SOUTH DAKOTA SOYBEAN PROCESSORS LLC - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
☒ COMMISSION FILE NO. 000-50253
| SOUTH DAKOTA SOYBEAN PROCESSORS LLC | ||
| (Exact name of registrant as specified in its charter) | ||
| SD | 46-0462968 | |||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
100 Caspian Ave; PO Box 500 Volga, SD | 57071 | |||||||
| (Address of Principal Executive Offices | (Zip Code) | |||||||
(605) 627-9240 | ||
| (Registrant's telephone number, including area code) | ||
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.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
¨ Large Accelerated Filer | ¨ Accelerated Filer | x Non-Accelerated Filer | ¨ Smaller Reporting Company | ¨ Emerging Growth Company | ||||||||||
| (do not check if a smaller reporting company) | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for company with an new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes x No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: On November 10, 2021, the registrant had 30,419,000 capital units outstanding.
Table of Contents
| Page | |||||||||||
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
South Dakota Soybean Processors, LLC
Condensed Financial Statements
September 30, 2021 and 2020
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South Dakota Soybean Processors, LLC
Condensed Balance Sheets
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 335,031 | $ | 3,650,950 | |||||||
| Trade accounts receivable | 35,886,295 | 28,990,655 | |||||||||
| Inventories | 128,720,906 | 69,593,473 | |||||||||
| Commodity derivative instruments | 13,515,113 | 28,417,680 | |||||||||
| Margin deposits | 14,631,549 | 6,018,001 | |||||||||
| Prepaid expenses | 1,240,930 | 2,093,622 | |||||||||
| Total current assets | 194,329,824 | 138,764,381 | |||||||||
| Property and equipment | 128,940,668 | 122,195,099 | |||||||||
| Less accumulated depreciation | (61,343,290) | (57,963,905) | |||||||||
| Total property and equipment, net | 67,597,378 | 64,231,194 | |||||||||
| Other assets | |||||||||||
| Investments in related parties | 9,327,890 | 9,327,890 | |||||||||
| Investments in cooperatives | 1,559,800 | 1,539,293 | |||||||||
| Right-of-use lease asset, net | 11,115,009 | 11,960,289 | |||||||||
| Total other assets | 22,002,699 | 22,827,472 | |||||||||
| Total assets | $ | 283,929,901 | $ | 225,823,047 | |||||||
(continued on following page)
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South Dakota Soybean Processors, LLC
Condensed Balance Sheets (continued)
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Liabilities and Members' Equity | |||||||||||
| Current liabilities | |||||||||||
| Excess of outstanding checks over bank balance | $ | 12,195,414 | $ | 8,263,020 | |||||||
| Current maturities of long-term debt | 4,000,000 | — | |||||||||
| Note payable - seasonal loan | 48,589,449 | — | |||||||||
| Current operating lease liabilities | 2,039,455 | 5,846,456 | |||||||||
| Accounts payable | 1,108,338 | 1,506,779 | |||||||||
| Accrued commodity purchases | 59,770,822 | 44,962,904 | |||||||||
| Commodity derivative instruments | 23,924,891 | 41,940,744 | |||||||||
| Accrued expenses | 3,616,809 | 3,083,591 | |||||||||
| Accrued interest | 132,687 | 40,564 | |||||||||
| Deferred liabilities - current | 1,463,601 | 1,728,407 | |||||||||
| Total current liabilities | 156,841,466 | 107,372,465 | |||||||||
| Long-term liabilities | |||||||||||
| Long-term debt, net of current maturities and unamortized debt issuance costs | 13,990,238 | 17,499,868 | |||||||||
| Long-term operating lease liabilities | 5,873,768 | 6,113,834 | |||||||||
| Total long-term liabilities | 19,864,006 | 23,613,702 | |||||||||
| Commitments and contingencies (Notes 5, 6, 7, and 12) | |||||||||||
| Members' equity | |||||||||||
| Class A Units, no par value, 30,419,000 units issued and outstanding at September 30, 2021 and December 31, 2020 | 107,224,429 | 94,836,880 | |||||||||
| Total liabilities and members' equity | $ | 283,929,901 | $ | 225,823,047 | |||||||
The accompanying notes are an integral part of these condensed financial statements.
5
South Dakota Soybean Processors, LLC
Condensed Statements of Operations (Unaudited)
For the Three and Nine-Month Periods Ended September 30, 2021 and 2020
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net revenues | $ | 147,796,292 | $ | 104,454,116 | $ | 431,696,940 | $ | 296,445,621 | ||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||||
| Cost of product sold | 113,498,309 | 85,001,018 | 350,233,888 | 234,803,800 | ||||||||||||||||||||||
| Production | 8,314,321 | 7,286,860 | 23,087,341 | 22,117,229 | ||||||||||||||||||||||
| Freight and rail | 9,823,431 | 9,592,900 | 32,053,378 | 28,235,885 | ||||||||||||||||||||||
| Brokerage fees | 164,130 | 168,043 | 550,888 | 486,099 | ||||||||||||||||||||||
| Total cost of revenues | 131,800,191 | 102,048,821 | 405,925,495 | 285,643,013 | ||||||||||||||||||||||
| Gross profit (loss) | 15,996,101 | 2,405,295 | 25,771,445 | 10,802,608 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Administration | 1,220,595 | 857,116 | 3,295,243 | 2,780,612 | ||||||||||||||||||||||
| Operating income (loss) | 14,775,506 | 1,548,179 | 22,476,202 | 8,021,996 | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest expense | (470,522) | (238,984) | (1,280,832) | (897,325) | ||||||||||||||||||||||
| Other non-operating income (expense) | 162,306 | 83,534 | 256,922 | (217,798) | ||||||||||||||||||||||
| Patronage dividend income | — | — | 365,147 | 195,553 | ||||||||||||||||||||||
| Total other income (expense) | (308,216) | (155,450) | (658,763) | (919,570) | ||||||||||||||||||||||
| Income (loss) before income taxes | 14,467,290 | 1,392,729 | 21,817,439 | 7,102,426 | ||||||||||||||||||||||
| Income tax benefit (expense) | — | — | — | — | ||||||||||||||||||||||
| Net income (loss) | $ | 14,467,290 | $ | 1,392,729 | $ | 21,817,439 | $ | 7,102,426 | ||||||||||||||||||
| Basic and diluted earnings (loss) per capital unit | $ | 0.48 | $ | 0.05 | $ | 0.72 | $ | 0.23 | ||||||||||||||||||
Weighted average number of capital units outstanding for calculation of basic and diluted earnings (loss) per capital unit | 30,419,000 | 30,419,000 | 30,419,000 | 30,419,000 | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
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South Dakota Soybean Processors, LLC
Condensed Statements of Changes in Members' Equity (Unaudited)
For the Nine Months Ended September 30, 2021 and 2020
| Class A Units | |||||||||||
| Units | Amount | ||||||||||
| Balances, December 31, 2019 | 30,419,000 | $ | 85,947,333 | ||||||||
| Net income | — | 7,102,426 | |||||||||
| Distribution to members | — | (6,692,180) | |||||||||
Balances, September 30, 2021 | 30,419,000 | $ | 86,357,579 | ||||||||
| Balances, December 31, 2020 | 30,419,000 | $ | 94,836,880 | ||||||||
| Net income | — | 21,817,439 | |||||||||
| Distribution to members | — | (9,429,890) | |||||||||
Balances, September 30, 2021 | 30,419,000 | $ | 107,224,429 | ||||||||
The accompanying notes are an integral part of these condensed financial statements.
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South Dakota Soybean Processors, LLC
Condensed Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2021 and 2020
| 2021 | 2020 | ||||||||||
| Operating activities | |||||||||||
| Net income (loss) | $ | 21,817,439 | $ | 7,102,426 | |||||||
| Charges and credits to net income not affecting cash: | |||||||||||
| Depreciation and amortization | 3,786,317 | 3,669,109 | |||||||||
| Net (gain) loss recognized on derivative activities | (1,919,827) | (34,076) | |||||||||
| Gain on sales of property and equipment | (89,150) | (40,356) | |||||||||
| Non-cash patronage dividends | (75,411) | (43,405) | |||||||||
| Forgiveness of Paycheck Protection Program loan | (10,000) | — | |||||||||
| Change in current assets and liabilities | (63,409,164) | (12,082,495) | |||||||||
| Net cash provided by (used for) operating activities | (39,899,796) | (1,428,797) | |||||||||
| Investing activities | |||||||||||
| Purchase of investments | — | (404,329) | |||||||||
| Retirement of patronage dividends | 54,904 | 66,210 | |||||||||
| Proceeds from sales of property and equipment | 126,060 | 41,216 | |||||||||
| Purchase of property and equipment | (7,185,750) | (4,158,360) | |||||||||
| Net cash provided by (used for) investing activities | (7,004,786) | (4,455,263) | |||||||||
| Financing activities | |||||||||||
| Change in excess of outstanding checks over bank balances | 3,932,394 | 10,961,501 | |||||||||
| Net proceeds (payments) from seasonal borrowings | 48,589,449 | (1,743,029) | |||||||||
| Distributions to members | (9,429,890) | (6,692,180) | |||||||||
| Payments for debt issue costs | — | (10,000) | |||||||||
| Proceeds from long-term debt | 11,839,877 | 17,131,227 | |||||||||
| Principal payments on long-term debt | (11,343,167) | (10,557,204) | |||||||||
| Net cash provided by (used for) financing activities | 43,588,663 | 9,090,315 | |||||||||
| Net change in cash and cash equivalents | (3,315,919) | 3,206,255 | |||||||||
| Cash and cash equivalents, beginning of period | 3,650,950 | 624,681 | |||||||||
| Cash and cash equivalents, end of period | $ | 335,031 | $ | 3,830,936 | |||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 1,188,709 | $ | 908,220 | |||||||
| Income taxes | $ | — | $ | — | |||||||
| Noncash investing activities: | |||||||||||
| Soybean meal contributed as investment in related party | $ | — | 335,124 | ||||||||
The accompanying notes are an integral part of these condensed financial statements.
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South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
Note 1 - Principal Activity and Significant Accounting Policies
The unaudited condensed financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although South Dakota Soybean Processors, LLC (the “Company”, “LLC”, “we”, “our”, or “us”) believes that the disclosures made are adequate to make the information not misleading.
In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in the accompanying condensed financial statements. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year due in part to the seasonal nature of some of the Company’s businesses. The balance sheet data as of December 31, 2020 has been derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.
These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2020, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2021.
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 amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
The Company accounts for all of its revenues from contracts with customers under ASC 606, Revenue from Contracts with Customers.
The Company principally generates revenue from merchandising and transporting manufactured agricultural products used as ingredients in food, feed, energy and industrial products. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any amounts collected on behalf of third parties (e.g. - taxes). The Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product to a customer. Control transfer typically occurs when goods are shipped from our facilities or at other predetermined control transfer points (for instance, destination terms). Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of revenues. Accordingly, amounts billed to customers for such costs are included as a component of revenues.
Payments received in advance to the transfer of goods, or "contract liabilities", are included in "Deferred liabilities - current" on the Company's condensed balance sheets. These customer prepayments totaled $1,463,601 and $1,728,407 as of September 30, 2021 and December 31, 2020, respectively. Of the $1,728,407 balance as of December 31, 2020, contract liabilities recognized as revenues were $414,729 and $1,309,540 for the three and nine months ended September 30, 2021, respectively. Of the $313,347 customer prepayments as of December 31, 2019, the Company recognized $0 and $313,347 of contract liabilities as revenues during the three and nine months ended September 30, 2020, respectively.
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South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
The following table presents a disaggregation of revenue from contracts with customers for the three and nine month periods ended September 30, 2021 and 2020, by product type:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Soybean meal and hulls | $ | 81,331,885 | $ | 63,195,149 | $ | 252,047,044 | $ | 187,220,101 | |||||||||||||||
| Soybean oil and oil byproducts | 66,464,407 | 41,258,967 | 179,649,896 | 109,225,520 | |||||||||||||||||||
| Totals | $ | 147,796,292 | $ | 104,454,116 | $ | 431,696,940 | $ | 296,445,621 | |||||||||||||||
Recent accounting pronouncements
Any recent accounting pronouncements are not expected to have a material impact on our condensed financial statements.
Note 2 - Accounts Receivable
Accounts receivable are considered past due when payments are not received on a timely basis in accordance with the Company’s credit terms, which is generally 30 days from invoice date. Accounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any.
The following table presents the aging analysis of trade receivables as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Past due: | |||||||||||
| Less than 30 days past due | $ | 8,479,115 | $ | 4,827,150 | |||||||
| 30-60 days past due | 948,394 | 85,177 | |||||||||
| 60-90 days past due | 72,899 | 11,366 | |||||||||
| Greater than 90 days past due | 12,642 | 43,524 | |||||||||
| Total past due | 9,513,050 | 4,967,217 | |||||||||
| Current | 26,373,245 | 24,023,438 | |||||||||
| Totals | $ | 35,886,295 | $ | 28,990,655 | |||||||
The following table provides information regarding the Company's allowance for doubtful accounts receivable as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Balances, beginning of period | $ | — | $ | — | |||||||
| Amounts charged (credited) to costs and expenses | 31,331 | — | |||||||||
| Additions (deductions) | (31,331) | — | |||||||||
| Balances, end of period | $ | — | $ | — | |||||||
In general, cash received is applied to the oldest outstanding invoice first, unless payment is for a specified invoice. The Company, on a case by case basis, may charge a late fee of 1.5% per month on past due receivables.
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South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
Note 3 - Inventories
The Company’s inventories consist of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Finished goods | $ | 57,831,451 | $ | 35,502,780 | |||||||
| Raw materials | 70,596,078 | 33,824,265 | |||||||||
| Supplies & miscellaneous | 293,377 | 266,428 | |||||||||
| Totals | $ | 128,720,906 | $ | 69,593,473 | |||||||
Finished goods and raw materials are valued at estimated market value, which approximates net realizable value. Supplies and other inventories are stated at the lower of cost or net realizable value.
Note 4 - Property and Equipment
The following is a summary of the Company's property and equipment at September 30, 2021 and December 31, 2020:
| 2021 | 2020 | ||||||||||||||||||||||
| Cost | Accumulated Depreciation | Net | Net | ||||||||||||||||||||
| Land | $ | 516,326 | $ | — | $ | 516,326 | $ | 516,326 | |||||||||||||||
| Land improvements | 2,406,915 | (872,249) | 1,534,666 | 1,647,052 | |||||||||||||||||||
| Buildings and improvements | 22,443,026 | (10,477,266) | 11,965,760 | 12,391,726 | |||||||||||||||||||
| Machinery and equipment | 88,543,029 | (48,618,957) | 39,924,072 | 41,674,080 | |||||||||||||||||||
| Railroad cars | 5,852,292 | (235,793) | 5,616,499 | 5,704,283 | |||||||||||||||||||
| Company vehicles | 151,682 | (104,589) | 47,093 | 59,613 | |||||||||||||||||||
| Furniture and fixtures | 1,387,880 | (1,034,436) | 353,444 | 408,288 | |||||||||||||||||||
| Construction in progress | 7,639,518 | — | 7,639,518 | 1,829,826 | |||||||||||||||||||
| Totals | $ | 128,940,668 | $ | (61,343,290) | $ | 67,597,378 | $ | 64,231,194 | |||||||||||||||
Depreciation of property and equipment was $1,254,004 and $1,234,580 for the three months ended September 30, 2021 and 2020, respectively, and $3,782,656 and $3,665,676 for the nine months ended September 30, 2021 and 2020, respectively.
Note 5 - Note Payable – Seasonal Loan
The Company has entered into a revolving credit agreement with CoBank which expires December 1, 2021. The purpose of the credit agreement is to finance the operating needs of the Company. Under this agreement, the Company could borrow up to $70 million, and advances on the revolving credit agreement are secured. Interest accrues at a variable rate (2.29% at September 30, 2021). The Company pays a 0.20% annual commitment fee on any funds not borrowed. There were advances outstanding of $48,589,449 and $0 at September 30, 2021 and December 31, 2020, respectively. The remaining available funds to borrow under the terms of the revolving credit agreement were $21.4 million as of September 30, 2021.
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South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
Note 6 - Long-Term Debt
The following is a summary of the Company's long-term debt at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | ||||||||||
Revolving term loan from CoBank, interest at variable rates (2.54% and 2.60% at September 30, 2021 and December 31, 2020, respectively), secured by substantially all property and equipment. Loan matures September 20, 2023. | $ | 18,000,000 | $ | 17,503,291 | |||||||
Note payable to U.S. Small Business Authority, due in monthly principal and interest installments, interest rate at 1.00%, unsecured. Note matures July 20, 2022. | — | 10,000 | |||||||||
| Total debt before debt issuance costs | 18,000,000 | 17,513,291 | |||||||||
| Less current maturities | (4,000,000) | — | |||||||||
Less debt issuance costs, net of amortization of $14,238 and $10,577 as of September 30, 2021 and December 31, 2020, respectively | (9,762) | (13,423) | |||||||||
| Total long-term debt | $ | 13,990,238 | $ | 17,499,868 | |||||||
The Company entered into an agreement as of January 28, 2020 with CoBank to amend and restate its Credit Agreement, which includes both the revolving term and seasonal loans. Under the terms and conditions of the Credit Agreement, CoBank agreed to make advances to the Company for up to $26,000,000 on the revolving term loan with a variable effective interest rate of 2.54%. The amount available for borrowing on the revolving term loan, however, will decrease by $2,000,000 every six months beginning on March 20, 2020, with a scheduled balloon payment for the remaining balance on the loan's maturity date of September 20, 2023. The Company pays a 0.40% annual commitment fee on any funds not borrowed. The debt issuance costs of $24,000 paid by the Company on this amendment will be amortized over the term of loan. The principal balance outstanding on the revolving term loan was $18,000,000 and $17,503,291 as of September 30, 2021 and December 31, 2020, respectively. There were no remaining commitments available to borrow on the revolving term loan as of September 30, 2021.
Under this agreement, the Company is subject to compliance with standard financial covenants and the maintenance of certain financial ratios. The Company was in compliance with all covenants and conditions with CoBank as of September 30, 2021.
On April 20, 2020, the Company entered into an unsecured promissory note for $1,215,700 under the U.S. Small Business Administration's Paycheck Protection Program (“PPP Loan“), a loan program created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act“). The PPP Loan is being made through First Bank & Trust, N.A. The PPP Loan was scheduled to mature on July 20, 2022 and had a 1% interest rate. The Company submitted to the SBA a loan forgiveness application on November 20, 2020, with the amount which may be forgiven equal to the sum of qualifying expenses such as payroll, rent obligations, and covered utility payments. The forgiveness application was approved by the SBA for $1,205,700 on November 25, 2020 and $10,000 on February 19, 2021.
The following are minimum principal payments on long-term debt obligations for the twelve-month periods ended September 30:
| 2022 | $ | 4,000,000 | |||
| 2023 | 14,000,000 | ||||
| Total | $ | 18,000,000 | |||
Note 7 - Operating Leases
The Company has several operating leases for railcars. These leases have terms ranging from 3-18 years and do not have renewal terms provided. The leases require the Company to maintain the condition of the railcars, restrict
12
South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
the use of the railcars to specified products, such as soybean meal, hulls or oil, limit usage to the continental United States, Canada or Mexico, require approval to sublease to other entities, and require the Company's submission of its financial statements. Lease expense for all railcars was $765,469 and $847,671 for the three months ended September 30, 2021 and 2020, respectively, and $2,309,436 and $2,371,586 for the nine months ended September 30, 2021 and 2020, respectively.
The following is a schedule of the Company's operating leases for railcars as of September 30, 2021:
| Lessor | Quantity of Railcars | Commencement Date | Maturity Date | Monthly Payment | ||||||||||||||||||||||
| American Railcar Leasing | 13 | 6/1/2021 | 5/31/2024 | $ | 7,150 | |||||||||||||||||||||
| Andersons Railcar Leasing Co. | 10 | 7/1/2018 | 6/30/2023 | 5,000 | ||||||||||||||||||||||
| Andersons Railcar Leasing Co. | 20 | 7/1/2019 | 6/30/2026 | 11,300 | ||||||||||||||||||||||
| Farm Credit Leasing | 87 | 9/1/2020 | 8/31/2032 | 34,929 | ||||||||||||||||||||||
| Farm Credit Leasing | 8 | 6/1/2021 | 5/31/2033 | 5,966 | ||||||||||||||||||||||
| GATX Corporation | 14 | 7/1/2020 | 6/30/2024 | 4,200 | ||||||||||||||||||||||
| Midwest Railcar Corporation | 64 | 1/1/2015 | 12/31/2021 | 27,200 | ||||||||||||||||||||||
| Trinity Capital | 29 | 11/1/2020 | 10/31/2023 | 17,255 | ||||||||||||||||||||||
| Trinity Capital | 20 | 11/1/2020 | 10/31/2023 | 11,900 | ||||||||||||||||||||||
| Trinity Capital | 24 | 6/1/2021 | 5/31/2026 | 10,440 | ||||||||||||||||||||||
| Wells Fargo Rail | 112 | 8/1/2017 | 7/31/2022 | 52,557 | ||||||||||||||||||||||
| Wells Fargo Rail | 107 | 1/1/2018 | 12/31/2022 | 35,845 | ||||||||||||||||||||||
| Wells Fargo Rail | 7 | 1/1/2004 | 12/31/2021 | 2,926 | ||||||||||||||||||||||
| Wells Fargo Rail | 15 | 1/1/2004 | 12/31/2021 | 5,850 | ||||||||||||||||||||||
| Wells Fargo Rail | 8 | 1/1/2015 | 12/31/2021 | 3,600 | ||||||||||||||||||||||
| 538 | $ | 236,118 | ||||||||||||||||||||||||
The Company also has a number of other operating leases for machinery and equipment. These leases have terms ranging from 3-7 years; however, most of these leases have automatic renewal terms. These leases require monthly payments of $3,779. Rental expense under these other operating leases was $168,239 and $11,013 for the three months ended September 30, 2021 and 2020, respectively, and $226,843 and $30,088 for the nine-month periods ended September 30, 2021 and 2020, respectively.
On March 19, 2020, the Company entered into an agreement with an entity in the western United States to provide storage and handling services for the Company's soybean meal. The Company paid the entity $3,300,000, which is included in current operating lease liabilities on the Company's balance sheet, after the entity's construction of additional storage and handling facilities. The agreement began May 1, 2021 and will mature on April 30, 2027 but includes an additional seven-year renewal period at the sole discretion of the Company.
Operating leases are included in right-to-use lease assets, current operating lease liabilities, and long-term lease liabilities on the condensed balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company's secured incremental borrowing rates or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the condensed balance sheet.
Lease expense for these operating leases is recognized on a straight-line basis over the lease terms. The components of lease costs recognized within our condensed statements of operations for the three-month and nine-month periods ended September 30, 2021 and 2020 were as follows:
13
South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cost of revenues - Freight and rail | $ | 765,469 | $ | 847,671 | $ | 2,309,436 | $ | 2,371,586 | |||||||||||||||
| Cost of revenues - Production | 165,856 | 8,631 | 219,693 | 22,004 | |||||||||||||||||||
| Administration expenses | 2,383 | 2,382 | 7,150 | 8,084 | |||||||||||||||||||
| Total operating lease costs | $ | 935,729 | $ | 860,704 | $ | 2,536,279 | $ | 2,401,674 | |||||||||||||||
The following summarizes the supplemental cash flow information for the three and nine-month periods ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cash paid for amounts included in measurement of lease liabilities | $ | 689,988 | $ | 743,763 | $ | 5,485,025 | $ | 2,298,049 | |||||||||||||||
| Supplemental non-cash information: | |||||||||||||||||||||||
| Right-of-use assets obtained in exchange for lease liabilities | $ | — | $ | 5,337,749 | $ | 1,250,115 | $ | 8,823,499 | |||||||||||||||
The following summarizes the weighted-average remaining lease term and weighted-average discount rate:
| September 30, 2021 | ||||||||
| Weighted-average remaining lease-term - operating leases (in years) | 8.0 | |||||||
| Weighted-average discount rate - operating leases | 3.0 | % | ||||||
The following is a maturity analysis of the undiscounted cash flows of the operating lease liabilities as of September 30, 2021:
| Railcars | Other | Total | ||||||||||||||||||
Twelve-month periods ended September 30: | ||||||||||||||||||||
| 2022 | $ | 2,383,878 | $ | 278,062 | $ | 2,661,940 | ||||||||||||||
| 2023 | 1,401,974 | 275,355 | 1,677,329 | |||||||||||||||||
| 2024 | 887,534 | 258,597 | 1,146,131 | |||||||||||||||||
| 2025 | 763,379 | 242,722 | 1,006,101 | |||||||||||||||||
| 2026 | 683,799 | 236,918 | 920,717 | |||||||||||||||||
| Thereafter | 2,957,231 | 2,023,214 | 4,980,445 | |||||||||||||||||
| Total lease payments | 9,077,795 | 3,314,868 | 12,392,663 | |||||||||||||||||
| Less amount of lease payments representing interest | (1,269,761) | (7,893) | (1,277,654) | |||||||||||||||||
| Total present value of lease payments | $ | 7,808,034 | $ | 3,306,975 | $ | 11,115,009 | ||||||||||||||
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South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
Note 8 - Member Distribution
On February 2, 2021, the Company’s Board of Managers approved a cash distribution of approximately $9.4 million, or 31.0¢ per capital unit. The distribution was paid in accordance with the Company’s operating agreement and distribution policy on February 4, 2021.
Note 9 - Derivative Instruments and Hedging Activities
In the ordinary course of business, the Company enters into contractual arrangements as a means of managing exposure to changes in commodity prices and, occasionally, foreign exchange and interest rates. The Company’s derivative instruments primarily consist of commodity futures, options and forward contracts, and interest rate swaps, caps and floors. Although these contracts may be effective economic hedges of specified risks, they are not designated as, nor accounted for, as hedging instruments. These contracts are recorded on the Company’s condensed balance sheets at fair value as discussed in Note 10, Fair Value.
As of September 30, 2021 and December 31, 2020, the value of the Company’s open futures, options and forward contracts was approximately $(10,409,778) and $(13,523,064), respectively.
As of September 30, 2021 | |||||||||||||||||
| Balance Sheet Classification | Asset Derivatives | Liability Derivatives | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Commodity contracts | Current Assets/Liabilities | $ | 13,222,084 | $ | 23,410,734 | ||||||||||||
| Foreign exchange contracts | Current Assets/Liabilities | 65,558 | 32,086 | ||||||||||||||
| Interest rate caps and floors | Current Assets/Liabilities | 227,471 | 482,071 | ||||||||||||||
| Totals | $ | 13,515,113 | $ | 23,924,891 | |||||||||||||
As of December 31, 2020 | |||||||||||||||||
| Balance Sheet Classification | Asset Derivatives | Liability Derivatives | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Commodity contracts | Current Assets/Liabilities | $ | 28,365,908 | $ | 41,196,628 | ||||||||||||
| Foreign exchange contracts | Current Assets/Liabilities | 50,979 | 48,539 | ||||||||||||||
| Interest rate caps and floors | Current Assets/Liabilities | 793 | 695,577 | ||||||||||||||
| Totals | $ | 28,417,680 | $ | 41,940,744 | |||||||||||||
During the three and nine-month periods ended September 30, 2021 and 2020, net realized and unrealized gains (losses) on derivative transactions were recognized in the condensed statements of operations as follows:
| Net Gain (Loss) Recognized on Derivative Activities for the | Net Gain (Loss) Recognized on Derivative Activities for the | ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Commodity contracts | $ | 14,581,706 | $ | (6,632,699) | $ | 1,749,894 | $ | 498,472 | |||||||||||||||
| Foreign exchange contracts | 5,892 | (222,464) | 35,013 | (43,805) | |||||||||||||||||||
| Interest rate swaps, caps and floors | 62,763 | 38,147 | 134,920 | (420,591) | |||||||||||||||||||
| Totals | $ | 14,650,361 | $ | (6,817,016) | $ | 1,919,827 | $ | 34,076 | |||||||||||||||
15
South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
The Company recorded gains (losses) in cost of goods sold related to its commodity derivative instruments of $14,650,361 and $(6,817,016) during the three months ended September 30, 2021 and 2020, respectively, and $1,919,827 and $34,076 for the nine-month periods ended September 30, 2021 and 2020, respectively.
Note 10 - Fair Value
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, this guidance establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. The three levels of hierarchy and examples are as follows:
•Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange and commodity derivative contracts listed on the Chicago Board of Trade (“CBOT”).
•Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs, such as commodity prices using forward future prices.
•Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
The following tables set forth financial assets and liabilities measured at fair value in the condensed balance sheets and the respective levels to which fair value measurements are classified within the fair value hierarchy as of September 30, 2021 and December 31, 2020:
Fair Value as of September 30, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Inventory | $ | — | $ | 128,205,139 | $ | — | $ | 128,205,139 | |||||||||||||||
| Commodity derivative instruments | $ | — | $ | (10,409,778) | $ | — | $ | (10,409,778) | |||||||||||||||
| Margin deposits (deficits) | $ | 14,631,549 | $ | — | $ | — | $ | 14,631,549 | |||||||||||||||
Fair Value as of December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Inventory | $ | — | $ | 69,127,700 | $ | — | $ | 69,127,700 | |||||||||||||||
| Commodity derivative instruments | $ | — | $ | (13,523,064) | $ | — | $ | (13,523,064) | |||||||||||||||
| Margin deposits | $ | 6,018,001 | $ | — | $ | — | $ | 6,018,001 | |||||||||||||||
The Company enters into various commodity derivative instruments, including futures, options, swaps and other agreements. The fair value of the Company’s commodity derivatives is determined using unadjusted quoted prices for identical instruments on the CBOT. The Company estimates the fair market value of their finished goods and raw materials inventories using the market price quotations of similar forward future contracts listed on the CBOT and adjusts for the local market adjustments derived from other grain terminals in our area.
The Company considers the carrying amount of significant classes of financial instruments on the balance sheets, including cash, accounts receivable, and accounts payable, to be reasonable estimates of fair value due to their
16
South Dakota Soybean Processors, LLC
Notes to Condensed Financial Statements
length or maturity. The fair value of the Company’s long-term debt approximates the carrying value. The interest rates on the long-term debt are similar to rates the Company would be able to obtain currently in the market.
The Company has patronage investments in other cooperatives and common and preferred stock holdings in privately held entities. There is no market for their patronage credits or the entity’s common and preferred holdings, and it is impracticable to estimate the fair value of the Company’s investments. These investments are carried on the balance sheet at original cost plus the amount of patronage earnings allocated to the Company, less any cash distributions received.
Note 11 - Related Party Transactions
The Company has equity investments in Prairie AquaTech, LLC, Prairie AquaTech Manufacturing, LLC and Prairie AquaTech Investments, LLC. The Company sold soybean products to Prairie AquaTech, LLC and Prairie AquaTech Manufacturing, LLC totaling $1,885,669 and $282,877 during the three months ended September 30, 2021 and 2020, respectively, and $3,837,003 and $342,136 during the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, Prairie AquaTech, LLC and Prairie AquaTech Manufacturing, LLC owed the Company $0 and $339,967, respectively.
The Company has entered into agreements with Prairie AquaTech Manufacturing, LLC to perform various management services and to serve as the owner's representative during the construction of its new manufacturing facility adjacent to the Company's plant in Volga, South Dakota. The Company received a total of $1.72 million in compensation for those services, which was recorded in deferred liabilities on the Company's condensed balance sheet. The Company recognized revenues from management services of $0 and $0 during the three months ended September 30, 2021 and 2020, respectively, and $0 and $121,111 during the nine months ended September 30, 2021 and 2020, respectively.
Note 12 - Commitments and Contingencies
From time to time in the ordinary course of our business, the Company may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual dispute. The Company carries insurance that provides protection against general commercial liability claims, claims against our directors, officer and employees, business interruption, automobile liability, and workers' compensation. The Company is not currently involved in any material legal proceedings and are not aware of any potential claims.
Note 13 - Subsequent Event
The Company evaluated all of its activities and concluded that no subsequent events have occurred that would require recognition in its financial statements or disclosed in the notes to its financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
The information in this quarterly report on Form 10-Q for the nine-month period ended September 30, 2021, (including reports filed with the Securities and Exchange Commission (the “SEC” or “Commission”), contains “forward-looking statements” that deal with future results, expectations, plans and performance, and should be read in conjunction with the financial statements and Annual Report on Form 10-K for the year ended December 31, 2020. Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions. Forward-looking statements involve numerous assumptions, risks and uncertainties. Actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements are identified in our Form 10-K for the year ended December 31, 2020.
We are not under any duty to update the forward-looking statements contained in this report, nor do we guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.
Executive Overview and Summary
We recorded a net income of $21.8 million for the nine-month period ended September 30, 2021, compared to $7.1 million during the same period in 2020. The $14.7 million increase in net income was largely due to an increased demand for soybean oil along with an improvement in the quantity and quality of the local soybean crop. Demand for soybean oil increased significantly in 2021 due to increased consumption in the biofuel industry. In addition, soybean production in South Dakota rebounded in 2020 which resulted in a substantial fall harvest and improvement in soybean supply locally compared to 2019. The oil protein and moisture content of this crop also improved, further boosting profits during the year. Despite one of the largest on record soybean crops in 2020, concerns about the prospect of running out of soybeans to process prior to the 2021 harvest kept soybean meal values in line with previous years. These same concerns negatively impacted margins as local producers were reluctant to sell their soybeans during the months leading up to harvest.
Looking ahead, we anticipate above average processing margins for the remainder of 2021 and into 2022. A number of new renewable diesel plants in the Western U.S. are slated to begin production in 2022 which should keep soybean oil demand well above historical levels. Yet, we are concerned about the local soybean supply especially during the third quarter of 2022. Drought conditions this past summer have made it very difficult to accurately measure the quantity available for purchase until new crop supplies become available. Meal premiums are forecast to remain near average at least until the end of the first quarter 2022. South American supplies are anticipated to add pressure to the U.S. soybean meal export market during the second and third quarters in 2022 which may negatively affect our margins.
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RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2021 and 2020
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | ||||||||||||||||||||
| Revenue | $ | 147,796,292 | 100.0 | $ | 104,454,116 | 100.0 | |||||||||||||||||
| Cost of revenues | (131,800,191) | (89.2) | (102,048,821) | (97.7) | |||||||||||||||||||
| Gross profit | 15,996,101 | 10.8 | 2,405,295 | 2.3 | |||||||||||||||||||
| Operating expenses | (1,220,595) | (0.8) | (857,116) | (0.8) | |||||||||||||||||||
| Interest expense | (470,522) | (0.3) | (238,984) | (0.2) | |||||||||||||||||||
| Other non-operating income (expense) | 162,306 | 0.1 | 83,534 | 0.1 | |||||||||||||||||||
| Net income | $ | 14,467,290 | 9.8 | $ | 1,392,729 | 1.3 | |||||||||||||||||
Revenue – Revenue increased $43.3 million, or 41.5%, for the three-month period ended September 30, 2021, compared to the same period in 2020. The increase in revenues was primarily due to increases in the average sales prices of all soybean products, especially refined soybean oil. Oil prices doubled in 2021 due to surging demand for soybean oil from the renewable diesel and food sectors. In addition, soybean meal prices increased approximately 25% during the three-month period ended September 30, 2021, compared to the same period in 2020. The increase in meal prices was due to concerns about the prospect of a heavily diminished soybean supply prior to the 2021 harvest as a result of a very strong demand in the soybean export sector.
Gross Profit/Loss – Gross profit increased $13.6 million, or 565.0%, for the three months ended September 30, 2021, compared to the same period in 2020. The increase in gross profit was primarily due to surging demand for oil from the renewable diesel sector as more diesel plants opened. In addition, the quantity and quality of soybeans grown in the U.S., especially in our local procurement area, improved in 2020 from 2019 due to more favorable weather conditions.
Operating Expenses – Administrative expenses, including selling, general and administrative expenses, increased approximately $363,000, or 42.4%, during the three-month period ended September 30, 2021, compared to the same period in 2020. The increase was primarily due to an increase in personnel costs.
Interest Expense – Interest expense increased $232,000, or 96.9%, during the three months ended September 30, 2021, compared to the same period in 2020. The increase in interest expense was due primarily to an increase in borrowings from our lines of credit, as we borrowed more due to higher commodity prices and to pay for capital improvements. The average debt level during the three-month period ended September 30, 2021 was approximately $71.6 million, compared to $31.9 million for the same period in 2020.
Other Non-Operating Income – Other non-operating income (expense), including patronage dividend income, increased $79,000 during the three-month period ended September 30, 2021, compared to the same period in 2020. The increase in other non-operating income was primarily due to a $54,000 increase in gains on sales of property and equipment. During the three-month period ended September 30, 2021, gains on sales of property and equipment totaled $94,000, compared to $40,000 during the same period in 2020.
Net Income/Loss – During the three-month period ended September 30, 2021, we generated a net income of $14.5 million, compared to $1.4 million for the same period in 2020. The $13.1 million increase was primarily attributable to an increase in gross profit.
19
Comparison of the nine months ended September 30, 2021 and 2020
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | ||||||||||||||||||||
| Revenue | $ | 431,696,940 | 100.0 | $ | 296,445,621 | 100.0 | |||||||||||||||||
| Cost of revenues | (405,925,495) | (94.0) | (285,643,013) | (96.4) | |||||||||||||||||||
| Gross profit | 25,771,445 | 6.0 | 10,802,608 | 3.6 | |||||||||||||||||||
| Operating expenses | (3,295,243) | (0.8) | (2,780,612) | (0.9) | |||||||||||||||||||
| Interest expense | (1,280,832) | (0.3) | (897,325) | (0.3) | |||||||||||||||||||
| Other non-operating income (expense) | 622,069 | 0.1 | (22,245) | — | |||||||||||||||||||
| Net income | $ | 21,817,439 | 5.1 | $ | 7,102,426 | 2.4 | |||||||||||||||||
Revenue – Revenue increased $135.3 million, or 45.6%, for the nine-month period ended September 30, 2021, compared to the same period in 2020. The increase in revenues was primarily due to increases in the average sales prices of all soybean products, especially refined soybean oil. The average sales price of soybean oil increased approximately 70% in the nine months ended September 30, 2021, compared to the same period in 2020, due to surging demand for soybean oil from the renewable diesel and food sectors. In addition, soybean meal prices increased approximately 30% during the nine-month period ended September 30, 2021, compared to the same period in 2020. The increased meal prices were due to concerns about the prospect of a heavily diminshed soybean supply prior to the 2021 harvest as a result of strong demand in the soybean export sector.
Gross Profit/Loss – Gross profit increased $15.0 million for the nine months ended September 30, 2021, compared to the same period in 2020. The increase in gross profit was primarily due to surging in demand for oil from the renewable diesel sector as more diesel plants were opened. In addition, the quantity and quality of soybeans grown in the U.S., especially in our local procurement area, improved in 2020 from 2019 due to more favorable weather conditions.
Operating Expenses – Administrative expenses, including all selling, general and administrative expenses, increased approximately $515,000, or 18.5%, during the nine-month period ended September 30, 2021, compared to the same period in 2020. The increase was primarily due to increases in personnel costs and professional fees.
Interest Expense – Interest expense increased $384,000, or 42.7%, during the nine months ended September 30, 2021, compared to the same period in 2020. The increase in interest expense was due primarily to an increase in borrowings from our lines of credit, as borrowed more due to higher commodity prices and to pay for capital improvements. The average debt level during the nine-month period ended September 30, 2021 was approximately $65.8 million, compared to $35.9 million for the same period in 2020.
Other Non-Operating Income – Other non-operating income (expense), including patronage dividend income, improved $644,000 during the nine-month period ended September 30, 2021, compared to the same period in 2020. The increase in other non-operating income was due to a $556,000 improvement in gains (losses) on our interest rate hedge instruments. During the nine-month period ended September 30, 2021, gains on interest rate hedges totaled $135,000, compared to losses of $421,000 during the same period in 2020.
Net Income/Loss – During the nine-month period ended September 30, 2021, we generated a net income of $21.8 million, compared to $7.1 million for the same period in 2020. The $14.7 million increase was primarily attributable to an increase in gross profit and other non-operating income.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash provided by operations and borrowings under our two lines of credit which are discussed below under “Indebtedness.” On September 30, 2021, we had working capital, defined as current assets less current liabilities, of approximately $37.5 million, compared to $23.7 million on September 30, 2020. Working capital increased $13.8 million between periods primarily due to increases in net income during that period.
20
Based on current plans, we will continue funding our capital and operating needs from cash from operations and revolving lines of credit.
Comparison of the Nine Months Ended September 30, 2021 and 2020
| 2021 | 2020 | ||||||||||
| Net cash provided by (used for) operating activities | $ | (39,899,796) | $ | (1,428,797) | |||||||
| Net cash provided by (used for) investing activities | (7,004,786) | (4,455,263) | |||||||||
| Net cash provided by (used for) financing activities | 43,588,663 | 9,090,315 | |||||||||
Cash Flows Used For Operations
The $38.5 million increase in cash flows used for operating activities was due to a $36.0 million increase in inventories which were largely the result of increased commodity prices in our industry. During the nine-month period ended September 30, 2021, we increased inventories by $59.1 million, compared to $23.1 million during the same period in 2020.
Cash Flows Used For Investing Activities
The $2.5 million increase in cash flows used for investing activities during the nine-month period ended September 30, 2021, compared to the same period in 2020, was due to an $3.0 million increase in capital improvements. During the nine months ended September 30, 2021, we spent $7.2 million on capital improvements, compared to $4.2 million during the same period in 2020. Partially offsetting the increase in capital improvements was a $0.4 million decrease in investment purchases. During the nine months ended September 30, 2021, we made no new investments in Prairie AquaTech Manufacturing, LLC, compared to $0.4 million during the same period in 2020.
Cash Flows Provided By (Used For) Financing Activities
The $34.5 million increase in cash flows provided by financing activities was principally due to a $44.3 million increase in net proceeds on borrowings. During the nine months ended September 30, 2021, net proceeds on borrowings increased $49.1 million, compared to $4.8 million during the same period in 2020. Partially offsetting the increase in net borrowings was a $7.1 million decrease in outstanding checks over bank balance and a $2.7 million increase in cash distributions to our members during the nine-month period ended September 30, 2021, compared to the same period in 2020.
Indebtedness
We have two lines of credit with CoBank, our primary lender, to meet the short and long-term needs of our operations. The first credit line is a revolving long-term loan. Under this loan, we may borrow funds as needed up to the credit line maximum, or $26.0 million, and then pay down the principal whenever excess cash is available. Repaid amounts may be borrowed up to the available credit line. On March 20, 2020, the available credit line decreased by $2.0 million, and decreases continually by the same amount every six months until the credit line’s maturity on September 20, 2023 at which time we will be required to make a balloon payment for the remaining balance. We pay a 0.40% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan was $18.0 million and $17.5 million as of September 30, 2021 and December 31, 2020. Under this loan, there were no additional funds available to borrow as of September 30, 2021.
The second credit line is a revolving working capital (seasonal) loan. The primary purpose of this loan, which matures on December 1, 2021, is to finance our operating needs. The maximum amount we can borrow under this credit line is $70.0 million. We pay a 0.20% annual commitment fee on any funds not borrowed; however, we have the option to reduce the credit line during any given commitment period listed in the credit agreement to avoid the commitment fee. As of September 30, 2021 and December 31, 2020, the principal balance outstanding on this credit line was $48.6 million and $0, respectively, allowing us to borrow an additional $21.4 million as of September 30, 2021.
21
Both the revolving and seasonal loans with CoBank are set up with a variable rate option. The variable rate is set by CoBank and changes weekly on the first business day of each week. We also have a fixed rate option on both loans, allowing us to fix rates for any period between one day and the entire commitment period. The annual interest rate on the revolving term loan was 2.54% and 2.60% as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, the interest rate on the seasonal loan was 2.29% and 2.35%, respectively. We were in compliance with all covenants and conditions with CoBank as of September 30, 2021.
On April 20, 2020, we entered into an unsecured promissory note for $1,215,700 under the U.S. Small Business Administration's Paycheck Protection Program (“PPP Loan“), a loan program created under the Coronavirus Aid, Relief and Economic Security (the "CARES Act"). The PPP Loan, which was scheduled to mature on July 20, 2022 and had a 1.0% interest rate, was made through First Bank & Trust, N.A., Brookings, South Dakota. The PPP Loan has since been forgiven in full by the SBA, with $1,205,700 being forgiven on November 25, 2020 and $10,000 being forgiven in February 2021.
OFF BALANCE SHEET FINANCING ARRANGEMENTS
We do not utilize variable interest entities or other off-balance sheet financial arrangements.
Contractual Obligations
The following table shows our contractual obligations for the periods presented:
| Payment due by period | ||||||||||||||||||||||||||||||||
| CONTRACTUAL OBLIGATIONS | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||
| Long-Term Debt Obligations (1) | $ | 18,668,000 | $ | 4,441,000 | $ | 14,227,000 | $ | — | $ | — | ||||||||||||||||||||||
| Operating Lease Obligations | 12,393,000 | 2,662,000 | 2,823,000 | 1,927,000 | 4,981,000 | |||||||||||||||||||||||||||
| Totals | $ | 31,061,000 | $ | 7,103,000 | $ | 17,050,000 | $ | 1,927,000 | $ | 4,981,000 | ||||||||||||||||||||||
(1) Represents principal and interest payments on our notes payable, which are included on our Balance Sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of our Financial Statements under Part I, Item 1, for a discussion on the impact, if any, of the recently pronounced accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Commodities Risk & Risk Management. To reduce the price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight or options futures contract) on a regulated commodity futures exchange, the Chicago Board of Trade. While hedging activities reduce the risk of loss from changing market prices, such activities also limit the gain potential which otherwise could result from these significant fluctuations in market prices. Our policy is generally to maintain a hedged position within limits, but we can be long or short at any time. Our profitability is primarily derived from margins on soybeans processed, not from hedging transactions. Our management does not anticipate that hedging activities will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a cash contract.
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At any one time, our inventory and purchase contracts for delivery to our facility may be substantial. We have risk management policies and procedures that include net position limits. They are defined by commodity, and include both trader and management limits. This policy and procedure triggers a review by management when any trader is outside of position limits. The position limits are reviewed at least annually with the board of managers. We monitor current market conditions and may expand or reduce the limits in response to changes in those conditions.
An adverse change in market prices would not materially affect our profitability since we generally take opposite and offsetting positions by entering into commodity futures and forward contracts as economic hedges of price risk.
Foreign Currency Risk. We conduct essentially all of our business in U.S. dollars and have minimal direct risk regarding foreign currency fluctuations. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of and demand for U.S. agricultural products compared to the same products offered by foreign suppliers.
An adverse change in market prices would not materially affect our profitability since we generally take opposite and offsetting positions by entering into commodity futures and forward contracts as economic hedges of price risk.
Interest Rate Risk. We manage exposure to interest rate changes by using variable rate loan agreements with fixed rate options. Long-term loan agreements can utilize the fixed option through maturity; however, the revolving ability to pay down and borrow back would be eliminated once the funds were fixed.
As of September 30, 2021, we had $0 in fixed rate debt outstanding and $88.0 million of variable rate lines of credit. Interest rate changes impact the amount of our interest payments and, therefore, our future earnings and cash flows. Assuming other variables remain constant, a 1.0% increase in interest rates on our variable rate debt could have an estimated impact on profitability of approximately $880,000 per year.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting. There were no changes to our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting during the quarter ended September 30, 2021.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time in the ordinary course of our business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual dispute. We carry insurance that provides protection against general commercial liability claims, claims against our directors, officer and employees, business interruption, automobile liability, and workers' compensation. We are not currently involved in any material legal proceedings and are not aware of any potential claims.
Item 1A. Risk Factors.
During the quarter ended September 30, 2021, there were no material changes to the Risk Factors disclosed in Item 1A (Part I) of our 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
| Exhibit Number | Description | |||||||
| 3.1(i) | ||||||||
| 3.1(ii) | ||||||||
| 3.1(iii) | ||||||||
| 4.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
____________________________________________________________________________
(1) Incorporated by reference from Appendix B to the information statement/prospectus filed as a part of the issuer’s Registration Statement on Form S-4 (File No. 333-75804).
(2) Incorporated by reference from the same numbered exhibit to the issuer’s Form 8-K filed on June 22, 2017.
(3) Incorporated by reference from the same numbered exhibit to the issuer’s Form 10-Q filed on August 14, 2002.
(4) Incorporated by reference from the same numbered exhibit to the issuer’s Registration Statement on Form S-4 (File No. 333-75804).
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SOUTH DAKOTA SOYBEAN PROCESSORS, LLC | |||||||||||
| Dated: | November 10, 2021 | By | /s/ Thomas Kersting | ||||||||
| Thomas Kersting, Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Dated: | November 10, 2021 | By | /s/ Mark Hyde | ||||||||
| Mark Hyde, Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
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