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, 2022, compared to
the same period of the prior year. This discussion should be read in conjunction
with the consolidated financial statements and the Management's Discussion and
Analysis section for the fiscal year ended December 31, 2021, included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021
which was filed with the SEC on March 3, 2022.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking
statements that involve known and unknown risks, including the growing crisis in
Ukraine, and relate to future events, our future financial performance, or our
expected future operations and actions. In some cases, you can identify
forward-looking statements by terms such as "may," "will," "should," "expect,"
"plan," "anticipate," "believe," "estimate," "future," "intend," "could,"
"hope," "predict," "target," "potential," "continue" or the negative of these
terms or other similar expressions. These forward-looking statements are only
our predictions based on current information and involve numerous assumptions,
risks and uncertainties. Our actual results or actions may differ materially
from these forward-looking statements for many reasons, including the reasons
described in this report and our annual report on Form 10-K for the fiscal year
ended December 31, 2021.
The cautionary statements referred to in this section also should be considered
in connection with any subsequent written or oral forward-looking statements
that may be issued by us or persons acting on our behalf. We undertake no duty
to update these forward-looking statements, even though our situation may change
in the future. Furthermore, we cannot guarantee future results, events, levels
of activity, performance, or achievements. We caution you not to put undue
reliance on any forward-looking statements, which speak only as of the date of
this report. You should read this report and the documents that we reference in
this report and have filed as exhibits completely and with the understanding
that our actual future results may be materially different from what we
currently expect. We qualify all of our forward-looking statements by these
cautionary statements.
Overview
Lake Area Corn Processors, LLC is a South Dakota limited liability company that
owns and manages its wholly-owned subsidiary, Dakota Ethanol, LLC. Dakota
Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South
Dakota that has a nameplate production capacity of 90 million gallons of ethanol
per year. Lake Area Corn Processors, LLC is referred to in this report as
"LACP," the "Company," "we," or "us." Dakota Ethanol, LLC is referred to in this
report as "Dakota Ethanol" or the "ethanol plant."
Our revenue is derived from the sale and distribution of our ethanol, distillers
grains and corn oil. Corn is supplied to us primarily from our members who are
local agricultural producers and from purchases of corn on the open market. We
have engaged Renewable Products Marketing Group, Inc. ("RPMG, Inc.") to market
all of the ethanol and corn oil that we produce at the ethanol plant. Further,
RPMG, Inc. markets all of the distillers grains that we produce that we do not
market internally to local customers.
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Results of Operations
Comparison of the Three Months Ended June 30, 2022 and 2021
The following table shows the results of our operations and the percentage of
revenues, cost of revenues, operating expenses and other items to total revenues
in our consolidated statements of income for the three months ended June 30,
2022 and 2021:
2022 2021
Income Statement Data Amount % Amount %
Revenues $ 75,437,299 100.0 $ 64,238,127 100.0
Cost of Revenues 66,601,639 88.3 54,770,073 85.3
Gross Profit 8,835,660 11.7 9,468,054 14.7
Operating Expense 1,152,015 1.5 1,276,095 2.0
Income from Operations 7,683,645 10.2 8,191,959 12.8
Other Income (Expense) 3,439,329 4.6 1,866,693 2.9
Net Income $ 11,122,974 14.8 $ 10,058,652 15.7
Revenues
Revenue from ethanol sales increased by approximately 15.3% during the three
months ended June 30, 2022 compared to the same period of 2021 due to increased
average prices that we received for our ethanol during the 2022 period along
with increased gallons of ethanol sold. Revenue from distillers grains sales
increased by approximately 17.6% during the three months ended June 30, 2022
compared to the same period of 2021 due primarily to increased average prices
that we received for our distillers grains. Revenue from corn oil sales
increased by approximately 50.0% during the three months ended June 30, 2022
compared to the same period of 2021 due primarily to increased average prices
that we received for corn oil sold during the 2022 period along with a small
increase in the pounds of corn oil we sold.
Ethanol
Our ethanol revenue was approximately $7.6 million higher during our three
months ended June 30, 2022 compared to the three months ended June 30, 2021, an
increase of approximately 15.3%. This increase in ethanol revenue was due
primarily to an increase in the average price that we received per gallon of
ethanol sold during the three months ended June 30, 2022 compared to the three
months ended June 30, 2021. The average price we received for our ethanol was
approximately $0.28 higher per gallon during the three months ended June 30,
2022 compared to the three months ended June 30, 2021, an increase of
approximately 12.1%. Management attributes this increase in ethanol prices
during the three months ended June 30, 2022 to higher gasoline prices along with
increasing gasoline demand. Since ethanol is blended with gasoline, when
gasoline price and demand are higher it has a corresponding impact on ethanol
price and demand. Management also believes that higher corn prices during the
2022 period had an impact on ethanol prices.
We sold approximately 2.8% more gallons of ethanol during the three months ended
June 30, 2022 compared to the same period of 2021, an increase of approximately
614,000 gallons. The increase is due primarily to increased sales of ethanol
inventory during the three months ended June 30, 2022. Management expects
relatively stable ethanol production for the rest of our 2022 fiscal year.
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Distillers Grains
Our total distillers grains revenue was approximately 17.6% higher during the
three months ended June 30, 2022 compared to the same period of 2021 due
primarily to increased average prices received for our distillers grains. The
average price we received for our dried distillers grains was approximately
24.2% higher during the three months ended June 30, 2022 compared to the same
period of 2021, an increase of approximately $49.51 per ton. Management
attributes the increase in dried distillers grains prices during the three
months ended June 30, 2022 to increases in the domestic price of corn and
natural gas. The average price we received for our modified/wet distillers
grains was approximately 19.9% higher for the three months ended June 30, 2022
compared to the same period of 2021, an increase of approximately $43.10 per
ton. Management attributes this increase in modified/wet distillers grains
prices with higher corn prices in the market and increased natural gas prices.
We sold approximately 3.3% less total tons of distillers grains during the three
months ended June 30, 2022 compared to the same period of 2021 primarily due to
decreased dried distillers grains production caused by the increase in the price
of natural gas. We also produced more corn oil during the 2022 period which
results in fewer tons of distillers grains produced.
Corn Oil
Our total corn oil revenue was approximately 50.0% higher during the three
months ended June 30, 2022 compared to the same period of 2021 due primarily to
increased prices received for our corn oil. The average price per pound we
received for our corn oil was higher by approximately 48.9% for the three months
ended June 30, 2022 compared to the same period of 2021 due primarily to demand
from the renewable diesel industry for corn oil along with higher soybean oil
prices.
Our total pounds of corn oil sold increased by approximately 0.7% during the
three months ended June 30, 2022 compared to the same period of 2021, an
increase of approximately 46,000 pounds. We produced more corn oil due to
increased oil extraction proficiency during the 2022 period compared to the
three months ended June 30, 2021.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 21.3% higher for the
three months ended June 30, 2022 compared to the same period of 2021 due to
significantly increased corn prices during the 2022 period.
Our average cost per bushel of corn increased by approximately 13.4% for the
three months ended June 30, 2022 compared to the three months ended June 30,
2021. We consumed approximately 7.0% more bushels of corn during the three
months ended June 30, 2022 compared to the same period of 2021 that contributed
to higher corn cost. Management attributes the increased corn cost per bushel to
significantly higher market corn prices and decreased corn availability during
our 2022 fiscal period. Management anticipates corn prices to remain higher
until the harvest of 2022 begins. After harvest, corn prices are expected to
remain stable for the remainder of our 2022 fiscal year. However, corn prices
could continue to be impacted in the future by the Russian invasion of Ukraine
and weather conditions.
Natural Gas
Our cost of revenues related to natural gas increased by approximately $836,000,
an increase of approximately 56.0%, for the three months ended June 30, 2022
compared to the three months ended June 30, 2021. This increase was due to
higher natural gas costs per MMBtu offset partially by less natural gas usage
during the three months ended June 30, 2022 compared to the same period of 2021.
Our average cost per MMBtu of natural gas during the three months ended June 30,
2022 was approximately 63.2% more compared to the cost per MMbtu for the three
months ended June 30, 2021. Management attributes this increase in our average
natural gas costs to higher market natural gas prices due to high export demand
and supply shortages caused by the Russian invasion of Ukraine.
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The volume of natural gas we used decreased by approximately 4.4% during the
three months ended June 30, 2022 compared to the same period of 2021 due to
decreased dried distillers grains production.
Operating Expenses
Our operating expenses were lower for the three months ended June 30, 2022
compared to the same period of 2021 due primarily to employee wages and
benefits.
Other Income and Expense
Our other income increased during the three months ended June 30, 2022 compared
to the same period of 2021 due primarily to increased income from our
investments and the USDA Biofuel Producer Relief Program payment awarded during
the three months ended June 30, 2022. We had more interest income during the
three months ended June 30, 2022 compared to the same period of 2021 due to
having more cash on hand during the 2022 period. We had more income from our
investments during the three months ended June 30, 2022 compared to the same
period of 2021 due to higher profitability in the ethanol sector. We had less
interest expense during the three months ended June 30, 2022 compared to the
same period of 2021 due to lower carrying balances on outstanding debt.
Comparison of the Six Months Ended June 30, 2022 and 2021
The following table shows the results of our operations and the percentage of
revenues, cost of revenues, operating expenses and other items to total revenues
in our consolidated statements of income for the six months ended June 30, 2022
and 2021:
2022 2021
Income Statement Data Amount % Amount %
Revenues $ 139,888,192 100.0 $ 112,853,779 100.0
Cost of Revenues 128,359,733 91.8 96,428,506 85.4
Gross Profit 11,528,459 8.2 16,425,273 14.6
Operating Expense 2,399,894 1.7 2,527,229 2.2
Income from Operations 9,128,565 6.5 13,898,044 12.4
Other Income (Expense) 3,659,608 2.6 2,696,138 2.4
Net Income $ 12,788,173 9.1 $ 16,594,182 14.8
Revenues
Revenue from ethanol sales increased by approximately 21.6% during the six
months ended June 30, 2022 compared to the same period of 2021 due to increased
average prices that we received for our ethanol during the 2022 period along
with an increase in the gallons of ethanol we sold. Revenue from distillers
grains sales increased by approximately 24.7% during the six months ended June
30, 2022 compared to the same period of 2021 due primarily to increased average
prices that we received for our distillers grains and increased tons of
distillers grains sold. Revenue from corn oil sales increased by approximately
56.9% during the six months ended June 30, 2022 compared to the same period of
2021 due primarily to increased average prices that we received for corn oil
sold during the 2022 period.
Ethanol
Our ethanol revenue was approximately $19 million higher during our six months
ended June 30, 2022 compared to the six months ended June 30, 2021, an increase
of approximately 21.6%. This increase in ethanol revenue was due primarily
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to an increase in the average price that we received per gallon of ethanol sold
during the six months ended June 30, 2022 compared to the six months ended June
30, 2021.
The average price we received for our ethanol was approximately $0.36 higher per
gallon during the six months ended June 30, 2022 compared to the six months
ended June 30, 2021, an increase of approximately 18.1%. Management attributes
this increase in ethanol prices during the six months ended June 30, 2022 to
higher gasoline prices along with increasing gasoline demand. Since ethanol is
blended with gasoline, when gasoline price and demand are higher it has a
corresponding impact on ethanol price and demand. Management also believes that
higher corn prices during the 2022 period had an impact on ethanol prices.
We sold approximately 3.1% more gallons of ethanol during the six months ended
June 30, 2022 compared to the same period of 2021, an increase of approximately
1,339,000 gallons. The increase is due primarily to increased sales of ethanol
inventory during the six months ended June 30, 2022.
Distillers Grains
Our total distillers grains revenue was approximately 24.7% higher during the
six months ended June 30, 2022 compared to the same period of 2021 due primarily
to increased average prices received for our distillers grains.
The average price we received for our dried distillers grains was
approximately 17.9% higher during the six months ended June 30, 2022 compared to
the same period of 2021, an increase of approximately $34.11 per ton. Management
attributes the increase in dried distillers grains prices during the six months
ended June 30, 2022 to increases in the domestic price of corn and natural gas.
The average price we received for our modified/wet distillers grains was
approximately 20.6% higher for the six months ended June 30, 2022 compared to
the same period of 2021, an increase of approximately $40.82 per ton. Management
attributes this increase in modified/wet distillers grains prices with higher
corn prices in the market and increased natural gas prices.
We sold approximately 4.1% more total tons of distillers grains during the six
months ended June 30, 2022 compared to the same period of 2021 primarily due to
increased distillers grains production caused by increased market demand during
the 2022 period.
Corn Oil
Our total corn oil revenue was approximately 56.9% higher during the six
months ended June 30, 2022 compared to the same period of 2021 due primarily to
increased prices received for our corn oil. Our total pounds of corn oil sold
increased by approximately 3.2% during the six months ended June 30, 2022
compared to the same period of 2021, an increase of approximately 414,000
pounds. We produced more corn oil due to increased oil extraction proficiency
during the 2022 period compared to the six months ended June 30, 2021.
The average price per pound we received for our corn oil was higher by
approximately 51.0% for the six months ended June 30, 2022 compared to the same
period of 2021 due primarily to demand from the renewable diesel industry for
corn oil along with higher soybean oil prices.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 34.9% higher for the six
months ended June 30, 2022 compared to the same period of 2021 due to
significantly increased corn prices during the 2022 period.
Our average cost per bushel of corn increased by approximately 26.3% for the six
months ended June 30, 2022 compared to the six months ended June 30, 2021. We
consumed approximately 6.8% more bushels of corn during the six months ended
June 30, 2022 compared to the same period of 2021 that contributed to higher
corn cost. Management attributes the increased corn cost per bushel to
significantly higher market corn prices and decreased corn availability during
our 2022
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fiscal period. Management anticipates corn prices to remain higher until the
harvest of 2022 begins. After harvest, corn prices are expected to remain stable
for the remainder of our 2022 fiscal year.
Natural Gas
Our cost of revenues related to natural gas increased by approximately
$1,250,000, an increase of approximately 35.8%, for the six months ended June
30, 2022 compared to the six months ended June 30, 2021. This increase was due
to higher natural gas costs per MMBtu partially offset with small decrease in
natural gas usage during the six months ended June 30, 2022 compared to the same
period of 2021.
Our average cost per MMBtu of natural gas during the six months ended June 30,
2022 was approximately 40.1% more compared to the cost per MMbtu for the six
months ended June 30, 2021. Management attributes this increase in our average
natural gas costs to higher market natural gas prices due to high demand and
supply shortages.
The volume of natural gas we used decreased by approximately 3.0% during the six
months ended June 30, 2022 compared to the same period of 2021.
Operating Expenses
Our operating expenses were less for the six months ended June 30, 2022 compared
to the same period of 2021 due primarily to decreased wages and benefits.
Other Income and Expense
Our other income increased during the six months ended June 30, 2022 compared to
the same period of 2021 due primarily to increased income from investments and
the USDA Biofuel Producer Relief Program payment awarded during the six months
ended June 30, 2022. We had more interest income during the six months ended
June 30, 2022 compared to the same period of 2021 due to having more cash on
hand during the 2022 period. We had more income from our investments during the
six months ended June 30, 2022 compared to the same period of 2021 due to
improved profitability in the ethanol sector. We had less interest expense
during the six months ended June 30, 2022 compared to the same period of 2021
due to lower carrying balances on outstanding debt.
Changes in Financial Condition for the Six Months Ended June 30, 2022
Current Assets
Our cash on hand at June 30, 2022 was less compared to December 31, 2021 due
to deferred corn payments and member distribution payments which we made in
January 2022. We had slightly more accounts receivable at June 30, 2022 compared
to December 31, 2021 due to the timing of our quarter end and the payments
received related to the shipments of our products. The value of our inventory
was greater at June 30, 2022 compared to December 31, 2021 due to more corn
inventory on hand as well as higher corn and ethanol prices which increase the
value of our inventory. The asset value of our derivative instruments was
greater at June 30, 2022 compared to December 31, 2021 due to recent corn price
changes which impacted our derivative instruments. We had less prepaid expenses
at June 30, 2022 compared to December 31, 2021 due to amortization of our
insurance premiums.
Property and Equipment
The value of our property and equipment was more at June 30, 2022 compared to
December 31, 2021 primarily as a result of new construction currently in
progress for an additional grain bin, ethanol storage tank, and fermentor.
Other Assets
The value of our investments was lower at June 30, 2022 compared to
December 31, 2021 due to distributions in excess of earnings from our
investments during the six months ended June 30, 2022.
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Current Liabilities
We had more outstanding checks in excess of bank balances at June 30, 2022
compared to December 31, 2021 due to the timing of our quarter end and payments
issued. We use our revolving loan to pay any checks that are presented for
payment which exceed the cash we have available in our accounts. Our accounts
payable were lower at June 30, 2022 compared to December 31, 2021 due primarily
to decreased corn payables at June 30, 2022 compared to December 31, 2021 as the
deferred payments were paid during the first quarter of 2022. Our derivative
instrument liability was higher at June 30, 2022 compared to December 31, 2021
due to corn price changes, which impacted our derivative instruments. The
current portion of our notes payable was unchanged at June 30, 2022 compared to
December 31, 2021.
Long-Term Liabilities
Our long-term liabilities were comparable at June 30, 2022 and December 31,
2021.
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, 2022, we had
$1,000 outstanding and $46,499,000 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, 2022 and
2021:
Six Months Ended June 30,
2022 2021
Net cash (used in) operating activities $ (7,912,086) $ (8,775,429)
Net cash (used in) investing activities (4,661,241) (158,262)
Net cash (used in) financing activities (10,197,344) (8,263,361)
Cash Flow From Operations. Our operating activities used less cash during the
six months ended June 30, 2022 compared to the same period of 2021, due
primarily to a decrease in our accounts receivable and decreased changes in cash
related to our inventory, partially offset by less net income and more cash used
for our accounts payable during the 2022 period.
Cash Flow From Investing Activities. Our investing activities used more cash
during the six months ended June 30, 2022 compared to the same period of 2021,
due to the construction of an additional grain bin, ethanol storage tank, and
additional fermentor.
Cash Flow From Financing Activities. Our financing activities used more cash
during the six months ended June 30, 2022 compared to the same period of 2021,
due primarily to distributions paid to members during the 2022 period.
Plans for Cash in the Short Term and in the Long Term
In the next 12 months, the Company plans to reinvest its cash into current
business operations and to use cash for the design and construction of an eighth
fermentor, the design and construction of an additional grain storage bin and
the design
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and construction of a 2 million gallon ethanol storage tank. The Company will
also use its cash to contribute to the cost of constructing additional natural
gas pipeline and storage facilities. In the long term, the Company plans to
reinvest its cash into current business operations and may provide further
distributions to its members.
Indebtedness
We maintain a comprehensive credit facility with Farm Credit Services of
America, PCA and Farm Credit Services of America, FLCA (collectively "FCSA").
All of our assets, including the ethanol plant and equipment, its accounts
receivable and inventory, serve as collateral for our loans with FCSA.
On October 11, 2021, we entered into a Fourth Amendment to the credit agreement
(the "Fourth Amendment"). Under the Fourth Amendment, the operating lines's
maturity date was extended to November 1, 2023. Interest on the outstanding
principal balance of the operating line will accrue at the SOFR 30 plus 305
basis points. The available credit on the reducing revolving note is
$44,499,000. Interest on the outstanding principal balance of the revolving loan
and term loan will accrue at the SOFR 30 plus 330 basis points. The working
capital covenant was increased to $13,500,000, and the net worth covenant was
increased to $28,000,0000. Dakota Ethanol may make distributions in an amount up
to 75% of our prior year's net income, so long as the Company's working capital
stays above $18,000,000 post distribution. The combined distributions for 2021
and 2022 shall also be limited to 75% of the combined net income of 2020 and
2021.
Operating Line
Dakota Ethanol has a revolving promissory note from FCSA in an amount up to
$2,000,000 or the amount available in accordance with the borrowing base
calculation, whichever is less. Interest on the outstanding principal balance
will accrue at 305 basis points above the SOFR 30 and is not subject to a floor.
The rate was 3.75% at June 30, 2022. There is a non-use fee of 0.25% on the
unused portion of the availability. The note is collateralized by substantially
all assets of the Company. The note expires on November 1, 2023. On June 30,
2022, Dakota Ethanol had $0 outstanding and $2,000,000 available to be drawn on
the revolving promissory note under the borrowing base.
Reducing Revolving Loan
Dakota Ethanol has a reducing revolving promissory note from FCSA in the
amount up to $46,250,000 or the amount available in accordance with the
borrowing availability under the credit agreement. The amount Dakota Ethanol can
borrow on the note decreases by $1,750,000 semi-annually starting on July 1,
2021 until the maximum balance reaches $32,250,000 on July 1, 2025. The note
matures on January 1, 2026. Interest on the outstanding principal balance will
accrue at the SOFR 30 plus 330 basis points. The interest rate is not subject to
a floor. The rate was 4.00% at June 30, 2022. The note contains a non-use fee of
0.5% on the unused portion of the note. On June 30, 2022, Dakota Ethanol had
$1,000 outstanding and $44,499,000 available to be drawn on the note.
2017 Term Loan
On August 1, 2017, Dakota Ethanol executed a term note with FCSA in the amount
of $8 million. Dakota Ethanol agreed to make monthly interest payments starting
September 1, 2017 and annual principal payments of $1,000,000 starting on August
1, 2018. The payment that was due in August 2020 was deferred to August 2025.
The notes matures on August 1, 2025. Interest on the outstanding principal
balance will accrue at 330 basis points above the SOFR 30 and is not subject to
a floor. The rate was 4.00% at June 30, 2022. On June 30, 2022, Dakota Ethanol
had $5,000,000 outstanding on the note.
Covenants
Our credit facilities with FCSA are subject to various loan covenants. If we
fail to comply with these loan covenants, FCSA can declare us to be in default
of our loans. The material loan covenants applicable to our credit facilities
are our working capital covenant, local net worth covenant and our debt service
coverage ratio. We are required to maintain working capital (current assets
minus current liabilities plus availability on our revolving loan) of at least
$13.5 million. We are required to maintain local net worth (total assets minus
total liabilities minus the value of certain investments) of at least $28
million. We are required to maintain a debt service coverage ratio of at least
1.25:1.00. Dakota Ethanol may make distributions in an
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amount up to 75% of prior year's net income, so long as the Company's working
capital stays above $18,000,000 post distribution. The combined distributions
for 2021 and 2022 shall also be limited to 75% of the combined net income of
2020 and 2021.
As of June 30, 2022, we were in compliance with our financial covenants under
the FCSA loans. Management's current financial projections indicate that we will
be in compliance with our financial covenants for the next 12 months and we
expect to remain in compliance thereafter. Management does not believe that it
is reasonably likely that we will fall out of compliance with our material loan
covenants in the next 12 months. If we fail to comply with the terms of our
credit agreements with FCSA, and FCSA refuses to waive the non-compliance, FCSA
may require us to immediately repay all amounts outstanding on our loans.
Application of Critical Accounting Policies
Management uses estimates and assumptions in preparing our consolidated
financial statements in accordance with generally accepted accounting
principles. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Of the significant accounting policies
described in the notes to our consolidated financial statements, we believe that
the following are the most critical:
Derivative Instruments
We enter into short-term forward option and futures contracts as a means of
securing corn for the ethanol plant and managing exposure to changes in
commodity prices. We enter into short-term forward, option and futures contracts
for sales of ethanol to manage exposure to changes in commodity prices. All of
our derivatives are designated as non-hedge derivatives, and accordingly are
recorded at fair value with changes in fair value recognized in net income or
treated as normal purchases and sales contracts and analyzed for inherent
losses. Although the contracts are considered economic hedges of specified
risks, they are not designated as nor accounted for as hedging instruments.
As part of our trading activity, we use futures and option contracts offered
through regulated commodity exchanges to reduce our risk and we are exposed to
risk of loss in the market value of inventories. To reduce that risk, we
generally take positions using cash and futures contracts and options.
Unrealized gains and losses related to derivative contracts for corn and
natural gas purchases are included as a component of cost of revenues and
derivative contracts related to ethanol sales are included as a component of
revenues in the accompanying financial statements. The fair values of derivative
contracts are presented on the accompanying balance sheets as derivative
financial instruments.
Goodwill
Annually, as well as when an event triggering impairment may have occurred,
the Company performs an impairment test on goodwill which compares the fair
value of the reporting unit with its carrying amount. An impairment charge is
recognized, if necessary, for the amount by which the carrying value exceeds the
fair value up to the amount of the goodwill attributed to the reporting unit.
The Company performs the annual analysis as of December 31 of each fiscal year.
Inventory Valuation
Inventories are generally valued using methods which approximate the lower of
cost (first-in, first-out) or net realizable value. In the valuation of
inventories and purchase commitments, net realizable value is based on estimated
selling prices in the ordinary course of business less reasonably predictable
costs of completion, disposal and transportation.
Revenue Recognition
The Company generally recognizes revenue at a point in time when performance
obligations are satisfied. Revenue from the production of ethanol and related
products is recorded when control transfers to customers. Generally, ethanol and
related products are shipped FOB shipping point, based on written contract terms
between Dakota Ethanol and its customers.
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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.
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