asset. For long-lived assets to be held for use in future operations and for fixed (tangible) assets, fair value is determined primarily using either the projected cash flows discounted at a rate commensurate with the risk involved or an appraisal. For long-lived assets to be disposed of by sale or other than sale, fair value is determined in a similar manner, except that fair values are reduced for disposal costs.

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.

Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, are recorded based on the net selling price. Railcar lease costs incurred by the Company in the sale of its products are included in the cost of goods sold.

Revenue from the sale of the Company's ethanol and distillers grains is recognized at the time title, control and all risks of ownership transfer to the marketing company. This generally occurs upon the loading of the product. For ethanol, title and control passes at the time the product crosses the loading flange in either a railcar or truck. For distillers grain, title and control passes upon the loading into trucks or railcars. Corn oil is marketed internally. Revenue is recognized when title and control of ownership transfers, upon loading. Shipping and handling costs incurred by the Company for the sale of distillers grain are included in costs of goods sold. Ethanol revenue is reported free on board (FOB) and all shipping and handling costs are incurred by the ethanol marketer. Commissions for the marketing and sale of ethanol and distiller grains are included in costs of goods sold.

28, 2020, the Company issued an additional 14,037 Class A Units and 6,987 new Class B Units. The combined issuance of Class A Units is 56,086 units and the total issuance of Class B Units is 6,987 units. There are also 42,049 Common Units outstanding for an aggregate number of 105,122 units outstanding comprised of Class A Units, Class B Units and Common Units. The weighted average number of units is based on days outstanding for the reporting period. The Class A Units and Class B Units have a liquidation preference which provides that in the event of a liquidation or deemed liquidation, the Class A and Class B members will receive the return of their capital contributions, reduced by the amount of distributions received, prior to the holders of Common Units receiving any proceeds.

The Company has a revolving credit loan with a bank which provides for loans not to exceed $4,000,000 outstanding at any time. The loan originally matured on January 1, 2020 but the Company received an extension on December 24, 2019 extending the

maturity date to June 1, 2020. Effective as of May 29, 2020, the Company and the bank amended the revolving credit loan to extend the maturity date of the revolving credit loan until January 1, 2021. Interest accrues at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.75% (4.74%(3.93% as of March 31,June 30, 2020). The Company also pays a commitment fee on the average daily unused portion of the loan at the rate of .25%0.25% per annum, payable monthly. The loan is secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the

As noted above, the Company and the bank amended the revolving term loan to defer the initial step-down reduction of available borrowing capacity so that the new maximum commitment amount reduction schedule is as follows:

The Company’s financial statements for the fiscal year ended September 30, 2019 were prepared assuming that the Company would continue as a going concern. However, the Company has experienced an extended period of depressed margins which has resulted in a significant decrease in working capital and cash over those periods and resulted in the Company’s failure to satisfy its financial covenants under its master credit agreement. As detailed in the Company’s Form 10-K for the fiscal year September 30, 2019 (the “2019 Form 10-K”), the Company was not in compliance with certain financial covenants under its master credit agreement as of September 30, 2019. As a result, the Report of Independent Registered Public Accounting Firm included in the Company’s 2019 Form 10-K included an explanatory paragraph regarding the Company’s ability to continue as a going concern. Management also disclosed a going concern uncertainty in the Company’s financial statements included in the Company’s Form

10-Q for the fiscal quarter ended December 31, 2019 filed with the SEC on February 14, 2020 (the “Q1 2020 Form 10-Q”). During the fiscal second quarter and thereafter, management determined that the previous going concern uncertainty has now been mitigated based on the following:

Based upon the completion of the transactions described above together with the continued effects of our recent capital issuances and our improved liquidity, management believes the previously reported going concern uncertainty has been mitigated.

The Company had the following related-party activity with members during the sixnine months ended March 31,June 30, 2020 and 2019:

On January 15, 2020, the Company entered into a Management Services Agreement with Husker Ag, LLC (“Husker Ag”) for management services pertaining to the Company’s ethanol facility. Effective April 1, 2020, the Company entered into an Amended and Restated Management Services Agreement (the “Management Agreement”) with HALE, LLC, an affiliate of Husker Ag (“HALE”), which replaced and superseded the original Management Services Agreement between the Company and Husker Ag. Pursuant to the terms of the Management Agreement, HALE now provides management services to the Company’s ethanol facility, including providing the Company with individuals to (a) serve as General Manager, Environmental and Safety Manager, Commodity Risk Manager, and to fill such other positions as may be necessary from time to time; and (b) perform the respective management services for each such position. For three month and nine month period ended March 31,June 30, 2020, Lincolnway Energy incurred expenses $147,753$242,096 and $389,849 due to Husker Ag LLC for services and out-of-pocket travel expenses. At March 31,June 30, 2020 $72,659$60,900 was included in accrued expenses on the balance sheet.

Effective March 31, 2020, the Company and HALE entered into a Preferred Membership Unit Purchase Agreement (the “MUPA”) pursuant to which HALE purchased 42,049 new Class A Units of the Company for an aggregate price of $5,000,000. Effective on May 28, 2020, in accordance with the terms of the MUPA, HALE purchased an additional14,037 Class A Units for an aggregate price of $1,669,176. As a result, HALE holds a total of 56,086 new Class A Units. In connection with the investment by HALE

in the Company and pursuant to the terms of the MUPA and the Company’s current operating agreement, HALE has the right to appoint four of the Company’s seven directors (the “Class A Directors”). The Class A Directors serve until they resign or HALE removes them. The remaining three directors are elected by the members holding Common Units and Class B UnitsUnits.

The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the distillers grains produced by the Company. Revenues from this entity including both distillers grains and corn oil were $4,852,114$4,473,741 and $9,355,783,

As of March 31,June 30, 2020, the Company had purchase commitments for corn forward contracts with various unrelated parties, totaling approximately $70,000.$397,592. These contracts matured on AprilJuly 2020. The Company had no basis contract commitments with unrelated parties to purchase corn.

The Company has an agreement with an unrelated party for the transportation of natural gas to the Company's ethanol plant. Under the agreement, the Company is committed to future monthly usage fees totaling approximately $3.6 million over the 10 year10-year term which commenced in November 2014. The Company assigned an irrevocable standby letter of credit to the counter-party to stand as security for the Company's obligation under the agreement maturing May 2021. The letter of credit is reduced over time as the Company makes payments under the agreement. At March 31,June 30, 2020, the remaining commitment was approximately $1.4$1.3 million.

As of March 31,June 30, 2020, the Company had purchase commitments for natural gas basis contracts with an unrelated party totaling 563,676395,313 MMBtu's maturing at various dates through October 2020.

Effective October 1, 2019, the Company adopted ASU 2016-02 regarding Leases. The Company elected the short-term lease exception provided for in the standard and therefore only recognized right-of-use assets and lease liabilities for leases with a term greater than one year.

A lease exists when a contract conveys to a party the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company recognized a lease liability equal to the present value of future lease payments based on an estimated interest rate commensurate with the rate the Company would pay to borrow equivalent funds. A lease asset was recognized based on the lease liability value and adjusted for any prepaid lease payments or lease incentives. The lease term at the commencement date includes any renewal options or termination options when it is reasonably certain that the Company will exercise or not exercise those options, respectively.

The Company leases railcars and is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. Rent expense for the operating leases during the three months ended March 31,June 30, 2020 and 2019 was approximately $521,000$470,000 and $537,000,$497,000, respectively. Rent expense for the operating leased during the nine months ended June 30, 2020 and 2019 was approximately $1,489,000 and $1,540,000, respectively. The lease agreements have maturity dates ranging from April 2020June 2021 to September 2025.

The discount rate used in determining the lease liability ranged from 3.68% to 6.23% and was determined by incremental borrowing rates at the time the lease commenced. The right of use asset and liability at March 31,June 30, 2020 is $6,108,965.$5,711,404.

At March 31,June 30, 2020, the Company had the following approximate future minimum rental commitments through September 30 of each year:

A reconciliation of the undiscounted future payments in the schedule above and the lease liability recognized in the balance sheet as of March 31,June 30, 2020 is shown below:

The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices.  These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program.  The Company's risk management program focuses on the unpredictability of commodity markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations.  The Company's specific goal is to protect the Company from large moves in the commodity costs.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures and options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward purchase and sale contracts.  Exchange traded futures and options contracts are designated as non-hedge derivatives and are valued at market price with changes in market price recorded in operating income through cost of goods sold for corn derivatives and through revenue for ethanol derivatives. The Company treats all contracts with the same counterparty on a net basis on the balance sheet.

Derivatives not designated as hedging instruments are as follows:

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company's financial statements but are subject to a lower of cost or net realizable value assessment.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.

 

Various discussions and statements in this quarterly report are or contain forward-looking statements that express our current beliefs, forecasts, projections and predictions about future events.  All statements other than statements of historical fact are forward-looking statements, and include statements with respect to financial results and condition; anticipated trends in business, revenues, net income, net profits or net losses; projections concerning ethanol prices, distillers grain prices, corn prices, gas prices, operations, capital needs and cash flow; investment, business, growth, joint venture, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections, predictions and statements of expectation.  Words such as "expects," "anticipates," "estimates," "plans," "may," "will," "contemplates," "forecasts," "strategy," "future," "potential," "predicts," "projects," "prospects," "possible," "continue," "hopes," "intends," "believes," "seeks," "should," "could," "thinks," "objectives" and other similar expressions or variations of those words or those types of words help identify forward-looking statements.

These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report.   Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended

September 30, 2019 and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.  We undertake no obligation to revise or update any forward-looking statements.  The forward-looking statements contained in this report are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

General Overview

Lincolnway Energy is an Iowa limited liability company that operates a dry mill, natural gas fired ethanol plant located in Nevada, Iowa.  We have been processing corn into fuel grade ethanol and distillers grains at the ethanol plant since May 22, 2006.  Our ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year.

All of the ethanol we produce is marketed by Eco-Energy, LLC (“Eco-Energy”) and all of our distillers grains are marketed by Gavilon Ingredients, LLC (“Gavilon”). Our revenues are derived primarily from the sale of our ethanol and distillers grains.

We also extract corn oil from the syrup generated in the production of ethanol. We market and distribute all of our corn oil directly to end users and third partythird-party brokers within the domestic market.

Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. (“Air Products”), has a plant located on the Company’s site that collects the carbon dioxide gas that is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. Air Products also markets and sells the liquid carbon dioxide.

Impact of COVID-19 on our Business

On April 14,13, 2020, the Company received a loan in the amount of $505,700 under the new Paycheck Protection Program ("PPP Loan") legislation passed in response to the economic downturn triggered by COVID-19 and administered by the U.S. Small Business Administration. Our PPP Loan willmay be forgiven based upon various factors, including, without limitation, our payroll cost and certain other approved expenses over an eight to twenty-four week period starting upon our receipt of the funds. Expenses for payroll costs, lease payments on agreements before February 15, 2020, and utility payments under agreements before February 1, 2020 and certain other specified costs can be utilized from these funds and eligible for payment forgiveness by the federal government. At least 75%60% of the proceeds must be used for approved payroll costs, and no more than 25%40% on

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our current cash reserves, cash generated from our operations, cash generated from the issuance of new Class A Units and new Class B Units, our PPP Loan and the available cash under our amended revolving credit loan and our amended revolving term loan leave us well-positioned to manage our business through this crisis as it continues to unfold. However, the impacts of the COVID-19 pandemic are broad-reaching and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses. As a result, although we were in compliance with our financial covenants set forth in our amended master credit agreement (the "Credit Agreement") with Farm Credit Services of America, FLCA, Farm Credit Services of America, PCA and CoBank, ACB as of May 29,June 30, 2020, the impact the COVID-19 pandemic could have an adverse impact on our operating results which could result in our inability to comply with certain of these financial covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default. However, based on our current forecast of market conditions and our financial performance together with the amended financial covenants set forth in our Credit Agreement effective as of May 29,June 30, 2020, we expect that we will be in a position to satisfy all of the financial covenants in our Credit Agreement for the next twelve months.

The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, and actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast any effects on our results for the fiscal year ended September 30, 2020 (“Fiscal 2020”). However,Despite the positive financial performance achieved by the Company during the third quarter of Fiscal 2020, the challenges posed by the COVID-19 pandemic on the ethanol industry and the global economy increased significantly ascontinued throughout the secondthird quarter of Fiscal 2020 progressed and as of the date of this filing, management does not anticipate material improvement in the macroeconomic environment and, as a result our results for Fiscal 2020 may be significantly affected.

Despite the economic uncertainty resulting from the COVID-19 pandemic, we intend to continue to focus on strategic initiatives designed to improve on our operational efficiencies and diversify our products which is critical in order to drive positive results in a negative margin environment. We believe that consolidation within the ethanol industry, coupled with our location, good operating efficiencies and our solid team may provide new opportunities for our plant.

Effective March 31, 2020, we entered into a Preferred Membership Unit Purchase Agreement (the “MUPA”) with HALE, LLC (“HALE”), an affiliate of Husker Ag, LLC (“Husker Ag”). Under the MUPA, HALE purchased 42,049 new Class A Units of the Company for an aggregate price of $5,000,000, or $118.91 per Class A Unit. Pursuant to the terms of those Class A Units, HALE, and by affiliation Husker Ag, has the right to approve certain actions customary for holders of senior equity, more specifically set forth in the Fourth Amended and Restated Operating Agreement (as defined below). The Class A Units have equal rights to distributions as other units of the Company, but, for distributions as a result of a liquidation (and deemed liquidation) holders of Class A Units will first receive the amount of their capital contributions (reduced by the amount of distributions received) prior to any other unit holders receiving any proceeds. Additionally, the Class A Unit holders are entitled to appoint four of the seven directors on the Company’s board of directors. As a condition to HALE’s obligations under the MUPA, the Company and HALE executed the Management Agreement (defined below), and the Company entered into the Fourth Amended and Restated Operating Agreement (defined below).

On January 15, 2020, we entered into a Management Services Agreement with Husker Ag for management services pertaining to our ethanol facility. Effective April 1, 2020 and pursuant to the terms of the MUPA, we entered into an Amended and Restated

The initial term of the Management Agreement is twelve months from the Effective Date. Upon expiration of the initial term, the Management Agreement will automatically renew for one-year periods unless either party provides notice of non-renewal at least ninety days prior to the expiration of the then-current term. Either party may terminate the Management Agreement for cause as defined in the Management Agreement. In the event of a change of control event pursuant to which a third party other than HALE or Husker Ag acquires control of the Company, either party has the right to terminate the Management Agreement upon ninety days written notice. During the initial term of the Management Agreement, we will pay HALE a monthly fee of $36,000 for the management services. The parties shall mutually agree upon the compensation for any renewal term prior to the expiration of the then-current term. In the event the parties are unable to agree upon compensation for any renewal term, we will pay HALE, on a monthly basis, an amount equal to 50% of the total salary, bonuses, benefits, expenses and costs incurred by the HALE and Husker Ag employees performing the services. The monthly payment will be paid on an estimated basis with a true up calculation and payment occurring as soon as possible at the end of the applicable HALE fiscal year.

Effective as of April 1, 2020 the Company entered into the Fourth Amended and Restated Operating Agreement of the Company (the “Fourth Amended and Restated Operating Agreement”). The adoption of the Fourth Amended and Restated Operating Agreement was a condition precedent to HALE’s obligations under the MUPA. The Fourth Amended and Restated Operating Agreement contains material changes from the Third Amended and Restated Operating Agreement, including the following:

In connection with the restructuring of the Company’s board of directors pursuant to the Fourth Amended and Restated Operating Agreement, five of the Company’s directors resigned, effective April 1, 2020. These directors were Douglas Moore, James Dickson, Brian Conrad, Timothy Fevold, and Kurt Olson. These resignations were not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

HALE obtained control of the Company in consideration of the $5,000,000 investment that it made pursuant to the MUPA in exchange for 42,049 Class A Units, at a per unit price of $118.91.

On May 28, 2020, the Company closed its previously announced private offering of up to $2,500,000 of Class B Units to its existing members who are “accredited investors” (such members “Existing Accredited Members”), as such term is defined in Rule 501 of Regulation D, promulgated by the SEC (the “Class B Offering”). In connection with the Class B Offering, the Company sold 6,822 Class B Units to Existing Accredited Members for an aggregate purchase price of $811,204, at a per unit price of $118.91.

$118.91. In addition, on May 28, 2020, the Company also agreed to sell, and subsequently sold, 165 Class B Units to LKPK Holdings, LLC, a Nebraska limited liability company, for a purchase price of $19,620, at a per unit price of $118.91.

Pursuant to the terms of the MUPA, HALE agreed to make an additional equity investment in the Company to offset any shortfall from the $2,500,000 in the Class B Offering. PursuantUnder the MUPA, HALE agreed to this agreement, HALE will contribute cash to the Company in exchange for additional Class A Units in an amount equal to any shortfall in the $2,500,000 that the Company is seekingsought to raise in the aforementioned offering, thereby guaranteeingClass B Offering discussed above which guaranteed that the Company willwould receive a cumulative total capital infusion of $7,500,000 from the MUPA and the Class B Offering transactions. OnIn accordance with the terms of the MUPA, on May 28, 2020, the Company sold an additional 14,037 Class B Units to HALE for a purchase price of $1,669,176, at a per unit price of $118.91.

Domestic ethanol use ispeaked the week ended of March 6, 2020 at around 14 billion gallons per year.year as reported by the Energy Information Agency (“EIA”). Domestic ethanol plant production peaked the week ended January 10, 2020 near 16.7 billion annualized as reported by EIA. The industry currently has capacity to produce over 16.617 billion gallons with approximately 10% of such capacity currently idled. Exports playin a long-term idled state. The COVID-19 pandemic became a mainstream news topic during the week ended January 10, 2020. On January 13, 2020 sources such as Apple Mobility started using this date as the base line in tracking consumer mileage patterns. The week ended April 24, 2020, the EIA reported ethanol plant production for 2020 dropped to 49.04% from production as of January 10, 2020. The EIA reported consumption of ethanol dropped to 7.6 billion gallons for the week ended April 3, 2020 which was the first week of the calendar quarter for this reporting period. This low consumption week came four weeks after the EIA reported peak consumption near 14 billion annualized ended March 6, 2020. During this time period several states implemented stay at home restrictions with California restrictions effective March 19, 2020 and states such as Illinois, New Jersey and New York effective shortly thereafter. These restrictions adversely impacted driving habits and gasoline consumption and therefore reduced consumption of ethanol. Additionally, during the week ended April 3, 2020, the domestic inventory level according to the EIA data was near 54 days on hand. This amount is 25 to 30 days higher than historical typical domestic inventory days on hand and highlights the domestic oversupply within the ethanol industry which has been exacerbated by the COVID-19 pandemic.

Even prior to the rise of the COVID-19 pandemic, exports played a critical role in keeping the United States from being awash in production. Worldwide exports fromproduction and the U.S. increased almost 24% between calendar years 2017 and 2018. But in calendar year 2019, ethanol exports decreased 13.6% as compared to the calendar year 2018 according to the most recent available data from the U.S. Energy Information Administration ("EIA"). This decrease is primarily due to the reduction of exports to Brazil, historically onecritical nature of the largest customers of U.S. ethanolexport market has intensified as a result of tariffs implemented by Brazil onthe impact of COVID-19 and the actions of government authorities and corporate businesses. If U.S. ethanol. Despite the

The ethanol industry receives support through the Federal Renewable Fuels Standard (the “RFS”) which has been, and will continue to be, a driving factor in the growth of ethanol usage. The RFS requires that each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that allows refiners to use renewable fuel blends in those areas of the country where it is most cost-effective. The EPA is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

The RFS original statutory volume requirements increased incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels.  Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

Annually, the EPA is required to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. On November 30, 2018, the EPA issued the final rule for 2019 which set the 2019 annual volume requirements for renewable fuel at 19.92 billion gallons per year (the "Final 2019 Rule"). On July 5, 2019, the EPA issued a proposed rule for 2020 which set the annual volume requirements for renewable fuel at 19.92 billion gallons (the "Proposed 2020 Rule"). Both the Final 2019 Rule and the Proposed 2020 Rule maintained the number of gallons that may be met by conventional renewable fuels such as corn based ethanol at 15.0 billion gallons. A public hearing on the Proposed 2020 Rule was held in July and the public comment period expired on August 30, 2019. The final rule was originally expected to be issued in November 2019.

However, on October 15, 2019, the EPA released a supplemental notice seeking additional comments on a proposed rule on adjustments to the way that annual renewable fuel percentages are calculated. The supplemental notice was issued in response to an announcement on October 4, 2019, by President Trump of a proposed plan to require refiners not exempt from the rules to blend additional gallons of ethanol to make up for the gallons exempted by the EPA's expanded use of waivers to small refineries. The effect of these waivers is that the refinery is no longer required to earn or purchase blending credits, known as Renewable Identification Numbers or RINs, negatively affecting ethanol demand and resulting in lower ethanol prices. The proposed plan was expected to calculate the volume that refiners were required to blend by using a three-year average of exempted gallons. However, the EPA proposed to use a three-year average to account for the reduction in demand resulting from the waivers using the number of gallons of relief recommended by the United States Department of Energy. A public hearing on the proposed rule was held October 30 and the public comment period expired on November 30, 2019. On December 19, 2019, the EPA issued the final rule that set out the 2020 annual volume requirements (the "Final 2020 Rule") at 20.09 billion gallons up from the 19.92 billion gallons for 2019. Similar to the Final 2019 Rule, the Final 2020 Rule included 15.0 billion gallons of conventional corn-based ethanol.

Although the volume requirements set forth in the Final 2019 Rule are slightly higher than the final 2018 volume requirements (the "Final 2018 Rule") and the Final 2020 Rule volume requirements are slightly higher than those set forth in the Final 2019 Rule, the volume requirements under the Final 2018 Rule, the Final 2019 Rule and the Final 2020 Rule are all still significantly below the 26 billion gallons, 28 billion gallons and 30 billion gallons, respectively, statutory mandates, with significant reductions in the volume requirements for advanced biofuels as well.

Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. The Final 2018 Rule represented the first year the total proposed volume requirements were more than 20% below statutory levels. In response, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The Final 2019 Rule is approximately 29%

the Final 2019 Rule, the EPA became statutorily required to modify the statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022. These factors include environmental impact, domestic energy security, expected production, infrastructure impact, consumer costs, job creation, price of agricultural commodities, food prices, and rural economic development.

In October 2018, the Trump administration released timelines for certain EPA rulemaking initiatives relating to the RFS including the “reset” of the statutory blending targets. The EPA is expected to propose rules modifying the applicable statutory volume targets for cellulosic biofuel, advanced biofuel, and total renewable fuel for the years 2020-2022. The proposed rules are also expected to include proposed diesel renewable volume obligations for 2021 and 2022.

Despite the recent actions by the Trump administration relating to E15, there continues to be uncertainty regarding the future of the RFS as a result of the significant number of small refinery waivers granted.  Under the RFS, the EPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. The mechanism that provides accountability in RFS compliance is the Renewable Identification Number (RIN). RIN’sRINs are a tradeable commodity given that if refiners (obligated parties) need additional RIN’sRINs to be compliant, they have to purchase them from those that have excess. Thus, there is an economic incentive to use renewable fuels like ethanol, or in the alternative, buy RIN’s.RINs. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by ethanol producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties.

On April 15, 2020, five Governors sent a letter to the EPA requesting a general waiver from the RFS due to the drop in demand caused by COVID-19 travel restrictions. They contend that the compliance costs (i.e. cost to purchase RINs) is onerous and could put some refineries out of business. In June 2020, the Attorneys General of seven sates joined in the request made to waive the 2020 RFS compliance mandate. The EPA has 90 days to respond, and as of this filing had indicated only that they are “watching the situation closely and reviewing the governors’ letter.”

Although the Final 2019 Rule and the Final 2020 Rule maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons this number does not take into account waivers granted by the EPA to small refiners for "hardship." The EPA can, in consultation with the Department of Energy, waive the obligation for individual smaller refineries that are suffering “disproportionate economic hardship” due to compliance with the RFS. To qualify, for this “small refinery waiver,” the refineries must be under total throughput of 75,000 barrels per day and state their case for an exemption in an application to the EPA each year.

As of October 2019,June 2020, the EPA has approved 85 exemptions for compliance years 2016 to 2018, freeing refineries from using 4 billion gallons of renewable fuel. This effectively reduces the annual renewable volume obligation for each year by that amount as the waivers exempt the obligating parties from meeting the RFS blending targets and the waived gallons are not reallocated to other obligated parties at this time. As discussed above, the mechanism that provides accountability in RFS compliance is the Renewable Identification Number (RIN). RINs are a tradeable commodity given that if refiners (obligated parties) need additional RINs to be compliant, they have to purchase them from those that have excess. Thus, there is an economic incentive to use renewable fuels like ethanol, or in the alternative, buy RINs. Granting these small refinery waivers effectively reduces the annual renewable volume obligation for each year by that amount as the waivers exempt the obligating parties from meeting the RFS

Since higher RIN values help to make higher blends of ethanol more cost competitive, lower RIN values could hinder or at least slow retailer and consumer adoption of E15 and higher blends. As discussed further below, the Tenth Circuit Court of December 31, 2019,Appeals ruled that multiple small refinery exemptions were improperly extended by the EPA which caused D6 RIN trading prices to increase to approximately $0.24 per gallon in January 2020. As of June 30, 2020, the EPA has received sixteen52 requests for small refinery waivers that will be up for consideration during 2020. If the EPA approves all 52 of the pending applications, the ethanol market would suffer another loss of 2 billion gallons of biofuel blending requirements which will adversely impact RIN prices and the ethanol market. These waiver requests represent an effort by refineries to bypass the ruling of the Tenth Circuit and establish a continuous chain of exemptions. If the EPA continues to grant discretionary waivers and RIN prices continue to fall, it could negatively affect ethanol prices.

The Trump Administration has not announced a plan to reallocate ethanol gallons lost to exemptions in the current year and therefore, the continued granting of waivers and the failure of the Trump Administration to take any action to reallocate the lost exemptions will continue to negatively impact ethanol demand and RIN and ethanol prices.

Biofuels groups have filed a lawsuit in the U.S. Federal District Court for the D.C. Circuit, challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. This is the first RFS rulemaking since the expanded use of the exemptions came to light, however the EPA has refused to cap the number of waivers it grants or how it accounts for the retroactive waivers in its percentage standard calculations. The EPA has a statutory mandate to ensure the volume requirements are met, which are achieved by setting the percentage standards for obligated parties. The EPA's current approach runs counter to this statutory mandate and undermines Congressional intent. Biofuels groups argue the EPA must therefore adjust its percentage standard calculations to make up for past retroactive waivers and adjust the standards to account for any waivers it reasonably expects to grant in the future.

If the EPA’s decisions to reduce the volume requirements under the RFS statutory mandates are allowed to stand, if the volume requirements are further reduced or if the EPA continues to grant waivers to small refineries, the market price and demand for ethanol would be adversely effective which would negatively impact our financial performance. The EPA's based the projected volume of gasoline and diesel that was exempt in 2020 on utilizing the three yearthree-year rolling average of relief recommended by the Department of Energy, rather than the three year rolling level of actual exemptions advocated by agricultural interests.

On May 18, 2018, the Advanced Biofuel Association initiated a legal challenge to the EPA’s process for granting exemptions from compliance under the RFS to small refineries. In its petition, the Advanced Biofuel Association seeks judicial review of the EPA’s decision to modify criteria to lower the threshold by which the agency determines whether to grant small refineries an exemption for the RFS for reasons of disproportionate economic hardship. In November 2019, the Court dismissed the case because the Advanced Biofuels Association did not identify a final agency action in their original lawsuit.

On January 24, 2020, the U.S. Court of Appeals for the Tenth Circuit announced that the three exemptions were improperly issued by the EPA. The Court held that the EPA cannot "extend" exemptions to any small refineries whose earlier, temporary exemptions had lapsed. The Court concluded that the EPA exceeded its statutory authority in granting these petitions because there was nothing for the agency to "extend". Utilizing this criteria, there would have been a maximum of seven small refineries that could have received continuous extensions, yet the EPA has granted thirty five exemptions in a single year. The Court also found the EPA had abused their discretion in failing to explain how the EPA could maintain that such refineries would incur an economic hardship while continuing to claim that the costs of RIN compliance are passed through and recovered by those same refineries.

Related to the recent lawsuits, the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy, National Biodiesel Board, National Corn Growers Association, Biotechnology Industry Organization, and National Farmers Union petitioned the EPA on June 4, 2018 to change its regulations to account for lost volumes of renewable fuel resulting from the retroactive small refinery exemptions. This petition to the EPA seeks a broader, forward-looking remedy to account for the collective

lost volumes caused by the recent increase in retroactive small refinery RVO exemptions. The EPA has not reallocated volume exemptions in prior years and continued to approve 31 new requests in 2019. On October 29, 2019, the U.S. House of Representatives Committee on Energy and Commerce met to examine the effects of the small refinery exemptions on biofuels and agriculture since 2016. Companies were seeking the EPA to make available more information on refinery exemptions.

On February 4, 2019, Growth Energy filed a lawsuit in the Court of Appeals for the District of Columbia against the EPA challenging the EPA’s failure to address small refinery exemptions in the Final 2019 Rule. An administrative stay has been granted to research the contents of the lawsuit.

Although the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol in the Final 2019 Rule and the Final 2020 Rule together with the application of the One-Pound Waiver to E15 permitting the year round sale of E15 signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of any such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") in late March 2020 in an attempt to offset the subsequent economic damage. The CARES Act created and funded multiple programs that have impacted or could impact our industry. The United States Department of Agriculture ("USDA") was given additional resources for the Commodity Credit Corporation ("CCC") and they are using those funds to provide direct payments to farmers, including corn farmers from whom we purchase most of our feedstock for ethanol production. Similar to the trade aid payments made by the USDA over the past two years, this cash injection for farmers could cause them to delay marketing decisions and increase the price we have to pay to purchase the corn. The USDA did not include any CCC funds for ethanol plants as of this filing.

The CARES Act also provided for the Small Business Administration (the "SBA") to assist companies that constitute small business and keep them from laying off workers. The Paycheck Protection Program (the "PPP") was created and quickly paid out all of the funds appropriated, including some to farmers and to ethanol plants. Although we received our PPP Loan under the CARES Act, as discussed above, the receipt of PPP funds by farmers could, like the CCC funds, incentivize them to delay marketing corn which could increase the price of corn.

Ethanol is the primary ingredient in hand sanitizer. The CARES Act provided a tax exclusion on the shipment of undenatured ethanol for use in manufacturing hand sanitizer. The FDA hasoriginally provided expanded guidance to allow for more denaturants to be used in ethanol intended for hand sanitizer production, and has expanded the grades of ethanol allowed for the duration of the public health crisis. Management is currently exploring opportunities for use ofHowever, in June 2020, the FDA prohibited certain ethanol produced atplants without specialized purification processes in place from producing and distributing hand sanitizer by limiting chemicals permitted in the Company’s plant for use in manufacturing hand sanitizer.finished product and as a result forced such ethanol plants to halt production and cancel supply agreements.

Executive Summary

Results of Operations

Sales from co-products increased by 16%10.5% for the three months ended March 31,June 30, 2020 as compared to the three months ended March 31,June 30, 2019. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide. The change in co-product sales resulted primarily from an increase in distillers grain and carbon dioxide revenue. Distillers grain revenue increased as market prices increased due to reduced supply as a result of steady world and U.S. protein prices along with higher corn expense being incurred as an alternative feed substitute for the U.S. meat producer.idled ethanol plant production capacity due to COVID-19. The additional increase in distillers grains revenue related to improvement in plant production efficiencies resulting in premium rail market sales due to 105 ton railcars being delivered instead of low 90 ton rail cars which previously resulted in a discounted price per ton as compared to premium rail market sales.

Corn costs, including hedging, increased $2.8decreased $5.6 million, or 15.9%27.9%, for the three months ended March 31,June 30, 2020 compared to the three months ended March 31,June 30, 2019. The increasedecrease resulted from a 5.3% increase13.8% decrease in the price of corn. For the three months ended March 31,June 30, 2020 corn costs included a $580,856derivatives gain of $0.172 million compared to a $1 million net gainloss for derivatives relating to corn costs compared to a $401,949 net gain in the same quarter for the prior year. Corn costs represented 76.8%78.8% of cost of goods sold for the three months ended March 31,June 30, 2020 compared to 72.18%73.7% for the three months ended March 31,June 30, 2019.

Repairs and maintenance decreased approximately 25.8%45%, or $.441$.411 million for the three months ended March 31,June 30, 2020 as compared to the three months ended March 31,June 30, 2019. The decrease was due an increased effort from internal maintenance staff completing required maintenance services instead of paying contractors to perform such services.

Depreciation expense increased approximately $.238 million, or 2%,remained flat for the three months ended March 31,June 30, 2020 as compared to the three months ended March 31,June 30, 2019. The increase instabilized depreciation during the secondthird quarter of Fiscal 2020 can be attributed to minimal capital improvement spent on the Company capitalizing key equipment with longer asset life during the three month period March 31, 2019 due to its known replacement date.plant.

General and administrative costs increaseddecreased by $70,667,$262,000, or 7.9%25%, for the three months ended March 31,June 30, 2020 as compared to the three months ended March 31,June 30, 2019. The increasedecrease is due to a combination of increased costs relating to changes insavings measured by management effected during January 2020, and increased legal expenses due to capital raising activity during the three months ended March 31,June 30, 2020.

Sales from co-products increased by 15%14%, or $1.6$2.2 million for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide. Co-product revenue increased primarily due to a 24.8%28.2% increase in dried distillers grains revenue for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019. Distillers grainThe additional increase in distillers grains revenue related to improvement in plant production increasedresulting in premium rail market sales due to 105 ton railcars being delivered instead of low 90 ton rail cars which previously resulted in a discounted price per ton as ethanol production rates increased. This improvement resultedcompared to a better conversion of corn bushels into a heavier tons of distillers through process change.premium rail market sales.

Corn costs, including hedging, increaseddecreased by $6$5.2 million, or 20%9.6%, for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019. The increase was due to a 13.3% increase inDuring the nine months ending June 30, 2020 corn bushels consumed due to increased because of increasing the plants run rates and higher ethanol production.production in the amount of 855 thousand bushels. This increased in bushel increased corn cost $3 million or 5.7%. For the sixnine months ended March 31,June 30, 2020, corn costs included a $.2 million$56,000 net lossgain for derivatives relating to future contracts, compared to a $.3$0.6 million loss for the sixnine months ended March 31,June 30, 2019. The additional factor in the increased corn cost was a 6% increase in the$0.1 per bushel increase price paid for the six-monthsnine months ended March 31,2020June 30, 2020 compared to the comparable period ending 2019. Corn costs represented 75.8%67% of cost of goods sold for the sixnine months ended March 31,June 30, 2020, compared to 69.7%70.2% for the six-months emded March 31,nine months ended June 30, 2019.

Repairs and maintenance decreased by $1.2$1.6 million, or 24%30.7%, for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019. The decrease was due the utilization of Company maintenance staff to perform the necessary maintenance work instead of hiring outside contractors as part of managements increased focus on cost control.

Depreciation expense decreased approximately $.5$0.5 million, or 83%88%, for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019. Depreciation decrease is based on the normal useful life.life and not adding new capital projects.

General and administrative costs increaseddecreased by $39,064,$242,000, or 2.7%8.7%, for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019. The increasedecrease is due to additional legal fees and investor related expenses related to equity raise activity.a combination of costs savings measures by management during over the past six months for the quarter ending June 30, 2020.

Other income decreased $3 million for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019. The decrease is due to approximately $3 million one time settlement payment received in exchange for the early termination of a contract.

Industry Factors that May Affect Future Operating Results

During the three months ended March 31,June 30, 2020, the economic uncertainty relating to the COVID-19 pandemic continues to impact the ethanol industry resulting in decreased prices for production output due to uncertain demand. Likewise, corn feedstock price has also decreased when compared to corn prices over the last few years however since demand for ethanol is uncertain, Management continues to believe that buying corn from month to month is the best strategy in case the market experiences further decreased in and resulting production decreases over those we have experienced moderate ethanol production margins atover the beginning and ended with extremely weak ethanol production margins in March as a result of a combination of factors including the following:past five months.

led to historically low ethanol pricing such that it is currently unprofitable to operate our ethanol plants at such levels. Consequently, we have reduced our plants operating production capacity before and after our planned April maintenance shutdown which we extended to 10 days from the normal five days.days and completed using internal staff rather than third parties. The impacts of COVID-19 on our business operations, including the duration and impact on ethanol demand cannot be reasonably estimated at this time, although a prolonged reduction in production or potential stoppage at our plant would have a material adverse impact on our results of operations, financial condition and cash flows in Fiscal 2020. Management will continue to support efforts to contain the spread of the virus and evaluate and implement strategies relating to staffing, production and operations as it deems appropriate.

We use futures and options strategies on the Chicago Mercantile Exchange to hedge some of the risk involved with changing corn prices, as well as the purchase and physical delivery of corn contracts from area farmers and commercial suppliers. We also incorporate risk management strategies to cover some of the risk involved with changing ethanol and distillers market prices. We continue to monitor the markets and attempt to provide for an adequate supply of corn and protection against rapid price increases for corn and price decreases for ethanol and distillers grains.

Corn oil prices started to recover during the beginning of the 2020 and the price received remains higher than the previous year. The reinstated blenders’ tax credit for biodiesel could positively impact the price and demand for corn oil as biodiesel production margins improve. Corn oil supplies in the U.S. are expected to grow due to yield improvements which could offset the impact of lower ethanol production rates.

The Final 2020 Rule raised the renewable volume requirements for advanced biofuels from the 201 level of 4.9 billion gallons to 5.09 billion gallons and increased the biomass-based diesel from 2.1 billion gallons to 2.43 billion gallons. Additionally, the reinstated Blenders

Tax Credit of $1.00 per gallon may positively impact the demand for corn oil. U.S. corn oil supplies are expected to grow by approximately 10%. World oilseed supplies are projected to be flat and world oilseed stocks are expected to contract. This suggests corn oil prices may fluctuate modestly.

Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities.  We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations.  The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). Part of our risk management strategy requires that we actively monitor credit and counterparty risk through credit analysis.

Liquidity and Capital Resources

In addition, the Amendment modified the dividend and distributions negative covenant set forth in the Credit Agreement to provide increased financial limitations on the ability of the Company to declare or pay dividends or distributions to its members. Under the Amendment, the Company may not declare or pay any dividends or purchase, redeem, retire or otherwise acquire for value any of its capital stock, or allocate or otherwise set apart any sum for any of the foregoing, except that beginning with fiscal year ending September 30, 2022 and each fiscal year thereafter, the Company may pay dividends in an amount up to 40.00% of its net income for the prior fiscal year assuming there no Event of Default or Potential Default has occurred and continues or would result therefrom. Notwithstanding the foregoing, the Company may pay dividends of up to 75% of net income for the prior fiscal year,

provided that the Company’s working capital, pre and post distribution, remains above $15,000,000 million and assuming there no Event of Default or Potential Default has occurred and continues or would result therefrom.

   

In addition, the Lender provided the Company with a letter dated May 28, 2020 waiving past violations resulting from non-compliance with the working capital, net worth and debt service coverage ratio financial covenants from June 30, 2019 through April 30, 2020.

As discussed above, the Report of Independent Registered Public Accounting Firm included in the Company’s 2019 Form 10-K included an explanatory paragraph expressing doubt regarding the Company’s ability to continue as a going concern. Management also disclosed a going concern uncertainty in the Company’s financial statements included in the Q1 2020 Form 10-Q. Based on the completion of the transactions described above together with the continued effects of our recent capital issuances and our improved liquidity, management believes the previously reported going concern uncertainty has been mitigated.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our current cash reserves, the cash received from our recent equity issuances, our PPP Loan, and the available cash under our revolving term loan and our revolving credit loan leave us well-positioned to manage our business through this crisis as it continues to unfold. However, the impacts of the COVID-19 pandemic are broad-reaching and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses. As a result, although we were in compliance with our financial covenants set forth in our Credit Agreement as of May 29, 2020, the impact the COVID-19 pandemic could adversely impact our operating results which could result in our inability to comply with certain of these financial covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default. However, based on our current forecast of market conditions and our financial performance, we expect that we will be in a position to satisfy all of the financial covenants in our Credit Agreement for the next twelve months.

For the sixnine months ended March 31,June 30, 2020, net cash provided byused in operating activities increasedimproved by $1.4 million when compared to net cash provided by operating activities for the six -nine- months ended March 31,June 30, 2019. The increaseimprovement in cash provided by operating activities is due to the reduction of operating expenses, andimprovements in inventory controls, improved production efficiencies and timing inof working capital components.cycles.

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant. Net cash used in investing activities decreased $1.6 million for the sixnine month ended March 31,June 30, 2020 compared to the sixnine months ended March 31,June 30, 2019. The decrease was due to less capitalized expenses and improvements to the facility as the plant has implemented a preventive maintenance plan.

Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash provided by financing activities decreased by $2.7 million for the sixnine months ended March 31,June 30, 2020 compared to the sixnine months ended March 31,June 30, 2019. The decrease was due to less borrowing along with proceeds received by the Company from issuance of membership units.

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following

policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.

Revenue from the sale of our ethanol and distillers grains is recognized at the time title, control and all risks of ownership transfer to the marketing company. This generally occurs upon the loading of the product. For ethanol, title and control passes at the time the product crosses the loading flange into either a railcar or truck. For distillers grains, title and control passes upon the loading of distillers grains into trucks or railcars. Corn oil is marketed internally. Revenue is recognized when title and control of ownership transfers, upon loading. Shipping and handling costs incurred by the Company for the sale of distillers grain are included in the costs of goods sold. Ethanol revenue is reported free on board (FOB) and all shipping and handling costs are incurred by the ethanol marketer. Commissions for the marketing and sale of ethanol and distiller grains are included in the costs of goods sold.

All of our ethanol production is sold to Eco-Energy. The purchase price payable to us under our agreement with Eco-Energy is the purchase price set forth in the applicable purchase order, less a marketing fee payable to Eco-Energy.

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in our financial statements but are subject to a lower of cost or market assessment.

Inventories are stated at the lower of net realizable value or actual cost using the first-in, first-out method.  In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation. For the sixnine months ended March 31,June 30, 2020 and 2019, the Company had a lower of cost or net realizable value inventory adjustment of $820,000$0.00 and $511,000$180,000 respectively.

Property and equipment is stated at cost. Construction in progress is comprised of costs related to the projects that are not completed. Depreciation is computed using the straight-line method over the following estimated useful lives. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. When circumstances or events arise that questions an asset's usefulness, the asset is evaluate for future use and appropriate carrying value.

The Company evaluates the carrying value of long-lived tangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable. Such events and circumstances include, but are not limited to, significant decreases in the market value of the asset, adverse changes in the extent or manner in which the asset is being used, significant changes in business climate, or current or projected cash flow losses associated with the use of the assets. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such assets are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. For long-lived assets to be held for use in future operations and for fixed (tangible) assets, fair value is determined primarily using either the projected cash flows discounted at a rate commensurate with the risk involved or an appraisal. For long-lived assets to be disposed of by sale or other than sale, fair value is determined in a similar manner, except that fair values are reduced for disposal costs.

We currently do not have any off-balance sheet arrangements.

In addition to the various risks inherent in the ethanol industry and our operations, we are exposed to various market risks.  The primary market risks arise as a result of possible changes in certain commodity prices and changes in interest rates.

Commodity Price Risk

We are exposed to market risk with respect to the price of ethanol, which is our principal product, and the price and availability of corn and natural gas, which are the principal commodities we use to produce ethanol.  Our other primary product is distillers grains, and we are also subject to market risk with respect to the price for distillers grains.  The prices for ethanol, distillers grains, corn and natural gas are volatile, and we may experience market conditions where the prices we receive for our ethanol and distillers grains are declining, but the price we pay for our corn, natural gas and other inputs is increasing. Our results will therefore vary substantially over time, and include the possibility of losses, which could be substantial.

In general, rising ethanol and distillers grains prices result in higher profit margins, and therefore represent favorable market conditions.  We are, however, subject to various material risks related to our production of ethanol and distillers grains and the price for ethanol and distillers grains.  For example, ethanol and distillers grains prices are influenced by various factors beyond the control of our management, including the supply and demand for gasoline, the availability of substitutes, international trade and the effects of domestic and foreign laws, regulations and government policies.

In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions.  We will generally not be able to pass along increased corn costs to our ethanol customers.  We are subject to various material risks related to the availability and price of corn, many of which are beyond our control.  For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture, and local, regional, national and international trade, demand and supply. If our corn costs were to increase $.10 per bushel from one year to the next, the impact on costs of goods sold would be approximately $2.1 million for the year, assuming corn use of 21 million bushels during the year.

Falling ethanol prices indicate weak market conditions and will usually negatively impact profit margins. Lincolnway Energy will typically be unable to pass through the impact of decreased ethanol revenues to its corn suppliers. Lincolnway Energy is subject to various material risks related to the demand for and price of ethanol, many of which are beyond the control of the Company. For example, the demand for and price of ethanol is subject to significant fluctuations due to various unpredictable factors which are beyond the control of Lincolnway Energy's management, including driving habits, consumer vehicle buying decisions, petroleum price movement, plant capacity utilization, and government policies with respect to biofuel use, railroad transportation requirements, national and international trade and supply and demand. If Lincolnway Energy's ethanol revenue were to decrease $.05 per gallon from one year to the next, the impact on gross revenues would be approximately $3.1 million for the year.

Although we intend our futures and option positions to accomplish an economic hedge against our future purchases of corn or futures sales of ethanol, we have chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged.  To avoid the higher costs associated with hedge accounting, we are instead using fair value accounting for the positions. Generally that means as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in our costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions.  The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged.  For example, our net gain on corn derivative financial instruments that was included in our cost of goods sold for the three months ended March 31,June 30, 2020 was $580,856,$171,662 as opposed to a net lossgain of $424,449$1,005,692 for the three months ended March 31,June 30, 2019.

We attempt to offset or hedge some of the risk involved with changing corn prices through the trading of futures and options on the Chicago Mercantile Exchange, as well as through purchase and physical delivery contracts from suppliers. We continue to stay at a near neutral corn position due to an uptrend in ethanol sales margins. We continue to monitor and attempt to ensure

adequate corn supply and protection against rapid price increases. As noted above those activities are, however, subject to various material risks, including that price movements in the cash corn and corn futures markets are highly volatile and are influenced by many factors and occurrences which are beyond our control.

Another important raw material for our production of ethanol is natural gas. Our cost per MMBTU is subject to various factors that are outside of the control of our management. The factors include changes in weather, increase in transportation costs and the overall economic activity.  Our natural gas costs will therefore vary, and the variations could be material.  Our natural gas costs for the three months ended March 31, 2020 represented approximately 5.86% of our total cost of goods sold for that period.

We have various outstanding loan agreements that expose us to market risk related to changes in the interest rate imposed under the loan agreement and promissory notes.

We have entered into loan agreements, including an irrevocable letter of credit, with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, "Farm Credit"). The interest rate on the Farm Credit revolving term loan and irrevocable letter of credit is a variable interest rate based on the one-month LIBOR index plus 3.75%. We do not anticipate any significant increase in interest rates during Fiscal 2020.

Our  management,  under the supervision and with  the  participation  of  our General Manager, President and Chief Executive Officer and our Interim Chief Financial Officer (our principal financial officer), have evaluated the  effectiveness of our disclosure  controls  and  procedures  (as defined in Rule  13a-15(e) under the Securities  Exchange  Act of 1934) as of the end of the  period covered by this quarterly report.  Based on that evaluation,  our General Manager, President and Chief Executive Officer and our Interim Chief Financial Officer have  concluded  that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures have been effective to provide  reasonable  assurance that the information required to be disclosed in the reports our management files or submits  under the Securities Exchange  Act of 1934 is (i)  recorded,  processed, summarized and reported within the time  periods  specified  in the  Securities  and  Exchange Commission's   rules  and  forms,  and  (ii)  accumulated  and  communicated  to management,  including our  principal executive and principal financial officers or persons performing such functions,  as appropriate,  to allow timely decisions regarding  disclosure.  We believe that a control system, no matter how well designed and operated, cannot provide absolute  assurance that the  objectives of the control system are met, and no evaluation of controls can provide  absolute  assurance that all control issues and instances of fraud,  if any, within a company have been detected.

 

No change in our internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Members should carefully consider the discussion of risks and the other information in our annual report on Form 10-K for the year ended September 30, 2019, in Part I, Item 1A, “Risk Factors,” andthe disclosures of risks in Part II, Item 1.A in our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2020 along with the discussion of risks and other information in Part

I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under “Cautionary Information Regarding Forward-Looking Statements,” of this report. Although we have attempted to discuss key factors, our members need to be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. The following risk factors supplement and/or update risk factors previously disclosed and should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.

As previously disclosed in the Company's Current Report on Form 8-K filed with the SEC on June 3, 2020 and its Quarterly Report on Form 10-Q filed with the SEC on June 19, 2020, on May 28, 2020 (the “Closing Date”), the Company closed its previously announced private offering of new Class B Units (the “Class B Offering”) to its existing members who are “accredited investors” (such members “Existing Accredited Members”), as such term is defined in Rule 501 of Regulation D, promulgated by the SEC under the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to subscription agreements between the Company and certain Existing Accredited Investors entered into as part of the Class B Offering, the Company sold 6,822 new Class B Units for an aggregate price of $811,204, or $118.91 per unit.

Also effective as of the Closing Date (a) pursuant to the Preferred Membership Unit Purchase Agreement between the Company and HALE, LLC, an Iowa limited liability company (“HALE”) dated as of March 31, 2020 (a copy of which was previously filed with the SEC as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 3, 2020) incorporated herein by reference (the “MUPA”) the Company sold an additional 14,037 Class A Units to HALE for $1,669,176, or $118.91 per unit, and (b) pursuant to a separate subscription agreement between the Company and LKPK Holdings, LLC, a Nebraska limited liability company (“LKPK”), the Company agreed to sell and subsequently sold 165 Class B Units to LKPK for $19,620, or $118.91 per unit. The aggregate price for the sale of these Class A Units and Class B Units was $2,500,000, or $118.91 per unit. These securities were sold for cash consideration, and there were no underwriting discounts, sales commissions, or brokerage fees applied or paid in the transaction.

These sales were consummated in reliance on the exemption from registration found in Rule 506(b) of Regulation D, promulgated by the SEC under the Securities Act. The facts relied upon to make the exemption available are that (a) the securities were offered and sold exclusively to accredited investors, as such term is defined in Rule 501 of Regulation D; (b) no general solicitations were made in connection with the offer or sale of the securities; (c) the securities bear the required statutory legend prescribing the restrictions on transfer and resale applicable to the securities as required by Section 502 of Regulation D; (d) none of the “bad actor” disqualification events contained in Rule 506(d) of Regulation D apply to any pertinent person or entity in the offering; and (e) the Company filed the Form D notice, and all other necessary notices, in a timely manner with all applicable securities regulators, both state and federal.

None.

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