LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2021 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||||
| For the quarterly period ended | |||||||||||
| June 30, 2021 | |||||||||||
or | |||||||||||
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||||
| For the transition period from to | |||||||||||
| Commission file number: | 000-50254 | ||||||||||
| LAKE AREA CORN PROCESSORS, LLC | |||||||||||
| (Exact name of registrant as specified in its charter) | |||||||||||
| South Dakota | 46-0460790 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 46269 SD Highway 34 | Wentworth, | SD | |||||||||
| P.O. Box 100 | 57075 | ||||||||||
| (Zip Code) | |||||||||||
| (Address of principal executive offices) | |||||||||||
| (605) | 483-2676 | ||||||||||
| (Registrant's telephone number, including area code) | |||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | ||||||||
| Non-accelerated filer | x | Smaller Reporting Company | o | ||||||||
| Emerging Growth Company | o | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
As of August 12, 2021, there are 29,620,000 membership units of the registrant outstanding.
INDEX
| Page No. | |||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
| June 30, 2021 | December 31, 2020* | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | 1,440,759 | $ | 18,637,811 | |||||||
| Accounts receivable | 941,932 | 585,054 | |||||||||
| Accounts receivable (related party) | 3,634,737 | 1,633,760 | |||||||||
| Inventory | 19,587,122 | 9,768,916 | |||||||||
| Derivative financial instruments | 4,530,232 | 2,074,010 | |||||||||
| Prepaid expenses | 432,764 | 677,471 | |||||||||
| Total current assets | 30,567,546 | 33,377,022 | |||||||||
| PROPERTY AND EQUIPMENT | |||||||||||
| Land | 874,473 | 874,473 | |||||||||
| Land improvements | 8,631,224 | 8,631,224 | |||||||||
| Buildings | 9,316,576 | 9,316,576 | |||||||||
| Equipment | 96,003,379 | 95,867,639 | |||||||||
| Construction in progress | 28,827 | 6,303 | |||||||||
| 114,854,479 | 114,696,215 | ||||||||||
| Less accumulated depreciation | (56,168,747) | (53,328,718) | |||||||||
| Net property and equipment | 58,685,732 | 61,367,497 | |||||||||
| OTHER ASSETS | |||||||||||
| Goodwill | 10,395,766 | 10,395,766 | |||||||||
| Investments | 17,923,926 | 16,636,367 | |||||||||
| Other | 73,298 | 81,295 | |||||||||
| Total other assets | 28,392,990 | 27,113,428 | |||||||||
| TOTAL ASSETS | $ | 117,646,268 | $ | 121,857,947 | |||||||
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
3
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
| June 30, 2021 | December 31, 2020* | ||||||||||
| LIABILITIES AND MEMBERS’ EQUITY | (unaudited) | ||||||||||
| CURRENT LIABILITIES | |||||||||||
| Outstanding checks in excess of bank balance | $ | 3,048,247 | $ | 319,608 | |||||||
| Accounts payable | 6,381,427 | 18,526,170 | |||||||||
| Accrued liabilities | 945,577 | 732,544 | |||||||||
| Derivative financial instruments | 414,332 | 244,181 | |||||||||
| Current portion of notes payable | 1,000,000 | 1,201,628 | |||||||||
| Other | — | 4,000 | |||||||||
| Total current liabilities | 11,789,583 | 21,028,131 | |||||||||
| LONG-TERM LIABILITIES | |||||||||||
| Notes payable | 23,993,924 | 35,561,237 | |||||||||
| Total long-term liabilities | 23,993,924 | 35,561,237 | |||||||||
| MEMBERS' EQUITY (29,620,000 units issued and outstanding) | 81,862,761 | 65,268,579 | |||||||||
| TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 117,646,268 | $ | 121,857,947 | |||||||
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
4
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Operations (Unaudited)
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | ||||||||||||||||||||
| REVENUES | $ | 64,238,127 | $ | 25,424,832 | $ | 112,853,779 | $ | 57,881,070 | |||||||||||||||
| COSTS OF REVENUES | 54,770,073 | 19,812,907 | 96,428,506 | 60,118,787 | |||||||||||||||||||
| GROSS PROFIT (LOSS) | 9,468,054 | 5,611,925 | 16,425,273 | (2,237,717) | |||||||||||||||||||
| OPERATING EXPENSES | 1,276,095 | 945,709 | 2,527,229 | 2,285,547 | |||||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 8,191,959 | 4,666,216 | 13,898,044 | (4,523,264) | |||||||||||||||||||
| OTHER INCOME (EXPENSE) | |||||||||||||||||||||||
| Interest and other income | 944,424 | 31,660 | 1,306,603 | 346,030 | |||||||||||||||||||
| Equity in net income (loss) of investments | 1,184,130 | (66,498) | 1,937,559 | (1,225,802) | |||||||||||||||||||
| Interest expense | (261,861) | (418,003) | (548,024) | (858,632) | |||||||||||||||||||
| Total other income (expense) | 1,866,693 | (452,841) | 2,696,138 | (1,738,404) | |||||||||||||||||||
| NET INCOME (LOSS) | $ | 10,058,652 | $ | 4,213,375 | $ | 16,594,182 | $ | (6,261,668) | |||||||||||||||
| BASIC AND DILUTED EARNINGS (LOSS) PER UNIT | $ | 0.34 | $ | 0.14 | $ | 0.56 | $ | (0.21) | |||||||||||||||
| WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS (LOSS) PER UNIT | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | |||||||||||||||||||
| DISTRIBUTIONS DECLARED PER UNIT | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
5
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Changes in Members' Equity (Unaudited)
| Members' Equity | |||||
| Balance - December 31, 2019 | $ | 64,212,940 | |||
| Net (loss) for the three-month period ended March 31, 2020 | (10,475,043) | ||||
| Balance - March 31, 2020 | 53,737,897 | ||||
| Net income for the three-month period ended June 30, 2020 | 4,213,375 | ||||
| Balance - June 30, 2020 | $ | 57,951,272 | |||
| Members' Equity | |||||
| Balance - December 31, 2020 | $ | 65,268,579 | |||
| Net income for the three-month period ended March 31, 2021 | 6,535,530 | ||||
| Balance - March 31, 2021 | 71,804,109 | ||||
| Net income for the three-month period ended June 30, 2021 | 10,058,652 | ||||
| Balance - June 30, 2021 | $ | 81,862,761 | |||
See Notes to Unaudited Consolidated Financial Statements.
6
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Cash Flows (Unaudited)
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income (loss) | $ | 16,594,182 | $ | (6,261,668) | |||||||
| Adjustments to reconcile net income (loss) to cash used in operating activities | |||||||||||
| Depreciation and amortization | 2,849,484 | 2,869,845 | |||||||||
| Distributions in excess of earnings (earnings in excess of distributions) from investments | (1,287,559) | 1,389,172 | |||||||||
| (Gain) on forgiveness of notes payable | (778,400) | — | |||||||||
| (Increase) decrease in | |||||||||||
| Accounts receivable | (2,357,855) | (6,350,541) | |||||||||
| Inventory | (9,818,206) | 2,840,857 | |||||||||
| Prepaid expenses | 244,705 | 132,892 | |||||||||
| Derivative financial instruments | (2,286,070) | (568,514) | |||||||||
| Increase (decrease) in | |||||||||||
| Accounts payable | (12,144,744) | (9,447,821) | |||||||||
| Accrued and other liabilities | 209,034 | (18,722) | |||||||||
| NET CASH USED IN OPERATING ACTIVITIES | (8,775,429) | (15,414,500) | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchase of property and equipment | (158,262) | (264,884) | |||||||||
| NET CASH USED IN INVESTING ACTIVITIES | (158,262) | (264,884) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Increase in outstanding checks in excess of bank balance | 2,728,639 | 907,979 | |||||||||
| Borrowings on notes payable | 18,008,000 | 43,770,400 | |||||||||
| Payments on notes payable | (29,000,000) | (39,000,000) | |||||||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (8,263,361) | 5,678,379 | |||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (17,197,052) | (10,001,005) | |||||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 18,637,811 | 12,823,653 | |||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,440,759 | $ | 2,822,648 | |||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||||
| Cash paid during the period for interest, net of capitalized interest of $525 and $128 in 2021 and 2020, respectively. | $ | 526,701 | $ | 854,213 | |||||||
| Capital expenditures in accounts payable | — | 3,229 | |||||||||
See Notes to Unaudited Consolidated Financial Statements
7
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC and subsidiary (the "Company") is a South Dakota limited liability company.
The Company owns and manages Dakota Ethanol, LLC ("Dakota Ethanol"), a 90 million-gallon (annual nameplate capacity) ethanol plant, located near Wentworth, South Dakota. Dakota Ethanol sells ethanol and related products to customers located in North America.
In addition, the Company has investment interests in five companies in related industries. See note 5 for further details.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. All adjustments are of a normal and recurring nature. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the financial statements and notes included in the Company’s audited financial statements for the year ended December 31, 2020, contained in the annual report on Form 10-K for 2020.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Company has adopted the guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606). Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company generally recognizes revenue at a point in time. The Company’s contracts with customers have one performance obligation and a contract duration of one year or less.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. Generally, ethanol and related products are shipped free on board ("FOB") shipping point, and the control of the goods transfers to customers when the goods are loaded into trucks or rail cars are released to the railroad. Consideration is based on predetermined contractual prices or on current market prices.
•sales of ethanol
•sales of distillers grains
•sales of distillers corn oil
8
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
Disaggregation of revenue:
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line:
| Three Months Ended June 30 | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Revenues ethanol | $ | 49,954,234 | $ | 20,304,373 | $ | 86,997,893 | $ | 43,486,152 | ||||||||||||||||||
| Revenues distillers grains | 10,984,294 | 4,010,385 | 20,075,545 | 11,735,394 | ||||||||||||||||||||||
| Revenues distillers corn oil | 3,299,599 | 1,110,074 | 5,780,341 | 2,659,524 | ||||||||||||||||||||||
| $ | 64,238,127 | $ | 25,424,832 | $ | 112,853,779 | $ | 57,881,070 | |||||||||||||||||||
Contract assets and contract liabilities:
The Company has no significant contract assets or contract liabilities from contracts with customers.
The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract.
Shipping costs
Shipping costs incurred by the Company in the sale of ethanol, dried distiller's 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.
When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.
Reporting Segment
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance. The Company has determined that it has six operating segments that give rise to two reportable segments. See "Note 3 - Segments" in our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our segment reporting.
Costs of Revenues
The primary components of costs of revenues from the production of ethanol and related co-products are corn, energy (natural gas and electricity), raw materials (chemicals and denaturant), and direct labor costs.
Shipping costs on modified and wet distiller's grains are included in costs of revenues.
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.
9
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
Receivables and Credit Policies
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within fifteen days from the invoice date. Unpaid accounts receivable with invoice dates over thirty days old bear interest at 1.5% per month. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
The carrying amount of trade receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management regularly reviews trade receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The valuation allowance was zero as of June 30, 2021 and December 31, 2020.
Investment in commodities contracts, derivative instruments and hedging activities
The Company is exposed to certain risks related to its ongoing business operations. The primary risks that the Company manages by using forward or derivative instruments are price risks on anticipated purchases of corn and natural gas and the sale of ethanol, distillers grains and distillers corn oil.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material the Company uses to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow us to pass along increased corn costs to our customers. The availability and price of corn are subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.
The Company does not apply the normal purchase and sales exemption for forward corn purchase contracts. As of June 30, 2021, the Company was committed to purchasing approximately 4.9 million bushels of corn on a forward contract basis with an average price of $5.69 per bushel. The total corn purchase contracts represent 16% of the annual projected plant corn usage.
The Company enters into firm-price purchase commitments with natural gas suppliers under which the Company agrees to buy natural gas at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time the price is fixed and the time the natural gas is delivered. At June 30, 2021, the Company is committed to purchasing approximately 730,000 MMBtus of natural gas with an average price of $2.78 per MMBtu. The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market. The natural gas purchase contracts represent 36% of the annual plant requirements.
The Company enters into firm-price sales commitments with distillers grains customers under which the Company agrees to sell distillers grains at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers grain between the time the price is fixed and the time the distillers grains are delivered. At June 30, 2021, the Company was committed to selling approximately 20,000 dry equivalent tons of distillers grains with an average price of $210 per ton. The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers grains sales represent approximately 9% of the projected annual plant production.
The Company enters into firm-price sales commitments with distillers corn oil customers under which the Company agrees to sell distillers corn oil at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers corn oil between the time the price is fixed and the time the distillers corn oil is delivered. At June 30, 2021, the Company was committed to selling approximately 2.1 million pounds of distillers corn oil
10
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
with an average price of $0.59 per pound. The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers corn oil sales represent approximately 9% of the projected annual plant production.
The Company did not have any firm-priced sales commitments for ethanol as of June 30, 2021.
The Company enters into short-term forward, option and futures contracts for ethanol, corn and natural gas as a means of managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of our trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk of loss in the market value of inventories and purchase commitments.
Derivatives not designated as hedging instruments at June 30, 2021 and December 31, 2020 were as follows:
| Balance Sheet Classification | June 30, 2021 | December 31, 2020* | ||||||||||||||||||
| Forward contracts in gain position | $ | 2,724,449 | $ | 1,742,054 | ||||||||||||||||
| Futures contracts in gain position | 118,925 | — | ||||||||||||||||||
| Futures contracts in loss position | (2,200,625) | (1,799,688) | ||||||||||||||||||
| Total | 642,749 | (57,634) | ||||||||||||||||||
| Cash held by broker | 3,887,483 | 2,131,644 | ||||||||||||||||||
| Current Assets | $ | 4,530,232 | $ | 2,074,010 | ||||||||||||||||
| Forward contracts in loss position | (Current Liabilities) | $ | (414,332) | $ | (244,181) | |||||||||||||||
*Derived from audited financial statements
Futures contracts and cash held by broker are all with one party, and the right of offset exists. Therefore, on the balance sheet, these items are netted in one balance regardless of position.
Forward contracts are with multiple parties, and the right of offset does not exist. Therefore, these contracts are reported at the gross amounts on the balance sheet.
Gains and losses related to derivative contracts related to corn are included as a component of costs of revenues.
11
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
| Statement of Operations | Three Months Ended June 30, | |||||||||||||||||||
| Classification | 2021 | 2020 | ||||||||||||||||||
| Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||||||||||||
| Futures contracts | Cost of Revenues | $ | (8,207,255) | $ | 333,387 | |||||||||||||||
| Forward contracts | Cost of Revenues | 6,650,381 | 742,543 | |||||||||||||||||
| Statement of Operations | Six Months Ended June 30, | |||||||||||||||||||
| Classification | 2021 | 2020 | ||||||||||||||||||
| Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||||||||||||
| Futures contracts | Cost of Revenues | $ | (11,225,875) | $ | 1,436,264 | |||||||||||||||
| Forward contracts | Cost of Revenues | 10,104,326 | (2,370,490) | |||||||||||||||||
Investments
The Company has investment interests in five companies in related industries. All of these interests are at ownership shares less than 20%. These investments are all flow-through entities. Per ASC 323-30-S99-1, they are being accounted for by the equity method of accounting under which the Company’s share of net income is recognized as income in the Company’s statements of operations and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data.
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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the fair value of derivative financial instruments, lower of cost or net realizable value accounting for inventory and forward purchase contracts and goodwill impairment evaluation.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three months ended June 30, 2021, ethanol sales averaged approximately 78% of total revenues, while approximately 17% of revenues were generated from the sale of distiller grains and 5% of revenues were generated from the sale of corn oil. For the six months ended June 30, 2021, ethanol sales averaged approximately 77% of total revenues, while approximately 18% of revenues were generated from the sale of distiller grains and 5% of revenues were generated from the sale of corn oil.
12
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
The Company's operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
On January 30, 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a “Public Health Emergency of International Concern” and on March 11, 2020, declared COVID-19 a pandemic. Quarantines, labor shortages, and other disruptions to the Company’s operations, and those of its customers, adversely impacted the Company’s revenues, ability to provide its services and operating results. Any future quarantines, labor shortages, or other disruptions to the Company's operations, or those of its customers may adversely impact the Company's revenues, ability to provide its services and operating results. Like the COVID-19 pandemic, any significant outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the geographical area in which the Company operates, resulting in an economic downturn that could affect demand for its goods and services. The extent to which COVID-19 will impact the Company’s long-term results will depend on future developments, which are highly uncertain and cannot be predicted, including new developments regarding continued distribution of the COVID-19 vaccine, new information which may emerge concerning the severity of the coronavirus, prevalence of new COVID-19 cases and actions taken to contain the coronavirus or its impact, among others.
NOTE 3. SEGMENT REPORTING
The Company reports its financial and operating performance in two segments: (1) production, which includes the manufacturing and marketing of fuel-grade ethanol and co-products of the ethanol production process and (2) ethanol producing equity method investments, which consists of the aggregation of the Company's two equity method operating segments of investment in Guardian Hankinson, LLC and investment in Ring-neck Energy & Feed, LLC. The Company discloses its other identified operating segments in an all other category, which consists of the Company's investments in RPMG, LLC, Lawrenceville Tank, LLC, and Guardian Energy Management, LLC.
The Company’s two reportable segments have been identified based on their unique characteristics. Our production segment is the Company’s ethanol plant that is operated in a manner chosen by our chief decision making team. The ethanol producing equity method segment consists of aggregated operating segments investments that have exceeded the quantitative thresholds for reportable segments which have similar economic characteristics but our chief decision making team does not have input into the daily operations of those entities. The all other category is comprised of investments that fall below the quantitative thresholds for reporting segments and the Company's chief decision making team has no input into their daily operations. Production includes the core operating drivers of the Company’s consolidated financial statements which consist of the production and sale of ethanol and its co-products. Ethanol producing equity method investments derive their revenues from the production and sale of ethanol and its co-products. The all other category receives its revenues from marketing fees, management fees, and storage fees. The reconciliation item is necessary due to reportable segments not being consolidated in the financial statements, but rather are reflected as equity method investments.
The segments were identified using standards under ASC 280-10-50. They each engage in business activities, the operating results are reviewed by the Company’s chief operating decision maker, and discrete financial information is available for each segment.
13
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
The following tables set forth certain financial data for the Company's operating segments:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
| Net Sales | unaudited | unaudited | unaudited | unaudited | ||||||||||||||||||||||
| Production | $ | 64,238,127 | $ | 25,424,832 | $ | 112,853,779 | $ | 57,881,070 | ||||||||||||||||||
| Ethanol Producing Equity Method Investments | 164,027,153 | 45,954,973 | 292,348,281 | 134,655,876 | ||||||||||||||||||||||
| All Other | 4,226,582 | 3,579,897 | 8,215,555 | 7,506,973 | ||||||||||||||||||||||
| Total | 232,491,862 | 74,959,702 | 413,417,615 | 200,043,919 | ||||||||||||||||||||||
| Reconciliation | (168,253,735) | (49,534,870) | (300,563,836) | (142,162,849) | ||||||||||||||||||||||
| Consolidated | $ | 64,238,127 | $ | 25,424,832 | $ | 112,853,779 | $ | 57,881,070 | ||||||||||||||||||
| Gross Profit (Loss): | ||||||||||||||||||||||||||
| Production | $ | 9,468,054 | $ | 5,611,925 | $ | 16,425,273 | $ | (2,237,717) | ||||||||||||||||||
| Ethanol Producing Equity Method Investments | 14,522,776 | 4,874,799 | 27,323,018 | (2,596,516) | ||||||||||||||||||||||
| All Other | 2,627,783 | 2,399,060 | 5,252,858 | 4,919,679 | ||||||||||||||||||||||
| Total | 26,618,613 | 12,885,784 | 49,001,149 | 85,446 | ||||||||||||||||||||||
| Reconciliation | (17,150,559) | (7,273,859) | (32,575,876) | (2,323,163) | ||||||||||||||||||||||
| Consolidated | $ | 9,468,054 | $ | 5,611,925 | $ | 16,425,273 | $ | (2,237,717) | ||||||||||||||||||
| Net Income (Loss): | ||||||||||||||||||||||||||
| Production | $ | 10,058,652 | $ | 4,213,375 | $ | 16,594,182 | $ | (6,261,668) | ||||||||||||||||||
| Ethanol Producing Equity Method Investments | 10,175,037 | (994,105) | 17,304,031 | (12,923,765) | ||||||||||||||||||||||
| All Other | 1,806,780 | 639,216 | 2,660,238 | 1,450,392 | ||||||||||||||||||||||
| Total | 22,040,469 | 3,858,486 | 36,558,451 | (17,735,041) | ||||||||||||||||||||||
| Reconciliation | (11,981,817) | 354,889 | (19,964,269) | 11,473,373 | ||||||||||||||||||||||
| Consolidated | $ | 10,058,652 | $ | 4,213,375 | $ | 16,594,182 | $ | (6,261,668) | ||||||||||||||||||
| June 30, 2021 | December 31, 2020 | |||||||||||||
| Total Assets | unaudited | audited | ||||||||||||
| Production | $ | 117,646,268 | $ | 121,857,947 | ||||||||||
| Ethanol Producing Equity Method Investments | 259,625,353 | 244,353,900 | ||||||||||||
| All Other | 243,072,614 | 175,909,073 | ||||||||||||
| Total | 620,344,235 | 542,120,920 | ||||||||||||
| Reconciliation | (502,697,967) | (420,262,973) | ||||||||||||
| Consolidated | $ | 117,646,268 | $ | 121,857,947 | ||||||||||
14
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
NOTE 4. INVENTORY
Inventory consisted of the following as of June 30, 2021 and December 31, 2020:
| June 30, 2021 | December 31, 2020* | |||||||||||||
| Raw materials | $ | 10,514,715 | $ | 5,096,067 | ||||||||||
| Finished goods | 6,179,689 | 2,474,638 | ||||||||||||
| Work in process | 1,688,884 | 1,090,893 | ||||||||||||
| Parts inventory | 1,203,834 | 1,107,318 | ||||||||||||
| $ | 19,587,122 | $ | 9,768,916 | |||||||||||
*Derived from audited financial statements.
As of June 30, 2021 and December 31, 2020, the Company recorded a lower of cost or net realizable value write-down on distillers grains inventory of approximately $0 and $13,000, respectively.
NOTE 5. INVESTMENTS
Dakota Ethanol has a 5% investment interest in the Company’s ethanol marketer, Renewable Products Marketing Group, LLC (RPMG). The net income, which is reported in the Company’s income statement for RPMG, is based on RPMG’s March 31, 2021 unaudited interim results. The carrying amount of the Company’s investment was approximately $1,299,000 and $1,208,000 as of June 30, 2021 and December 31, 2020, respectively.
Dakota Ethanol has a 10% investment interest in Lawrenceville Tanks, LLC (LT), a partnership to operate an ethanol storage terminal in Georgia. The net income, which is reported in the Company’s income statement for LT, is based on LT’s June 30, 2021 unaudited interim results. The carrying amount of the Company’s investment was approximately $275,000 and $194,000 as of June 30, 2021 and December 31, 2020, respectively.
Lake Area Corn Processors has a 10% investment interest in Guardian Hankinson, LLC (GH), a partnership to operate an ethanol plant in North Dakota. The net income, which is reported in the Company’s income statement for GH, is based on GH’s June 30, 2021 unaudited interim results. The carrying amount of the Company’s investment was approximately $5,301,000 and $5,012,000 as of June 30, 2021 and December 31, 2020, respectively.
Lake Area Corn Processors has a 17% investment interest in Guardian Energy Management, LLC (GEM), a partnership to provide management services to ethanol plants. The net income, which is reported in the Company’s income statement for GEM, is based on GEM’s June 30, 2021 unaudited interim results. The carrying amount of the Company’s investment was approximately $90,000 and $90,000 as of June 30, 2021 and December 31, 2020, respectively.
Lake Area Corn Processors has an 11% investment interest in Ring-neck Energy and Feeds, LLC (REF), a partnership to operate an ethanol plant in South Dakota. The net income, which is reported in the Company’s income statement for REF, is based on REF’s June 30, 2021 unaudited interim results. The carrying amount of the Company’s investment was approximately $10,959,000 and $10,134,000 as of June 30, 2021 and December 31, 2020, respectively. REF commenced operations during the second quarter of 2019. Prior to then, the ethanol plant was under construction. The carrying amount of the investment exceeds the underlying equity in net assets by approximately $1,028,000. The excess is comprised of a basis adjustment of approximately $422,000 and capitalized interest of $606,000. The excess is amortized over 20 years from May 2019, the time the plant became operational. The amortization is recorded in equity in net income of investments. Amortization was $28,831 for both the six months ended June 30, 2021 and 2020, respectively. Amortization was $14,416 for both the three months ended June 30, 2021 and 2020, respectively.
15
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
Condensed, combined unaudited financial information of the Company’s investments in RPMG, LT, GH, GEM and REF are as follows:
| Balance Sheet | June 30, 2021 | December 31, 2020 | ||||||||||||
| Current Assets | $ | 312,128,360 | $ | 218,336,920 | ||||||||||
| Other Assets | 190,569,606 | 201,926,053 | ||||||||||||
| Current Liabilities | 246,513,217 | 209,538,950 | ||||||||||||
| Long-term Liabilities | 81,682,073 | 48,854,217 | ||||||||||||
| Members' Equity | 174,502,676 | 161,869,806 | ||||||||||||
| Three Months Ended | ||||||||||||||
| Income Statement | June 30, 2021 | June 30, 2020 | ||||||||||||
| Revenue | $ | 168,253,735 | $ | 49,534,870 | ||||||||||
| Gross Profit | 17,150,559 | 7,273,860 | ||||||||||||
| Net Income (Loss) | 11,981,817 | (354,889) | ||||||||||||
| Six Months Ended | ||||||||||||||
| Income Statement | June 30, 2021 | June 30, 2020 | ||||||||||||
| Revenue | $ | 300,563,836 | $ | 142,162,849 | ||||||||||
| Gross Profit | 32,575,876 | 2,323,164 | ||||||||||||
| Net Income (Loss) | 19,964,269 | (11,473,373) | ||||||||||||
The Company recorded equity in net income (loss) of approximately $1,938,000 and $(1,226,000) from our investments for the six months ended June 30, 2021, and 2020, respectively. The Company recorded equity in net income (loss) of approximately $1,184,000 and $(66,000) from our investments for the three months ended June 30, 2021, and 2020, respectively.
NOTE 6. REVOLVING OPERATING NOTE
On February 6, 2018, Dakota Ethanol executed a revolving promissory note with Farm Credit Services of America (FCSA) in the amount up to $10,000,000 or the amount available in accordance with the borrowing base calculation, whichever is less. Dakota Ethanol amended the note agreement with FCSA in June of 2020. The amendment reduced the available credit under the revolving operating note to $2,000,000. Interest on the outstanding principal balance will accrue at 300 basis points above the one-month LIBOR rate and is not subject to a floor. The rate was 3.10% 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 no balance outstanding and approximately $2,000,000 available to be drawn on the revolving promissory note under the borrowing base.
NOTE 7. LONG-TERM NOTES PAYABLE
On August 1, 2017, Dakota Ethanol executed a term note from FCSA in the amount of $8,000,000. 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 on August 1, 2020 was deferred after the note was amended with FCSA and is now due on August 1, 2025. The notes matures on August 1, 2025. Interest on the outstanding principal balance will accrue at 325 basis points above the one-month LIBOR rate until February 1, 2023 and increases to 350 basis points thereafter until maturity. The interest rate 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.
On February 6, 2018, Dakota Ethanol executed a reducing revolving promissory note from FCSA in the amount up to $40,000,000 or the amount available in accordance with the borrowing availability under the credit agreement. Dakota Ethanol amended the note agreement with FCSA in June of 2020. The amendment increased the available credit on the reducing
16
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
revolving note to $48,000,000. 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 325 basis points above the one-month LIBOR rate 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 0.50% 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.
As part of the note payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing financial reporting requirements, distribution and capital expenditure limits, minimum debt service coverage ratios, net worth and working capital requirements. The note is collateralized by substantially all assets of the Company. The note payable agreement was amended in June 2020 with modifications to the requirements. The working capital covenant was reduced to $11,000,000 and the net worth covenant was reduced to $18,000,000. The next measurement date for the debt service coverage ratio was deferred until December 31, 2021.
The Company entered into a loan agreement with the Small Business Association through First State Bank, Gothenburg, NE on April 4, 2020 for $760,400 as part of the Paycheck Protection Program under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). 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.
The balances of the notes payable are as follows. The balances reflect the updated agreement:
| June 30, 2021 | December 31, 2020 | |||||||||||||
| Notes Payable - FCSA | $ | 25,000,000 | $ | 36,000,000 | ||||||||||
| Notes Payable - Other | — | 770,400 | ||||||||||||
| Less unamortized debt issuance costs | (6,076) | (7,535) | ||||||||||||
| 24,993,924 | 36,762,865 | |||||||||||||
| Less current portion | (1,000,000) | (1,201,628) | ||||||||||||
| $ | 23,993,924 | $ | 35,561,237 | |||||||||||
| *Derived from audited financial statements | ||||||||||||||
Principal maturities for the next five years are estimated as follows.
| Periods Ending June 30, | Principal | |||||||
| 2022 | $ | 1,000,000 | ||||||
| 2023 | 1,000,000 | |||||||
| 2024 | 1,000,000 | |||||||
| 2025 | 1,000,000 | |||||||
| 2026 | 21,000,000 | |||||||
| thereafter | — | |||||||
| $ | 25,000,000 | |||||||
17
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
NOTE 8. FAIR VALUE MEASUREMENTS
The Company complies with the fair value measurements and disclosures standard, which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.
The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1 uses quoted market prices in active markets for identical assets or liabilities.
Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 uses unobservable inputs that are not corroborated by market data.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Derivative financial instruments. Commodity futures contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade ("CBOT") and New York Mercantile Exchange ("NYMEX") markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| June 30, 2021 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Derivative financial instruments, | ||||||||||||||||||||||||||
| futures contracts | $ | 118,925 | $ | 118,925 | $ | — | $ | — | ||||||||||||||||||
| forward contracts | $ | 2,724,449 | $ | — | $ | 2,724,449 | $ | — | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivative financial instruments, | ||||||||||||||||||||||||||
| futures contracts | $ | 2,200,625 | $ | 2,200,625 | $ | — | $ | — | ||||||||||||||||||
| forward contracts | $ | 414,332 | $ | — | $ | 414,332 | $ | — | ||||||||||||||||||
18
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
| December 31, 2020* | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Derivative financial instruments, | ||||||||||||||||||||||||||
| futures contracts | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| forward contracts | $ | 1,742,054 | $ | — | $ | 1,742,054 | $ | — | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivative financial instruments, | ||||||||||||||||||||||||||
| futures contracts | $ | 1,799,688 | $ | 1,799,688 | $ | — | $ | — | ||||||||||||||||||
| forward contracts | $ | 244,181 | $ | — | $ | 244,181 | $ | — | ||||||||||||||||||
*Derived from audited financial statements.
During the six months ended June 30, 2021, the Company did not make any changes between Level 1 and Level 2 assets and liabilities. As of June 30, 2021 and December 31, 2020, the Company did not have any Level 3 assets or liabilities.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2021.
Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.
The Company believes the carrying amount of cash and cash equivalents (level 1), accounts receivable (level 2), other receivables (level 2), accounts payable and accruals (level 2) and short-term debt (level 3) approximates fair value.
The carrying amount of long-term obligations (level 3) at June 30, 2021 of $25,000,000 had an estimated fair value of approximately $25,000,000 based on estimated interest rates for comparable debt. The carrying amount of long-term obligations at December 31, 2020 of $36,770,400 had an estimated fair value of approximately $36,770,400.
ggeNOTE 9. RELATED PARTY TRANSACTIONS
Dakota Ethanol has a 5% interest in RPMG, and Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol, dried distiller's grains and corn oil inventories produced by Dakota Ethanol. The marketing fees are included in net revenues. The Company also purchases denaturant from RPMG.
19
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2021 AND 2020
Revenues and marketing fees related to the agreements as well as denaturant purchases are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenues ethanol | $ | 50,017,972 | $ | 20,324,281 | $ | 87,125,369 | $ | 43,565,787 | |||||||||||||||
| Revenues distillers dried grains | 3,951,100 | 1,140,435 | 6,335,568 | 3,678,750 | |||||||||||||||||||
| Revenues corn oil | 3,313,337 | 1,114,584 | 5,807,243 | 2,677,418 | |||||||||||||||||||
| Marketing fees ethanol | 63,738 | 19,909 | 127,476 | 79,636 | |||||||||||||||||||
| Marketing fees distillers dried grains | 18,438 | 6,078 | 31,709 | 23,919 | |||||||||||||||||||
| Marketing fees corn oil | 13,738 | 4,510 | 26,901 | 17,894 | |||||||||||||||||||
| Denaturant purchases | 838,142 | 123,329 | 1,633,482 | 691,893 | |||||||||||||||||||
| June 30, 2021 | December 31, 2020* | ||||||||||||||||||||||
| Amounts due to RPMG | $ | 54,309 | $ | 47,073 | |||||||||||||||||||
*Derived from audited financial statements.
The Company purchased corn and services from members of its Board of Managers that farm and operate local businesses. Corn purchases from these related parties during the six months ended June 30, 2021 and 2020 totaled approximately $1,006,000 and $376,000, respectively. Corn purchases from these related parties during the three months ended June 30, 2021 and 2020 totaled approximately $758,000 and $355,000, respectively. As of June 30, 2021 and December 31, 2020, the Company had no outstanding obligations to these related parties.
NOTE 10. SUBSEQUENT EVENTS
During August 2021, the Company declared a distribution to its members of $2,962,000, or $0.10 per capital unit, to unit holders of record as of July 1, 2021.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
21
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of market fluctuations associated with commodity prices and interest rates as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding loans which bear variable interest rates. As of June 30, 2021, we had $25,000,000 outstanding on our variable interest rate loans with interest accruing at a rate of 3.35%. Our variable interest rates are calculated by adding a set basis to LIBOR. If we were to experience a 10% increase in LIBOR, the annual effect such change would have on our income statement, based on the amount we had outstanding on our variable interest rate loans as of June 30, 2021, would be approximately $2,500.
Commodity Price Risk
We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge
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against our future purchases, they are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are marking to market our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of revenues.
The immediate recognition of hedging gains and losses can cause net income 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. We recorded a combined increase to our cost of revenues of approximately $1,557,000 related to derivative instruments for the quarter ended June 30, 2021. We recorded a combined decrease to our cost of revenues of approximately $1,076,000 related to derivative instruments for the quarter ended June 30, 2020. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of June 30, 2021, we were committed to purchasing approximately 4.9 million bushels of corn with an average price of $5.69 per bushel. These corn purchases represent approximately 16% of our projected plant corn usage for the next 12 months.
As of June 30, 2021, we were committed to purchasing approximately 730,000 MMBtus of natural gas with an average price of $2.78 per MMBtu. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time the price is fixed and the time the natural gas is delivered. The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market. The natural gas purchases represent approximately 36% of the projected annual plant requirements.
As of June 30, 2021, we were committed to selling approximately 20,000 dry equivalent tons of distillers grains with an average price of $210 per ton. The distillers grains sales represent approximately 9% of the projected annual plant production.
As of June 30, 2021, we were committed to selling approximately 2.1 million pounds of distillers corn oil with an average price of $0.59 per pound. The distillers corn oil sales represent approximately 9% of the projected annual plant production.
We did not have any firm-priced sales commitments for ethanol as of June 30, 2021.
A sensitivity analysis has been prepared to estimate our exposure to corn, natural gas and ethanol price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of June 30, 2021, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from June 30, 2021. The results of this analysis, which may differ from actual results, are as follows:
| Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||||||||||||||
| Ethanol | 92,000,000 | Gallons | 10 | % | $ | 21,068,000 | |||||||||||||||||
| Corn | 28,270,599 | Bushels | 10 | % | $ | 19,201,391 | |||||||||||||||||
| Natural Gas | 1,340,000 | MMBTU | 10 | % | $ | 501,026 | |||||||||||||||||
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For comparison purposes, our sensitivity analysis for our quarter ended June 30, 2020 is set forth below.
| Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||||||||||||||
| Ethanol | 92,000,000 | Gallons | 10 | % | $ | 13,156,000 | |||||||||||||||||
| Corn | 28,768,915 | Bushels | 10 | % | $ | 8,630,674 | |||||||||||||||||
| Natural Gas | 1,460,040 | MMBTU | 10 | % | $ | 237,987 | |||||||||||||||||
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer (the principal executive officer), Scott Mundt, along with our Chief Financial Officer (the principal financial officer), Rob Buchholtz, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2021. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
For the fiscal quarter ended June 30, 2021, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, Dakota Ethanol or Lake Area Corn Processors may be named as a defendant in legal proceedings related to various issues, including, worker's compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of material legal proceedings.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors that were previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this report.
| Exhibit No. | Exhibit | ||||
| Certificate Pursuant to 17 CFR 240.13a-14(a)* | |||||
| Certificate Pursuant to 17 CFR 240.13a-14(a)* | |||||
| Certificate Pursuant to 18 U.S.C. Section 1350* | |||||
| Certificate Pursuant to 18 U.S.C. Section 1350* | |||||
| 101.INS* | XBRL Instance Document | ||||
| 101.SCH* | XBRL Schema Document | ||||
| 101.CAL* | XBRL Calculation Document | ||||
| 101.LAB* | XBRL Labels Linkbase Document | ||||
| 101.PRE* | XBRL Presentation Linkbase Document | ||||
| 101.DEF* | XBRL Definition Linkbase Document | ||||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LAKE AREA CORN PROCESSORS, LLC | |||||||||||
| Date: | August 12, 2021 | /s/ Scott Mundt | |||||||||
| Scott Mundt | |||||||||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: | August 12, 2021 | /s/ Robbi Buchholtz | |||||||||
| Robbi Buchholtz | |||||||||||
| Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||||||
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