HIGHWATER ETHANOL, LLC Results of Operations for the Fiscal Years Ended
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, gross loss, operating expenses, operating profit (loss) and other items to total revenues in our statements of operations for the fiscal years endedOctober 31, 2021 and 2020: 2021
2020
Statements of Operations Data Amount % Amount % Revenues$ 158,717,536 100.00 %$ 97,256,146 100.00 % Cost of Goods Sold 143,172,419 90.21 % 99,813,857 102.63 % Gross Profit (Loss) 15,545,117 9.79 % (2,557,711) (2.63) % Operating Expenses 3,234,524 2.03 % 3,552,328 3.65 % Operating Profit (Loss) 12,310,593 7.76 % (6,110,039) (6.28) % Other Income (Expense), Net 1,430,335 0.90 % (256,127) (0.27) % Net Income (Loss)$ 13,740,928 8.66 %$ (6,366,166) (6.55) % The following table shows the sources of our revenues for the fiscal years endedOctober 31, 2021 and 2020. 2021 2020 Percentage of Percentage of Revenue Sources Amount Total Revenues Amount Total Revenues Ethanol Sales$ 122,902,729 77.43 %$ 75,161,967 77.28 % Modified Wet Distillers Grains Sales 4,899,649 3.09 % 4,163,426 4.28 % Dried Distillers Grains Sales 21,090,325 13.29 % 14,123,366 14.52 % Corn Oil Sales 9,824,833 6.19 % 3,807,387 3.92 % Total Revenues$ 158,717,536 100.00 %$ 97,256,146 100.00 % Revenues Ethanol Our total revenues were higher for the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 . Revenue from ethanol sales increased by approximately 63.5% during the fiscal year endedOctober 31, 2021 compared to the fiscal year endedOctober 31, 2020 primarily due to an increase in the average price per gallon and number of 21 -------------------------------------------------------------------------------- gallons of ethanol sold during the fiscal year endedOctober 31, 2021 compared to the fiscal year endOctober 31, 2020 . The average ethanol sales price per gallon we received for the fiscal year endedOctober 31, 2021 was approximately 56.6% higher than the average price received for the fiscal year endedOctober 31, 2020 due to higher corn prices and increases in demand during the during the fiscal year endedOctober 31, 2021 . Ethanol prices were lower during the fiscal year endedOctober 31, 2020 due to restrictions put in place in response to the COVID-19 pandemic. In addition, we received a premium on ethanol shipped toCalifornia during the fiscal year endedOctober 31, 2021 due to approval from CARB for our cellulosic pathway pursuant to the LCFS. The LCFS requires renewable fuels to meet certain standards in order to be sold intoCalifornia . However, this pathway does not guarantee a premium for ethanol shipped intoCalifornia . Factors likely to affect ethanol prices in the future include changes in domestic corn prices and corn supply, trade disputes with foreign governments, possible changes in domestic and foreign demand due to the evolving COVID-19 pandemic, and the potential for the EPA to resume granting small refinery exemptions. The number of gallons of ethanol sold increased by approximately 4.2% during the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 . Our ethanol production levels for the fiscal year endedOctober 31, 2021 are at an annual rate of approximately 64 million gallons. Management anticipates that the amount of ethanol produced will remain relatively consistent in the future unless economic conditions worsen and we reduce ethanol production levels. For the fiscal year endedOctober 31, 2021 , we recorded gains due to changes in the fair value of our outstanding ethanol derivative positions of approximately$1,000 . For the fiscal year endedOctober 31, 2020 , we recorded losses due to changes in the fair value of our outstanding ethanol derivative positions of approximately$623,000 . Distillers Grains Revenue from distillers grains sales increased by approximately 42.1% during the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 , due to an increase in the price of distillers grains and tons of dried distillers grains sold during the period. For the fiscal year endedOctober 31, 2021 , the average price per ton that we received for our dried distillers grains was approximately 44.2% higher than the average price we received during the fiscal year endedOctober 31, 2020 , due primarily to increases in the domestic prices of corn and soybeans for the period. For the fiscal year endedOctober 31, 2021 , the average price per ton that we received for our modified distillers grains was approximately 18.5% higher than during the fiscal year endedOctober 31, 2020 , due to increases in the domestic prices of corn and soybeans. Distillers grains prices typically change in proportion to domestic corn prices and availability of corn. Domestic demand for distillers grains could decrease if corn prices decline and end-users switch to lower priced alternatives. Management anticipates that both domestic and foreign demand for distillers grains may be negatively affected by the COVID-19 pandemic. Other factors likely to affect distillers grains prices include prices and availability of other commodities, the continued imposition byChina of anti-dumping and anti-subsidy duties on distillers grains produced inthe United States and other trade actions bythe United States and foreign governments. The tons of dried distillers grains sold during the fiscal year endedOctober 31, 2021 , increased by approximately 3.6% as compared to the tons of dried distillers grains we sold during the fiscal year endedOctober 31, 2020 . The tons of modified distillers grains we sold during the fiscal year endedOctober 31, 2021 , were similar when compared to the same period for 2020. Overall, the number of tons of distillers grains sold increased during our fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 , due primarily to increased corn grind offset by higher corn oil production levels for the period which led to higher production levels for the period. Management anticipates that the amount of distillers grains produced will remain relatively consistent in the future unless economic conditions worsen and we reduce ethanol production levels which would then have a corresponding effect on distillers grains.
Corn Oil
Revenue from corn oil sales increased by approximately 158.0% for the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 primarily due to increases in the price of corn oil and pounds of corn oil sold during the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 . The average price per pound of corn oil sold during the fiscal year endedOctober 31, 2021 increased 100% due to an increases in the price of corn and soybeans and increased biodiesel production for the period. Factors likely to affect corn oil 22 --------------------------------------------------------------------------------
prices include biodiesel demand, prices of corn and soybeans, the status of the biodiesel blenders' tax credit and new crop corn oil content.
The pounds of corn oil we sold during the fiscal year endedOctober 31, 2021 increased by approximately 29.7% as compared to the pounds of corn oil we sold for the fiscal year endedOctober 31, 2020 , due to increased corn grind and improved efficiencies leading to increased production for the period. Management anticipates that the amount of corn oil produced will remain relatively consistent in the future unless economic conditions worsen and we reduce ethanol production levels which would then have a corresponding effect on corn oil. Cost of Goods Sold Our two largest costs of production are corn (77.1% of cost of goods sold for the fiscal year endedOctober 31, 2021 ) and natural gas (3.5% of cost of goods sold for the fiscal year endedOctober 31, 2021 ). Our total cost of goods sold was approximately 43.4% more during the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 .
Corn
Our average price per bushel of corn for the fiscal year endedOctober 31, 2021 increased by approximately 55.4% compared to the fiscal year endedOctober 31, 2020 primarily due to higher market value for corn as a result of increased demand which outpaced supply. We also used approximately 3.8% more bushels of corn in the fiscal year endedOctober 31, 2021 as compared to the fiscal year endedOctober 31, 2020 due to increased ethanol production. Management expects there to be an adequate corn supply available in our area to operate the ethanol plant. However, yields in our local area have been lower due to dry weather which could have a negative affect on the price we pay for our corn. Corn prices are dependent on weather conditions, supply and demand, stocks and other factors which could contribute to price volatility and significantly impact our costs of production. AtOctober 31, 2021 , we had approximately 1,824,000 bushels of forward fixed basis corn purchase contracts and 1,188,000 bushels of forward fixed price corn purchase contracts valued at approximately$6,100,000 for various delivery periods throughJanuary 2023 . We recorded gains due to changes in the fair value of our outstanding corn derivative positions for the fiscal year endedOctober 31, 2021 of approximately$353,000 . We recorded losses due to changes in the fair value of our outstanding corn derivative positions for the fiscal year endedOctober 31, 2020 of approximately$845,000 .
Natural Gas
For the fiscal year endedOctober 31, 2021 , we purchased approximately 4.7% more natural gas as compared to the same period of 2020. This increase in natural gas usage is primarily due to the increase in dried distillers grains production. Our average price per MMBTU of natural gas was approximately the same for the fiscal year endedOctober 31, 2021 compared to the fiscal year endedOctober 31, 2020 . Management anticipates that natural gas prices will continue at current levels unless the natural gas industry experiences production problems or if there are large increases in natural gas demand.
At
For the fiscal years endedOctober 31, 2021 and 2020, we recorded gains due to the change in fair value of our outstanding natural gas derivative positions of approximately$24,000 and$11,000 , respectively.
Operating Expenses
We had operating expenses for the fiscal year ended
23
--------------------------------------------------------------------------------Other Income (Expense), Net
We had total other income for the fiscal year endedOctober 31, 2021 of$1,430,335 compared to total other expense of$256,127 for the fiscal year endedOctober 31, 2020 . Our other income for the fiscal year endedOctober 31, 2021 , consisted primarily of gain on extinguishment of debt related to the forgiveness of the PPP loan and the resale of natural gas.
Results of Operations for the Fiscal Years Ended
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, gross loss, operating expenses, operating loss and other items to total revenues in our statements of operations for the fiscal years endedOctober 31, 2020 and 2019: 2020
2019
Statements of Operations Data Amount % Amount % Revenues$ 97,256,146 100.00 %$ 97,249,109 100.00 % Cost of Goods Sold 99,813,857 102.63 % 101,759,731 104.64 % Gross Loss (2,557,711) (2.63) % (4,510,622) (4.64) % Operating Expenses 3,552,328 3.65 % 3,200,285 3.29 % Operating Loss (6,110,039) (6.28) % (7,710,907) (7.93) % Other Income (Expense), Net (256,127) (0.27) % (563,329) (0.58) % Net Loss$ (6,366,166) (6.55) %$ (8,274,236) (8.51) % The following table shows the sources of our revenues for the fiscal years endedOctober 31, 2020 and 2019. 2020 2019 Percentage of Percentage of Revenue Sources Amount Total Revenues Amount Total Revenues Ethanol Sales$ 75,161,967 77.28 %$ 75,541,437 77.68 % Modified Wet Distillers Grains Sales 4,163,426 4.28 % 3,874,384 3.98 % Dried Distillers Grains Sales 14,123,366 14.52 % 14,700,718 15.12 % Corn Oil Sales 3,807,387 3.92 % 3,132,570 3.22 % Total Revenues$ 97,256,146 100.00 %$ 97,249,109 100.00 % Revenues Ethanol Our total revenues were similar for the fiscal year endedOctober 31, 2020 , compared to the fiscal year endedOctober 31, 2019 . Revenue from ethanol sales decreased by approximately 0.5% during the fiscal year endedOctober 31, 2020 compared to the fiscal year endedOctober 31, 2019 primarily due to lower ethanol prices during the fiscal year endedOctober 31, 2020 compared to the fiscal year endOctober 31, 2019 . The average ethanol sales price per gallon we received for the fiscal year endedOctober 31, 2020 was approximately 2.2% lower than the average price received for the fiscal year endedOctober 31, 2019 . However, we experienced an increase in the gallons of ethanol sold during the fiscal year endedOctober 31, 2020 , compared to the fiscal year endedOctober 31, 2019 . The gallons of ethanol we sold during the fiscal year endedOctober 31, 2020 increased by 1.7% as compared to the number of gallons of ethanol sold for the fiscal year endedOctober 31, 2019 . Ethanol prices were negatively affected for an extended period by lower domestic demand resulting in part from the use by theEnvironmental Protection Agency ("EPA") of the small refinery exemption and a decline in ethanol exports due to trade disputes with foreign governments and the institution of a tariff byChina on ethanol produced inthe United States . Ethanol prices further decreased due to a collapse in both domestic and foreign demand as a result of restrictions put in place in response to the COVID-19 pandemic. As a result of poor economic conditions, many ethanol plants curtailed or stopped ethanol production. The decrease in industry-wide production coupled with a gradual increase in domestic demand due to the lifting of COVID-19 restrictions in some areas had a positive effect on ethanol prices towards the end of the fiscal year endedOctober 31, 2020 . 24 -------------------------------------------------------------------------------- The increase in ethanol gallons sold for the fiscal year endedOctober 31, 2020 , as compared to the number of gallons of ethanol we sold for the fiscal year endedOctober 31, 2019 , resulted primarily from increased ethanol production rates due to our receipt of our updated air permit inOctober 2019 . This was partially offset by reduced ethanol production levels by up to 25% during the months of March, April, May andJune 2020 due to unfavorable operating conditions in the ethanol industry and the COVID-19 pandemic. In the ordinary course of business, we enter into forward contracts for our commodity purchases and sales. AtOctober 31, 2020 , we had no forward fixed price ethanol sales contracts. For the fiscal years endedOctober 31, 2020 and 2019, we recorded losses due to changes in the fair value of our outstanding ethanol derivative positions of approximately$623,000 and$240,000 , respectively.
Distillers Grains
Revenue from distillers grains decreased by approximately 1.6% during the fiscal year endedOctober 31, 2020 compared to the fiscal year endedOctober 31, 2019 , primarily due to a decrease in tons of dried distillers grains sold during the fiscal year endedOctober 31, 2020 , compared to same period of 2019. The tons of dried distillers grains we sold during the fiscal year endedOctober 31, 2020 decreased by approximately 5.2% as compared to the tons of dried distillers grains we sold during the fiscal year endedOctober 31, 2019 . The tons of modified distillers grains we sold during the fiscal year endedOctober 31, 2020 , were similar when compared to the same period for 2019. Overall, the number of tons of distillers grains sold decreased during our fiscal year endedOctober 31, 2020 , as compared to the fiscal year endedOctober 31, 2019 due primarily to higher corn oil production levels for the period. For the fiscal year endedOctober 31, 2020 , the average price per ton that we received for our dried distillers grains was approximately 1.3% higher than the average price we received during the fiscal year endedOctober 31, 2019 , due primarily to a decrease in supply during our second fiscal quarter resulting from some ethanol plants reducing or shutting down production and an increase in corn and soybean prices in the latter part of the period. For the fiscal year endedOctober 31, 2020 , the average price per ton that we received for our modified distillers grains was approximately 7.0% higher than during the fiscal year endedOctober 31, 2019 due to increased demand and reduced production in our local area. Corn Oil Revenue from corn oil sales increased by approximately 21.5% for the fiscal year endedOctober 31, 2020 , as compared to the fiscal year endedOctober 31, 2019 primarily due to an increase in pounds of corn oil sold during the fiscal year endedOctober 31, 2020 , compared to the fiscal year endedOctober 31, 2019 . The pounds of corn oil we sold during the fiscal year endedOctober 31, 2020 increased by approximately 22.3% as compared to the pounds of corn oil we sold for the fiscal year endedOctober 31, 2019 due to improved efficiencies leading to increased production for the period.
The average price per pound of corn oil sold sold during the fiscal year ended
Cost of Goods Sold
Our two largest costs of production are corn (68.6% of cost of goods sold for the fiscal year endedOctober 31, 2020 ) and natural gas (4.9% of cost of goods sold for the fiscal year endedOctober 31, 2020 ). Our total cost of goods sold was approximately 2.2% less during the fiscal year endedOctober 31, 2020 , compared to the fiscal year endedOctober 31, 2019 .
Corn
Our average price per bushel of corn for the fiscal year endedOctober 31, 2020 increased by approximately 1.5% compared to the fiscal year endedOctober 31, 2019 primarily due to increased market value for corn. We used approximately 1.7% more bushels of corn in the fiscal year endedOctober 31, 2020 as compared to the fiscal year endedOctober 31, 2019 due to increased ethanol production. AtOctober 31, 2020 , we had approximately 881,000 bushels of forward fixed basis corn purchase contracts and 1,399,000 bushels of forward fixed price corn purchase contracts valued at approximately$5,254,000 for various delivery periods throughDecember 2021 . We recorded losses due to changes in the fair value of our outstanding corn derivative positions for the fiscal years endedOctober 31, 2020 and 2019 of approximately$845,000 and$835,000 , respectively. 25 --------------------------------------------------------------------------------
Natural Gas
For the fiscal year endedOctober 31, 2020 , we purchased approximately 1.1% less natural gas as compared to the same period of 2019. This decrease in natural gas usage is primarily due to the decrease in dried distillers grains production. Our average price per MMBTU of natural gas was approximately 2.1% higher for the fiscal year endedOctober 31, 2020 compared to the fiscal year endedOctober 31, 2019 . Natural gas prices were higher due to new interim tariff rates levied byNorthern Natural Gas effectiveJanuary 1, 2020 .
At
For the fiscal years endedOctober 31, 2020 and 2019, we recorded gains due to the change in fair value of our outstanding natural gas derivative positions of approximately$11,000 and$22,000 , respectively.
Operating Expenses
We had operating expenses for the fiscal year ended
Other Expense, Net
We had total other expense for the fiscal year endedOctober 31, 2020 of$256,127 compared to other expense of$563,329 for the fiscal year endedOctober 31, 2019 . Our other expense for the fiscal year endedOctober 31, 2020 , consisted primarily of interest expense which was offset in part by income from investments. This decrease in other expense is primarily due to a decrease in interest expense and an increase in income from investments.
Changes in Financial Condition for the Fiscal Years Ended
The following table highlights the changes in our financial condition for the fiscal year endedOctober 31, 2021 from our previous fiscal year endedOctober 31, 2020 : October 31, 2021 October 31, 2020 Current Assets$ 31,173,692 $ 15,705,336 Current Liabilities 21,322,079
12,749,753
Long-Term Liabilities 1,803,610 11,417,150
Current Assets. The increase in current assets was primarily the result of increases in cash and cash equivalents, accounts receivable and inventories atOctober 31, 2021 , as compared toOctober 31, 2020 . Current Liabilities. The increase in current liabilities was primarily the result of increases in accounts payable atOctober 31, 2021 , as as compared toOctober 31, 2020 . Long-Term Liabilities. Long-term debt decreased atOctober 31, 2021 , as compared toOctober 31, 2020 , primarily due to decreased borrowings on our 2020 Term Loan and the forgiveness of a PPP loan we obtained in 2020. We have also adopted ASC 842 which resulted in recording lease liabilities.
Liquidity and Capital Resources
The ethanol industry experienced adverse conditions throughout most of 2018 and
2019 as a result of industry-wide record low ethanol prices due to reduced
demand and high industry inventory levels. These adverse conditions continued
into 2020 and were compounded by the COVID-19 pandemic resulting in negative
operating margins, lower cash flow from operations and net operating losses for
those periods. Ethanol demand rebounded in 2021 due to the lifting of COVID-19
restrictions in many areas having a positive effect on ethanol prices resulting
in positive operating margins, higher cash flow
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from operations and net operating income for the period. However, we continue to
monitor evolving COVID-19 developments and the potential effect on demand for
our products. Based on financial forecasts prepared by our management, we
anticipate that we will have sufficient cash on hand, cash from our current
credit facilities, and cash from our operations to continue to operate the
ethanol plant for the next 12 months. We do not currently anticipate seeking
additional equity or debt financing in the near term in order to fund
operations. However, if market conditions worsen, we could have difficulty
maintaining our liquidity and may need to rely on our revolving lines of credit
or seek increases.
The following table shows cash flows for the fiscal years ended October 31, 2021
and 2020:
October 31, 2021 October 31, 2020
Net cash provided by (used in) operating
activities $ 22,409,864 $ (247,864)
Net cash used in investing activities (6,827,516) (3,275,201)
Net cash provided by (used in) financing
activities (8,700,657) 2,551,268
Cash Flow From Operations
We had more cash from operations for the fiscal year ended October 31, 2021 , as
compared to the fiscal year ended October 31, 2020 due to an increase in net
income partially offset by changes in accounts receivables and accounts payable
during the fiscal year ended October 31, 2021 .
Cash Flow From Investing Activities
We used more cash for investing activities during the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 . This change was primarily due to an increase in capital expenditures due to our USP grade ethanol project during the fiscal year endedOctober 31, 2021 .
Cash Flow From Financing Activities
We used more cash in financing activities during the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 . Our cash used in financing activities resulted primarily from net payments on long-term debt during the fiscal year endedOctober 31, 2021 , as compared to net proceeds from long-term debt during the fiscal year endedOctober 31, 2020 . The following table shows cash flows for the fiscal years endedOctober 31, 2020 and 2019: October 31, 2020 October 31, 2019 Net cash provided by (used in) operating activities $ (247,864)$ 2,957,651 Net cash used in investing activities (3,275,201) (1,709,039) Net cash provided by (used in) financing activities 2,551,268 (40,200) Cash Flow From Operations We experienced a decrease in our cash provided by (used in) operating activities for the fiscal year endedOctober 31, 2020 , as compared to the fiscal year endedOctober 31, 2019 . This decrease was primarily due to changes in accounts receivables, inventories and accrued expense during the fiscal year endedOctober 31, 2020 .
Cash Flow From Investing Activities
We used more cash for investing activities during the fiscal year ended
27
--------------------------------------------------------------------------------Cash Flow From Financing Activities
We experienced an increase in our cash for financing activities during the fiscal year endedOctober 31, 2020 , as compared to the fiscal year endedOctober 31, 2019 . This increase was primarily a result of increased net borrowings on long-term debt during the fiscal year endedOctober 31, 2020 , as compared to the fiscal year endedOctober 31, 2019 .
Short-Term and Long-Term Debt Sources
Our loan facility with Compeer Financial f/k/aAgStar Financial Services , PCA ("Compeer") included a$20,000,000 Term Revolving Loan and a term loan in the original amount of$6,000,000 (the "2020 Term Loan") to be used to fund certain improvements to the ethanol production facility. OnMarch 15, 2021 , we amended our loan facility to add a Revolving Line of Credit Loan. The specifics of the Revolving Line of Credit Loan are set forth below.
Our loan facility with Compeer is secured by substantially all business assets and also subjects the Company to various financial and non-financial covenants.
Term Revolving Loan
The Term Revolving Loan is for up to$20,000,000 with a variable interest rate that is based on the 30-day LIBOR rate plus 325 basis points with no minimum interest rate. The applicable interest rate atOctober 31, 2021 was 3.33%. The Term Revolving Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Term Revolving Loan with payment of all amounts outstanding due onJanuary 22, 2023 . The outstanding balance on this note was$499,000 atOctober 31, 2021 . We pay interest at a rate of 1.50% on amounts outstanding for letters of credit which also reduce the amount available under the Term Revolving Loan. We had no letters of credit outstanding atOctober 31, 2021 . We are also required to pay unused commitment fees for the Term Revolving Loan as defined in the loan documents.
2020 Term Loan
The 2020 Term Loan is for up to$6,000,000 with a variable interest rate based on theWall Street Journal's Prime Rate plus 45 basis points with no minimum interest rate. The applicable interest rate atOctober 31, 2021 was 3.70%. Monthly principal payments are due on the 2020 Term Loan of approximately$250,000 plus accrued interest with payments of all amounts outstanding due onSeptember 14, 2022 . The outstanding balance on this note was$3,000,000 atOctober 31, 2021 . Subsequent to our fiscal year end, the loan balance was paid off.
Revolving Line of Credit Loan
The Revolving Line of Credit Loan is for an amount equal to the borrowing base, with a maximum limit of$10,000,000 , with a variable interest rate based on at the 30-day LIBOR rate plus 325 basis points with no minimum interest rate. The amount available to borrow per the borrowing base calculations atOctober 31, 2021 was approximately$0 . The applicable interest rate atOctober 31, 2021 was 3.33%. The Revolving Line of Credit Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Revolving Line of Credit Loan with payment of all amounts outstanding due onMarch 15, 2022 . The outstanding balance on this note was$0 atOctober 31, 2021 . We are also required to pay unused commitment fees for the Revolving Line of Credit Loan.
Covenants and other Miscellaneous Financing Agreement Terms
The loan facility with Compeer is secured by substantially all business assets. We executed a mortgage in favor of Compeer creating a first lien on our real estate and plant and a security interest in all personal property located on the premises and assigned in favor of Compeer, all rents and leases to our property, our marketing contracts, our risk management services contract, and our natural gas, electricity, water service and grain procurement agreements. We are also subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage and working capital requirements. Our debt service coverage ratio is to be no less than 1.25:1.00 measured annually by comparing our adjusted EBITDA to our scheduled payments of principal and interest. Our minimum working capital is$8,250,000 , which is calculated as current assets plus the amount available for drawing under our Term Revolving Loan and undrawn amounts on outstanding letters of credit, less current liabilities, and is measured quarterly.
We are limited to annual capital expenditures of
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Agreement without prior approval. Our project to install a system to produce USP
grade high purity alcohol was pre-approved by Compeer. We are allowed to make
cash distributions to members as frequently as monthly in an amount equal to 75%
of net income if working capital is greater than or equal to $8,250,000 , or 100%
of net income if working capital is greater than or equal to $11,000,000 , or an
unlimited amount if working capital is greater than or equal to $11,000,000 and
there is no outstanding balance on the 2020 Term Loan.
Presently, we are meeting our liquidity needs and complying with our financial
covenants and the other terms of our loan agreements with Compeer. We will
continue to work with Compeer to ensure that the terms of our loan agreements
are met going forward. However, we cannot provide any assurance that our actions
will result in sustained profitable operations or that we will not be in
violation of our loan covenants or in default on our principal payments in the
future. Should unfavorable market conditions result in our violation of the
terms or covenants of our loan and we fail to obtain a waiver of any such term
or covenant, Compeer could deem us in default of our loans and require us to
immediately repay a significant portion or possibly the entire outstanding
balance of our loans. In the event of a default, Compeer could also elect to
proceed with a foreclosure action on our plant.
PPP Loan
InMarch 2020 ,Congress passed a stimulus bill called the CARES Act to provide economic relief related to the COVID-19 pandemic. One of the programs established by the Cares Act is the Paycheck Protection Program ("PPP"), authorizing loans to small business for use in paying employees that continue to work throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the PPP are administered by theSmall Business Administration and eligible to be forgiven as long as the proceeds are used for qualifying purposes and other conditions are met. OnApril 14, 2020 , we were awarded a PPP loan in the amount of$712,200 . InJanuary 2021 , we received notification from theSmall Business Administration that all loan proceeds received by the Company were forgiven. Due to the forgiveness of the loan, we recorded a gain on debt extinguishment in the statement of operations for$712,000 for the fiscal year endedOctober 31, 2021 .
Capital Expenditures
OnAugust 26, 2020 , we entered into an agreement withNelson Baker BioTech, Inc. to install a system which will allow us to produce USP grade high purity alcohol for use in the sanitizer market. We commenced construction in November, 2020. The project was completed inOctober 2021 and limited production of high purity alcohol commenced. We expect to begin sales in our 2022 fiscal year. However, we had only limited production of high purity alcohol in our 2021 fiscal year due to current positive margins in ethanol.
Contractual Cash Obligations
In addition to our long-term debt obligations, we have certain other
contractual cash obligations and commitments. The following tables provide
information regarding our contractual obligations and approximate commitments as
of
Payment Due By Period
Less than One One to Three Three to Five After Five
Total Year Years Years Years
Long-Term Debt Obligations $ 3,573,797 $ 3,074,797 $ 499,000 $ - $ -
Operating Lease Obligations 449,280 168,480 280,800 - -
Finance Lease Obligations 1,430,400 178,800 357,600 357,600 536,400
Purchase Obligations 15,958,950 10,096,645 5,862,305 - -
Total Contractual Obligations $ 21,412,427 $ 13,518,722 $
6,999,705
Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our 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. Accounting estimates that are the most important to the
presentation of our results of operations and financial condition, and which
require the greatest use of
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--------------------------------------------------------------------------------judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of carrying value of property and equipment to be a critical accounting estimate.
Inventory Valuation
We value our inventory at lower of cost or net realizable value. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. In our analysis, we consider corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realizable value on inventory to be a critical accounting estimate.
Derivatives
We are exposed to market risks from changes in interest rates, corn, natural gas, and ethanol prices. We may seek to minimize these commodity price fluctuation risks through the use of derivative instruments. In the event we utilize derivative instruments, we will attempt to link these instruments to financing plans, sales plans, market developments, and pricing activities. Such instruments in and of themselves can result in additional costs due to unexpected directional price movements. We have entered into ethanol, corn and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices. In practice, as markets move, we actively attempt to manage our risk and adjust hedging strategies as appropriate. We do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity contracts being hedged. Instead, we use fair value accounting for our hedge positions, which means that as the current market price of our hedge position changes, the gains and losses are immediately recognized in our statement of operations. The immediate recognition of hedging gains and losses under fair value accounting can cause net income (loss) to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. As ofOctober 31, 2021 , the fair values of our commodity-based derivative instruments are a net liability of$915,000 . As the prices of the hedged commodity moves in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to protect the Company over the term of the contracts for the hedged amounts.
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