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 month period ended March 31, 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.
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 crisiss
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.
21
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and March 31, 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 March 31,
2022 and March 31, 2021:
2022 2021
Income Statement Data Amount % Amount %
Revenues $ 64,450,894 100.0 $ 48,615,653 100.0
Cost of Revenues 61,758,095 95.8 41,658,434 85.7
Gross Profit 2,692,799 4.2 6,957,219 14.3
Operating Expense 1,247,879 2.0 1,251,134 2.6
Income from Operations 1,444,920 2.2 5,706,085 11.7
Other Income (Expense) 220,279 0.3 829,445 1.7
Net Income $ 1,665,199 2.5 $ 6,535,530 13.4
Revenues
Revenue from ethanol sales increased by approximately 30.1% during the three
months ended March 31, 2022 compared to the same period of 2021 due to increased
average prices that we received for our ethanol during the 2022 period. Revenue
from distillers grains sales increased by approximately 33.4% during the three
months ended March 31, 2022 compared to the same period of 2021 due primarily to
increased average prices that we received for our distillers grains and
increased tons of distillers grains sold. Revenue from corn oil sales increased
by approximately 66.1% during the three months ended March 31, 2022 compared to
the same period of 2021 due primarily to increased average prices that we
received for corn oil sold during the 2022 period.
Ethanol
Our ethanol revenue was approximately $11.2 million higher during our three
months ended March 31, 2022 compared to the three months ended March 31, 2021,
an increase of approximately 30.1%. This increase in ethanol revenue was due
primarily to an increase in the average price that we received per gallon of
ethanol sold during the three months ended March 31, 2022 compared to the three
months ended March 31, 2021. We sold approximately 3.3% more gallons of ethanol
during the three months ended March 31, 2022 compared to the same period of
2021, an increase of approximately 725,000 gallons. The increase is due
primarily to increased sales of ethanol inventory during the three months ended
March 31, 2022.
The average price we received for our ethanol was approximately $0.44 higher per
gallon during the three months ended March 31, 2022 compared to the three months
ended March 31, 2021, an increase of approximately 26.0%. Management attributes
this increase in ethanol prices during the three months ended March 31, 2021 to
higher gasoline prices along with increasing gasoline demand. 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.
Distillers Grains
Our total distillers grains revenue was approximately 33.4% higher during the
three months ended March 31, 2022 compared to the same period of 2021 due
primarily to increased average prices received for our distillers grains. We
sold
22
--------------------------------------------------------------------------------
Table of Contents
approximately 11.6% more total tons of distillers grains during the three months
ended March 31, 2022 compared to the same period of 2021 primarily due to
increased dried distillers grains production caused by increased market demand
during the 2022 period.
The average price we received for our dried distillers grains was
approximately 15.2% higher during the three months ended March 31, 2022 compared
to the same period of 2021, an increase of approximately $26.13 per ton.
Management attributes the increase in dried distillers grains prices during the
three months ended March 31, 2022 to increases in the domestic price of corn and
natural gas. The average price we received for our modified/wet distillers
grains, on a dry-equivalent basis, was approximately 21.5% higher for the three
months ended March 31, 2022 compared to the same period of 2021, an increase of
approximately $39.16 per ton. Management attributes this increase in
modified/wet distillers grains prices with higher corn prices in the market and
increased natural gas prices.
Corn Oil
Our total corn oil revenue was approximately 66.1% higher during the three
months ended March 31, 2022 compared to the same period of 2021 due primarily to
increased prices received for our corn oil. Our total pounds of corn oil sold
increased by approximately 5.9% during the three months ended March 31, 2022
compared to the same period of 2021, an increase of approximately 368,000
pounds. We produced more corn oil due to increased oil extraction proficiency
during the 2022 period compared to the three months ended March 31, 2021.
The average price per pound we received for our corn oil was higher by
approximately 56.9% for the three months ended March 31, 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 45.6% higher for the
three months ended March 31, 2022 compared to the same period of 2021 due to
significantly increased corn prices during the 2022 period.
Our average cost per bushel of corn increased by approximately 43.2% for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021. We consumed approximately 1.7% more bushels of corn during the three
months ended March 31, 2022 compared to the same period of 2021 that resulted in
slightly less production at the ethanol plant. 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 until the harvest of 2022 begins. After
harvest, corn prices are expected to remain stable for the remainder of our 2022
fiscal year.
Natural Gas
Our cost of revenues related to natural gas increased by approximately $414,000,
an increase of approximately 20.8%, for the three months ended March 31, 2022
compared to the three months ended March 31, 2021. This increase was due to
higher natural gas costs per MMBtu offset partially by less natural gas usage
during the three months ended March 31, 2022 compared to the same period of
2021.
Our average cost per MMBtu of natural gas during the three months ended March
31, 2022 was approximately 22.8% more compared to the cost per MMbtu for the
three months ended March 31, 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 decreased by approximately 1.6% during the
three months ended March 31, 2022 compared to the same period of 2021.
23
--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Our operating expenses were comparable for the three months ended March 31, 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 March 31, 2022 compared
to the same period of 2021 due to lower income on investments during the three
months ended March 31, 2022. We had less income from our investments during the
three months ended March 31, 2022 compared to the same period of 2021 due to
lower profitability in the ethanol sector. We had less interest expense during
the three months ended March 31, 2022 compared to the same period of 2021 due to
lower carrying balances on outstanding debt.
Changes in Financial Condition for the Three Months Ended March 31, 2022
Current Assets
Our cash on hand at March 31, 2022 was less compared to December 31, 2021 due
to deferred corn payments and member distribution payments which we made in
January 2022. We had greater accounts receivable at March 31, 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 greater
at March 31, 2022 compared to December 31, 2021 due to more corn inventory on
hand as well as higher corn and ethanol prices which increase the value of our
inventory. The asset value of our derivative instruments was greater at
March 31, 2022 compared to December 31, 2021, primarily because we had more cash
in our margin account as of March 31, 2022 compared to December 31, 2021. We had
less prepaid expenses at March 31, 2022 compared to December 31, 2021 due to
amortization of our insurance premiums.
Property and Equipment
The value of our property and equipment was more at March 31, 2022 compared to
December 31, 2021 primarily as a result of new construction currently in
progress for an additional grain bin, ethanol storage tank, and additional
fermentor.
Other Assets
The value of our investments was lower at March 31, 2022 compared to
December 31, 2021 due to distributions in excess of earnings from our
investments during the three months ended March 31, 2022.
Current Liabilities
We had less outstanding checks in excess of bank balances at March 31, 2022
compared to December 31, 2021. 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 March 31, 2022 compared to
December 31, 2021 due primarily to decreased corn payables at March 31, 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
March 31, 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 March 31, 2022 compared to December 31, 2021.
Long-Term Liabilities
Our long-term liabilities were higher at March 31, 2022 compared to
December 31, 2021 due to increased borrowing on our available credit.
24
--------------------------------------------------------------------------------
Table of Contents
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 March 31, 2022, we
had $2,000,000 outstanding and $44,500,000 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 three months ended March 31, 2022
and 2021:
Three Months Ended March 31,
2022 2021
Net cash (used in) operating activities $ (22,054,476) $ (13,759,119)
Net cash (used in) investing activities (2,386,032) (14,544)
Net cash (used in) financing activities (13,362,482) (3,001,133)
Cash Flow From Operations. Our operating activities used more cash during the
three months ended March 31, 2022 compared to the same period of 2021, due
primarily to decreased net income and more cash used by accounts payable
partially offset by an decrease in accounts receivable during the 2022 period.
Cash Flow From Investing Activities. Our investing activities used more cash
during the three months ended March 31, 2022 compared to the same period of
2021, due to the construction of an additional grain bin, ethanol storage tank,
and additional fermentor.
Cash Flow From Financing Activities. Our financing activities used more cash
during the three months ended March 31, 2022 compared to the same period of
2021, due primarily to 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 eighth
fermentor and the design and construction of an additional grain storage bin.
The Company will also use its cash for Dakota Ethanol's design and construction
of a 2 million gallon ethanol storage tank. 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's
maturity date was extended to November 1, 2023. Interest on the outstanding
principal balance of the operating line will accrue at the Secured Overnight
Financing Rate ("SOFR") 30-Day Average Rate plus 305 basis points. The available
credit on the reducing revolving note is $44,500,000. Interest on the
outstanding principal balance of the revolving loan and term loan will accrue at
the SOFR 30-Day Average Rate plus 330 basis points. The working
25
--------------------------------------------------------------------------------
Table of Contents
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 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.
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-Day Average Rate and is not
subject to a floor. The rate was 3.1% at March 31, 2022. 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 on
November 1, 2023. On March 31, 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-Day Average Rate plus 330 basis points. The interest rate
is not subject to a floor. The rate was 3.35% at March 31, 2022. The note
contains a non-use fee of 0.5% on the unused portion of the note. On March 31,
2022, Dakota Ethanol had $2,000,000 outstanding and $44,500,000 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-Day Average Rate and
is not subject to a floor. The rate was 3.35% at March 31, 2022. On March 31,
2022, Dakota Ethanol had $5,000,000 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 March 31, 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.
26
--------------------------------------------------------------------------------
Table of Contents
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.
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.
© Edgar Online, source Glimpses
LAKE AREA CORN PROCESSORS, LLC 
