ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022* |
ASSETS | (unaudited) | | |
| | | |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 842,277 | | | $ | 27,004,205 | |
Accounts receivable | 950,008 | | | 1,083,258 | |
Accounts receivable (related party) | 8,944,477 | | | 1,850,646 | |
| | | |
Inventory | 19,255,718 | | | 25,795,711 | |
Derivative financial instruments | 1,249,678 | | | 2,856,439 | |
Prepaid and other expenses | 1,445,914 | | | 864,810 | |
Total current assets | 32,688,072 | | | 59,455,069 | |
| | | |
PROPERTY AND EQUIPMENT | | | |
Land | 874,473 | | | 874,473 | |
Land improvements | 8,763,023 | | | 8,763,023 | |
Buildings | 9,316,576 | | | 9,316,576 | |
Equipment | 108,127,329 | | | 108,125,289 | |
Construction in progress | 416,491 | | | 13,366 | |
| 127,497,892 | | | 127,092,727 | |
Less accumulated depreciation | (65,005,083) | | | (63,611,356) | |
Net property and equipment | 62,492,809 | | | 63,481,371 | |
| | | |
OTHER ASSETS | | | |
Goodwill | 10,395,766 | | | 10,395,766 | |
Investments | 18,554,806 | | | 17,691,011 | |
Other | 8,194,480 | | | 5,383,310 | |
Total other assets | 37,145,052 | | | 33,470,087 | |
| | | |
TOTAL ASSETS | $ | 132,325,933 | | | $ | 156,406,527 | |
| | | |
| | | |
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
| | | | | | | | | | | |
| | | |
| March 31, 2023 | | December 31, 2022* |
LIABILITIES AND MEMBERS’ EQUITY | (unaudited) | | |
| | | |
CURRENT LIABILITIES | | | |
Outstanding checks in excess of bank balance | $ | 3,828,414 | | | $ | 4,200,281 | |
Accounts payable | 12,213,956 | | | 39,105,845 | |
Accrued liabilities | 571,303 | | | 719,113 | |
Derivative financial instruments | 474,497 | | | 435,053 | |
| | | |
Current portion of notes payable | 1,000,000 | | | 1,000,000 | |
| | | |
Total current liabilities | 18,088,170 | | | 45,460,292 | |
| | | |
LONG-TERM LIABILITIES | | | |
Notes payable | 2,998,667 | | | 2,998,229 | |
| | | |
| | | |
Total long-term liabilities | 2,998,667 | | | 2,998,229 | |
| | | |
| | | |
MEMBERS' EQUITY (29,620,000 units issued and outstanding) | 111,239,096 | | | 107,948,006 | |
| | | |
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 132,325,933 | | | $ | 156,406,527 | |
| | | |
| | | |
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Operations (Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 | | | | |
| | | | | | | |
REVENUES | $ | 77,841,106 | | | $ | 64,450,894 | | | | | |
| | | | | | | |
COSTS OF REVENUES | 73,942,513 | | | 61,758,095 | | | | | |
| | | | | | | |
GROSS PROFIT | 3,898,593 | | | 2,692,799 | | | | | |
| | | | | | | |
OPERATING EXPENSES | 1,451,502 | | | 1,247,879 | | | | | |
| | | | | | | |
INCOME FROM OPERATIONS | 2,447,091 | | | 1,444,920 | | | | | |
| | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | |
Interest and other income | 196,465 | | | 254,548 | | | | | |
| | | | | | | |
Equity in net income (loss) of investments | 863,795 | | | (1,543) | | | | | |
Interest expense | (90,291) | | | (32,726) | | | | | |
Total other income | 969,969 | | | 220,279 | | | | | |
| | | | | | | |
NET INCOME | $ | 3,417,060 | | | $ | 1,665,199 | | | | | |
| | | | | | | |
BASIC AND DILUTED EARNINGS PER UNIT | $ | 0.12 | | | $ | 0.06 | | | | | |
| | | | | | | |
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING | 29,620,000 | | | 29,620,000 | | | | | |
| | | | | | | |
DISTRIBUTIONS DECLARED PER UNIT | $ | — | | | $ | 0.51 | | | | | |
| | | | | | | |
See Notes to Unaudited Consolidated Financial Statements.
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Changes in Members' Equity (Unaudited)
| | | | | |
| Members' Equity |
| |
Balance - December 31, 2021 | $ | 113,468,865 | |
| |
Net income for the three-month period ended March 31, 2022 | 1,665,199 | |
| |
Member distributions | (15,056,167) | |
| |
Balance - March 31, 2022 | $ | 100,077,897 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | |
| Members' Equity |
| |
Balance - December 31, 2022 | $ | 107,948,006 | |
| |
Net income for the three-month period ended March 31, 2023 | 3,417,060 | |
| |
Member distributions | (125,970) | |
| |
Balance - March 31, 2023 | $ | 111,239,096 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
See Notes to Unaudited Consolidated Financial Statements.
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| | | |
OPERATING ACTIVITIES | | | |
Net income | $ | 3,417,060 | | | $ | 1,665,199 | |
Adjustments to reconcile net income to cash used in operating activities | | | |
Depreciation and amortization | 1,398,163 | | | 1,222,429 | |
Distributions in excess of earnings (earnings in excess of distributions) from investments | (863,795) | | | 2,501,543 | |
| | | |
Loss on disposal of property and equipment | — | | | (125,400) | |
| | | |
(Increase) decrease in | | | |
Accounts receivable | (6,960,581) | | | 819,094 | |
Inventory | 6,539,993 | | | (3,178,651) | |
Prepaid and other expenses | 159,728 | | | 149,788 | |
Derivative financial instruments | 1,646,205 | | | (2,893,456) | |
| | | |
Increase (decrease) in | | | |
Accounts payable | (26,287,473) | | | (21,814,546) | |
Accrued liabilities | (147,810) | | | (400,476) | |
NET CASH USED IN OPERATING ACTIVITIES | (21,098,510) | | | (22,054,476) | |
| | | |
INVESTING ACTIVITIES | | | |
Natural gas transportation prepayment | (3,556,000) | | | — | |
Purchase of property and equipment | (1,009,581) | | | (2,386,032) | |
| | | |
NET CASH USED IN INVESTING ACTIVITIES | (4,565,581) | | | (2,386,032) | |
| | | |
FINANCING ACTIVITIES | | | |
Decrease in outstanding checks in excess of bank balance | (371,867) | | | (306,315) | |
Borrowings on notes payable | 5,949,000 | | | 3,000,000 | |
Payments on notes payable | (5,949,000) | | | (1,000,000) | |
| | | |
Distributions paid to members | (125,970) | | | (15,056,167) | |
NET CASH USED IN FINANCING ACTIVITIES | (497,837) | | | (13,362,482) | |
| | | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | (26,161,928) | | | (37,802,990) | |
| | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 27,004,205 | | | 37,995,310 | |
| | | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 842,277 | | | $ | 192,320 | |
| | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | |
Cash paid during the period for interest, net of capitalized interest of $2,480 and $26,844 in 2023 and 2022, respectively. | $ | 75,768 | | | $ | 50,316 | |
Capital expenditures in accounts payable | — | | | 37,561 | |
See Notes to Unaudited Consolidated Financial Statements
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC (the "Company") and its wholly owned subsidiary, Dakota Ethanol, LLC ("Dakota Ethanol") are both South Dakota limited liability companies.
The Company owns and manages Dakota Ethanol, a 100 million-gallon (annual nameplate capacity) ethanol plant, located near Wentworth, South Dakota. Dakota Ethanol sells ethanol and related products to customers located in North America.
In addition, the Company has investment interests in five companies in related industries. See Note 5 to the Consolidated Financial Statements of the Company for further details.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. All adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2022, contained in the Company's annual report on Form 10-K for 2022 filed with the SEC on March 9, 2023.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
ASC Topic 606, Revenue from Contracts with Customers requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company generally recognizes revenue at one point in time, as more thoroughly described below. The Company's contracts with customers generally have one performance obligation and a contract duration of one year or less.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. Generally, ethanol and related products are shipped FOB shipping point and control of the goods transfers to customers when the goods are loaded into trucks or when rail cars are shipped. Consideration is based on predetermined contractual prices or on current market prices.
•sales of ethanol
•sales of distillers grains
•sales of distillers corn oil
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
Disaggregation of revenue:
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31 | | |
| | 2023 | | 2022 | | | | |
| | | | | | | | |
Revenues ethanol | | $ | 58,403,869 | | | $ | 48,205,895 | | | | | |
Revenues distillers grains | | 14,609,329 | | | 12,124,702 | | | | | |
Revenues distillers corn oil | | 4,827,908 | | | 4,120,297 | | | | | |
| | $ | 77,841,106 | | | $ | 64,450,894 | | | | | |
Contract assets and contract liabilities:
The Company receives payments from customers based on contractual billing schedules and accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract.
The Company has no significant contract assets or contract liabilities from contracts with customers at March 31, 2023 and December 31, 2022.
Shipping costs
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.
When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.
Reporting Segment
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance. The Company has determined that it has six (6) operating segments that give rise to two (2) reportable segments. See "Note 3 - Segments" in our Notes to Consolidated Financial Statements.
Costs of Revenues
The primary raw materials we use to produce ethanol, distillers grains and corn oil are corn and natural gas.
Electricity, raw materials expense (chemicals and denaturant), direct labor costs, and shipping costs on modified and wet distillers grains are included in cost of revenues.
Inventory Valuation
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand accounts and other accounts with original maturities of three months or less that provide withdrawal privileges.
Receivables and Credit Policies
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within fifteen days from the invoice date. Unpaid accounts receivable with invoice dates over thirty days old bear interest at 1.5% per month. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
The carrying amount of trade receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. Management regularly reviews trade receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The allowance was $0 as of March 31, 2023 and December 31, 2022.
Investment in commodities contracts, derivative instruments and hedging activities
The Company is exposed to certain risks related to its ongoing business operations including price risks on anticipated purchases of corn, natural gas, the sale of ethanol, distillers grains and distillers corn oil. The Company manages these risks by using forward, future and options derivative instruments.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material the Company uses to produce ethanol and ethanol by-products. In general, unfavorable market conditions result from rising corn prices. This is especially true when market conditions do not allow us to pass along increased corn costs to our customers. The availability and price of corn are subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply. Additionally, the crisis in Ukraine may effect the price of corn, and by extension, our business.
Certain contracts that meet the definition of a derivative may be exempt from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.
The Company does not apply the normal purchase and sales exemption for forward corn purchase contracts. As of March 31, 2023, the Company was committed to purchasing approximately 3.2 million bushels of corn on a forward contract basis with an average price of $6.58 per bushel. The total corn purchase contracts represent approximately 9% of the annual projected plant corn usage.
The Company enters into firm-price purchase commitments with natural gas suppliers under which the Company agrees to buy natural gas at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time the price is fixed and the time the natural gas is delivered. At March 31, 2023, the Company is committed to purchasing approximately 1,649,000 MMBtus of natural gas with an average price of $3.64 per MMBtu. The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market. The natural gas purchase contracts represent approximately 79% of the annual plant requirements.
The Company enters into firm-price sales commitments with distillers grains customers under which the Company agrees to sell distillers grains at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
a price increase in the market price of distillers grain between the time the price is fixed and the time the distillers grains are delivered. At March 31, 2023, the Company was committed to selling approximately 34,000 dry equivalent tons of distillers grains with an average price of $246 per ton. The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers grains sales represent approximately 15% of the projected annual plant production.
The Company enters into firm-price sales commitments with distillers corn oil customers under which the Company agrees to sell distillers corn oil at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers corn oil between the time the price is fixed and the time the distillers corn oil is delivered. At March 31, 2023, the Company was committed to selling approximately 2.8 million pounds of distillers corn oil with an average price of $0.59 per pound. The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers corn oil sales represent approximately 8% of the projected annual plant production.
The Company did not have any firm-priced sales commitments for ethanol as of March 31, 2023.
The Company enters into short-term forward, option and futures contracts for corn and natural gas as a means of managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income, or a normal purchase, normal sale exemption is elected. Although the contracts are considered economic hedges of specified risks, they are not designated and accounted for as hedging instruments.
As part of our trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk of loss in the market value of inventories and purchase commitments.
Derivatives not designated as hedging instruments at March 31, 2023 and December 31, 2022 were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Classification | | March 31, 2023 | | December 31, 2022* |
| | | | | | |
Corn forward contracts in gain position | | | | $ | 197,924 | | | $ | 922,181 | |
Futures contracts in gain position | | | | 346,463 | | | 252,450 | |
Futures contracts in loss position | | | | (397,363) | | | (395,300) | |
Total forward, futures and options contracts | | | | 147,024 | | | 779,331 | |
Cash held by broker | | | | 1,102,654 | | | 2,077,108 | |
| | Current Assets | | $ | 1,249,678 | | | $ | 2,856,439 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Corn forward contracts in loss position | | Current Liabilities | | $ | (474,497) | | | $ | (435,053) | |
*Derived from audited financial statements
Futures contracts and cash held by broker are all with one party, and the right of offset exists. Therefore, on the balance sheet, these items are netted in one balance regardless of position.
Forward contracts are with multiple parties, and the right of offset does not exist. Therefore, these contracts are reported at the gross amounts on the balance sheet.
Gains and losses related to derivative contracts related to corn and natural gas are included as a component of costs of revenues.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
| | | | | | | | | | | | | | | | | | | | |
| | Statement of Operations | | Three Months Ended March 31, |
| | Classification | | 2023 | | 2022 |
Net realized and unrealized gains (losses) related to purchase contracts: | | | | | | |
Futures contracts | | Cost of Revenues | | $ | 1,317,655 | | | $ | (8,560,524) | |
Forward contracts | | Cost of Revenues | | (2,095,875) | | | 4,207,196 | |
| | | | | | |
| | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Investments
The Company has investment interests in five companies in related industries. All of these interests are at ownership shares less than 20%. These investments are flow-through entities and are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's statements of operations and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data.
Goodwill
Annually, as well as when an event triggering impairment may have occurred, the Company performs an impairment test on goodwill, which compares the fair value of the reporting unit with its carrying amount. An impairment charge is recognized, if necessary, for the amount by which the carrying value exceeds the fair value up to the amount of the goodwill attributed to the reporting unit. The Company performs the annual analysis as of December 31 of each fiscal year. The Company determined that there was no impairment of goodwill at December 31, 2022 or through March 31, 2023 on the basis that no triggering events were noted.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the fair value of derivative financial instruments, lower of cost or net realizable value accounting for inventory and goodwill and fixed asset impairment evaluation.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three months ended March 31, 2023, ethanol sales averaged approximately 75% of total revenues, while approximately 19% of revenues were generated from the sale of distillers grains and 6% of revenues were generated from the sale of corn oil. For the three months ended March 31, 2023, corn costs averaged approximately 76% of cost of goods sold.
The Company's operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, unleaded gasoline and the petroleum markets, government programs, global political or economic issues, including but not limited to, the war in Ukraine including sanctions associated therewith, shortages, export prices, crude oil prices, currency valuations and government policies in the United States and around the world, over which we have no control. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol.
The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government programs, global political or economic issues, including but not limited to the war in Ukraine
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
including sanctions associated therewith, or global damaging growing conditions, such as plant disease or adverse weather, including drought, increased fertilizer costs as well as global conflicts. The Company's risk management program is used to protect against the price volatility of these commodities.
NOTE 3. SEGMENTS
The Company reports its financial and operating performance in two segments: (1) production, which includes the manufacturing and marketing of fuel-grade ethanol and co-products of the ethanol production process and (2) ethanol producing equity method investments, which consists of the aggregation of the Company's two equity method operating segments of investment in Guardian Hankinson, LLC and investment in Ring-neck Energy & Feed, LLC. The Company discloses its other identified operating segments in an all other category ("All Other"), which consists of the Company's investments in RPMG, LLC, Lawrenceville Tank, LLC, and Guardian Energy Management, LLC.
The Company’s two reportable segments have been identified based on their unique characteristics. Our production segment is the Company’s ethanol plant that is operated in a manner chosen by our chief decision making team. The ethanol producing equity method segment consists of aggregated operating segments investments that have exceeded the quantitative thresholds for reportable segments which have similar economic characteristics but our chief decision making team does not have input into the daily operations of those entities. The All Other is comprised of investments that fall below the quantitative thresholds for reporting segments and the Company's chief decision making team has no input into their daily operations. Production includes the core operating drivers of the Company’s consolidated financial statements which consist of the production and sale of ethanol and its co-products. Ethanol producing equity method investments derive their revenues from the production and sale of ethanol and its co-products. The All Other receives its revenues from marketing fees, management fees, and storage fees. The reconciliation item is necessary due to reportable segments not being consolidated in the financial statements, but rather are reflected as equity method investments.
The segments were identified using standards under ASC 280-10-50. They each engage in business activities, the operating results are reviewed by the Company’s chief operating decision maker, and discrete financial information is available for each segment.
The following tables set forth certain financial data for the Company's operating segments:
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
| | unaudited | | unaudited | | | | |
Net Sales | | | | | | | | |
Production | | $ | 77,841,106 | | | $ | 64,450,894 | | | | | |
Ethanol Producing Equity Method Investments | | 162,621,455 | | | 170,128,327 | | | | | |
All Other | | 4,338,014 | | | 4,409,009 | | | | | |
Total | | 244,800,575 | | | 238,988,230 | | | | | |
Reconciliation | | (166,959,469) | | | (174,537,336) | | | | | |
Consolidated | | $ | 77,841,106 | | | $ | 64,450,894 | | | | | |
| | | | | | | | |
Gross Profit: | | | | | | | | |
Production | | $ | 3,898,593 | | | $ | 2,692,799 | | | | | |
Ethanol Producing Equity Method Investments | | 12,538,070 | | | 4,158,879 | | | | | |
All Other | | 2,903,760 | | | 2,935,856 | | | | | |
Total | | 19,340,423 | | | 9,787,534 | | | | | |
Reconciliation | | (15,441,830) | | | (7,094,735) | | | | | |
Consolidated | | $ | 3,898,593 | | | $ | 2,692,799 | | | | | |
| | | | | | | | |
Net Income: | | | | | | | | |
Production | | $ | 3,417,060 | | | $ | 1,665,199 | | | | | |
Ethanol Producing Equity Method Investments | | 6,268,544 | | | (1,472,217) | | | | | |
All Other | | 1,206,647 | | | 1,131,978 | | | | | |
Total | | 10,892,251 | | | 1,324,960 | | | | | |
Reconciliation | | (7,475,191) | | | 340,239 | | | | | |
Consolidated | | $ | 3,417,060 | | | $ | 1,665,199 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | unaudited | | audited |
Total Assets | | | | |
Production | | $ | 132,325,933 | | | $ | 156,406,527 | |
Ethanol Producing Equity Method Investments | | 220,287,839 | | | 239,476,419 | |
All Other | | 301,223,137 | | | 296,653,249 | |
Total | | 653,836,909 | | | 692,536,195 | |
Reconciliation | | (521,510,976) | | | (536,129,668) | |
Consolidated | | $ | 132,325,933 | | | $ | 156,406,527 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
NOTE 4. INVENTORY
Inventory consisted of the following as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022* |
Raw materials | | $ | 12,186,837 | | | $ | 12,397,256 | |
Finished goods | | 3,617,883 | | | 10,050,394 | |
Work in process | | 1,817,431 | | | 1,353,715 | |
Parts inventory | | 1,633,567 | | | 1,994,346 | |
| | $ | 19,255,718 | | | $ | 25,795,711 | |
*Derived from audited financial statements.
As of March 31, 2023 and December 31, 2022, the Company recorded a lower of cost or net realizable value write-down on inventory of approximately $5,000 and $2,000, respectively.
NOTE 5. INVESTMENTS
Dakota Ethanol has a 5% investment interest in the Company’s ethanol marketer, Renewable Products Marketing Group, LLC ("RPMG"). The net income, which is reported in the Company’s income statement for RPMG, is based on RPMG’s December 31, 2022 unaudited interim results. The carrying amount of the Company’s investment was approximately $2,303,000 and $2,286,000 as of March 31, 2023 and December 31, 2022, respectively.
Dakota Ethanol has a 10% investment interest in Lawrenceville Tanks, LLC ("LT"), a partnership which operates an ethanol storage terminal in Georgia. The net income, which is reported in the Company’s income statement for LT, is based on LT’s March 31, 2023 unaudited interim results. The carrying amount of the Company’s investment was approximately $287,000 and $216,000 as of March 31, 2023 and December 31, 2022, respectively.
Lake Area Corn Processors has a 10% investment interest in Guardian Hankinson, LLC ("GH"), a partnership which operates an ethanol plant in North Dakota. The net income, which is reported in the Company’s income statement for GH, is based on GH’s March 31, 2023 unaudited interim results. The carrying amount of the Company’s investment was approximately $2,271,000 and $1,870,000 as of March 31, 2023 and December 31, 2022, respectively.
Lake Area Corn Processors has a 17% investment interest in Guardian Energy Management, LLC ("GEM"), a partnership to provide management services to ethanol plants. The net income, which is reported in the Company’s income statement for GEM, is based on GEM’s March 31, 2023 unaudited interim results. The carrying amount of the Company’s investment was approximately $92,000 as of March 31, 2023 and December 31, 2022.
Lake Area Corn Processors has an 12% investment interest in Ring-neck Energy and Feeds, LLC ("REF"), a partnership which operates an ethanol plant in South Dakota. The net income, which is reported in the Company’s income statement for REF, is based on REF’s March 31, 2023 unaudited interim results. The carrying amount of the Company’s investment was approximately $13,601,000 and $13,227,000 as of March 31, 2023 and December 31, 2022, respectively. The carrying amount of the investment exceeds the underlying equity in net assets by approximately $927,000. The excess is comprised of a basis adjustment of approximately $381,000 and capitalized interest of $546,000. The excess is amortized over 20 years from May 2019, the time the plant became operational.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
Condensed, combined unaudited financial information of the Company’s investments in RPMG, LT, GH, GEM and REF are as follows:
| | | | | | | | | | | | | | |
Balance Sheet | | March 31, 2023 | | December 31, 2022 |
Current Assets | | $ | 364,219,061 | | | $ | 376,111,612 | |
Other Assets | | 157,291,914 | | | 160,018,056 | |
Current Liabilities | | 305,205,261 | | | 334,797,023 | |
Long-term Liabilities | | 30,527,382 | | | 36,462,751 | |
Members' Equity | | 185,778,332 | | | 164,869,892 | |
| | | | |
| | Three Months Ended |
Income Statement | | March 31, 2023 | | March 31, 2022 |
Revenue | | $ | 166,959,469 | | | $ | 174,537,336 | |
Gross Profit | | 15,441,830 | | | 7,094,735 | |
Net Income (Loss) | | 7,458,774 | | | (340,239) | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
The following table shows the condensed financial information of GH; the investment which represents greater than 10% of the Company's income as of December 31, 2022.
| | | | | | | | | | | | | | |
Balance Sheet | | March 31, 2023 | | December 31, 2022 |
Current Assets | | $ | 36,869,488 | | | $ | 35,429,047 | |
Other Assets | | 41,101,992 | | | 41,806,802 | |
Current Liabilities | | 46,563,523 | | | 49,708,032 | |
Long-term Liabilities | | 8,702,074 | | | 8,829,302 | |
Members' Equity | | 22,705,883 | | | 18,698,514 | |
| | | | |
| | Three Months Ended |
Income Statement | | March 31, 2023 | | March 31, 2022 |
Revenue | | $ | 112,936,798 | | | $ | 109,398,742 | |
Gross Profit | | 5,339,374 | | | 370,244 | |
Net Income (Loss) | | 4,007,369 | | | (450,990) | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
The following table shows the condensed financial information of REF; the investment which represents greater than 10% of the Company's assets as of December 31, 2022.
| | | | | | | | | | | | | | |
Balance Sheet | | March 31, 2023 | | December 31, 2022 |
Current Assets | | $ | 27,853,480 | | | $ | 46,040,175 | |
Other Assets | | 114,462,879 | | | 116,200,396 | |
Current Liabilities | | 13,548,389 | | | 30,950,092 | |
Long-term Liabilities | | 21,825,308 | | | 27,633,449 | |
Members' Equity | | 106,942,662 | | | 103,657,030 | |
| | | | |
| | Three Months Ended |
Income Statement | | March 31, 2023 | | March 31, 2022 |
Revenue | | $ | 49,684,657 | | | $ | 60,729,585 | |
Gross Profit | | 7,198,696 | | | 3,788,635 | |
Net Income (Loss) | | 2,261,175 | | | (1,021,227) | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
The Company recorded equity in net income (loss) of investment at approximately $864,000 and $(1,500) from our investments for the three months ended March 31, 2023, and 2022, respectively.
NOTE 6. REVOLVING PROMISSORY NOTE
Dakota Ethanol has a revolving promissory note with Farm Credit Services of America (FCSA) in the amount up to $2,000,000 or the amount available in accordance with the borrowing base calculation, whichever is less. There is a non-use fee of 0.25% per annum on the unused portion of the $2,000,000 availability. The note is collateralized by substantially all assets of the Company. The note expires on November 1, 2023. Interest on the outstanding principal balance will accrue at 305 basis points above the Secured Overnight Financing 30-day Average Rate ("SOFR 30"). The interest rate is not subject to a floor. The rate was 7.60% at March 31, 2023. On March 31, 2023, Dakota Ethanol had $0 outstanding and $2,000,000 available to be drawn on the revolving promissory note.
NOTE 7. LONG-TERM NOTES PAYABLE
Dakota Ethanol has a term note from FCSA in the amount of $8,000,000. Dakota Ethanol makes monthly interest payments and annual principal payments of $1,000,000. The note matures on August 1, 2025. Interest on the outstanding principal balance will accrue at 330 basis points above the SOFR 30. The interest rate is not subject to a floor. The rate was 7.85% at March 31, 2023. On March 31, 2023, Dakota Ethanol had $4,000,000 outstanding on the note.
Dakota Ethanol has a reducing revolving promissory note from FCSA in the amount up to $48,000,000 or the amount available in accordance with the borrowing availability under the credit agreement. The amount Dakota Ethanol can borrow on the note decreases by $1,750,000 semi-annually starting on July 1, 2021 until the maximum balance reaches $32,250,000 on July 1, 2025. The note matures on January 1, 2026. Interest on the outstanding principal balance will accrue at 330 basis points above the SOFR 30. The interest rate is not subject to a floor. The rate was 7.85% at March 31, 2023. The note contains a non-use fee of 0.50% on the unused portion of the note. On March 31, 2023, Dakota Ethanol had $1,000 outstanding and $40,999,000 available to be drawn on the note.
As part of the notes, Dakota Ethanol is subject to certain restrictive covenants establishing financial reporting requirements, distribution and capital expenditure limits, minimum debt service coverage ratios, net worth and working capital requirements. The note is collateralized by substantially all assets of the Company. The note payable agreement was amended in October 2021 with modifications to the requirements. The working capital covenant was increased to $13,500,000 and the net worth covenant was increased to $28,000,000. We are required to maintain a debt service coverage ratio of at least 1.25:1.00.
The balances of the notes payable are as follows. The balances reflect the updated agreement:
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Term Note Payable | | $ | 4,000,000 | | | $ | 4,000,000 | |
| | | | |
| | | | |
Revolving Note Payable | | 1,000 | | | 1,000 | |
Less unamortized debt issuance costs | | (2,333) | | | (2,771) | |
| | 3,998,667 | | | 3,998,229 | |
Less current portion | | (1,000,000) | | | (1,000,000) | |
| | $ | 2,998,667 | | | $ | 2,998,229 | |
*Derived from audited financial statements | | | | |
Principal maturities for the remainder of the Note are estimated as follows.
| | | | | | | | |
| | |
Periods Ending March 31, | | Principal |
2024 | | $ | 1,000,000 | |
2025 | | 1,000,000 | |
2026 | | 2,001,000 | |
| | |
| | |
| | |
| | $ | 4,001,000 | |
NOTE 8. FAIR VALUE MEASUREMENTS
The Company complies with the fair value measurements and disclosures standard, which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.
The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1 uses quoted market prices in active markets for identical assets or liabilities.
Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 uses unobservable inputs that are not corroborated by market data.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Derivative financial instruments. Commodity futures contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade ("CBOT") and New York Mercantile Exchange ("NYMEX") markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 |
March 31, 2023 | | | | | | | | |
| | | | | | | | |
Assets: | | | | | | | | |
Derivative financial instruments, futures and options contracts | | $ | 346,463 | | | $ | 346,463 | | | $ | — | | | $ | — | |
Forward contracts | | $ | 197,924 | | | $ | — | | | $ | 197,924 | | | $ | — | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivative financial instruments, futures and options contracts | | $ | 397,363 | | | $ | 397,363 | | | $ | — | | | $ | — | |
Forward contracts | | $ | 474,497 | | | $ | — | | | $ | 474,497 | | | $ | — | |
| | | | | | | | |
December 31, 2022* | | | | | | | | |
| | | | | | | | |
Assets: | | | | | | | | |
Derivative financial instruments, futures and options contracts | | $ | 252,450 | | | $ | 252,450 | | | $ | — | | | $ | — | |
Forward contracts | | $ | 922,181 | | | $ | — | | | $ | 922,181 | | | $ | — | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivative financial instruments, futures and options contracts | | $ | 395,300 | | | $ | 395,300 | | | $ | — | | | $ | — | |
Forward contracts | | $ | 435,053 | | | $ | — | | | $ | 435,053 | | | $ | — | |
*Derived from audited financial statements.
During the three months ended March 31, 2023, the Company did not make any changes between Level 1 and Level 2 assets and liabilities. As of March 31, 2023 and December 31, 2022, the Company did not have any Level 3 assets or liabilities.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at March 31, 2023 and December 31, 2022.
Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.
The Company believes the carrying amount of cash and cash equivalents (level 1), accounts receivable (level 2), accounts payable and accruals (level 2) and short-term debt (level 2) approximates fair value.
The carrying amount of long-term obligations (level 3) at March 31, 2023 of $4,001,000 had an estimated fair value of approximately $4,001,000 based on estimated interest rates for comparable debt. The carrying amount of long-term obligations at December 31, 2022 of $4,001,000 had an estimated fair value of approximately $4,001,000.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
NOTE 9. RELATED PARTY TRANSACTIONS
Dakota Ethanol has a 5% interest in RPMG, and Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol, dried distillers grains and corn oil inventories produced by Dakota Ethanol. The marketing fees are included in net revenues. The Company also purchases denaturant from RPMG.
Revenues and marketing fees related to the agreements as well as denaturant purchases are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| | | | | | | |
Revenues ethanol | $ | 58,468,720 | | | $ | 48,282,029 | | | | | |
Revenues distillers dried grains | 2,920,145 | | | 3,361,155 | | | | | |
Revenues corn oil | 4,844,211 | | | 4,134,608 | | | | | |
Marketing fees ethanol | (64,851) | | | (76,134) | | | | | |
Marketing fees distillers dried grains | (11,389) | | | (16,919) | | | | | |
Marketing fees corn oil | (16,303) | | | (14,311) | | | | | |
Denaturant purchases | 535,782 | | | 686,120 | | | | | |
| | | | | | | |
| March 31, 2023 | | December 31, 2022* | | | | |
Amounts due to RPMG | $ | 10,074 | | | $ | 123,573 | | | | | |
*Derived from audited financial statements.
The Company purchased corn and services from members of its Board of Managers that farm and operate local businesses. Corn purchases from these related parties during the three months ended March 31, 2023 and 2022 totaled approximately $285,000 and $159,000, respectively. As of March 31, 2023 and December 31, 2022, the Company had no outstanding obligations to these related parties.
NOTE 10 - CCOMMITMENTS, CONTINGENCIES AND AGREEMENTS
Agreements
On June 24, 2022, Dakota Ethanol, LLC, entered into the Precedent Agreement West Leg 2023 Expansion between Northern Natural Gas Company and the Dakota Ethanol (the "West Leg Agreement"). Pursuant to the West Leg Agreement, Dakota Ethanol will receive additional firm commitment natural gas transportation services. In order to secure these firm commitment natural gas transportation services, Dakota Ethanol agrees to pay Northern Natural Gas Company a contribution to the cost of constructing certain additional natural gas pipeline and storage facilities. Dakota Ethanol's contribution is estimated to be $8,890,000, which has been paid in its entirety as of March 31, 2023. For a period of five years beginning on November 1, 2023, Dakota Ethanol is entitled to a firm natural gas commitment of 7,000 decatherms per day during the winter months (between November 1 and March 31 each year), and firm commitment of 4,340 decatherms per day during the summer months. The payments to Northern Natural Gas are included in other assets on the consolidated balance sheet.
From time to time in the normal course of business, the Company can be subject to litigation based on its operations. There is no current litigation nor any litigation that is considered probable at this time.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023 AND 2022
NOTE 11 - SUBSEQUENT EVENTS
On April 3, 2023, Dakota Ethanol, LLC, received a formal proposal from the USDA Biofuel Producer Relief Program for an additional payment of approximately $2,500,000 that was the result of a summary judgement ruling in favor of Dakota Ethanol. On May 2, 2023, that offer was formally accepted.
During May 2023, the Company declared a distribution to its members of $2,962,000 or $0.10 per capital unit, to unit holders of record as of April 1, 2023.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended March 31, 2023, 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, 2022, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 which was filed with the SEC on March 9, 2023.
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, 2022.
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 100 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.
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
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 March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Income Statement Data | | Amount | | % | | Amount | | % |
Revenues | | $ | 77,841,106 | | | 100.0 | | | $ | 64,450,894 | | | 100.0 | |
| | | | | | | | |
Cost of Revenues | | 73,942,513 | | | 95.0 | | | 61,758,095 | | | 95.8 | |
| | | | | | | | |
Gross Profit | | 3,898,593 | | | 5.0 | | | 2,692,799 | | | 4.2 | |
| | | | | | | | |
Operating Expense | | 1,451,502 | | | 1.9 | | | 1,247,879 | | | 1.9 | |
| | | | | | | | |
Income from Operations | | 2,447,091 | | | 3.1 | | | 1,444,920 | | | 2.3 | |
| | | | | | | | |
Other Income | | 969,969 | | | 1.3 | | | 220,279 | | | 0.3 | |
| | | | | | | | |
Net Income | | $ | 3,417,060 | | | 4.4 | | | $ | 1,665,199 | | | 2.6 | |
Revenues
Revenue from sales increased by approximately 20.8% during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to increased gallons of ethanol sold. Revenue from distillers grains sales increased by approximately 20.5% during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to increased prices that we received for our distillers grains. Revenue from corn oil sales increased by approximately 17.2% during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to more pounds of corn oil sold during the 2023 period along with increased prices that we received for corn oil sold.
Ethanol
Our ethanol revenue was approximately $10.2 million higher during our three months ended March 31, 2023 compared to the three months ended March 31, 2022, an increase of approximately 21.2%. This increase in ethanol revenue was due primarily to an increase in the gallons of ethanol sold during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The average price we received for our ethanol was approximately $0.03 lower per gallon during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, a decrease of approximately 1.6%. Management attributes this decrease in ethanol prices during the three months ended March 31, 2023 to lower gasoline prices generally which decreases the price of ethanol. Since ethanol is blended with gasoline, when gasoline price and demand are lower it has a corresponding impact on ethanol price and demand.
We sold approximately 23.1% more gallons of ethanol during the three months ended March 31, 2023 compared to the same period of 2022, an increase of approximately 5,257,000 gallons. The increase is due primarily to increased production and sales of ethanol inventory during the three months ended March 31, 2023. Management anticipates increased production and sales during our 2023 fiscal year due to fermentation expansion added in 2022.
Distillers Grains
Our total distillers grains revenue was approximately 20.5% higher during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to increased prices received for our distillers grains. The average price we received for our dried distillers grains was approximately 29.2% higher during the three months ended March 31, 2023
compared to the same period of 2022, an increase of approximately $57.78 per ton. Management attributes the increase in dried distillers grains prices during the three months ended March 31, 2023 to increases in the demand for distillers grains. The average price we received for our modified/wet distillers grains was approximately 25.7% higher for the three months ended March 31, 2023 compared to the same period of 2022, an increase of approximately $56.86 per ton. Management attributes this increase in modified/wet distillers grains prices with higher demand in the market.
We sold approximately 5.5% less total tons of distillers grains during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to an increase of distillers grain inventory at March 31, 2023.
Corn Oil
Our total corn oil revenue was approximately 17.2% higher during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to increased pounds sold during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The average price per pound we received for our corn oil was higher by approximately 2.5% for the three months ended March 31, 2023 compared to the same period of 2022 due primarily to demand from the renewable diesel industry for corn oil along with higher soybean oil prices. During 2022, the biodiesel blenders' tax credit was reinstated through 2024 so we expect that corn oil demand will remain high through 2024.
Our total pounds of corn oil sold increased by approximately 14.3% during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to increased production.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 5.2% higher for the three months ended March 31, 2023 compared to the same period of 2022 due to increased corn usage during the 2023 period.
Our average cost per bushel of corn increased by approximately 0.1% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. We consumed approximately 5.3% more bushels of corn during the three months ended March 31, 2023 compared to the same period of 2022 that contributed to higher corn cost. Management anticipates corn prices to remain higher during our 2023 fiscal year due to drought conditions in the area that surrounds our plant and global uncertainty in the commodities markets.
We experienced approximately $574,00 of combined realized and unrealized loss for the three months ended March 31, 2023 to our corn derivative instruments which increased our cost of goods sold. By comparison, we experienced approximately $4,389,000 of combined realized and unrealized loss for the three months ended March 31, 2022 related to our corn derivative instruments which increased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Natural Gas
Our cost of revenues related to natural gas increased by approximately $1,804,000, an increase of approximately 74.9%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. This increase was due to higher natural gas costs per MMBtu during the three months ended March 31, 2023 compared to the same period of 2022.
Our average cost per MMBtu of natural gas during the three months ended March 31, 2023 was approximately 68.6% more compared to the cost per MMbtu for the three months ended March 31, 2022. Management attributes this increase in our average natural gas costs to higher market natural gas prices and increased transportation costs.
The volume of natural gas we used increased by approximately 3.7% during the three months ended March 31, 2023 compared to the same period of 2022 due to increased production at the plant.
Operating Expenses
Our operating expenses were comparable for the three months ended March 31, 2023 compared to the same period of 2022.
Other Income and Expense
Our other income increased during the three months ended March 31, 2023 compared to the same period of 2022 due primarily to increased income from our investments. We had more income from our investments during the three months ended March 31, 2023 compared to the same period of 2022 due to increased profitability in the ethanol sector. We had more interest expense during the three months ended March 31, 2023 compared to the same period of 2022 due to higher interest rates on outstanding debt instruments.
Changes in Financial Condition for the Three Months Ended March 31, 2023
Current Assets
Our cash on hand at March 31, 2023 was less compared to December 31, 2022 due to deferred corn payments. We had more accounts receivable at March 31, 2023 compared to December 31, 2022 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 less at March 31, 2023 compared to December 31, 2022 due to decreased quantities of corn and finished goods inventory. The asset value of our derivative instruments was less at March 31, 2023 compared to December 31, 2022 due to recent corn price changes which impacted our derivative instruments. We had higher prepaid and other expenses at March 31, 2023 compared to December 31, 2022 due to the current portion of the prepayment for the firm commitment on natural gas transportation with Northern Natural Gas.
Property and Equipment
The value of our property and equipment was slightly lower at March 31, 2023 compared to December 31, 2022 due to regular depreciation of our assets.
Other Assets
The value of our investments was higher at March 31, 2023 compared to December 31, 2022 due to the profitability from our investments during the three months ended March 31, 2023. We had more other assets at March 31, 2023 compared to December 31, 2022 due primarily to the prepayment for the firm commitment on natural gas transportation with Northern Natural Gas.
Current Liabilities
We had less outstanding checks in excess of bank balances at March 31, 2023 compared to December 31, 2022 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 March 31, 2023 compared to December 31, 2022 due primarily to deferred corn payables at March 31, 2023 compared to December 31, 2022 as the deferred payments were paid during the first quarter of 2023. Our derivative instrument liability was higher at March 31, 2023 compared to December 31, 2022 due to recent corn price changes which impacted our derivative instruments. The current portion of our notes payable was unchanged at March 31, 2023 compared to December 31, 2022.
Long-Term Liabilities
Our long-term liabilities were unchanged at March 31, 2023 compared to December 31, 2022.
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 March 31, 2023, we had $1,000 outstanding and $42,999,000 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 three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Net cash (used in) operating activities | | $ | (21,098,510) | | | $ | (22,054,476) | |
Net cash (used in) investing activities | | (4,565,581) | | | (2,386,032) | |
Net cash (used in) financing activities | | (497,837) | | | (13,362,482) | |
Cash Flow From Operations. Our operating activities used less cash during the three months ended March 31, 2023 compared to the same period of 2022, due primarily to increased net income, decreased inventory, and a decrease in derivative financial instruments during the 2023 period partially offset by an increase in accounts receivable and a larger decrease in accounts payable.
Cash Flow From Investing Activities. Our investing activities used more cash during the three months ended March 31, 2023 compared to the same period of 2022, due to the prepayment of our natural gas services agreement.
Cash Flow From Financing Activities. Our financing activities used less cash during the three months ended March 31, 2023 compared to the same period of 2022, due primarily to less distributions paid to members during the 2023 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 may provide further distributions to its members. 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' 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 $40,999,000. 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.
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 7.60% at March 31, 2023. There is a non-use fee of 0.25% per anuum 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 March 31, 2023, 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 7.85% at March 31, 2023. The note contains a non-use fee of 0.5% per annum on the unused portion of the note. On March 31, 2023, Dakota Ethanol had $1,000 outstanding and $40,999,000 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 note 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 7.85% at March 31, 2023. On March 31, 2023, Dakota Ethanol had $4,000,000 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 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.
As of March 31, 2023, 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. 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.