(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None.
Title of each class
Trading Symbol(s)
Name of each exchange
on which registered
Securities registered pursuant to Section 12(g) of the Act: Membership Units.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x
iYeso No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x
iYeso No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large
Accelerated Filer
☐
Accelerated Filer
☐
iNon-Accelerated Filer
x
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ixNo
As of February 3, 2022, there were i14,606
membership units outstanding.
iThe accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with
the financial statements and notes thereto included in the Company's audited financial statements for the year ended September 30, 2021, contained in the Company's annual report on Form 10-K.
In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation.
Nature of Business
Cardinal Ethanol, LLC, (the “Company”) is an Indiana limited liability company currently producing fuel-grade ethanol, distillers grains, corn
oil and carbon dioxide near Union City, Indiana and sells these products throughout the continental United States. During the three months ended December 31, 2021 and 2020, the Company produced approximately i36,023,000 and i35,122,000
gallons of ethanol, respectively.
In addition, the Company procures, transports, and sells grain commodities through grain operations (the "Trading Division").
i
Reportable Segments
Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information
about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the related business nature and expected financial results criteria set forth in ASC 280, the Company has iitwo/
reportable operating segments for financial reporting purposes.
•Ethanol Division. Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.
•Trading Division. The Company has a grain loading facility within the Company's single site to buy, hold and sell inventories of agricultural grains, primarily soybeans.
The Company performs no additional processing of these grains, unlike the corn inventory the Company holds and uses in ethanol production. The activities of buying, selling and holding of grains other than for ethanol and co-product production comprise this financial reporting segment.
/
i
Accounting
Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Ethanol Division uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, inventory, the assumptions used in the analysis of the impairment of long lived assets, railcar rehabilitation costs, and inventory purchase commitments.
The Trading Division uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, the valuation
of inventory purchase and sale commitment derivatives and inventory at market. Actual results may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ materially from those estimates.
The Company maintains its accounts primarily at two financial institutions. At times throughout the year the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.
Restricted
Cash
As a part of its commodities hedging activities, the Company is required to maintain cash balances with its commodities trading companies for initial and maintenance margins on a per futures contract basis. Changes in the market value of contracts may increase these requirements. As the futures contracts expire, the margin requirements also expire. Accordingly, the Company records the cash maintained with the traders in the margin accounts
as restricted cash. Since this cash is immediately available upon request when there is a margin excess, the Company considers this restricted cash to be a current asset.
iTrade Accounts Receivable
Credit terms are extended to customers in the normal course of business. The
Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Amounts considered uncollectible are written off. The Company's estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At December 31, 2021 and September 30, 2021, the Company determined
that an allowance for doubtful accounts was not necessary.
i
Inventories
Ethanol Division (see Reportable Segments) inventories consist of raw materials, work in process, finished goods and spare parts. Corn is the primary raw material. Finished goods consist of ethanol, dried distiller grains and corn oil. Inventories are stated at the lower of weighted average cost or net realizable value. Net realizable value is the estimated selling prices in the normal course of business, less reasonably predictable
selling costs.
Trading Division (see Reportable Segments) inventories consist of grain. Soybeans were the only grains held and traded at December 31, 2021 and September 30, 2021. These inventories are stated at market value less estimated selling costs, which may include reductions for quality.
iProperty,
Plant and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight-line depreciation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.
The Company has various capital projects scheduled for the 2022 fiscal year in order to make certain improvements to the ethanol plant and maintain the facility. These improvements include updates to the grain pits, yeast props, economizers, cyber security, and other small miscellaneous
projects. The Company also invested in an ethanol recovery system, costing approximately $i2,400,000. The project was funded through operations and was completed and placed into service during the first quarter of fiscal year 2022.
i
Long-Lived
Assets
The Company reviews its long-lived assets, such as property, plant and equipment and financing costs, subject to depreciation and amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first
compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Management evaluated and determined iino/
impairment write-downs were considered necessary for the three months ended December 31, 2021 and the year ended September 30, 2021.
i
Investment
Investments consist of the capital stock and patron equities of the Company's distillers grains marketer. The investments are stated at the lower of cost or fair value and adjusted for non
cash patronage equities and cash equity redemptions received. Non cash patronage dividends are recognized when received and included within revenue in the condensed statements of operations.
i
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for
those products or services. The Company's contracts primarily consist of agreements with marketing companies and other customers as described below. The Company's performance obligations consist of the delivery of ethanol, distillers' grains, corn oil, soybeans and carbon dioxide to its customers. The consideration the Company receives for these products is fixed based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. The Company's contracts
have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. The Company sells each of the products via different marketing channels as described below.
•Ethanol. The Company sells its ethanol via a marketing agreement with
Murex, LLC. Murex markets one hundred percent of the Company's ethanol production based on agreements with end users at prices agreed upon mutually among the end user, Murex and the Company. Murex then provides a schedule of deliveries required and an order for each rail car or tankers needed to fulfill their commitment with the end user. These are individual performance obligations of the Company. The marketing agreement calls for control and title to pass when the delivery vehicle is filled. Revenue is recognized then at the price in the agreement with the end user, net of commissions, rail car lease, freight, and insurance.
•Distillers
grains. The Company engages another third-party marketing company, CHS, Inc, to market one hundred percent of the distillers grains it produces at the plant. The process for selling the distillers grains is like that of ethanol, except that CHS takes title and control once a rail car is released to the railroad or a truck is released from the Company's scales. Prices are agreed upon among the three parties, and CHS provides schedules and orders representing performance obligations. Revenue is recognized net of commissions, freight, and fees.
•Distillers corn oil (corn oil). The Company sells its production
of corn oil directly to commercial customers. The customer is provided with a delivery schedule and pick up orders representing performance obligations. These are fulfilled when the customer’s driver picks up the scheduled load. The price is agreed upon at the time each contract is made, and the Company recognizes revenue at the time of delivery at that price.
•Carbon dioxide. The Company sells a portion of the carbon dioxide it produces to a customer that maintains a plant on-site for a set price per ton. Delivery is defined as transference of the gas from the
Company's stream to their plant.
•Soybeans and other grains. The Company sells soybeans exclusively to commercial mills, processors or grain traders. Contracts are negotiated directly with the parties at prices based on negotiated prices.
Cost of goods sold include corn, trading division grains, natural gas and other components which includes processing ingredients, electricity, railcar maintenance, depreciation of ethanol production fixed assets and wages, salaries and benefits of production personnel.
Operating Expenses
Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees, depreciation of trading division
fixed assets, property taxes and similar costs.
i
Derivative Instruments
From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.
In
order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in the statement of operations, depending on the item being hedged.
Additionally, the Company is required to evaluate its contracts
to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted 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 accounting and reporting requirements,
and therefore, are not marked to market in our financial statements.
The Company has elected for its Ethanol Division to apply the normal purchase normal sale exemption to all forward commodity contracts. For the Trading Division, the Company has elected not to apply the normal purchase normal sale exemption to its forward purchase and sales contracts and therefore, marks these derivative instruments to market.
i
Net
Income (Loss) per Unit
Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members' units outstanding during the period. Diluted net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net income (loss) per unit are the same.
2. iREVENUE
Revenue
Recognition
Revenue is recognized at a single point in time when the Company satisfies its performance obligation under the terms of a contract with a customer. Generally, this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration expected, as specified in the contract with a customer, to be received in exchange for transferring goods or providing services.
Revenues
from contracts accounted for as derivatives under ASC Topic 815 (1)
Soybeans and other grains
i—
i27,289,648
i27,289,648
Total
revenues from contracts accounted for as derivatives
i—
i27,289,648
i27,289,648
Total
Revenues
$
i65,900,858
$
i27,339,123
$
i93,239,981
(1)
Revenues from contracts accounted for as derivatives represent physically settled derivative sales that are outside the scope of ASC Topic 606, Revenue from Contracts with Customers (ASC Topic 606), where the company recognizes revenue when control of the inventory is transferred within the meaning of ASC Topic 606 as required by ASC Topic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets.
The Company has contractual payment terms with each respective marketer that sells ethanol and distillers grains. These terms are generally i7
- i14 days after the week of the transfer of control.
The Company has standard payment terms of net i10
days for its sale for corn oil.
The Company has standard payments terms due upon delivery for its sale of soybeans.
The contractual terms with the carbon dioxide customer calls for an annual settlement.
Shipping and Handling Costs
Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of goods sold. Accordingly, amounts billed to customers for such costs are included as a
component of revenue.
The Company records unearned revenue when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of its contracts with customers.
3. iCONCENTRATIONS
Two
major customers accounted for approximately i94% and i90% of the outstanding accounts receivable balance at December 31, 2021 and September 30,
2021, respectively. These same two customers accounted for approximately i77% of revenue for the three months ended December 31, 2021 and i67% of revenue for the three months
ended December 31, 2020.
The
Company did iino/t have a net realizable value write-down of ethanol inventory for
the three months ended December 31, 2021 and 2020.
In the ordinary course of its ethanol business, the Company enters into forward purchase contracts for its commodity purchases and sales. Certain contracts for the ethanol division that literally meet the definition of a derivative may be exempted from
derivative accounting as normal purchases or normal sales. At December 31, 2021, the Company had forward corn purchase contracts at various fixed prices for various delivery periods through December 2023 for approximately i6%
of expected production needs for the next i24 months. Approximately i7% of the forward corn purchases were with related parties. Given
the uncertainty of future commodity prices, the Company could incur a loss on the outstanding purchase contracts in future periods. Management has evaluated these forward contracts using the lower of cost or net realizable value evaluation, and has determined that no impairment loss existed at December 31, 2021 and September 30, 2021. The Company has elected not to apply the normal purchase and sale exemption to its forward soybean contracts
of the trading division and therefore, treats them as derivative instruments.
At December 31, 2021, the Ethanol Division had forward dried distiller grains sales contracts for approximately i34% of expected production for the next i3
months at various fixed prices for delivery periods through March 2022. At December 31, 2021, the Company had forward corn oil contracts for approximately i74% of expected production for the next i3
months at various fixed prices for delivery through March 2022. Additionally, at December 31, 2021, the Trading Division had forward soybean purchase contracts for approximately i11% of expected origination for various delivery periods through November 2023. Approximately i10%
of the forward soybean purchases were with related parties.
5. iDERIVATIVE INSTRUMENTS
The Company enters into corn, ethanol, natural gas and soybean derivative instruments,
which are required to be recorded as either assets or liabilities at fair value in the balance sheet. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure.
The Company enters into commodity-based derivatives,
for corn, ethanol, natural gas and soybeans in order to protect cash flows from fluctuations caused by volatility in commodity prices and to protect gross profit margins from potentially adverse effects of market and price volatility on commodity based purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. The changes in the fair market value of ethanol derivative instruments are included as a component of revenue. The changes in the fair market value of corn, natural gas, and soybean derivative instruments are included as a component of cost of goods sold.
At December 31,
2021, the Ethanol Division had a net short (selling) position of i6,365,000 bushels of corn under derivative contracts used to hedge its forward corn purchase contracts, corn inventory and ethanol sales. These corn derivatives are traded on the Chicago Board of Trade as of December 31, 2021 and are forecasted
to settle for various delivery periods through December 2023. The Ethanol Division had a net short (selling) position of i15,111,600 gallons of ethanol under derivative contracts used to hedge its future ethanol sales. These ethanol derivatives are traded on the New York Mercantile Exchange and are forecasted to settle for various delivery periods through September 2022. At December 31, 2021, the
Trading Division also had a net short (selling) position of i1,215,000 bushels of soybeans under derivative contracts used to hedge its forward soybean contract purchases. These soybean derivatives are traded on the Chicago Board of Trade and are, as of December 31, 2021, forecasted to settle for various delivery
periods through November 2023. These derivatives have not been designated as effective hedges for accounting purposes.
As
of December 31, 2021, the Company had approximately $i13,917,000 cash collateral (restricted cash) related to ethanol, corn, and soybean derivatives held by ifour
brokers.
The following table provides balance sheet details regarding the Company's derivative financial instruments at September 30, 2021:
As
of September 30, 2021, the Company had approximately $i8,100,000 of cash collateral (restricted cash) related to ethanol, corn, soybean oil and soybean derivatives held by itwo
brokers.
iThe
following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments:
We
determine the fair value of commodity futures derivative instruments utilizing Level 1 inputs by obtaining 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 market and New York Mercantile Exchange.
We determine the fair value of corn and soybean futures and options Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above. Soybean forward purchase and sale contracts are reported at fair value using Level 2 inputs from current contract prices that are being issued by the
Company.
Soybean inventory held in the trading division is reported at fair value using Level 2 inputs which are based on purchases and sales transactions that occurred on or near December 31, 2021 and September 30, 2021.
Accounts payable is generally stated at historical amounts, with the exception of approximately $i8,996,000
and $i6,391,000 at December 31, 2021 and September 30, 2021, respectively, related to certain delivered inventory for which the payable fluctuates based on changes in commodity prices. These payables are hybrid financial instruments for which the Company has elected the fair value option.
7.
iBANK FINANCING
The Company has a loan agreement consisting of itwo
loans, the Declining Revolving Loan (Declining Loan) and the Revolving Credit Loan in exchange for liens on all property (real and personal, tangible and intangible) which include, among other things, a mortgage on the property, a security interest on commodity trading accounts and assignment of material contracts. The loan agreement assigns an interest rate based upon the U.S. prime rate published in the Wall Street Journal to each of the individual loans. The interest rates on each of the loans changes daily. The interest rate on the Revolving Credit Loan is the prime rate minus twenty-five basis points (i.25%)
and is subject to a floor of i2.75%. The Declining Loan has interest charged at the prime rate minus fifteen basis points (i.15%) and is subject to a floor of i2.85%.
Declining Loan
The maximum availability of the Declining Loan is $i5,000,000 and such amount is to be available for working capital purposes. The interest rate on the Declining Loan was ii3.10/%
at December 31, 2021 and September 30, 2021. There were iino/
borrowings outstanding on the Declining Loan at December 31, 2021 or September 30, 2021. The Declining Loan matures on February 28, 2023.
The Revolving Credit Loan has a limit of $i20,000,000 supported by a borrowing base made up of the Company's corn, ethanol, dried distillers grain, corn oil and soybean inventories reduced by accounts payable associated with those inventories having a priority. It is also supported by the eligible accounts receivable and commodity
trading account excess margin funds. The interest rate was ii3.00/%
at December 31, 2021 and September 30, 2021. There were iino/
borrowings outstanding on the Revolving Credit Loan at December 31, 2021 and September 30, 2021. The Revolving Credit Loan matures on February 28, 2022.
These loans are subject to protective covenants, which require the Company to maintain various financial ratios. The covenants include a working capital requirement of $i15,000,000,
and a capital expenditures covenant that allows the Company $i5,000,000 of expenditures per year without prior approval. There is also a requirement to maintain a minimum fixed charge coverage ratio of no less than i1.15:1.0
measured quarterly. A debt service charge coverage ratio of no less than i1.25:1.0 in lieu of the fixed charge coverage ratio will apply for any reporting period that working capital is equal to or more than $i23,000,000.
The
Company leases rail cars for its facility to transport ethanol and dried distillers grains to its end customers. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the three months ended December 31, 2021, the Company’s weighted average discount rate was i3.68%.
Operating lease expense is recognized on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately i1 year to i2.5
years, which may include options to extend the lease when it is reasonably certain the Company will exercise those options. For the three months ended December 31, 2021, the weighted average remaining lease term was i1.4 years. The Company does not have lease arrangements with residual value guarantees, sale leaseback terms or material restrictive covenants. The
Company does not have any material finance lease obligations nor sublease agreements.
i
The following table summarizes the remaining maturities of the Company’s operating lease liabilities as of December 31, 2021:
For
the three months ended December 31, 2021, the Company recorded operating lease costs of approximately $i932,000 in cost of goods sold in the Company’s statement of operations.
In
February 2010, a lawsuit against the Company was filed by an unrelated party claiming the Company's operation of the oil separation system in a patent infringement. In connection with the lawsuit, in February 2010, the agreement for the construction and installation of the tricanter oil separation system was amended. In this amendment the manufacturer and installer of the tricanter oil separation system indemnifies the Company against all claims of infringement of patents, copyrights or other intellectual property rights from the Company's purchase and use of the tricanter oil system and agrees to defend the
Company in the lawsuit filed at no expense to the Company. On October 23, 2014, the court granted summary judgment finding that all of the patents claimed were invalid and that the Company had not infringed. In addition, on September 15, 2016, the United States District Court granted summary judgment finding that the patents were invalid due to inequitable conduct before the US Patent and Trademark Office by the inventors and their attorneys. The rulings have since been affirmed on appeal and on February 22, 2021 the U.S. Supreme Court declined to review the decision. The court has yet to rule on the final attorney fees to be awarded to the
defendants.
Rail Car Rehabilitation Costs
The Company leases i180 hopper rail cars under a multi-year agreement which ends in November 2023. Under the agreement, the Company is required to pay to rehabilitate each car for "damage"
that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease.
Company management has estimated total costs to rehabilitate the cars at December 31, 2021, to be approximately $i1,830,000. During the three months ended December 31, 2021, the
Company has recorded a corresponding expense in cost of goods sold of approximately $i79,000. The Company accrues the estimated cost of railcar damages over the term of the lease.
High Protein System Installation Agreement
On January 20, 2022, the
Company contracted with ICM, Inc. to install a system to produce high protein feed which is expected to cost approximately $i45,390,000 and be funded from operations and from additional financing under the loan agreement. The Company is currently working with its lender on the terms of such financing.
10.
UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are primarily derived from the sale and distribution of ethanol, distillers grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. During the three months ended December 31, 2021, ethanol sales average approximately i68%
of total revenues and corn costs average i65% of total cost of goods sold.
The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol, distillers grains and corn oil, and the related cost of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies
and programs, and the unleaded gasoline and petroleum markets, although, since 2005, the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. 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, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
The Company, and the ethanol industry as a whole,
experienced adverse conditions throughout 2019 and 2020, as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors, which were
compounded by the impact of COVID-19, resulted in negative operating margins, lower cash flow from operations and net operating losses. In response to the low margin
environment, the Company reduced its ethanol production rate by approximately i20% in April 2020. As margins improved in May of 2020, the Company began increasing its ethanol production rate to approximately i135 million
gallons annually. The Company continues to monitor COVID-19 developments in order to determine whether future adjustments to production are warranted. The Company believes that its cash on hand and available debt from its lender will provide sufficient liquidity to meets its anticipated working capital, debt service and other liquidity needs through the next twelve months. If market conditions worsen affecting the Company's ability to profitably operate the plant or if the Company is unable to transport ethanol, it may be forced to further reduce our ethanol production rate or even temporarily shut down ethanol production altogether.
11. iBUSINESS SEGMENTS
The Company has iitwo/
reportable operating segments. Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Segment income or loss does not include any allocation of shared-service costs. Segment assets are those that are directly used in or identified with segment operations. Inter-segment balances and transactions have been eliminated.
i
The
following tables summarize financial information by segment and provide a reconciliation of segment revenue, gross profit, grain inventories, operating income, and total assets:
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 December 31, 2021, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may,""will,""should,""anticipate,""believe,""expect,""plan,""future,""intend,""could,""estimate,""predict,""hope,""potential,""continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report
and our other Securities and Exchange Commission filings.
•Reduction, delay, or elimination of the Renewable Fuel Standard;
•Changes in the availability and price of corn, natural gas and other grains;
•Our inability to secure credit or obtain additional equity financing we may require in the future to continue our operations;
•Decreases in the price we receive for our ethanol, distiller grains, corn oil and other grains;
•Our ability to satisfy the financial covenants contained in our credit agreements with our senior lender;
•Our
ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw material costs;
•Negative impacts that our hedging activities may have on our operations;
•Ethanol and distiller grains supply exceeding demand and corresponding price reductions;
•Our ability to generate free cash flow to invest in our business and service our debt;
•Changes in the environmental regulations that apply to our plant operations;
•Changes in our business strategy, capital improvements or development plans;
•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;
•Lack of transport, storage and blending infrastructure preventing our products from reaching high demand markets;
•Changes in federal and/or state laws;
•Changes and advances in ethanol production technology;
•Competition from alternative fuel additives;
•Changes in interest rates or the lack of credit availability;
•Changes
in legislation benefiting renewable fuels;
•Competition from the increased use of electric vehicles;
•Our ability to retain key employees and maintain labor relations;
•Volatile commodity and financial markets;
•Limitations and restrictions contained in the instruments and agreements governing our indebtedness;
•Decreases in export demand due to the imposition of tariffs by foreign governments on ethanol, distillers grains and soybeans produced in the United States;
•Use by the EPA of small refinery exemptions; and
•A
slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from COVID-19.
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. We cannot guarantee future results, 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 with these cautionary statements.
Overview
Cardinal Ethanol, LLC is an Indiana limited liability company operating an ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol, distillers grains and corn oil at the plant in November 2008. In addition, we procure, transport and sell grain commodities through our
grain trading business which began operations at the end of our fourth fiscal quarter of 2017.
On November 16, 2021, the board of directors declared a cash distribution of $650 per membership unit to the holders of units of record at the close of business on November 16, 2021 for a total distribution of $9,493,900. The distribution was paid on November 30, 2021.
On January 20, 2022, we entered into an Equipment Purchase and Installation Agreement (the "Agreement") with ICM, Inc. pursuant to which ICM has agreed to engineer, procure, construct, and install its high protein feed system and license
to us its proprietary, patent-protected technology to use, operate and maintain the system. Pursuant to the Agreement, we will pay approximately $45,390,000 which is payable in installments and is subject to adjustment pursuant to change orders. We will also pay license fees of $10 per ton of PROTOMAX™ produced by the system for a period of 10 years. We expect to fund the project from operations and from additional financing from our lender and are currently working with our lender regarding the financing needed.
We expect to fund our operations during the next 12 months using cash flow from our continuing operations and our current credit facilities as amended. If market conditions worsen affecting our ability to profitably operate the plant or if we are unable to transport ethanol, we may be forced to further reduce our ethanol production rate or even temporarily shut down ethanol
production altogether.
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three month ended December 31, 2021 and 2020:
2021
2020
Statement
of Operations Data
Amount
%
Amount
%
Revenue
$
150,256,949
100.0
$
93,239,981
100.0
Cost of Goods Sold
115,338,341
76.8
92,710,626
99.4
Gross
Profit
34,918,608
23.2
529,355
0.6
Operating Expenses
2,135,373
1.4
1,812,657
1.9
Operating Income
(Loss)
32,783,235
21.8
(1,283,302)
(1.3)
Other Income (Expense)
(388,071)
(0.3)
227,448
0.2
Net Income
(Loss)
$
32,395,164
21.5
$
(1,055,854)
(1.1)
Revenue
Operating Segments
Operating segments are defined as components of an enterprise for which separate financial information is available that are evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing
performance. Based on the nature of the products, services and operations and the expected financial results, we review our operations within the two operating segments-the Ethanol Division and the Trading Division. Our revenues from operations from our Ethanol Division come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. Revenues from operations of our Trading Division are derived from procuring, transporting and selling grain commodities.
Our current
lines of business and sources of revenue are the sale of ethanol, distillers grains, corn oil and and the trading of agricultural grains. We believe, that as a result of the Equipment Purchase and Installation Agreement with ICM, Inc. discussed in the Overview above, that PROTOMAX™, a high protein feed product, should become a significant new source of revenue after the installation is complete and the system is operating. Refer to Note 11, “Business Segments”, of the notes to the unaudited condensed financial statements for financial information about our financial reporting segments. Revenues in each division also include net gains or losses from derivatives related to products sold with the exception of soybean gains or losses from derivatives which are included in cost of goods sold.
The following table shows the sources of
our total revenue from the two segments and the approximate percentage of revenues to total revenues in our unaudited condensed statements of operations for the three months ended December 31, 2021 and 2020:
2021
2020
Revenue:
Amount
%
of Total Revenues
Amount
% of Total Revenues
Ethanol division
$
122,590,225
81.6
%
$
65,900,858
70.7
%
Trading division
27,666,724
18.4
%
27,339,123
29.3
%
Total
Revenue
$
150,256,949
100.0
%
$
93,239,981
100.0
%
Ethanol Division
The following table shows the sources of our revenues from our Ethanol Division for the three months ended December 31, 2021 and 2020:
2021
2020
Revenue
Source
Amount
% of Revenues
Amount
% of Revenues
Ethanol
$
102,522,928
83.6
%
$
49,371,575
74.9
%
Distillers Grains
13,766,898
11.3
12,958,367
19.7
Corn
Oil
6,161,538
5.0
3,437,541
5.2
Carbon Dioxide
114,386
0.1
123,375
0.2
Other Revenue
24,475
—
10,000
—
Total
Revenues
$
122,590,225
100.0
%
$
65,900,858
100.0
%
Ethanol
Our revenues from ethanol increased in the three months ended December 31, 2021 as compared the to the same period in 2020. This increase in revenues is primarily the result of an increase in the price per gallon of ethanol
sold and an increase in gallons of ethanol sold for the three months ended December 31, 2021 as compared to the same period in 2020. Revenue also includes the net gains or losses from derivatives related to the commodities purchased.
The average price per gallon of ethanol sold for the three months ended December 31, 2021 was approximately 91% higher than the average price per gallon of ethanol sold for the same period in 2020. Ethanol market prices have been higher for the current period due to an increase in fuel demand coupled with shipping disruptions attributed to labor shortages resulting, at least in part, from the recent spike in COVID-19 variants. However, ethanol market prices were lower towards the end of the period as positive operating margins encouraged some ethanol plants
to return to higher production levels increasing ethanol inventory levels.
Management anticipates that industry over-production as operating conditions continue to improve along with a seasonal decline in domestic demand could have a negative effect on prices. In addition, ethanol prices could decrease due to a reduction of the renewable volume obligations by the Environmental Protection Agency or other regulatory actions. Declines in ethanol exports as a result of existing trade disputes with foreign governments could also continue to affect demand and contribute to lower ethanol prices. Finally,
transportation and logistical issues could impact ethanol shipments having an affect on prices if labor shortages do not improve.
We experienced an increase in ethanol gallons sold of approximately 8% for the three months ended December 31, 2021 as compared to the same period in 2020 resulting primarily from increased ethanol production rates for the period. We are currently operating at a rate of approximately 140 million gallons annually. In addition, we have installed an ethanol recovery system which was fully operational during the first quarter of fiscal year 2022 and which we anticipate will result in an increase in efficiencies allowing us to achieve higher ethanol production rates going forward. However, management continues to monitor economic conditions carefully. If market conditions worsen affecting our ability to
profitably operate the plant, we may be forced to reduce our ethanol production rate or even temporarily shut down ethanol production altogether.
Distillers Grains
Our revenues from distillers grains increased in the three months ended December 31, 2021 as compared to the same period in 2020. This increase in revenues is primarily the result of an increase in the average price per ton of distillers grains sold for the period ended December 31, 2021 as compared to the same period in 2020.
The average price per ton of distillers grains sold for the three months ended December 31,
2021 was approximately 6% higher than the average price per ton of distillers grains sold for the same period in 2020. This increase in the market price of distillers grains is primarily due to higher corn prices during the current period which resulted in end users seeking out distillers grains as the lower cost alternative. However, soybean meal production driven by the demand for soybean oil by the biodiesel industry outpaced demand during the period driving the price of soybean meal lower and tempering distillers grains prices.
Management anticipates that distillers grains prices will continue to be affected by the price of corn and soybean meal. If there continues to be an oversupply of soybean meal, that could have a negative effect on the price of distillers grains. An increase in supply as certain ethanol plants return to higher production levels as operating conditions
improve could also have a negative effect on distillers grains prices. In addition, if trade disputes with foreign countries, such as China, are not favorably resolved, this could have a negative effect on distillers grains prices unless additional demand can be sustained from domestic or other foreign markets.
We sold approximately 1% more tons of distillers grains in the three months ended December 31, 2021 as compared to the same period in 2020 resulting primarily from higher ethanol production levels for the period which resulted in increased distillers grains production. We are currently operating at an ethanol production rate of approximately 140 million gallons annually which is approximately 40% above the nameplate capacity for the plant. However, if we were to reduce ethanol production that would result in a corresponding
decrease in distillers grains production.
Corn Oil
Our revenues from corn oil sales increased in the three months ended December 31, 2021 as compared to the same period in 2020 which was mainly the result of an increase in the average price per pound for corn oil. We sold approximately the same amount of corn oil in the three months ended December 31, 2021 as compared to the same period in 2020.
The average price per pound of corn oil was approximately 80% higher for the three months ended December 31, 2021 as compared to the same period in
2020. Higher soybean oil prices along with increased biodiesel production had a positive effect on corn oil prices for the period. Soybean oil is the primary competitor with distillers corn oil.
Management anticipates that corn oil prices will continue to follow soybean oil prices. Corn oil prices are also likely to be negatively affected by an increase in corn oil supply as operating conditions improve and certain ethanol plants increase production levels. However, the extension of the biodiesel tax credit by Congress is likely to continue to have a positive
impact on demand from biodiesel producers and corn oil prices.
We are currently operating at an ethanol production rate of approximately 140 million gallons annually which is approximately 40% above the nameplate capacity for the plant. However, if we are forced to again reduce ethanol production that would result in a corresponding decrease in corn oil production.
Trading Division
The following table shows the sources of our revenues from our Trading Division for the three months ended December 31, 2021 and 2020:
2021
2020
Revenue
Source
Amount
% of Revenues
Amount
% of Revenues
Soybean Sales
$
27,617,399
99.8
%
$
27,289,648
99.8
%
Other Revenue
49,325
0.2
49,475
0.2
Total
Revenues
$
27,666,724
100.0
%
$
27,339,123
100.0
%
Soybeans
During the three months ended December 31, 2021 revenues from our Trading Division were derived primarily from transporting and selling soybeans. Our revenues from soybeans sales increased in the three months ended December 31,
2021 as compared the to the same period in 2020. This increase in revenues is the result of an increase in the average price per bushel of soybeans sold of approximately 14% due to a comparatively short national supply of soybeans resulting in higher futures prices for the three months ended December 31, 2021 as compared to the same period in 2020. This increase in price was partially offset by a decrease in bushels sold during the period of approximately 11% during the three months ended December 31, 2021 as compared to the same period in 2020. The decrease is attributable to the short national supply of soybeans. Management anticipates that soybean sales over the remainder of the fiscal year will be consistent with recent fiscal years.
Cost of Goods Sold
Ethanol
Division
Our cost of goods sold for this division as a percentage of its total revenues was approximately 73% for the three months ended December 31, 2021 as compared to approximately 99% for the same period in 2020. This decrease in cost of goods sold as a percentage of revenues was the result of a substantially improved relationship between the prices of ethanol and corn, offset by increased natural gas costs for the three months ended December 31, 2021 as compared to the same period in 2020. Our two largest costs of production are corn and natural gas. Cost of goods sold also includes net gains or losses from derivatives related to our commodities purchases as well as our additional expense for our estimate of our rail car rehabilitation expense described below.
Corn
Our
largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the three months ended December 31, 2021, we used approximately 2% more bushels of corn to produce our ethanol, distillers grains and corn oil as compared to the same period in 2020 due to higher ethanol production levels for the period. During the three months ended December 31, 2021, our average price paid per bushel of corn was approximately 36% higher as compared to the same
period in 2020
due primarily to a smaller crop carryout in some areas from the 2021 harvest and increased export demand from China.
Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. Rising corn prices rise have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Volatility in the price of corn could significantly impact our cost of goods sold.
Natural Gas
Our natural gas cost after hedging was higher during the three months ended December 31, 2021 as compared to the same period in 2020. This increase in cost of natural gas for the three months ended
December 31, 2021 as compared to the same period in 2020 was primarily the result of increased ethanol production resulting in the use of approximately 4% more natural gas and higher natual gas prices for the three months ended December 31, 2021 as compared to the same period in 2020. Our average price per MMBTU of natural gas was approximately 52% higher during the three months ended December 31, 2021 as compared to the same period in 2020 primarily due to increased demand. In addition, natural gas prices were higher towards the end of the period as a result of an increase in the price of crude oil.
Management expects that natural gas prices will be dependent upon government policy and the severity of the winter weather. If the nation
were to experience a catastrophic weather event causing problems related to the supply of natural gas, this could result in higher natural gas prices.
Rail Car Rehabilitation Costs
We lease 180 hopper rail cars under a multi-year agreement which ends in November 2023. Under the agreement, we are required to pay to rehabilitate each car for "damage" that is considered to be other than normal wear and tear upon turn in of each car at the termination of the lease. We have evaluated the condition of the cars and believe that it is probable that we may be assessed for damages incurred. During the three months ended December 31, 2021, we have recorded an expense in cost of goods of $79,000. We accrue the estimated cost per railcar damages of $30,060
per month over the term of the lease. The accrued liability for these rehabilitation costs is $1,830,060 at December 31, 2021.
Trading Division
The following table shows the costs incurred to procure various agricultural commodities for our Trading Division for the three months ended December 31, 2021 and 2020:
2021
2020
Amount
% of
Revenues
Amount
% of Revenues
Soybeans
$
26,042,240
94.1
%
$
26,526,096
97.0
%
Total Cost of Goods Sold
$
26,042,240
94.1
%
$
26,526,096
97.0
%
Soybeans
During
the three months ended December 31, 2021, our cost was primarily the procurement of soybeans sold. During the three months ended December 31, 2021, our average price paid per bushel of soybeans was approximately 21% higher as compared to the same period in 2020 due to concerns over a smaller carryout of soybean inventory from the 2021 harvest and increased demand from China. We also purchased approximately 24% less bushels of soybeans in the three months ended December 31, 2021 compared to 2020 due mostly to a cash price that was not conducive to producer selling.
Derivatives
We enter into hedging instruments to minimize price fluctuations in the prices
of our finished products and inputs. As the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized
in our revenues and our cost of goods sold. These commodity-based derivatives are not designated as effective hedges for accounting purposes. Please refer to Item 3 - Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk for information on our derivatives.
Operating
Expense
Our operating expenses as a percentage of revenues was approximately 1% for the three months ended December 31, 2021 as compared to operating expenses of approximately 2% of revenues for the same period in 2020. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees, depreciation of trading division fixed assets, property taxes and other general administrative costs. Operating expenses on a per gallon basis decreased for the three months ended December 31, 2021 primarily due to increased efficiencies and an increase in ethanol production compared to the same period in 2020.
Operating Income (Loss)
Our
income from operations for the three months ended December 31, 2021 was approximately 22% of revenues as compared to operating loss of approximately (1.4)% of revenues for the same period in 2020. The increase in operating income for the three months ended December 31, 2021 was primarily the result of positive ethanol to corn margins.
Other Income (Expense)
Our other expense was approximately (0.3)% of revenues for the three months ended December 31, 2021 as compared to other income of approximately 0.2% of revenues for the three months ended December 31, 2020. Our other expense consisted primarily
of the cost associated with the acquisition of certain data and assets related to our evaluation of carbon sequestration.
Changes in Financial Condition for the Three Months Ended December 31, 2021
The following table highlights the changes in our financial condition:
We experienced an increase in our current assets at December 31, 2021 as compared to September 30, 2021. This increase was primarily driven by an increase in
inventory and cash balances at December 31, 2021 due primarily to commodity prices conducive to producer selling and farmers deferring payment for grain until January 2022 at December 31, 2021 as compared to September 30, 2021.
We experienced a decrease in our long term assets in the quarter ended December 31, 2021 as compared to September 30, 2021 due primarily to routine depreciation on long-term assets.
We experienced an increase in our total current liabilities at December 31, 2021 as compared to September 30,
2021. This increase was primarily due to an increase in our accounts payable grain because our farmer producers deferred more bushels for payment until January 2022 at December 31, 2021 as compared to September 30, 2021.
We experienced a decrease in our long-term liabilities as of December 31, 2021 as compared to September 30, 2021 as a result of the declining
life on leases due to the implementation of ASC 842.
Liquidity and Capital Resources
We, and the ethanol industry as a whole, experienced adverse conditions throughout most of 2019 and 2020, as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors, which are compounded by the recent impact of COVID-19, resulted in negative operating margins, lower cash flow from operations and net operating losses. In response to the low margin environment, we reduced our ethanol production rate by approximately 20% in April 2020. However, as margins improved in May of 2020, we returned to full production and are currently operating at approximately 135 million gallons annually which is approximately 40% above the nameplate capacity for the plant. We continue to monitor COVID-19
developments and the effect on demand for our products in order to determine whether future adjustments to production are warranted. The substantially improved ethanol prices and the resulting increase in profit margins beginning in late summer 2021 greatly improved our cash reserves. Part of this is reserved for distributions to unit holders and for planned capital improvements, but our liquidity has improved.
We have also engaged ICM, Inc. to install a system to produce high protein feed which is expected to cost approximately $45,390,000 and be funded from operations and from additional financing from our lender. The agreement calls for a down payment and scheduled payments at key points during the construction and installation process, which we expect to begin in mid-summer this fiscal year. We are currently working with our lender regarding the financing needed to fund this project.
The
following table shows cash flows for the three months ended December 31, 2021 and 2020:
2021
2020
Net cash provided by operating activities
$
68,030,732
$
17,604,183
Net
cash used for investing activities
(136,773)
(1,434,318)
Net cash used for financing activities
(9,493,900)
(1,460,600)
Net increase in Cash and Restricted Cash
58,400,059
14,709,265
Cash
and Restricted Cash, beginning of period
33,895,947
16,913,982
Cash and Restricted Cash, end of period
$
92,296,006
$
31,623,247
Cash Flow provided by Operating Activities
We experienced an increase in our cash flow from operating activities for the three months ended
December 31, 2021 as compared to the same period in 2020. This increase was primarily due to improved margins on our primary products coupled with a greater deferral of payments for grain until January 2022 for the three months ended December 31, 2021 as compared to the same period in 2020.
Cash Flow used for Investing Activities
We used less cash in investing activities for the three months ended December 31, 2021 as compared to the same period in 2020. This decrease was primarily the result of decreased amounts paid for construction in progress during the period ended December 31, 2021 compared with the same period
in 2020.
Cash Flow used for Financing Activities
We used more cash for financing activities for the three months ended December 31, 2021 as compared to the same period in 2020. This increase was primarily the results of payments to our investors in the form of distributions during the three months ended December 31, 2021.
Our
liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol, soybeans and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs. We expect operations to generate adequate cash flows to maintain operations.
Short and Long Term Debt Sources
We have a loan agreement consisting of two loans, the Declining Revolving Loan ("Declining Loan") and the Revolving Credit Loan. In exchange for these loans, we granted liens on all property (real and personal, tangible and intangible) which include, among other things, a mortgage on the property, a security interest on commodity trading accounts, and assignment of material
contracts. Please refer toItem 1 - Financial Statements, Note 7 - Bank Financing for additional details.
Declining Loan
The maximum availability of the Declining Loan is $5,000,000 with such amount to be available for working capital purposes. The interest rate on the Declining Loan at December 31, 2021 was 3.10%. There were no borrowings outstanding on the Declining Loan at December 31, 2021 and no borrowings outstanding at September 30, 2021. The Declining Loan matures on February 28, 2023.
Revolving
Credit Loan
The Revolving Credit Loan has a limit of $20,000,000 supported by a borrowing base made up of our corn, ethanol, dried distillers grain, corn oil and soybean inventories reduced by accounts payable associated with those inventories having a priority. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds. The interest rate on the Revolving Credit Loan at December 31, 2021 was 3.00%. There were no borrowings outstanding at December 31, 2021 and September 30, 2021. The Revolving Credit Loan matures on February 28, 2022. We are currently working with our lender to renew the Revolving Credit Loan to
February 28, 2023 and expect this to be done before the loan matures.
Covenants
During the term of the loans, we will be subject to certain financial covenants. Our minimum working capital is $15,000,000, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities. Our minimum fixed charge coverage ratio is no less than 1.15:1.0 measured on a rolling four quarter average basis. However, for any reporting period, if our working capital is equal to or more than $23,000,000, we will be subject to maintaining a debt service charge coverage ratio of no less than 1.25:1.0 in lieu of the fixed charge coverage ratio.
Our
loan agreement also requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures exceeding an aggregate amount of $5,000,000.
We are complying with our financial covenants and the other terms of our loan agreements at December 31, 2021. Based on current management projections, we anticipate that future operations will be sufficient to generate enough cash flow to maintain operations, service any new debt and comply with our financial covenants and other terms of our loan agreements through December 31, 2021. Should market conditions deteriorate in the future, circumstances may develop which could result in us violating the financial covenants or other terms of our loan agreements. Should we violate the terms or covenants of our loan
or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans if we have a balance outstanding. In that event, our lender could also elect to proceed with a foreclosure action on our plant.
The board of directors approved various capital projects scheduled for the 2022 fiscal year in order
to make certain improvements to the ethanol plant and maintain the facility. These improvements include updates to the grain pits, yeast props, economizers, cyber security, and other small miscellaneous projects. We have also invested in an ethanol recovery system, costing approximately $2,400,000. The project was funded through operations and was completed and placed into service during the first quarter of fiscal year 2022.
We have also engaged ICM, Inc. to install a system to produce high protein feed which is expected to cost approximately $45,390,000 and be funded from operations and from additional financing from our lender. We will also license from ICM technology to use, operate and maintain the system and expect to pay license fees of $10 per ton of PROTOMAX™ produced for a period of 10 years. We are currently working with our lender regarding the financing needed to fund
this project.
Development Agreement
In September 2007, we entered into a development agreement with Randolph County Redevelopment Commission (“the Commission”) to promote economic development in the area. Under the terms of this agreement, beginning in January 2008 through December 2028, the money we pay toward property tax expense is allocated to an expense and an acquisition account. The funds in the acquisition account can be used by the Commission to purchase equipment, at our direction, for the plant. We do not have title to or control over the funds in the acquisition account, no amounts have been recorded in the balance sheet relating to this account.
Critical Accounting Estimates
Management
uses various estimates and assumptions in preparing our 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. Our most critical accounting estimates, which require the greatest use of judgment by management, are designated as critical accounting estimates and include policies related to the useful lives of fixed assets; allowance for doubtful accounts; the valuation of basis and delay price contracts on corn purchases; derivatives; inventory; long-lived assets, railcar rehabilitation costs and inventory purchase commitments. The Ethanol Division uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets,
inventory, patronage dividends, long lived assets, railcar rehabilitation costs, and inventory purchase commitments. The Trading Division uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, the valuation of inventory purchase and sale commitments derivatives and inventory at market. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed financial statements in accordance with generally accepted accounting principles. There have been no changes in the policies for our accounting estimates for the three months ended December 31, 2021.
Item
3.Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our Declining Loan and Revolving Credit Loan which bear variable interest rates. There were no borrowings outstanding on the Declining Loan or on the Revolving Credit Loan at December 31, 2021.
Commodity Price Risk
We expect to be exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.
We
seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of
the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
We enter into forward contracts for our commodity purchases and sales on a regular basis. It is our intent that, as we enter in to these contracts, we will use various hedging instruments to maintain a near even market position. For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because
our ethanol marketing company is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
The following table provides details regarding the gains and (losses) from our derivative instruments in the statements of operations, none of which are designated as hedging instruments, for the three months ended December 31, 2021 and 2020:
These soybean forward purchase contracts will be marked to market as the
contract periods expire. This means that any gains or losses realized will be recognized in our gross margin at each month end until they are delivered upon. Due to the volatility and risk involved in the commodities market, we cannot be certain that these gains or losses will be realized.
As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, distillers grains, corn oil, corn, natural gas and soybeans price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas and average ethanol, distillers grains, corn oil and soybeans prices as of December 31, 2021 net of the forward and future contracts used to hedge our market risk. The volumes are based on our expected use, purchase and sale of these commodities for a one year period from December 31, 2021. The results of this analysis, which may
differ from actual results, are approximately as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
We participate in a captive reinsurance company (the “Captive”). The
Captive re-insures losses related to worker's compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive re-insurer. The Captive re-insures catastrophic losses in excess of a predetermined amount. Our premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed in excess of the amount in the collateral fund.
Item 4. Controls and Procedures
Disclosure
Controls and Procedures
Our management is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.
Our
management, including our Chief Executive Officer (the principal executive officer), Jeffrey Painter, along with our Chief Financial Officer (the principal financial officer), William Dartt, 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 Exchange Act) as of December 31, 2021. 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 similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal
control over financial reporting during our first quarter ended of our 2022 fiscal year that have materially affected, or are likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Patent Infringement
On June 27, 2008, we entered into a Tricanter Purchase and Installation Agreement with ICM, Inc. for the construction and installation of a Tricanter Oil Separation
System. On February 12, 2010, GS CleanTech Corporation ("GS CleanTech") filed a lawsuit in the United States District Court for the Southern District of Indiana, claiming that Cardinal's operation of the oil recovery system manufactured and installed by ICM, Inc. infringes a patent claimed by GS CleanTech. GS CleanTech subsequently filed actions against others for infringement of its patent rights, adding several additional patents and successfully petitioned for the cases to be joined in a multi-district litigation. ICM, Inc. agreed to indemnify Cardinal and defend the lawsuit at no expense to Cardinal. On October 23, 2014, the United States District Court (the "Court") granted summary judgment finding that all of the patents claimed by GS CleanTech were invalid and that Cardinal had not infringed. In addition, on September
15, 2016, the Court granted summary judgment finding that the patents were invalid due to inequitable conduct before the US Patent and Trademark Office by the inventors and their attorneys. These rulings were subsequently affirmed on appeal and on February 22, 2021, the U.S. Supreme Court declined to review the decision. The Court has yet to rule on the final attorney fees to be awarded to the defendants.
Item 1A. Risk Factors
None.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
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.
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.
