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, 2021 |
or
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 every Interactive Data File required to be submitted 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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ | ||||||||||
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. | |||||||||||
Yes | ☐ | No | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes ☑ No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The number of units outstanding as of May 17, 2021 was 105,122 units consisting of 42,049 Common Units, 56,086 Class A Units and 6,987 Class B Units.
LINCOLNWAY ENERGY, LLC
FORM 10-Q
For the Quarter Ended March 31, 2021
INDEX
Page | |||||||||||
Part I. | Financial Information | ||||||||||
Item 1. | Unaudited Financial Statements | ||||||||||
a) Balance Sheets | |||||||||||
b) Statements of Operations | |||||||||||
c) Statements of Members' Equity | |||||||||||
d) Statements of Cash Flows | |||||||||||
e) Notes to Unaudited Financial Statements | |||||||||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||||||||
Item 4. | Controls and Procedures | ||||||||||
Part II. | Other Information | ||||||||||
Item 1. | Legal Proceedings | ||||||||||
Item 1A. | Risk Factors | ||||||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||||
Item 3. | Defaults Upon Senior Securities | ||||||||||
Item 4. | Mine Safety Disclosures | ||||||||||
Item 5. | Other Information | ||||||||||
Item 6. | Exhibits | ||||||||||
Signatures | |||||||||||
Exhibits Filed With This Report | |||||||||||
Rule 13a-14(a) Certification of President and Chief Executive Officer | E-1 | ||||||||||
Rule 13a-14(a) Certification of Interim Chief Financial Officer | E-2 | ||||||||||
Section 1350 Certification of President and Chief Executive Officer | E-3 | ||||||||||
Section 1350 Certification of Interim Chief Financial Officer | E-4 | ||||||||||
Interactive Data Files (filed electronically herewith) |
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements.
Lincolnway Energy, LLC
Balance Sheets
March 31, 2021 | September 30, 2020 | ||||||||||
(Unaudited) | |||||||||||
ASSETS | |||||||||||
CURRENT ASSETS | |||||||||||
Cash and cash equivalents | $ | 5,458,935 | $ | 7,201,372 | |||||||
Derivative financial instruments (Note 8 and 9) | 327,603 | 300,476 | |||||||||
Trade accounts receivable (Note 7) | 6,036,087 | 4,602,150 | |||||||||
Inventories (Note 3) | 9,444,233 | 7,245,700 | |||||||||
Prepaid expenses and other | 474,143 | 304,244 | |||||||||
Total current assets | 21,741,001 | 19,653,942 | |||||||||
PROPERTY AND EQUIPMENT | |||||||||||
Land and land improvements | 7,156,465 | 7,156,465 | |||||||||
Buildings and improvements | 7,558,860 | 7,558,860 | |||||||||
Plant and process equipment | 86,607,779 | 86,274,048 | |||||||||
Office furniture and equipment | 441,332 | 441,332 | |||||||||
Construction in progress | 7,084,948 | 6,796,507 | |||||||||
108,849,384 | 108,227,212 | ||||||||||
Accumulated depreciation | (72,658,088) | (70,352,374) | |||||||||
Total property and equipment | 36,191,296 | 37,874,838 | |||||||||
OTHER ASSETS | |||||||||||
Right of use asset operating lease, net (Note 7) | 6,204,643 | 7,179,272 | |||||||||
Other | 1,039,247 | 1,102,850 | |||||||||
Total other assets | 7,243,890 | 8,282,122 | |||||||||
Total assets | $ | 65,176,187 | $ | 65,810,902 |
See Notes to Unaudited Financial Statements.
2
Lincolnway Energy, LLC
Balance Sheets (continued)
March 31, 2021 | September 30, 2020 | ||||||||||
(Unaudited) | |||||||||||
LIABILITIES AND MEMBERS' EQUITY | |||||||||||
CURRENT LIABILITIES | |||||||||||
Accounts payable | $ | 1,668,800 | $ | 1,858,459 | |||||||
Accounts payable, related party (Note 6) | 805,934 | 439,424 | |||||||||
Accrued expenses | 639,373 | 713,462 | |||||||||
Current maturities of long-term debt (Note 5) | 1,205,700 | 505,700 | |||||||||
Current portion of operating lease liability (Note 7) | 2,013,762 | 2,164,720 | |||||||||
Total current liabilities | 6,333,569 | 5,681,765 | |||||||||
NONCURRENT LIABILITIES | |||||||||||
Long-term debt, less current maturities (Note 5) | 20,000,000 | 21,700,000 | |||||||||
Operating lease liability, less current portion (Note 7) | 4,190,881 | 5,014,552 | |||||||||
Other | 1,213,817 | 844,217 | |||||||||
Total noncurrent liabilities | 25,404,698 | 27,558,769 | |||||||||
COMMITMENTS AND CONTINGENCIES (Note 7 and 8) | 0 | 0 | |||||||||
MEMBERS' EQUITY | |||||||||||
Member contributions 105,122 units issued and outstanding | 46,490,105 | 46,490,105 | |||||||||
Retained (deficit) | (13,052,185) | (13,919,737) | |||||||||
Total members' equity | 33,437,920 | 32,570,368 | |||||||||
Total liabilities and members' equity | $ | 65,176,187 | $ | 65,810,902 |
3
Lincolnway Energy, LLC
Statements of Operations
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
March 31, 2021 | March 31, 2020 | March 31, 2021 | March 31, 2020 | ||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||
Revenues (Notes 2 and 7) | $ | 37,976,400 | $ | 24,376,894 | $ | 67,315,146 | $ | 53,379,629 | |||||||||||||||
Cost of goods sold (Note 6 and 7) | 35,339,043 | 26,464,208 | 64,857,159 | 54,357,566 | |||||||||||||||||||
Gross profit (loss) | 2,637,357 | (2,087,314) | 2,457,987 | (977,937) | |||||||||||||||||||
General and administrative expenses | 642,618 | 954,621 | 1,437,413 | 1,765,159 | |||||||||||||||||||
Operating income (loss) | 1,994,739 | (3,041,935) | 1,020,574 | (2,743,096) | |||||||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income | 284 | 2,846 | 2,177 | 6,220 | |||||||||||||||||||
Interest expense | (197,052) | (317,281) | (408,210) | (643,712) | |||||||||||||||||||
Other income | 162,807 | 226,672 | 253,011 | 226,672 | |||||||||||||||||||
(33,961) | (87,763) | (153,022) | (410,820) | ||||||||||||||||||||
Net income (loss) | $ | 1,960,778 | $ | (3,129,698) | $ | 867,552 | $ | (3,153,916) | |||||||||||||||
Weighted average units outstanding | 105,122 | 42,501 | 105,122 | 42,269 | |||||||||||||||||||
Net income (loss) per unit - basic and diluted | $ | 18.65 | $ | (73.64) | 8.25 | $ | (74.62) | ||||||||||||||||
See Notes to Unaudited Financial Statements.
4
Lincolnway Energy, LLC
Statements of Members' Equity
Member Contributions | Retained (Deficit) | Total | |||||||||||||||
Balance, September 30, 2020 | $ | 46,490,105 | $ | (13,919,737) | $ | 32,570,368 | |||||||||||
Net (loss) | 0 | (1,093,226) | (1,093,226) | ||||||||||||||
Balance, December 31, 2020 | $ | 46,490,105 | $ | (15,012,963) | $ | 31,477,142 | |||||||||||
Net income | 0 | 1,960,778 | 1,960,778 | ||||||||||||||
Balance, March 31, 2021 | $ | 46,490,105 | $ | (13,052,185) | $ | 33,437,920 |
Member Contributions | Retained (Deficit) | Total | |||||||||||||||
Balance, September 30, 2019 | $ | 38,990,105 | $ | (14,239,713) | $ | 24,750,392 | |||||||||||
Net (loss) | 0 | (24,218) | (24,218) | ||||||||||||||
Balance, December 31, 2019 | $ | 38,990,105 | $ | (14,263,931) | $ | 24,726,174 | |||||||||||
Issuance of 42,049 membership units | 5,000,000 | 0 | 5,000,000 | ||||||||||||||
Net (loss) | 0 | (3,129,698) | (3,129,698) | ||||||||||||||
Balance, March 31, 2020 | $ | 43,990,105 | $ | (17,393,629) | $ | 26,596,476 |
See Notes to Unaudited Financial Statements.
5
Lincolnway Energy, LLC | Six Months Ended | Six Months Ended | |||||||||
Statements of Cash Flows | March 31, 2021 | March 31, 2020 | |||||||||
(Unaudited) | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
Net income (loss) | $ | 867,552 | $ | (3,153,916) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Depreciation | 2,319,631 | 2,414,120 | |||||||||
Loss on disposal of property and equipment | 9,385 | 0 | |||||||||
Accrued loss on firm purchase commitments | 0 | 26,170 | |||||||||
Changes in working capital components: | |||||||||||
Trade receivable | (1,433,937) | 1,934,677 | |||||||||
Inventories | (2,198,533) | 1,052,997 | |||||||||
Prepaid expenses and other | 263,304 | (426,663) | |||||||||
Accounts payable | (189,659) | (304,219) | |||||||||
Accounts payable, related party | 366,510 | (293,780) | |||||||||
Accrued expenses | (74,089) | 242,604 | |||||||||
Derivative financial instruments | (27,127) | (66,553) | |||||||||
Net cash provided by (used in) operating activities | (96,963) | 1,425,437 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
Purchase of property and equipment | (645,474) | (256,731) | |||||||||
Net cash (used in) investing activities | (645,474) | (256,731) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
Proceeds from operating line of credit | 0 | 10,450,000 | |||||||||
Payments on operating line of credit | 0 | (10,750,000) | |||||||||
Proceeds from long-term borrowings | 0 | 24,700,000 | |||||||||
Payments on long-term borrowings | (1,000,000) | (25,650,000) | |||||||||
Proceeds from issuance of membership units | 0 | 5,000,000 | |||||||||
Net cash provided by (used in) financing activities | (1,000,000) | 3,750,000 | |||||||||
Net increase (decrease) in cash and cash equivalents | (1,742,437) | 4,918,706 | |||||||||
CASH AND CASH EQUIVALENTS | |||||||||||
Beginning | 7,201,372 | 260,858 | |||||||||
Ending | $ | 5,458,935 | $ | 5,179,564 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION, | |||||||||||
cash paid for interest | $ | 461,203 | $ | 701,844 | |||||||
SUPPLEMENTAL DISCLOSURES OF NONCASH | |||||||||||
OPERATING, INVESTING, AND FINANCING ACTIVITIES, Construction in progress included in accounts payable | 0 | 50,525 | |||||||||
Establishment of lease liability and right of use asset | 0 | 6,691,675 |
See Notes to Unaudited Financial Statements.
6
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, 2020 was derived from the Company's audited balance sheet as of that date. The accompanying financial statements as of March 31, 2021 and for the three and six months ended March 31, 2021 and 2020 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, operating results and cash flows 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, 2020 contained in the Company's Annual Report on Form 10-K. The results of operations and cash flows 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. Estimates significant to the financial statements include impairment of long-lived assets and inventory at lower of cost or net realizable value. Actual results could differ from those estimates.
Risks and Uncertainties: The COVID-19 pandemic is currently impacting countries, communities, supply chains and commodities markets, in addition to the global financial markets. This pandemic has resulted in social distancing, travel bans, governmental stay-at-home orders, and quarantines, and these may limit access to our facilities, customers, suppliers, management, support staff and professional advisors. At this time it is not possible to fully assess the impact of the COVID-19 pandemic on the Company’s operations and capital requirements, but the aforementioned factors, among other things, may impact our operations, financial condition and demand for our products, as well as our overall ability to react timely and mitigate the impact of this event. Depending on its severity and longevity, the COVID-19 pandemic may have a material adverse effect on our business, customers, and members.
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. The Company maintains its cash accounts in one bank which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
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 0 allowance for doubtful accounts as of March 31, 2021 and September 30, 2020.
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. As of March 31, 2021 and September 30, 2020 the Company recognized 0 write-downs for a lower of net realizable value or cost of inventory.
Property and equipment: Property and equipment is stated at cost. Construction in progress is comprised of costs related to the projects that are not completed. Depreciation is computed using the straight-line method over the estimated useful lives. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized.
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
7
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
in the market value of the asset, adverse changes in the extent or manner in which the asset is being used, significant changes in the 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 means, fair value is determined in a similar manner, except that fair values are reduced for disposal costs.
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. Forward contracts with delivery dates within 30 days that can be reasonably estimated are subject to a lower of cost or net realizable value assessment. The Company recognized 0 accrued loss on purchase commitments as of March 31, 2021 or September 30, 2020.
Revenue recognition: The Company records revenue following the guidance presented in Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
•sales of ethanol
•sales of distillers grains
•sales of corn oil
Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, are recorded based on the net selling price. Railcar lease costs incurred by the Company in the sale of its products are included in the cost of goods sold.
Revenue from the sale of the Company's ethanol and distillers grains is recognized at the time control transfers to the marketing company. This generally occurs upon the loading of the product. For ethanol, control passes at the time the product crosses the loading flange in either a railcar or truck. For distillers grain, control passes upon the loading into trucks or railcars. Corn oil is marketed internally. Revenue is recognized when control 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.
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. Management has evaluated the Company's material tax positions and determined there were no uncertain tax positions that require adjustment to the financial statements. The Company does not currently anticipate significant changes in its uncertain tax positions over the next twelve months.
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. On March 31, 2020, 42,049 new Class A Units were issued which
8
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Class A Units are a separate class of unit than the units issued to existing members which have been renamed “Common Units”. On May 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.
Note 2. Revenues
Components of revenues are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
March 31, 2021 | March 31, 2020 | March 31, 2021 | March 31, 2020 | ||||||||||||||||||||
Ethanol, net of hedging gain (loss) | $ | 27,630,797 | $ | 18,183,469 | $ | 49,317,104 | $ | 41,157,733 | |||||||||||||||
Distillers Grains | 8,384,809 | 4,852,114 | 14,440,871 | 9,355,783 | |||||||||||||||||||
Distilled Corn Oil | 1,770,806 | 1,161,000 | 3,203,890 | 2,434,878 | |||||||||||||||||||
Other | 189,988 | 180,311 | 353,281 | 431,235 | |||||||||||||||||||
Total | $ | 37,976,400 | $ | 24,376,894 | $ | 67,315,146 | $ | 53,379,629 |
Note 3. Inventories
Inventories consist of the following:
March 31, 2021 | September 30, 2020 | ||||||||||
Raw materials, including corn, chemicals, parts and supplies | $ | 5,680,905 | $ | 5,292,339 | |||||||
Work in process | 1,262,624 | 653,680 | |||||||||
Ethanol and distillers grains | 2,500,704 | 1,299,681 | |||||||||
Total | $ | 9,444,233 | $ | 7,245,700 |
Note 4. Revolving Credit
The Company had a revolving credit line which provided for loans not to exceed $4,000,000 at any time which accrued interest at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.75%. Under the terms of the revolving credit line, the Company also had to pay a commitment fee on the average daily unused portion of the loan at the rate of 0.25% per annum, payable monthly. The loan was secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master loan agreement.
There was 0 outstanding balance on the revolving credit loan as of September 30, 2020. The revolving credit line matured as of January 1, 2021 and was not renewed.
Note 5. Long-Term Debt
The Company has a revolving term loan, with a bank, available up to $25,000,000. The Company's borrowing capacity under the revolving term loan will begin a step-down reduction of $5,000,000 each year starting October 20, 2021 until October 1, 2024 when the term loan matures. The Company pays interest on the unpaid balance at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.75% (3.86% as of March 31, 2021). The Company also pays a commitment fee on the average daily unused portion of the loan at the rate of 0.50% 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
9
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
master loan agreement. At March 31, 2021 and September 30, 2020 the outstanding balance on the revolving term loan was $20,700,000 and $21,700,000, respectively.
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:
Maximum Commitment Amount | From | Up to and Including | ||||||
$20,000,000 | October 20, 2021 | October 19, 2022 | ||||||
$15,000,000 | October 20, 2022 | October 19, 2023 | ||||||
$10,000,000 | October 20, 2023 | October 1, 2024 |
In connection with the revolving term loan, the Company entered into an Amended and Restated Letter of Credit Promissory Note. The maximum amount of the letter of credit commitment is $1,307,525. There were 0 amounts drawn on the available letter of credit as of March 31, 2021.
On April 13, 2020, the Company received a loan in the amount of $505,700 under the Paycheck Protection Program (the “PPP Loan”) legislation administered by the U.S. Small Business Administration (SBA). The PPP Loan may 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. Management believes the Company used the PPP Loan proceeds for the approved expense categories and satisfied the applicable employee headcount and compensation conditions. The PPP loan has a maturity date of April 13, 2022 and management currently believes this loan will be forgiven before maturity. Subsequent to the quarter ended March 31, 2021, our application to the SBA for forgiveness was submitted and approved for full forgiveness by the SBA.
Note 6. Related-Party Transactions
The Company had the following related-party activity with members during the three and six months ended March 31, 2021 and 2020:
Corn Commitment: | ||||||||||||||
March 31, 2021 | ||||||||||||||
Corn Forward Purchase Commitment | Basis Corn Commitment (Bushels) | Commitment Through | Amount Due | |||||||||||
Related Parties | $ | 1,425,591 | 4,216,944 | January 2022 | $ | 789,103 |
Corn Purchased: | |||||||||||||||||
Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Six Months Ended March 31, 2021 | Six Months Ended March 31, 2020 | ||||||||||||||
Related Parties | $ | 22,372,079 | $ | 17,876,090 | $ | 36,089,047 | $ | 28,822,893 |
The Company is a party to a Management Services Agreement with HALE, LLC (“HALE”) for management services pertaining to the Company’s ethanol facility. Under the Management Services Agreement, HALE provides management services to the Company’s ethanol facility, including providing the Company with individuals to (a) serve in various roles including Chief Executive Officer, Environmental and Safety Manager, Commodity Risk Manager and to fill such other positions, including, without limitation, Controller, as may be necessary from time to time and (b) perform the respective management services for each such positions. For the three and six months ended March 31, 2021, the Company incurred expenses of $150,756 and $264,766, respectively, pertaining to this agreement. For both the three and six month period ending
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Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
March 31, 2020, the Company paid a total of $72,000 under this agreement. At March 31, 2021 and September 30, 2020 $1,730 and $2,097 was included in accrued expenses on the balance sheet, respectively.
Note 7. Commitments, Major Customers and Lease Obligations
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 approximately $27,655,000 and $49,418,000, respectively, for the three and six months ended March 31, 2021. Revenues with this entity were approximately $18,183,000 and $41,158,000, respectively, for the three and six months ended March 31, 2020. Trade accounts receivable of approximately $4,741,000 and $3,255,000 were due from this entity as of March 31, 2021 and September 30, 2020, respectively. As of March 31, 2021, the Company had ethanol unpriced sales commitments with this entity of approximately 15 million gallons through June 2021. The Company incurred expenses of $100,267 and $200,761 for the three and six months ended March 31, 2021. This is compared to $95,800 and $195,037 for the same time period ending March 31, 2020.
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 $10,156,000 and $17,645,000, respectively, for the three and six months ended March 31, 2021. The revenues from this entity were approximately $4,852,000 and $9,356,000, respectively for the three and six months ended March 31, 2020. 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 approximately $939,000 and $685,000 were due from this entity as of March 31, 2021 and September 30, 2020, respectively. The Company had distillers grain sales commitments with this entity of approximately 30,000 tons, for a total sales commitment of approximately $6.3 million.
As of March 31, 2021, the Company had purchase commitments for corn forward contracts with various unrelated parties, totaling approximately $3.6 million. These contracts mature at various dates through March 2022. The Company has basis contract commitments with unrelated parties to purchase corn in the amount of 4,217,000 bushels.
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 is reduced over time as the Company makes payments under the agreement. At March 31, 2021, the remaining commitment was approximately $1.15 million.
As of March 31, 2021, the Company had purchase commitments for natural gas basis contracts with an unrelated party for 237,000 MMBtus with an approximate value of $596,000 maturing at various dates through June 2021.
Effective October 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). 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 and six months ended March 31, 2021 were approximately $584,000 and $1.2 million, respectively. Rent expense for the operating leases during the three and six months ended March 31, 2020 were approximately $521,000 and $1.1 million, respectively. The lease agreements have maturity dates ranging from June 2021 to September 2025.
11
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
_____________________________________________________________________________________________________
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, 2021 is approximately $6,205,000.
At March 31, 2021 the Company had the following minimum rental commitments for the period ending March 31:
2021 | $ | 1,130,949 | |||
2022 | 2,001,434 | ||||
2023 | 1,706,585 | ||||
2024 | 1,402,251 | ||||
2025 | 709,532 | ||||
Thereafter | 174,000 | ||||
Total | $7,124,751 |
A reconciliation of the undiscounted future payments in the schedule above and the lease liability recognized in the balance sheet as of March 31, 2021 is shown below:
Undiscounted future payments | $ | 7,124,751 | |||
Discount effect | 920,108 | ||||
$ | 6,204,643 |
Note 8. 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 where right of offset exists on a net basis on the balance sheet.
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Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Derivatives not designated as hedging instruments are as follows:
March 31, 2021 | September 30, 2020 | ||||||||||
Derivative assets - corn contracts | $ | 327,500 | $ | 675 | |||||||
Derivative assets - ethanol contracts | 32 | 33,107 | |||||||||
Derivative liabilities - corn contracts | 0 | (243,825) | |||||||||
Derivative liabilities - ethanol contracts | (323,863) | (93,335) | |||||||||
Due from (due to) broker | 323,934 | 603,854 | |||||||||
Total | $ | 327,603 | $ | 300,476 |
The effects on operating income from derivative activities for three and six months ending March 31, 2021 and 2020 are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
March 31, 2021 | March 31, 2020 | March 31, 2021 | March 31, 2020 | ||||||||||||||||||||
Gains (losses) in revenues due to derivatives related to ethanol sales: | |||||||||||||||||||||||
Realized (loss) | $ | (17,925) | $ | 0 | $ | (160,981) | $ | 0 | |||||||||||||||
Unrealized gain (loss) | (5,849) | 0 | 60,260 | 0 | |||||||||||||||||||
Total effect on revenues | $ | (23,774) | $ | 0 | $ | (100,721) | $ | 0 | |||||||||||||||
Gains (losses) in cost of goods sold due to derivatives related to corn costs: | |||||||||||||||||||||||
Realized gain (loss) | $ | (1,814,918) | $ | 426,281 | $ | (2,224,191) | $ | 1,033,268 | |||||||||||||||
Unrealized (loss) | 974,538 | 154,575 | 246,788 | (283,650) | |||||||||||||||||||
Total effect on cost of goods sold | (840,380) | 580,856 | (1,977,403) | 749,618 | |||||||||||||||||||
Total gain (loss) due to derivative activities | $ | (864,154) | $ | 580,856 | $ | (2,078,124) | $ | 749,618 |
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.
Note 9. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
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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, 2021 and September 30, 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
March 31, 2021 | ||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
Assets, derivative financial instruments | $ | 327,532 | $ | 327,532 | $ | 0 | $ | 0 | ||||||||||||||||||
Liabilities, derivative financial instruments | $ | (323,863) | $ | (323,863) | $ | 0 | $ | 0 | ||||||||||||||||||
September 30, 2020 | ||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
Assets, derivative financial instruments | $ | 33,782 | $ | 33,782 | $ | 0 | $ | 0 | ||||||||||||||||||
Liabilities, derivative financial instruments | $ | (337,160) | $ | (337,160) | $ | 0 | $ | 0 |
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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, 2020 ("Fiscal 2020") 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 the reduction in the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency;
•Changes in federal mandates relating to the blending of ethanol with gasoline, including, without limitation reductions to, or the elimination of, the Renewable Fuel Standard volume obligations;
•The inability to comply with the covenants and other requirements of the Company's various loan agreements;
•Negative impacts that hedging activities may have on the Company's operations or financial condition;
•Decreases in the market prices of ethanol and distiller's grains;
•Ethanol supply exceeding demand and corresponding ethanol price reductions;
•Changes in the environmental regulations that apply to the Company's plant operations;
•Changes in plant production capacity or technical difficulties in operating the plant;
•Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
•Changes in other federal or state laws and regulations relating to the production and use of ethanol;
•Changes and advances in ethanol production technology;
•Competition from larger producers as well as competition from alternative fuel additives;
•Changes in interest rates and lending conditions of the loan covenants in the Company loan agreements;
•Volatile commodity and financial markets;
•Decreases in export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distiller's grains produced in the United States;
•Disruptions, failures; security breaches or other cybersecurity threats relating to or impacting our information technology infrastructure;
•The continuing impact of trade actions, particularly those affecting the agriculture sector and related industries; and
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•Disruption caused by health epidemics, such as the novel strain of the coronavirus (COVID-19), and the adverse impact of such epidemics on global economic and business conditions, including reduced demand for our products, transport disruptions, labor shortages and disruptions in our workforce.
These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the Fiscal 2020 and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. We undertake no obligation to revise or update any forward-looking statements. The forward-looking statements contained in this report are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
General Overview
Lincolnway Energy, LLC is an Iowa limited liability company that operates a dry mill, natural gas fired ethanol plant located in Nevada, Iowa. We have been processing corn into fuel grade ethanol and distillers grains at the ethanol plant since May 22, 2006. Our ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year.
All of the ethanol we produce is marketed by Eco-Energy, LLC (“Eco-Energy”) and all of our distillers grains are marketed by Gavilon Ingredients, LLC (“Gavilon”). Our revenues are derived primarily from the sale of our ethanol and distillers grains.
We also extract corn oil from the syrup generated in the production of ethanol. We market and distribute all of our corn oil directly to end users and third party brokers within the domestic market.
Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. (“Air Products”), has a plant located on the Company’s site that collects the carbon dioxide gas that is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. Air Products also markets and sells the liquid carbon dioxide.
Executive Summary
Highlights for the three months ended March 31, 2021 are as follows:
•Total revenues increased 55.8%, or $13.6 million, compared to the same period in 2020.
•Total cost of goods sold increased 33.5%, or $8.9 million, compared to the same period in 2020.
•Net income was $2.0 million, compared to a net loss of $3.1 million for the same period in 2020.
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, 2021 and 2020 (dollars in thousands):
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Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $37,976 | 100.0 | % | $24,377 | 100.0 | % | $67,315 | 100.0 | % | $ | 53,380 | 100.0 | % | |||||||||||||||||||||||||||||||||||||
Cost of goods sold | 35,339 | 93.1 | % | 26,464 | 108.6 | % | 64,857 | 96.3 | % | 54,358 | 101.8 | % | ||||||||||||||||||||||||||||||||||||||
Gross profit (loss) | 2,637 | 6.9 | % | (2,087) | (8.6) | % | 2,458 | 3.7 | % | (978) | (1.8) | % | ||||||||||||||||||||||||||||||||||||||
General and administrative expenses | 643 | 1.7 | % | 955 | 3.9 | % | 1,437 | 2.1 | % | 1,765 | 3.3 | % | ||||||||||||||||||||||||||||||||||||||
Operating income (loss) | 1,995 | 5.2 | % | (3,042) | (12.5) | % | 1,021 | 1.5 | % | (2,743) | (5.1) | % | ||||||||||||||||||||||||||||||||||||||
Other income (expense), net | (34) | (0.1) | % | (88) | (0.4) | % | (153) | (0.2) | % | (411) | (0.8) | % | ||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 1,961 | 5.1 | % | $ | (3,130) | (12.9) | % | $ | 868 | 1.3 | % | $ | (3,154) | (5.9) | % |
Results of Operations for the Three Months Ended March 31, 2021 as Compared to the Three Months Ended March 31, 2020
Revenues. Total revenues increased by 56% for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. For the three months ended March 31, 2021, ethanol revenue increased by 52% due primarily to increased gallons of ethanol sold and an increase in the average price we received for our ethanol compared to the three months ended March 31, 2020. We sold approximately 4.7% more gallons of ethanol during the three months ended March 31, 2021 as compared to the same period of 2020. The average price we received per gallon of ethanol sold increased by approximately 45% during the three months ended March 31, 2021 as compared to the same period of 2020. Ethanol prices were higher during our second quarter of 2021 due to a combination of significantly higher corn prices and low ethanol stocks which combined to positively impact market ethanol prices. By comparison, ethanol prices were lower during our second quarter of 2020 due to excess ethanol supply in the market. Travel restrictions were just starting to be implemented during our second quarter of 2020 due to the COVID-19 pandemic but did not yet have a material impact on market ethanol prices.
Sales from co-products increased by approximately 67% for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. Co-products include dried distillers grains, wet distillers grains, corn oil and carbon dioxide. The change in co-product sales resulted primarily from an increase in distillers grain revenue along with an overall increase in our co-product sales. Distillers grain revenue increased as the approximate average price per ton of distillers grains increased in response to the increase in the market price for corn. Our overall co-product sales resulted from increased production at the ethanol plant during the three months ended March 31, 2021 compared to the same period of 2020.
Cost of goods sold. Cost of goods sold increased by 34%, or approximately $8.9 million, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The increase was primarily due to increases in corn costs of approximately $8.6 million. 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 approximately $8.6 million, or approximately 42%, for the three months ended March 31, 2021 compared to the same period of 2020. Our corn costs increased due partially to decreased corn supply in our immediate draw area from the derecho storm in August 2020 along with decreased corn supplies out of South America which has resulted in increased export demand for corn which has impacted our corn costs. For the three months ended March 31, 2021 corn costs included an approximately $840,000 combined realized and unrealized gain from corn derivative instruments as compared to an approximately $581,000 combined realized and unrealized loss on our corn derivative instruments during the same period of the prior year. Corn costs represented 82% of cost of goods for three months ended March 31, 2021 compared to 77% of cost of goods sold for the three months ended March 31, 2020.
Repairs and maintenance costs increased by approximately 42% for the three months ended March 31, 2021 as compared to the same period of 2020. The increase was due to an increased focus on preventative maintenance to avoid larger costly repairs. Depreciation expense decreased by approximately 5% for the three months ended March 31, 2021 as compared to the same
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period of 2020. The decrease in depreciation during the three months ended March 31, 2021 is due to capital assets being fully depreciated during the 2021 period.
General and administrative costs decreased by approximately $313,000, for the three months ended March 31, 2021 as compared to the same period of 2020. The decrease is due to a combination of cost control activities implemented during our 2020 fiscal year and during our 2021 fiscal year.
Other income (expense) increased by approximately $54,000 for three months ended March 31, 2021 as compared to the same period of 2020 due primarily to a decrease in interest expense of approximately $120,000 during the period.
Results of Operations for the Six Months Ended March 31, 2021 as Compared to the Six Months Ended March 31, 2020
Revenues. Total revenues increased by 26% for the six months ended March 31, 2021 as compared to the six months ended March 31, 2020. For the six months ended March 31, 2021, ethanol sales increased by 20% and sales from co-products increased by 47%. The change in ethanol revenue was a result of an 18%, or $0.23 per gallon, increase in the price per gallon received as well as an increase of approximately 2%, or approximately 606,000 gallons, in sales volume for six months ended March 31, 2021, when compared to the six months ended March 31, 2020. Ethanol prices increased due to decreased ethanol stocks compared to ethanol demand.
Sales from co-products increased by 47% for the six months ended March 31, 2021 as compared to the six months ended March 31, 2020. Co-products include dried distillers grains, wet distillers grains, corn oil and carbon dioxide. The change in co-product sales resulted primarily from an increase in distillers grain and corn oil revenue. Distillers grain revenue increased as the average price per ton of distillers grains increased in response to increases in the market price for corn. In addition, we produced more distillers grains during the six months ended March 31, 2021 as compared to the six months ended March 31, 2020. Corn oil revenue increased as a result of higher corn oil prices in the market due primarily to increased soybean meal prices which typically has a positive impact on corn oil prices and demand.
Cost of goods sold. Cost of goods sold increased by 19%, or approximately $10.5 million, for the six months ended March 31, 2021 as compared to the six months ended March 31, 2020. The increase was primarily due to increases in corn costs of approximately $11.4 million. 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 by approximately $11.4 million, or 28%, for the six months ended March 31, 2021 compared to the six months ended March 31, 2020. The increase resulted from a 10% increase in corn price, due partially to decreased corn supply in our immediate draw area from the derecho storm in August 2020. In addition, demand for corn from other countries increased resulting in increased demand for corn. For the six months ended March 31, 2021 corn costs included a $2.0 million loss from derivatives activity relating to corn costs compared to an approximate $750,000 net gain in the same period of the prior year. Corn costs represented 81% of cost of goods for the six months ended March 31, 2021 compared to 76% of cost of goods sold for the six months ended March 31, 2020.
Repairs and maintenance costs increased approximately 29%, or approximately $111,000, for the six months ended March 31, 2021 as compared to the same period of 2020. The increase was due to an increased focus on preventative maintenance to avoid larger costly repairs.
Depreciation expense decreased approximately $77,000 for the six months ended March 31, 2021 as compared to the same period of 2020. The decrease in depreciation during the first six months of fiscal year 2021 can be attributed to capital assets being fully depreciated during the six months ended March 31, 2021.
General and administrative costs decreased approximately $328,000, for the six months ended March 31, 2021 as compared to the same period of 2020. The decrease is due to a combination of cost control activities implemented during Fiscal 2020 and the first quarter of Fiscal 2021.
Other income (expense) increased approximately $258,000 for the six months ended March 31, 2021 as compared to the same period of 2020 due primarily from a one-time receipt of funds in the amount of $88,000 from a class-action lawsuit combined with decreased interest expense of approximately $236,000 during the period.
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Liquidity and Capital Resources
Although there is uncertainty related to the continuing impact of the COVID-19 pandemic on the global economy, the ethanol industry and our future financial results, we believe our current cash reserves and the available cash under our revolving term loan leave us well-positioned to manage our business through this crisis as it continues to unfold. However, the impacts of the COVID-19 pandemic are broad-reaching and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses. As a result, we anticipate negotiating a new revolving credit line with our lender on the same or substantially similar terms as those under the revolving credit line that matured January 1, 2021. However, there is no guarantee that our lender will provide a new revolving credit line to the Company or that we will be successful in negotiating similar terms. Currently we are in discussions with our Lender to set up a new line of credit with an increased amount over the previous $4 million for corn purchases and hedging requirements.
Although we were in compliance with our financial covenants set forth in our credit agreement as of March 31, 2021, the continuing impact of the COVID-19 pandemic could adversely impact our operating results which could result in our inability to comply with certain of these financial covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default. Our inability to satisfy our financial covenants under our credit agreement would also adversely impact our ability to negotiate a new revolving credit line with our lender or the terms available to us. However, based on our current forecast of market conditions and our financial performance, we expect that we will be in a position to satisfy all of the financial covenants in the credit agreement for the next twelve months.
We plan to closely monitor existing cash, our current credit facilities, and cash from operations to continue to operate the ethanol plant over the next 6 to 12 months. Working capital was approximately $15.4 million on March 31, 2021. Management currently projects that liquid working capital will be sufficient based on current cash balances and credit facilities available for the remainder of Fiscal 2021, but management will continue to monitor our liquidity position on a weekly basis.
Our financial position and liquidity are, and will continue to be, influenced by a variety of factors, including, without limitation:
•our ability to generate cash flows from operations;
•the level of our outstanding indebtedness and the interest we are obligated to pay;
•our ability to obtain ongoing credit from our primary lender and, if needed, to obtain waivers of covenant violations;
•our 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: | 2021 | 2020 | ||||||||||||
Net cash provided by (used in) operating activities | $ | (96,963) | $ | 1,425,437 | ||||||||||
Net cash (used in) investing activities | (645,474) | (256,731) | ||||||||||||
Net cash provided by (used in) financing activities | (1,000,000) | 3,750,000 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | (1,742,437) | $ | 4,918,706 |
Cash Flow - Operations
For the six months ended March 31, 2021, net cash provided by operating activities decreased by approximately $1,522,000 when compared to net cash provided by operating activities same period of 2020. The decrease in cash provided by operating activities was primarily due to an increase in working capital components including inventory and accounts receivable.
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Cash Flow - Investing Activities
Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant. During the period ended March 31, 2021, the plant consumed approximately $388,000 more cash when compared to changes in cash flows used in investing activities during the six months ended March 31, 2020.
Cash Flow - 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 (used in) financing activities was $1 million for the six months ended March 31, 2021 compared to proceeds from borrowing $3.75 million during the six months ended March 31, 2021 due to an increase in net payments on long-term debt. We also received $5 million from the issuance of additional membership units during the six months ended March 31, 2020.
Critical Accounting Estimates and Accounting Policies
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.
Revenue Recognition
The Company records revenue following the guidance presented in Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
•sales of ethanol
•sales of distillers grains
•sales of corn oil
Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, are recorded based on the net selling price. Railcar lease costs incurred by the Company in the sale of its products are included in the cost of goods sold.
Revenue from the sale of the Company's ethanol and distillers grains is recognized at the time control transfers to the marketing company. This generally occurs upon the loading of the product. For ethanol, control passes at the time the product crosses the loading flange in either a railcar or truck. For distillers grain, control passes upon the loading into trucks or railcars. Corn oil is marketed internally. Revenue is recognized when control 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.
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Derivative 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. Forward contracts with delivery dates within 30 days that can be reasonably estimated are subject to a lower of cost or net realizable value assessment. The Company didn't recognize any accrued loss on purchase commitments as of March 31, 2021 or September 30, 2020.
Inventories and Lower of Cost or Market
Inventories are stated at the lower of net realizable value or actual cost using the first-in, first-out method. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation. As of March 31, 2021 and September 30, 2020 the Company recognized 0 write-downs for a lower of net realizable value or cost of inventory.
Property and Equipment
Property and equipment is stated at cost. Construction in progress is comprised of costs related to the projects that are not completed. Depreciation is computed using the straight-line method over the 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.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
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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 $0.10 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. We will typically be unable to pass through the impact of decreased ethanol revenues to its corn suppliers. We are subject to various material risks related to the demand for and price of ethanol, many of which are beyond the control of the Company. For example, the demand for and price of ethanol is subject to significant fluctuations due to various unpredictable factors which are beyond the control of our 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 our ethanol revenue were to decrease $0.05 per gallon from one year to the next, the impact on gross revenues would be approximately $3.1 million for the year.
During the quarter ended March 31, 2021, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $4.84 per bushel in January 2021 to a high of $5.65 at the end of March 2021. The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended March 31, 2020 ranged from a low of $3.35 per bushel for March 2020 delivery to a high of $3.94 per bushel for January 2020 delivery.
The average price we received for our ethanol FOB Nevada, Iowa, during the three months ended March 31, 2021 was $1.65 compared to the three months ending March 31, 2020 at $1.14 per gallon.
During the quarter ended March 31, 2021, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.49 per gallon for January 2021 delivery to a high of $1.88 per gallon for March 2021 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $0.85 per gallon for March 2020 delivery to a high of $1.36 per gallon for February 2020 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
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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 increased our cost of goods sold for the three months ended March 31, 2021 was $840,000 compared to a net gain of approximately $581,000 for the three months ending March 31, 2020.
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, 2021 represented approximately 4.9% 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 3.75%. We do not anticipate any significant increase in interest rates during Fiscal 2021.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our President and General Manager (the principal executive officer), Seth Harder, along with our interim Chief Financial Officer (the principal financial officer), Jeff Kistner, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2021. Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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For the three months ended March 31, 2021, there has been no change in 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, 2020, there were no material developments to such matters.
Item 1A. Risk Factors.
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, 2020, in Part I, Item 1A, “Risk Factors” 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.
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.
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Item 6. Exhibits.
The following exhibits are filed as part of this quarterly report.
Description of Exhibit | Page | ||||||||||||||||
10 | Amendment No. 2 to the Ethanol Marketing Agreement between Lincolnway Energy, LLC and Eco-Energy, LLC effective October 1, 2020 | * | |||||||||||||||
Distiller's Grain Off-Take Agreement between Lincolnway Energy, LLC and Gavilon Ingredients, LLC effective October 1, 2020 | ** | ||||||||||||||||
31 | Rule 13a-14(a)/15d-14(a) Certifications | ||||||||||||||||
Rule 13a-14(a) Certification of President and Chief Executive Officer | E-1 | ||||||||||||||||
Rule 13a-14(a) Certification of Interim Chief Financial Officer | E-2 | ||||||||||||||||
32 | Section 1350 Certifications | ||||||||||||||||
Section 1350 Certification of President and Chief Executive Officer † | E-3 | ||||||||||||||||
Section 1350 Certification of Interim Chief Financial Officer† | E-4 | ||||||||||||||||
101 | Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T) | ||||||||||||||||
* Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2020 (000-51764) and incorporated by reference herein. | |||||||||||||||||
** Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2020 (000-51764) and incorporated by reference herein. | |||||||||||||||||
† 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. |
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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 17, 2021 | By: | /s/ Seth Harder | ||||||
Name: Seth Harder | ||||||||
Title: General Manager, President and Chief Executive Officer | ||||||||
May 17, 2021 | By: | /s/ Jeff Kistner | ||||||
Name: Jeff Kistner | ||||||||
Title: Interim Chief Financial Officer |
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