Washington, D.C. 20549
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company" and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 1. Unaudited Financial Statements.
See Notes to Unaudited Financial Statements.
The Company had the following related-party activity with members during the three and six months ended DecemberMarch 31, 20172022 and 2016:2021:
The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the distillers grains produced by the Company. Revenues from this entity including both distillers grains and corn oil were $3,732,164approximately $9,755,000 and $3,760,454,$10,156,000 respectively, for the three months ended DecemberMarch 31, 20172022 and 2016.2021. Revenues by this Company was approximately $17,653,000 and $17,645,000 respectively for six months ended March 31, 2022 and 2021. The Company sells corn oil to this entity as a third party broker independent of its agreement with the entity relating to distillers grain sales. Trade accounts receivable of $501,394approximately $441,000 and $589,000 were due from this entity as of DecemberMarch 31, 2017.2022 and September 30, 2021, respectively. The Company had distillers grain sales open commitments with this entity of approximately 9,97533,000 tons, for a total sales commitment of approximately $1.2$7.4 million.
The Company has an agreement with an unrelated party for the transportation of natural gas to the Company's ethanol plant. Under the agreement, the Company is committed to future monthly usage fees totaling approximately $3.6 million over the 10 year term which commenced in November 2014. The Company assigned an irrevocable standby letter of credit to the counter-party to stand as security for the Company's obligation under the agreement maturing May 2021.2023. The letter of credit will beis reduced over time as the Company makes payments under the agreement. At DecemberMarch 31, 2017,2022, the remaining commitment was approximately $2.0 million.$940,000.
The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company's risk management program focuses on the unpredictability of commodity markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations. The Company's specific goal is to protect the Company from large moves in the commodity costs.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures and options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward purchase and sale contracts. Exchange traded futures and options contracts are designated as non-hedge derivatives and are valued at market price with changes in market price recorded in operating income through cost of goods sold for corn derivatives and through revenue for ethanol derivatives. The Company treats all contracts with the same counterparty where right of offset exists on a net basis on the balance sheet.
Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company's financial statements but are subject to a lower of cost or marketnet realizable value assessment.
Note 9. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of DecemberMarch 31, 20172022 and September 30, 2017,2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
The following discussion and analysis provides information which management of Lincolnway Energy, LLC (the “Company”, “we,” “us,” and “our”) believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statementsand our Annual Report on Form 10-K for the year ended September 30, 20172021 ("Fiscal 2017"2021") including the financial statements, accompanying notesand the risk factors contained herein.
Cautionary Statement on Forward-Looking Statements
Various discussions and statements in this quarterly report are or contain forward-looking statements that express our current beliefs, forecasts, projections and predictions about future events. All statements other than statements of historical fact are forward-looking statements, and include statements with respect to financial results and condition; anticipated trends in business, revenues, net income, net profits or net losses; projections concerning ethanol prices, distillers grain prices, corn prices, gas prices, operations, capital needs and cash flow; investment, business, growth, joint venture, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections, predictions and statements of expectation. Words such as "expects," "anticipates," "estimates," "plans," "may," "will," "contemplates," "forecasts," "strategy," "future," "potential," "predicts," "projects," "prospects," "possible," "continue," "hopes," "intends," "believes," "seeks," "should," "could," "thinks," "objectives" and other similar expressions or variations of those words or those types of words help identify forward-looking statements.
Actual future performance, outcomes and results may differ materially from those suggested by or expressed in forward-looking statements as a result of numerous and varied factors, risks and uncertainties, some that are known and some that are not, and many of which are beyond the control of the Company and its management. We cannot guarantee our future results, performance or business conditions, and strong or undue reliance must not be placed on any forward-looking statements, which speak only as of the date of this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by the Company include:
•Changes in the availability and price of corn and natural gas;
•Negative impacts resulting from reductionsthe reduction in or other modifications to, the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency;
•Changes in federal mandates relating to the blending of ethanol with gasoline, including, without limitation reductions to, or the elimination of, the Renewable Fuel Standard volume obligations;
•The inability to comply with the covenants and other requirements of ourthe Company's various loan agreements;
•Negative impacts that hedging activities may have on ourthe Company's operations or financial condition;
•Decreases in the market prices of ethanol and distillersdistiller's grains;
•Ethanol supply exceeding demand and corresponding ethanol price reductions;
•Changes in the environmental regulations that apply to ourthe Company's plant operations;
•Changes in plant production capacity or technical difficulties in operating the plant;
•Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
•Changes in other federal or state laws and regulations relating to the production and use of ethanol;
•Changes and advances in ethanol production technology;
•Competition from larger producers as well as completioncompetition from alternative fuel additives;
•Changes in interest rates and lending conditions of the loan covenants in the Company loan agreements;
•Volatile commodity and financial markets;
Negative impacts resulting from recent tax reform legislation;
Disruptions, failures or security breaches relating to our information technology infrastructure; and
Decreased•Decreases in export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distillersdistiller's grains produced in the United States.States;
•Disruptions, failures; security breaches or other cybersecurity threats relating to or impacting our information technology infrastructure;
•The continuing impact of trade actions, particularly those affecting the agriculture sector and related industries; and
•Disruption caused by health epidemics/pandemics, such as the novel strain of the coronavirus (COVID-19), and the adverse impacts of such epidemics/pandemics on global economic and business conditions, including reduced demand for our products, transport disruptions, labor shortages and disruptions in our workforce.
These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. Any
expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017Fiscal 2021 and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. We undertake no obligation to revise or update any forward-looking statements. The forward-looking statements contained in this report are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
General Overview
Lincolnway Energy, LLC is an Iowa limited liability company that operates a dry mill, natural gas fired ethanol plant located in Nevada, Iowa. We have been processing corn into fuel grade ethanol and distillers grains at the ethanol plant since May 22, 2006. Our ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year.
All of the ethanol we produce is marketed by Eco-Energy, LLC (“Eco-Energy”) and all of our distillers grains are marketed by Gavilon Ingredients, LLC (“Gavilon”). Our revenues are derived primarily from the sale of our ethanol and distillers grains.
We also extract corn oil from the syrup generated in the production of ethanol. We market and distribute all of our corn oil directly to end users and third party brokers within the domestic market.
Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. (“Air Products”), has a plant located on the Company’s site that collects the carbon dioxide gas that is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. Air Products also markets and sells the liquid carbon dioxide.
We expect to fund our operations during the next 12 months using cash flow from continuing operations and the revolving long-term loan that is available to us.
Recent Events
On December 11, 2017, our Board of Directors approved a distribution of $25 per unit to its members of record on December 11, 2017 payable on or about December 15, 2017. Based on the current number of units outstanding, the aggregate payment was approximately $1.0 million.
Recent Regulatory Developments
Tax Cuts and Jobs Act
On December 22, 2017, the H.R. 1, originally known as the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), was signed into law. The 2017 Tax Reform Act includes significant changes to the taxation of business entities, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective in 2018 and changes in the deductibility of interest on debt obligations. The Company is currently evaluating the impact of the 2017 Tax Reform Act, as well as potential future regulations implementing the new tax law and interpretations of the new tax law with its professional advisers. The full impact of the Tax Act on the Company in future periods cannot be predicted at this time.
Renewable Fuel Standard
The ethanol industry is dependent on the Federal Renewable Fuels Standard (the “RFS”) , a federal ethanol support and economic incentive which mandates ethanol use, and the RFS continues to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.
The RFS usage requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.
Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. On July 5, 2017, the EPA released a proposed rule to set the 2018 renewable volume requirements which would set the annual volume requirement for renewable fuel at 19.24 billion gallons of renewable fuels per year (the “Proposed 2018 Rule”). On November 30, 2017, the EPA issued the final rule for 2018 which varied only slightly from the Proposed 2018 Rule with the annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year (the "Final 2018 Rule"). Although the volume requirements set forth in the Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the final 2017 renewable fuel volume requirements, the 2018 volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.
Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed volume requirements are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 volume requirements are also more than 20% below statutory levels, the reset will be triggered under the RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022.
On October 19, 2017, EPA Administrator Pruitt issued a letter to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS, among other topics, he stated the EPA is actively exploring its authority to remove arbitrary barriers to the year-rounds use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption and that the EPA will not pursue regulations to allow ethanol exports to generate renewable identification numbers (“RINs”). These statements represents actions that would likely have a positive impact on the ethanol industry either directly or indirectly.
The letter also stated that the EPA would soon finalize a decision to deny the request to change the point of obligation for renewable identification numbers, or RINs, from refiners and importers to blenders. The EPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences purchasing decisions by obligated parties. Consistent with the position in his letter, on November 22, 2017, the EPA issued a Notice of Denial of Petitions for rulemaking to change the RFS point of obligation which resulted in the EPA confirming the point of obligation will not change.
Management anticipates that there will be legal challenges to the EPA's recent reductions in the RFS volume requirements, including the Final 2018 Rule. However, if the EPA's decision to reduce the volume requirements under the RFS is allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.
Although the release of the Final 2018 Rule and the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol together with the letter issued by Administrator Pruitt and the resulting actions taken by the EPA consistent with Administrator Pruitt’s letter signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.
Executive Summary
Highlights for the three months ended DecemberMarch 31, 2017,2022 are as follows:
•Total revenues decreased 21.3%increased approximately 49.9%, or $6.1$19 million, compared to the 2016 comparable period.same period in 2021.
•Total cost of goods sold decreased 10.2%increased approximately 41.6%, or $2.6$14.7 million, compared to the 2016 comparable period.same period in 2021. At the same time the profit margin increased approximately $4.3 million or 2.6 times the previous year in 2021.
•Net (loss)income was approximately ($.9)$6 million, which was a decrease of $3.3 million when compared to thea net income of $2.4approximately $1.9 million for the 2016 comparable period.same period in 2021.
The Company entered into agreements with third parties for the installation of a grains drying and cooling system. The total commitments are for $11.2 million plus a potential performance bonus of $450,000. The Company made progress payments of $6.7 million under this contract as of December 31, 2017. The remaining payments will be made as invoiced throughout the life of the project. The project is estimated to be completed in the second quarter of fiscal year 2018. This new drying and cooling system will aid in our development of a new high quality species specific animal feed which we have branded as PureStream™ protein. We currently intend to market this new product to the growing swine and poultry markets in Iowa. When compared to traditional distillers grains, our new PureStream™ protein animal feed products are expected to be higher in crude protein and richer in the essential amino acids that drive growth in swine and poultry.
Results of Operations
The following table shows the results of operations and the percentages of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three and threesix months ended DecemberMarch 31, 20172022 and 2016 (dollars in thousands):2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Six Months Ended March 31, |
| | (Unaudited) |
| Income Statement Data | | 2022 | | 2021 | | 2022 | | 2021 |
| | (dollars in thousands) |
| Revenue | | $ | 56,911 | | | 100.0 | % | | $37,976 | | 100.0 | % | | $ | 111,964 | | | 100.0 | % | | $67,315 | | 100.0 | % |
| Cost of goods sold | | 50,024 | | | 88.0 | | | 35,339 | | 93.1 | | | 95,878 | | | 86.0 | | | 64,857 | | 96.3 | |
| Gross profit | | 6,887 | | | 12.0 | | | 2,637 | | 6.9 | | | 16,086 | | | 14.0 | | | 2,458 | | 3.7 | |
| General and administrative expenses | | 824 | | | 1.0 | | | 642 | | 1.7 | | | 1,752 | | | 2.0 | | | 1,437 | | 2.1 | |
| Operating income | | 6,063 | | | 11.0 | | | 1,995 | | 5.3 | | | 14,334 | | | 13.0 | | | 1,021 | | 1.5 | |
| Other income (expense), net | | 100 | | | — | | | (34) | | (0.1) | | | (82) | | | — | | | (153) | | (0.2) | |
| Net income | | $ | 6,163 | | | 11.0 | % | | $1,961 | | 5.2 | % | | $ | 14,252 | | | 13.0 | % | | $868 | | 1.3 | % |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | |
| | | (Unaudited) | |
| Income Statement Data | | 2017 |
| 2016 | |
| | | | | | | | | | |
| Revenue | | $22,470 | | 100.0 | % | | $28,562 | | 100.0 | % | |
| Cost of goods sold | | 22,777 |
| | 101.4 | % | | 25,365 |
| | 88.8 | % | |
| Gross profit (loss) | | (307 | ) | | (1.4 | )% | | 3,197 |
| | 11.2 | % | |
| General and administrative expenses | | 946 |
| | 4.2 | % | | 757 |
| | 2.7 | % | |
| Operating income (loss) | | (1,253 | ) | | (5.6 | )% | | 2,440 |
| | 8.5 | % | |
| Other income (expense), net | | 306 |
| | 1.4 | % | | (22 | ) | | (0.1 | )% | |
| Net income (loss) | | $ | (947 | ) | | (4.2 | )% | | $ | 2,418 |
| | 8.4 | % | |
Results of Operations for the Three Months Ended DecemberMarch 31, 20172022 as Compared to the Three Months Ended DecemberMarch 31, 20162021
Revenues. Total revenues decreasedincreased by 21.3%approximately 49.9% for the three months ended DecemberMarch 31, 20172022 as compared to the three months ended DecemberMarch 31, 2016. Ethanol sales decreased by 27.1% and sales from co-products increased by 2.8% for2021. For the three months ended DecemberMarch 31, 20172022, ethanol revenue increased by $15.1 million due primarily to increased gallons of ethanol sold and an increase in the average price we received for our ethanol compared to the three months ended March 31, 2021. We sold approximately 2.9 million more gallons of ethanol during the three months ended March 31, 2022 as compared to the same period of 2021. The average price we received per gallon of ethanol sold increased by approximately 31.6% during the three months ended DecemberMarch 31, 2016. The change in ethanol revenue was a result of a 20.6% decrease in the price per gallon received2022 as well as a 9.4% decrease in sales volume for the three months ended December 31, 2017, when compared to the three months ended December 31, 2016.same period of 2021. Ethanol prices decreasedwere higher during our second quarter of fiscal year 2022 due to relatively high inventoriesa combination of significantly higher corn and gasoline prices and low ethanol stocks which combined to positively impact market ethanol prices. By comparison, ethanol prices were lower during our second quarter of fiscal 2021 due to excess ethanol supply in the domestic market coupledmarket. Travel restrictions associated with ongoing record productionCOVID-19 negatively impacted ethanol demand during our second quarter of ethanol. Due to EPA regulations, the Company was limited on the the number of RINs it could generate in the calendar year. RINS are sold in conjunction with ethanol gallons. In order to stay compliant, the Company built up inventory levels and sales volume decreased as a result. Ethanol revenue for the three months ended December 31, 2017 also included a $48,825 net gain for ethanol derivatives, compared to a $225,059 net loss in the same quarter for the prior year.2021.
Sales from co-products increased by 2.8%approximately $3.6 million or 34.9% for the three months ended DecemberMarch 31, 2017 from2022 as compared to the three months ended DecemberMarch 31, 2016.2021. Co-products include dried distillers grains, wet distillers grains, corn oil syrup and carbon dioxide. Incremental increasesThe change in every categoryco-product sales resulted primarily from an increase in distillers grain and corn oil revenue partially offset by lower carbon dioxide sales. Distillers grain revenue increased due to a combination of higher average prices per ton of distillers grains sold and an increase in distillers grains production for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The higher average price per ton of distillers grains sold for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was due to an increase in the change.market price for corn. Corn oil revenue was higher for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 due to an increase in the average price we received per pound of corn oil sold along with an increase in the amount of corn oil we sold. Corn oil prices were higher due to increased corn oil demand for the renewable diesel feedstock.
Cost of goods sold. Cost of goods sold decreased by 10.2%, or approximately $2.6 million, for the three months ended December 31, 2017 from the three months ended December 31, 2016. The decrease was primarily due to decreases inconsist of corn costs, labor, supplies and railcar expense. Cost of goods sold includes corn costs,expense, process chemicals, denaturant, natural gas costs, electricity, production labor, repairs and maintenance and depreciation. Cost of goods sold increased by 41.6%, or approximately $14.7 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 primarily due to increases in corn costs and natural gas costs of approximately $14.4 million and $1.4 million, respectively.
Corn costs, including hedging, decreasedincreased by approximately $2.1$13.4 million, or 12.4%approximately 46.5%, for the three months ended DecemberMarch 31, 20172022 compared to the same period of 2021. Our corn costs increased due partially to increasing corn prices due to the limited supply in our immediate draw area. For the three months ended DecemberMarch 31, 2016. The decrease in corn costs is due to decreases in ethanol sales volume and improved yields in production. For the three months ended December 31, 20172022 corn costs included a $410,550 million netan approximately $98,000 combined realized and unrealized gain for derivatives relating tofrom corn costs,derivative instruments as compared to a $33,568 net gain inan approximately $840,000 combined realized and unrealized loss on our corn derivative instruments during the same quarter forperiod of the prior year. Corn costs represented 65.8%85% of cost of goods for three months ended March 31, 2022 compared to 82% of cost of goods sold for the three months ended DecemberMarch 31, 2017, compared to 67.5% for the three months ended December 31, 2016. Cost of goods sold also included a $.3 million loss of firm corn purchase commitments2021.
Repairs and maintenance costs increased by approximately 4% for the three months ended DecemberMarch 31, 2017.
Labor decreased2022 as compared to the same period of 2021. The increase was due to increased production gallons for preventive maintenance to avoid larger costly repairs. Depreciation expense increased by approximately $.3 million, or 28.5%,$25,800 for the three months ended DecemberMarch 31, 2017 from the three months ended December 31, 2016. The three months ended December 31, 2016 included bonuses accrued correlated to net income. No bonuses were accrued in the three months ended December 31, 2017 due2022 as compared to the net loss. Several open positions also contributed to the variance.same period of 2021 because of capitalizing equipment installation for higher ethanol production.
Supply costs decreased approximately 36.6%, or $.1 million, for the three months ended December 31, 2017 from the three months ended December 31, 2016. The decrease was due to 10 year tank inspections performed in the previous fiscal year..
Railcar expenses decreased approximately $.3 million, or 32.9%, for the three months ended December 31, 2017 from the three months ended December 31, 2016. The decrease is due to inspection and cleaning costs in the previous year during the transition of old leases to new leases. The number of railcars leased was also reduced.
General and administrative costs increased by $.2 million, or 24.9%,approximately $63,000, for the three months ended DecemberMarch 31, 2017 from2022 as compared to the three months ended December 31, 2016.same period of 2021. The increase iswas due to researchwages, industry dues and development costs,memberships, and insurance while decreasing legal fees and recruitment.expense.
Other incomeIncome (expense) increased $.3 million or 14.72 %by approximately $15,000 for the three months ended DecemberMarch 31, 2017 from2022 as compared to the threesame period of 2021 due primarily to an increase in other miscellaneous income and a decrease in interest expense along with a decrease in patronage income as our borrowings were reduced.
Results of Operations for the Six Months Ended March 31, 2022 as Compared to the Six Month Ended March 31, 2021
Revenues. Total revenues increased by approximately 66.3% for the six months ended DecemberMarch 31, 2016.2022 as compared to the six months ended March 31, 2021. For the six months ended March 31, 2022, ethanol revenue increased by $44.6 million due primarily to increased gallons of ethanol sold and an increase in the average price we received for our ethanol compared to the six months ended March 31, 2021. We sold approximately 5.9 million more gallons of ethanol during the six months ended March 31, 2022 as compared to the same period of 2021. The increase isaverage price we received per gallon of ethanol sold increased by approximately 67.8% during the six months ended March 31, 2022 as compared to the same period of 2021. Ethanol prices
were higher during the 6 months ending March 31, 2022 due to a settlement payment received by Lincolnway Energy in a litigation matter.
Industry Factors that May Affect Future Operating Results
During the three months ended December 31, 2017, the ethanol industry experienced generally declining ethanol margins as a result of a combination of factors including the following:
Corn prices were modestly lower during the three months ended December 31, 2017. The price per bushel ranged narrowly for most of the quarter as the market absorbed the impact ofsignificantly higher South American corn production and the resulting fall in U.S. export demand, and another record U.S. corn yield that removed concerns about any supply constraints resulting from a reduction in U.S. planted acreage. The corn basis quickly recovered post-harvest which offset most of the impact of the lower futures prices.
The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the "USDA") confirmed 2017 ending corn stocks of 2.3 billion bushels and 2018 ending corn stocks of over 2.4 billion bushels, suggesting stable to lower corn prices. In response to these estimates, corn prices declined.
Gasoline demand ended 2017 essentially flat versus 2016 levels despite low gasoline prices and a strong economy which led to steady demand for ethanol. Despite gasoline production remaining steady through 2017, ethanol inventories ballooned to record seasonally adjusted levels during the three months ended December 31, 2017. These high stocks of ethanol coupled with significantly increasing production of ethanol weighed heavily on margins in the final quarter of 2017.
Robust export sales of U.S. ethanol to a variety of foreign consumers continued as a result of rising petroleum prices and competitive and decreasing U.S. ethanol prices. Global ethanol demand as reported by the U.S. Department of Energy’s Energy Information Administration (the “EIA”) continues to increase with increased exports to various foreign markets, including China, Canada and Mexico, in response to higher blending mandates and octane demand within the foreign countries. Net ethanol exports of U.S. ethanol in calendar year 2017 were 33% higher than exports during 2016 and the industry forecasts that U.S. ethanol net exports in 2018 will likely surpass 2017 by another 25%. China made a surprise return to the market in the fourth quarter of calendar 2017, and despite the imposition of a 20% tariff on U.S. ethanol imports above a specified quota effective September 1, 2017, Brazilian demand from the U.S. remained steady. Management currently anticipates, at least in the short term, exports to Brazil will remain steady despite the tariff as a result of the high gasoline prices and low ethanol supplies within Brazil. Moreover, given thestocks which combined to positively impact market ethanol prices. By comparison, ethanol prices were lower during this same time period ending March 31, 2021 due to excess ethanol supply struggles Brazil is currently facing,in the governmentmarket. Travel restrictions associated with COVID-19 negatively impacted ethanol demand during our second quarter of Brazil is currently contemplating reversing2021.
Sales from co-products increased by approximately $7.9 million or 44% for the tariff. In September 2017, China’s National Developmentsix months ended March 31, 2022 as compared to the six months ended March 31, 2021. Co-products include dried distillers grains, wet distillers grains, corn oil and Reform Commission, the National Energy Boardcarbon dioxide. The change in co-product sales resulted primarily from an increase in distillers grain and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanolcorn oil revenue partially offset by 2020. China, the number three importer of U.S. ethanol in 2016, imported negligible volumes during calendar year 2017lower carbon dioxide sales. Distillers grain revenue increased due to a 30% tariff imposed on importscombination of U.S.higher average prices per ton of distillers grains sold and Brazil fuel ethanol, which took effectan increase in January 2017. There is no assurance thatdistillers grains production for the recently issued joint plan will leadsix months ended March 31, 2022 as compared to the six months ended March 31, 2021. The higher average price per ton of distillers grains sold for the six months ended March 31, 2022 as compared to the six months ended March 31, 2021 was due to an increase in the market price for corn. Corn oil revenue was higher for the six months ended March 31, 2022 as compared to the six months ended March 31, 2021 due to an increase in the average price we received per pound of corn oil sold along with an increase in the amount of corn oil we sold. Corn oil prices were higher due to increased imports of U.S. ethanol by China but any increase in exports to China could have a positive impact on the ethanol market.
Ethanol is now trading at a large discount to gasoline which has improved domestic and export demand somewhat, particularly among price opportunistic buyers.
The EPA’s maintenance in the Final 2018 Rule of the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons signals continued support by the administration of the RFS for ethanol and could encourage investment in infrastructure to accommodate higher ethanol blends which would lead to increasedcorn oil demand for ethanol. However, given the Trump administration’s recent attemptsrenewable diesel feedstock.
Cost of goods sold. Cost of goods sold consist of corn expense, process chemicals, denaturant, natural gas costs, electricity, production labor, repairs and maintenance and depreciation. Cost of goods sold increased by 47.8%, or approximately $31 million for the six months ended March 31, 2022 as compared to please both “Big Ag” and “Big Oil”, the perceived investment risks for ethanol have likely increased.
Despite the modest improvements in demand outlined above, the primary driving force moving our margins lower during the quarter wassix months ended March 31, 2021 primarily due to increases in domestic production. Year over year quarterly productioncorn costs and natural gas costs of approximately $30 million and $1.5 million, respectively.
Corn costs, including hedging, increased nearly 5%. While export increases are helpful, domestic offtake constitutes 90%by approximately $27 million, or approximately 51.5%, for the six months ended March 31, 2022 compared to the same period of overall demand, and when it stagnates, production increases can adversely impact the price of ethanol.
We use futures and options strategies on the Chicago Mercantile Exchange2021. Our corn costs increased due partially to hedge some of the risk involved with changingincreasing corn prices as well asdue to the purchase and physical delivery of corn contracts from area farmers and commercial suppliers. We also incorporate risk management strategies to cover some of the risk involved with changing ethanol and distillers market prices. We continue to monitor the markets and attempt to provide for an adequatelimited supply of corn in our immediate draw area. For the six months ended March 31, 2022, corn costs included an approximately $1 million combined realized and protection against rapid price increases forunrealized gain from corn derivative instruments as compared to an approximately $2 million combined realized and price decreases for ethanol and distillers grains.
Management currently believes thatunrealized loss on our margins will improve very modestlycorn derivative instruments during the remaindersame period of the fiscal yearprior year. Corn costs represented 83% of cost of goods for six months ended September 30, 2018 (“Fiscal 2018”) but continued large corn suppliesMarch 31, 2022 compared to 81% of cost of goods sold for the six months ended March 31, 2021.
Repairs and ethanol production capacity increases could have a negative impact onmaintenance costs decreased by approximately 4% for the market price of ethanol which could adversely impact our profitability. This negative impact could worsen in the event that domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline. The ethanol industry is currently experiencing growth in production capacity principally through plant optimization and some new construction. The EIA has reported that during 2017, increasing ethanol production rates have outpaced domestic E10 gasoline demand and export growth, leading to elevated ethanol inventory levels. Accordingsix months ended March 31, 2022 as compared to the EIA,same period of 2021. The decrease was due to already completing deferred and preventive maintenance to avoid larger costly repairs. Depreciation expense decreased by approximately $39,000 for the six months ended March 31, 2022 as of December 31, 2017, weekly ending stocks of ethanol were 19% higher thancompared to the same time last yearperiod of 2021.
General and 20% higher thanadministrative costs increased by approximately $195,000 for the previous five-year average. Although ethanol exports have provided some supportsix months ended March 31, 2022 as compared to the same period of 2021. The increase was due to wages, industry dues and memberships, and insurance while decreasing legal expense.
Other (expense) increased by approximately $48,000 for ethanol prices withsix months ended March 31, 2022 as compared to the same period of 2021 due primarily to an increase in export demand resulting from the lower domestic ethanol prices, if ethanol prices increase, this could negatively impact export demand. The adjustmentsother miscellaneous income and a decrease in the renewable volume obligations by the EPA also may resultinterest expense along with a decrease in an oversupply of renewable fuel credits which could decrease demand for corn-based ethanol despite the increase back to statutory requirements set forth in the Final 2018 Rule. The Final 2018 Rule renewable volume requirements did not include any material growth andpatronage income as a result, unless additional demand can be found in foreign or domestic markets, a continued level of current ethanol stocks or any increase in domestic ethanol supply could further adversely impact the price of ethanol.our borrowings were reduced.
Our margins have been, and could continue to be, negatively impacted due to the lower prices received for our distillers grains as a result of increased world corn and wheat supplies. The increased supplies of corn and wheat results in lower feed grain prices which adversely impacts the price of corn and demand for distillers grains which are an animal feed substitute for corn, and to a lesser extent, protein meal. Fortunately, in 2017, firm protein meal prices have enabled distillers grains prices to rally in the latter half of 2017. Demand and prices for distillers grains may experience declines in the near term due to potential decreased demand as a result of these higher prices taking some distillers grains out of domestic rations. The impact of the Chinese imposition of antidumping and countervailing duties on distillers grains produced in the U.S. is ongoing. China had historically been one of the largest importers of domestically produced distillers grains. At this time, management believes that the impact of reduced demand from China has been fully discounted in the market and that this development is now a neutral for margins and distillers grain prices.
The Final 2018 Rule held steady the renewable volume requirements for advanced biofuels from the 2017 level and raised biomass based diesel by 100 million gallons. This could negatively impact the demand for corn oil as U.S. corn oil supplies are expected to grow by well in excess of 10%. World oilseed supplies are projected to be higher. Still, most important is the uncertainty about what the United States Government may do to affect international biodiesel flows. Large amounts of biodiesel often flow into the U.S. from Argentina and the Far East. While these flows have moderated, corn oil prices have moved to multiyear lows as U.S. production overwhelms corn oil biodiesel production capacity.
Credit and Counterparty Risks
Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities. We define credit and counterparty risk as a potential
financial loss due to the failure of a counterparty to honor its obligations. The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). Part of our risk management strategy requires that we actively monitor credit and counterparty risk through credit analysis.
Liquidity and Capital Resources
BasedAlthough there is uncertainty related to the continuing impact of the COVID-19 pandemic on the global economy, the ethanol industry and our future financial projections prepared by management,results, we anticipatebelieve our current cash reserves and the available cash under our revolving term loan leave us well-positioned to manage our business through this crisis as it continues to unfold.However, the impacts of the COVID-19 pandemic are broad-reaching and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses. On June 29, 2021 our lender set up a revolving credit facility in the amount of $7.5 million for corn purchases and hedging requirements. This credit facility matures on August 1, 2022.
Although we were in compliance with our financial covenants set forth in our credit agreement as of March 31, 2022, the continuing impact of the COVID-19 pandemic could adversely impact our operating results which could result in our inability to comply with certain of these financial covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default. Our inability to satisfy our financial covenants under our credit agreement would also adversely impact our ability to negotiate a new revolving credit line with our lender or the terms available to us. However,
based on our current forecast of market conditions and our financial performance, we expect that we will have sufficient cash frombe in a position to satisfy all of the financial covenants in the credit agreement for the next twelve months.
We plan to closely monitor existing cash, our current credit facility,facilities, and cash from operations to continue to operate the ethanol plant forover the next 6 to 12 months. Management believes that an abundant corn supply will cause corn prices to remain near current levels and an anticipated increase in the supply of ethanol will cause ethanol prices to stay near current levels. Working capital was approximately $3.3$24.6 million as of Decemberon March 31, 2017 and is projected to2022. Management currently projects that liquid working capital will be sufficient withbased on current cash balances and credit facilities available for the remainder of the fiscal year. Management continuesFiscal 2022, but management will continue to monitor our liquidity position on a weekly basis.
Our financial position and liquidity are, and will continue to be, influenced by a variety of factors, including, without limitation:
•our ability to generate cash flows from operations;
•the level of our outstanding indebtedness and the interest we are obligated to pay;
•our ability to obtain ongoing credit from our primary lender and, if needed, to obtain waivers of covenant violations;
our capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies; and
•our margin maintenance requirements on all commodity trading accounts.
The following table summarizes our sources and uses of cash and cash equivalents from the unaudited statement of cash flows for the periods presented:
| | | | | | | | | | | | | | |
| | Six Months Ended March 31, |
| | (Unaudited) |
| Cash Flow Data: | | 2022 | | 2021 |
| Net cash provided by (used in) operating activities | | $ | 8,033,455 | | | $ | (96,963) | |
| Net cash (used in) investing activities | | (2,860,587) | | | (645,474) | |
| Net cash (used in) financing activities | | (7,256,100) | | | (1,000,000) | |
| Net decrease in cash and cash equivalents | | $ | (2,083,232) | | | $ | (1,742,437) | |
|
| | | | | | | | |
| | | Three Months Ended December 31, |
| | | (Unaudited) |
| Cash Flow Data: | | 2017 | | 2016 |
| Net cash provided by operating activities | | $ | 740,165 |
| | $ | 5,127,528 |
|
| Net cash (used in) investing activities | | (3,786,981 | ) | | (1,120,000 | ) |
| Net cash provided by (used in) financing activities | | 2,698,775 |
| | (2,527,571 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | (348,041 | ) | | $ | 1,479,957 |
|
Cash Flow from Operations- Operating Activities
For the threesix months ended DecemberMarch 31, 2017,2022, net cash provided byfrom operating activities decreased by $4.4 million when compared to net cash provided by operating activities for the three months ended December 31, 2016. The decrease in cash provided by operating activities isincreased primarily due to increased net lossincome. The increase in net income was partially offset by higher corn and the timing inethanol prices which increased our working capital components.components including trade receivable and inventory.
Cash Flow Used in- Investing Activities
CashThe increase in cash flows fromused in investing activities reflectreflects the impact of property and equipment acquired for the ethanol plant. Net cash used in investing activities increased by $2.7was approximately $2.8 million for the threesix months ended DecemberMarch 31, 20172022 compared to approximately $1 million for the six months ended March 31, 2021. During the period ended March 31, 2022, the plant used more cash for capital improvements compared to the threesix months ended DecemberMarch 31, 2016. The increase is due to progress payments on the installation of a grains drying and cooling system. The project is estimated to be completed in the second quarter of Fiscal 2018.2021.
Cash Flow Used in- Financing Activities
Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash provided by(used in) financing activities increased by $5.2$5.3 million for a distribution to members during the threesecond quarter and increased $1 million for debt pay down on long term borrowings for the six months ended DecemberMarch 31, 2017
compared to2022. In comparison, during the threesix months ended DecemberMarch 31, 2016. The increase is due to borrowings on our term revolver offset by distributions paid to members.2021, net cash (used in) financing activities totaled $1 million.
Critical Accounting Estimates and Accounting Policies
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of
operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.
Revenue Recognition
The Company records revenue following the guidance presented in Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The 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.
•sales of ethanol
•sales of distillers grains
•sales of corn oil
Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, are recorded based on the net selling price. Railcar lease costs incurred by the Company in the sale of its products are included in the cost of goods sold.
Revenue from the sale of ourthe Company's ethanol and distillers grains is recognized at the time title and all risks of ownership transfercontrol transfers to the marketing company. This generally occurs upon the loading of the product. For ethanol, titlecontrol passes from the Company at the time the product crosses the loading flange intoin either a railcar or truck. For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that the railcars have been loaded and are available for billing. For distillers grains, titlegrain, control passes upon the loading of distillers grains into trucks.trucks or railcars. Corn oil is marketed internally and corn oil revenue is recognized when control transfers, upon loading. Shipping and handling costs incurred by usthe Company for the sale of ethanol and distillers grain are included in costs of goods sold.
All of our Ethanol revenue is reported free on board (FOB) and all shipping and handling costs are incurred by the ethanol production is sold to Eco-Energy. The purchase price payable to us under our agreement with Eco-Energy is the purchase price set forth in the applicable purchase order, less a marketing fee payable to Eco-Energy.
We have an agreement with Gavilon to purchase all of the distillers grains produced at our ethanol plant. The purchase price payable to us is the corresponding price being paid to Gavilonmarketer. Commissions for the distillersmarketing and sale of ethanol and distiller grains less certain logisticsare included in costs and a service fee.of goods sold.
Derivative Instruments
We enterThe Company periodically enters into derivative contracts to hedge ourthe Company’s exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales. We doThe Company does not typically enter into derivative instruments other than for hedging purposes. All futurethe derivative contracts are recognized on the December 31, 2017balance sheet at their fair market value. Although we believe ourthe Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes. Accordingly, any realized or unrealized gain or loss related to these derivative instrumentscorn and natural gas derivatives is recorded in the statement of operations as a component of cost of goods sold for corn contracts andsold. Any realized or unrealized gain or loss related to ethanol derivative instruments is recorded in the statement of operations as a component of revenue for ethanol contracts.
revenue. The Company reports all contracts with the same counter party on a net basis on the balance sheet. Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in ourthe Company’s financial statements butstatements. Forward contracts with delivery dates within 30 days that can be reasonably estimated are subject to a lower of cost or marketnet realizable value assessment. The Company didn't recognize any accrued loss on purchase commitments as of March 31, 2022 or September 30, 2021.
Inventories and Lower of Cost or Market
Inventories are stated at the lower of net realizable value or actual cost using the first-in, first-out method. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation. As of March 31, 2022 and September 30, 2021 the Company recognized no write-downs for a lower of net realizable value or cost of inventory adjustment.
Property and Equipment
Property and equipment is stated at cost. Construction in progress is comprised of costs related to the projects that are not completed. Depreciation is computed using the straight-line method over the estimated useful lives. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. When circumstances or events arise that questions an asset's usefulness, the asset is evaluate for future use and appropriate carrying value.
The Company evaluates the carrying value of long-lived tangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable. Such events and circumstances include, but are not limited to, significant decreases in the market value of the asset, adverse changes in the extent or manner in which the asset is being used, significant changes in business climate, or current or projected cash flow losses associated with the use of the assets. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such assets are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. For long-lived assets to be held for use in future operations and for fixed (tangible) assets, fair value is determined primarily using either the projected cash flows discounted at a rate commensurate with the risk involved or an appraisal. For long-lived assets to be disposed of by sale or other than sale, fair value is determined in a similar manner, except that fair values are reduced for disposal costs.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to the various risks inherent in the ethanol industry and our operations, we are exposed to various market risks. The primary market risks arise as a result of possible changes in certain commodity prices and changes in interest rates.
Commodity Price Risk
We are exposed to market risk with respect to the price of ethanol, which is our principal product, and the price and availability of corn and natural gas, which are the principal commodities we use to produce ethanol. Our other primary product is distillers grains, and we are also subject to market risk with respect to the price for distillers grains. The prices for ethanol, distillers grains, corn and natural gas are volatile, and we may experience market conditions where the prices we receive for our ethanol and distillers grains are declining, but the price we pay for our corn, natural gas and other inputs is increasing. Our results will therefore vary substantially over time, and include the possibility of losses, which could be substantial.
In general, rising ethanol and distillers grains prices result in higher profit margins, and therefore represent favorable market conditions. We are, however, subject to various material risks related to our production of ethanol and distillers grains and the price for ethanol and distillers grains. For example, ethanol and distillers grains prices are influenced by various factors beyond the control of our management, including the supply and demand for gasoline, the availability of substitutes, international trade and the effects of domestic and foreign laws, regulations and government policies.
In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions. We will generally not be able to pass along increased corn costs to our ethanol customers. We are subject to various material risks related to the availability and price of corn, many of which are beyond our control. For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture, and local, regional, national and international trade, demand and supply. If our corn costs were to increase $.10$0.10 per bushel from one year to the next, the impact on costs of goods sold would be approximately $2.3$2.1 million for the year, assuming corn use of 2321 million bushels during the year.
Falling ethanol prices indicate weak market conditions and will usually negatively impact profit margins. Lincolnway EnergyWe will typically be unable to pass through the impact of decreased ethanol revenues to its corn suppliers. Lincolnway Energy isWe are subject to various material risks related to the demand for and price of ethanol, many of which are beyond the control of the Company. For example, the demand for and price of ethanol is subject to significant fluctuations due to various unpredictable factors which are beyond the control of Lincolnway Energy'sour management, including driving habits, consumer vehicle buying decisions, petroleum price movement, plant capacity utilization, and government policies with respect to biofuel use, railroad transportation requirements, national and international trade and supply and demand. If Lincolnway Energy'sour ethanol revenue were to decrease $.05$0.05 per gallon from one year to the next, the impact on gross revenues would be approximately $3.1 million for the year.
During the quarter ended DecemberMarch 31, 2017,2022, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $3.45$5.88 per bushel for March 2018 deliveryin January 2022 to a high of $3.69 per bushel for$7.65 during March 2018 delivery.2022. The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended DecemberMarch 31, 20162021 ranged from a low of $3.42$4.84 per bushel for March 2017during January 2021 delivery to a high of $3.69$5.65 per bushel forduring March 20172021 delivery.
The average price we received for our ethanol FOB Nevada, Iowa, during the threesix months ended DecemberMarch 31, 20172022 was $1.23 per gallon, a significant reduction as$2.06 compared to $1.55 per gallon during the threesix months ended December 30, 2016.March 31, 2021 at $1.52 per gallon.
During the quarter ended DecemberMarch 31, 2017,2022, ethanol prices based on the Chicago Mercantile Exchange Ethanol Platts settlement daily futures data ranged from a low of $1.99 per gallon for February 2022 delivery to a high of $2.57 per gallon for March 2022 delivery. During the quarter ended March 31, 2021, the ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.25$1.49 per gallon for January 20182021 delivery to a high of $1.45$1.88 per gallon for January 2018 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended December 31, 2016 ranged from a low of $1.42 per gallon for January 2017 delivery to a high of $1.76 per gallon for July 2017March 2021 delivery.
We may from time to time take various cash, futures, options or other positions in an attempt to minimize or reduce our price risks related to corn and ethanol. The extent to which we enter into such positions may vary substantially from time to time and based on various factors, including seasonal factors and our views as to future market trends. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn and ethanol markets are highly volatile and are influenced by many factors and occurrences that are beyond our control. We could incur substantial losses on our cash, futures, options or other positions.
Although we intend our futures and option positions to accomplish an economic hedge against our future purchases of corn or futures sales of ethanol, we have chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged. To avoid the higher costs associated with hedge accounting, we are instead using fair value accounting for the positions. Generally that means as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in our costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions. The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged. For example, our net gain on corn derivative financial instruments that was included indecreased our cost of goods sold for the threesix months ended DecemberMarch 31, 20172022 was $410,550, as opposednet gain $1,037,929 compared to a net gainloss of $33,568$1,977,403 for the threesix months ended DecemberMarch 31, 2016.2021.
We attempt to offset or hedge some of the risk involved with changing corn prices through the trading of futures and options on the Chicago Mercantile Exchange, as well as through purchase and physical delivery contracts from suppliers. We continue to stay at a near neutral corn position due to an uptrend in ethanol sales margins. We continue to monitor and attempt to ensure adequate corn supply and protection against rapid price increases. As noted above those activities are, however, subject to various material risks, including that price movements in the cash corn and corn futures markets are highly volatile and are influenced by many factors and occurrences which are beyond our control.
Another important raw material for our production of ethanol is natural gas. Our cost per MMBTU is subject to various factors that are outside of the control of our management. The factors include changes in weather, increase in transportation costs and the overall economic activity. Our natural gas costs will therefore vary, and the variations could be material. Our natural gas costs for the threesix months ended DecemberMarch 31, 20172022 represented approximately 7.1%6.6% of our total cost of goods sold for that period.period, compared to 5.0% for the six months ended March 31, 2021.
Interest Rate Risk
We have various outstanding loan agreements that expose us to market risk related to changes in the interest rate imposed under the loan agreement and promissory notes.
We have entered into loan agreements, including an irrevocable letter of credit, with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, "Farm Credit"). The interest rate on the Farm Credit revolving term loan and irrevocable letter of credit is a variable interest rate based on the one-month LIBOR index3.6% plus 3.15%the Secured Overnight Financing Rate (SOFR), subject to a floor rate of 3.6%. We anticipate interest rates will increase during Fiscal 2022.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our President and Chief Executive Officer and our Director of Finance (our principal financial officer), have evaluated the effectiveness of ourWe maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on that evaluation, our President and Chief Executive Officer and our Director of Finance have concludedare designed to ensure that as of the end of the period covered by this quarterly report, our disclosure controls and procedures have been effective to provide reasonable assurance that the information required to be disclosed in the reports our filesthat we file or submits undersubmit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii)that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our President and General Manager (the principal executive officer), Seth Harder, along with our interim Chief Financial Officer (the principal financial officer), Jeff Kistner, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of
1934, as amended) as of March 31, 2022. Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing suchsimilar functions, as appropriate to allow timely decisions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that
For the objectives of the control system are met, andsix months ended March 31, 2022, there has been no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
No Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. None of these matters, either individually or in the aggregate, currently is material to the Company except as reported in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2017 and2021, there were no material developments to such matters.
Item 1A. Risk Factors.
There have been noThe following risk factors are provided due to material changes tofrom the risk factors previously disclosed in Item 1A of our annual report on Form 10-K for the fiscal year ended September 30, 2017 other than2021. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended September 30, 2021, included in our annual report on Form 10-K.
The Company faces risks related to international conflicts, such as provided below. Additional risksthe ongoing conflict between Russia and uncertainties, including risksUkraine, that may adversely impact the Company's financial condition or results of operations.
In late February of 2022, Russia initiated a military operation in Ukraine. The Black Sea region is a key international grain and uncertaintiesfertilizer export market and the conflict between Russia and Ukraine could continue to disrupt supply and logistics, cause volatility in prices, and impact global margins due to increased commodity, energy, and input costs. The Company currently does not presently knownpurchase products directly from this region, however, the impact to us, or that we currently deem immaterial,the global supply could put the Company’s ability to secure product at risk over time.
To the extent the conflict between Russia and Ukraine adversely affects our business, it may also have anthe effect of heightening other risks disclosed in Part I, “Item 1A. Risk Factors” in the Company's 2021 Annual Report on Form 10-K, any of which could materially and adversely affect the Company's financial condition and results of operations. However, due to the continually evolving nature of the conflict, the potential impact that the conflict could have on such risk factors, and others that cannot yet be identified, remains uncertain. The Company continues to monitor the conflict and assess alternatives to mitigate these risks.
Inflation, including as a result of commodity price inflation or supply chain constraints due to the war in Ukraine, may adversely impact our results of operations.
We have experienced inflationary impacts on business expenses. Commodity prices in particular have risen significantly over the past year. Inflation and its negative impacts could escalate in future periods.
Ukraine is the third largest exporter of grain in the world. Russia is one of the largest producers of natural gas and oil and is the largest exporter of fertilizers. The commodity price impact of the war in Ukraine has been a sharp and sustained rise in grain and energy prices, including corn and natural gas. In addition, the war in Ukraine has adversely affected and may continue to adversely affect global supply chains resulting in further commodity price inflation for our production inputs. Lower fertilizer supplies may also impact future growing seasons, further impacting grain supplies and prices. Also, given high global grain prices, U.S. farmers may prefer to lock in prices and export additional volumes, reducing domestic grain supplies and resulting in further inflationary pressures.
We may not be able to include these additional costs in the prices of the products we sell. As a result, inflation may have a material adverse effect on our business, financial condition and/or results of operations.operations and financial condition.
Tax reform may affect the CompanyThe ability or willingness of OPEC and its members.
On December 22, 2017, President Trump signed into law H.R.1, originally known as the Tax Cutsother oil exporting nations to set and Jobs Act (the “2017 Tax Reform Act”), that reforms the Internal Revenue Code of 1986, as amended (the “Code”) making significant changes to the taxation of business entities. The 2017 Tax Reform Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and allows for the expensing of capital expenditures. We continue to assessmaintain production levels and/or the impact of sanctions on Russia related to the 2017 Tax Reform Act, as well as any future regulations implementing the new tax law and any interpretations of the new tax lawwar in Ukraine may have a significant impact on our business. natural gas commodity prices.
The impactOrganization of this tax reformPetroleum Exporting Countries and their allies (collectively, OPEC+), is an intergovernmental organization that seeks to manage the price and supply of oil on the Companyglobal energy market. Actions taken by OPEC+ members, including those taken alongside other oil exporting nations, have a significant impact on global oil supply and itspricing. For example, OPEC+ and certain other oil exporting nations have previously agreed to take measures, including production cuts, to support crude oil prices. In March 2020, members is uncertain butof OPEC+ considered extending and potentially increasing these oil production cuts, however these negotiations were unsuccessful. As a result, Saudi Arabia announced an immediate reduction in export prices and Russia announced that all previously agreed oil production cuts expired on April 1, 2020. These actions led to an immediate and steep decrease in oil prices. Conversely, sanctions imposed on Russia in the effectlast few months have increased prices. There can be no assurance that OPEC+ members and other oil exporting nations will agree to future production cuts or other actions to support and stabilize oil prices, nor can there be any assurance that sanctions or other global conflicts will not further impact oil prices. Uncertainty regarding future sanctions or actions to be taken by OPEC+ members or other oil exporting countries could lead to increased volatility in the price of the 2017 Tax Reform Actoil and any implementing regulations and interpretationsnatural gas, which could adversely affect our business, future financial condition and financial condition.results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are filed as part of this quarterly report.
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| Exhibit No. | Description of Exhibit | Incorporated by Reference | Page |
| | Multiple Advance Term Promissory Note between Farm Credit Services of America and Lincolnway Energy, LLC dated March 24, 2022 | | 9 |
| | Amended and Restated Revolving Term Promissory Note between Farm Credit Services of America and Lincolnway Energy, LLC dated March 24, 2022 | | 9 |
| | Rule 13a-14(a) Certification of President and Chief Executive Officer | | E-1 |
| | Rule 13a-14(a) Certification of Interim Chief Financial Officer | | E-2 |
| | Section 1350 Certification of President and Chief Executive Officer † | | E-3 |
| | Section 1350 Certification of Interim Chief Financial Officer † | | E-4 |
| 101.INS | | Inline XBRL Instance Document - the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document** | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document** | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document** | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document** | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document** | | |
| 101.PRE | | Inline XBRL Presentation Linkbase Document** | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted as Exhibit 101). | | |
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| † This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. |
| ** Furnished electronically herewith pursuant to Rule 405 of Regulation S-T. |
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Description of Exhibit | | | Page |
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31 | | Rule 13a-14(a)/15d-14(a) Certifications | |
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| | Rule 13a-14(a) Certification of President and Chief Executive Officer | E-1 |
| | | Rule 13a-14(a) Certification of Director of Finance | E-2 |
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32 | | Section 1350 Certifications | |
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| | | Section 1350 Certification of President and Chief Executive Officer † | E-3 |
| | | Section 1350 Certification of Director of Finance† | E-4 |
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101 | | Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T)
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† This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| LINCOLNWAY ENERGY, LLC |
| | |
| May 19, 2022 | By: | /s/ Seth Harder |
| Name: Seth Harder |
| Title: General Manager, President and Chief Executive Officer |
| |
| | |
| May 19, 2022 | LINCOLNWAY ENERGY, LLCBy: | /s/ Jeff Kistner |
| | Name: Jeff Kistner |
February 9, 2018 | By: | /s/ Eric Hakmiller |
| Name: Eric Hakmiller |
| Title: President andInterim Chief ExecutiveFinancial Officer |
| |
| | |
February 9, 2018 | By: | /s/ Kristine Strum |
| Name: Kristine Strum |
| Title: Director of Finance (Principal Financial Officer) |