LAKE AREA CORN PROCESSORS, LLC Results of Operations
Comparison of the Fiscal Years Ended
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 operations for the fiscal years endedDecember 31, 2020 and 2019: 2020 2019 Income Statement Data Amount % Amount % Revenue$ 130,521,814 100.0$ 115,986,821 100.0 Cost of Revenues 124,493,268 95.4 114,687,231 98.9 Gross Profit 6,028,546 4.6 1,299,590 1.1 Operating Expense 4,418,074 3.4 4,060,343 3.5
Income (Loss) from Operations 1,610,472 1.2
(2,760,753) (2.4)
Other Income (Expense) (554,833) (0.4) (1,063,431) (0.9)
Net Income (Loss) $ 1,055,639 0.8 $ (3,824,184) (3.3)
Revenues
Revenue from ethanol sales increased by approximately 9.6% during our 2020
fiscal year compared to the same period of 2019. Revenue from distillers grains
sales increased by approximately 20.4% during our 2020 fiscal year compared to
the same period of 2019. Revenue from corn oil sales increased by approximately
35.6% during our 2020 fiscal year compared to the same period of 2019.
Ethanol
Our ethanol revenue increased by approximately 9.6% during our 2020 fiscal year
compared to our 2019 fiscal year. This increase in ethanol revenue was due to
increased gallons of ethanol produced and sold due to our plant expansion
project partially offset by a lower average price we received per gallon of
ethanol sold. The average price we received for our ethanol during our 2020
fiscal year was approximately 8.2% lower compared to our 2019 fiscal year.
Management attributes this decrease in the average price we received per gallon
of ethanol with decreased gasoline demand due to travel restrictions from the
COVID-19 pandemic. Since ethanol is typically blended with gasoline, when
gasoline demand is lower, it has a corresponding impact on ethanol demand. As a
result, we experienced a significant decrease in average ethanol prices during
our first and second quarters of our 2020 fiscal year. Ethanol prices rebounded
during our third and fourth quarters of our 2020 fiscal year. Ethanol exports
were also lower during our 2020 fiscal year compared to our 2019 fiscal year as
the COVID-19 pandemic had an impact on gasoline and ethanol demand globally.
Management expects ethanol prices to remain lower during our 2021 fiscal year as
gasoline demand will continue to be negatively impacted by COVID-19. However,
management believes that as the COVID-19 vaccine is administered, it may result
in increased travel which may have a positive impact on ethanol prices.
Ethanol sales volumes were greater during our 2020 fiscal year compared to the
same period of 2019 due to our plant expansion project, which was operational
for our entire 2020 fiscal year, partially offset by lower ethanol sales during
our first and second quarters of 2020 due to the COVID-19 pandemic. The total
gallons of ethanol we sold during our 2020 fiscal year was approximately 19.4%
greater compared to the same period of 2019. Management anticipates increased
ethanol production and sales during our 2021 fiscal year compared to our 2020
fiscal year provided ethanol demand is higher during our 2021 fiscal year
compared to our 2020 fiscal year. Further, management anticipates that we will
continue to work to maximize our production following completion of our plant
expansion project.
22-------------------------------------------------------------------------------- Table of Contents Distillers Grains Our total distillers grains revenue increased by approximately 20.4% for our 2020 fiscal year compared to the same period of 2019. The increase in revenue from distillers grains was primarily due to increased tons of distillers grains sold during our 2020 fiscal year. For our 2020 fiscal year, we sold approximately 38.1% of our total distillers grains, by volume, in the dried form and approximately 61.9% of our total distillers grains in the modified/wet form. For our 2019 fiscal year, we sold approximately 25.9% of our total distillers grains, by volume, in the dried form and approximately 74.1% of our total distillers grains in the modified/wet form. The average price we received for our modified/wet distillers grains was approximately 1.3% less for our 2020 fiscal year compared to the same period of 2019. Due to our plant expansion project, the supply of modified/wet distillers grains in our market is higher which has had an impact on the price we received for our modified/wet distillers grains. Modified/wet distillers grains have a shorter shelf life and are more expensive to transport compared to dried distillers grains. As a result, they are only sold in our local market. The average price we received for our dried distillers grains was approximately 0.4% greater during our 2020 fiscal year compared to the same period of 2019. Management attributes this increase in dried distillers grains prices with lower distillers grains production inthe United States due to reduced ethanol demand. This reduction in distillers grains production reduced the supply of distillers grains in the market which had a positive impact on prices. Management expects that distillers grains prices may be higher during our 2021 fiscal year due to anticipated higher corn prices during our 2021 fiscal year which typically has a positive impact on distillers grains prices. Further, ifChina andthe United States reach an agreement on trade disputes which have occurred in recent years, it may have a positive impact on distillers grains prices and demand. Management anticipates increased distillers grains production during our 2021 fiscal year compared to our 2020 fiscal year due to anticipated increased overall production at the ethanol plant provided ethanol demand remains steady during our 2021 fiscal year. Corn Oil Our total corn oil revenue increased by approximately 35.6% during our 2020 fiscal year compared to the same period of 2019. Our total pounds of corn oil sold increased by approximately 27.4% during our 2020 fiscal year compared to the same period of 2019, primarily due to increased production due to our plant expansion project. Management anticipates increased corn oil production during our 2021 fiscal year compared to our 2020 fiscal year due to anticipated increased production provided ethanol demand remains at current levels allowing us to operate the ethanol plant at capacity during our 2021 fiscal year. The average price we received for our corn oil was approximately 6.4% greater during our 2020 fiscal year compared to the same period of 2019. Management believes that corn oil prices were higher due to less total industry-wide ethanol production during our 2020 fiscal year which reduced the volume of corn oil in the market. In addition, corn oil demand remained favorable due to demand from the biodiesel industry which uses corn oil as a feedstock to produce biodiesel. The biodiesel blenders' tax credit was reinstated through 2022 so we expect that corn oil demand will remain higher through 2022.
Cost of Revenues
The primary raw materials we use to produce ethanol, distillers grains and corn oil are corn and natural gas.
Corn
Our cost of revenues relating to corn was approximately 8.1% greater for our
2020 fiscal year compared to the same period of 2019. Our average cost per
bushel of corn decreased by approximately 10.0% for our 2020 fiscal year
compared to our 2019 fiscal year. Management attributes the decrease in corn
prices to decreased corn demand from the ethanol industry. Corn demand was lower
due to decreased ethanol demand during the COVID-19 pandemic. Management
anticipates corn prices will be higher during our 2021 fiscal year due to
anticipated higher corn demand from the ethanol industry.
We used approximately 19.9% more bushels of corn during our 2020 fiscal year
compared to the same period of 2019 due to increased overall production at the
ethanol plant during our 2020 fiscal year. Management expects our corn
consumption will be higher during our 2021 fiscal year compared to our 2020
fiscal year due to an anticipated increase in ethanol production during our 2021
fiscal year provided ethanol demand returns to more normal levels during our
2021 fiscal year.
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We experienced approximately$1,627,000 of combined realized and unrealized loss for our 2020 fiscal year related to our corn derivative instruments which increased our cost of goods sold. By comparison, we experienced approximately$906,000 of combined realized and unrealized loss for our 2019 fiscal year related to our corn derivative instruments which increased our cost of goods sold We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Natural Gas
Our cost of revenues related to natural gas increased by approximately 10.8% for our 2020 fiscal year compared to our 2019 fiscal year. This increase was due to increased consumption due to our plant expansion project, partially offset by lower natural gas costs per MMBtu during our 2020 fiscal year compared to the same period of 2019. Natural gas prices were lower during our 2020 fiscal year compared to the same period of 2019 primarily because of decreased natural gas demand and lower energy prices generally during 2020 which decreased natural gas prices during that period of time. Our average cost per MMBtu of natural gas during our 2020 fiscal year was approximately 6.7% less compared to the cost for our 2019 fiscal year. Management anticipates higher natural gas costs per MMBtu during 2021 due to cold weather during the first quarter of our 2021 fiscal year. We used approximately 18.6% more MMBtus of natural gas during our 2020 fiscal year compared to the same period of 2019 due to increased overall production due to our plant expansion project. Management anticipates that our natural gas consumption during our 2021 fiscal year will increase due to expected increased production during our 2021 fiscal year provided we can operate the ethanol plant at capacity during our 2021 fiscal year.
Operating Expense
Our operating expenses were higher for our 2020 fiscal year compared to the same period of 2019 due primarily to increased professional fees and property insurance premiums.
Other Income and Expense
Our interest and other income was greater during our 2020 fiscal year compared to our 2019 fiscal year due to additional dividend income from our lender during the 2020 period. Our equity in net income of our investments was higher during our 2020 fiscal year compared to our 2019 fiscal year due to increased profitability in the ethanol industry which impacts the income generated by our investments. We had significantly more interest expense during our 2020 fiscal year compared to our 2019 fiscal year due to borrowing for our plant expansion project. During the time the expansion was under construction, interest was capitalized. When the expansion became operational, subsequent interest was expensed to our statement of operations.
Results of Operations
Comparison of the Fiscal Years Ended
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 operations for the fiscal years endedDecember 31, 2019 and 2018: 24
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2019 2018
Income Statement Data Amount % Amount %
Revenue $ 115,986,821 100.0 $ 74,703,630 100.0
Cost of Revenues 114,687,231 98.9 68,619,694 91.9
Gross Profit 1,299,590 1.1 6,083,936 8.1
Operating Expense 4,060,343 3.5 3,837,659 5.1
Income (Loss) from Operations (2,760,753) (2.4) 2,246,277 3.0
Other Income (Expense) (1,063,431) (0.9) 470,310 0.6
Net Income (Loss) $ (3,824,184) (3.3) $ 2,716,587 3.6
Revenues
Revenue from ethanol sales increased by approximately 56.7% during our 2019
fiscal year compared to the same period of 2018. Revenue from dried distillers
grains sales increased by approximately 97.4% during our 2019 fiscal year
compared to the same period of 2018. Revenue from modified distillers grains
sales increased by approximately 32.7% during our 2019 fiscal year compared to
the same period of 2018. Revenue from corn oil sales increased by approximately
88.4% during our 2019 fiscal year compared to the same period of 2018.
Ethanol
Our ethanol revenue increased by approximately$32.7 million during our 2019 fiscal year compared to our 2018 fiscal year, an increase of approximately 56.7%. This increase in ethanol revenue was due to increased gallons of ethanol produced and sold due to our plant expansion project along with an increase in the average price we received for our ethanol. The average price we received for our ethanol during our 2019 fiscal year was approximately$0.06 higher compared to our 2018 fiscal year. Management attributes this increase in the average price we received per gallon of ethanol with fewer small refinery waiver exemptions which were allowed by the EPA during our 2019 fiscal year compared to our 2018 fiscal year. Also, due to unfavorable operating margins in the ethanol industry, some ethanol producers reduced production or ceased production altogether which resulted in a drop in ethanol supply in the market. This decrease in ethanol supply provided some price support for the ethanol we produced. Ethanol exports were lower during our 2019 fiscal year compared to our 2018 fiscal year which had a negative impact on market ethanol demand. The ethanol industry depends on ethanol exports which are more volatile than domestic demand. Ethanol sales volumes were greater during our 2019 fiscal year compared to the same period of 2018 due to our plant expansion project which was operational during our 2019 fiscal year. Our total gallons of ethanol sold during our 2019 fiscal year was approximately 49.2% greater compared to the same period of 2018, an increase of approximately 22,793,000 gallons.
Distillers Grains
Our total distillers grains revenue increased for our 2019 fiscal year compared to the same period of 2018. The increase in revenue was due to increased average prices we received for our distillers grains along with increased production due to our plant expansion project. For our 2019 fiscal year, we sold approximately 25.9% of our total distillers grains, by volume, in the dried form and approximately 74.1% of our total distillers grains in the modified/wet form. For our 2018 fiscal year, we sold approximately 17.0% of our total distillers grains, by volume, in the dried form and approximately 83.0% of our total distillers grains in the modified/wet form. The average price we received for our dried distillers grains was approximately 8.1% less during our 2019 fiscal year compared to the same period of 2018, a decrease of approximately$11 per ton. Management attributes this decrease in dried distillers grains prices with the impact of our plant expansion on available buyers of our dried distillers grains. When we increased the amount of dried distillers grains we were selling following the plant expansion, the price our customers were willing to pay was lower. In addition, export demand was not as strong during our 2019 fiscal year for dried distillers grains which had a negative impact on prices. The average price we received for our modified/wet distillers grains was approximately 5.6% greater for our 2019 fiscal year compared to the same period of 2018, an increase of approximately$7 per dry equivalent ton. Since demand for 25 -------------------------------------------------------------------------------- Table of Contents modified/wet distillers grains is a more local market, it is not as impacted by export demand as compared to dried distillers grains.
Corn Oil
Our total corn oil revenue increased by approximately 88.4% during our 2019 fiscal year compared to the same period of 2018. Our total pounds of corn oil sold increased by approximately 87.6% during our 2019 fiscal year compared to the same period of 2018, an increase of approximately 8,612,000 pounds, primarily due to increased production due to our plant expansion project. The average price we received for our corn oil was comparable during our 2019 fiscal year and the same period of 2018.
Cost of Revenues
The primary raw materials we use to produce ethanol, distillers grains and corn oil are corn and natural gas.
Corn
Our cost of revenues relating to corn was approximately 83.2% greater for our 2019 fiscal year compared to the same period of 2018. Our average cost per bushel of corn increased by approximately 22.8% for our 2019 fiscal year compared to our 2018 fiscal year. Management attributes the increase in corn prices to unfavorable weather conditions and late planting during the 2019 growing season along with late harvest. In addition, there were fewer acres planted with corn during 2019 which impacted the size of the corn harvest. These unfavorable weather conditions and fewer planted acres resulted in less corn harvested during 2019 which had an impact on prices. We used approximately 49.2% more bushels of corn during our 2019 fiscal year compared to the same period of 2018 due to increased overall production at the ethanol plant during our 2019 fiscal year. We experienced approximately$906,000 of combined realized and unrealized loss for our 2019 fiscal year related to our corn derivative instruments which increased our cost of goods sold. By comparison, we experienced approximately$550,000 of combined realized and unrealized gain for our 2018 fiscal year related to our corn derivative instruments which decreased our cost of goods sold. Natural Gas Our cost of revenues related to natural gas increased by approximately$1,085,000 , an increase of approximately 28.9%, for our 2019 fiscal year compared to our 2018 fiscal year. This increase was due to increased consumption due to our plant expansion project, partially offset by lower market natural gas costs per MMBtu during our 2019 fiscal year compared to the same period of 2018. Natural gas prices were lower during our 2019 fiscal year compared to the same period of 2018 primarily because of strong natural gas supply during 2019 which decreased natural gas prices during that period of time. Our average cost per MMBtu of natural gas during our 2019 fiscal year was approximately 13.9% less compared to the cost for our 2018 fiscal year. We used approximately 49.8% more MMBtus of natural gas during our 2019 fiscal year compared to the same period of 2018 due to increased overall production due to our plant expansion project.
Operating Expense
Our operating expenses were higher for our 2019 fiscal year compared to the same period of 2018 due primarily to increased wages and benefits for our larger staff due to the plant expansion project.
Other Income and Expense
Our interest and other income was greater during our 2019 fiscal year compared
to our 2018 fiscal year due to additional dividend income from our lender during
the 2019 period. Our equity in net income of our investments was lower during
our 2019 fiscal year compared to our 2018 fiscal year due to less profitability
in the ethanol industry which negatively impacts the income generated by our
investments. We had significantly more interest expense during our 2019 fiscal
year compared to our 2018 fiscal year due to borrowing for our plant expansion
project. During the time the expansion was under construction, interest was
capitalized. When the expansion became operational, subsequent interest was
expensed to our statement of operations.
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Changes in Financial Condition for the Fiscal Year Ended
Current Assets
We had more cash and cash equivalents atDecember 31, 2020 compared toDecember 31, 2019 , primarily due to increased deferred payment corn liability along with increased net income during our 2020 fiscal year. We had more accounts receivable atDecember 31, 2020 , compared toDecember 31, 2019 , due to our increased sales volumes. We had decreased inventory values atDecember 31, 2020 , compared toDecember 31, 2019 , due primarily to the timing of our year end and shipments of our products. The value of our derivative financial instruments was greater atDecember 31, 2020 compared toDecember 31, 2019 , primarily because we had more unrealized gains on our forward corn positions along with more cash in our margin account as ofDecember 31, 2020 compared toDecember 31, 2019 . We had more prepaid expenses atDecember 31, 2020 compared toDecember 31, 2019 due to insurance premium increases during our 2020 fiscal year.
Property and Equipment
The value of our property and equipment was lower at
Other Assets
The value of our investments was less at
Current Liabilities
AtDecember 31, 2020 , we had fewer checks which were issued in excess of the amount of cash we had in our bank accounts, compared to atDecember 31, 2019 , due to the timing of transfers between our accounts. Any checks which are presented for payment in excess of the balances in our bank accounts are paid from our revolving lines of credit. Our accounts payable was higher atDecember 31, 2020 , compared toDecember 31, 2019 , due to increased corn payables at the end of our 2020 fiscal year. We had less accrued liabilities atDecember 31, 2020 , compared toDecember 31, 2019 due to less interest payable at the end of the 2020 fiscal year. The liability on our balance sheet related to our derivative instruments was less atDecember 31, 2020 , compared toDecember 31, 2019 , due to having fewer unrealized losses on our forward corn purchases atDecember 31, 2020 , compared to atDecember 31, 2019 . The current portion of our long-term debt payments was greater atDecember 31, 2020 and atDecember 31, 2019 due to the current portion of the Paycheck Protection Program Loan we received in 2020. Long-Term Liabilities
Our long-term liabilities were less at
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, but 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 two revolving loans are described in greater detail below in the section entitled "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness." As ofDecember 31, 2020 , we had$30,000,000 outstanding and$18,000,000 available to be drawn on these revolving loans. Management anticipates that this is sufficient to maintain our liquidity and continue our operations. 27 -------------------------------------------------------------------------------- Table of Contents The following table shows cash flows for the fiscal years endedDecember 31, 2020 and 2019: Fiscal Years EndedDecember 31 2020 2019
Net cash provided by operating activities $ 9,238,635
$ 7,517,770 Net cash used in investing activities (359,221) (9,700,103) Net cash (used in) provided by financing activities (3,065,256) 13,308,049 Cash Flow From Operations. Our operating activities generated more cash during our fiscal year endedDecember 31, 2020 , compared to the same period of 2019, primarily due to having more net income during the 2020 period. Cash Flow From Investing Activities. Our investing activities used less cash during our fiscal year endedDecember 31, 2020 , compared to the same period of 2019, primarily because we had less capital expenses during the 2020 period compared to the 2019 period. Cash Flow From Financing Activities. Our financing activities provided less cash during our fiscal year endedDecember 31, 2020 , compared to the same period of 2019, primarily due to net payments on borrowings during the 2020 period compared to net proceeds from borrowings during the same period of 2019. The following table shows cash flows for the fiscal years endedDecember 31, 2019 and 2018: Fiscal Years Ended December 31 2019 2018
Net cash provided by operating activities
Net cash used in investing activities (9,700,103)
(26,323,269)
Net cash provided by financing activities 13,308,049
15,113,779
Cash Flow From Operations. Our operating activities generated less cash during our fiscal year endedDecember 31, 2019 , compared to the same period of 2018, primarily due to having less net income during the 2019 period which was partially offset by an increase in accounts payable which had a positive impact on cash during the 2019 period. Cash Flow From Investing Activities. Our investing activities used less cash during our fiscal year endedDecember 31, 2019 , compared to the same period of 2018, primarily because we had less capital expenses related to our expansion project during the 2019 period compared to the 2018 period. Cash Flow From Financing Activities. Our financing activities provided less cash during our fiscal year endedDecember 31, 2019 , compared to the same period of 2018, primarily due to fewer net proceeds from borrowing we incurred during the 2019 period offset by decreased distributions to our members.
Indebtedness
We maintain a comprehensive credit facility withFarm Credit Services of America , PCA andFarm Credit Services of America , FLCA (collectively "FCSA"). We have a$2 million revolving operating line of credit (the "Operating Line"), a$48 million reducing revolving loan (the "Reducing Revolving Loan") and a$8 million term loan (the "2017 Term Loan"). All of our assets, including the ethanol plant and equipment, its accounts receivable and inventory, serve as collateral for our loans with FCSA.
Operating Line
OnOctober 21, 2019 , Dakota Ethanol amended the revolving promissory note fromFarm Credit Services of America (FCSA) in the amount up to$10,000,000 or the amount available in accordance with the borrowing base calculation, whichever is less. OnJune 5, 2020 , the available balance of the Operating Line was reduced to$2,000,000 . 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 3.15% atDecember 31, 2020 . There is a non-use fee of 0.25% on the unused portion of the$2,000,000 availability. The note is collateralized by substantially all assets of the Company. The note expires onNovember 1, 2021 . OnDecember 31 , 28
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2020, Dakota Ethanol had
Reducing Revolving Loan
OnFebruary 6, 2018 , Dakota Ethanol executed a reducing revolving promissory note from FCSA in the amount up to$40,000,000 or the amount available in accordance with the borrowing availability under the credit agreement. The available balance of the Reducing Revolving Loan was increased to$48,000,000 onJune 5, 2020 . The amount Dakota Ethanol can borrow on the note decreases by$1,750,000 semi-annually starting onJuly 1, 2021 until the maximum balance reaches$32,250,000 onJuly 1, 2025 . The note matures onJanuary 1, 2026 . UntilFebruary 1, 2023 , interest on the outstanding principal balance will accrue at 325 basis points above the 1 month LIBOR rate untilFebruary 1, 2023 and increases to 350 basis points thereafter until maturity. The rate was 3.40% atDecember 31, 2020 . The note contains a non-use fee of 0.50% on the unused portion of the note. OnDecember 31, 2020 , Dakota Ethanol had$30,000,000 outstanding and$18,000,000 available to be drawn on the note.
2017 Term Loan
OnAugust 1, 2017 , Dakota Ethanol executed a term note with FCSA in the amount of$8 million . Dakota Ethanol agreed to make monthly interest payments startingSeptember 1, 2017 and annual principal payments of$1,000,000 starting onAugust 1, 2018 . The notes matures onAugust 1, 2025 . The payment due onAugust 1, 2020 was deferred toAugust 1, 2025 . Interest on the outstanding principal balance will accrue at 325 basis points above the 1 month LIBOR rate untilFebruary 1, 2023 and increases to 350 basis points thereafter until maturity. The rate was 3.40% atDecember 31, 2020 . OnDecember 31, 2020 , Dakota Ethanol had$6,000,000 outstanding on the note.
2020 Loans
We entered into a loan agreement with theSmall Business Association through First State Bank,Gothenburg, NE onApril 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 inJanuary 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. We applied for the loan to be forgiven during June of 2020. We are currently awaiting approval of the application. The Paycheck Protection Program Flexibility Act, which was put into effect onJune 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 inJune 2020 . Repayment of the loan will begin inJune 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$18 million . We are required to maintain a debt service coverage ratio of at least 1.25:1.00. Dakota Ethanol is also restricted from making distributions toLake Area Corn Processors without the consent of the lender. As ofDecember 31, 2020 , we were in compliance with our financial covenants under the FCSA loans. Management's current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter. Management does not believe that it is reasonably likely that we will fall out of compliance with our material loan covenants in the next 12 months. If we fail to comply with the terms of our credit agreements with FCSA, and FCSA refuses to waive the non-compliance, FCSA may require us to immediately repay all amounts outstanding on our loans. 29 -------------------------------------------------------------------------------- Table of Contents Contractual Cash Obligations In addition to our debt obligations, we have certain other contractual cash obligations and commitments. The following table provides information regarding our consolidated contractual obligations and commitments as ofDecember 31, 2020 : Payments Due By Period Contractual Cash Less than One One to Three Three to Five Obligations Total Year Years Years After Five Years Long-Term Debt Obligations$ 42,581,626 $ 2,441,398 $ 4,915,087 $ 5,208,287 $ 30,016,854 Purchase Obligations 24,092,515 22,706,515 369,600 369,600 646,800 Other Liabilities 4,000 4,000 - - - Total Contractual Cash Obligations$ 66,678,141 $ 25,151,913 $ 5,284,687 $ 5,577,887 $ 30,663,654
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 grain, 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. 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 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.
Annually, as well as when an event triggering impairment may have occurred, the Company performs an impairment test on goodwill. The Company performs a quantitative analysis that tests for impairment. The second step, if necessary, measures the impairment. During the first quarter of 2020 a triggering event was determined to have occurred and an impairment test was performed as ofMarch 31, 2020 . The Company determined there was no impairment at that time. The Company performs the annual analysis onDecember 31 of each fiscal year. The Company determined that there was no impairment of goodwill atDecember 31, 2020 and 2019. 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. 30 -------------------------------------------------------------------------------- Table of Contents 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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