We prepared the following discussion and analysis to help you better understand
our financial condition, changes in our financial condition, and results of
operations for the three and nine month periods ended September 30, 2022,
compared to the same period of the prior year. This discussion should be read in
conjunction with the consolidated financial statements and the Management's
Discussion and Analysis section for the fiscal year ended December 31, 2021,
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2021 which was filed with the SEC on March 3, 2022.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking
statements that involve known and unknown risks, including the growing crisis in
Ukraine, and relate to future events, our future financial performance, or our
expected future operations and actions. In some cases, you can identify
forward-looking statements by terms such as "may," "will," "should," "expect,"
"plan," "anticipate," "believe," "estimate," "future," "intend," "could,"
"hope," "predict," "target," "potential," "continue" or the negative of these
terms or other similar expressions. These forward-looking statements are only
our predictions based on current information and involve numerous assumptions,
risks and uncertainties. Our actual results or actions may differ materially
from these forward-looking statements for many reasons, including the reasons
described in this report and our annual report on Form 10-K for the fiscal year
ended December 31, 2021.
The cautionary statements referred to in this section also should be considered
in connection with any subsequent written or oral forward-looking statements
that may be issued by us or persons acting on our behalf. We undertake no duty
to update these forward-looking statements, even though our situation may change
in the future. Furthermore, we cannot guarantee future results, events, levels
of activity, performance, or achievements. We caution you not to put undue
reliance on any forward-looking statements, which speak only as of the date of
this report. You should read this report and the documents that we reference in
this report and have filed as exhibits completely and with the understanding
that our actual future results may be materially different from what we
currently expect. We qualify all of our forward-looking statements by these
cautionary statements.
Overview
Lake Area Corn Processors, LLC is a South Dakota limited liability company that
owns and manages its wholly-owned subsidiary, Dakota Ethanol, LLC. Dakota
Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South
Dakota that has a nameplate production capacity of 90 million gallons of ethanol
per year. Lake Area Corn Processors, LLC is referred to in this report as
"LACP," the "Company," "we," or "us." Dakota Ethanol, LLC is referred to in this
report as "Dakota Ethanol" or the "ethanol plant."
Our revenue is derived from the sale and distribution of our ethanol, distillers
grains and corn oil. Corn is supplied to us primarily from our members who are
local agricultural producers and from purchases of corn on the open market. We
have engaged Renewable Products Marketing Group, Inc. ("RPMG, Inc.") to market
all of the ethanol and corn oil that we produce at the ethanol plant. Further,
RPMG, Inc. markets all of the distillers grains that we produce that we do not
market internally to local customers.
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Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The following table shows the results of our operations and the percentage of
revenues, cost of revenues, operating expenses and other items to total revenues
in our consolidated statements of income for the three months ended
September 30, 2022 and 2021:
2022 2021
Income Statement Data Amount % Amount %
Revenues $ 74,210,499 100.0 $ 63,794,494 100.0
Cost of Revenues 66,808,651 90.0 54,753,379 85.8
Gross Profit 7,401,848 10.0 9,041,115 14.2
Operating Expense 1,268,468 1.7 1,249,243 2.0
Income from Operations 6,133,380 8.3 7,791,872 12.2
Other Income (Expense) 376,312 0.5 1,020,685 1.6
Net Income $ 6,509,692 8.8 $ 8,812,557 13.8
The following table depicts the disaggregation of revenue according to product
line:
Three Months Ended September 30
2022 2021
Revenues ethanol $ 56,385,702 $ 49,995,030
Revenues distillers grains 12,922,675 9,731,338
Revenues distillers corn oil 4,902,122 4,068,126
$ 74,210,499 $ 63,794,494
Revenues
Revenue from sales increased by approximately 16.3% during the three months
ended September 30, 2022 compared to the same period of 2021 due to increased
prices that we received for our ethanol during the 2022 period along with
increased gallons of ethanol sold. Revenue from distillers grains sales
increased by approximately 32.8% during the three months ended September 30,
2022 compared to the same period of 2021 due primarily to increased prices that
we received for our distillers grains along with more tons of distillers grains
sold. Revenue from corn oil sales increased by approximately 20.5% during the
three months ended September 30, 2022 compared to the same period of 2021 due
primarily to increased prices that we received for corn oil sold during the 2022
period along with more pounds of corn oil sold.
Ethanol
Our ethanol revenue was approximately $6.4 million higher during our three
months ended September 30, 2022 compared to the three months ended September 30,
2021, an increase of approximately 12.8%. This increase in ethanol revenue was
due primarily to an increase in the gallons sold and price that we received per
gallon of ethanol sold during the three months ended September 30, 2022 compared
to the three months ended September 30, 2021. The average price we received for
our ethanol was approximately $0.11 higher per gallon during the three months
ended September 30, 2022
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compared to the three months ended September 30, 2021, an increase of
approximately 4.8%. Management attributes this increase in ethanol prices during
the three months ended September 30, 2022 to higher gasoline prices generally
which increases the price of ethanol. Since ethanol is blended with gasoline,
when gasoline price and demand are higher it has a corresponding impact on
ethanol price and demand. Management also believes that higher corn prices
during the 2022 period had an impact on ethanol prices.
We sold approximately 7.6% more gallons of ethanol during the three months ended
September 30, 2022 compared to the same period of 2021, an increase of
approximately 1,673,000 gallons. The increase is due primarily to increased
production and sales of ethanol inventory during the three months ended
September 30, 2022. Management expects relatively stable ethanol production for
the rest of our 2022 fiscal year.
Distillers Grains
Our total distillers grains revenue was approximately 32.8% higher during the
three months ended September 30, 2022 compared to the same period of 2021 due
primarily to increased prices received for our distillers grains along with more
tons of distillers grain sold. The average price we received for our dried
distillers grains was approximately 9.7% higher during the three months ended
September 30, 2022 compared to the same period of 2021, an increase of
approximately $19.71 per ton. Management attributes the increase in dried
distillers grains prices during the three months ended September 30, 2022 to
increases in the domestic price of corn. The average price we received for our
modified/wet distillers grains was approximately 10.4% higher for the three
months ended September 30, 2022 compared to the same period of 2021, an increase
of approximately $22.47 per ton. Management attributes this increase in
modified/wet distillers grains prices with higher corn prices in the market.
We sold approximately 20.8% more total tons of distillers grains during the
three months ended September 30, 2022 compared to the same period of 2021 due
primarily to increased production and sales of distillers grain inventory.
Corn Oil
Our total corn oil revenue was approximately 20.5% higher during the three
months ended September 30, 2022 compared to the same period of 2021 due
primarily to increased prices received for our corn oil. The average price per
pound we received for our corn oil was higher by approximately 15.9% for the
three months ended September 30, 2022 compared to the same period of 2021 due
primarily to demand from the renewable diesel industry for corn oil along with
higher soybean oil prices.
Our total pounds of corn oil sold increased by approximately 3.9% during the
three months ended September 30, 2022 compared to the same period of 2021 due
primarily to increased production and sales of corn oil inventory.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 24.3% higher for the
three months ended September 30, 2022 compared to the same period of 2021 due to
significantly increased corn prices and corn usage during the 2022 period.
Our average cost per bushel of corn increased by approximately 13.0% for the
three months ended September 30, 2022 compared to the three months ended
September 30, 2021. We consumed approximately 10.0% more bushels of corn during
the three months ended September 30, 2022 compared to the same period of 2021
that contributed to higher corn cost. Management attributes the increased corn
cost per bushel to significantly higher market corn prices and decreased corn
availability during our 2022 fiscal period. Management anticipates corn prices
to remain higher into our 2023 fiscal year due to drought conditions in the area
that surrounds our plant and global uncertainty in the commodities markets.
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Natural Gas
Our cost of revenues related to natural gas increased by approximately $529,000,
an increase of approximately 24.9%, for the three months ended September 30,
2022 compared to the three months ended September 30, 2021. This increase was
due to higher natural gas costs per MMBtu during the three months ended
September 30, 2022 compared to the same period of 2021.
Our average cost per MMBtu of natural gas during the three months ended
September 30, 2022 was approximately 20.0% more compared to the cost per MMbtu
for the three months ended September 30, 2021. Management attributes this
increase in our average natural gas costs to higher market natural gas prices
due to high export demand and supply shortages caused by the Russian invasion of
Ukraine.
The volume of natural gas we used increased by approximately 4.1% during the
three months ended September 30, 2022 compared to the same period of 2021 due to
increased production at the plant.
Operating Expenses
Our operating expenses were comparable for the three months ended September 30,
2022 compared to the same period of 2021 due primarily to decreased wages and
benefits offset by increased professional fees.
Other Income and Expense
Our other income decreased during the three months ended September 30, 2022
compared to the same period of 2021 due primarily to decreased income from our
investments. We had more interest income during the three months ended September
30, 2022 compared to the same period of 2021 due to having more cash on hand
during the 2022 period. We had less income from our investments during the three
months ended September 30, 2022 compared to the same period of 2021 due to
decreased profitability in the ethanol sector. We had less interest expense
during the three months ended September 30, 2022 compared to the same period of
2021 due to the capitalization of interest expense on current construction
projects.
Comparison of the Nine Months Ended September 30, 2022 and 2021
The following table shows the results of our operations and the percentage of
revenues, cost of revenues, operating expenses and other items to total revenues
in our consolidated statements of income for the nine months ended September 30,
2022 and 2021:
2022 2021
Income Statement Data Amount % Amount %
Revenues $ 214,098,692 100.0 $ 176,648,273 100.0
Cost of Revenues 195,168,386 91.2 151,181,885 85.6
Gross Profit 18,930,306 8.8 25,466,388 14.4
Operating Expense 3,668,362 1.7 3,776,472 2.1
Income from Operations 15,261,944 7.1 21,689,916 12.3
Other Income (Expense) 4,035,921 1.9 3,716,823 2.1
Net Income $ 19,297,865 9.0 $ 25,406,739 14.4
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The following table depicts the disaggregation of revenue according to product
line:
Nine Months Ended September 30,
2022 2021
Revenues ethanol $ 162,164,019 $ 136,992,923
Revenues distillers grains 37,962,783 29,806,883
Revenues distillers corn oil 13,971,890 9,848,467
$ 214,098,692 $ 176,648,273
Revenues
Revenue from ethanol sales increased by approximately 18.4% during the nine
months ended September 30, 2022 compared to the same period of 2021 due to
increased prices that we received for our ethanol during the 2022 period along
with an increase in the gallons of ethanol we sold. Revenue from distillers
grains sales increased by approximately 27.4% during the nine months ended
September 30, 2022 compared to the same period of 2021 due primarily to
increased prices that we received for our distillers grains and increased tons
of distillers grains sold. Revenue from corn oil sales increased by
approximately 41.9% during the nine months ended September 30, 2022 compared to
the same period of 2021 due primarily to increased prices that we received for
corn oil sold during the 2022 period along with more pounds of corn oil sold.
Ethanol
Our ethanol revenue was approximately $25 million higher during our nine months
ended September 30, 2022 compared to the nine months ended September 30, 2021,
an increase of approximately 18.4%. This increase in ethanol revenue was due
primarily to an increase in the price that we received per gallon of ethanol
sold and increased gallons of ethanol sold during the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021.
The average price we received for our ethanol was approximately $0.27 higher per
gallon during the nine months ended September 30, 2022 compared to the nine
months ended September 30, 2021, an increase of approximately 12.9%. Management
attributes this increase in ethanol prices during the nine months ended
September 30, 2022 to higher oil prices. Management also believes that higher
corn prices during the 2022 period had an impact on ethanol prices.
We sold approximately 4.6% more gallons of ethanol during the nine months ended
September 30, 2022 compared to the same period of 2021, an increase of
approximately 3,012,000 gallons. The increase is due primarily to increased
sales of ethanol inventory during the nine months ended September 30, 2022.
Distillers Grains
Our total distillers grains revenue was approximately 27.4% higher during the
nine months ended September 30, 2022 compared to the same period of 2021 due
primarily to increased prices received for our distillers grains.
The average price we received for our dried distillers grains was
approximately 15.0% higher during the nine months ended September 30, 2022
compared to the same period of 2021, an increase of approximately $29.20 per
ton. Management attributes the increase in dried distillers grains prices during
the nine months ended September 30, 2022 to increases in the domestic price of
corn. The average price we received for our modified/wet distillers grains was
approximately 17.4% higher for the nine months ended September 30, 2022 compared
to the same period of 2021, an increase of approximately $35.36 per ton.
Management attributes this increase in modified/wet distillers grains prices
with higher corn prices in the market.
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We sold approximately 9.3% more total tons of distillers grains during the nine
months ended September 30, 2022 compared to the same period of 2021 primarily
due to increased sales of distillers grain inventory.
Corn Oil
Our total corn oil revenue was approximately 41.9% higher during the nine
months ended September 30, 2022 compared to the same period of 2021 due
primarily to increased prices received for our corn oil along with increased
pounds of corn oil sold. Our total pounds of corn oil sold increased by
approximately 3.5% during the nine months ended September 30, 2022 compared to
the same period of 2021, an increase of approximately 686,000 pounds. We
produced more corn oil due to increased oil extraction proficiency during the
2022 period compared to the nine months ended September 30, 2021.
The average price per pound we received for our corn oil was higher by
approximately 38.0% for the nine months ended September 30, 2022 compared to the
same period of 2021 due primarily to demand from the renewable diesel industry
for corn oil along with higher soybean oil prices.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 31.3% higher for the
nine months ended September 30, 2022 compared to the same period of 2021 due to
significantly increased corn prices during the 2022 period along with increased
corn usage.
Our average cost per bushel of corn increased by approximately 21.7% for the
nine months ended September 30, 2022 compared to the nine months ended September
30, 2021. We consumed approximately 7.9% more bushels of corn during the nine
months ended September 30, 2022 compared to the same period of 2021 that
contributed to higher corn cost. Management attributes the increased corn cost
per bushel to significantly higher market corn prices and decreased corn
availability during our 2022 fiscal period. Management anticipates corn prices
to remain higher into our 2023 fiscal year.
Natural Gas
Our cost of revenues related to natural gas increased by approximately
$1,963,000, an increase of approximately 35.7%, for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021. This
increase was due to higher natural gas costs per MMBtu during the nine months
ended September 30, 2022 compared to the same period of 2021.
Our average cost per MMBtu of natural gas during the nine months ended September
30, 2022 was approximately 32.6% higher compared to the cost per MMbtu for the
nine months ended September 30, 2021. Management attributes this increase in our
average natural gas costs to higher market natural gas prices due to high demand
and supply shortages.
The volume of natural gas we used was similar during the nine months ended
September 30, 2022 compared to the same period of 2021.
Operating Expenses
Our operating expenses were less for the nine months ended September 30, 2022
compared to the same period of 2021 due primarily to decreased wages and
benefits offset by increased professional fees.
Other Income and Expense
Our other income increased during the nine months ended September 30, 2022
compared to the same period of 2021 due primarily to less interest expense and
the USDA Biofuel Producer Relief Program payment awarded during the nine months
ended September 30, 2022. We had more interest income during the nine months
ended September 30, 2022 compared to the same period of 2021 due to having more
cash on hand during the 2022 period. We had less income from our investments
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during the nine months ended September 30, 2022 compared to the same period of
2021 due to decreased profitability in the ethanol sector. We had less interest
expense during the nine months ended September 30, 2022 compared to the same
period of 2021 due to lower carrying balances on outstanding debt.
Changes in Financial Condition for the Nine Months Ended September 30, 2022
Current Assets
Our cash on hand at September 30, 2022 was less compared to December 31, 2021
due to deferred corn payments and member distribution payments. We had more
accounts receivable at September 30, 2022 compared to December 31, 2021 due to
the timing of our quarter end and the payments received related to the shipments
of our products. The value of our inventory was less at September 30, 2022
compared to December 31, 2021 due to decreased quantities of corn and finished
goods inventory. The asset value of our derivative instruments was greater at
September 30, 2022 compared to December 31, 2021 due to recent corn price
changes which impacted our derivative instruments. We had less prepaid expenses
at September 30, 2022 compared to December 31, 2021 due to amortization of our
insurance premiums.
Property and Equipment
The value of our property and equipment was higher at September 30, 2022
compared to December 31, 2021 primarily as a result of the new construction of
an additional fermentor as well as construction currently in progress for an
additional grain bin and ethanol storage tank.
Other Assets
The value of our investments was lower at September 30, 2022 compared to
December 31, 2021 due to distributions in excess of earnings from our
investments during the nine months ended September 30, 2022. We had
significantly more other assets at September 30, 2022 compared to December 31,
2021 due primarily to the prepayment for the firm commitment on natural gas
transportation with Northern Natural Gas.
Current Liabilities
We had more outstanding checks in excess of bank balances at September 30,
2022 compared to December 31, 2021 due to the timing of our quarter end and
payments issued. We use our revolving loan to pay any checks that are presented
for payment which exceed the cash we have available in our accounts. Our
accounts payable were lower at September 30, 2022 compared to December 31, 2021
due primarily to decreased corn payables at September 30, 2022 compared to
December 31, 2021 as the deferred payments were paid during the first quarter of
2022. Our derivative instrument liability was lower at September 30, 2022
compared to December 31, 2021 due to corn price changes, which impacted our
derivative instruments. The current portion of our notes payable was unchanged
at September 30, 2022 compared to December 31, 2021.
Long-Term Liabilities
Our long-term liabilities were less at September 30, 2022 and December 31,
2021 due to our annual $1,000,000 principal payment which was made in August
2022.
Liquidity and Capital Resources
Our main sources of liquidity are cash from our continuing operations,
distributions we receive from our investments and amounts we have available to
draw on our revolving credit facilities. Management does not anticipate that we
will need to raise additional debt or equity financing in the next twelve months
and management believes that our current sources of liquidity will be sufficient
to continue our operations during that time period. We anticipate that any
capital expenditures we undertake will be paid out of cash from operations and
existing loans and will not require any additional debt or equity financing.
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Currently, we have two revolving loans, which allow us to borrow funds for
working capital. These loans are described in greater detail below in the
section entitled "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Indebtedness." As of September 30, 2022,
we had $1,000 outstanding and $44,749,000 available to be drawn on our revolving
loans, after taking into account the borrowing base calculation. Management
anticipates that this is sufficient to maintain our liquidity and continue our
operations for the next twelve months.
The following table shows cash flows for the nine months ended September 30,
2022 and 2021:
Nine Months Ended September 30,
2022 2021
Net cash provided by operating activities $ 10,272,275 $ 16,732,755
Net cash (used in) investing activities (11,075,787) (340,540)
Net cash (used in) financing activities (27,426,714) (31,694,584)
Cash Flow From Operations. Our operating activities provided less cash during
the nine months ended September 30, 2022 compared to the same period of 2021,
due primarily to decreased net income, a larger increase in accounts receivable,
and a larger decrease in accounts payable during the 2022 period partially
offset by distributions in excess of earnings on investments and a decrease in
inventory.
Cash Flow From Investing Activities. Our investing activities used more cash
during the nine months ended September 30, 2022 compared to the same period of
2021, due to the construction of an additional grain bin, ethanol storage tank,
and additional fermentor as well as prepayment for our natural gas
transportation services agreement.
Cash Flow From Financing Activities. Our financing activities used less cash
during the nine months ended September 30, 2022 compared to the same period of
2021, due primarily to less payments on long-term debt partially offset by
increased distributions paid to members during the 2022 period.
Plans for Cash in the Short Term and in the Long Term
In the next 12 months, the Company plans to reinvest its cash into current
business operations and to use cash for the design and construction of an
additional grain storage bin. The Company will also use its cash for prepayments
for the firm commitment of natural gas transportation from Northern Natural Gas
and may provide further distributions to its members. In the long term, the
Company plans to reinvest its cash into current business operations and may
provide further distributions to its members.
Indebtedness
We maintain a comprehensive credit facility with Farm Credit Services of
America, PCA and Farm Credit Services of America, FLCA (collectively "FCSA").
All of our assets, including the ethanol plant and equipment, its accounts
receivable and inventory, serve as collateral for our loans with FCSA.
On October 11, 2021, we entered into a Fourth Amendment to the credit agreement
(the "Fourth Amendment"). Under the Fourth Amendment, the operating lines'
maturity date was extended to November 1, 2023. Interest on the outstanding
principal balance of the operating line will accrue at the SOFR 30 plus 305
basis points. The available credit on the reducing revolving note is
$42,749,000. Interest on the outstanding principal balance of the revolving loan
and term loan will accrue at the SOFR 30 plus 330 basis points. The working
capital covenant was increased to $13,500,000, and the net worth covenant was
increased to $28,000,0000. Dakota Ethanol may make distributions in an amount up
to 75% of our prior year's net income, so long as the Company's working capital
stays above $18,000,000 post distribution. The combined distributions for 2021
and 2022 shall also be limited to 75% of the combined net income of 2020 and
2021.
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Operating Line
Dakota Ethanol has a revolving promissory note from FCSA in an amount up to
$2,000,000 or the amount available in accordance with the borrowing base
calculation, whichever is less. Interest on the outstanding principal balance
will accrue at 305 basis points above the SOFR 30 and is not subject to a floor.
The rate was 5.35% at September 30, 2022. There is a non-use fee of 0.25% per
anuum on the unused portion of the availability. The note is collateralized by
substantially all assets of the Company. The note expires on November 1, 2023.
On September 30, 2022, Dakota Ethanol had $0 outstanding and $2,000,000
available to be drawn on the revolving promissory note under the borrowing base.
Reducing Revolving Loan
Dakota Ethanol has a reducing revolving promissory note from FCSA in the
amount up to $46,250,000 or the amount available in accordance with the
borrowing availability under the credit agreement. The amount Dakota Ethanol can
borrow on the note decreases by $1,750,000 semi-annually starting on July 1,
2021 until the maximum balance reaches $32,250,000 on July 1, 2025. The note
matures on January 1, 2026. Interest on the outstanding principal balance will
accrue at the SOFR 30 plus 330 basis points. The interest rate is not subject to
a floor. The rate was 5.60% at September 30, 2022. The note contains a non-use
fee of 0.5% per annum on the unused portion of the note. On September 30, 2022,
Dakota Ethanol had $1,000 outstanding and $42,749,000 available to be drawn on
the note.
2017 Term Loan
On August 1, 2017, Dakota Ethanol executed a term note with FCSA in the amount
of $8 million. Dakota Ethanol agreed to make monthly interest payments starting
September 1, 2017 and annual principal payments of $1,000,000 starting on August
1, 2018. The payment that was due in August 2020 was deferred to August 2025.
The notes matures on August 1, 2025. Interest on the outstanding principal
balance will accrue at 330 basis points above the SOFR 30 and is not subject to
a floor. The rate was 5.60% at September 30, 2022. On September 30, 2022, Dakota
Ethanol had $4,000,000 outstanding on the note.
Covenants
Our credit facilities with FCSA are subject to various loan covenants. If we
fail to comply with these loan covenants, FCSA can declare us to be in default
of our loans. The material loan covenants applicable to our credit facilities
are our working capital covenant, local net worth covenant and our debt service
coverage ratio. We are required to maintain working capital (current assets
minus current liabilities plus availability on our revolving loan) of at least
$13.5 million. We are required to maintain local net worth (total assets minus
total liabilities minus the value of certain investments) of at least $28
million. We are required to maintain a debt service coverage ratio of at least
1.25:1.00. Dakota Ethanol may make distributions in an amount up to 75% of prior
year's net income, so long as the Company's working capital stays above
$18,000,000 post distribution. The combined distributions for 2021 and 2022
shall also be limited to 75% of the combined net income of 2020 and 2021.
As of September 30, 2022, we were in compliance with our financial covenants
under the FCSA loans. Management's current financial projections indicate that
we will be in compliance with our financial covenants for the next 12 months and
we expect to remain in compliance thereafter. Management does not believe that
it is reasonably likely that we will fall out of compliance with our material
loan covenants in the next 12 months. If we fail to comply with the terms of our
credit agreements with FCSA, and FCSA refuses to waive the non-compliance, FCSA
may require us to immediately repay all amounts outstanding on our loans.
Application of Critical Accounting Policies
Management uses estimates and assumptions in preparing our consolidated
financial statements in accordance with generally accepted accounting
principles. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Of the significant accounting policies
described in the notes to our consolidated financial statements, we believe that
the following are the most critical:
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Derivative Instruments
We enter into short-term forward option and futures contracts as a means of
securing corn for the ethanol plant and managing exposure to changes in
commodity prices. We enter into short-term forward, option and futures contracts
for sales of ethanol to manage exposure to changes in commodity prices. All of
our derivatives are designated as non-hedge derivatives, and accordingly are
recorded at fair value with changes in fair value recognized in net income or
treated as normal purchases and sales contracts and analyzed for inherent
losses. Although the contracts are considered economic hedges of specified
risks, they are not designated as nor accounted for as hedging instruments.
As part of our trading activity, we use futures and option contracts offered
through regulated commodity exchanges to reduce our risk and we are exposed to
risk of loss in the market value of inventories. To reduce that risk, we
generally take positions using cash and futures contracts and options.
Unrealized gains and losses related to derivative contracts for corn and
natural gas purchases are included as a component of cost of revenues and
derivative contracts related to ethanol sales are included as a component of
revenues in the accompanying financial statements. The fair values of derivative
contracts are presented on the accompanying balance sheets as derivative
financial instruments.
Goodwill
Annually, as well as when an event triggering impairment may have occurred,
the Company performs an impairment test on goodwill which compares the fair
value of the reporting unit with its carrying amount. An impairment charge is
recognized, if necessary, for the amount by which the carrying value exceeds the
fair value up to the amount of the goodwill attributed to the reporting unit.
The Company performs the annual analysis as of December 31 of each fiscal year.
Inventory Valuation
Inventories are generally valued using methods which approximate the lower of
cost (first-in, first-out) or net realizable value. In the valuation of
inventories and purchase commitments, net realizable value is based on estimated
selling prices in the ordinary course of business less reasonably predictable
costs of completion, disposal and transportation.
Revenue Recognition
The Company generally recognizes revenue at a point in time when performance
obligations are satisfied. Revenue from the production of ethanol and related
products is recorded when control transfers to customers. Generally, ethanol and
related products are shipped FOB shipping point, based on written contract terms
between Dakota Ethanol and its customers. Collectability of revenue is
reasonably assured based on historical evidence of collectability between Dakota
Ethanol and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol, dried
distillers grains and corn oil are not specifically identifiable and as a
result, revenue from the sale of those products is recorded based on the net
selling price reported to the Company from the marketer.
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