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, 2020,
compared to the same periods 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, 2019,
included in the Company's Annual Report on Form 10-K for 2019.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking
statements that involve known and unknown risks 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, 2019.
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" "we" "us" or the "ethanol plant."
Our revenue is derived from the sale and distribution of our ethanol, distillers
grains and corn oil. The ethanol plant increased its nameplate capacity in May
of 2019 from 50 million gallons per year to 90 million gallons per year. 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, 2020 and 2019
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, 2020 and 2019:
2020 2019
Income Statement Data Amount % Amount %
Revenues $ 33,917,787 100.0 $ 32,441,510 100.0
Cost of Revenues 27,871,295 82.2 34,256,712 105.6
Gross Profit (Loss) 6,046,492 17.8 (1,815,202) (5.6)
Operating Expense 992,023 2.9 971,662 3.0
Income (Loss) from Operations 5,054,469 14.9 (2,786,864) (8.6)
Other Income (Expense) 755,957 2.2 (812,925) (2.5)
Net Income (Loss) $ 5,810,426 17.1 $ (3,599,789) (11.1)
Revenues
Revenue from ethanol sales increased by approximately 3.4% during the three
months ended September 30, 2020 compared to the same period of 2019 due to
increased gallons of ethanol sold, partially offset by lower average prices that
we received for our ethanol during the 2020 period. Revenue from distillers
grains sales increased by approximately 8.8% during the three months ended
September 30, 2020 compared to the same period of 2019 due primarily to
increased tons of distillers grains sold during the 2020 period. Revenue from
corn oil sales increased by approximately 9.5% during the three months ended
September 30, 2020 compared to the same period of 2019 due primarily to
increased pounds of corn oil sold during the 2020 period.
Ethanol
Our ethanol revenue was approximately $0.9 million higher during our three
months ended September 30, 2020 compared to the three months ended September 30,
2019, an increase of approximately 3.4%. This increase in ethanol revenue was
due primarily to an increase in the volume of ethanol we sold, partially offset
by a lower average price we received per gallon of ethanol sold during the three
months ended September 30, 2020 compared to the three months ended September 30,
2019. We sold approximately 12.0% more gallons of ethanol during the three
months ended September 30, 2020 compared to the same period of 2019, an increase
of approximately 2.3 million gallons, due to reduced production in September of
2019.
The average price we received for our ethanol was approximately $0.10 less per
gallon during the three months ended September 30, 2020 compared to the three
months ended September 30, 2019, a decrease of approximately 7.7%. Management
attributes this decrease in ethanol prices during the three months ended
September 30, 2020 with decreased gasoline demand from travel restrictions and
social distancing measures related to the COVID-19 pandemic. Since ethanol is
blended with gasoline, when gasoline demand is lower it has a corresponding
impact on ethanol demand. The most significant reductions in ethanol demand
occurred at the end of our first quarter of 2020, however, the impact of this
reduced gasoline demand has continued to impact us throughout our 2020 fiscal
year.
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Distillers Grains
Our total distillers grains revenue was approximately 8.8% higher during the
three months ended September 30, 2020 compared to the same period of 2019 due
primarily to increased total production. We sold approximately 20.0% more total
tons of distillers grains during the three months ended September 30, 2020
compared to the same period of 2019 due to increased overall production at the
ethanol plant compared to the same period of 2019.
The average price we received for our dried distillers grains was
approximately 10.2% lower during the three months ended September 30, 2020
compared to the same period of 2019, a decrease of approximately $12.70 per ton.
Management attributes the decrease in dried distillers grains prices during the
three months ended September 30, 2020 to lower commodity prices and more
available supply. The average price we received for our modified/wet distillers
grains, on a dry-equivalent basis, was approximately 7.7% lower for the three
months ended September 30, 2020 compared to the same period of 2019, a decrease
of approximately $10.06 per ton. Management attributes this decrease in
modified/wet distillers grains prices with lower commodity prices in the market
and more available supply.
Corn Oil
Our total pounds of corn oil sold increased by approximately 18.4% during the
three months ended September 30, 2020 compared to the same period of 2019, an
increase of approximately 1.0 million pounds, primarily due to improved corn oil
extraction efficiency and higher production compared to the same period in 2019.
The average price per pound we received for our corn oil was lower by 7.5% for
the three months ended September 30, 2020 and the same period of 2019 due to
lower commodity prices.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 21.7% lower for the
three months ended September 30, 2020 compared to the same period of 2019 due to
significantly decreased corn prices during the 2020 period.
Our average cost per bushel of corn decreased by approximately 30.0% for the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019. We consumed approximately 11.7% more bushels of corn during
the three months ended September 30, 2020 compared to the same period of 2019.
Management attributes the decreased corn cost per bushel to significantly lower
corn prices during our 2020 fiscal period due to favorable planting and growing
conditions as well as decreased market prices related to COVID-19. Management
expects corn prices to increase for the rest of our 2020 fiscal year.
Natural Gas
Our cost of revenues related to natural gas decreased by approximately $80,000,
a decrease of approximately 7.0%, for the three months ended September 30, 2020
compared to the three months ended September 30, 2019. This decrease was due to
slightly higher natural gas consumption, offset by lower natural gas costs per
MMBtu during the three months ended September 30, 2020 compared to the same
period of 2019.
Our average cost per MMBtu of natural gas during the three months ended
September 30, 2020 was approximately 14.6% less compared to the cost per MMbtu
for the three months ended September 30, 2019. Management attributes this
decrease in our average natural gas costs with generally lower natural gas
prices and energy prices generally along with steady supply in 2020.
The volume of natural gas we used increased by approximately 8.7% during the
three months ended September 30, 2020 compared to the same period of 2019 due
primarily to more distillers produced in the dried form and increased production
compared to the same period in 2019.
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Operating Expenses
Our operating expenses were higher for the three months ended September 30, 2020
compared to the same period of 2019 due primarily to increased insurance
expenses offset slightly by decreased professional fees.
Other Income and Expense
We had more other income during the three months ended September 30, 2020
compared to the same period of 2019 due to increased investment income during
the 2020 period. We had more income from our investments during the three months
ended September 30, 2020 compared to the same period of 2019 due to improved
profitability in the ethanol sector. We had less interest expense during the
three months ended September 30, 2020 compared to the same period of 2019 due to
lower carrying balances on outstanding debt in addition to lower interest rates.
Comparison of the Nine Months Ended September 30, 2020 and 2019
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,
2020 and 2019:
2020 2019
Income Statement Data Amount % Amount %
Revenues $ 91,798,857 100.0 $ 80,151,796 100.0
Cost of Revenues 87,990,082 95.9 78,218,717 97.6
Gross Profit 3,808,775 4.1 1,933,079 2.4
Operating Expense 3,277,570 3.5 2,906,424 3.6
Income (Loss) from Operations 531,205 0.6 (973,345) (1.2)
Other (Expense) (982,447) (1.1) (1,029,137) (1.3)
Net (Loss) $ (451,242) (0.5) $ (2,002,482) (2.5)
Revenues
Revenue from ethanol sales increased by approximately 11.7% during the nine
months ended September 30, 2020 compared to the same period of 2019 due to
increased gallons of ethanol sold, partially offset by lower average prices that
we received for our ethanol during the 2020 period. Revenue from distillers
grains sales increased by approximately 22.9% during the nine months ended
September 30, 2020 compared to the same period of 2019 due primarily to
increased tons of dried distillers grains sold during the 2020 period. Revenue
from corn oil sales increased by approximately 32.3% during the nine months
ended September 30, 2020 compared to the same period of 2019 due to increased
pounds of corn oil sold during the 2020 period.
Ethanol
Our ethanol revenue was approximately $7.34 million greater during our nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019, an increase of approximately 11.7%. This increase in ethanol revenue was
due primarily to an increase in the volume of ethanol we sold partially offset
by a lower average price we received per gallon of ethanol sold during the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019. We sold approximately 24.6% more gallons of ethanol during the nine months
ended September 30, 2020 compared to the same period of 2019, an increase of
approximately 12 million gallons, due to increased production at the plant
following
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completion of our plant expansion project during 2019 offset partially by the
slowdown in production caused by COVID-19 in the second fiscal quarter of 2020.
The average price we received for our ethanol was approximately $0.14 less per
gallon during the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2019, a decrease of approximately 10.4%. Management
attributes this decrease in ethanol prices during the nine months ended
September 30, 2020 with decreased ethanol demand due to decreased gasoline
demand from the COVID-19 pandemic.
Distillers Grains
Our total distillers grains revenue was approximately 22.9% greater during the
nine months ended September 30, 2020 compared to the same period of 2019 due
primarily to increased total production. Following our expansion project, we are
selling a greater percentage of our distillers grains in the dried form than in
the past when we primarily produced modified distillers grains. We sold
approximately 27.0% more total tons of distillers grains during the nine months
ended September 30, 2020 compared to the same period of 2019 due to increased
overall production at the ethanol plant due to our plant expansion project.
The average price we received for our dried distillers grains was
approximately 1.6% lower during the nine months ended September 30, 2020
compared to the same period of 2019, a decrease of approximately $2.03 per ton.
Management attributes the slight decrease in dried distillers grains prices
during the nine months ended September 30, 2020 to lower prices in the commodity
markets. The average price we received for our modified/wet distillers grains,
on a dry-equivalent basis, was approximately 2.4% less for the nine months ended
September 30, 2020 compared to the same period of 2019. Management attributes
this decrease in modified/wet distillers grains prices with lower prices in the
commodity markets.
Corn Oil
Our total pounds of corn oil sold increased by approximately 34.9% during the
nine months ended September 30, 2020 compared to the same period of 2019, an
increase of approximately 4.4 million pounds, primarily due to increased overall
production and improved corn oil extraction efficiency.
The average price per pound we received for our corn oil was comparable for
the nine months ended September 30, 2020 and the same period of 2019.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 10.7% greater for the
nine months ended September 30, 2020 compared to the same period of 2019 due to
increased corn bushels used due to the plant expansion project, partially offset
by lower corn costs per bushel during the 2020 period.
Our average cost per bushel of corn decreased by approximately 12.0% for the
nine months ended September 30, 2020 compared to the nine months ended September
30, 2019. We consumed approximately 26.0% more bushels of corn during the nine
months ended September 30, 2020 compared to the same period of 2019. Management
attributes the decreased corn cost per bushel to favorable planting and growing
conditions as well as the COVID-19 pandemic experienced during our 2020 fiscal
period. Management expects corn prices to increase for the rest of our 2020
fiscal year.
Natural Gas
Our cost of revenues related to natural gas increased by approximately $560,000,
an increase of approximately 16.8%, for the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019. This increase was
primarily due to increased natural gas consumption during the nine months ended
September 30, 2020 compared to the same period of 2019.
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Our average cost per MMBtu of natural gas during the nine months ended September
30, 2020 was approximately 5.2% lower compared to the cost per MMbtu for the
nine months ended September 30, 2019. Management attributes this decrease in our
average natural gas costs with generally lower natural gas prices in 2020 due to
the COVID-19 pandemic.
The volume of natural gas we used increased by approximately 23.1% during the
nine months ended September 30, 2020 compared to the same period of 2019 due
primarily to increased production from our plant expansion project offset by the
plant slowdown during the second quarter of 2020 due to the COVID-19 pandemic.
Operating Expenses
Our operating expenses were greater for the nine months ended September 30, 2020
compared to the same period of 2019 due primarily to increased expenses related
to professional fees and insurance expense.
Other Income and Expense
We had more dividend income from our lender during the nine months ended
September 30, 2020 compared to the same period of 2019 due to having more debt
drawn during the 2020 period. We had smaller losses on our investments during
the nine months ended September 30, 2020 compared to the same period of 2019 due
to increased profitability in the ethanol industry. We had more interest expense
during the nine months ended September 30, 2020 compared to the same period of
2019 because we had more debt outstanding that was partially offset by lower
interest rates.
Changes in Financial Condition for the Nine Months Ended September 30, 2020
Current Assets
Our cash on hand at September 30, 2020 was less compared to December 31, 2019
due to the reduction in corn payables and payments to reduce notes payable. We
had greater accounts receivable at September 30, 2020 compared to December 31,
2019 due to the timing of our quarter end and the payments related to the
shipments of our products. The value of our inventory was less at September 30,
2020 compared to December 31, 2019 due to less inventory on hand as well as
lower input costs. The asset value of our derivative instruments was less at
September 30, 2020 compared to December 31, 2019 due to recent corn price
changes which impacted our derivative instruments. We had less prepaid expenses
at September 30, 2020 compared to December 31, 2019 due to amortization of our
insurance premiums.
Property and Equipment
The value of our property and equipment was less at September 30, 2020
compared to December 31, 2019 as a result of regular depreciation of our assets.
Other Assets
The value of our investments was less at September 30, 2020 compared to
December 31, 2019 due to decreased profitability in the ethanol industry during
the first and second quarter of 2020, which the majority of our investments are
related to.
Current Liabilities
We had more outstanding checks in excess of bank balances at September 30,
2020 compared to December 31, 2019 due to the fewer checks outstanding at
December 31, 2019 as farmers choose to defer payments for corn until the new
year. We use our revolving loan to pay any checks which are presented for
payment which exceed the cash we have available in our accounts. Our accounts
payable were lower at September 30, 2020 compared to December 31, 2019 due
primarily to decreased corn payables at September 30, 2020 compared to
December 31, 2019 as the deferred payments were paid during the first quarter.
Our derivative instrument liability was lower at September 30, 2020 compared to
December 31, 2019 due to corn price changes which impacted our derivative
instruments.
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Long-Term Liabilities
Our long-term liabilities were lower at September 30, 2020 compared to
December 31, 2019 due to decreased borrowing and reductions in notes payable
resulting from increased profitability.
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.
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, 2020,
we had $23,000,000 outstanding and $27,000,000 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.
The following table shows cash flows for the nine months ended September 30,
2020 and 2019:
Nine Months Ended September 30,
2020 2019
Net cash (used in) operating activities $ (1,594,191) $ (1,987,916)
Net cash (used in) investing activities (334,571) (9,501,988)
Net cash provided by (used in) by financing
activities (8,780,738) 15,274,846
Cash Flow From Operations. Our operating activities used less cash during the
nine months ended September 30, 2020 compared to the same period of 2019, due
primarily to decreased losses during the 2020 period along with a decrease in
inventory partially offset by a decrease in accounts payable during the 2020
period.
Cash Flow From Investing Activities. Our investing activities used less cash
during the nine months ended September 30, 2020 compared to the same period of
2019, due to fewer capital expenditures.
Cash Flow From Financing Activities. Our financing activities used more cash
during the nine months ended September 30, 2020 compared to the same period of
2019, due primarily to cash being used to reduce the principle outstanding on
our loans during the 2020 period.
Indebtedness
We entered into a comprehensive credit facility with Farm Credit Services of
America, PCA and Farm Credit Services of America, FLCA (collectively "FCSA"). We
have a $2 million revolving operating line of credit (the "Operating Line") and
a $48 million reducing revolving loan (the "Reducing Revolving Loan"). All of
our assets, including the ethanol plant and equipment, its accounts receivable
and inventory, serve as collateral for our loans with FCSA.
On August 1, 2017, we executed an amendment to our credit agreement to create
an $8 million term loan which we used to finance a portion of our investment in
Ring-neck Energy & Feed, LLC.
On February 6, 2018, we executed an Amended and Restated Credit Agreement (the
"Credit Agreement") with FCSA. Pursuant to the Credit Agreement, our total
credit availability is $40 million to support our expansion project. The credit
availability matures on January 1, 2026. Interest on the outstanding principal
balance will accrue at the one month London Interbank Offered Rate ("LIBOR")
plus 325 basis points until February 1, 2023 and the basis increases to 350
points thereafter
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until maturity. The interest rate is not subject to a floor. We agreed to pay a
fee of 0.50% on the unused portion of the increased credit availability.
On October 21, 2019, we entered into a Second Amendment to Amended and
Restated Credit Agreement (the "Loan Amendment") with FCSA. In the Loan
Amendment, we extended the maturity date of our $10 million revolving loan to
November 1, 2021, we also extended the date when the available balance of our
$40 million revolving loan starts to decrease from January 1, 2020 to January 1,
2021.
On June 5, 2020, we entered into a Third Amendment to the agreement (the
"Third Amendment"). Under the Third Amendment, the available credit under the
revolving operating note was reduced to $2,000,000 and the available credit on
the reducing revolving note was increased to $48,000,000. The working capital
covenant was reduced to $11,000,000 and the net worth covenant was reduced to
$18,000,0000. The next measurement date for the debt service coverage ratio was
deferred until December 31, 2021. The annual installment on the term note for
2020 was deferred until maturity in 2025. The interest rates were unchanged.
Operating Line
Dakota Ethanol has a revolving promissory note from Farm Credit Services of
America (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 300 basis points above the 1
month LIBOR rate and is not subject to a floor. The rate was 3.2% at
September 30, 2020. There is a non-use fee of 0.3% on the unused portion of the
$2,000,000 availability. The note is collateralized by substantially all assets
of the Company. The note expires on November 1, 2021. On September 30, 2020,
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 $48,000,000 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 one month London Interbank Offered Rate ("LIBOR") plus 325 basis
points until February 1, 2023 and the basis increases to 350 points thereafter
until maturity. The interest rate is not subject to a floor. The rate was 3.4%
at September 30, 2020. The note contains a non-use fee of 0.5% on the unused
portion of the note. On September 30, 2020, Dakota Ethanol had $23,000,000
outstanding and $25,000,000 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 325 basis points above the 1 month LIBOR rate and is not
subject to a floor. The rate was 3.4% at September 30, 2020. On September 30,
2020, Dakota Ethanol had $6,000,000 outstanding on the note.
2020 Loans
The Company entered into a loan agreement with the Small Business Association
through First State Bank, Gothenburg, NE on April 4, 2020 for $760,400 as part
of the Paycheck Protection Program under Division A, Title I of the Coronavirus
Aid, Relief and Economic Security Act (CARES Act). The loan matures in January
2023 and has an interest rate of 1.0%. Proceeds of the loan are restricted for
use towards payroll costs and other allowable uses such as covered utilities for
an eight-week period following the loan under the Paycheck Protection Program
Rules. Provisions of the agreement allow for a portion of the loan to be
forgiven if certain qualifications are met. The Company applied for the loan to
be forgiven during June
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of 2020. We are currently awaiting approval of the application. The Paycheck
Protection Program Flexibility Act, which was put into effect on June 5, 2020,
may effect the terms of our loan.
The Company also received an Economic Injury Disaster Loan (EIDL) in the
amount of $10,000 in June 2020. Repayment of the loan will begin in June 2021
and has a 30 year term at 3.75% interest.
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
$11.0 million. We are required to maintain local net worth (total assets minus
total liabilities minus the value of certain investments) of at least $18
million. We are required to maintain a debt service coverage ratio of at least
1.25:1.00. The working capital and local net worth capital covenants are
measured monthly while the debt service coverage covenant is measured annually
at year-end. The debt service coverage covenant measurement will be measured
again starting on December 31, 2021.
As of September 30, 2020, we are in compliance with the working capital and
local net worth loan covenants. 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. 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:
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.
A triggering
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event was determined to have occurred during the first quarter of 2020 and an
impairment test was performed as of March 31, 2020. The Company determined there
was no impairment.
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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