2. LIQUIDITY AND MARKET UNCERTAINTIES
The Company has certain risks and uncertainties that it experiences during volatile market conditions such as what the ethanol industry has experienced since mid 2008 and which continues through mid 2011. These volatilities can have a severe impact on operations.
As a commodity processor, the Company's profitability is primarily driven by the relationship between the cost of corn and the price at which the Company can sell its end-products, ethanol and distiller's grains. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The Company's cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and risk management techniques used to protect against the price volatility. The Company is subject to significant risk that its operating margins may be reduced or eliminated due to the relative movements in the market prices of its products and major manufacturing inputs. As a result, market fluctuations in the price of or demand for these commodities can have a significant adverse effect on the Company's operations and profitability. Due to the current conditions of these commodity markets, the Company may again produce negative margins.
As of June 30, 2011, the Company was in default under its Credit Agreement and its Tax Increment Financing loan, as further discussed in Notes 8 and 9. For this reason, the Company has presented these loans as current liabilities. Such treatment of the Company's long term debt will continue, as required by GAAP, until such defaults are cured.
Because of these events and market conditions, there is an increased level of uncertainty with respect to the Company's ability to obtain sufficient cash flows from operations or debt or equity financing sufficient to cover the liquidity needed for ongoing operations. The Company is having continued discussions with its lenders to resolve defaults under the Credit Agreement and Tax Increment Financing loan, which may include entering into a tolling agreement and obtaining additional capital. A final resolution to the defaults and amortization of the loans will require approval of the lenders and may include requirements for additional capital. The Company has also engaged a firm to undertake a more systematic approach to potential capital sources.
The Company continues to work with its lenders and others to identify the means by which it can improve its capital position. Management believes improved capitalization would better enable the Company to hedge and better manage its market risk in the commodity markets, among other things. Improving its capitalization will likely involve restructuring its debt so that both the debt level and the associated covenants are more compatible with current market conditions, and may also involve the Company issuing equity.
Exclusive of the reclassification of the majority of the Company's long term debt to current liabilities, the Company would have had negative working capital of $6,402,907, which includes restricted cash and investments of $2,202,227, and which includes only current maturities of long term debt that represent normal amortization of principal, as of June 30, 2011. As reported in the balance sheet, including the presentation of long term debt as current liabilities, working capital was a negative $42,1121,903 as of June 30, 2011.
Accrued liabilities include accrued board compensation of $1,084,750 and $772,250 as of June 30, 2011 and 2010, respectively, which payment terms the Company believes are favorable. If these payment terms change, more cash may be required.
These financial statements have been prepared assuming the Company will continue as a going concern. Until the Company is able to obtain additional working capital from the above options or from operations, for which no assurance can be given, and in addition, modify the Credit Agreement covenants or refinance the construction loan, there is substantial doubt as to whether the Company can continue to operate as a going concern.