We prepared the following discussion and analysis to help you better understand
our financial condition, changes in our financial condition, and results of
operations for the three and six month periods ended June 30, 2021, compared to
the same periods of the prior year. This discussion should be read in
conjunction with the consolidated financial statements and the Management's
Discussion and Analysis section for the fiscal year ended December 31, 2020,
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2020.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking
statements that involve known and unknown risks and relate to future events, our
future financial performance, or our expected future operations and actions. In
some cases, you can identify forward-looking statements by terms such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"future," "intend," "could," "hope," "predict," "target," "potential,"
"continue" or the negative of these terms or other similar expressions. These
forward-looking statements are only our predictions based on current information
and involve numerous assumptions, risks and uncertainties. Our actual results or
actions may differ materially from these forward-looking statements for many
reasons, including the reasons described in this report and our annual report on
Form 10-K for the fiscal year ended December 31, 2020.
The cautionary statements referred to in this section also should be considered
in connection with any subsequent written or oral forward-looking statements
that may be issued by us or persons acting on our behalf. We undertake no duty
to update these forward-looking statements, even though our situation may change
in the future. Furthermore, we cannot guarantee future results, events, levels
of activity, performance, or achievements. We caution you not to put undue
reliance on any forward-looking statements, which speak only as of the date of
this report. You should read this report and the documents that we reference in
this report and have filed as exhibits completely and with the understanding
that our actual future results may be materially different from what we
currently expect. We qualify all of our forward-looking statements by these
cautionary statements.
Overview
Lake Area Corn Processors, LLC is a South Dakota limited liability company that
owns and manages its wholly-owned subsidiary, Dakota Ethanol, LLC. Dakota
Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South
Dakota that has a nameplate production capacity of 90 million gallons of ethanol
per year. Lake Area Corn Processors, LLC is referred to in this report as
"LACP," the "company," "we," or "us." Dakota Ethanol, LLC is referred to in this
report as "Dakota Ethanol" or the "ethanol plant."
Our revenue is derived from the sale and distribution of our ethanol, distillers
grains and corn oil. Corn is supplied to us primarily from our members who are
local agricultural producers and from purchases of corn on the open market. We
have engaged Renewable Products Marketing Group, Inc. ("RPMG, Inc.") to market
all of the ethanol and corn oil that we produce at the ethanol plant. Further,
RPMG, Inc. markets all of the distillers grains that we produce that we do not
market internally to local customers.
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Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
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 June 30,
2021 and 2020:
2021 2020
Income Statement Data Amount % Amount %
Revenues $ 64,238,127 100.0 $ 25,424,832 100.0
Cost of Revenues 54,770,073 85.3 19,812,907 77.9
Gross Profit 9,468,054 14.7 5,611,925 22.1
Operating Expense 1,276,095 2.0 945,709 3.7
Income from Operations 8,191,959 12.7 4,666,216 18.4
Other Income (Expense) 1,866,693 2.9 (452,841) (1.8)
Net Income $ 10,058,652 15.6 $ 4,213,375 16.6
Revenues
Revenue from ethanol sales increased by approximately 146.0% during the three
months ended June 30, 2021 compared to the same period of 2020 due to increased
gallons of ethanol sold and increased average prices that we received for our
ethanol during the 2021 period. Revenue from distillers grains sales increased
by approximately 173.9% during the three months ended June 30, 2021 compared to
the same period of 2020 due primarily to increased average prices that we
received for our distillers grains along with increased tons of distillers
grains sold during the 2021 period. Revenue from corn oil sales increased by
approximately 197.2% during the three months ended June 30, 2021 compared to the
same period of 2020 due primarily to increased average prices that we received
for corn oil sold and increased pounds of corn oil sold during the 2021 period.
Ethanol
Our ethanol revenue was approximately $29.6 million higher during our three
months ended June 30, 2021 compared to the three months ended June 30, 2020, an
increase of approximately 146.0%. This increase in ethanol revenue was due
primarily to an increase in the volume of ethanol sold and increased average
price that we received per gallon of ethanol sold during the three months ended
June 30, 2021 compared to the three months ended June 30, 2020. We sold
approximately 31.3% more gallons of ethanol during the three months ended June
30, 2021 compared to the same period of 2020, an increase of approximately
5,165,000 gallons. The increase is due primarily to not having the COVID-19
pandemic related shutdown we experienced during three months ended June 30,
2020.
The average price we received for our ethanol was approximately $1.07 higher per
gallon during the three months ended June 30, 2021 compared to the three months
ended June 30, 2020, an increase of approximately 87.4%. Management attributes
this increase in ethanol prices during the three months ended June 30, 2021 to
lower ethanol stocks along with increasing gasoline demand. Since ethanol is
blended with gasoline, when gasoline demand is higher it has a corresponding
impact on ethanol demand. Management also believes that higher corn prices
during the 2021 period had an impact on ethanol prices.
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Distillers Grains
Our total distillers grains revenue was approximately 173.9% higher during the
three months ended June 30, 2021 compared to the same period of 2020 due
primarily to increased average prices received for our distillers grains and
increased tons of distillers grains sold. We sold approximately 70.9% more total
tons of distillers grains during the three months ended June 30, 2021 compared
to the same period of 2020 primarily due to increased ethanol production during
the 2021 period.
The average price we received for our dried distillers grains was
approximately 64.0% higher during the three months ended June 30, 2021 compared
to the same period of 2020, an increase of approximately $79.89 per ton.
Management attributes the increase in dried distillers grains prices during the
three months ended June 30, 2021 to increases in the domestic price of corn and
decreased market supply of corn. The average price we received for our
modified/wet distillers grains, on a dry-equivalent basis, was approximately
59.6% higher for the three months ended June 30, 2021 compared to the same
period of 2020, an increase of approximately $80.78 per ton. Management
attributes this increase in modified/wet distillers grains prices with higher
corn prices in the market and decreased corn supply.
Corn Oil
Our total corn oil revenue was approximately 197.2% higher during the three
months ended June 30, 2021 compared to the same period of 2020 due primarily to
increased prices received for our corn oil and more pounds of corn oil sold. Our
total pounds of corn oil sold increased by approximately 51.3% during the three
months ended June 30, 2021 compared to the same period of 2020, an increase of
approximately 2,217,000 pounds. We produced more corn oil due to our increased
overall production during the 2021 period since we did not have a pandemic
related shutdown like we did during the three months ended June 30, 2020.
The average price per pound we received for our corn oil was higher by
approximately 96.5% for the three months ended June 30, 2021 compared to the
same period of 2020 due primarily to demand from the biodiesel industry for corn
oil along with higher soybean oil prices.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 225.9% higher for the
three months ended June 30, 2021 compared to the same period of 2020 due to
significantly increased corn prices during the 2021 period.
Our average cost per bushel of corn increased by approximately 154.4% for the
three months ended June 30, 2021 compared to the three months ended June 30,
2020. We consumed approximately 27.9% more bushels of corn during the three
months ended June 30, 2021 compared to the same period of 2020 due to increased
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 2021 fiscal period. Corn production was lower in South
America which has resulted in increased export demand for United States corn.
Management anticipates corn prices to remain higher until the harvest of 2021
begins. After harvest, corn prices are expected to decrease for the remainder of
our 2021 fiscal year.
Natural Gas
Our cost of revenues related to natural gas increased by approximately $472,000,
an increase of approximately 46.9%, for the three months ended June 30, 2021
compared to the three months ended June 30, 2020. This increase was due to
higher natural gas costs per MMBtu along with increased natural gas usage during
the three months ended June 30, 2021 compared to the same period of 2020.
Our average cost per MMBtu of natural gas during the three months ended June 30,
2021 was approximately 23.3% more compared to the cost per MMbtu for the three
months ended June 30, 2020. Management attributes this increase in our average
natural gas costs to higher natural gas prices due to increased demand along
with higher energy prices generally.
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The volume of natural gas we used increased by approximately 19.1% during the
three months ended June 30, 2021 compared to the same period of 2020 due
primarily to increased overall production at the ethanol plant.
Operating Expenses
Our operating expenses were higher for the three months ended June 30, 2021
compared to the same period of 2020 due primarily to increased professional
fees, insurance expense, and increased wages and benefits.
Other Income and Expense
We had greater other income during the three months ended June 30, 2021 compared
to the same period of 2020 due to a gain on investments during the 2021 period
and forgiveness of our Paycheck Protection Program ("PPP") loan which was
included in other income during the three months ended June 30, 2021. We had
more income from our investments during the three months ended June 30, 2021
compared to the same period of 2020 due to improved profitability in the ethanol
sector. We had less interest expense during the three months ended June 30, 2021
compared to the same period of 2020 due to lower carrying balances on
outstanding debt in addition to lower interest rates.
Comparison of the Six Months Ended June 30, 2021 and 2020
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 six months ended June 30, 2021
and 2020:
2021 2020
Income Statement Data Amount % Amount %
Revenues $ 112,853,779 100.0 $ 57,881,070 100.0
Cost of Revenues 96,428,506 85.4 60,118,787 103.9
Gross Profit (Loss) 16,425,273 14.6 (2,237,717) (3.9)
Operating Expense 2,527,229 2.2 2,285,547 3.9
Income (Loss) from Operations 13,898,044 12.4 (4,523,264) (7.8)
Other Income (Expense) 2,696,138 2.4 (1,738,404) (3.0)
Net Income (Loss) $ 16,594,182 14.8 $ (6,261,668) (10.8)
Revenues
Revenue from ethanol sales increased by approximately 100.1% during the six
months ended June 30, 2021 compared to the same period of 2020 due to increased
gallons of ethanol sold and increased average prices that we received for our
ethanol during the 2021 period. Revenue from distillers grains sales increased
by approximately 71.1% during the six months ended June 30, 2021 compared to the
same period of 2020 due primarily to increased average prices that we received
for our distillers grains during the 2021 period along with increased tons of
distillers grains sold. Revenue from corn oil sales increased by approximately
117.3% during the six months ended June 30, 2021 compared to the same period of
2020 due primarily to increased average prices and increased pounds of corn oil
sold during the 2021 period.
Ethanol
Our ethanol revenue was approximately $43.5 million higher during our six months
ended June 30, 2021 compared to the six months ended June 30, 2020, an increase
of approximately 100.1%. This increase in ethanol revenue was due primarily to
an increase in the volume of ethanol sold and increased average price that we
received per gallon of ethanol sold during the
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six months ended June 30, 2021 compared to the six months ended June 30, 2020.
We sold approximately 14.0% more gallons of ethanol during the six months ended
June 30, 2021 compared to the same period of 2020, an increase of approximately
5 million gallons. The increased production is due to not having the pandemic
related downtime we experienced during the 2020 period.
The average price we received for our ethanol was approximately $0.86 more per
gallon during the six months ended June 30, 2021 compared to the six months
ended June 30, 2020, an increase of approximately 75.5%. Management attributes
this increase in ethanol prices during the six months ended June 30, 2021 to
lower ethanol stocks along with increasing gasoline demand. Since ethanol is
blended with gasoline, when gasoline demand is higher it has a corresponding
impact on ethanol demand.
Distillers Grains
Our total distillers grains revenue was approximately 71.1% higher during the
six months ended June 30, 2021 compared to the same period of 2020 due primarily
to increased prices received for our distillers grains and increased tons of
distillers grains sold. We sold approximately 18.7% more total tons of
distillers grains during the six months ended June 30, 2021 compared to the same
period of 2020 primarily due to increased production at the ethanol plant for
the six months ended June 30, 2021 compared to six months ended June 30, 2020.
The average price we received for our dried distillers grains was
approximately 44.6% higher during the six months ended June 30, 2021 compared to
the same period of 2020, an increase of approximately $59 per ton. Management
attributes the increase in dried distillers grains prices during the six months
ended June 30, 2021 to increases in the domestic price of corn. The average
price we received for our modified/wet distillers grains, on a dry-equivalent
basis, was approximately 43.9% higher for the six months ended June 30, 2021
compared to the same period of 2020, an increase of approximately $60 per ton.
Management attributes this increase in modified/wet distillers grains prices
with higher corn prices in the market.
Corn Oil
Our total corn oil revenue was approximately 117.3% higher during the six
months ended June 30, 2021 compared to the same period of 2020 due primarily to
increased prices received for our corn oil and increased corn oil sales. Our
total pounds of corn oil sold increased by approximately 19.7% during the six
months ended June 30, 2021 compared to the same period of 2020, an increase of
approximately 2.1 million pounds, primarily due to increased overall production
at the ethanol plant during the 2021 period.
The average price per pound we received for our corn oil was higher by
approximately 81.5% for the six months ended June 30, 2021 compared to the same
period of 2020 due primarily to demand from the biodiesel industry for corn oil
and higher soybean oil prices.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 81.4% higher for the six
months ended June 30, 2021 compared to the same period of 2020 due to
significantly increased corn prices during the 2021 period along with increased
corn usage.
Our average cost per bushel of corn increased by approximately 62.5% for the six
months ended June 30, 2021 compared to the six months ended June 30, 2020. We
consumed approximately 11.5% more bushels of corn during the six months ended
June 30, 2021 compared to the same period of 2020. Management attributes the
increased corn cost per bushel to significantly higher corn prices during our
2021 fiscal period due to lower corn production in South America which has
resulted in increased export demand for United States corn. We used more corn
during the six months ended June 30, 2021 compared to the six months ended June
30, 2020 due to increased overall production at the ethanol plant.
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Natural Gas
Our cost of revenues related to natural gas increased by approximately $532,000,
an increase of approximately 18.6%, for the six months ended June 30, 2021
compared to the six months ended June 30, 2020. This increase was due to higher
natural gas costs per MMBtu along with increased usage during the six months
ended June 30, 2021 compared to the same period of 2020.
Our average cost per MMBtu of natural gas during the six months ended June 30,
2021 was approximately 12.4% more compared to the cost per MMbtu for the six
months ended June 30, 2020. Management attributes this increase in our average
natural gas costs to higher natural gas prices due to increased demand as well
as a deep freeze that occurred in February of 2021.
The volume of natural gas we used increased by approximately 5.5% during the six
months ended June 30, 2021 compared to the same period of 2020 due primarily to
increased overall production at the ethanol plant.
Operating Expenses
Our operating expenses were higher for the six months ended June 30, 2021
compared to the same period of 2020 due primarily to increased insurance expense
and increased wages and benefits.
Other Income and Expense
We had greater other income during the six months ended June 30, 2021 compared
to the same period of 2020 due to a gain on investments during the 2021 period
along with forgiveness of our PPP loan. We had more income from our investments
during the six months ended June 30, 2021 compared to the same period of 2020
due to improved profitability in the ethanol sector. We had less interest
expense during the six months ended June 30, 2021 compared to the same period of
2020 due to lower carrying balances on outstanding debt in addition to lower
interest rates.
Changes in Financial Condition for the Six Months Ended June 30, 2021
Current Assets
Our cash on hand at June 30, 2021 was less compared to December 31, 2020 due
to deferred corn payments which we made in January 2021. We had greater accounts
receivable at June 30, 2021 compared to December 31, 2020 due to the timing of
our quarter end and the payments related to the shipments of our products. The
value of our inventory was greater at June 30, 2021 compared to December 31,
2020 due to more corn and ethanol 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 June 30, 2021 compared to December 31,
2020 due to recent corn price changes which impacted our derivative instruments.
We had less prepaid expenses at June 30, 2021 compared to December 31, 2020 due
to amortization of our insurance premiums.
Property and Equipment
The value of our property and equipment was less at June 30, 2021 compared to
December 31, 2020 primarily as a result of regular depreciation of our assets.
Other Assets
The value of our investments was greater at June 30, 2021 compared to
December 31, 2020 due to increased profitability in the ethanol industry, in
which the majority of our investments are related.
Current Liabilities
We had more outstanding checks in excess of bank balances at June 30, 2021
compared to December 31, 2020. We use our revolving loan to pay any checks that
are presented for payment which exceed the cash we have available in our
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accounts. Our accounts payable were lower at June 30, 2021 compared to
December 31, 2020 due primarily to decreased corn payables at June 30, 2021
compared to December 31, 2020 as the deferred payments were paid during the
first quarter. Our derivative instrument liability was lower at June 30, 2021
compared to December 31, 2020 due to corn price changes, which impacted our
derivative instruments. The current portion of our notes payable was less at
June 30, 2021 compared to December 31, 2020 due to forgiveness of our PPP loan
which reduced the amount of long-term loan payments we need to make in the next
twelve months.
Long-Term Liabilities
Our long-term liabilities were lower at June 30, 2021 compared to December 31,
2020 due to decreased borrowing and reductions in notes payable resulting from
increased profitability.
Liquidity and Capital Resources
Our main sources of liquidity are cash from our continuing operations,
distributions we receive from our investments and amounts we have available to
draw on our revolving credit facilities. Management does not anticipate that we
will need to raise additional debt or equity financing in the next twelve months
and management believes that our current sources of liquidity will be sufficient
to continue our operations during that time period. We anticipate that any
capital expenditures we undertake will be paid out of cash from operations and
existing loans, and will not require any additional debt or equity financing.
Currently, we have two revolving loans, which allow us to borrow funds for
working capital. These loans are described in greater detail below in the
section entitled "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Indebtedness." As of June 30, 2021, we had
$19,000,000 outstanding and $31,000,000 available to be drawn on our revolving
loans, after taking into account the borrowing base calculation. Management
anticipates that this is sufficient to maintain our liquidity and continue our
operations for the next twelve months.
The following table shows cash flows for the six months ended June 30, 2021 and
2020:
Six Months Ended June 30,
2021 2020
Net cash (used in) operating activities $ (8,775,429) $ (15,414,500)
Net cash (used in) investing activities (158,262) (264,884)
Net cash provided by (used in) by financing activities (8,263,361) 5,678,379
Cash Flow From Operations. Our operating activities used less cash during the
six months ended June 30, 2021 compared to the same period of 2020, due
primarily to increased net income partially offset by an increase in inventory
with higher values and a reduction in corn payables during the 2021 period.
Cash Flow From Investing Activities. Our investing activities used less cash
during the six months ended June 30, 2021 compared to the same period of 2020,
due to fewer capital expenditures.
Cash Flow From Financing Activities. Our financing activities used more cash
during the six months ended June 30, 2021 compared to the same period of 2020,
due primarily to the reduction of balances outstanding on our loans during the
2021 period.
Indebtedness
We maintain a comprehensive credit facility with Farm Credit Services of
America, PCA and Farm Credit Services of America, FLCA (collectively "FCSA"). We
have a $2 million revolving operating line of credit (the "Operating Line") and
a $48 million reducing revolving loan (the "Reducing Revolving Loan"). All of
our assets, including the ethanol plant and equipment, its accounts receivable
and inventory, serve as collateral for our loans with FCSA.
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On August 1, 2017, we executed an amendment to our credit agreement to create
an $8 million term loan, which we used to finance a portion of our investment in
Ring-neck Energy & Feed, LLC.
On February 6, 2018, we executed an Amended and Restated Credit Agreement (the
"Credit Agreement") with FCSA. Pursuant to the Credit Agreement, our total
credit availability is $40 million to support our expansion project. The credit
availability matures on January 1, 2026. Interest on the outstanding principal
balance will accrue at the one month London Interbank Offered Rate ("LIBOR")
plus 325 basis points until February 1, 2023 and the basis increases to 350
points thereafter until maturity. The interest rate is not subject to a floor.
We agreed to pay a fee of 0.50% on the unused portion of the increased credit
availability.
On October 21, 2019, we entered into a Second Amendment to Amended and
Restated Credit Agreement (the "Loan Amendment") with FCSA. In the Loan
Amendment, we extended the maturity date of our $10 million revolving loan to
November 1, 2021; we also extended the date when the available balance of our
$40 million revolving loan started to decrease from January 1, 2020 to January
1, 2021.
On June 5, 2020, we entered into a Third Amendment to the credit agreement
(the "Third Amendment"). Under the Third Amendment, the available credit under
the revolving operating note was reduced to $2,000,000 and the available credit
on the reducing revolving note was increased to $48,000,000. The working capital
covenant was reduced to $11,000,000, and the net worth covenant was reduced to
$18,000,0000. The next measurement date for the debt service coverage ratio was
deferred until December 31, 2021. The annual installment on the term note for
2020 was deferred until maturity in 2025. The interest rates were unchanged.
Operating Line
Dakota Ethanol has a revolving promissory note from Farm Credit Services of
America (FCSA) in an amount up to $2,000,000 or the amount available in
accordance with the borrowing base calculation, whichever is less. Interest on
the outstanding principal balance will accrue at 300 basis points above the 1
month LIBOR rate and is not subject to a floor. The rate was 3.1% at June 30,
2021. 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, 2021. On June 30, 2021, Dakota Ethanol
had $0 outstanding and $2,000,000 available to be drawn on the revolving
promissory note under the borrowing base.
Reducing Revolving Loan
Dakota Ethanol has a reducing revolving promissory note from FCSA in the
amount up to $48,000,000 or the amount available in accordance with the
borrowing availability under the credit agreement. The amount Dakota Ethanol can
borrow on the note decreases by $1,750,000 semi-annually starting on July 1,
2021 until the maximum balance reaches $32,250,000 on July 1, 2025. The note
matures on January 1, 2026. Interest on the outstanding principal balance will
accrue at the one month London Interbank Offered Rate ("LIBOR") plus 325 basis
points until February 1, 2023 and the basis increases to 350 points thereafter
until maturity. The interest rate is not subject to a floor. The rate was 3.35%
at June 30, 2021. The note contains a non-use fee of 0.5% on the unused portion
of the note. On June 30, 2021, Dakota Ethanol had $19,000,000 outstanding and
$29,000,000 available to be drawn on the note.
2017 Term Loan
On August 1, 2017, Dakota Ethanol executed a term note with FCSA in the amount
of $8 million. Dakota Ethanol agreed to make monthly interest payments starting
September 1, 2017 and annual principal payments of $1,000,000 starting on August
1, 2018. The payment that was due in August 2020 was deferred to August 2025.
The notes matures on August 1, 2025. Interest on the outstanding principal
balance will accrue at 325 basis points above the 1 month LIBOR rate and is not
subject to a floor. The rate was 3.35% at June 30, 2021. On June 30, 2021,
Dakota Ethanol had $6,000,000 outstanding on the note.
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2020 Loans
We entered into a loan agreement with the Small Business Association through
First State Bank, Gothenburg, NE on April 4, 2020 for $760,400 as part of the
Paycheck Protection Program under Division A, Title I of the Coronavirus Aid,
Relief and Economic Security Act (CARES Act). In June 2021, the Company received
notification from the Small Business Administration that all loan proceeds and
accrued interest received and recorded by the Company were forgiven. Due to
forgiveness of the loan, the Company recorded a gain on debt extinguishment in
other income in the statement of operations for $768,400 for the six months
ended June 30, 2021.
The Company also received an Economic Injury Disaster Loan (EIDL) in the
amount of $10,000 in June 2020. The Company was notified by the Small Business
Association in June 2021 that all EIDL proceeds received by the Company had been
forgiven. Due to forgiveness of the loan, the Company recorded a gain on debt
extinguishment in other income in the statement of operations for $10,000 for
the six months ended June 30, 2021.
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 million. We are required to maintain local net worth (total assets minus
total liabilities minus the value of certain investments) of at least $18
million. We are required to maintain a debt service coverage ratio of at least
1.25:1.00. The working capital and local net worth capital covenants are
measured monthly while the debt service coverage covenant is measured annually
at year-end. The debt service coverage covenant measurement will be measured
again starting on December 31, 2021.
As of June 30, 2021, we were in compliance with the working capital and local
net worth loan covenants. Management's current financial projections indicate
that we will be in compliance with our financial covenants for the next 12
months and we expect to remain in compliance thereafter. If we fail to comply
with the terms of our credit agreements with FCSA, and FCSA refuses to waive the
non-compliance, FCSA may require us to immediately repay all amounts outstanding
on our loans.
Application of Critical Accounting Policies
Management uses estimates and assumptions in preparing our consolidated
financial statements in accordance with generally accepted accounting
principles. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Of the significant accounting policies
described in the notes to our consolidated financial statements, we believe that
the following are the most critical:
Derivative Instruments
We enter into short-term forward option and futures contracts as a means of
securing corn for the ethanol plant and managing exposure to changes in
commodity prices. We enter into short-term forward, option and futures contracts
for sales of ethanol to manage exposure to changes in commodity prices. All of
our derivatives are designated as non-hedge derivatives, and accordingly are
recorded at fair value with changes in fair value recognized in net income or
treated as normal purchases and sales contracts and analyzed for inherent
losses. Although the contracts are considered economic hedges of specified
risks, they are not designated as nor accounted for as hedging instruments.
As part of our trading activity, we use futures and option contracts offered
through regulated commodity exchanges to reduce our risk and we are exposed to
risk of loss in the market value of inventories. To reduce that risk, we
generally take positions using cash and futures contracts and options.
Unrealized gains and losses related to derivative contracts for corn and
natural gas purchases are included as a component of cost of revenues and
derivative contracts related to ethanol sales are included as a component of
revenues in the
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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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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