Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2009.
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: 000-50254

 

LAKE AREA CORN PROCESSORS, LLC

(Exact name of registrant as specified in its charter)

 

 

46269 SD Highway 34

P.O. Box 100

Wentworth, South Dakota 57075

(Address of principal executive offices)

 

(605) 483-2679

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o   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:

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o   Yes   x   No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date:  As of August 12, 2009, there were 29,620,000 units outstanding.

 

 

Table of Contents

 

INDEX

 

		Page No.
PART I.  FINANCIAL INFORMATION		3
ITEM 1.  FINANCIAL STATEMENTS		3
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		27
ITEM 4.  CONTROLS AND PROCEDURES		28
PART II.  OTHER INFORMATION		28
ITEM 1. LEGAL PROCEEDINGS		28
ITEM 1A. RISK FACTORS		28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		30
ITEM 5. OTHER INFORMATION		30
ITEM 6. EXHIBITS		30
SIGNATURES		31

 

2

Table of Contents

 

PART I.     FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		June 30,			December 31,
		2009			2008*
ASSETS
CURRENT ASSETS
Cash		$	322,588		$	488,517
Accounts receivable		4,266,639			2,769,458
Other receivables		83,333			166,667
Inventory		6,742,647			6,526,977
Due from broker		435,473			60
Derivative financial instruments		433,534			373,313
Prepaid expenses		140,042			289,444
Total current assets		12,424,256			10,614,436
PROPERTY AND EQUIPMENT
Land		676,097			676,097
Land improvements		2,665,358			2,665,358
Buildings		8,088,853			8,088,853
Equipment		40,768,265			38,882,582
Construction in progress		—			1,256,194
		52,198,573			51,569,084
Less accumulated depreciation		(18,387,144		)	(17,037,417		)
Net property and equipment		33,811,429			34,531,667
OTHER ASSETS
Goodwill		10,395,766			10,395,766
Investments		2,221,334			2,507,074
Guarantee premium		116,843			141,263
Other		9,825			16,242
Total other assets		12,743,768			13,060,345
		$	58,979,453		$	58,206,448

 

---

* Derived from audited financial statements

 

See Notes to Unaudited Consolidated Financial Statements

 

3

---

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		June 30,			December 31,
		2009			2008*
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES
Outstanding checks in excess of bank balance		$	1,426,223		$	400,918
Accounts payable		3,493,719			7,858,935
Accrued liabilities		1,115,228			3,199,234
Derivative financial instruments		892,912			97,912
Short-term notes payable		1,745,991			—
Current portion of guarantee payable		74,814			60,678
Current portion of notes payable		2,373,487			2,065,357
Total current liabilities		11,122,374			13,683,034
LONG-TERM LIABILITIES
Notes payable, net of current maturities		9,560,480			5,201,498
Guarantee payable, net of current portion		200,278			200,278
Other		304,550			262,500
Total long-term liabilities		10,065,308			5,664,276
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY
Capital units, $0.50 stated value, 29,620,000 units issued and outstanding		14,810,000			14,810,000
Additional paid-in capital		96,400			96,400
Retained earnings		22,885,371			23,952,738
Total members’ equity		37,791,771			38,859,138
		$	58,979,453		$	58,206,448

 

---

* Derived from audited financial statements

 

See Notes to Unaudited Consolidated Financial Statements

 

4

---

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months			Three Months			Six Months			Six Months
		Ended			Ended			Ended			Ended
		June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
REVENUES		$	22,487,000		$	29,916,456		$	43,462,005		$	56,394,467
COST OF REVENUES		21,456,600			18,273,259			42,393,017			32,701,421
GROSS PROFIT		1,030,400			11,643,197			1,068,988			23,693,046
OPERATING EXPENSES		747,143			988,648			1,449,604			2,089,706
INCOME (LOSS) FROM OPERATIONS		283,257			10,654,549			(380,616		)	21,603,340
OTHER INCOME (EXPENSE)
Interest and other income		11,929			16,039			16,496			24,554
Equity in net income(loss) of investment		101,662			—			(285,741		)	—
Interest and other expense		(214,195		)	(168,267		)	(417,506		)	(389,075		)
Total other income (expense)		(100,604		)	(152,228		)	(686,751		)	(364,521		)
NET INCOME (LOSS)		$	182,653		$	10,502,321		$	(1,067,367	)	$	21,238,819
BASIC AND DILUTED EARNINGS (LOSS) PER UNIT		$	0.01		$	0.35		$	(0.04	)	$	0.72
WEIGHTED AVERAGE UNITS OUTSTANDING FOR THE CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER UNIT		29,620,000			29,620,000			29,620,000			29,620,000
DISTRIBUTIONS DECLARED PER UNIT		$	—		$	0.05		$	—		$	0.05

 

See Notes to Unaudited Consolidated Financial Statements

 

5

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

 

		2009			2008
OPERATING ACTIVITIES
Net income (loss)		$	(1,067,367	)	$	21,238,819
Changes to income not affecting cash
Depreciation and amortization		1,380,566			1,395,125
Equity in net (income) loss of investments		285,741			—
Unrealized loss on purchase commitments		614,744			—
Lower of cost or market adjustment on inventory		412,357			—
(Increase) decrease in
Receivables		(1,413,847		)	(809,574		)
Inventory		(628,027		)	(2,468,219		)
Prepaid expenses		149,401			146,223
Derivative financial instruments and due from broker		299,365			(14,731,992		)
Increase (decrease) in
Accounts payable		(3,961,375		)	(2,352,690		)
Accrued liabilities		(2,656,700		)	(37,794		)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(6,585,142		)	2,379,898
INVESTING ACTIVITIES
Purchase of property and equipment		(1,033,330		)	(612,588		)
Purchase of investment		—			(135,556		)
NET CASH (USED IN) INVESTING ACTIVITIES		(1,033,330		)	(748,144		)
FINANCING ACTIVITIES
Increase in outstanding checks in excess of bank balance		1,025,305			—
Short-term notes payable issued		4,745,991			1,686,000
Long-term notes payable issued		2,639,000			—
Principal payments on long-term notes payable		(957,753		)	(847,166		)
Distributions paid to LACP members		—			(1,481,000		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		7,452,543			(642,166		)
NET INCREASE (DECREASE) IN CASH		(165,929		)	989,588
CASH AT BEGINNING OF PERIOD		488,517			361,122
CASH AT END OF PERIOD		$	322,588		$	1,350,710
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest		$	325,179		$	390,821

 

See Notes to Unaudited Consolidated Financial Statements

 

6

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

NOTE 1 -         NATURE OF OPERATIONS

 

Principal Business Activity

 

Lake Area Corn Processors, LLC (the Company) is a South Dakota limited liability company located in Wentworth, South Dakota. The Company was organized by investors to provide a portion of the corn supply for a 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol, LLC (Dakota Ethanol). On September 4, 2001, the ethanol plant commenced its principal operations. The Company sells ethanol and related products to customers located in North America.

 

NOTE 2 -         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.

 

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. The results of operations for the six and three months ended June 30, 2009 and 2008 are not necessarily indicative of the results to be expected for a full year.

 

These financial statements should be read in conjunction with the financial statements and notes included in the Company’s financial statements for the year ended December 31, 2008, contained in the annual report on Form 10-K for 2008.

 

Principles of Consolidation

 

The consolidated financial statements of the Company include the accounts of its subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.

 

Revenue Recognition

 

Revenue from the production of ethanol and related products is recorded when title transfers to customers, net of allowances for estimated returns. Generally, ethanol and related products are shipped FOB shipping point, based on written contract terms between Dakota Ethanol and it customers.  Collectibility of revenue is reasonably assured based on historical evidence of collectibility between Dakota Ethanol and its customers.  Interest income is recognized as earned.

 

Cost of Revenues

 

The primary components of cost of revenues from the production of ethanol and related co-product are corn expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), and direct labor costs.

 

Shipping costs incurred in the sale of distiller’s grains are classified in net revenues.  Shipping costs on distiller’s grains were approximately $482,000 and $221,000 for the six and three months ended June 30, 2009, respectively.  Shipping costs on distiller’s grains were approximately $978,000 and $539,000 for the six and three months ended June 30, 2008, respectively.

 

7

---

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

Inventory Valuation

 

Ethanol and related products are stated at net realizable value. Raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

 

Investment in commodities contracts, derivative instruments and hedging activities

 

SFAS No. 133 requires a company to evaluate its contracts to determine whether the contracts are derivatives. On January 1, 2009, we adopted the provisions of SFAS No. 161, which requires entities to provide greater transparency in interim and annual financial statements about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS No. 133, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity

 

We are exposed to certain risks related to our ongoing business operations.  The primary risks that we manage by using forward or derivative instruments are price risk on anticipated purchases of corn, natural gas and the sale of ethanol.

 

We are subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products.  In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow us to pass along increased corn costs to our customers.  The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.

 

Certain contracts that literally meet the definition of a derivative may be exempted from SFAS No. 133 as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.  Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of SFAS No. 133.  Effective January 1, 2008, we apply the normal purchase and sales exemption under SFAS No. 133 for forward purchases of corn and sales of distiller’s grains.  Transactions initiated prior to January 1, 2008 are not exempted from the accounting and reporting requirements of SFAS No. 133.  As of June 30, 2009, we are committed to purchasing 4.1 million bushels of corn on a forward contract basis with an average price of $4.33 per bushel, of which 1.4 million bushels are subject to SFAS No. 133 and 2.7 million bushels are accounted for as normal purchases under SFAS 133, and accordingly, are not marked to market and are accounted for using lower of cost or market accounting.

 

We sometimes enter into firm-price purchase commitments with some of our natural gas suppliers under which we agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us.  Under these arrangements, we assume the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered.  At June 30, 2009, we are committed to purchasing 240,000 MMBtu’s of natural gas in advance at prices other than at market.  We account for these transactions as normal purchases under SFAS 133, and accordingly, do not mark these transactions to market.

 

We enter into short-term forward, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices.  All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

 

8

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using forward and futures contracts and options.

 

Derivatives not designated as hedging instruments under SFAS 133 at June 30, 2009 and December 31, 2008 were as follows:

 

		Balance Sheet		June 30,			December 31,
		Classification		2009			2008
Futures and options contracts		Current Assets		$	433,534		$	373,313
Forward contracts		(Current Liabilities)		$	(892,912	)	$	(97,912	)

 

Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.

 

		Statement of Operations		Three Months Ended June 30,
		Classification		2009			2008
Net realized and unrealized gains (losses) related to purchase contracts:
Futures and options contracts		Cost of Revenues		$	538,876		$	1,456,904
Forward contracts		Cost of Revenues		$	(761,883	)	$	3,334,959

 

		Statement of Operations		Six Months Ended June 30,
		Classification		2009			2008
Net realized and unrealized gains (losses) related to purchase contracts:
Futures and options contracts		Cost of Revenues		$	480,460		$	1,430,463
Forward contracts		Cost of Revenues		$	(770,625	)	$	9,630,554

 

Investments

 

Dakota Ethanol has a less than 20% investment interest in three unlisted companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company’s share of net income is recognized as income in the Company’s income statement and added to the investment account.  Distributions or dividends received from the investments are treated as a reduction of the investment account.  The Company consistently follows the practice of recognizing the net income based on the most recent reliable data.

 

Dakota Ethanol has a less than 20% investment interest in the company’s ethanol marketer, Renewable Products Marketing Group, LLC (RPMG).  The net income which is reported in the Company’s income statement for RPMG is based on RPMG’s March 31, 2009 unaudited results.  The carrying amount of the Company’s investment was approximately $1,227,000 and $1,513,000 as of June 30, 2009 and December 31, 2008, respectively.

 

9

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

Dakota Ethanol has a less than 20% investment interest in Prairie Gold Venture Partnership, LLC (PGVP), a venture capital fund investing in cellulosic ethanol production.  The net income which is reported in the Company’s income statement for PGVP is based on PGVP’s March 31, 2009 unaudited results.  The carrying amount of the Company’s investment was approximately $994,000 as of June 30, 2009 and December 31, 2008.

 

Dakota Ethanol has a less than 20% investment interest in Corn Oil Bio-Solutions, LLC (COBS), a developmental stage bio-diesel refinery.  During the quarter ended December 31, 2008, the project was idled due to credit conditions, as such, the company reduced its investment to zero.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Environmental Liabilities

 

Dakota Ethanol’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require Dakota Ethanol to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, Dakota Ethanol has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when Dakota Ethanol’s liability is probable and the costs can be reasonably estimated.

 

Risks and Uncertainties

 

The current U.S. recession has reduced the nation’s demand for energy.  The recent bankruptcy filing of one of the industry’s major producers has resulted in great economic uncertainty about the viability of ethanol.  The ethanol boom of recent years has spurred overcapacity in the industry and production capacity is currently exceeding the RFS mandates.  The average national ethanol spot market price has plunged over 30% since May 2008.  The drop in crude oil prices from a record $150 a barrel to its recent price of less than $70 a barrel has resulted in the price of reformulated gasoline blendstock for oxygen blending (RBOB) dropping below $1 per gallon in December 2008.  With ethanol spot prices exceeding RBOB prices the economic incentives for blenders to continue using ethanol has become less advantageous.  This could result in a significant reduction in the demand for ethanol.  As such, the Company may need to evaluate whether crush margins will be sufficient to operate the plant and generate enough debt service.  In the event crush margins become negative for an extended period of time, the Company may be required to reduce capacity or shut down the plant.  The Company will continue to evaluate crush margins on a regular basis and may reduce capacity or shut down depending on the economic conditions at the time.

 

Recent Accounting Pronouncements

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”).  FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements.  FSP FAS 107-1 and APB 28-1 is effective for periods ending after June 15, 2009.  The Company adopted FSP FAS 107-1 and APB 28-1 effective for the quarter ending June 30, 2009.  The adoption did not have an impact on the Company’s financial position or results of operations.

 

In May 2009, the FASB issued FASB Statement No. 165, “ Subsequent Events” (“SFAS No. 165”).  SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  The Company adopted this statement for the quarter ending June 30, 2009.

 

10

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

In June 2009, the FASB issued Statement No. 168, “ The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.”   Under the Statement, The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  In the FASB’s view, the issuance of this Statement and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,” paragraphs 38—76.  The Company does not expect that the adoption of this Statement will have a material impact on the Company’s financial statements.

 

NOTE 3 -         INVENTORY

 

Inventory consisted of the following as of June 30, 2009 and December 31, 2008:

 

		June 30,			December 31,
		2009			2008*
Raw materials		$	3,931,012		$	3,937,873
Finished goods		1,110,976			825,878
Work in process		526,601			591,870
Parts inventory		1,174,058			1,171,356
		$	6,742,647		$	6,526,977

 

* Derived from audited financial statements

 

Included in inventory is a lower of cost or market adjustment of approximately $412,000 and $1,139,000 at June 30, 2009 and December 31, 2008 respectively.

 

NOTE 4 -         SHORT-TERM NOTES PAYABLE

 

On June 18, 2009, Dakota Ethanol renewed a revolving promissory note from First National Bank of Omaha in the amount of $4,000,000.  The note expires on May 17, 2010 and the amount available is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital, net worth and borrowing base requirements. Interest on the outstanding principal balances will accrue at adjustable basis points above the lender’s base rate (5.25 percent at June 30, 2009). There is a commitment fee of 3/8 percent on the unused portion of the $4,000,000 availability. The note is collateralized by the ethanol plant, its accounts receivable and inventories.  On June 30, 2009, Dakota Ethanol had approximately $1,746,000 outstanding and $2,254,000 available to be drawn on the revolving promissory note.  On December 31, 2008, Dakota Ethanol had $0 outstanding and $3,000,000 available to be drawn on the revolving promissory note.

 

NOTE 5 -         LONG-TERM NOTES PAYABLE

 

On January 16, 2009, we entered into an amendment to our credit agreements with FNBO.  The primary purposes of these amendments were to increase our revolving line of credit with FNBO from $3,000,000 to $5,000,000 and to make changes to the covenants applicable to our credit agreements.  We agreed to provide FNBO more information regarding our hedging transactions and to make adjustments to our hedging strategies.  We also agreed to raise an additional $2,000,000 in subordinated debt by March 31, 2009 and to secure alternate financing for our corn oil

 

11

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

extraction equipment by April 30, 2009.  In addition, we agreed not to make any distributions to our members without FNBO’s prior approval.

 

In order to comply with the conditions FNBO imposed regarding raising additional subordinated debt financing, we conducted a private placement offering of subordinated unsecured debt securities which closed on May 30, 2009.  The securities mature two years from the date of issuance.  Interest on the outstanding balances will accrue at a fixed rate of 9 percent.  Interest will be paid annually on January 30 th  of each year beginning on January 30, 2010.  As of June 30, 2009, we have raised $1,439,000 in subordinated debt through this offering.

 

On May 22, 2009, Dakota Ethanol entered into two loan agreements for alternative financing for our corn oil extraction equipment as we had agreed with FNBO; one loan with Rural Electric Economic Development, Inc (REED) and the other loan with First District Development Company (FDDC).

 

The note to REED for $1 million has a fixed interest rate of 4.7%.  The note requires monthly installments of principal and interest and matures on May 25, 2014.  The note is secured by the oil extraction equipment.

 

The note to FDDC for $200,000 has a fixed interest rate of 5.5%.  The note requires monthly installments of principal and interest and matures on May 22, 2014.  The note is secured by the oil extraction equipment.

 

FNBO has agreed that the $1.2 million in additional financing we have secured for the corn oil extraction equipment is sufficient to satisfy the requirement in our amended credit agreements.

 

As of June 30, 2009, we have raised $1,439,000 in subordinated debt through this offering and had secured an additional $700,000 which closed on July 24, 2009.  FNBO has agreed that the $2.1 million in additional subordinated financing we have secured is sufficient to satisfy the requirement in our amended credit agreements.

 

We are in compliance with our financial covenants as of June 30, 2009.

 

The balances of the notes payable are as follows:

 

		June 30,			December 31,
		2009			2008*
Note payable to First National Bank of Omaha
Term Note 2		$	3,862,165		$	4,816,855
Term Note 5		5,000,000			2,000,000
Note payable - Land		450,000			450,000
Note payable - Subordinated notes		1,439,000			—
Note payable - REED		985,705			—
Note payable - FDDC		197,097			—
		11,933,967			7,266,855
Less current portion		(2,373,487		)	(2,065,357		)
		$	9,560,480		$	5,201,498

 

* Derived from audited financial statements

 

The interest rate on the outstanding principal balances of term note 5 was 5.0 percent at June 30, 2009.

 

Minimum principal payments for the next five years are estimated as follows:

 

12

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

Twelve Months Ending June 30,		Amount
2010		$	2,373,487
2011		3,600,012
2012		5,352,877
2013		364,757
2014		242,834

 

NOTE 6 -         FAIR VALUE MEASUREMENTS

 

Effective January 1, 2009, the Company completely adopted SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.

 

The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis.  SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value.  There are three levels of determining fair value.

 

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

 

Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.

 

Level 3 uses unobservable inputs that are not corroborated by market data.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

 

Derivative financial instruments . Commodity futures and 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 CBOT and NYMEX markets.  Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs.  For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.  For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.

 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

		Total			Level 1			Level 2			Level 3
Assets:
Derivative financial instruments		$	433,534		$	433,534		$	—		$	—
Liabilities:
Derivative financial instruments		892,912			—			892,912			—

 

13

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2009.

 

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non recurring basis are discussed above.  The methodologies for other financial assets and financial liabilities are discussed below.

 

The Company believes the carrying amount of cash, cash equivalents, accounts receivable, due from broker, derivative instruments, and accounts payable approximates fair value due to the short maturity of these instruments.

 

The carrying amount of long-term obligations at June 30, 2009 of $12,194,923 had an estimated fair value of approximately $12,309,137 based on estimated interest rates for comparable debt.  The carrying amount and fair value were $7,527,811 and $7,700,926 respectively at December 31, 2008.

 

The Company believes the carrying amount of the short-term note payable at June 30, 2009 approximates fair value due to the short maturity of the instrument.

 

NOTE 7 -         COMMITMENTS, CONTINGENCIES AND AGREEMENTS

 

Environmental — During the year ended December 31, 2002, management became aware that the ethanol plant may have exceeded certain emission levels allowed by their operating permit. The Company has disclosed the situation to the appropriate state regulatory agency and has taken steps to reduce the emissions to acceptable levels. Management has not accrued a liability for environmental remediation costs since the costs, if any, cannot be estimated.

 

NOTE 8 -         RELATED PARTY TRANSACTIONS

 

Dakota Ethanol owns a 9% interest in RPMG, in which Dakota Ethanol has entered into an ethanol marketing agreement for the exclusive rights to market, sell and distribute the entire ethanol inventory produced by Dakota Ethanol.  The marketing fees are included in net revenues.

 

On August 1, 2008, Dakota Ethanol entered into a dried distiller’s grains marketing agreement with RPMG for the exclusive rights to market, sell and distribute the entire dried distiller’s grains inventory produced by Dakota Ethanol.

 

14

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2009 AND 2008

 

Sales and marketing fees related to the agreements are as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Sales ethanol		$	18,381,116		$	26,167,626		$	35,053,846		$	50,319,836
Sales distiller’s grains		1,322,406			—			2,437,293			—
Marketing fees ethanol		53,525			44,132			105,795			90,371
Marketing fees distillers grains		26,218			—			43,496			—
		June 30,			December 31,
		2009			2008
Amounts due included in accounts receivable		$	3,585,325		$	2,049,739

 

NOTE 9 -         SUBSEQUENT EVENTS

 

Subsequent events have been evaluated through August 12, 2009.  Through that date, the events requiring  disclosure are as follows:

 

Subordinated Debt - On July 24 th , we issued an additional $700,000 in subordinated secured debt to Guardian Eagle Investments, LLC.  The note has a fixed interest rate of 9.0%.  The note requires monthly installments of principal and interest and matures in April 2012.

 

Corn Oil Agreement - On August 11, 2009, we executed a corn oil marketing agreement with RPMG, Inc.  Pursuant to the agreement, RPMG agreed to market all of the corn oil we expect to produce.  The initial term of the agreement is for one year.  The agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed.  We agreed to pay RPMG a commission based on each pound of  our corn oil that is sold by RPMG.

 

15

---

Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month periods ended June 30, 2009, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the consolidated financial statements and the Management’s Discussion and Analysis section for the fiscal year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K.

 

Disclosure Regarding Forward-Looking Statements

 

This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

 

·	Availability and costs of products and raw materials, particularly corn and natural gas;
·	Changes in the price and market for ethanol and distiller’s grains;
·	Decreases in the price of gasoline or decreased gasoline demand;
·	Our ability to secure the financing we require to maintain liquidity and operate our business;
·	Changes in the availability and cost of credit;
·	Changes and advances in ethanol production technology;
·	The effectiveness of our hedging strategy to offset increases in the price of our raw materials and decreases in the prices of our products;
·	Projected growth or overcapacity within the ethanol industry causing supply to exceed demand;
·	Our ability to market and our reliance on third parties to market our products;
·	The decrease or elimination of governmental incentives which support the ethanol industry;
·	Changes in the weather or general economic conditions impacting the availability and price of corn;
·	Our ability to generate free cash flow to invest in our business and service our debt;
·	Changes in plant production capacity or technical difficulties in operating the plant;
·	Changes in our business strategy, capital improvements or development plans;
·	Our ability to retain key employees and maintain labor relations;
·	Our liability resulting from litigation;
·	Competition from alternative fuels and alternative fuel additives; and
·	Other factors described elsewhere in this report.

 

16

---

Table of Contents

 

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.  We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

 

Overview

 

Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, LLC.  Dakota Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year.  Lake Area Corn Processors, LLC is referred to in this report as “LACP,” the “company,” “we,” or “us.”  Dakota Ethanol, LLC is referred to in this report as “Dakota Ethanol” “we” “us” or the “ethanol plant.”

 

Our revenues are derived from the sale and distribution of our ethanol, distillers grains and corn oil.  The ethanol plant currently operates in excess of its nameplate capacity, producing approximately 47 million gallons of ethanol per year.  Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market.

 

As of the end of our 2008 fiscal year and the end of the first quarter of our 2009 fiscal year, we were not in compliance with all of the covenants contained in our credit agreements with First National Bank of Omaha (FNBO), our primary lender.  As a result, we entered into two amendments to our credit agreements with FNBO and took various steps required by FNBO to address these covenant non-compliance issues.  As of June 30, 2009, we were in compliance with all of the covenants contained in our credit agreements and we have satisfied all of FNBO’s requirements as a result of our previous non-compliance.  The steps that we took to comply with FNBO’s requirements are described in more detail below in “ Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness. ”

 

We recently completed installation of corn oil extraction equipment which allows us to remove some of the corn oil contained in our distiller’s grains.  This allows us to sell the corn oil separately from the distiller’s grains that we produce.  We used cash from our revolving lines of credit to finance the corn oil extraction equipment.  We recently secured $1.2 million in subordinated financing to offset the cost of installing the corn oil extraction equipment.

 

On August 11, 2009, we executed a corn oil marketing agreement with RPMG, Inc., which is the same entity that markets our ethanol and distiller’s grains.  Pursuant to the agreement, RPMG agreed to market all of the corn oil we expect to produce.  The initial term of the agreement is for one year.  The agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed.  We agreed to pay RPMG a commission based on each pound of  our corn oil that is sold by RPMG.

 

The production of corn oil presents a new source of revenue for us.  We are continuing to improve the efficiency of our corn oil extraction equipment in order to maximize this additional revenue.

 

Results of Operations for the Three Months Ended June 30, 2009 and 2008

 

The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items in relation to total revenues in our consolidated statements of operations for the three months ended June 30, 2009 and 2008:

 

17

Table of Contents

 

		June 30, 2009					June 30, 2008
Income Statement Data		Amount			%		Amount			%
Revenues		$	22,487,000		100.0		$	29,916,456		100.0
Cost of Revenues		$	21,456,600		95.4		$	18,273,259		61.1
Gross Profit		$	1,030,400		4.6		$	11,643,197		38.9
Operating Expenses		$	747,143		3.3		$	988,648		3.3
Income from Operations		$	283,257		1.3		$	10,654,549		35.6
Other Expense		$	(100,604	)	(0.5	)	$	(152,228	)	(0.5	)
Net Income		$	182,653		0.8		$	10,502,321		35.1

 

Revenues .  Our total revenues for the three months ended June 30, 2009 decreased by approximately 25% compared to the same period of 2008.  Our ethanol revenue decreased by approximately 30% during the three month period ended June 30, 2009 compared to the same period of 2008, which in real terms equaled a decrease of approximately $7,787,000.  However, our total distiller’s grains revenue increased by approximately 5% for the three month period ended June 30, 2009 compared to the same period of 2008.  In real terms, this equaled an approximately $166,000 increase in total distiller’s grains revenue.  We also experienced an increase in our other revenues, including our corn oil sales, of approximately $191,000 for the three month period ended June 30, 2009 compared to the same period of 2008.

 

Our decreased ethanol revenue was primarily the result of a significant decrease in the average price at which we sold our ethanol during the three month period ended June 30, 2009 compared to the same period of 2008.  We attribute this decrease in our average ethanol sales price with decreases in commodity prices generally, including decreased energy prices.  We anticipate that the average price we receive for our ethanol is comparable to what is received by other producers in our industry.  The average price we received for our ethanol during the three month period ended June 30, 2009 was approximately $1.55 per gallon, compared to approximately $2.37 per gallon during the same period of 2008, an approximately 35% decrease.  This decrease mirrors the decrease experienced in gasoline prices during the same time period.  However, ethanol prices have recently been increasing after decreasing through June and the beginning of July 2009.  We anticipate that ethanol prices will remain lower in the near future, with an anticipated increase in ethanol prices should the world economy continue to recover.  Management believes that soft world demand for gasoline has a negative impact on demand for ethanol, since ethanol is primarily blended with conventional gasoline.  However, we anticipate that during the summer months, when gasoline demand typically increases, we will experience more favorable ethanol demand which may include increases in ethanol prices.

 

Management believes that the ethanol industry must continue to grow demand for ethanol in order to maintain profitability in the industry.  Management believes that there is currently excess ethanol supply capacity which has resulted in lower ethanol prices.  This has caused some ethanol producers to reduce production or cease production altogether.  Further, ethanol demand may be capped due to what is commonly referred to as the “blending wall.”  Currently, ethanol is blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline.  Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year.  Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons.  This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool.  Many believe that the ethanol industry will reach this blending wall in 2009 or 2010.  Without an expansion of the percentage of ethanol that is blended for use in conventional automobiles, or increased demand for higher ethanol blends such as E85, demand for ethanol may not exceed this 13.5 billion gallon limit.

 

We somewhat offset the decrease in ethanol revenue related to our decreased average ethanol sales prices with an increase in the total number of gallons of ethanol we sold during our second quarter of 2009.  We sold

 

18

Table of Contents

 

approximately 11,894,000 gallons of ethanol during the three month period ended June 30, 2009 compared to approximately 11,033,000 gallons of ethanol during the comparable period of 2008, an increase of approximately 8%.  We attribute the lower ethanol sales during the three month period ended June 30, 2008 with equipment problems we experienced during that time period which reduced our ethanol production.  We have since rectified these equipment issues and the ethanol plant is currently operating at its full capacity.

 

Our total distiller’s grains sales increased to approximately 33,016 dry-equivalent tons of distiller’s grains during the three month period ended June 30, 2009 compared to approximately 30,016 dry-equivalent tons of distiller’s grains we sold during the three month period ended June 30, 2008, an increase of approximately 10%.  We attribute this increase in distiller’s grains sales with increased ethanol and distiller’s grains production during 2009.

 

During the three month period ended June 30, 2009, the average price we received for our dried distiller’s grains was approximately $120 per dry-equivalent ton and the average price we received for our modified/wet distiller’s grains was approximately $111 per dry-equivalent ton.  By comparison, during the three month period ended June 30, 2008, the average price we received for our dried distiller’s grains was approximately $82 per dry-equivalent ton and the average price we received for our modified/wet distiller’s grains was approximately $133 per dry-equivalent ton.  We experienced comparatively lower distiller’s grains pricing during the three month period ended June 30, 2008 as a result of long-term distiller’s grains sales contracts that we had in place in 2008 which were lower than the market price at that time.  However, we have experienced decreasing distiller’s grains prices during 2009 as a result of falling corn and soybean meal prices.  This trend is continuing and has negatively impacted our recent distiller’s grains sales prices.  We anticipate that distiller’s grains sales prices will continue to change in relation to changes in corn and soybean meal prices.

 

During the three month period ended June 30, 2009, we sold approximately 33% of our total distiller’s grains in the dried form and approximately 67% in the modified/wet form.  Comparatively, during the three month period ended June 30, 2008, we sold approximately 26% of our total distiller’s grains in the dried form compared to approximately 74% in the modified/wet form.  We attribute this increase in our dried distiller’s grains sales during the three month period ended June 30, 2009 compared to the same period of 2008 with softer demand for modified/wet distiller’s grains in our local market.  If we are unable to sell our distiller’s grains locally in the modified/wet form, we must sell more distiller’s grains in the dried form outside of our local market.  We make determinations with respect to what form of distiller’s grains we will sell based on market conditions and the relationship between natural gas costs and the relative market price of dried distiller’s grains versus modified/wet distiller’s grains.  However, due to current low natural gas costs, dried distiller’s grains are relatively less expensive to produce than they have been in previous years.

 

During the three month period ended June 30, 2009, we were engaged in the sale of corn oil which was extracted from our distiller’s grains.  The addition of corn oil sales provided revenue of approximately $152,000 for the three month period ended June 30, 2009.  We did not have any corn oil sales during the comparable period of 2008.

 

Cost of Revenues .  We experienced a significant increase in our total cost of revenues for the three month period ended June 30, 2009 compared to the same period of 2008.  Our two primary costs of producing ethanol and distiller’s grains are corn costs and natural gas costs.  During the three month period ended June 30, 2009, our total corn costs were approximately 54% higher than the comparable period of 2008.  In real terms, our total corn costs were approximately $5,833,000 higher for the second quarter of 2009 compared to the same period of 2008.  However, our total natural gas costs decreased by approximately 51%, or a total of approximately $1,666,000, for the second quarter of 2009 compared to the same period of 2008.

 

We attribute the increase in our total corn costs for the three month period ended June 30, 2009 compared to the same period of 2008 with a combination of increased corn costs per bushel during 2009 along with an increase in corn consumption during 2009.  We experienced an increase in our total cost per bushel of corn during the three month period ended June 30, 2009 of approximately 37% or $1.07 per bushel.  We attribute the increase in corn costs per bushel for the three month period ended June 30, 2009 with favorable risk management positions that we had in place during 2008 which reduced our corn costs per bushel during that period of time.  Further, corn prices peaked during June of 2008.  In response to increasing corn prices at that time, we entered into a significant amount of fixed price forward purchase contracts, some of which were delivered during the three month period ended June 

 

19

Table of Contents

 

30, 2009, which were for prices higher than the current market price of corn.  This resulted in us using corn during our second fiscal quarter of 2009 which was more expensive than the spot market prices.  In addition, we increased our corn consumption during the three month period ended June 30, 2009 by approximately 12% or 446,000 bushels.  We attribute this increase in corn consumption with increased production of ethanol and distiller’s grains by the ethanol plant during the three month period ended June 30, 2009 compared to the same period of 2008.

 

As energy prices in general have decreased, we have experienced a significant decrease in our natural gas costs.  Natural gas prices tend to change in relation to energy prices generally.  However, management believes that in addition to decreased energy demand as a result of the continuing worldwide economic slowdown, new natural gas reserves have been brought into production which have increased the supply of natural gas in the market.  This has significantly increased natural gas reserves.  Management believes that these two factors have combined to create the current low natural gas prices.  Our total natural gas costs for the three month period ended June 30, 2009 decreased significantly compared to the same period of 2008 as a result of a significant decrease in natural gas prices, partially offset by a smaller increase in natural gas consumption.  Our average cost per MMBTU of natural gas decreased by approximately 52% or $5.51 for the three month period ended June 30, 2009 compared to the same period of 2008.  As a result of our increased ethanol and distiller’s grains production, our natural gas consumption increased by approximately 2% or approximately 7,000 MMBTU for the three month period ended June 30, 2009 compared to the same period of 2008.  Management believes that for the remaining quarters of our 2009 fiscal year, natural gas prices will be flat or slightly increasing.  Management anticipates that we will experience the typical premium natural gas pricing during the winter months as a result of increased natural gas demand for home heating needs.  In addition, natural gas prices can be volatile as a result of hurricane activity in the Gulf Coast region of the United States.  If a significant amount of natural gas production is damaged or shuttered as a result of hurricane activity during the late summer and early fall, we may experience a significant increase in natural gas prices.  These supply disruptions due to hurricane activity are difficult to predict.

 

A s of June 30, 2009, we recorded an impairment of approximately $614,000 related to our future corn purchase contracts and our corn inventory.  This was a lower of cost or market adjustment that we made based on estimates of the value of our future corn contracts and corn inventory related to the projected selling price of ethanol.  This adjustment increased our corn costs and therefore had a negative impact on our cost of revenues.

 

Operating Expenses .  Our operating expenses decreased significantly for the three month period ended June 30, 2009 compared to the same period of 2008.  This decrease in operating expenses is primarily the result of decreased wages and bonuses we paid to our employees as well as decreased environmental compliance costs and public relations fees.  Our bonus payments are tied to the financial results of our operations.  Due to current conditions in the ethanol industry, we have experienced decreased net income which has decreased the bonuses we pay to our employees.

 

Other Expense .  Our total other expense for the three month period ended June 30, 2009 was less than our other expense for the comparable period of 2008.  We experienced increased interest expenses during the three month period ended June 30, 2009 compared to the same period of 2008 as a result of having increased borrowing on our loans.  This increase in interest expense was offset by an increase in our equity interest in the net income of our investments.  This increase in our equity interest in the net income of our investments was primarily related to our investment in RPMG, our ethanol, distiller’s grains and corn oil marketer.  We also had less interest income during the three month period ended June 30, 2009 compared to the same period of 2008 due to having less cash on hand and lower interest rates during 2009.

 

Results of Operations for the Six Months Ended June 30, 2009 and 2008

 

The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items in relation to total revenues in our consolidated statements of operations for the six months ended June 30, 2009 and 2008:

 

20

Table of Contents

 

		June 30, 2009					June 30, 2008
Income Statement Data		Amount			%		Amount			%
Revenues		$	43,462,005		100.0		$	56,394,467		100.0
Cost of Revenues		$	42,393,017		97.5		$	32,701,421		58.0
Gross Profit		$	1,068,988		2.5		$	23,693,046		42.0
Operating Expenses		$	1,449,604		3.3		$	2,089,706		3.7
Income (Loss) from Operations		$	(380,616	)	(0.9	)	$	21,603,340		38.3
Other Expense		$	(686,751	)	(1.6	)	$	(364,521	)	(0.6	)
Net Income (Loss)		$	(1,067,367	)	(2.5	)	$	21,238,819		37.7

 

Revenues .  Our total revenues for the six months ended June 30, 2009 decreased by approximately 23% compared to the same period of 2008.  Our ethanol revenue decreased by approximately 30% during the six month period ended June 30, 2009 compared to the same period of 2008.  In real terms, we experienced an approximately $15,266,000 decrease in ethanol revenue for the six months ended June 30, 2009 compared to the same period of 2008.  However, our total distiller’s grains revenue increased by approximately 36% for the six month period ended June 30, 2009 compared to the same period of 2008.  In real terms, this equaled an approximately $2,068,000 increase in distiller’s grains revenue.  We also experienced an increase in other revenue for the six month period ended June 30, 2009 of approximately $265,000 compared to the same period of 2008.

 

We experienced a decrease in our average ethanol sales price of approximately 33%, or approximately $0.74 per gallon for the six month period ended June 30, 2009 compared to the same period of 2008.  We attribute this decrease in ethanol sales prices with decreased commodity prices generally and decreases in energy prices as a result of the current global economic climate.  We increased the total number of gallons of ethanol sold for the six month period ended June 30, 2009 by approximately 4%, or approximately 917,000 gallons, compared to the same period of 2008.

 

The average prices we received for our dried distiller’s grains increased by approximately 45%, or approximately $40 per dry-equivalent ton, for the first six months of our 2009 fiscal year compared to the same period of 2008.  In addition, the average price we received for our modified/wet distiller’s grains increased by approximately 18%, or approximately $18 per dry-equivalent ton, for the first six months of our 2009 fiscal year compared to the same period of 2008.  We increased the total tons of distiller’s grains sold during the six month period ended June 30, 2009 by approximately 8%, or approximately 5,000 dry-equivalent tons.

 

We had corn oil revenue of approximately $199,000 for the six month period ended June 30, 2009.  We did not have any corn oil revenue for the comparable period of 2008.

 

Cost of Revenues .  Our total corn costs increased by approximately 72% for the six month period ended June 30, 2009 compared to the same period of 2008.  In real terms, this was an increase of approximately $13,487,000.  Our average cost per bushel of corn increased by approximately 60% and our corn consumption increased by approximately 8% for the first six months of 2009 compared to the same period of 2008.  Our total natural gas costs for the six month period ended June 30, 2009 decreased by approximately 33%, or approximately $2,085,000, compared to the six months ended June 30, 2008.  Our cost per MMBTU of natural gas decreased by approximately 32% and our natural gas consumption decreased by approximately 1% for the six month period ended June 30, 2009 compared to the same period of 2008.

 

We experienced significantly larger gains on our derivative instrument positions for the six month period ended June 30, 2008 compared to the same period of 2009.  These derivative instrument gains reduce our cost of revenues.  We experienced an approximately $11,061,000 gain on our derivative instruments for the six month period ended June 30, 2008 compared to a gain of approximately $2,431,000 for the comparable period of 2009.

 

21

Table of Contents

 

General and Administrative Expense .  Our general and administrative expenses decreased significantly for the six month period ended June 30, 2009 compared to the same period of 2008.  We attribute this significant decrease to decreased wages and bonuses we paid to our employees as well as decreased environmental compliance costs and business promotions for the first six months of 2009 compared to the same period of 2008.

 

Other Expense .  Our total other expense for the six month period ended June 30, 2009 increased significantly compared to the same period of 2008, primarily as a result of a reduction in the value of our investment in RPMG, our ethanol, distiller’s grains and corn oil marketer, which we recorded during the first fiscal quarter of 2009.  We also experienced increased interest expenses due to increased borrowing on our line of credit as well as reduced interest income related to our decreased cash on hand for the six month period ended June 30, 2009 compared to the same period of 2008.

 

Changes in Financial Condition for the Six Months Ended June 30, 2009

 

We experienced an increase in our current assets at June 30, 2009 compared to December 31, 2008.  We experienced a significant increase in accounts receivable at June 30, 2009 compared to December 31, 2008 due to the timing of payments we received from our ethanol, distiller’s grains and corn oil marketer.  We had an other receivable at June 30, 2009 of approximately $83,000 compared to an other receivable at December 31, 2008 of approximately $167,000.  These other receivables are related to subsidy payments we receive periodically from the State of South Dakota.

 

The value of our inventory was higher at June 30, 2009 compared to December 31, 2008, primarily as a result of an increase in the value of our finished goods inventory.  The value of our raw materials inventory was lower at June 30, 2009 compared to December 31, 2008, primarily as a result of lower corn prices at June 30, 2009 compared to December 31, 2008.  We had a comparable quantity of corn in inventory at both June 30, 2009 and December 31, 2008.  The amount we had due from our commodities broker was higher at June 30, 2009 compared to December 31, 2008 as a result of our commodities broker holding more cash in our margin account related to the futures and options positions we had on June 30, 2009.  At December 31, 2008, we predominantly had options that did not require us to maintain a significant amount of cash in our margin account.  Further, the value of our derivative financial instruments was higher at June 30, 2009 compared to December 31, 2008 due to the greater number and value of the derivative instruments that we held at June 30, 2009.

 

The net value of our property and equipment was slightly lower at June 30, 2009 compared to December 31, 2008 as the result of the net effect of increases in the value of our property and equipment, offset by our accumulated depreciation.  We completed installation of our corn oil extraction equipment during our first fiscal quarter of 2009 which resulted in an increase in the value of our equipment.

 

Our other assets were lower at June 30, 2009 compared to December 31, 2008, primarily due to a reduction in the value of our investment in RPMG, our ethanol marketer in the amount of approximately $286,000.

 

We experienced a decrease in our total current liabilities on June 30, 2009 compared to December 31, 2008.  We experienced a significant increase in our checks which were outstanding in excess of our bank balance at June 30, 2009 compared to December 31, 2008 as a result of deferred corn payments at the end of our fiscal year.  This increased the value of our accounts payable and therefore decreased the amount of payments that we had outstanding in excess of our bank balance on December 31, 2008.  Amounts drawn on checks in excess of our bank balance are paid from our revolving lines of credit.  We experienced a decrease in our accounts payable of approximately $4,365,000 at June 30, 2009 compared to December 31, 2008.  We had higher than usual accounts payable as of December 31, 2008 due to our corn suppliers seeking to defer corn payments until after the end of their taxable years.  As of June 30, 2009, our accounts payable is more in line with what we typically have outstanding.  We also experienced a significant decrease in our accrued liabilities primarily as a result of a decrease in the lower of cost or market impairment which we recorded at June 30, 2009.  The amount of our lower of cost or market adjustment related to our corn future purchases and corn inventory decreased from approximately $2.7 million on December 31, 2008 to approximately $614,000 at June 30, 2009.  We experienced a significant increase in our liability related to derivative financial instruments as a result of the impact decreasing corn costs had on our future corn purchase contracts.  Further, as of June 30, 2009, we had approximately $1,746,000 outstanding on our short-term revolving line of credit.  As of December 31, 2008, we had not drawn any funds on our short-term

 

22

Table of Contents

 

revolving line of credit.  In addition, our current liabilities were higher on June 30, 2009 compared to December 31, 2008 as a result of increased principal payments on our debt financing.

 

We experienced a significant increase in our long-term liabilities as of June 30, 2009 compared to December 31, 2008, primarily as a result of increases in our long-term notes payable.  At June 30, 2009, we had approximately $9,560,000 outstanding in the form of long-term loans, compared to approximately $5,201,000 at December 31, 2008.  This increase is attributed to cash we utilized from our long-term revolving loan for our continuing operations.  We also had approximately $1,439,000 outstanding in subordinated debt securities as of June 30, 2009 which are included in our long-term liabilities.  We experienced an increase in our other long-term liabilities related to accrued damage to our leased railcars.  We anticipate being required to repair damage to certain railcars that we are leasing when the leases expire in 2010.  We are including this anticipated cost as a long-term liability on our balance sheet.

 

Liquidity and Capital Resources

 

During the end of our 2008 fiscal year and the beginning of our current fiscal year, we worked to solidify our liquidity as a result of the extremely difficult conditions we have been experiencing in the ethanol industry.  During the end of 2008 and the early part of 2009, the ethanol industry was experiencing very tight operating margins and in some cases negative operating margins.  Currently, we are enjoying a more favorable spread between the market prices of corn and ethanol which has allowed us to maintain positive operating margins throughout our second fiscal quarter.  Following the end of our second fiscal quarter, ethanol prices have increased and corn prices have continued to fall which has positively impacted our operating margins.  However, we anticipate that ethanol and corn prices will continue to be volatile and we anticipate continually working to maintain our profitability and our liquidity.  As a result of certain forward corn purchase contracts that we executed for delivery in the fourth quarter of our 2009 fiscal year which are currently in excess of the market price of corn, our financial projections predict that we will experience net losses during the fourth fiscal quarter of 2009.  We anticipate that most of our above market corn forward purchase contracts will be satisfied by the end of our 2009 fiscal year.

 

We do not anticipate making any significant capital expenditures during the next 12 months.

 

Based on current financial forecasts performed by management, we anticipate that we will have sufficient cash from our current credit facilities, our current subordinated debt, our corn oil equipment financing, and cash from our operations to continue to operate the ethanol plant for the next 12 months.  We do not anticipate seeking additional equity or debt financing during the next 12 months.

 

We have recently adjusted our risk management strategy in order to more closely match our raw material costs with current market ethanol prices.  To the extent we can, we try to price most of our raw material purchases closely in time to when these raw materials will be delivered.  We believe that ethanol prices follow commodity prices generally, including corn and natural gas prices.  Therefore, we anticipate that if we price our raw materials, including corn and natural gas, closely in time to our ethanol sales, we will be able to maintain a positive operating margin and maintain our liquidity.  However, should ethanol prices cease moving in relation to corn and natural gas prices, we could again experience negative operating margins, especially if the price of corn increases at a time when ethanol prices are falling.  This could cause us to operate unprofitably and negatively impact our liquidity.

 

The following table shows cash flows for the six months ended June 30, 2009 and 2008:

 

		Six months Ended June 30,
		2009			2008
Net cash provided by (used in) operating activities		$	(6,585,142	)	$	2,379,898
Net cash used in investing activities		$	(1,033,330	)	$	(748,144	)
Net cash provided by (used in) financing activities		$	7,452,543		$	(642,166	)

 

Cash Flow From Operations .  The decrease in net cash flow from operating activities between the six month periods ended June 30, 2009 and 2008 was primarily due to a significant decrease in our net income for the six months ended June 30, 2009.  We experienced significant decreases in our accounts payable and accrued liabilities during the six month period ended June 30, 2009 which had a negative impact on our net cash from our

 

23