Lincolnway Energy 10Q 2018 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	March 31, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______________________ to _______________________

Commission File Number: 000-51764

LINCOLNWAY ENERGY, LLC

Exact name of registrant as specified in its charter)



Iowa	20-1118105
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

59511 W. Lincoln Highway, Nevada, Iowa	50201
(Address of principal executive offices)	(Zip Code)

515-232-1010

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



	Large accelerated filer o	Accelerated filer o

	Non-accelerated filer þ	Smaller reporting company o

		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 42,049 membership units outstanding at May 11, 2018.

LINCOLNWAY ENERGY, LLC

FORM 10-Q

For the Quarter Ended March 31, 2018

INDEX



			Page

Part I.	Financial Information

	Item 1.	Unaudited Financial Statements

		a) Balance Sheets	2
		b) Statements of Operations	4
		c) Statements of Cash Flows	5
		d) Notes to Unaudited Financial Statements	6

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	27

Part II.	Other Information

	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.	Defaults Upon Senior Securities	28
	Item 4.	Mine Safety Disclosures	28
	Item 5.	Other Information	28
	Item 6.	Exhibits	29

Signatures			30

Exhibits Filed With This Report
	Rule 13a-14(a) Certification of President and Chief Executive Officer		E-1
	Rule 13a-14(a) Certification of Director of Finance		E-2
	Section 1350 Certification of President and Chief Executive Officer		E-3
	Section 1350 Certification of Director of Finance		E-4
	Interactive Data Files (filed electronically herewith)

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements.

Lincolnway Energy, LLC

Balance Sheets



	March 31, 2018			September 30, 2017
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	328,344		$	690,513
Derivative financial instruments (Note 7 and 8)	763,480			428,666
Trade and other accounts receivable (Note 6)	2,588,128			3,229,474
Inventories (Note 3)	7,167,490			5,684,729
Prepaid expenses and other	277,568			375,787
Total current assets	11,125,010			10,409,169

PROPERTY AND EQUIPMENT
Land and land improvements	7,148,360			7,148,360
Buildings and improvements	3,227,783			3,220,876
Plant and process equipment	82,498,968			80,951,321
Office furniture and equipment	479,896			473,517
Construction in progress	13,469,002			6,178,622
	106,824,009			97,972,696
Accumulated depreciation	(60,059,887		)	(58,027,513		)
Total property and equipment	46,764,122			39,945,183

OTHER ASSETS	827,797			818,971

Total assets	$	58,716,929		$	51,173,323

See Notes to Unaudited Financial Statements.

Lincolnway Energy, LLC

Balance Sheets (continued)



	March 31, 2018		September 30, 2017
	(Unaudited)
LIABILITIES AND MEMBERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$2,323,866		$3,276,755
Accounts payable, related party (Note 5)	213,826		642,726
Accrued expenses	923,739		1,313,244
Total current liabilities	3,461,431		5,232,725

NONCURRENT LIABILITIES
Long-term debt, less current maturities (Note 4)	14,750,000		3,000,000
Deferred revenue	370,370		444,444
Other	528,905		498,516
Total noncurrent liabilities	15,649,275		3,942,960

COMMITMENTS AND CONTINGENCIES (Notes 6)

MEMBERS' EQUITY
Member contributions, 42,049 units issued and outstanding	38,990,105		38,990,105
Retained earnings	616,118		3,007,533
Total members' equity	39,606,223		41,997,638

Total liabilities and members' equity	$	58,716,929	$	51,173,323

Lincolnway Energy, LLC

Statements of Operations



	Three Months Ended						Six Months Ended
	March 31, 2018			March 31, 2017			March 31, 2018			March 31, 2017
	(Unaudited)						(Unaudited)
Revenues (Notes 2 and 6)	$	26,788,654		$	27,316,985		$	49,258,782		$	55,878,701

Cost of goods sold (Note 6)	26,495,320			26,185,059			49,272,643			51,550,023

Gross profit (loss)	293,334			1,131,926			(13,861		)	4,328,678

General and administrative expenses	783,759			826,092			1,729,518			1,583,011

Operating income (loss)	(490,425		)	305,834			(1,743,379		)	2,745,667

Other income (expense):
Interest income	21,931			498			21,931			983
Interest expense	—			(6,586		)	—			(29,374		)
Other income	75,325			—			381,258			—
	97,256			(6,088		)	403,189			(28,391		)

Net income (loss)	$	(393,169	)	$	299,746		$	(1,340,190	)	$	2,717,276

Weighted average units outstanding	42,049			42,049			42,049			42,049

Net income (loss) per unit - basic and diluted	$	(9.35	)	$	7.13		$	(31.87	)	$	64.62

Distributions per unit - basic and diluted	$	—		$	—		$	25.00		$	—

See Notes to Unaudited Financial Statements.



Lincolnway Energy, LLC	Six Months Ended			Six Months Ended
Statements of Cash Flows	March 31, 2018			March 31, 2017
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(1,340,190	)	$	2,717,276
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	2,055,078			1,894,113
Loss on disposal of property and equipment	24,260			10,417
Gain on equity dividend	(7,518		)	(3,614		)
Changes in working capital components:
Trade and other accounts receivable	641,346			192,955
Inventories	(1,482,761		)	451,225
Prepaid expenses and other	127,300			121,921
Accounts payable	(1,811,000		)	(1,436,466		)
Accounts payable, related party	(428,900		)	(193,435		)
Accrued expenses and deferred revenue	(254,229		)	56,594
Derivative financial instruments	(334,814		)	132,971
Net cash provided by (used in) operating activities	(2,811,428		)	3,943,957

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(8,249,516		)	(4,778,470		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings	38,250,000			28,550,000
Payments on long-term borrowings	(26,500,000		)	(27,977,571		)
Member distributions	(1,051,225		)	—
Net cash provided by financing activities	10,698,775			572,429

Net (decrease) in cash and cash equivalents	(362,169		)	(262,084		)

CASH AND CASH EQUIVALENTS
Beginning	690,513			613,139
Ending	$	328,344		$	351,055

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION, cash paid for interest, including capitalized interest for 2018 of $124,157 and 2017 of none	$	124,157		$	10,388

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Construction in progress included in accounts payable	$	1,041,111		$	295,805
Construction in progress included in accrued expenses	13,459			19,864

See Notes to Unaudited Financial Statements.

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements

_____________________________________________________________________________________________________

Note 1. Nature of Business and Significant Accounting Policies

Principal business activity: Lincolnway Energy, LLC (the "Company"), located in Nevada, Iowa, was formed in May 2004 to build and operate a 50 million gallon annual production dry mill corn-based ethanol plant. The Company began making sales on May 30, 2006 and became operational during the quarter ended June 30, 2006. The Company is directly influenced by commodity markets and the agricultural and energy industries and, accordingly, its results of operations and financial condition may be significantly affected by cyclical market trends and the regulatory, political and economic conditions in these industries.

Basis of presentation and other information: The balance sheet as of September 30, 2017 was derived from the Company's audited balance sheet as of that date. The accompanying financial statements as of March 31, 2018 and for the three and six months ended March 31, 2018 and 2017 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the year ended September 30, 2017 contained in the Company's Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Although the Company maintains its cash accounts in one bank, the Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Trade accounts receivable: Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering customers financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables written off are recorded when received. A receivable is considered past due if any portion of the receivable is outstanding more than 90 days. There was no allowance for doubtful accounts balance as of March 31, 2018 and September 30, 2017.

Inventories: 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.

Derivative financial instruments: The Company periodically enters into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales. The Company does not typically enter into derivative instruments other than for hedging purposes. All the derivative contracts are recognized on the balance sheet at their fair market value. Although the Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes. Accordingly, any realized or unrealized gain or loss related to corn and natural gas derivatives is recorded in the statement of operations as a component of cost of goods sold. Any realized or unrealized gain or loss related to ethanol derivative instruments is recorded in the statement of operations as a component of revenue. The Company reports all contracts with the same counter party on a net basis on the balance sheet. Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company’s financial statements, but are subject to a lower of cost or market assessment.

Revenue recognition: Revenue from the sale of the Company’s ethanol and distillers grains is recognized at the time title and all risks of ownership transfer to the customers. This generally occurs upon the loading of the product. For ethanol, title passes at the time the product crosses the loading flange in either a railcar or truck. For distillers grain, title passes upon the loading into trucks or railcars. 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.

Deferred revenue: Deferred revenue represents fees received under a service agreement in advance of services being performed. The related revenue is deferred and recognized as the services are performed over the 10 year agreement.

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Income taxes: The Company is organized as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, the Company’s earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

Earnings per unit: Basic and diluted net income (loss) per unit have been computed on the basis of the weighted average number of units outstanding during each period presented.

Recently Issued Accounting Pronouncements: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for the Company on October 1, 2018. The Company is currently evaluating the potential impact that Topic 606 may have on the financial position and results of operations, however at this time we do not believe the adoption will have a material effect on the financial statements.

In February 2016, FASB issued ASU No. 2016-2 "Leases" ("ASU 2016-02"). ASU 2016-02 requires the recognition of operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. The Company is evaluating the impact it will have on the financial statements.

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements

Note 2. Revenues

Components of revenues are as follows:



	Three Months Ended				Six Months Ended
	March 31, 2018		March 31, 2017		March 31, 2018		March 31, 2017
Ethanol, net of hedging gain (loss)	$	20,251,712	$	21,988,544	$	37,126,033	$	45,120,148
Distillers Grains	4,759,804		3,388,441		8,435,280		6,989,357
Other	1,777,138		1,940,000		3,697,469		3,769,196
Total	$	26,788,654	$	27,316,985	$	49,258,782	$	55,878,701

Note 3. Inventories

Inventories consist of the following:



	March 31, 2018		September 30, 2017

Raw materials, including corn, chemicals and supplies	$	5,055,548	$	4,166,618
Work in process	743,673		773,978
Ethanol and distillers grains	1,368,269		744,133
Total	$	7,167,490	$	5,684,729

Note 4. Long-Term Debt

The Company has a revolving term loan, with a bank, available for up to $21,000,000. Borrowings will be reduced by $3,600,000 every year starting July 1, 2019 until July 1, 2024 when the loan expires. The Company will pay interest on the unpaid balance at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.15%. The Company also pays a commitment fee on the average daily unused portion of the loan at the rate of .50% 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 master agreement. There were outstanding borrowings of $14,750,000 and $3,000,000, respectively, on the revolving term loan at March 31, 2018 and September 30, 2017.

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements

Note 5. Related-Party Transactions

The Company had the following related-party activity with members during the three and six months ended March 31, 2018 and 2017:



Corn Commitment:
March 31, 2018

	Corn Forward Purchase Commitment		Basis Corn Commitment (Bushels)	Commitment Through	Amount Due
Related Parties	$	1,707,326	1,630,000	April 2019	$	213,826



Corn Purchased:
	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017		Six Months Ended March 31, 2018		Six Months Ended March 31, 2017
Related Parties	$	11,992,132	$	10,015,232	$	19,921,289	$	19,651,606

Note 6. Commitments and Major Customers

The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the ethanol produced by the Company. Revenues from this entity were $20,313,536 and $37,139,032, respectively, for the three and six months ended March 31, 2018. Revenues with this entity were $21,915,972 and $45,272,635, respectively for the three and six months ended March 31, 2017. Trade accounts receivable of $1,369,872 were due from this entity as of March 31, 2018. As of March 31, 2018, the Company had ethanol unpriced sales commitments with this entity of approximately 11.6 million gallons through June 2018.

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 $4,759,804 and $8,435,280, respectively, for the three and six months ended March 31, 2018. Revenues with this entity were $3,388,441 and $7,148,895, respectively, for the three and six months ended March 31, 2017. The Company sells corn oil to this entity as a third party broker independent of its agreement with the entity relating to distillers grain sales. Trade accounts receivable of $658,522 were due from this entity as of March 31, 2018. The Company had distillers grain sales commitments with this entity of approximately 4,758 tons, for a total sales commitment of approximately $694,104.

As of March 31, 2018, the Company had purchase commitments for corn forward contracts with various unrelated parties, totaling approximately $5.4 million. These contracts mature at various dates through June 2019. The Company also had basis contract commitments with unrelated parties to purchase 81,000 bushels of corn. These contracts mature at various dates through December 2018.

The Company has an agreement with an unrelated party for the transportation of natural gas to the Company's ethanol plant. Under the agreement, the Company is committed to future monthly usage fees totaling approximately $3.6 million over the 10 year term which commenced in November 2014. The Company assigned an irrevocable standby letter of credit to the counter-party to stand as security for the Company's obligation under the agreement maturing May 2021. The letter of credit will be reduced over time as the Company makes payments under the agreement. At March 31, 2018, the remaining commitment was approximately $1.9 million.

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements

_____________________________________________________________________________________________________

As of March 31, 2018, the Company had purchase commitments for natural gas basis contracts with an unrelated party totaling 309,600 MMBtu's maturing at various dates through October 2018.

The Company signed contracts with unrelated parties for the installation of a grain drying and cooling system. The total commitments are for $11.6 million plus a potential performance bonus of $450,000. The Company made progress payments of $9.7 million under this contract through March 31, 2018. The remaining payments will be made as invoiced throughout the life of the project. The project is estimated to be completed in the third quarter of fiscal year 2018.

The Company has an agreement with an unrelated party for fermentation expansions. The total commitment is for $2.5 million. Through March 31, 2018, the Company made progress payments of $.6 million. The remaining payments will be made as invoiced throughout the life of the project. The project is estimated to be completed in the fourth quarter of fiscal year 2018.

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements

Note 7. Risk Management

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:



	March 31, 2018			September 30, 2017
Derivative assets - corn contracts	$	74,163		$	506,187
Derivative assets - ethanol contracts	8,631			—
Derivative liabilities - corn contracts	(214,738		)	(275		)
Derivative liabilities - ethanol contracts	—			(12,310		)
Derivative liabilities - natural gas contracts	—			(1,980		)
Cash held by (due to) broker	895,424			(62,956		)
Total	$	763,480		$	428,666

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements

The effects on operating income from derivative activities are as follows:



	Three Months Ended						Six Months Ended
	March 31, 2018			March 31, 2017			March 31, 2018			March 31, 2017
Gains (losses) in revenues due to derivatives related to ethanol sales:
Realized (loss)	$	(54,180	)	$	(124,170	)	$	(21,630	)	$	(213,672	)
Unrealized gain (loss)	(7,644		)	196,742			8,631			61,185
Total effect on revenues	(61,824		)	72,572			(12,999		)	(152,487		)

Gains (losses) in cost of goods sold due to derivatives related to corn costs:
Realized gain	45,525			589,775			420,725			1,184,481
Unrealized (loss)	(681,838		)	(451,025		)	(646,488		)	(1,012,163		)
Total effect on corn cost	(636,313		)	138,750			(225,763		)	172,318
Gains in cost of goods sold due to derivatives related to natural gas costs:
Realized gain (loss)	(11,840		)	(16,620		)	30,939			2,990
Unrealized gain (loss)	(7,010		)	—			14,290			—
Total effect on natural gas cost	(18,850		)	(16,620		)	45,229			2,990
Total effect on cost of goods sold	(655,163		)	122,130			(180,534		)	175,308
Total gain (loss) due to derivative activities	$	(716,987	)	$	194,702		$	(193,533	)	$	22,821

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 market assessment.

Note 8. Fair Value Measurements

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

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements



Level 1 -	Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 -	Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

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.

Derivative financial instruments: Commodity futures and exchange-traded commodity options 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 CME and NYMEX markets. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and September 30, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	March 31, 2018
	Total		Level 1		Level 2		Level 3
Assets, derivative financial instruments	$	82,794	$	82,794	$	—	$	—

Liabilities, derivative financial instruments	$	214,738	$	214,738	$	—	$	—

	September 30, 2017
	Total		Level 1		Level 2		Level 3
Assets, derivative financial instruments	$	506,187	$	506,187	$	—	$	—

Liabilities, derivative financial instruments	$	14,565	$	14,565	$	—	$	—

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussion and analysis provides information which management of Lincolnway Energy, LLC (the “Company”, “we,” “us,” and “our”) believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year ended September 30, 2017 ("Fiscal 2017") including the financial statements, accompanying notes and the risk factors contained herein.

Cautionary Statement on Forward-Looking Statements

Various discussions and statements in this quarterly report are or contain forward-looking statements that express our current beliefs, forecasts, projections and predictions about future events. All statements other than statements of historical fact are

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

Actual future performance, outcomes and results may differ materially from those suggested by or expressed in forward-looking statements as a result of numerous and varied factors, risks and uncertainties, some that are known and some that are not, and many of which are beyond the control of the Company and its management. We cannot guarantee our future results, performance or business conditions, and strong or undue reliance must not be placed on any forward-looking statements, which speak only as of the date of this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by the Company include:


•	Changes in the availability and price of corn and natural gas;


•	Negative impacts resulting from reductions in, or other modifications to, the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency;


•	Changes in federal mandates relating to the blending of ethanol with gasoline, including, without limitation reductions to, or the elimination of, the Renewable Fuel Standard volume obligations;


•	The potential for additional ethanol demand through higher level blends of ethanol, including E15 and E85;


•	The inability to comply with the covenants and other requirements of our various loan agreements;


•	Negative impacts that hedging activities may have on our operations or financial condition;


•	Decreases in the market prices of ethanol, distillers grains and corn oil;


•	Ethanol supply exceeding demand and corresponding ethanol price reductions;


•	Changes in the environmental regulations that apply to our plant operations;


•	Changes in plant production capacity or technical difficulties in operating the plant;


•	Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;


•	Changes in other federal or state laws and regulations relating to the production and use of ethanol;


•	Changes and advances in ethanol production technology;


•	Competition from larger producers as well as from alternative fuel additives;


•	Changes in interest rates and lending conditions of the loan covenants in the Company loan agreements;


•	Negative impacts resulting from recent tax reform legislation;


•	Volatile commodity and financial markets;


•	Disruptions, failures or security breaches relating to our information technology infrastructure; and


•	Negative impacts of higher ethanol tariffs and other disruptions to international agricultural trade related to current trade actions announced by the Trump administration and responsive actions announced by trading partners; and


•	Decreased export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distillers grains produced in the United States.

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, 2017 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 party brokers within the domestic market.

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

We expect to fund our operations during the next 12 months using cash flow from continuing operations and the revolving term loan that is available to us.

Recent Events

Effective February 23, 2018, we entered into an amendment (the “Amendment”) to our Credit Agreement (the “Credit Agreement”) with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, the “Lender”) dated July 3, 2017. CoBank, ACB (“CoBank”) continues to have a participation interest in the underlying loans issued under the Credit Agreement and continues to serve as administrative agent for the Credit Agreement. The Amendment modifies the Credit Agreement to add an additional financial fiscal year covenant requiring Debt Service Coverage Ratio of not less than 1.50 to 1.00 at the end of each of the Company’s fiscal years. Under the Amendment, Debt Service Coverage Ratio is defined as: (a) net income (after taxes), plus depreciation and amortization, minus non-cash investment income (plus loss), minus extraordinary gains (plus losses), minus gains (plus loss) on asset sale; divided by (b) $3,600,000 (all as determined in accordance with the Accounting Standards).

In connection with the execution of the Amendment, we entered into an Amended and Restated Revolving Term Promissory Note dated February 23, 2018 with the Lender (the “Restated Revolving Term Note”) which amended, restated and superseded the Revolving Term Promissory Note dated July 3, 2017 (the “Prior Revolving Term Note”). The Restated Revolving Term Note amends the Prior Revolving Term Note to increase the aggregate principal amount that Lender may loan to us under the Restated Revolving Term Note from $18,000,000 to $21,000,000 and to amend the maximum commitment amount reduction schedule as follows:



Maximum Commitment Amount	From	Up to and Including
$17,400,000	July 1, 2019	June 30, 2020
$13,800,000	July 1, 2020	June 30, 2021
$10,200,000	July 1, 2021	June 30, 2022
$6,600,000	July 1, 2022	June 30, 2023
$3,000,000	July 1, 2023	July 1, 2024

The Restated Revolving Term Note expires on July 1, 2024. All other terms and conditions set forth in the Restated Revolving Term Note remain the same as set forth in the Prior Revolving Term Note. As of March 31, 2018, the outstanding amount payable by the Company under the Restated Revolving Term Note was $14,750,000.

In connection with the execution of the Credit Agreement, we also entered into an Amended and Restated Letter of Credit Promissory Note dated February 23, 2018 with the Lender (the “Restated Letter of Credit Note”) which amended, restated and superseded the Revolving Letter of Credit Promissory Note dated July 3, 2017 (the “Prior Letter of Credit Note”) to reduce the aggregate principal amount the Lender may loan us under the Restated Letter of Credit Note from $2,134,000 to $1,937,400 to reflect payments made by the Company against the Prior Letter of Credit Note. All other terms and conditions set forth in the Restated Letter of Credit Note remain the same as set forth in the Prior Letter of Credit Note. As of March 31, 2018, the outstanding amount committed by the Company under the Restated Letter of Credit Note was approximately $1.9 million.

Tax Cuts and Jobs Act

On December 22, 2017, the H.R. 1, originally known as the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), was signed into law. The 2017 Tax Reform Act includes significant changes to the taxation of business entities, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective in 2018 and changes in the deductibility of interest on debt obligations. The Company is currently evaluating the impact of the 2017 Tax Reform Act, as well as potential future regulations implementing the new tax law and interpretations of the new tax law with its professional advisers. The full impact of the Tax Act on the Company in future periods cannot be predicted at this time.

Renewable Fuel Standard

The ethanol industry is dependent on the Federal Renewable Fuels Standard (the “RFS”) , a federal ethanol support and economic incentive which mandates ethanol use, and the RFS continues to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

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

Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. On July 5, 2017, the EPA released a proposed rule to set the 2018 renewable volume requirements which would set the annual volume requirement for renewable fuel at 19.24 billion gallons of renewable fuels per year (the “Proposed 2018 Rule”). On November 30, 2017, the EPA issued the final rule for 2018 which varied only slightly from the Proposed 2018 Rule with the annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year (the "Final 2018 Rule"). Although the volume requirements set forth in the Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the final 2017 renewable fuel volume requirements, the 2018

volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.

Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed volume requirements are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 volume requirements are also more than 20% below statutory levels, the reset will be triggered under the RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022.

On October 19, 2017, EPA Administrator Pruitt issued a letter to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS, among other topics, he stated the EPA is actively exploring its authority to remove arbitrary barriers to the year-rounds use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption and that the EPA will not pursue regulations to allow ethanol exports to generate renewable identification numbers (“RINs”). In addition, on April 12, 2018, as part of a series of meetings focused on RIN prices and E15 year-round sales involving President Trump, Senators, key federal agency and industry leaders, President Trump indicated that EPA would be moving forward to authorize year-round sales of E15 by rulemaking designed to address the waiver that currently inhibits sales of E15 in certain markets during summer driving months. The letter and these statements represent actions that would likely have a positive impact on the ethanol industry either directly or indirectly.

The letter also stated that the EPA would soon finalize a decision to deny the request to change the point of obligation for renewable identification numbers, or RINs, from refiners and importers to blenders. The EPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences purchasing decisions by obligated parties. Consistent with the position in his letter, on November 22, 2017, the EPA issued a Notice of Denial of Petitions for rulemaking to change the RFS point of obligation which resulted in the EPA confirming the point of obligation will not change.

Legal challenges are underway to the EPA's recent reductions in the RFS volume requirements, including the Final 2018 Rule as well as the denial of petitions to change the RFS point of obligation. If the EPA's decision to reduce the volume requirements under the RFS is allowed to stand if the volume requirements are further reduced, or if the RFS point of obligation were changed, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Although the release of the Final 2018 Rule and the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol together with the letter issued by Administrator Pruitt and the resulting actions taken by the EPA consistent with Administrator Pruitt’s letter signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

Further uncertainty results from the recently revealed EPA grants of a number of small refiner exemptions from the volume purchase requirements of the RFS, as well as an exemption granted to a refiner as part of bankruptcy proceedings. The joint impact of large increased in small refiner waivers granted by the EPA and the expected reduction in Chinese imports has had a very negative impact on ethanol D6 RINs prices. RINs prices have fallen by over 60%, largely removing a powerful blending incentive from the ethanol marketplace.

Executive Summary

Highlights for the three months ended March 31, 2018, are as follows:

•Total revenues decreased 1.9%, or $.5 million, compared to the 2017 comparable period.

•Total cost of goods sold increased 1.2%, or $.3 million, compared to the 2017 comparable period.

•Net (loss) was approximately -$.4 million, which was a decrease of $.7 million when compared to the net income of $.3 million for the 2017 comparable period.

The Company entered into agreements with third parties for the installation of a grains drying and cooling system. The total commitments are for $11.6 million plus a potential performance bonus of $450,000. The Company made progress payments of $9.7 million under this contract as of March 31, 2018. The remaining payments will be made as invoiced throughout the life of the project. The project is estimated to be completed in the third quarter of fiscal year 2018. This new drying and cooling system will aid in our development of a new high quality species specific animal feed which we have branded as PureStream™ protein. We currently intend to market this new product to the growing swine and poultry markets in Iowa. When compared to traditional distillers grains, our new PureStream™ protein animal feed products are expected to be higher in crude protein and richer in the essential amino acids that drive growth in swine and poultry.

Results of Operations

The following table shows the results of operations and the percentages of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three and six months ended March 31, 2018 and 2017 (dollars in thousands):



	Three Months Ended March 31,										Six Months Ended March 31,
	(Unaudited)										(Unaudited)
Income Statement Data	2018					2017					2018					2017

Revenue	$26,789			100.0	%	$27,317			100.0	%	$49,259			100.0	%	$55,879			100.0	%
Cost of goods sold	26,495			98.9	%	26,185			95.9	%	49,272			100.0	%	51,550			92.3	%
Gross profit (loss)	294			1.1	%	1,132			4.1	%	(13		)	—	%	4,329			7.7	%
General and administrative expenses	784			2.9	%	826			3.0	%	1,730			3.5	%	1,584			2.8	%
Operating income (loss)	(490		)	(1.8	)%	306			1.1	%	(1,743		)	(3.5	)%	2,745			4.9	%
Other income (expense), net	97			0.4	%	(6		)	—	%	403			0.8	%	(28		)	(0.1	)%
Net income (loss)	$	(393	)	(1.4	)%	$	300		1.1	%	$	(1,340	)	(2.7	)%	$	2,717		4.8	%

Results of Operations for the Three Months Ended March 31, 2018 as Compared to the Three Months Ended March 31, 2017

Revenues. Total revenues decreased by 1.9% for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. Ethanol sales decreased by 7.3% and sales from co-products increased by 22.7% for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The change in ethanol revenue was a result of a 8.0% decrease in the price per gallon received which was partially offset by a 1.1% increase in sales volume for the three months ended March 31, 2018, when compared to the three months ended March 31, 2017. Ethanol prices decreased due to relatively high inventories in the domestic market coupled with ongoing record production of ethanol. Our sales volume increased due to better production rates with the implementation of new process improvements. Ethanol revenue for the three months ended March 31, 2018 also included a $61,824 net loss for ethanol derivatives, compared to a $72,572 net gain in the same quarter for the prior period.

Sales from co-products increased by 22.7% for the three months ended March 31, 2018 from the three months ended March 31, 2017. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide. The change in co-product sales was primarily due to a $1.1 million increase in distillers grain revenue. Distillers grain revenue increased as market prices increased in response to increased export demand as Argentina, the world's biggest meal exporter, suffers from continued drought.

Cost of goods sold. Cost of goods sold increased by 1.2% or approximately $.3 million, for the three months ended March 31, 2018 from the three months ended March 31, 2017. The increase was primarily due to increases in corn costs, ingredients and depreciation. Cost of goods sold includes corn costs, process chemicals, denaturant, natural gas costs, electricity, production labor, repairs and maintenance, and depreciation.

Corn costs, including hedging, increased $90,478 or .5% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was due to hedging losses which were partially offset by reduced bushels consumed with improved production yields as well as a 1.5% decrease in corn prices. For the three months ended March 31, 2018 corn costs included a $.6 million net loss for derivatives relating to corn costs, compared to a $.1 million net gain in the same quarter for the prior year. Corn costs represented 71.3% of cost of goods sold for the three months ended March 31, 2018, compared to 71.8% for the three months ended March 31, 2017.

Ingredient costs increased approximately 10.9% or $.2 million for the three months ended March 31, 2018 from the three months ended March 31, 2017. The increase was due to switching to higher priced process chemicals as required by government regulations for animal food.

Depreciation totaled approximately $.9 million an increase of $.1 million for the three months ended March 31, 2018 from the three months ended March 31, 2017. The increase in depreciation resulted from the installation of the first piece of equipment in the PureStream™ Protein project. This piece of equipment is part of the first phase of the process. The project is expected to be complete in the third quarter for fiscal year 2018.

General and administrative costs decreased by $42,333 or 5.1% for the three months ended March 31, 2018 from the three months ended March 31, 2017. The decrease is due to higher legal fees and farming expenses as well as certain relocation fees during the three months ended March 31, 2017.

Results of Operations for the Six Months Ended March 31, 2018 as Compared to the Six Months Ended March 31, 2017

Revenues. Revenues decreased by $6.6 million, or 11.8%, for the six months ended March 31, 2018 from the six months ended March 31, 2017. Ethanol sales decreased $8.1 million, or 18.0%, for the six months ended March 31, 2018 from the six months ended March 31, 2017. The change in ethanol revenue was a result of a 15% decrease in the price per gallon received as well as a 4.0% decrease in sales volume for the six months ended March 31, 2018, when compared to the six months ended March 31, 2017. Ethanol prices decreased due to relatively high inventories in the domestic market coupled with ongoing record production of ethanol. Due to EPA regulations, the Company was limited on the number of RINs it could generate in the calendar year. RINs are sold in conjunction with ethanol gallons. In order to stay compliant, during the first quarter of fiscal year 2018, the Company built up inventory levels and sales volume decreased as a result. Inventory levels remained high at the end of the second quarter of fiscal year 2018. The six months ended March 31, 2018 also included a $12,999 net loss for derivatives related to ethanol sales, compared to a $152,487 net loss in the prior period.

Sales from co-products increased by 12.8%, or $1.4 million, for the six months ended March 31, 2018 from the six months ended March 31, 2017. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide. Co-product revenue increased primarily due to a 17.8% increase in dried distillers grains revenue for the six months ended March 31, 2018 from the six months ended March 31, 2017. Distillers grain revenue increased as market prices climbed in response to increased export demand as Argentina, the world's biggest meal exporter, suffers from continued drought.

Cost of goods sold. Cost of goods sold decreased by 4.4% or $2.3 million for the six months ended March 31, 2018 from the six months ended March 31, 2017. The decrease was primarily due to decreases in corn costs, natural gas and railcar expense. Increases in other categories were fairly small and considered immaterial. Cost of goods sold includes corn costs, process chemicals, denaturant, natural gas, electricity, production labor, repairs and maintenance, and depreciation.

Corn costs, including hedging, decreased by $1.8 million, or 5.0%, for the six months ended March 31, 2018 from the six months ended March 31, 2017. The decrease was due to a 1.8% decrease in corn prices, reduced production due to EPA RIN regulations and improved yields in production. For the six months ended March 31, 2018, corn costs included a $.2 million net loss for derivatives relating to future contracts, compared to a $.2 million gain for the six months ended March 31, 2017. Corn costs represented 69.2% of cost of goods sold for the six months ended March 31, 2018, compared to 69.6% for the six month March 31, 2017.

Natural gas costs decreased approximately 5.5% or $.2 million for the six months ended March 31, 2018 from the six months ended March 31, 2017. The decrease was due to lower natural gas prices, running the plant more efficiently at higher yields and lower production levels.

Railcar expenses decreased approximately $.3 million, or 25.5% for the six months ended March 31, 2018 from the six months ended March 31, 2017. The decrease is due to inspection and cleaning costs in previous year during the transition of old leases to new leases. The number of railcars leased was also reduced.

General and administrative costs increased by $.1 million or 9.3% for the six months ended March 31, 2018 from the six months ended March 31, 2017. The increase is due to additional legal fees related to environmental permits as well as research and development costs.

Other income increased $.4 million for the six months ended March 31, 2018 from the six months ended March 31, 2017. The increase is due to a settlement payment received by Lincolnway Energy in a litigation matter.

Industry Factors that May Affect Future Operating Results

During the three months ended March 31, 2018, the ethanol industry experienced steady ethanol production margins as a result of a combination of factors including the following:

•Corn prices were firm during the three months ended March 31, 2018. The price per bushel rallied for most of the quarter as the market measured the impact of a severe drought in Argentina and a dramatic acceleration in U.S. export sales. The market was further concerned about a potential reduction in U.S. corn plantings, which was confirmed by the U.S. Department of Agriculture (the “USDA”) in their March 31, 2018 planting intentions report. Farmer selling increased on the price rally and corn basis fell to historically low levels for the quarter.

•The latest estimates of supply and demand provided by the USDA held steady with 2017 ending corn stocks of 2.3 billion bushels and reduced 2018 ending corn stocks by almost 15% from over 2.4 billion bushels down to 2.1 billion bushels, reflecting improved export prospects and increasing upside price risks. In response to these estimates, corn prices rose.

•Gasoline demand during the beginning of the first quarter of fiscal year 2018 started on a somewhat weak note. But ethanol usage was 5% above the very weak consumption during the first quarter of 2017. This allowed a modest ethanol price rally to ensue. With ongoing economic growth and low unemployment, gasoline demand could improve modestly and result in a corresponding increase in ethanol demand.

•Robust export sales of U.S. ethanol to a variety of foreign consumers continued as a result of firm petroleum prices and competitive U.S. ethanol prices. Global ethanol demand as reported by the U.S. Department of Energy’s Energy Information Administration (the “EIA”) continues to increase with increased exports to various foreign markets, including China, Canada and Mexico, in response to higher blending mandates and octane demand within the foreign countries. Net ethanol exports of U.S. ethanol in calendar year 2017 were 33% higher than exports during 2016. However, the expectations for net ethanol exports in 2018 are less optimistic and are unlikely to surpass 2017. After China made a surprise return to the market in the fourth quarter of calendar 2017, in response to the tariffs imposed by the Trump administration, the Chinese reversed course. During March 2018, China imposed an additional retaliatory tariff on ethanol imports of 15%, bringing the total tariff up to 45%. Brazilian demand from the U.S. remained steady. Management currently anticipates, at least in the short term, exports to Brazil will remain steady despite the tariff imposed in 2017. High gasoline prices and low ethanol supplies within Brazil should continue to support the flows from the U.S. to that country. Despite China’s National Development and Reform Commission, the National Energy Board and 15 other state departments efforts to expand the use and production of biofuels containing up to 10% ethanol by 2020, political considerations will predominate in the short run. China had been one of the top 3 importers of U.S. ethanol during the past 6 months. But there is now no assurance that the recently issued joint plan will lead to increased imports of U.S. ethanol by China. But any eventual increase in exports to China could have a positive impact on the ethanol market.

•Ethanol continues trading at a large discount to gasoline which has improved domestic and export demand somewhat, particularly among price opportunistic foreign buyers. Typically such an ethanol trading discount would also bolster the penetration of E15 blends in the domestic market. However, the joint impact of large increases in small refiner waivers granted by the EPA and the expected reduction in Chinese imports has had a very negative impact on ethanol prices for D6 RINs (the RINs associated with corn-based ethanol). RINS prices have fallen by over 60%, largely removing a powerful blending incentive from the ethanol marketplace.

•The EPA’s maintenance in the Final 2018 Rule of the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons appeared to signal continued support by the administration of the RFS for ethanol. However, given the EPA’s recent waivers of small refiner RFS obligations, the scale may have tilted in favor of “Big Oil”and the perceived investment risks for ethanol have likely increased.

•Despite the threats to export demand outlined above, the primary driving force moving our margins higher during the quarter was year over year increased domestic consumption. Year over year quarterly domestic demand increased nearly 5%. While export increases are helpful, domestic offtake constitutes 90% of overall demand, and when it improves the negative impacts of production increases are somewhat alleviated.

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.

Management currently believes that our margins will improve modestly during the remainder of the fiscal year ending September 30, 2018 (“Fiscal 2018”) but continued large old crop corn supplies and ethanol production capacity increases could have a negative impact

on the market price of ethanol which could adversely impact our profitability. This negative impact could worsen in the event that domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline further. The ethanol industry is currently experiencing growth in production capacity principally through plant optimization and some new construction. The EIA has reported that during 2017, increasing ethanol production rates outpaced domestic E10 gasoline demand and export growth, leading to elevated ethanol inventory levels. According to the EIA, as of December 31, 2017, weekly ending stocks of ethanol were 19% higher than the same time last year and 20% higher than the previous five-year average. But given the increases in both domestic demand and net exports during the first three months of 2018, ending stocks of ethanol on March 31, 2018 declined to 95% of the ending stocks on March 31, 2017. Although ethanol exports have provided some support for ethanol prices with the increase in export demand resulting from the lower domestic ethanol prices, if ethanol prices increase, this could negatively impact export demand. The adjustments in the renewable volume obligations and small refiner waivers granted by the EPA also may result in an oversupply of renewable fuel credits which could decrease demand for corn-based ethanol despite the increase back to statutory requirements set forth in the Final 2018 Rule. The Final 2018 Rule renewable volume requirements did not include any material growth and as a result, unless additional demand can be found in foreign or domestic markets, a continued level of current ethanol stocks or any increase in domestic ethanol supply could further adversely impact the price of ethanol.

Our margins have been, and could continue to be, negatively impacted due to the lower prices received for our distillers grains. During the first quarter of our 2018 distillers grains prices did improve as a result of rising world soybean meal prices which management believes is attributable to the Argentinian drought. Argentina is the third largest soybean producer in the world and a leading exporter of soybean meal. In addition to being an animal feed substitute for corn, distillers grains are increasingly considered a protein feed substitute for soybean meal. In 2018, strong protein meal prices have enabled distillers grains prices to rally versus corn, our basic raw material. Demand and prices for distillers grains may experience increases in the near term due to potential higher demand as a result of these higher protein meal prices raising the share of distillers grains in domestic rations. Also, management currently believes that the impact of the Chinese imposition of antidumping and countervailing duties on distillers grains produced in the U.S. has been fully absorbed into the current market and therefore should not result in further prices declines. In addition, other countries such as Mexico, Canada and South Korea have increased their imports of distillers grains. Management believes that the impact of reduced demand from China has been fully discounted in the market and that the adoption of distillers grains by other importers is positive for prices.

The Final 2018 Rule held steady the renewable volume requirements for advanced biofuels from the 2017 level and raised biomass based diesel by 100 million gallons. This could negatively impact the demand for corn oil as U.S. corn oil supplies are expected to grow by well in excess of 10%. World oilseed supplies are projected to be higher, but world soybean supplies are expected to contract modestly. The most important factor currently is the uncertainty about what the United States Government may do in regard to tariffs on a wide range of imports and the potential impact to international biodiesel flows. Large amounts of biodiesel often flow into the U.S. from Argentina and the Far East. While these flows have moderated, corn oil prices have moved to multiyear lows as U.S. production overwhelms corn oil biodiesel production capacity. Management sees little potential for an increase in corn oil prices given production increases and large trade flow uncertainty.

Credit and Counterparty Risks

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

Liquidity and Capital Resources

Based on the financial projections prepared by management, we anticipate that we will have sufficient cash from existing cash, our current credit facilities, and cash from operations to continue to operate the ethanol plant for the next 12 months. Management believes that an abundant corn supply will cause corn prices to remain near current levels and an anticipated increase in the supply of ethanol will cause ethanol prices to stay near current levels. Working capital was approximately $7.7 million as of March 31, 2018 and is projected to be sufficient with current cash balances and credit facilities available for the remainder of the fiscal year. Management continues to monitor our liquidity position on a weekly basis.

Our financial position and liquidity are, and will continue to be, influenced by a variety of factors, including, without limitation:


•	our ability to generate cash flows from operations;


•	the level of our outstanding indebtedness and the interest we are obligated to pay;


•	our capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies and expenditures for our new PureStream™ protein process; and


•	our margin maintenance requirements on all commodity trading accounts.

The following table summarizes our sources and uses of cash and cash equivalents from the unaudited statement of cash flows for the periods presented:



	Six Months Ended March 31,
	(Unaudited)
Cash Flow Data:	2018			2017
Net cash provided by (used in) operating activities	$	(2,811,428	)	$	3,943,957
Net cash (used in) investing activities	(8,249,516		)	(4,778,470		)
Net cash provided by financing activities	10,698,775			572,429
Net (decrease) in cash and cash equivalents	$	(362,169	)	$	(262,084	)

Cash Flow Provided by (Used in) Operations

For the six months ended March 31, 2018, net cash used in operating activities increased by $6.8 million when compared to net cash provided by operating activities for the six months ended March 31, 2017. The increase in cash used in operating activities is due to net loss and the timing in working capital components.

Cash Flow Used in Investing Activities

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant. Net cash used in investing activities increased by $3.5 million for the six months ended March 31, 2018 compared to the six months ended March 31 2017. The increase is due to initial progress payments on the installation of a grains drying and cooling system. The project is estimated to be completed in the third quarter of fiscal year 2018.

Cash Flow Provided by Financing Activities

Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash provided by financing activities increased by $10.1 million for the six months ended March 31, 2018 compared to the six months ended March 31, 2017. The increase is due to borrowings on our term revolver offset by distributions paid to members.

Critical Accounting Estimates and Accounting Policies

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

Revenue Recognition

Revenue from the sale of our ethanol and distillers grains is recognized at the time title and all risks of ownership transfer to the marketing company. This generally occurs upon the loading of the product. For ethanol, title passes from the Company at the time the product crosses the loading flange into either a railcar or truck. For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that the railcars have been loaded and are available for billing. For distillers grains, title passes upon the loading of distillers grains into trucks. Shipping and handling costs incurred by us for the sale of ethanol and distillers grain are included in 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.

We have an agreement with Gavilon to purchase all of the distillers grains produced at our ethanol plant. The purchase price payable to us is the corresponding price being paid to Gavilon for the distillers grains, less certain logistics costs and a service fee.

Derivative Instruments

We enter into derivative contracts to hedge our exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales. We do not typically enter into derivative instruments other than for hedging purposes. All future derivative contracts are recognized on the March 31, 2018 balance sheet at their fair value. Although we believe our derivative positions are economic hedges, none have been designated as a hedge for accounting purposes. Accordingly, any realized or unrealized gain or loss related to these derivative instruments is recorded in the statement of operations as a component of cost of goods sold for corn contracts and as a component of revenue for ethanol contracts.

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 and Lower of Cost or Market

Inventories are stated at the lower of net realizable value or actual cost using the first-in, first-out method. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Commodity Price Risk

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

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

In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions. We will generally not be able to pass along increased corn costs to our ethanol customers. We are subject to various material risks related to the availability and price of corn, many of which are beyond our control. For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture, and local, regional, national and international trade, demand and supply. If our corn costs were to increase $.10 per bushel from one year to the next, the impact on costs of goods sold would be approximately $2.3 million for the year, assuming corn use of 23 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.

During the quarter ended March 31, 2018, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $3.54 per bushel for May 2018 delivery to a high of $3.91 per bushel for May 2018 delivery. The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended March 31, 2017 ranged from a low of $3.54 per bushel for May 2017 delivery to a high of $3.87 per bushel for May 2017 delivery.

The average price we received for our ethanol during the three months ended March 31, 2018 was $1.27 per gallon, as compared to $1.38 per gallon during the three months ended March 31, 2017.

During the quarter ended March 31, 2018, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.37 per gallon for April 2018 delivery to a high of $1.54 per gallon for April 2018 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended March 31, 2017 ranged from a low of $1.47 per gallon for April 2017 delivery to a high of $1.65 per gallon for April 2017 delivery.

We may from time to time take various cash, futures, options or other positions in an attempt to minimize or reduce our price risks related to corn and ethanol. The extent to which we enter into such positions may vary substantially from time to time and based on various factors, including seasonal factors and our views as to future market trends. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn and ethanol markets are highly volatile and are influenced by many factors and occurrences that are beyond our control. We could incur substantial losses on our cash, futures, options or other positions.

Although we intend our futures and option positions to accomplish an economic hedge against our future purchases of corn or futures sales of ethanol, we have chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged. To avoid the higher costs associated with hedge accounting, we are instead using fair value accounting for the positions. Generally that means as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in our costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions. The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged. For example, our net loss on corn derivative financial instruments that was included in our cost of goods sold for the three months ended March 31, 2018 was $636,313, as opposed to a net gain of $138,750 for the three months ended March 31, 2017.

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, 2018 represented approximately 6.8% of our total cost of goods sold for that period.

Interest Rate Risk

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

We have entered into loan agreements, including an irrevocable letter of credit, with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, "Farm Credit"). The interest rate on the Farm Credit revolving term loan and irrevocable letter of credit is a variable interest rate based on the one-month LIBOR index plus 3.15%. We do not anticipate any significant increase in interest rates during Fiscal 2018.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our President and Chief Executive Officer and our Director of Finance (our principal financial officer), have evaluated the effectiveness of 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 President and Chief Executive Officer and our Director of Finance 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 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 Changes in Internal Control Over Financial Reporting

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. None of these matters, either individually or in the aggregate, currently is material to the Company except as reported in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2017, there were no material developments to such matters.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and in Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017 other than as provided below. Additional risks and uncertainties, including risk and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and results of operations.

Recent trade actions by the Trump Administration May Have an Adverse Effect on the Price of and Demand for Ethanol and Distiller's Grains and Negatively Affect Lincolnway Energy's Profitability.

We may experience impacts of higher ethanol tariffs and other disruptions to international agricultural trade related to current trade actions announced by the Trump administration and responsive actions announced by trading partners, including China.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are filed as part of this quarterly report.



Description of Exhibit			Page

10	10.1	Amendment dated February 23, 2018 to the Credit Agreement dated July 3, 2017 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA.	*
	10.2	Amended and Restated Revolving Term Promissory Note dated February 23, 2018 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA	*
	10.3	Amended and Restated Letter of Credit Promissory Note dated February 23, 2018 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA	*

31	Rule 13a-14(a)/15d-14(a) Certifications

	31.1	Rule 13a-14(a) Certification of President and Chief Executive Officer	E-1
	31.2	Rule 13a-14(a) Certification of Director of Finance	E-2

32	Section 1350 Certifications

	32.1	Section 1350 Certification of President and Chief Executive Officer †	E-3
	32.2	Section 1350 Certification of Director of Finance†	E-4

101	Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T)

* Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Committee on February 26, 2018.
† This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	LINCOLNWAY ENERGY, LLC

May 11, 2018	By:	/s/ Eric Hakmiller
	Name: Eric Hakmiller
	Title: President and Chief Executive Officer


May 11, 2018	By:	/s/ Kristine Strum
	Name: Kristine Strum
	Title: Director of Finance (Principal Financial Officer)

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Lincolnway Energy 10-Q2018 Q2 Quarterly report

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