   | $ | (9,292,835 | ) |
| Net cash (used in) investing activities              |       | $                                 | (1,537,294 | ) | $ | (25,819,970 | ) |
| Net cash provided by (used in) financing  activities |       | $                                 | (8,159,636 | ) | $ | 41,130,495 |   |

 

OperatingCash Flows.  Wegenerated more cash from our operating activities during the six month periodended June 30, 2010 compared to the same period of 2009 because our plantwas operational during the entire 2010 period. Further, since we were just starting operations during the 2009 period,we used cash to build our inventories.

 

InvestingCash Flows.  We usedless cash for investing activities during the six month period ended June 30,2010 compared to the same period of 2009. We used cash during the 2009 period for equipment purchases andconstruction in progress payments as we were completing the construction of ourethanol plant at that time.  During the2010 period we used cash for construction in progress related to an ongoingefficiency improvement project.

 

FinancingCash Flows.  Ourfinancing activities provided cash during the six month period ended June 30,2009 due to approximately $41 million that we received from our Home Federalloans which we used to pay costs associated with the construction of our ethanolplant.  By comparison, during the sixmonth period ended June 30, 2010, we used cash for our financingactivities in making payments on our Home Federal term loan.  We did not receive any proceeds from ourloans during the first six months of 2010.

 

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**Short-Termand Long-Term Debt Sources**

 

Master Loan Agreement with Home Federal SavingsBank

 

On November 30, 2007, we entered into a MasterLoan Agreement with Home Federal Savings Bank (“Home Federal”) establishing asenior credit facility with Home Federal. In return, we executed a mortgage in favor of Home Federal creating asenior lien on substantially all of our assets. The Master Loan Agreement provides for a (i) $74 million term loan;(ii) $20 million term revolving loan; and (iii) $6 million revolvingline of credit.

 

*Term Loan*

 

The original principal amount of the term loan was$74,000,000.  We made monthly payments ofaccrued interest on the term loan until February 1, 2010.  On February 1, 2010, we began makingequal monthly principal payments in the amount of $616,667 plus accruedinterest. All unpaid principal and accrued interest on the term loan will bedue on July 1, 2014. We have the right to convert up to 50% of the termloan into a fixed rate loan with the consent of Home Federal. The fixed rateloan will bear interest at the five year London Interbank Offered Rate (LIBOR)swap rate that is in effect on the date of conversion plus 300 basis points, oranother rate mutually agreed upon between us and Home Federal. If we elect thisfixed rate option, the interest rate will not be subject to any adjustmentsotherwise provided for in the Master Loan Agreement. The remaining portion ofthe term loan will bear interest at a rate equal to the LIBOR plus 300 basispoints.  As of June 30, 2010, theprincipal balance of the Home Federal term loan was approximately$60,916,667.  As of June 30, 2010,interest on the term loan accrued at an annual rate of 3.351%.

 

*Term Revolving Loan*

 

In addition to the term loan, we have a $20,000,000term revolving loan which has a maturity date of July 1, 2014. Interest onthe term revolving loan accrues at a rate equal to the LIBOR plus 300 basispoints. We are required to make monthly payments of interest until the maturitydate of the term revolving loan, on which date the unpaid principal amount ofthe term revolving loan becomes due.  Asof June 30, 2010, we had no outstanding borrowing and $20,000,000available to be drawn on the term revolving loan.

 

*Revolving Line of Credit*

 

Under the terms of the Master Loan Agreement, weagreed to the terms of a revolving line of credit. The revolving line of creditbecame available on July 1, 2009 and expired on June 30, 2010.  Management does not anticipate renewing thisline of credit.  We had no amountoutstanding on this line of credit on June 30, 2010.

 

If we fail to make a payment of principal orinterest on any loan within 10 days of the due date, there will be a latecharge equal to 5% of the amount of the payment.

 

Covenants

 

In connection with the Master Loan Agreement, weare required to comply with certain debt covenants and financial ratios.  As of June 30, 2010, we were incompliance with all of our debt covenants and financial ratios.  We are required to maintain a debt servicereserve account of $10,000,000 for use by Home Federal for repayment of theloans.   Should Home Federal apply any ofthe funds in this account, we are required to replenish the account to$10,000,000.  We had in excess of$10,000,000 in our debt service reserve account as of June 30, 2010.  Once we achieve and maintain tangible networth of 65%, based on audited financial statements, and we are in compliancewith all other covenants, the debt service fund will be released to us and wewill no longer be required to replenish the account.  However, should our tangible net worth fallbelow 65% at any time in the future, we would again be required to replenishthe debt service fund.  Tangible networth is calculated as the excess total assets, including the debt reserveaccount, (with certain exclusions, such as intangible assets) over totalliabilities (except subordinated debt if applicable).  It is difficult to predict when and if wewill achieve tangible net worth of 65%, however, we had tangible net worth ofapproximately 64% or approximately $115,072,000 as of June 30, 2010.

 

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In addition, we are subject to certain financialcovenants at various times calculated monthly, quarterly or annually.  We were required to have working capital ofat least $12,000,000 as of July 1, 2010 and annually thereafter.  Our tangible net worth requirement was$90,000,000 as of December 31, 2009, and increases by $5,000,000 annuallyuntil we are required to meet $105,000,000 by December 31, 2012, andannually thereafter.  Managementanticipates that we will be in compliance with all of our debt covenants andfinancial ratios for the next 12 months.

 

Failure to comply with the loan covenants ormaintain the required financial ratios may cause acceleration of theoutstanding principal balances on the loans and/or the imposition of fees,charges or penalties.  Any accelerationof the debt financing or imposition of the significant fees, charges orpenalties may restrict or limit our access to the capital resources necessaryto continue plant operations.  Should wedefault on any of our obligations pursuant to the Home Federal loans, HomeFederal may terminate its commitment to provide us funds and declare the entireunpaid principal balance of the loans, plus accrued interest, immediately dueand payable.  Events of default include,the failure to make payments when due, our insolvency, any material adversechange in our financial condition or the breach of any of the covenants,representations or warranties we have in connection with the transaction.

 

We are required by the Master Loan Agreement tomake an additional payment each year equal to 100% of our excess cash flow asthat term is defined in the Master Loan Agreement.  This excess cash flow payment is capped at$5,000,000 each year.  Following the endof the first quarter of 2010, we made an excess cash flow payment of $5,000,000to Home Federal.  As a result, we willmake no further excess cash flow payments during our 2010 fiscal year.  We are only required to make the excess cashflow payment until our tangible net worth is equal to or greater than 65% ofour total assets.

 

*Grantsand Government Programs*

 

Inaddition to our equity and debt financing, we have applied for and receivedvarious grants.  In May 2006 wereceived a grant from the Iowa Corn Promotion Board in the amount of $25,000for the preparation of our feasibility study and legal fees during our equitydrive.

 

OnDecember 19, 2007, the Iowa Department of Economic Development approved usfor a package of benefits under the High Quality Jobs Program from the State ofIowa. Such tax benefits include a refund of sales, service and use taxes paidto contractors during the construction phase, an investment tax credit of up to$10,000,000 for qualified expenditures directly related to the new jobscreated, and a property tax exemption for a portion of the value added byimprovements we made to our property directly related to new jobs created bythe plant (estimated at $10,350,000).  Inorder to receive these benefits, we are required to meet certain requirementsby 2012, such as the creation of 40 full-time employee positions meetingcertain minimum wage and benefit criteria. These 40 positions must be maintained for at least two years followingtheir creation. Currently, we have 42 employees and hope to maintain the minimumjob requirement until 2012.   We alsoreceived a grant of $240,000 from the Iowa Department of Transportation underthe RISE Program for the construction of a turning lane off of Iowa Highway 24to the plant.

 

OnSeptember 16, 2009, we received notice that we had satisfied theconditions for disbursing the sales, service and use tax refund and theinvestment tax credit.  The Department ofEconomic Development agreement contains certain requirements that we must meetthrough 2012.  In the event that we failto meet or maintain any one of the requirements of the High Quality JobsCreation Program or Funding Agreement, we are subject to repayment of all or aportion of the incentives and assistance received based on specific provisionsof the agreement.  The agreement providesthat IDED may elect to have us repay a portion of the benefits received, on apro rata basis, based on the number of jobs attained compared to the number ofjobs pledged.  We have maintained all ofthe requirements to be met to date and have not incurred any liability forrepayment of the incentives and assistance received.

 

Wereceived preliminary approval for a loan guarantee of 60% of a potential$40,000,000 loan through Home Federal from the United States Department ofAgriculture (“USDA”) under the Rural Energy Program based on some uniqueefficiencies at our plant.  However, wewere required to meet certain conditions prior to the receipt of the loanguarantee which we have not yet been able to meet. We received an extensionfrom the USDA of its 

 

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commitmentuntil November 2010.  However, if wedo not meet those conditions by November 2010, we may not receive theguarantee.  Currently, the board hasdecided not to pursue this loan guarantee due to costs associated with the loanguarantee.

 

InJune 2009, we were awarded a $300,000 working capital grant from the USDApursuant to the Value-Added Producer Grant (“VAPG”) program.  Pursuant to the program, the USDA can provideup to 50% of the eligible project amount, which in our case was $625,000.  We are required to utilize the funds, as wellas the $325,000 in matching funds, for corn, yeast, enzymes and processingchemical purchases.

 

*Grantsand Government Programs for Coal Gasification*

 

Weapplied to the Iowa Power Fund for approximately $8,000,000 in funds to helpfinance the construction of a coal gasification energy center.  However, our application was rejected and wewill not receive any funds from the Iowa Power Fund at this time.

 

Wewere awarded two unsecured loans from the Iowa Department of EconomicDevelopment.  The forgivable loan wassubject to installation of coal gasification technology.  We repaid the interest free and forgivableloans in full on April 23, 2009 because we did not fulfill the coalgasification requirement of the IDED agreement.

 

**Applicationof Critical Accounting Estimates and Significant Accounting Policies**

 

Managementuses estimates and assumptions in preparing our financial statements inaccordance with generally accepted accounting principles.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.

 

We evaluate our contracts to determine whether thecontracts are derivative instruments. Certain contracts that literally meet the definition of a derivative maybe exempted from derivative accounting as normal purchases or normalsales.  Normal purchases and normal salesare contracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business.  Contracts that meetthe requirements of normal purchases or sales are documented as normal andexempted from the accounting and reporting requirements of derivativeaccounting.

 

We enter into short-term cash, option and futurescontracts as a means of securing purchases of corn, natural gas and sales ofethanol for the plant and managing exposure to changes in commodity and energyprices.  All of our derivatives aredesignated as non-hedge derivatives, with changes in fair value recognized innet income.  Although the contracts areeconomic hedges of specified risks, they are not designated as and accountedfor as hedging instruments.

 

As part of our trading activity, we use futures andoption contracts through regulated commodity exchanges to manage our riskrelated to pricing of inventories.  Toreduce that risk, we generally take positions using cash and futures contractsand options.

 

Realized and unrealized gains and losses related toderivative contracts related to corn and natural gas are included as acomponent of cost of goods sold and derivative contracts related to ethanol areincluded as a component of revenues in the accompanying financialstatements.  The fair values of contractsentered through commodity exchanges are presented on the accompanying balancesheet as derivative instruments.

 

Revenue from the sale of our products is recognizedat the time title to the goods and all risks of ownership transfer to thecustomers.  This generally occurs upon shipment, loading of the goods orwhen the customer picks up the goods. Interest income is recognized asearned.  Shipping costs incurred in thesale of ethanol and distillers grains are not specifically identifiable and asa result, revenue from the sale of ethanol and distillers grains is recordedbased on the net selling price reported to us from the marketer.

 

We consider the carrying amount of significantclasses of financial instruments on the balance sheets including cash, accountsreceivable, due from broker, restricted cash, other assets, accounts payable,accrued 

 

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liabilities and variable rate long-term debt to bereasonable estimates of fair value either due to their length of maturity orthe existence of variable interest rates underlying such financial instrumentsthat approximate prevailing market rates at June 30, 2010.

 

We review our property and equipment for impairment whenever eventsindicate that the carrying amount of the assets may not be recoverable.  Ifcircumstances require a long-lived asset be tested for possible impairment, wefirst compare undiscounted cash flows expected to be generated by an asset tothe carrying value of the asset. If the carrying value of the long-lived assetis not recoverable on an undiscounted cash flow basis, an impairment isrecognized to the extent that the carrying value exceeds its fair value. Fairvalue is determined through various valuation techniques including discountedcash flow models, quoted market values and third-party independent appraisals,as considered necessary.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements.

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk.**

 

Weare a smaller reporting company as defined by Rule 12b-2 of the SecuritiesExchange Act of 1934 and are not required to provide information under thisitem.

 

**Item 4T.  Controls andProcedures.**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the reports that we file or submitpursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowfor timely decisions regarding required disclosures.

 

Ourmanagement, including our President and Chief Executive Officer (the principalexecutive officer), Walter Wendland, along with our Chief Financial Officer,(the principal financial officer), Jeffrey Grober, have reviewed and evaluatedthe effectiveness of our disclosure controls and procedures as of June 30,2010.  Based on this review andevaluation, these officers believe that our disclosure controls and proceduresare effective in ensuring that material information related to us is recorded,processed, summarized and reported within the time periods required by theforms and rules of the Securities and Exchange Commission.

 

Forthe fiscal quarter ended June 30, 2010, there has been no change in ourinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.               OTHERINFORMATION**

 

**Item 1.  LegalProceedings**

 

Fromtime to time in the ordinary course of business, Homeland Energy Solutions, LLCmay be named as a defendant in legal proceedings related to various issues,including without limitation, workers’ compensation claims, tort claims, orcontractual disputes.  We are notcurrently involved in any material legal proceedings.

 

**Item 1A.  Risk Factors.**

 

Weare a smaller reporting company as defined by Rule 12b-2 of the SecuritiesExchange Act of 1934 and are not required to provide information under thisitem.

 

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**Item 2.  UnregisteredSales of Equity Securities and Use of Proceeds.**

 

None.

 

**Item 3.  DefaultsUpon Senior Securities**

 

None.

 

**Item 4.  (Removedand Reserved)**

 

**Item 5.  OtherInformation**

 

None.

 

**Item 6.  Exhibits**

 

(a)           The following exhibits are filed aspart of, or are incorporated by reference into, this report:

 
| **Exhibit  No.** | ** ** | **Exhibit**                                          | ** ** | **Filed  Herewith** | ** ** | **Incorporated by Reference** |
|------------------|------------|------------------------------------------------------|------------|---------------------|------------|-------------------------------|
| 31.1             |       | Certificate  Pursuant to 17 CFR 240.13a-14(a)        |       | X                   |       |                          |
|             |       |                                                 |       |                |       |                          |
| 31.2             |       | Certificate  Pursuant to 17 CFR 240.13a-14(a)        |       | X                   |       |                          |
|             |       |                                                 |       |                |       |                          |
| 32.1             |       | Certificate  Pursuant to 18 U.S.C. Section 1350 |       | X                   |       |                          |
|             |       |                                                 |       |                |       |                          |
| 32.2             |       | Certificate  Pursuant to 18 U.S.C. Section 1350 |       | X                   |       |                          |

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |                  |   | HOMELAND  ENERGY SOLUTIONS, LLC                                       |
|--------|-----------------------|--------|-----------------------------------------------------------------------|
|   |                  |   |                                                                  |
|   |                  |   |                                                                  |
| Date:  | August 13,  2010 |   | /s/  Walter W. Wendland                                               |
|   |                  |   | Walter  W. Wendland                                                   |
|   |                  |   | Chief  Executive Officer and President (Principal Executive Officer)  |
|   |                  |   |                                                                  |
|   |                  |   |                                                                  |
| Date:  | August 13,  2010 |   | /s/  Jeffrey S. Grober                                                |
|   |                  |   | Jeffrey  S. Grober                                                    |
|   |                  |   | Chief  Financial Officer (Principal Financial and Accounting Officer) |

 

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