LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended June 30, 2020
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Six Months Ended June 30, 2019
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OPERATING ACTIVITIES
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Net income (loss)
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$
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(6,261,668
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)
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$
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1,597,307
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Adjustments to reconcile net income (loss) to cash used in operating activities
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Depreciation and amortization
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2,869,845
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2,097,814
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Distributions in excess of earnings (earnings in excess of distributions) from investments
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1,389,172
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167,968
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(Increase) decrease in
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Accounts receivable
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(6,350,541
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)
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(2,086,458
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)
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Inventory
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2,840,857
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(3,249,448
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)
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Prepaid expenses
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132,892
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97,054
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Derivative financial instruments
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(568,514
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)
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(625,568
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)
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Increase (decrease) in
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Accounts payable
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(9,447,821
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)
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1,143,247
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Accrued and other liabilities
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(18,722
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)
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89,957
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NET CASH USED IN OPERATING ACTIVITIES
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(15,414,500
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)
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(768,127
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)
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INVESTING ACTIVITIES
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Purchase of property and equipment
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(264,884
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)
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(7,634,093
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)
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Purchase of investments
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—
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(633,924
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)
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NET CASH USED IN INVESTING ACTIVITIES
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(264,884
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)
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(8,268,017
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)
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FINANCING ACTIVITIES
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Increase in outstanding checks in excess of bank balance
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907,979
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2,129,846
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Borrowings on notes payable
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43,770,400
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26,500,000
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Payments on notes payable
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(39,000,000
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)
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(15,100,000
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)
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NET CASH PROVIDED BY FINANCING ACTIVITIES
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5,678,379
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13,529,846
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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(10,001,005
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)
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4,493,702
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
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12,823,653
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1,697,937
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CASH AND CASH EQUIVALENTS AT END OF PERIOD
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$
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2,822,648
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$
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6,191,639
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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Cash paid during the period for interest, net of capitalized interest of $128 and $712,000 in 2020 and 2019, respectively.
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$
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854,213
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$
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81,951
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Capital expenditures in accounts payable
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3,229
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947,996
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See Notes to Unaudited Consolidated Financial Statements
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC and subsidiary (the "Company") is a South Dakota limited liability company.
The Company owns and manages Dakota Ethanol, LLC ("Dakota Ethanol"), a 90 million-gallon (annual nameplate capacity) ethanol plant, located near Wentworth, South Dakota. Dakota Ethanol sells ethanol and related products to customers located in North America.
In addition, the Company has investment interests in five companies in related industries. See note 4 for further details.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. All adjustments are of a normal and recurring nature. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the financial statements and notes included in the Company’s audited financial statements for the year ended December 31, 2019, contained in the annual report on Form 10-K for 2019.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Company has adopted the guidance of ASC Topic 606, 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 guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company generally recognizes revenue at a point in time. The Company’s contracts with customers have one performance obligation and a contract duration of one year or less.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. Generally, ethanol and related products are shipped FOB shipping point and the control of the goods transfers to customers when the goods are loaded into trucks or rail cars are released to the railroad. Consideration is based on predetermined contractual prices or on current market prices.
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•
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sales of distillers grains
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•
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sales of distillers corn oil
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
Disaggregation of revenue:
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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Revenues ethanol
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$
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20,304,373
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$
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20,673,752
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$
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43,486,152
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$
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37,009,577
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Revenues distillers grains
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4,010,385
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4,420,567
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11,735,394
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8,904,917
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Revenues distillers corn oil
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1,110,074
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1,002,670
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2,659,524
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1,795,793
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$
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25,424,832
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$
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26,096,989
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$
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57,881,070
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$
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47,710,287
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Contract assets and contract liabilities:
The Company has no significant contract assets or contract liabilities from contracts with customers.
The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract.
Shipping costs
Shipping costs incurred by the Company in the sale of ethanol, dried distiller's grains and corn oil are not specifically identifiable and as a result, revenue from the sale of those products is recorded based on the net selling price reported to the Company from the marketer.
When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.
Operating Segment
The Company uses the "management approach" for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the "management approach" model, the Company has determined that its business is comprised of a single operating segment.
Costs of Revenues
The primary components of costs of revenues from the production of ethanol and related co-product are corn, energy (natural gas and electricity), raw materials (chemicals and denaturant), and direct labor costs.
Shipping costs on modified and wet distiller's grains are included in costs of revenues.
Inventory Valuation
Inventories are generally valued using methods which approximate the lower of cost (first-in, first-out) or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is based on estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
Receivables and Credit Policies
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within fifteen days from the invoice date. Unpaid accounts receivable with invoice dates over thirty days old bear interest at 1.5% per month. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
The carrying amount of trade receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management regularly reviews trade receivable balances and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The valuation allowance was zero as of June 30, 2020 and December 31, 2019.
Investment in commodities contracts, derivative instruments and hedging activities
The Company is exposed to certain risks related to its ongoing business operations. The primary risks that the Company manages by using forward or derivative instruments are price risks on anticipated purchases of corn and natural gas and the sale of ethanol, distillers grains and distillers corn oil.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material the Company uses to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow us to pass along increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.
The Company does not apply the normal purchase and sales exemption for forward corn purchase contracts. As of June 30, 2020, the Company is committed to purchasing approximately 2.2 million bushels of corn on a forward contract basis with an average price of $2.99 per bushel. The total corn purchase contracts represent 7% of the annual projected plant corn usage.
The Company enters into firm-price purchase commitments with natural gas suppliers under which the Company agrees to buy natural gas at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time the price is fixed and the time the natural gas is delivered. At June 30, 2020, the Company is committed to purchasing approximately 610,000 MMBtus of natural gas with an average price of $2.17 per MMBtu. The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market. The natural gas purchase contracts represent 30% of the annual plant requirements.
The Company enters into firm-price sales commitments with distillers grains customers under which the Company agrees to sell distillers grains at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers grain between the time the price is fixed and the time the distillers grains are delivered. At June 30, 2020, the Company is committed to selling approximately 42,000 dry equivalent tons of distillers grains with an average price of $108 per ton. The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers grains sales represent approximately 19% of the projected annual plant production.
The Company enters into firm-price sales commitments with distillers corn oil customers under which the Company agrees to sell distillers corn oil at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers corn oil between the time the price is fixed and the time the distillers corn oil is delivered. At June 30, 2020, the Company is committed to selling approximately 4.9 million pounds of distillers corn oil with an
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
average price of $0.24 per pound. The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers corn oil sales represent approximately 22% of the projected annual plant production.
The Company does not have any firm-priced sales commitments for ethanol as of June 30, 2020.
The Company enters into short-term forward, option and futures contracts for ethanol, corn and natural gas as a means of managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of our trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk of loss in the market value of inventories and purchase commitments. To reduce that risk, the Company generally takes positions using forward and futures contracts and options.
Derivatives not designated as hedging instruments at June 30, 2020 and December 31, 2019 were as follows:
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Balance Sheet Classification
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June 30, 2020
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December 31, 2019*
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Forward contracts in gain position
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$
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109,237
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$
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160,687
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Futures contracts in gain position
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79,825
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33,338
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Futures contracts in loss position
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(150,400
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)
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(1,500
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)
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Total
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38,662
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192,525
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Cash held by broker
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550,957
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312,500
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Current Assets
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$
|
589,619
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$
|
505,025
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Forward contracts in loss position
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(Current Liabilities)
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$
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(214,931
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)
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$
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(698,850
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)
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*Derived from audited financial statements
Futures contracts and cash held by broker are all with one party and the right of offset exists. Therefore, on the balance sheet, these items are netted in one balance regardless of position.
Forward contracts are with multiple parties and the right of offset does not exist. Therefore, these contracts are reported at the gross amounts on the balance sheet.
Gains and losses related to derivative contracts related to corn are included as a component of costs of revenues.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
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Statement of Operations
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Three Months Ended June 30,
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Classification
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2020
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2019
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Net realized and unrealized gains related to purchase contracts:
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Futures contracts
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Cost of Revenues
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$
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333,387
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$
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513,695
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Forward contracts
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Cost of Revenues
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742,543
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597,923
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Statement of Operations
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Six Months Ended June 30,
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Classification
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2020
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2019
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Net realized and unrealized gains (losses) related to purchase contracts:
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Futures contracts
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Cost of Revenues
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$
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1,436,264
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$
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674,581
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Forward contracts
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Cost of Revenues
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(2,370,490
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)
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478,549
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Investments
The Company has investment interests in five companies in related industries. All of these interests are at ownership shares less than 20%. These investments are all flow-through entities. Per ASC 323-30-S99-1, they are being accounted for by the equity method of accounting under which the Company’s share of net income is recognized as income in the Company’s statements of operations and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data.
Goodwill
Annually, as well as when an event triggering impairment may have occurred, the Company performs an impairment test on goodwill which compares the fair value of the reporting unit with its carrying amount. An impairment charge is recognized, if necessary, for the amount by which the carrying value exceeds the fair value up to the amount of the goodwill attributed to the reporting unit. The Company performs the annual analysis as of December 31 of each fiscal year. A triggering event was determined to have occurred during the first quarter of 2020 and an impairment test was performed as of March 31, 2020. The Company determined there was no impairment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the fair value of derivative financial instruments, lower of cost or net realizable value accounting for inventory and forward purchase contracts and goodwill impairment evaluation.
Recently Issued Accounting Pronouncements
In January 2017, FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350)" (ASU 2017-04). ASU 2017-04 simplifies the test for goodwill impairment. It eliminates the two-step process of assessing goodwill impairment and replaces it with one step which compares the fair value of the reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the fair value up to the amount of the goodwill attributed to the reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and for interim periods within that fiscal year. Dakota Ethanol found it preferable to adopt ASU 2017-04 because the benefits of this standard to users of the financial statements will
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
outweigh the costs of following the pre-existing guidance. The standard has not had a material impact on the Company's consolidated financial statements.
In August 2018, FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" (ASU 2018-13). ASU 2018-13 improves the effectiveness of the fair value disclosures in the financial statements. It adds, removes and modifies various disclosure requirements relating to the fair value hierarchy. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and for interim periods within that fiscal year. The standard has not had a material impact on the Company's consolidated financial statements.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three months ended June 30, 2020, ethanol sales averaged approximately 80% of total revenues, while approximately 16% of revenues were generated from the sale of distiller grains and 4% of revenues were generated from the sale of corn oil. For the six months ended June 30, 2020, ethanol sales averaged approximately 75% of total revenues, while approximately 20% of revenues were generated from the sale of distiller grains and 5% of revenues were generated from the sale of corn oil.
The Company's operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
On January 30, 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a “Public Health Emergency of International Concern” and on March 11, 2020, declared COVID-19 a pandemic. The impact of COVID-19 has negatively impacted the Company’s operations, suppliers or other vendors, and customer base. Gasoline demand has been reduced in the United States which has forced the Company to reduce ethanol production accordingly. Any quarantines, labor shortages or other disruptions to the Company’s operations, or those of their customers, may adversely impact the Company’s revenues, ability to provide its services and operating results. In addition, a significant outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the geographical area in which the Company operates, resulting in an economic downturn that could affect demand for its goods and services. The extent to which the coronavirus impacts the Company’s long-term results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.
NOTE 3. INVENTORY
Inventory consisted of the following as of June 30, 2020 and December 31, 2019:
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June 30, 2020
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December 31, 2019*
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Raw materials
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$
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4,339,694
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$
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4,968,731
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Finished goods
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1,428,629
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3,505,224
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Work in process
|
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817,094
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952,319
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Parts inventory
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1,117,148
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1,117,148
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$
|
7,702,565
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|
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$
|
10,543,422
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|
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
As of June 30, 2020 and December 31, 2019, the Company recorded a lower of cost or net realizable value write-down on corn inventory of approximately $0 and $424,000, ethanol inventory of approximately $0 and $167,000, distillers grains inventory of approximately $0 and $72,000, and corn oil inventory of approximately $0 and $0, respectively.
*Derived from audited financial statements.
NOTE 4. INVESTMENTS
Dakota Ethanol has a 5% investment interest in the Company’s ethanol marketer, Renewable Products Marketing Group, LLC (RPMG). The net income which is reported in the Company’s income statement for RPMG is based on RPMG’s March 31, 2020 unaudited interim results. The carrying amount of the Company’s investment was approximately $1,244,000 and $1,295,000 as of June 30, 2020 and December 31, 2019, respectively.
Dakota Ethanol has a 10% investment interest in Lawrenceville Tanks, LLC (LT), a partnership to operate an ethanol storage terminal in Georgia. The net income which is reported in the Company’s income statement for LT is based on LT’s June 30, 2020 unaudited interim results. The carrying amount of the Company’s investment was approximately $248,000 and $251,000 as of June 30, 2020 and December 31, 2019, respectively.
Lake Area Corn Processors has a 10% investment interest in Guardian Hankinson, LLC (GH), a partnership to operate an ethanol plant in North Dakota. The net income which is reported in the Company’s income statement for GH is based on GH’s June 30, 2020 unaudited interim results. The carrying amount of the Company’s investment was approximately $4,259,000 and $4,991,000 as of June 30, 2020 and December 31, 2019, respectively.
Lake Area Corn Processors has a 17% investment interest in Guardian Energy Management, LLC (GEM), a partnership to provide management services to ethanol plants. The net income which is reported in the Company’s income statement for GEM is based on GEM’s June 30, 2020 unaudited interim results. The carrying amount of the Company’s investment was approximately $53,000 as of June 30, 2020 and December 31, 2019.
Lake Area Corn Processors has an 11% investment interest in Ring-neck Energy and Feeds, LLC (REF), a partnership to operate an ethanol plant in South Dakota. The net income which is reported in the Company’s income statement for REF is based on REF’s June 30, 2020 unaudited interim results. The carrying amount of the Company’s investment was approximately $9,490,000 and $10,093,000 as of June 30, 2020 and December 31, 2019, respectively. REF commenced operations during the second quarter of 2019. Prior to then, the ethanol plant was under construction. The carrying amount of the investment exceeds the underlying equity in net assets by approximately $1,086,000. The excess is comprised of a basis adjustment of approximately $446,000 and capitalized interest of $640,000. The excess is amortized over 20 years from May 2019, the time the plant became operational. The amortization is recorded in equity in net income of investments. Amortization was $28,831 and $3,946 for the six months ended June 30, 2020 and 2019, respectively.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
Condensed, combined unaudited financial information of the Company’s investments in RPMG, LT, GH, GEM and REF are as follows:
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Balance Sheet
|
|
June 30, 2020
|
|
December 31, 2019
|
Current Assets
|
|
$
|
134,854,074
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|
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$
|
219,618,012
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Other Assets
|
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214,571,494
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226,475,383
|
|
Current Liabilities
|
|
123,263,835
|
|
|
187,381,453
|
|
Long-term Liabilities
|
|
76,889,035
|
|
|
95,219,540
|
|
Members' Equity
|
|
149,272,698
|
|
|
163,492,402
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Income Statement
|
|
June 30, 2020
|
|
June 30, 2019
|
Revenue
|
|
$
|
49,534,870
|
|
|
$
|
75,598,119
|
|
Gross Profit
|
|
7,273,860
|
|
|
2,771,334
|
|
Net (Loss)
|
|
(354,889
|
)
|
|
(3,358,215
|
)
|
|
|
|
|
|
|
|
Six Months Ended
|
Income Statement
|
|
June 30, 2020
|
|
June 30, 2019
|
Revenue
|
|
$
|
142,162,849
|
|
|
$
|
136,241,079
|
|
Gross Profit
|
|
2,323,164
|
|
|
8,829,314
|
|
Net (Loss)
|
|
(11,473,373
|
)
|
|
(347,474
|
)
|
The Company recorded equity in net (loss) of approximately $(66,000) and $(1,226,000) from our investments for the three and six months ended June 30, 2020, respectively.
NOTE 5. REVOLVING OPERATING NOTE
On February 6, 2018, Dakota Ethanol executed a revolving promissory note with Farm Credit Services of America (FCSA) in the amount up to $10,000,000 or the amount available in accordance with the borrowing base calculation, whichever is less. Dakota Ethanol amended the note agreement with FCSA in June of 2020. Under the amendment, the available credit under the revolving operating note was reduced to $2,000,000. Interest on the outstanding principal balance will accrue at 300 basis points above the one-month LIBOR rate and is not subject to a floor. The rate was 3.20% at June 30, 2020. There is a non-use fee of 0.25% on the unused portion of the $2,000,000 availability. The note is collateralized by substantially all assets of the Company. The note expires on November 1, 2021. On June 30, 2020, Dakota Ethanol had no balance outstanding and approximately $2,000,000 available to be drawn on the revolving promissory note under the borrowing base.
NOTE 6. LONG-TERM NOTES PAYABLE
On August 1, 2017, Dakota Ethanol executed a term note from FCSA in the amount of $8,000,000. Dakota Ethanol agreed to make monthly interest payments starting September 1, 2017 and annual principal payments of $1,000,000 starting on August 1, 2018. The payment on August 1, 2020 is no longer due after the note was amended with FCSA and is now due on August 1, 2025. The notes matures on August 1, 2025. Interest on the outstanding principal balance will accrue at 325 basis points above the one-month LIBOR rate until February 1, 2023 and increases to 350 basis points thereafter until maturity. The interest rate is not subject to a floor. The rate was 3.45% at June 30, 2020. On June 30, 2020, Dakota Ethanol had $6,000,000 outstanding on the note.
On February 6, 2018, Dakota Ethanol executed a reducing revolving promissory note from FCSA in the amount up to $40,000,000 or the amount available in accordance with the borrowing availability under the credit agreement. Dakota Ethanol amended the note agreement with FCSA in June of 2020. Under the amendment, the available credit on the reducing revolving note was increased to $48,000,000. The amount Dakota Ethanol can borrow on the note decreases by $1,750,000 semi-annually starting on July 1, 2021 until the maximum balance reaches $32,250,000 on July 1, 2025. The note matures on January 1, 2026. Interest on the outstanding principal balance will accrue at 325 basis points above the one-month LIBOR rate until February 1, 2023 and the basis increases to 350 points thereafter until maturity. The interest rate is not subject to a floor. The rate was 3.45% at June 30,
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
2020. The note contains a non-use fee of 0.50% on the unused portion of the note. On June 30, 2020, Dakota Ethanol had $37,000,000 outstanding and $11,000,000 available to be drawn on the note.
As part of the note payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing financial reporting requirements, distribution and capital expenditure limits, minimum debt service coverage ratios, net worth and working capital requirements. The note is collateralized by substantially all assets of the Company. The note payable agreement was amended in June 2020 with modifications to the requirements. The working capital covenant was reduced to $11,000,000 and the net worth covenant was reduced to $18,000,000. The next measurement date for the debt service coverage ratio was deferred until December 31, 2021. Management's current financial projections indicate that we will be in compliance with our revised financial covenants for the next 12 months and we expect to remain in compliance thereafter.
The Company entered into a loan agreement with the Small Business Association through First State Bank, Gothenburg, NE on April 4, 2020 for $760,400 as part of the Paycheck Protection Program under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The loan matures in April 2022 and has an interest rate of 1%. Proceeds of the loan are restricted for use towards payroll costs and other allowable uses such as covered utilities for incurred before December 31, 2020 under the Paycheck Protection Program Rules. Provisions of the agreement allow for a portion of the loan to be forgiven if certain qualifications are met. The Company anticipates applying for forgiveness of this loan . The Paycheck Protection Program Flexibility Act, which was put into effect on June 5, 2020, may effect the terms of our loan.
The Company also received an Economic Injury Disaster Loan (EIDL) in the amount of $10,000 in June 2020. Repayment of the loan will begin in June 2021 and has a 30 year term at 3.75% interest.
The balances of the notes payable are as follows. The balances reflect the updated agreement:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019*
|
Notes Payable - FCSA
|
|
43,000,000
|
|
|
39,000,000
|
|
Notes Payable - Other
|
|
770,400
|
|
|
—
|
|
Less unamortized debt issuance costs
|
|
(9,042
|
)
|
|
(10,792
|
)
|
|
|
43,761,358
|
|
|
38,989,208
|
|
Less current portion
|
|
(186
|
)
|
|
(1,000,000
|
)
|
|
|
$
|
43,761,172
|
|
|
$
|
37,989,208
|
|
*Derived from audited financial statements
|
|
|
|
|
Principal maturities for the next five years are estimated as follows.
|
|
|
|
|
|
|
|
|
Years Ending June 30,
|
|
Principal
|
2021
|
|
$
|
186
|
|
2022
|
|
1,760,593
|
|
2023
|
|
1,000,200
|
|
2024
|
|
1,000,208
|
|
2025
|
|
4,000,215
|
|
thereafter
|
|
36,008,998
|
|
NOTE 7. FAIR VALUE MEASUREMENTS
The Company complies with the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.
The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
Level 1 uses quoted market prices in active markets for identical assets or liabilities.
Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 uses unobservable inputs that are not corroborated by market data.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Derivative financial instruments. Commodity futures contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Derivative financial instruments,
|
|
|
|
|
|
|
|
|
futures contracts
|
|
$
|
79,825
|
|
|
$
|
79,825
|
|
|
$
|
—
|
|
|
$
|
—
|
|
forward contracts
|
|
$
|
109,237
|
|
|
$
|
—
|
|
|
$
|
109,237
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments,
|
|
|
|
|
|
|
|
|
futures contracts
|
|
$
|
150,400
|
|
|
$
|
150,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
forward contracts
|
|
$
|
214,931
|
|
|
$
|
—
|
|
|
$
|
214,931
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Derivative financial instruments,
|
|
|
|
|
|
|
|
|
futures contracts
|
|
$
|
33,338
|
|
|
$
|
33,338
|
|
|
$
|
—
|
|
|
$
|
—
|
|
forward contracts
|
|
$
|
160,687
|
|
|
$
|
—
|
|
|
$
|
160,687
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments,
|
|
|
|
|
|
|
|
|
futures contracts
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
forward contracts
|
|
$
|
698,850
|
|
|
$
|
—
|
|
|
$
|
698,850
|
|
|
$
|
—
|
|
*Derived from audited financial statements.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020 AND 2019
During the three and six months ended June 30, 2020, the Company did not make any changes between Level 1 and Level 2 assets and liabilities. As of June 30, 2020 and December 31, 2019, the Company did not have any Level 3 assets or liabilities.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2020.
Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.
The Company believes the carrying amount of cash and cash equivalents (level 1), accounts receivable (level 2), other receivables (level 2), accounts payable and accruals (level 2) and short-term debt (level 3) approximates fair value.
The carrying amount of long-term obligations (level 3) at June 30, 2020 of $43,770,400 had an estimated fair value of approximately $43,770,400 based on estimated interest rates for comparable debt. The carrying amount of long-term obligations at December 31, 2019 of $39,000,000 had an estimated fair value of approximately $39,000,000.
NOTE 8. RELATED PARTY TRANSACTIONS
Dakota Ethanol has a 5% interest in RPMG, and Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol, dried distiller's grains and corn oil inventories produced by Dakota Ethanol. The marketing fees are included in net revenues. The Company also purchases denaturant from RPMG.
Revenues and marketing fees related to the agreements as well as denaturant purchases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues ethanol
|
$
|
20,324,281
|
|
|
$
|
20,723,838
|
|
|
$
|
43,565,787
|
|
|
$
|
37,103,781
|
|
Revenues distillers dried grains
|
1,140,435
|
|
|
849,741
|
|
|
3,678,750
|
|
|
1,175,323
|
|
Revenues corn oil
|
1,114,584
|
|
|
1,010,829
|
|
|
2,677,418
|
|
|
1,810,516
|
|
Marketing fees ethanol
|
19,909
|
|
|
60,960
|
|
|
79,636
|
|
|
121,920
|
|
Marketing fees distillers dried grains
|
6,078
|
|
|
6,763
|
|
|
23,919
|
|
|
8,940
|
|
Marketing fees corn oil
|
4,510
|
|
|
8,143
|
|
|
17,894
|
|
|
14,577
|
|
Denaturant purchases
|
123,329
|
|
|
205,034
|
|
|
691,893
|
|
|
336,084
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019*
|
|
|
|
|
Amounts due from RPMG
|
$
|
7,417,432
|
|
|
$
|
891,227
|
|
|
|
|
|
Amounts due to RPMG
|
$
|
40,656
|
|
|
$
|
46,234
|
|
|
|
|
|
*Derived from audited financial statements.
The Company purchased corn and services from members of its Board of Managers that farm and operate local businesses. Purchases during the three and six months ended June 30, 2020 totaled approximately $355,000 and $376,000, respectively. As of June 30, 2020 and December 31, 2019, the amount we owed to other related parties was approximately $0 and $0, respectively.