10-K 1 cardinal10-kfye9x30x18.htm 10-K FYE 9-30-18 Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the fiscal year ended September 30, 2018
 
 
 
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 000-53036
 
CARDINAL ETHANOL, LLC
(Exact name of registrant as specified in its charter)
 
Indiana
 
20-2327916
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1554 N. County Road 600 E., Union City, IN 47390
(Address of principal executive offices)
 
(765) 964-3137
(Registrant's telephone number, including area code)
 
Securities registered pursuant to 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Membership Units.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes     x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes     x No

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 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).
x Yes     o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

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

As of March 31, 2018, the aggregate market value of the membership units held by non-affiliates (computed by reference to the most recent offering price of such membership units) was $52,085,000. There is no established public trading market for our membership units. The aggregate market value was computed by reference to the price at which membership units were last sold by the registrant ($5,000 per unit).

As of November 21, 2018, there were 14,606 membership units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of this Annual Report is incorporated herein by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended September 30, 2018.



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INDEX
 
Page Number
 
 
 
 
 
 

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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This annual 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 terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon 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:

Reduction or elimination of the Renewable Fuel Standard;
Changes in the availability and price of corn and natural gas;
Our inability to secure credit or obtain additional equity financing we may require in the future to continue our operations;
Decreases in the price we receive for our ethanol, distillers grains and corn oil;
Our ability to satisfy the financial covenants contained in our credit agreements with our lender;
Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw material costs;
Negative impacts that our hedging activities may have on our operations;
Ethanol and distillers grains supply exceeding demand and corresponding price reductions;
Our ability to generate free cash flow to invest in our business and service any debt;
Changes in the environmental regulations that apply to our plant operations;
Changes in our business strategy, capital improvements or development plans;
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;
Lack of transport, storage and blending infrastructure preventing our products from reaching high demand markets;
Changes in federal and/or state laws;
Changes and advances in ethanol production technology;
Competition from alternative fuel additives;
Changes in interest rates or the lack of credit availability;
Changes in legislation benefiting renewable fuels;
Our ability to retain key employees and maintain labor relations;
Volatile commodity and financial markets;
Limitations and restrictions contained in the instruments and agreements governing any indebtedness; and
Decreases in export demand due to the imposition of tariffs by foreign governments on ethanol,distillers grains, and soybeans produced in the United States.

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.

AVAILABLE INFORMATION

Information about us is also available at our website at www.cardinalethanol.com, under "Financials and SEC Filing Information" which includes links to the reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.

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PART I

ITEM 1. BUSINESS

Business Development

Cardinal Ethanol, LLC is an Indiana limited liability company formed on February 7, 2005 with the name of Indiana Ethanol, LLC. On September 27, 2005, we changed our name to Cardinal Ethanol, LLC. References to “we,” “us,” “our,” “Cardinal” and the “Company” refer to Cardinal Ethanol, LLC. We began producing ethanol, distillers grains and corn oil at the plant in November 2008 (the "Ethanol Division"). In addition, we in 2017 added a facility to allow us to procure, transport and sell grain commodities through our new grain operations (the "Trading Division").

Reportable Operating Segments
 
Operating segments are defined as components of an enterprise for which separate financial information is available that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the nature of the products, services and operations and the expected financial results, we review our operations within the following two separate operating segments: (1) ethanol production through our Ethanol Division; and (2) trading of agricultural grains through our Trading Division. We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol, distillers’ grains, corn oil and and the trading of agricultural grains.  

Ethanol Division

In August 2010, we obtained a new Title V air permit allowing us to increase our annual ethanol production to 140 million gallons compared to 110 million gallons under our previous permit. Our annual ethanol production for the fiscal year ended September 30, 2018 increased to approximately 131 million gallons due to the completion of certain projects which added storage capacity, improved process efficiencies, and added an additional cooling tower cell and a beer-degasser.

Our revenues are primarily derived from the sale of our ethanol, distillers grains and corn oil. We market and sell ethanol and its co-products (distillers grains and corn oil) primarily in the continental United States using third party marketers. Murex, LLC markets all of our ethanol. Our distillers grains are marketed by CHS, Inc. We market and distribute all of the corn oil we produce directly to end users and third party brokers.    
    
Principal Products

The principal products in our Ethanol Division are fuel-grade ethanol and distillers grains. In addition, we are extracting corn oil and capturing a portion of the raw carbon dioxide we produce for sale. The table below shows the approximate percentage of our total ethanol division revenue which is attributed to each of our products for each of our last three fiscal years.
Product
 
Fiscal Year 2018
 
Fiscal Year 2017
 
Fiscal Year 2016
Ethanol
 
77
%
 
83
%
 
78
%
Distillers Grains
 
19
%
 
14
%
 
18
%
Corn Oil
 
4
%
 
4
%
 
4
%
Carbon Dioxide
 
< 1%

 
< 1 %

 
< 1%


Ethanol

Our primary product is ethanol. Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains. The ethanol we produce is manufactured from corn. Although the ethanol industry continues to explore production technologies employing various feedstocks, such as biomass, corn-based production technologies remain the most practical and provide the lowest operating risks. Corn produces large quantities of carbohydrates, which convert into glucose more easily than most other kinds of biomass. The Renewable Fuels Association estimates current domestic ethanol production capacity of approximately 16.4 billion gallons with approximately 3% of that capacity idled as of September 20, 2018.

An ethanol plant is essentially a fermentation plant. Ground corn and water are mixed with enzymes and yeast to produce a substance called “beer,” which contains about 10% alcohol and 90% water. The “beer” is boiled to separate the water, resulting

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in ethyl alcohol, which is then dehydrated to increase the alcohol content. This product is then mixed with a certified denaturant to make the product unfit for human consumption and commercially saleable.

Ethanol can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide emissions; and (iii) a non-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form for blending with unleaded gasoline and other fuel products. Used as a fuel oxygenate, ethanol provides a means to control carbon monoxide emissions in large metropolitan areas. The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender. The principal markets for our ethanol are petroleum terminals in the northeastern United States.

Distillers Grains

The principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy, beef, poultry and swine industries. Dry mill ethanol processing creates three forms of distillers grains: Distillers Wet Grains with Solubles ("DWS"), Distillers Modified Wet Grains with Solubles ("DMWS") and Distillers Dried Grains with Solubles ("DDGS"). DWS is processed corn mash that contains approximately 70% moisture. DWS has a shelf life of approximately three days and can be sold only to farms within the immediate vicinity of an ethanol plant. DMWS is DWS that has been dried to approximately 50% moisture. DMWS have a slightly longer shelf life of approximately ten days and are often sold to nearby markets. DDGS is DWS that has been dried to 10% to 12% moisture. DDGS has an almost indefinite shelf life and may be sold and shipped to any market regardless of its vicinity to an ethanol plant.

Corn Oil

Since November 2008, we have been separating some of the corn oil contained in our distillers grains for sale. We have worked hard to improve corn oil production levels and continue to fine tune the operation of our equipment to further increase production rates. The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. However, corn oil can be used as the feedstock to produce biodiesel, as a feed ingredient and has other industrial uses.

Carbon Dioxide

Since March 2010, we have been selling some of the carbon dioxide gas produced at the plant.

Ethanol, Distillers Grains, Carbon Dioxide and Corn Oil Markets

As described below in "Distribution Methods," we market and distribute our ethanol and distillers grains through third parties. Our ethanol and distillers grains marketers make all decisions, in consultation with management, with regard to where our products are marketed. Our ethanol and distillers grains are predominately sold in the domestic market. Specifically, we ship a substantial portion of the ethanol we produce to the New York harbor. We expect our ethanol and distillers grains marketers to explore all markets for our products, including export markets, and believe that there is some potential for increased international sales of our products. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.

Over the past year, exports of ethanol have increased with Brazil receiving the largest percentage of ethanol produced in the United States and Canada in second place. China, India, the Philippines and South Korea have also been top destinations. However, tariffs implemented by Brazil and China on ethanol imported from the United States and the potential for the imposition of tariffs by other countries due to trade disputes with the United States, may reduce overall ethanol export demand, which could have a negative effect on domestic ethanol prices. In addition, ethanol export demand is typically more unpredictable than domestic demand and tends to fluctuate over time as it is subject to monetary and political forces in other nations. For example, a strong U.S. Dollar is a force that may negatively impact ethanol exports from the United States.

Historically, the United States ethanol industry has exported a significant amount of distillers grains to China. The imposition of anti-dumping and anti-subsidy duties by China over the past two years has resulted in a significant decline in demand from China requiring United States producers to seek out alternative markets. Over the past year, export markets have become increasingly diversified with Turkey, Mexico and South Korea received the largest percentage of distillers grains produced in the United States and Thailand, Vietnam, Indonesia and Canada also receiving notable amounts. However, recent trade disputes with other countries have created additional uncertainty as to future export demand.

As described below in "Distribution Methods," we sell carbon dioxide to Air Products and Chemicals, Inc. ("Air Products") and we market and distribute all of the corn oil we produce directly to end users and third party brokers in the domestic market.

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Distribution Methods

Our ethanol plant is located near Union City, Indiana in Randolph County. We selected the site because of its location to existing ethanol consumption and accessibility to road and rail transportation. Our site is in close proximity to rail and major highways that connect to major population centers such as Indianapolis, Cincinnati, Columbus, Cleveland, Toledo, Detroit, New York and Chicago.

Ethanol

We entered into an Ethanol Purchase and Sale Agreement with Murex, LLC ("Murex") for the purpose of marketing and distributing all of the ethanol we produce at the plant. The initial term of the agreement was five years commencing on the date of first delivery of ethanol with automatic renewal for one year terms thereafter unless otherwise terminated by either party. The agreement may be terminated due to the insolvency or intentional misconduct of either party or upon the default of one of the parties as set forth in the agreement.
Under the terms of the agreement, Murex markets all of our ethanol unless we choose to sell a portion at a retail fueling station owned by us or one of our affiliates. Murex pays to us the purchase price invoiced to the third-party purchaser less all resale costs, taxes paid by Murex and Murex's commission. Murex has agreed to purchase on its own account and at market price any ethanol which it is unable to sell to a third party purchaser. Murex has promised to use its best efforts to obtain the best purchase price available for our ethanol. In addition, Murex has agreed to promptly notify us of any and all price arbitrage opportunities. Under the agreement, Murex is responsible for all transportation arrangements for the distribution of our ethanol. This agreement provides for an annual cap on the commission paid to Murex. Effective November 18, 2018, we further amended our agreement to provide for the payment of the commission to Murex to be calculated on each net gallon of ethanol taken under the agreement. The amendment provides that Murex will handle all RIN activity, submit regulatory reports, and lease us a minimum number of tank cars for rail transportation and manage the tank car fleet in exchange for a monthly payment. The amendment also extends the term of the agreement until November 30, 2022, to be renewed thereafter automatically for one-year periods unless either party gives notice of non-renewal.
Distillers Grains
We have entered into an agreement with CHS, Inc. to market all distillers grains we produce at the plant. CHS, Inc. is a diversified energy, grains and foods company owned by farmers, ranchers and cooperatives. CHS, Inc. provides products and services ranging from grain marketing to food processing to meet the needs of its customers around the world. We receive a percentage of the selling price actually received by CHS, Inc. in marketing our distillers grains to its customers. The agreement remains in effect unless otherwise terminated by either party with 120 days notice. Under the agreement, CHS, Inc. is responsible for all transportation arrangements for the distribution of our distillers grains.
Corn Oil
We market and distribute all of the corn oil we produce directly to end users and third party brokers. Our corn oil is mainly used as an animal feed ingredient and as a feedstock in biodiesel production.
Carbon Dioxide
We have entered into an agreement with Air Products under which Air Products purchases a portion of the carbon dioxide gas produced at our plant. In addition, we entered into a Site Lease Agreement with Air Products under which Air Products leases a portion of our property, on which it is operating a carbon dioxide liquefaction plant. Under the amendment, Air Products pays us for a minimum of 98,700 tons each year or approximately $493,500 annually.
Federal Ethanol Supports and Governmental Regulation

Federal Ethanol Supports

The ethanol industry is dependent on several economic incentives to produce ethanol. One significant federal ethanol support is the Federal Renewable Fuels Standard (the “RFS”). The RFS requires that in each year, a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The RFS statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable

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fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.
    
The United States Environmental Protection Agency ("EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Annually, the EPA is required by statute to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. The statutory volumes and the EPA's volumes for 2014, 2015, 2016, 2017 and 2018 (in billion gallons) are as follows:
 
 
Total Renewable Fuel Volume Requirement
Portion of Volume Requirement That Can Be Met By Corn-based Ethanol
2014
Statutory
18.15
14.40
EPA Rule 11/30/2015
16.28
13.61
2015
Statutory
20.50
15.00
EPA Rule 11/30/2015
16.93
14.05
2016
Statutory
22.25
15.00
EPA Rule 11/30/2015
18.11
14.50
2017
Statutory
24.00
15.00
 
EPA Rule 11/30/2016
19.28
15.00
2018
Statutory
26.00
15.00
 
EPA Rule 11/30/2017
19.29
15.00

On June 26, 2018, the EPA released a proposed rule to set the renewable volume obligation for 2019. The EPA proposes to set the total volume obligation at 19.88 billion gallons of which 15.0 billion gallon could be met by corn-based ethanol. A public hearing on the proposed rule was held in July and the public comment period expired on August 17, 2018. The final rule is expected to be issued in November 2018. If the volume requirements of the RFS were to be reduced in the future, it could have an adverse effect on market prices and demand for ethanol. In addition, the EPA has recently expanded its use of waivers to small refineries. The effect of these waivers is that the refinery is no longer required to earn or purchase blending credits known as RINs. If the increase in discretionary waivers by the ERPA were to continue, it could negatively affect ethanol prices.

In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of green house gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in green house gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% green house gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these green house gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% green house gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS up to 115,000,000 gallons annually due to the fact that it was constructed prior to the effective date of the lifecycle green house gas requirement. Therefore, we are not required to prove compliance with the lifecycle green house gas reductions for a significant amount of our production. Certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane

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based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.

Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. In 2016, gasoline demand in the United States was approximately 143 billion gallons. 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 14.3 billion gallons per year. 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. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends.

In June 2012, the EPA gave final approval for the sale of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, for use in vehicles manufactured in the model year 2001 and later. Although there have been significant steps towards introduction of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. Many states still have regulatory issues that hamper or prevent the sale of E15. In addition, sales of E15 may be limited because E15 is not approved for use in all vehicles, the EPA requires a label that may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks are currently required at certain times of the year due to federal regulations related to fuel evaporative emissions which prevent E15 from being used during certain times of the year in various states. Recently President Trump announced plans to change this policy. However, the EPA has not yet taken steps to enable the year-round sale of E15 and it is unclear when this might occur.
    
A blender pump is a gasoline pump that can dispense a variety of different ethanol/gasoline blends. Blender pumps typically can dispense E10, E20, E30, E40, E50 and E85. These blender pumps accomplish these different ethanol/gasoline blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations. Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers with flex-fuel vehicles to purchase more ethanol through these mid-level blends. However, the expense of blender pumps has delayed their availability in the retail gasoline market.

Effect of Governmental Regulation

The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding the required oxygen content of automobile emissions could have an adverse effect on the ethanol industry. Plant operations are governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of operating the plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions affecting our operations, cash flows and financial performance.

In late 2009, California passed a Low Carbon Fuels Standard ("LCFS"). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to the RFS. On December 29, 2011, a federal district court in California ruled that the California LCFS was unconstitutional which halted implementation of the California LCFS. However, the California Air Resources Board ("CARB") appealed this court ruling and on September 18, 2013, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling and CARB recently re-adopted the LCFS with some slight modifications. The LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices affecting our ability to operate profitably.    

We have obtained all of the necessary permits to operate the plant. In the fiscal year ended September 30, 2018, we incurred costs and expenses of approximately $166,000 complying with environmental laws. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.


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Competition

Ethanol

We are in direct competition with numerous ethanol producers, many of whom have greater resources than we do. Following the significant growth during 2005 and 2006, the ethanol industry has grown at a much slower pace. As of September 20, 2018, the Renewable Fuels Association estimates that there are approximately 210 ethanol production facilities in the United States with capacity to produce approximately 16.4 billion gallons of ethanol and seven additional plants under expansion or construction with capacity to produce an additional 362 million gallons. However, the Renewable Fuels Association estimates that approximately 3% of the ethanol production capacity in the United States is idled.

Since ethanol is a commodity product, competition in the industry is predominantly based on price. We have also experienced increased competition from oil companies who have purchased ethanol production facilities. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate. Larger ethanol producers may be able to realize economies of scale that we are unable to realize. This could put us at a competitive disadvantage to other ethanol producers. The ethanol industry is continuing to consolidate where a few larger ethanol producers are increasing their production capacities and are controlling a larger portion of the United States ethanol production. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. This added flexibility may allow these ethanol producers to compete more effectively, especially during periods when operation margins are unfavorable in the ethanol industry.

The largest ethanol producers include Archer Daniels Midland, Flint Hill Resources LP, Green Plains Renewable Energy, POET Biorefining and Valero Renewable Fuels, each of which are capable of producing significantly more ethanol than we produce.

The following table identifies the majority of the largest ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL PRODUCTION CAPACITY
BY TOP PRODUCERS
Producers of Approximately 750
million gallons per year (mmgy) or more

Company
Current Capacity
(mmgy)

Archer Daniels Midland
1,716

POET Biorefining
1,711

Green Plains Renewable Energy
1,475

Valero Renewable Fuels
1,400

Flint Hill Resources LP
840

Updated: September 20, 2018

The ethanol industry in the United States experienced increased competition from ethanol produced outside of the United States during 2012 which was likely the result of the expiration of the tariff on imported ethanol which expired on December 31, 2011. Although ethanol imports have since decreased, if competition from ethanol imports were to increase again that could negatively impact demand for ethanol produced in the United States which could result in lower operating margins.

We also anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock is cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice, straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. Several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol and are producing cellulosic ethanol on a small scale and a few companies in the United States have begun producing on a commercial scale. Additional commercial scale cellulosic ethanol plants could be completed in the near future. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

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Our ethanol plant also competes with producers of other gasoline additives having similar octane and oxygenate values as ethanol. Alternative fuels, gasoline oxygenates and alternative ethanol production methods are also continually under development. The major oil companies have significantly greater resources than we have to market other additives, to develop alternative products, and to influence legislation and public perception of ethanol. These companies also have sufficient resources to begin production of ethanol should they choose to do so.

    A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has recently grown in popularity, especially in urban areas. While in the past there were a limited number of vehicle recharging stations, making electric cars not feasible for all consumers, there has been an increased focus on developing these recharging stations which have made electric car technology more widely available. This additional competition from alternate sources could reduce the demand for ethanol, which would negatively impact our profitability.

Distillers Grains

Ethanol plants in the Midwest produce the majority of distillers grains and primarily compete with other ethanol producers in the production and sales of distillers grains. Ethanol plants produced approximately 44 million metric tons of distillers grains in 2017.

The primary consumers of distillers grains are dairy and beef cattle. In recent years, an increasing amount of distillers grains have been used in the swine and poultry markets. Numerous feeding trials show advantages in milk production, growth, rumen health, and palatability over other dairy cattle feeds. With the advancement of research into the feeding rations of poultry and swine, we expect these markets to expand and create additional demand for distillers grains; however, no assurance can be given that these markets will in fact expand, or if they do, that we will benefit from it. The market for distillers grains is generally confined to locations where freight costs allow it to be competitively priced against other feed ingredients. Distillers grains compete with three other feed formulations: corn gluten feed, dry brewers grain and mill feeds. The primary value of these products as animal feed is their protein content. Dry brewers grain and distillers grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower protein contents.
Sources and Availability of Raw Materials
The major raw material required for our ethanol plant to produce ethanol, distillers grain and corn oil is corn. To produce 135 million gallons of ethanol per year, our ethanol plant needs approximately 47 million bushels of corn per year, or approximately 129,000 bushels per day, as the feedstock for its dry milling process. Traditionally, corn grown in the area of the plant site has been fed locally to livestock or exported for feeding or processing and/or overseas export sales.

The price at which we purchase corn will depend on prevailing market prices. We are significantly dependent on the availability and price of corn. The price and availability of corn are subject to significant fluctuations depending upon a number of factors affecting grain commodity prices in general, including crop conditions, weather, governmental programs and foreign purchases. Because the market price of ethanol is not directly related to grain prices, ethanol producers are generally not able to compensate for increases in the cost of grain feedstock through adjustments in prices charged for their ethanol. We therefore anticipate that our plant's profitability will be negatively impacted during periods of high grain prices.
In an attempt to minimize the effects of the volatility of corn costs on operating profits, we take hedging positions in corn futures markets. Hedging means protecting the price at which we buy corn and the price at which we will sell our products in the future. It is a way to attempt to reduce the risk caused by price fluctuation. The effectiveness of hedging activities is dependent upon, among other things, the cost of corn and our ability to sell sufficient amounts of ethanol and distillers grains to utilize all of the corn subject to the futures contracts. Hedging activities can result in costs to us because price movements in grain contracts are highly volatile and are influenced by many factors beyond our control. These costs may be significant.

High corn prices have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Corn prices were lower during the fiscal year ended September 30, 2018, compared to the same period in 2017 due to increased supply resulting from a plentiful 2017 harvest in our corn supply region. On September 12, 2018, the United States Department of Agriculture ("USDA") released a report estimating the 2018 corn crop in the United States at approximately 14.8 billion bushels, up 2% from last year's production, with yields averaging 181.3 bushels per acre. The USDA forecasted area harvested for grain at 81.8 million acres, down 1% from 2017. The Indiana corn crop is estimated to be approximately 945 million bushels, up 1% from 2017. Yields in Indiana are expected to be approximately 192 bushels per acre, up 7% from 2017. Management will continue to monitor the availability of corn in our area.

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Utilities

We engaged Capstone Energy Services, LLC ("Capstone") to provide us with on-going energy management services. Capstone manages the procurement and delivery of energy to our location. They assist with strategy development, cost analysis, risk management, supply management and reporting services in exchange for a monthly fee. The agreement commenced on June 1, 2015, and continues for one year unless earlier terminated due to an event of default. Following the expiration of the initial one-year term, the agreement will be on a month-to-month basis and may be terminated by either party upon sixty days prior written notice.
Natural Gas

Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage for our fiscal year ended September 30, 2018 was approximately 3.3% more MMBTUs than for last fiscal year, constituting approximately 4.4% of our total costs of goods sold. We are using natural gas to produce process steam and to dry our distillers grain products to a moisture content at which they can be stored for long periods of time, and can be transported greater distances, so that we can market the product to broader livestock markets, including poultry and swine markets in the continental United States.

On March 20, 2007, we entered into a Long-Term Transportation Service Contract for Redelivery of Natural Gas with Ohio Valley Gas Corporation ("Ohio Valley"). Under the contract, Ohio Valley receives, transports and redelivers natural gas to us for all of our natural gas requirements up to a maximum of 100,000 therms per purchase gas day and our estimated annual natural gas requirements of 34,000,000 therms. For all gas received for and redelivered to us by Ohio Valley, we pay a throughput rate in the amount of $0.0138 per therm for the first five years of the contract term, and $0.0138 increased by the compounded inflation rate as established and determined by the U.S. Consumer Price Index - All Urban Consumers for Transportation for the following five years. In addition, we pay a service charge for all gas received for and redelivered to us by Ohio Valley in the amount of $750 per delivery meter per billing cycle per month for the first five years of the contract term and $750 increased by the compounded inflation rate over the initial rate as established and determined by the U.S. Consumer Price Index - All Urban Consumers for Transportation for the following five years. The initial term of the contract is ten years. Provided neither party terminates the contract, the contract will automatically renew for a series of not more than three consecutive one year periods.

Electricity

We require a significant amount of electrical power to operate the plant. On May 2, 2007, we entered into an agreement with Indiana Michigan Power Company to furnish our electric energy. The initial term of the contract was 30 months from the time service is commenced and continues thereafter unless terminated by either party with 12 months written notice. We pay Indiana Michigan Power Company monthly pursuant to their standard rates.

Water

We require a significant supply of water. Engineering specifications show our plant's water requirements to be approximately 774 gallons per minute, 1.1 million gallons per day, depending on the quality of water. We have assessed our water needs and available supply and have determined that we have an adequate supply. Union City Water Works is supplying the water necessary to operate our plant.

         Much of the water used in our ethanol plant is recycled back into the process. There are, however, certain areas of production where fresh water is needed. Those areas include boiler makeup water and cooling tower water. Boiler makeup water is treated on-site to minimize all elements that will harm the boiler and recycled water cannot be used for this process. Cooling tower water is deemed non-contact water because it does not come in contact with the mash, and, therefore, can be regenerated back into the cooling tower process. The makeup water requirements for the cooling tower are primarily a result of evaporation. Much of the water can be recycled back into the process, which minimizes the discharge water. This will have the long-term effect of lowering wastewater treatment costs. Many new plants today are zero or near zero effluent discharge facilities. Our plant design incorporates the ICM/Phoenix Bio-Methanator wastewater treatment process resulting in a zero discharge of plant process water.

Patents, Trademarks, Licenses, Franchises and Concessions

We do not currently hold any patents, trademarks, franchises or concessions. We were granted a license by ICM, Inc. to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM, Inc. was included in the amount we paid to Fagen, Inc. to design and build our ethanol plant. In addition, we were granted a license by ICM, Inc. to use certain corn oil technologies necessary to extract corn oil during our plant operations.


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Seasonality of Ethanol Sales

We experience some seasonality of demand for ethanol. Since ethanol is predominantly blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand.

Dependence on One or a Few Major Customers

As discussed above, we have entered into a marketing agreement with Murex for the purpose of marketing and distributing our ethanol and have engaged CHS, Inc. for the purpose of marketing and distributing our distillers grains. We rely on Murex for the sale and distribution of our ethanol and CHS, Inc. for the sale and distribution of our distillers grains. Therefore, although there are other marketers in the industry, we are highly dependent on Murex and CHS, Inc. for the successful marketing of our products. Any loss of Murex or CHS, Inc. as our marketing agent for our ethanol and distillers grains respectively could have a significant negative impact on our revenues.
 
Trading Division

We procure, transport and sell grain commodities through our Trading Division which began operations at the end of our fourth fiscal quarter of 2017. To provide funding for the construction of this facility, we obtained a construction loan in the amount of $10,000,000 which converted to term debt effective December 31, 2017 (the "Grain Loadout Facility Loan"). Please refer to Item 8- Financial Statements, Note 8 - Bank Financing for additional details.

Principal Products
    
We have and expect to continue to buy primarily soybeans and corn from producers relying principally on forward purchase contracts to ensure an adequate supply of grain. However, we occasionally also purchase grain the day of delivery. Grain prices are typically comprised of futures prices on the Chicago Mercantile Exchange ("CME") and local basis adjustments.

Grain Markets and Distribution Methods

Grain shipments are made by rail and truck. Our sales are made to grain processors and export markets in the southeastern United States. Our grain sales are generally made by contract for delivery in a future period. Income is expected to be earned on grain bought and sold, the appreciation or depreciation in the basis value of the grain held and the appreciation or depreciation between the futures contract months.

Competition

We primarily compete in the purchase of grain on a local or regional basis although there are some larger national and international companies that maintain regional grain purchase and storage facilities. We compete in the sale of grain with other public and private grain brokers, elevator operators and farmer owned cooperatives. Competition is based primarily on price, service and reliability.

Seasonality of Grain Purchases and Sales

Our grain operations are somewhat seasonal in nature in that the grain we procure is harvested in October and November. The largest portion of the grain is delivered by producers in the fall although we buy and sell a significant portion of our grain throughout the year.

Risk Management

We manage the futures price risk of changing commodity prices by entering into exchange-traded futures contracts on the CME. The CME is a regulated commodity futures exchange that maintains futures markets for the grain we trade. Futures prices are determined by worldwide supply and demand.

We entered into a Risk Management Agreement with John Stewart & Associates ("JS&A") under which JS&A provides risk management and related services pertaining to grain hedging, grain pricing information, aid in purchase of grain, and assistance in risk management as it pertains to ethanol, co-products and soybeans. In exchange for JS&A's risk management services, we

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pay JS&A a fee of $1,500 per month. We are currently on a month to month basis for this contract with JS&A. The agreement may be terminated by either party at any time upon written notice.

We also entered into an agreement with Advance Trading to assist us with hedging corn, ethanol, natural gas and soybeans. We pay them a fee of $3,000 per month for these services. The term of the agreement is month-to-month and may be terminated by either party at any time upon proper notice.

We also entered into an agreement with Commodity & Ingredient Hedging, LLC to evaluate and provide marketing advice and margin management related to cash sales and purchases, forward contracts and exchange-traded futures and options. We pay an annual fee of $12,000 in exchange for these services. The agreement automatically renews for additional one year terms unless either party gives written notice of non-renewal as provided in the agreement.

Employees
    
We have 56 full-time employees as of November 21, 2018.

Working Capital

We primarily use our working capital for purchases of raw materials necessary to operate the Ethanol Division and for purchases of grain commodities for the Trading Division. Our primary source of working capital is cash we generate from our operations along with our Declining Loan and our Revolving Credit Loan with our primary lender First National Bank of Omaha. The Declining Loan provides $5,000,000 in total for us to use on capital projects allowing us to preserve our working capital at a sufficient level. At September 30, 2018, we have approximately $15,000,000 available to draw on the Revolving Credit Loan to provide additional working capital. We will discuss the Declining Loan and Revolving Loan in more detail in "Item 7- Management Discussion and Analysis of Financial Condition and Results of Operations".

ITEM 1A. RISK FACTORS

You should carefully read and consider the risks and uncertainties below and the other information contained in this report.  The risks and uncertainties described below are not the only ones we may face.  The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.

Risks Relating to Our Business 

Our existing debt financing agreements contain, and our future debt financing agreements may contain, restrictive covenants that limit distributions and impose restrictions on the operation of our business. The use of debt financing makes it more difficult for us to operate because we must make principal and interest payments on the indebtedness and abide by covenants contained in our debt financing agreements. Although we have significantly reduced our level of debt, the restrictive covenants contained in our financing agreements may have important implications on our operations, including, among other things: (a) limiting our ability to obtain additional debt or equity financing; (b) subjecting all or substantially all of our assets to liens; and (c) limiting our ability to make business and operational decisions regarding our business, including, among other things making capital improvements and selling or purchasing assets or engaging in transactions we deem to be appropriate and in our best interest.

Declines in the price of ethanol or distillers grain would significantly reduce our revenues. The sales prices of ethanol and distillers grains can be volatile as a result of a number of factors such as overall supply and demand, the price of gasoline and corn, levels of government support, and the availability and price of competing products. We are dependent on a favorable spread between the price we receive for our ethanol and distillers grains and the price we pay for corn and natural gas. Any lowering of ethanol and distillers grains prices, especially if it is associated with increases in corn and natural gas prices, may affect our ability to operate profitably. We anticipate the price of ethanol and distillers grains to continue to be volatile in our 2019 fiscal year as a result of the net effect of changes in the price of gasoline and corn and increased ethanol supply offset by increased export demand. In addition, growing conditions in a particular season’s harvest may cause the corn crop to be of poor quality resulting in corn shortages and a decrease in distillers grains prices. Declines in the prices we receive for our ethanol and distillers grains will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably for an extended period of time which could decrease the value of our units.

Increases in the price of corn or natural gas would reduce our profitability.  Our primary source of revenue is from the sale of ethanol, distillers grains and corn oil. Our results of operations and financial condition are significantly affected by the cost

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and supply of corn and natural gas. Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control including weather and general economic factors.

Ethanol production requires substantial amounts of corn. Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to operate profitably because of the higher cost of operating our plant. We may not be able to offset any increase in the price of corn by increasing the price of our products. If we cannot offset increases in the price of corn, our financial performance may be negatively affected.

The prices for and availability of natural gas are subject to volatile market conditions.  These market conditions often are affected by factors beyond our control such as higher prices as a result of colder than average weather conditions or natural disasters, overall economic conditions and foreign and domestic governmental regulations and relations.  Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and more significantly, distillers grains for our customers.  Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  However, these hedging transactions also involve risks to our business.  See “Risks Relating to Our Business - We engage in hedging transactions which involve risks that could harm our business.” If we were to experience relatively higher corn and natural gas costs compared to the selling prices of our products for an extended period of time, the value of our units may be reduced.
 
We may violate the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans. We were in compliance with all financial covenants at September 30, 2018. Current management projections indicate that we will be in compliance with our loan covenants through September 30, 2019. However, unforeseen circumstances may develop which could result in violations of our loan covenants. If we violate the terms of our credit agreement, our primary lender could deem us in default of our loans and require us to immediately repay any outstanding balance of our loans.

Our inability to maintain or secure credit facilities we may require in the future may negatively impact our liquidity. While we do not currently require more financing than we have, in the future we may need additional financing. If we require financing in the future and we are unable to secure such financing, or we are unable to secure the financing we require on reasonable terms, it may have a negative impact on our liquidity. This could negatively impact the value of our units.

We engage in hedging transactions which involve risks that could harm our business.  We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments.  The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices. Alternatively, we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn and/or natural gas prices increase. Utilizing cash for margin calls has an impact on the cash we have available for our operations which could result in liquidity problems during times when corn prices rise or fall significantly.
 
Price movements in corn, natural gas and ethanol contracts are highly volatile and are influenced by many factors that are beyond our control.  There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.  We may incur such costs and they may be significant which could impact our ability to profitably operate the plant and may reduce the value of our units.
 
Our business is not diversified.  Our success depends largely on our ability to profitably operate our ethanol plant. We do not have any other significant sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol, distillers grains, corn oil and carbon dioxide or if economic or political factors adversely affect the market for ethanol, distillers grains, corn oil or carbon dioxide. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.

We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their

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employment with us, they may choose to seek other employment. Any loss of these officers and key employees may prevent us from operating the ethanol plant profitably and could decrease the value of our units.

We are subject to litigation involving our corn oil extraction technology. We have been sued by GS CleanTech Corporation asserting its intellectual property rights to certain corn oil extraction processes we obtained from ICM, Inc. in August 2008. GS CleanTech is seeking to enforce its patent rights against ICM and the Company. The court ruled that all of the patents claimed by GS CleanTech were invalid, that the Company had not infringed and that the patents were invalid due to inequitable conduct before the US Patent and Trademark Office by the inventors and their attorneys. However, these rulings are subject to appeal. If GS CleanTech is successful in its appeal and allowed to continue to pursue its claims against the Company, we may be forced to pay damages to GS CleanTech as a result of our use of such technology and cease our production of corn oil.

Our Trading Division business is affected by the supply and demand of commodities, and is sensitive to factors outside of our control. Adverse price movements could negatively affect our profitability and results of operations.  Our Trading Division buys, sells and holds inventories of agricultural commodities, some of which are readily traded on commodity futures exchanges. Unfavorable weather conditions, both local and worldwide, as well as other factors beyond our control, can affect the supply and demand of these commodities and expose us to liquidity pressures to finance hedges in the grain business in rapidly rising markets. Increased costs of inventory and prices of raw material would decrease our profit margins and adversely affect our results of operations. While we attempt to manage the risk associated with commodity price changes for our grain inventory positions with derivative instruments, including purchase and sale contracts, we are unable to offset 100% of the price risk of each transaction due to timing, availability of futures and options contracts and third-party credit risk. Furthermore, there is a risk that the derivatives we employ will not be effective in offsetting all of the risks that we are trying to manage. This can happen when the derivative and the underlying value of grain inventories and purchase and sale contracts are not perfectly matched. Our grain derivatives, for example, do not perfectly correlate with the basis component of our grain inventory and contracts. (Basis is defined as the difference between the local cash price of a commodity and the corresponding exchange-traded futures price.) Differences can reflect time periods, locations or product forms. Although the basis component is smaller and generally less volatile than the futures component of our grain market price, basis moves on a large grain position can significantly impact the profitability of the Trading Division. Our futures, options and over-the-counter contracts are subject to margin calls. If there are large movements in the commodities market, we could be required to post significant levels of margin, which would impact our liquidity. There is no assurance that the efforts we have taken to mitigate the impact of the volatility of the prices of commodities upon which we rely will be successful and any sudden change in the price of these commodities could have an adverse effect on our business and results of operations.

We face intense competition in our Trading Division. We face significant competition in our Trading Division and we have numerous competitors, some of which are larger and have greater financial resources than we have. Competition could cause us to lose market share and talented employees, exit certain lines of business, increase marketing or other expenditures or reduce pricing, each of which could have an adverse effect on our business and profitability.
    
Our Trading Division uses derivative contracts to reduce volatility in the commodity markets. Non-performance by the counter-parties to those contracts could adversely affect our future results of operations and financial position. A significant amount of our commodity purchases and sales are done through forward contracting. In addition, we use exchange traded and to a lesser degree over-the-counter contracts to reduce volatility in changing commodity prices. A significant adverse change in commodity prices could cause a counter-party to one or more of our derivative contracts to not perform on their obligation.

If a substantial portion of our inventory becomes damaged or obsolete, its value would decrease and our profit margins would suffer. We may carry significant amounts of inventory in our Trading Division. The value of our inventories could decrease due to deterioration in the quality of our grain inventory due to damage, moisture, insects, disease or foreign material. If the quality of our grain were to deteriorate below an acceptable level, the value of our inventory could decrease significantly.  
Failures of our information technology infrastructure could have a material adverse effect on operations.  We utilize various software applications and other information technology that are critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, including production, manufacturing, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery

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and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected.            
                A cyber attack or other information security breach could have a material adverse effect on our operations and result in financial losses. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact.  If we are unable to prevent cyber attacks and other information security breaches, we may encounter significant disruptions in our operations which could adversely impact our business, financial condition and results of operations or result in the unauthorized disclosure of confidential information. Such breaches may also harm our reputation, result in financial losses or subject us to litigation or other costs or penalties.

Risks Related to Ethanol Industry

The ethanol industry is an industry that is changing rapidly which can result in unexpected developments that could negatively impact our operations and the value of our units. The ethanol industry has grown significantly in the last decade. This rapid growth has resulted in significant shifts in supply and demand of ethanol over a very short period of time. As a result, past performance by the ethanol plant or the ethanol industry generally might not be indicative of future performance. We may experience a rapid shift in the economic conditions in the ethanol industry which may make it difficult to operate the ethanol plant profitably. If changes occur in the ethanol industry that make it difficult for us to operate the ethanol plant profitably, it could result in a reduction in the value of our units.

Changes and advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.  Advances and changes in the technology of ethanol production are expected to occur.  Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete.  These advances could also allow our competitors to produce ethanol at a lower cost than we are able.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive.  Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures.  These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms.  These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.
    
Decreasing gasoline prices could negatively impact our ability to operate profitably. Discretionary blending is an important secondary market which is often determined by the price of ethanol versus the price of gasoline. In periods when discretionary blending is financially unattractive, the demand for ethanol may be reduced. Lower gasoline prices reduce the spread between the price of gasoline and the price of ethanol which can discourage discretionary blending, dampen the export market and result in a downwards market adjustment in the price of ethanol. If oil and gasoline prices were to remain low for a significant period of time, it could hurt our ability to profitably operate the ethanol plant which could decrease the value of our units.

Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for conventional automobiles. 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. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol have become a contentious issue with automobile manufacturers and environmental groups having fought against higher percentage ethanol blends. E15 is a blend which is 15% ethanol and 85% conventional gasoline. Although there have been significant developments towards the availability of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. As a result, the approval of E15 may not significantly increase demand for ethanol.

Technology advances in the commercialization of cellulosic ethanol may decrease demand for corn based ethanol which may negatively affect our profitability. Ethanol production research has worked to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. Cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn. The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer a very strong incentive to develop commercial scale cellulosic ethanol. The statutory volume requirement in the RFS requires that 16 billion gallons per year of advanced bio-fuels be consumed in the United States by 2022. Some companies have reportedly produced cellulosic ethanol on a commercial scale and other companies have begun construction on commercial scale cellulosic ethanol plants. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be

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able to compete effectively. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and our financial condition will be negatively impacted.

Decreasing ethanol prices could reduce our ability to operate profitably. Decreases in the price of ethanol reduce our revenue. Our profitability depends on a favorable spread between our corn and natural gas costs and the price we receive for our ethanol. If ethanol prices fall during times when corn and/or natural gas prices are high, we may not be able to operate our ethanol plant profitably.

We operate in an intensely competitive industry and compete with larger, better financed entities which could impact our ability to operate profitably.  There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United States.  In addition, we have seen increased competition from oil companies who have purchased ethanol production facilities. We also face competition from outside of the United States. The largest ethanol producers include Archer Daniels Midland, Flint Hill Resources LP, Green Plains Renewable Energy, POET Biorefining and Valero Renewable Fuels, each of which is capable of producing significantly more ethanol than we produce. Further, many believe that there will be further consolidation occurring in the ethanol industry in the future which will likely lead to a few companies which control a significant portion of the ethanol production market. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could affect our financial performance. 
 
Competition from the advancement of alternative fuels may lessen the demand for ethanol.  Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.
 
Increased use of fuel cells, plug-in hybrids and electric cars may lessen the demand for ethanol.  A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has recently grown in popularity, especially in urban areas, which has led to an increase in recharging stations which may make electric car technology more widely available in the future. This additional competition from alternate sources could reduce the demand for ethanol, resulting in lower ethanol prices which could negatively impact our results of operations and financial condition.

Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, uses too much corn, adds to air pollution, harms engines and/or takes more energy to produce than it contributes may affect the demand for ethanol.  Certain individuals believe that use of ethanol will have a negative impact on gasoline prices at the pump and that ethanol uses too much of the available corn supply. Many also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. These consumer beliefs could potentially be wide-spread and may be increasing as a result of recent efforts to increase the allowable percentage of ethanol that may be blended for use in conventional automobiles. If consumers choose not to buy ethanol based on these beliefs, it would affect the demand for the ethanol we produce which could negatively affect our profitability and financial condition.

Risks Related to Regulation and Governmental Action
    
Government incentives for ethanol production may be eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal ethanol production and tax incentives, including the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive.
The United States Environmental Protection Agency ("EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided certain conditions have been met. Annually, the EPA passes a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations. In the past, the EPA has set the renewable volume obligations below the statutory volume requirements. In addition, the EPA has recently expanded its use of waivers to small refineries. The effect of these waivers is that the refinery is no longer required to earn or purchase blending credits known as RINs. If the EPA were to significantly reduce the volume requirements under the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress, the market price and demand for ethanol could decrease which will negatively impact our financial performance.
    
Government policies and regulations, particularly those affecting the agricultural sector and related industries, could adversely affect our operations and profitability.  Agricultural commodity production and trade flows are significantly affected

17


by government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, import and export restrictions on agricultural commodities and commodity products can influence industry profitability, the planting of certain crops versus other uses of agricultural resources, the location and size of crop production, whether unprocessed or processed commodity products are traded and the volume and types of imports and exports. In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. Future governmental policies, regulations or actions affecting our industry may adversely affect the supply of, demand for and prices of our products, restrict our ability to do business and cause our financial results to suffer.    

A reduction in distillers grains exports to China could have a negative effect on the price of distillers grains in the U.S. and negatively affect our profitability. China was the world's largest buyer of distillers grains produced in the United States. On January 12, 2016, the Chinese government began an antidumping and countervailing duty investigation related to distillers grains imported from the United States which contributed to a decline in distillers grains shipped to China. China began imposing anti-dumping and anti-subsidy duties during 2016 as a result of a preliminary ruling on its investigation. On January 10, 2017, China announced a final ruling related to its anti-dumping and countervailing duty investigation imposing anti-dumping duties from a range of 42.2% to 53.7% and anti-subsidy duties from 11.2% to 12.0%. The imposition of these duties has resulted in a significant decline in demand from this top importer and negatively impacted prices for distillers grains produced in the United States. This reduction in demand could negatively impact our ability to profitably operate the ethanol plant.
    
A reduction in ethanol exports to Brazil due to the imposition by the Brazilian government of a tariff on U.S. ethanol could have a negative impact on ethanol prices. Brazil has historically been a top destination for ethanol produced in the United States. However, earlier this year, Brazil imposed a tariff on ethanol which is produced in the United States and exported to Brazil. This tariff has resulted in a decline in demand for ethanol from Brazil and could negatively impact the market price of ethanol in the United States and our ability to profitably operate the ethanol plant.

A reduction in ethanol exports to Europe due to the imposition by the European Union of a tariff on U.S. ethanol could have a negative impact on ethanol prices. The European Union imposed a five-year tariff on ethanol which is produced in the United States and exported to Europe which has negatively impacted exports of ethanol to Europe. The decrease could negatively impact the market price of ethanol in the United States and our ability to profitably operate the ethanol plant.

Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability.  We are subject to extensive air, water and other environmental laws and regulations.  In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment.  A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns.  In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits.  Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.
    
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability. California passed a Low Carbon Fuels Standard ("LCFS") which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn based ethanol to California, it could significantly reduce demand for the ethanol we produce. This could result in a reduction of our revenues and could negatively impact our ability to profitably operate the ethanol plant.
    
ITEM 2. PROPERTIES

Our plant site is made up of two adjacent parcels which together total approximately 295 acres in east central Indiana near Union City, Indiana. The address of our plant is 1554 N. County Road 600 E., Union City, Indiana 47390. On October 31, 2016, we purchased approximately 64 acres of land adjacent to our property for a total purchase price of approximately $646,000.
 
In November 2008, the plant was substantially completed and plant operations commenced. The plant consists of the following buildings:

A grains area, fermentation area, distillation - evaporation area;
A dryer/energy center area;

18


A tank farm;
An auxiliary area; and
An administration building.

Our plant is in excellent condition and is capable of functioning at over 100% of its 100 million gallons per year nameplate production capacity.

In September 2017, we completed a construction project to add grain receiving and train loading facilities and additional rail spurs, track and grain storage to allow us to procure, transport and sell grain commodities.

All of our tangible and intangible property, real and personal, serves as the collateral for the debt financing with First National Bank of Omaha, which is described below under "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations."

ITEM 3. LEGAL PROCEEDINGS

Patent Infringement

On June 27, 2008, we entered into a Tricanter Purchase and Installation Agreement with ICM, Inc. for the construction and installation of a Tricanter Oil Separation System. On February 12, 2010, GS CleanTech Corporation ("GS CleanTech") filed a lawsuit in the United States District Court for the Southern District of Indiana, claiming that the Company's operation of the oil recovery system manufactured and installed by ICM, Inc. infringes a patent claimed by GS CleanTech. GS CleanTech sought royalties and damages associated with the alleged infringement, as well as attorney's fees from the Company. GS CleanTech subsequently filed actions against at least fourteen other ethanol producing companies for infringement of its patent rights, adding several additional patents. GS CleanTech successfully petitioned for the cases to be joined in a multi-district litigation ("MDL") which was assigned to the United States District Court for the Southern District of Indiana (Case No. 1:10-ml-02181). We subsequently answered and counterclaimed that the patent claims at issue are invalid and that the Company is not infringing.

Motions for summary judgment were filed by the defendants, including the Company, and GS CleanTech. Meanwhile, GS CleanTech filed suit against another group of defendants which were joined with the MDL. On October 23, 2014, the United States District Court granted summary judgment finding that all of the patents claimed by GS CleanTech were invalid and that the Company had not infringed. In addition, on September 15, 2016, the United States District Court granted summary judgment finding that the patents were invalid due to inequitable conduct before the US Patent and Trademark Office by the inventors and their attorneys. GS CleanTech and its attorneys filed a Notice of Appeal appealing the rulings on summary judgment. The defendants have since settled with the attorneys for GS CleanTech.

On February 16, 2010, ICM, Inc. agreed to indemnify the Company from and against all claims, demands, liabilities, actions, litigations, losses, damages, costs and expenses, including reasonable attorney's fees arising out of any claim of infringement of patents, copyrights or other intellectual property rights by reason of our purchase and use of the oil recovery system and agrees to defend the Company. Several of the other defendants also use equipment and processes provided by ICM, Inc. ICM, Inc. has, and we expect it will continue, to vigorously defend itself and the Company in this lawsuit and the appeal filed by GS CleanTech. If GS CleanTech were to be successful in the appeal filed and allowed to continue to pursue its claims, we estimate that damages, if awarded, would be based on a reasonable royalty to, or lost profits of, GS CleanTech. Because of its rulings, it seems unlikely that the District Court would deem the case exceptional. However, in the event it would be deemed to be exceptional, attorney's fees may be awarded and are likely to be $1,000,000 or more. ICM, Inc. has also agreed to indemnify us. However, in the event that damages were to be awarded, if ICM, Inc. does not fully indemnify us for any reason, we could be liable and could also be required to cease use of our oil separation process and seek out a replacement or cease oil production altogether.

Air Permit

On January 4, 2018, we received a letter from the Indiana Department of Environmental Management, Office of Air Quality (“IDEM”) alleging violations of our air permit.  IDEM alleges that we (i) constructed and operated a fermenter without previous construction or operational approval; (ii) constructed and operated emission units (conveyors and legs) without the appropriate emission controls (two baghouses instead of one larger baghouse); (iii) constructed and operated emission units (steel bins) without emission controls; and (iv) operated emission units above the emission limits.  IDEM indicates that it intends to refer this matter for formal enforcement action.  We are currently reviewing the allegations and have provided IDEM with additional information.  While we believe that we have certain defenses to these allegations, we are currently unable to determine with any certainty the outcome of this matter including the extent of any potential monetary sanctions that may result.


19


ITEM 4. MINE SAFETY DISCLOSURES

None.

PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
Market for Our Units

As of November 21, 2018, we had approximately 14,606 membership units outstanding and approximately 1,145 unit holders of record. There is no public trading market for our units. However, we have established through FNC Ag Stock, LLC a Unit Trading Bulletin Board, a private online matching service, in order to facilitate trading among our members.  The Unit Trading Bulletin Board has been designed to comply with federal tax laws and IRS regulations establishing an “alternative trading service,” as well as state and federal securities laws.  Our Unit Trading Bulletin Board consists of an electronic bulletin board that provides a list of interested buyers with a list of interested sellers, along with their non-firm price quotes.  The Unit Trading Bulletin Board does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached.  We do not become involved in any purchase or sale negotiations arising from our Unit Trading Bulletin Board and have no role in effecting the transactions beyond approval, as required under our operating agreement, and the issuance of new certificates.  We do not give advice regarding the merits or shortcomings of any particular transaction.  We do not receive, transfer or hold funds or securities as an incident of operating the Unit Trading Bulletin Board.  We do not receive any compensation for creating or maintaining the Unit Trading Bulletin Board.  In advertising our alternative trading service, we do not characterize Cardinal as being a broker or dealer or an exchange.  We do not use the Unit Trading Bulletin Board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements.
 
There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units.  All transactions must comply with the Unit Trading Bulletin Board Rules, our operating agreement, and are subject to approval by our board of directors.

As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause the Company to be deemed a publicly traded partnership.

The following table contains historical information by fiscal quarter for the past two fiscal years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe this most accurately represents the current trading value of the Company's units. The information was compiled by reviewing the completed unit transfers that occurred on our qualified matching service bulletin board during the quarters indicated.
Selling Quarter
 
Low Price
 
High Price
 
Average Price
 
# of
Units Traded
2017 1st
 
$
13,500

 
$
15,150

 
$
13,807

 
38

2017 2nd
 
$
14,000

 
$
15,000

 
$
14,363

 
41

2017 3rd
 
$
14,000

 
$
15,100

 
$
14,815

 
42

2017 4th
 
$
15,500

 
$
15,600

 
$
15,591

 
22

2018 1st 
 
$
14,000

 
$
14,000

 
$
14,000

 
5

2018 2nd 
 
$
11,500

 
$
12,000

 
$
11,778

 
9

2018 3rd 
 
$

 
$

 
$

 

2018 4th 
 
$
9,500

 
$
9,985

 
$
9,781

 
12

 
The following table contains the bid and asked prices that were posted on the Company's alternative trading service bulletin board and includes some transactions that were not completed. The Company believes the table above more accurately describes the trading value of its units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the Company's alternative trading service bulletin board.

20


Listing Quarter
 
Low Price
 
High Price
 
Average Price
 
# of
Units Listed
2017 1st
 
$
13,500

 
$
15,150

 
$
14,236

 
43

2017 2nd
 
$
14,000

 
$
15,500

 
$
14,459

 
52

2017 3rd
 
$
14,000

 
$
15,500

 
$
15,166

 
86

2017 4th
 
$
15,400

 
$
17,000

 
$
16,000

 
47

2018 1st 
 
$
13,000

 
$
14,000

 
$
13,650

 
20

2018 2nd 
 
$
12,000

 
$
13,750

 
$
13,222

 
90

2018 3rd 
 
$
11,000

 
$
11,000

 
$
11,000

 
10

2018 4th 
 
$
9,985

 
$
11,800

 
$
11,354

 
9

 
Distributions

Our board of directors has complete discretion over the timing and amount of distributions to our members. Our expectations with respect to our ability to make future distributions are discussed in greater detail in "Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations."

Performance Graph

The following graph shows a comparison of cumulative total member return since September 30, 2013, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the “Composite”) and the NASDAQ Clean Edge Green Energy Index (the "CELS"). The graph assumes $100 was invested in each of our units, the Composite and the CELS on September 30, 2013. Data points on the graph are annual. Note that historic unit price performance is not necessarily indicative of future unit price performance.
    


21


ceperformance.jpg
Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.


22


ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data as of the years ended September 30, 2016, 2015 and 2014 and the selected income statement data and other financial data for the years ended September 30, 2015 and 2014 have been derived from our audited financial statements that are not included in this Form 10-K. The selected balance sheet financial data for the years ended September 30, 2018 and 2017 and the selected income statement data and other financial data for the years ended September 30, 2018, 2017 and 2016 have been derived from the audited Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with "Item 7- Management Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following financial data.

Statement of Operations Data:
 
2018
 
2017
 
2016
 
2015
 
2014
Revenues
 
$
266,858,452

 
$
228,496,827

 
$
222,895,449

 
$
240,695,293

 
$
337,355,515

 
 
 
 
 
 
 
 
 
 
 
Cost Goods Sold
 
251,670,473

 
209,241,617

 
204,014,877

 
197,305,291

 
244,414,762

 
 
 
 
 
 
 
 
 
 
 
Gross Profit
 
15,187,979

 
19,255,210

 
18,880,572

 
43,390,002

 
92,940,753

 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
6,778,756

 
5,520,971

 
5,233,634

 
4,714,891

 
4,945,382

 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
8,409,223

 
13,734,239

 
13,646,938

 
38,675,111

 
87,995,371

 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense), Net
 
(778,158
)
 
(309,615
)
 
(125,143
)
 
46,706

 
(733,697
)
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
7,631,065

 
$
13,424,624

 
$
13,521,795

 
$
38,721,817

 
$
87,261,674

 
 
 
 
 
 
 
 
 
 
 
Weighted Average Units Outstanding
 
14,606

 
14,606

 
14,606

 
14,606

 
14,606

 
 
 
 
 
 
 
 
 
 
 
Net Income Per Unit
 
$
522

 
$
919

 
$
926

 
$
2,651

 
$
5,974

 
 
 
 
 
 
 
 
 
 
 
Cash Distributions Per Unit
 
$
950

 
$
1,175

 
$
1,630

 
$
3,500

 
$
4,547

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
2018
 
2017
 
2016
 
2015
 
2014
Current Assets
 
$
46,351,013

 
$
50,139,370

 
$
48,529,843

 
$
48,646,801

 
$
60,034,736

 
 
 
 
 
 
 
 
 
 
 
Net Property and Equipment
 
96,948,671

 
107,936,389

 
104,461,078

 
107,998,425

 
105,632,776

 
 
 
 
 
 
 
 
 
 
 
Other Assets
 
1,295,192

 
1,096,237

 
938,251

 
823,494

 
718,553

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
144,594,876

 
159,171,996

 
153,929,172

 
157,468,720

 
166,386,065

 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
16,941,813

 
18,007,407

 
11,676,852

 
11,997,241

 
13,380,637

 
 
 
 
 
 
 
 
 
 
 
Long-Term Debt
 
7,314,867

 
14,581,758

 
11,932,063

 
4,865,236

 

 
 
 
 
 
 
 
 
 
 
 
Members' Equity
 
120,338,196

 
126,582,831

 
130,320,257

 
140,606,243

 
153,005,428


* See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of our financial results.


23


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We produce ethanol, distillers grains and corn oil at our plant located near Union City, Indiana. In addition, we procure, transport and sell grain commodities.

Results of Operations for the Fiscal Years Ended September 30, 2018 and 2017

The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended September 30, 2018 and 2017:

 
2018
 
2017
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
266,858,452

 
100.0

 
$
228,496,827

 
100.0

Cost of Goods Sold
251,670,473

 
94.3

 
209,241,617

 
91.6

Gross Profit
15,187,979

 
5.7

 
19,255,210

 
8.4

Operating Expenses
6,778,756

 
2.5

 
5,520,971

 
2.4

Operating Income
8,409,223

 
3.2

 
13,734,239

 
6.0

Other Expense, net
(778,158
)
 
(0.3
)
 
(309,615
)
 
(0.1
)
Net Income
$
7,631,065

 
2.9

 
$
13,424,624

 
5.9


Revenues

We have two reportable segments-the Ethanol Division and the Trading Division. Our revenues from operations from our Ethanol Division come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. Revenues from operations of our Trading Division are derived from procuring, transporting and selling grain commodities. Revenues in each division also include net gains or losses from derivatives related to products sold.

The following table shows the sources of our total revenue from the two segments and the approximate percentage of revenues to total revenues in our unaudited condensed consolidated statements of operations for the fiscal years ended September 30, 2018 and 2017:

 
2018
 
2017
Revenue:
Amount
% of Total Revenues
 
Amount
% of Total Revenues
Ethanol production
$
222,847,401

83.5
%
 
$
228,496,827

100.0
%
Grain trading
44,011,051

16.5

 


Total Revenue
$
266,858,452

100.0
%
 
$
228,496,827

100.0
%

Ethanol Division

Our revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. The following table shows the sources of our ethanol division revenue for the fiscal years ended September 30, 2018 and 2017:

 
2018
 
2017
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
171,669,232

77.0
%
 
$
188,860,886

82.7
%
Distillers Grains Sales
42,422,819

19.1

 
30,886,518

13.5

Corn Oil Sales
8,020,761

3.6

 
8,010,124

3.5

CO2 Sales
477,355

0.2

 
481,893

0.2

Other Revenue
257,234

0.1

 
257,406

0.1

Total Revenues
$
222,847,401

100.0
%
 
$
228,496,827

100.0
%

24


Ethanol
    
Our revenues from ethanol decreased for our fiscal year ended September 30, 2018 as compared to our fiscal year ended September 30, 2017. This decrease in revenues is primarily the result of a lower average price per gallon of ethanol sold for the fiscal year ended September 30, 2018 as compared to the same period in 2017.
    
We experienced an increase in ethanol gallons sold of approximately 3.6% for the fiscal year ended September 30, 2018 as compared to the same period in 2017 resulting primarily from increased ethanol production rates. We are currently operating at approximately 35% above our nameplate capacity due to completion of certain improvements during our 2016 and 2017 fiscal years which increased our annual production rate. Management expects ethanol production will further increase for the fiscal year ended September 30, 2019 due to plans for completion of various projects which are expected to increase our annual ethanol production rate to approximately 140 million gallons.

Our average price per gallon of ethanol sold for the fiscal year ended September 30, 2018 was approximately 12.7% lower than our average price per gallon of ethanol sold for the same period in 2017. Ethanol prices were lower during the fiscal year ended September 30, 2018 due to increased industry-wide production which was in excess of demand. In addition, recent trade disputes with countries such as China, Mexico and the European Union and the potential for the imposition of tariffs on products produced in the United States have had a negative effect on ethanol prices. Finally, ethanol prices may have been negatively impacted by the increase in the number of waivers granted by the EPA exempting certain refiners from compliance with the RFS.

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. If corn, crude oil and gasoline prices increase, that could have a significant negative impact on the market price of ethanol and our profitability, particularly should ethanol stocks grow because of expansion of production capacity in the industry. A decline in ethanol exports due to trade disputes resulting in tariffs imposed on ethanol produced in the United States would also likely contribute to higher ethanol stocks unless additional demand could be created domestically through the used of higher blends.

Distillers Grains

Our revenues from distillers grains increased in the fiscal year ended September 30, 2018 as compared to the same period in 2017. This increase in revenues is primarily the result of an increase in the average market price per ton of distillers grains sold for the period ended September 30, 2018 compared to the same period in 2017. The average price per ton of distillers grains sold for the fiscal year ended September 30, 2018 increased by approximately 42.4% compared to the average price per ton of distillers grains sold for the same period in 2017. This increase in the market price of distillers grains is due to increased export demand from nations other than China during the fiscal year ended September 30, 2018 as compared to the same period in 2017. In addition, poor corn quality from the 2016 corn crop had a negative effect on the price of distillers grains during our 2017 fiscal year.     

China has been a significant consumer of exported distillers grains. However, an anti-dumping investigation beginning in January of 2016 into distillers grains produced in the United States led to the imposition by China of preliminary anti-dumping and anti-subsidy duties on imports of ethanol produced in the United States in the fall of 2016 and a final ruling imposing even higher duties in January 2017. The investigation and imposition of these duties resulted in a decline in demand from China. Recent trade disputes with countries such as China, Mexico and the European Union have created additional uncertainty as to future export demand. If export demand suffers, this could lead to lower distillers grains prices unless additional demand can be sustained from domestic or other foreign markets. Domestic demand for distillers grains could also decrease due to expansion of production capacity in the ethanol industry or if lower corn or soybean prices result in end-users switching to lower priced alternatives. In addition, growing conditions in a particular season’s harvest may cause the corn crop to be of poor quality resulting in lower distillers grains prices. 
    
We experienced a decrease of approximately 3.6% in distillers grains tons sold in the fiscal year ended September 30, 2018 as compared to the same period in 2017 due to higher ethanol and corn oil yields which decreased production of distillers grains. Management anticipates that our annual distillers grains production volume will increase for the fiscal year ended September 30, 2019 due to completion of various projects which are expected to increase our ethanol production rate to approximately 140 million gallons. However, this increase in production may be offset somewhat by a decrease in DDGS yield per bushel.

Corn Oil

Our revenues from corn oil sales increased by approximately 0.1% in the fiscal year ended September 30, 2018 as compared to the same period in 2017 which resulted from a 15.6% increase in the number of pounds sold despite a $0.11 decrease

25


in the average selling price for the corn oil sold in the fiscal year ended September 30, 2018 as compared to the same period in 2017. The 15.6% increase in corn oil sold during the fiscal year ended September 30, 2018 as compared to the same period in 2017 was principally because of increased oil extraction rates per bushel of corn, which we attribute mostly to the higher quality of corn available and purchased during the fiscal year. The increased overall production rate of the plant in the fiscal year ended September 30, 2018 also contributed to higher corn oil sales.

The average price per pound of corn oil sold for the fiscal year ended September 30, 2018 decreased by approximately 10.7% as compared to the same period in 2017 due primarily to increased production by the ethanol industry and to uncertainty of biodiesel demand. Management anticipates that higher production and an over-supply will keep prices low into 2019. Corn oil prices may be negatively affected if the renewable volume obligations for biodiesel are reduced by the EPA or if the biodiesel tax credit which was retroactively extended for 2017 is not further extended by Congress. In addition, recent trade disputes have created additional uncertainty which could have a negative affect on corn oil prices. Management expects corn oil production will increase for the fiscal year ended September 30, 2019 due to completion of various projects which are expected to increase our ethanol production rate to approximately 140 million gallons which would also increase our corn oil production.

Trading Division

The following table shows the sources of our revenues from our Trading Division for the fiscal year ended September 30, 2018 and 2017:
 
2018
 
2017
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Soybean Sales
$
43,975,501

99.9
%
 
$

 
Other Revenue
$
35,550

0.1

 
 
 
Total Revenues
$
44,011,051

100.0
%
 
$

%

We began operating the Trading Division in late September 2017. During the fiscal year ended September 30, 2018 our revenues were derived primarily from transporting and selling soybeans. The average price per bushel of soybeans sold was $9.61 based on sales of approximately 4,582,000 bushels for the fiscal year ended September 30, 2018.

Cost of Goods Sold

Ethanol Division

Our Ethanol Division cost of goods sold as a percentage of its revenues was approximately 94.1% for the fiscal year ended September 30, 2018 as compared to approximately 91.5% for the same period in 2017. This increase in cost of goods sold as a percentage of revenues was the result of decreased ethanol prices relative to the price of corn for the fiscal year ended September 30, 2018 as compared to the same period in 2017. Our two largest costs of production are corn and natural gas. Cost of goods sold also includes net gains or losses from derivatives related to commodities purchased.

Corn

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the fiscal year ended September 30, 2018, the bushels of corn we used to produce our ethanol, distillers grains and corn oil increased by approximately 1.9% as compared to the same period in 2017. More bushels were used in production because we produced more gallons of ethanol during the fiscal year ended September 30, 2018 compared to the same period in 2017. During the fiscal year ended September 30, 2018, our average price paid per bushel of corn decreased approximately 2.9% as compared to the same period in 2017 due primarily to a plentiful 2017 harvest which kept corn prices low until concerns related to planting conditions and domestic corn stocks led to increased volatility in corn prices in the late spring and early summer months. Better growing conditions in July and August relieved those concerns.

Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Volatility in the price of corn could significantly impact our cost of goods sold.


26


Natural Gas

Our natural gas cost was lower during our fiscal year ended September 30, 2018 as compared to the fiscal year ended September 30, 2017. This decrease in the cost of natural gas for the fiscal year ended September 30, 2018 as compared to the same period in 2017 was primarily the result of a decrease of approximately 5.4% in the average price per MMBTU of natural gas due to an increase in natural gas stocks. We also used approximately 3.3% more natural gas for the fiscal year ended September 30, 2018 as compared to the same period in 2017 because of higher ethanol production.

Management expects that natural gas prices will be dependent upon the severity of the coming winter weather. If the nation were to experience a catastrophic weather event causing problems related to the supply of natural gas, this could result in higher natural gas prices.

Trading Division

The following table shows the costs incurred to procure various agricultural commodities for our Trading Division for the fiscal year ended September 30, 2018 and 2017:
 
2018
 
2017
 
Amount
% of Revenues
 
Amount
% of Revenues
Soybeans
$
42,062,458

95.6
%
 
$

%
Total Cost of Goods Sold
$
42,062,458

95.6
%
 
$

%

We began operating the Trading Division in late September 2017. During the fiscal year ended September 30, 2018 our cost was primarily the procurement of soybeans for sale.
    
Derivatives

We enter into hedging instruments to minimize price fluctuations in the prices of our finished products and inputs. As the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our revenues and our cost of goods sold. These commodity-based derivatives are not designated as effective hedges for accounting purposes. Please refer to "Item 7A - Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk" for information on our derivatives.

Operating Expense

Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees, depreciation of trading division fixed assets, property taxes and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. The increase was due primarily to the depreciation of Trading Division assets of approximately $770,000 for the year ended September 30, 2018. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain consistent with 2018 into and throughout our 2019 fiscal year.

Operating Income

Our income from operations for the fiscal year ended September 30, 2018 was approximately 3.2% of our revenues compared to operating income of approximately 6.0% of revenues for the same period in 2017. The decrease in operating income for the fiscal year ended September 30, 2018 was primarily the result of decreased ethanol prices relative to the cost of corn.

Other Expense

We had other expense of approximately 0.3% of revenues for the fiscal year ended September 30, 2018 compared to other income of approximately 0.1% of revenues for the same period in 2017. This increase in other expense for the fiscal year ended September 30, 2018, was primarily due to drawing additional funds on our debt facilities which increased our interest expense for our fiscal year ended September 30, 2018.


27


Subsequent Event

On November 6, 2018, we experienced an explosion in one of our DDGS silos. There were no injuries related to the incident and the damage was limited to the DDGS silos and the associated materials handling equipment. Operations at the plant were temporarily suspended pending an evaluation and assessment of the situation. The plant resumed operations within a few days of the incident. The extent of monetary damages related to the incident has not yet been fully determined. We are presently working with our insurance carrier and other experts to assess the amount of the damages.

Results of Operations for the Fiscal Years Ended September 30, 2017 and 2016

The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended September 30, 2017 and 2016:

 
2017
 
2016
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
228,496,827

 
100.0

 
$
222,895,449

 
100.0

Cost of Goods Sold
209,241,617

 
91.6

 
204,014,877

 
91.5

Gross Profit
19,255,210

 
8.4

 
18,880,572

 
8.5

Operating Expenses
5,520,971

 
2.4

 
5,233,634

 
2.3

Operating Income
13,734,239

 
6.0

 
13,646,938

 
6.2

Other Expense, net
(309,615
)
 
(0.1
)
 
(125,143
)
 
(0.1
)
Net Income
$
13,424,624

 
5.9

 
$
13,521,795

 
6.1

    
Revenues

The Trading Division began operations at the end of our fourth fiscal quarter of 2017. Although we bought soybeans and entered into forward purchase contracts for soybean purchases and sales, we determined that the Trading Division was not material to our business at September 30, 2017 and therefore, was not a reportable, separate business segment at that time and all operations were included in what is now the ethanol production segment. For the fiscal years ended September 30, 2017 and 2016, revenues come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. The following table shows the sources of our revenue for the fiscal years ended September 30, 2017 and 2016:

Ethanol
    
Our revenues from ethanol increased for our fiscal year ended September 30, 2017 as compared to our fiscal year ended September 30, 2016. This increase in revenues was primarily the result of an increase in the average price per gallon of ethanol sold for the fiscal year ended September 30, 2017 as compared to the same period in 2016.
    
 
2017
 
2016
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
188,860,886

82.7
%
 
$
173,252,481

77.7
%
Distillers Grains Sales
30,886,518

13.5

 
40,709,845

18.3

Corn Oil Sales
8,010,124

3.5

 
8,226,924

3.7

CO2 Sales
481,893

0.2

 
514,937

0.2

Other Revenue
257,406

0.1

 
191,262

0.1

Total Revenues
$
228,496,827

100
%
 
$
222,895,449

100
%

We experienced an increase in ethanol gallons sold of approximately 4.8% for the fiscal year ended September 30, 2017 as compared to the same period in 2016 resulting primarily from increased ethanol production rates.

Our average price per gallon of ethanol sold for the fiscal year ended September 30, 2017 was approximately 4.2% more than our average price per gallon of ethanol sold for the same period in 2016. Ethanol prices were higher during the fiscal year ended September 30, 2017 due to increased export demand which offset increased industry-wide production. In addition, lower corn, crude oil and gasoline prices during the 2016 fiscal year had a negative affect on ethanol prices for that period.


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Distillers Grains

Our revenues from distillers grains decreased in the fiscal year ended September 30, 2017 as compared to the same period in 2016. This decrease in revenues was primarily the result of a decrease in the average market price per ton of distillers grains sold for the period ended September 30, 2017 compared to the same period in 2016. The average price per ton of distillers grains sold for the fiscal year ended September 30, 2017 was approximately 25.3% lower than the average price per ton of distillers grains sold for the same period in 2016. This decline in the market price of distillers grains was due to increased industry-wide production along with lower export demand during the fiscal year ended September 30, 2017 as compared to the same period in 2016 which resulted in a decline in the price of distillers grains as a percentage of corn values. In addition, poor corn quality from the 2016 corn crop had a negative effect on the price of distillers grains during our 2017 fiscal year.

China was historically a significant consumer of exported distillers grains particularly since December of 2014 following the resolution of a dispute related to China's objection to the presence of an unapproved genetically modified organism in some U.S. shipments. However, an anti-dumping investigation began in January of 2016 into distillers grains produced in the United States led to the imposition by China of preliminary anti-dumping and anti-subsidy duties on imports of ethanol produced in the United States in the fall of 2016 and a final ruling imposing even higher duties in January 2017. The investigation and imposition of these duties resulted in a decline in demand from China resulting in lower distillers grains prices.
    
We experienced an increase of approximately 1.5% in distillers grains tons sold in the fiscal year ended September 30, 2017 as compared to the same period in 2016 due primarily to timing of shipments.

Corn Oil

Our revenues from corn oil sales decreased by approximately 2.6% in the fiscal year ended September 30, 2017 as compared to the same period in 2016 which was primarily a result of a decrease of gallons of corn oil sold in the fiscal year ended September 30, 2017 as compared to the same period in 2016. We sold approximately 10.3% less corn oil in the fiscal year ended September 30, 2017 as compared to the same period in 2016 due primarily to decreased oil extraction rates per bushel of corn, which was primarily attributed to the the quality of corn purchased.

The average price per pound of corn oil was approximately 7.7% higher for the fiscal year ended September 30, 2017 as compared to the same period in 2016 due primarily to higher demand from the biodiesel industry during our first fiscal quarter of 2017 and from the feed industry during our second fiscal quarter of 2017 which positively impacted the market price of corn oil. However, corn oil demand was lower during the last half of our fiscal year.

Cost of Goods Sold

Our cost of goods sold of the Ethanol Division as a percentage of its revenues was approximately 91.5% for the fiscal year ended September 30, 2017 as compared to approximately 91.5% for the same period in 2016. While the cost of goods sold was virtually the same in 2017 and 2016, the total cost of goods sold increased from $204,015,000 in 2016 to $209,138,000 in 2017. This dichotomy arose from the increased production in 2017 over 2016 and because the price of corn decreased by 1.6%. Another contributor was the price of natural gas, which increased 19.2% in 2017 compared to 2016.

Corn

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the fiscal year ended September 30, 2017, we used approximately 3.4% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2016. More bushels were used in production because we produced more gallons of ethanol during the fiscal year ended September 30, 2017 compared to the same period in 2016. During the fiscal year ended September 30, 2017, our average price paid per bushel of corn increased approximately 1.6% as compared to the same period in 2016 due primarily to market concerns in the late spring and early summer months about wet conditions in our area of the corn belt. Better growing conditions in July and August relieved those concerns but the higher prices earlier caused the average annual price to be higher.

Natural Gas

Our natural gas cost was higher during our fiscal year ended September 30, 2017 as compared to the fiscal year ended September 30, 2016. This increase in the cost of natural gas for the fiscal year ended September 30, 2017 as compared to the same period in 2016 was primarily the result of an increase of approximately 19.2% in the average price per MMBTU of natural gas due to lower production and increased demand which used up natural gas stocks built up in 2015. We also used approximately

29


3.1% more natural gas for the fiscal year ended September 30, 2017 as compared to the same period in 2016 because of higher ethanol production.

Derivatives

We enter into hedging instruments to minimize price fluctuations in the prices of our finished products and inputs. As the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our revenues and our cost of goods sold. These commodity-based derivatives are not designated as effective hedges for accounting purposes. Please refer to "Item 7A - Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk" for information on our derivatives.

Operating Expense

Our operating expenses as a percentage of revenues were approximately 2.4% and 2.3% for the fiscal years ended September 30, 2017 and 2016, respectively. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs.

Operating Income

Our income from operations for the fiscal year ended September 30, 2017 was approximately 6.0% of our revenues compared to operating income of approximately 6.2% of revenues for the same period in 2016. The decrease in operating income for the fiscal year ended September 30, 2017 was primarily the result of decreased ethanol prices relative to the cost of corn.

Other Expense

We had other expense of approximately 0.1% of revenues for the fiscal year ended September 30, 2017 compared to other income of approximately 0.1% of revenues for the same period in 2016. This increase in other expense for the fiscal year ended September 30, 2017, was primarily due to drawing additional funds on our debt facilities which increased our interest expense for our fiscal year ended September 30, 2017.

Changes in Financial Condition for the Fiscal Year Ended September 30, 2018

The following table highlights the changes in our financial condition for the fiscal years ended September 30, 2018 and 2017:
 
September 30, 2018
 
September 30, 2017
Current Assets
$
46,351,013

 
$
50,139,370

Current Liabilities
16,941,813

 
18,007,407

Long-term Liabilities
7,314,867

 
14,581,758

Members' Equity
120,338,196

 
126,582,831


We experienced a decrease in our current assets at September 30, 2018 as compared to September 30, 2017. This decrease was primarily driven by a decrease in our trade accounts receivable at September 30, 2018 compared to September 30, 2017 because of the shorter payment terms under the amended marketing agreement with our ethanol marketer.

We experienced a decrease in our current liabilities at September 30, 2018 compared to September 30, 2017. This decrease is primarily due to the lower current portion of long-term debt at September 30, 2018 as compared to September 30, 2017 which resulted from paying the outstanding balance of the Term Loan in August 2018. This decrease was partially offset by an increase in our commodity derivative instrument liability positions at September 30, 2018.

We experienced a decrease in our long-term liabilities as of September 30, 2018 compared to September 30, 2017. This decrease resulted from paying the outstanding balance of the Term Loan in August 2018.

Liquidity and Capital Resources

Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not anticipate seeking additional equity financing during our 2019 fiscal year. However, should we experience unfavorable operating

30


conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity and may need to rely on our revolving lines of credit for operations.
    
Comparison of Cash Flows for Fiscal Years Ended September 30, 2018 and 2017

The following table shows cash flows for the fiscal year ended September 30, 2018 and 2017:

 
 
2018
 
2017
Net cash provided by operating activities
 
$
25,369,114

 
$
21,535,242

Net cash used for investing activities
 
(2,064,437
)
 
(12,950,173
)
Net cash used for financing activities
 
(23,463,846
)
 
(13,650,819
)
Net decrease in cash & restricted cash
 
(159,169
)
 
(5,065,750
)
Cash & restricted cash, beginning of period
 
19,397,161

 
24,462,911

Cash & restricted cash, end of period
 
$
19,237,992

 
$
19,397,161

    
Cash Flow from Operations

We experienced an increase in our cash flow from operations for the fiscal year ended September 30, 2018 as compared to the same period in 2017. This increase was due to a decrease in payment time from the point of sale from our ethanol marketer during the fiscal year ended September 30, 2018 as compared with the same period in 2017.

Cash Flow used for Investing Activities

We used less cash in investing activities for the fiscal year ended September 30, 2018 as compared to the same period in 2017. This decrease was primarily the result of decreased payments for construction in progress because the construction of the grain receiving and loading facility for our Trading Division was finished at the beginning of 2018 and no new large capital projects were in progress during our 2018 fiscal year.

Cash Flow used for Financing Activities

We used more cash for financing activities for the fiscal year ended September 30, 2018 as compared to the same period in 2017. This increase was the result of paying the outstanding balance on the Term Loan in August 2018. This increase was partially offset by a decrease in distributions to our members during the fiscal year ended September 30, 2018 as compared with the same period in 2017.

Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol, soybeans and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs.  Assuming future relative price levels for corn, ethanol, distillers grains and soybeans remain consistent with the relative price levels as of September 30, 2018, we expect operations to generate adequate cash flows to maintain operations.
Comparison of Cash Flows for Fiscal Years Ended September 30, 2017 and 2016

The following table shows cash flows for the fiscal year ended September 30, 2017 and 2016:
 
 
2017
 
2016
Net cash provided by operating activities
 
$
21,535,242

 
$
23,207,492

Net cash used for investing activities
 
(12,950,173
)
 
(6,931,007
)
Net cash used for financing activities
 
(13,650,819
)
 
(13,852,664
)
Net increase (decrease) in cash & restricted cash
 
(5,065,750
)
 
2,423,821

Cash & restricted cash, beginning of period
 
24,462,911

 
22,039,090

Cash & restricted cash, end of period
 
$
19,397,161

 
$
24,462,911



31


Cash Flow from Operations

We experienced a decrease in our cash flow from operations for the fiscal year ended September 30, 2017 as compared to the same period in 2016. This decrease was primarily the result of decreased ethanol and distillers grain prices relative to the cost of corn and the impact these prices had on inventory and other working capital components for the fiscal year ended September 30, 2017 as compared with the same period in 2016.

Cash Flow used for Investing Activities

We used more cash in investing activities for the fiscal year ended September 30, 2017 as compared to the same period in 2016. This increase was primarily the result of an increase in payments for construction in progress due to construction of the grain receiving and loading facility for our Trading Division.

Cash Flow used for Financing Activities

We used less cash for financing activities for the fiscal year ended September 30, 2017 as compared to the same period in 2016. This decrease was the result of paying less distributions to our members during the fiscal year ended September 30, 2017 as compared to the same period in 2016. This was partially offset by net additional borrowing of approximately $3.5 million from our debt facilities.

Short and Long Term Debt Sources

We have a loan agreement consisting of four loans, the Term Loan, the Declining Revolving Loan ("Declining Loan"), the Revolving Credit Loan and a Grain Loadout Facility Loan (formerly the Construction Loan). In exchange for these loans, we granted liens on all property (real and personal, tangible and intangible) which include, among other things, a mortgage on the property, a security interest on commodity trading accounts, and an assignment of material contracts. Please refer to "Item 8 - Financial Statements, Note 8 - Bank Financing" for additional details regarding the Amendment. On August 22, 2018, we paid the outstanding balance on the Term Loan and we have no ability to borrow additional funds against the Term Loan.
Term Loan
    
The interest rate on the Term Loan was formerly based on the 3-month London Interbank Offered Rate ("LIBOR") plus two hundred ninety basis points. The Term Loan required monthly installment payments of approximately $282,700 commencing on September 1, 2016, with a final maturity date of February 28, 2021. The outstanding balance on the Term Loan was repaid in August 2018 and as such, there was $0 outstanding on September 30, 2018 and approximately $11,856,000 outstanding on the Term Loan at September 30, 2017.

Declining Loan
    
The maximum availability of the Declining Loan is $5,000,000 with such amount to be available for working capital purposes. The interest rate on the Declining Loan is based on the 3-month LIBOR plus two hundred ninety basis points. The interest rate at September 30, 2018 was 5.24%. There was no borrowings outstanding on the Declining Loan at September 30, 2018 or September 30, 2017.
    
Revolving Credit Loan

The Revolving Credit Loan has a limit of $15,000,000 supported by a borrowing base made up of our corn, ethanol, dried distillers grain and corn oil inventories reduced by accounts payable associated with those inventories having a priority over FNBO. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds. The interest rate on the Revolving Credit Loan is the 1-month LIBOR plus two hundred ninety basis points. The interest rate at September 30, 2018 was 5.01%. There were no borrowings outstanding on the Revolving Credit Loan at September 30, 2018 or September 30, 2017.

Grain Loadout Facility Loan

The Grain Loadout Facility Loan (formerly construction loan) has a limit of $10,000,000. The interest rate on the Grain Loadout Facility Loan is based on the 3-month LIBOR plus two hundred ninety basis points and at September 30, 2018 was 5.23%. There were borrowings in the amount of approximately $8,743,000 outstanding on the Grain Loadout Facility Loan at September 30, 2018 and $6,476,000 outstanding on the Grain Loadout Facility Loan at September 30, 2017. The principal balance on the Construction Loan of $10,000,000 was converted to term debt effective December 31, 2017. The Grain Loadout Facility Loan

32


requires monthly installment payments of principal of approximately $119,000 plus interest accrued in arrears from the date of the last payment, such payments commenced on February 1, 2018, with a final maturity date of February 28, 2023. During the fiscal year ended September 30, 2018, we have capitalized approximately $15,000 of interest related to the various improvement and construction projects. This compares with approximately $263,000 capitalized in the same period ended September 30, 2017.
    
Covenants

During the term of the loans, we will be subject to certain financial covenants. Our minimum working capital is $15,000,000, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities. Our minimum fixed charge coverage ratio is no less than 1.15:1.0 measured on a rolling four quarter average basis. However, for any reporting period, if our working capital is equal to or more than $25,000,000, we will be subject to maintaining a debt service charge coverage ratio of no less than 1.25:1.0 in lieu of the fixed charge coverage ratio.

Our loan agreement also requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures exceeding an aggregate amount of $5,000,000.

We are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements at September 30, 2018. Based on current management projections, we anticipate that future operations will be sufficient to generate enough cash flow to maintain operations, service any new debt and comply with our financial covenants and other terms of our loan agreements through September 30, 2019. Should market conditions deteriorate in the future, circumstances may develop which could result in us violating the financial covenants or other terms of our loan agreements. Should we violate the terms or covenants of our loan or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans if we have a balance outstanding. In that event, our lender could also elect to proceed with a foreclosure action on our plant.
Development Agreement

In September 2007, the Company entered into a development agreement with Randolph County Redevelopment Commission (“the Commission”) to promote economic development in the area. Under the terms of this agreement, beginning in January 2008 through December 2028, the money the Company pays toward property tax expense is allocated to an expense and an acquisition account. The funds in the acquisition account can be used by the Commission to purchase equipment, at the Company's direction, for the plant. The Company does not have title to or control over the funds in the acquisition account, no amounts have been recorded in the balance sheet relating to this account.

Tax Abatement

In October 2006, the real estate on which our plant was constructed was determined to be an economic revitalization area, which qualified us for tax abatement. The abatement period is for a ten year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. We must apply annually and meet specified criteria to qualify for the abatement program.

Capital Improvements

We completed a construction project to add grain receiving and train loading facilities and additional rail spurs, track and grain storage to allow us to procure, transport and sell grain commodities through our new Trading Division. This project was substantially complete at September 30, 2017 for a total cost of approximately $9,300,000. To provide funding for this construction project, we executed a Tenth Amendment of First Amended and Restated Construction Loan Agreement with our primary lender, First National Bank of Omaha. Please refer to "Item 1 - Financial Statements, Note 8 - Bank Financing" for additional details regarding the terms of our construction financing.

The board of directors has approved various capital projects for the 2019 fiscal year in order to make certain improvements to our ethanol plant. These improvements are expected to allow us to increase our annual ethanol production rate to approximately 140 million gallons. We have not yet received bids for construction of these projects. However, we expect to use funds from operations and our existing debt facilities to fund these improvements.


33


Contractual Cash Obligations

In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following tables provide information regarding our contractual obligations and approximate commitments as of September 30, 2018:
 
Payment Due By Period
Contractual Cash Obligations
Total
 
Less than
One Year
 
One to
Three
Years
 
Three to
Five
Years
 
After Five
Years
Long-Term Debt Obligations
$
10,017,575

 
$
1,851,163

 
$
5,099,955

 
$
3,066,457

 
$

Operating Lease Obligations
10,115,700

 
2,676,660

 
7,103,880

 
335,160

 
 
Purchase Obligations
29,153,614

 
26,916,526

 
2,063,488

 
173,600

 

Total Contractual Cash Obligations
$
49,286,889

 
$
31,444,349

 
$
14,267,323

 
$
3,575,217

 
$

 
The long-term debt obligations in the table above include both estimated principal and interest payments applicable to the obligations incurred as a result of the borrowings against the Term Loan for our expansion projects (discussed above). The operating lease obligations in the table above include our hopper and tank railcars and forklift lease obligations as of September 30, 2018. Purchase obligations consist of forward contracted corn and soybean deliveries and forward contracted natural gas purchases.

Critical Accounting Estimates

Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:

We enter into derivative instruments to hedge the variability of expected future cash flows related to commodity markets. We do not typically enter into derivative instruments other than for economic hedging purposes. All derivative instruments are recognized on the September 30, 2018 balance sheet at their fair market value. Changes in the fair value of a derivative instrument that is designated as and meets all of the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged items affect earnings.

As of September 30, 2018, we have open short (selling) positions for 10,611,000 bushels of corn and long (buying) positions for 3,795,000 bushels of corn on the Chicago Board of Trade, open short (selling) positions of 2,310,000 gallons of ethanol and long (buying) positions of 3,150,000 gallons of ethanol on the Chicago Board of Trade. We also have open short (selling) positions for 1,235,000 bushels of soybeans and long (buying) positions of 320,000 bushels of soybeans on the Chicago Board of Trade. These derivatives have not been designated as an effective hedge for accounting purposes. Corn, ethanol and soybean positions are forecasted to settle through December 2019, March 2019 and July 2019, respectively. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

We carry our long-lived assets at the original acquisition cost as required by current generally accepted accounting principles. Due to business conditions and the business environment in which our industry operates, the fair market value of those assets could, theoretically, fall below the amount which we carry them in our financial statements. In such cases, those assets would be known as impaired. Thus, we periodically perform an assessment of the fair value of these assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of the useful lives of property and equipment to be a critical accounting estimate. Our assessment shows us that the fair value of our long-lived assets as a group is substantially in excess of its carrying value.

Inventories consist of raw materials, work in process, finished goods, grain inventory and parts. Corn is the primary raw material Finished goods consist of ethanol, dried distiller grains and corn oil. We, other than for our Trading Division, state inventories at the lower of weighted average cost or net realizable value. For our Trading Division, we state our grain inventories at market price less estimated disposition costs. Net realizable value is the estimated selling prices in the normal course of business, less reasonably predictable costs. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant

34


assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realizable value on inventory to be a critical accounting estimate.

We enter into forward contracts for grain purchases and natural gas to supply the two divisions. These contracts represent firm purchase commitments which must be evaluated for potential losses. We have determined that there are no losses that are required to be recognized on these firm purchase commitments related to contracts in place at September 30, 2018. Our estimates include various assumptions including the future prices of ethanol, distillers grains, corn, natural gas and soybeans.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our Declining Loan, Revolving Credit Loan and Grain Loadout Facility Loan (formerly Construction Loan) which bear variable interest rates.  The interest rate on the Declining Loan is the 3-month LIBOR plus 290 basis points with no minimum. There were no borrowings outstanding on the Declining Loan and the applicable interest rate was 5.24% at September 30, 2018. The interest rate for the Revolving Credit Note is the 1-month LIBOR rate plus 290 basis points with no minimum. There were no outstanding balances on the Revolving Credit Note at September 30, 2018 and the applicable interest rate was 5.01%. The interest rate on the Grain Loadout Facility Loan is the 3-month LIBOR plus 290 basis points with no minimum. There were borrowings in the amount of approximately $8,743,000 outstanding on the Grain Loadout Facility Loan and the applicable interest rate was 5.23% at September 30, 2018. The specifics of the Term Loan, Declining Loan, the Revolving Credit Loan and the Grain Loadout Facility Loan are discussed in greater detail above. If we were to experience a 10% adverse change in LIBOR, the annual effect such change would have on our statement of operations, based on the amount we had outstanding on our variable interest rate loans at September 30, 2018, would be approximately $46,000.

Commodity Price Risk

We expect to be exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

We enter into forward contracts for our commodity purchases and sales on a regular basis.  It is our intent that, as we enter in to these contracts, we will use various hedging instruments to maintain a near even market position.  For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts.  Because our ethanol marketing company is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.

    

35


At September 30, 2018, we had a net long position of 840,000 gallons of ethanol under derivative contracts used to hedge our future ethanol sales for various delivery periods through March 2019, a net short position of 6,816,000 bushels of corn under derivative contracts used to hedge our forward corn contracts, corn inventory and ethanol sales for various delivery periods through December 2019. At September 30, 2018, we had a net short (selling) position of 915,000 bushels of soybeans under derivative contracts used to hedge its forward soybean purchase contracts that it had entered into for its new Trading Division. These derivatives have not been designated as an effective hedge for accounting purposes. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above. At September 30, 2018, we also had entered into certain forward purchase contracts at fixed prices for which we elected to account for as derivatives. The following table provides details regarding the gains and (losses) from our derivative instruments in the statements of operations, none of which are designated as hedging instruments for the fiscal years ended September 30, 2018, September 30, 2017 and September 30, 2016:

 
Fiscal Year Ended
Fiscal Year Ended
Fiscal Year Ended
 
September 30, 2018
September 30, 2017
September 30, 2016
Corn Derivative Contracts
$
1,994,778

$
2,003,473

$
6,134,582

Ethanol Derivative Contracts
(700,074
)
1,640,292

(218,066
)
Natural Gas Derivative Contracts
165,590

205,523

(90,442
)
Soybean Derivative Contracts
3,495,818

223,409


Soybean Forward Purchase and Sales Contracts Derivatives
(1,344,332
)
(327,005
)

Totals
$
3,611,780

$
3,745,692

$
5,826,074


    At September 30, 2018, we had forward corn purchase contracts at various fixed prices for various delivery periods through March 2020 for approximately 5.7% of our expected production needs for the next 18 months. At September 30, 2018, we also had forward dried distiller grains sales contracts at various fixed prices for various delivery periods through January 2019 for approximately 18.6% of expected production for the next 4 months and forward corn oil contracts at various prices for various delivery periods through December 2018 for approximately 48.4% of expected production for the next 3 months. Also, at September 30, 2018, we had forward natural gas contracts for approximately 34.2% of expected purchases for the next 25 months at various prices for various delivery periods through October 2020. We had no forward ethanol sales contracts at fixed prices as of September 30, 2018.

We began operating our Trading Division in late September 2017. In preparation for beginning those operations, we entered into forward purchases contracts for soybeans. At September 30, 2018, the Company had soybean forward purchase and sales contracts at various fixed prices for various delivery periods through July 2019 for approximately 32.33% of its anticipated trading volume of that commodity for the next 10 months.

As contracts are delivered, any gains or losses realized will be recognized in our gross margin.  Due to the volatility and risk involved in the commodities market, we cannot be certain that these gains or losses will be realized. 

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, distillers grains, corn oil, corn, natural gas and soybeans price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas and average ethanol, distillers grains, corn oil and soybeans prices as of September 30, 2018 net of the forward and future contracts used to hedge our market risk. The volumes are based on our expected use, purchase and sale of these commodities for a one year period from September 30, 2018. The results of this analysis, which may differ from actual results, are approximately as follows:

36


 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Hypothetical Adverse Change in Price as of
September 30, 2018
Approximate Adverse Change to Income
Natural Gas
945,000

MMBTU
10
%
 
$
279,578

Ethanol
135,000,000

Gallons
10
%
 
$
17,010,000

Corn
39,459,275

Bushels
10
%
 
$
12,676,292

DDGs
303,665

Tons
10
%
 
$
4,099,478

Corn Oil
27,658,328

Pounds
10
%
 
$
732,946

Soybeans-Purchase
3,653,888

Bushels
10
%
 
$
2,833,590

Soybeans-Sale
4,861,473

Bushels
10
%
 
$
3,842,994


For comparison purposes, the results of our sensitivity analysis as of September 30, 2017 were approximately as follows:
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Hypothetical Adverse Change in Price as of
September 30, 2017
Approximate Adverse Change to Income
Natural Gas
1,262,500

MMBTU
10
%
 
$
367,009

Ethanol
130,000,000

Gallons
10
%
 
$
19,760,000

Corn
40,710,063

Bushels
10
%
 
$
14,146,747

DDGs
295,837

Tons
10
%
 
$
3,195,040

Corn Oil
23,165,660

Pounds
10
%
 
$
671,804

Soybeans - purchase
8,445,899

Bushels
10
%
 
$
7,766,004


Our Trading Division did not begin operations until the end of the fourth fiscal quarter of September 2017.

Liability Risk

We participate in a captive reinsurance company (the “Captive”).  The Captive reinsures losses related to worker's compensation, commercial property and general liability.  Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer.  The Captive reinsures catastrophic losses in excess of a predetermined amount.  Our premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage.  The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed in excess of the amount in the collateral fund.


37


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


38




boulaylogovera04.jpg
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Members of Cardinal Ethanol, LLC
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Cardinal Ethanol, LLC (the Company) as of September 30, 2018 and 2017, and the related statements of operations, changes in members’ equity, and cash flows for each of the years in the three-year period ended September 30, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2005.


/s/ Boulay PLLP
Minneapolis, Minnesota
November 21, 2018



39


CARDINAL ETHANOL, LLC
Balance Sheets

 ASSETS
September 30, 2018
 
September 30, 2017

 
 

Current Assets
 
 

Cash
$
17,989,013

 
$
18,995,755

Restricted cash
1,248,979

 
401,406

Trade accounts receivable
9,539,007

 
15,006,093

Miscellaneous receivables
519,721

 
384,508

Inventories
16,552,600

 
14,604,975

Prepaid and other current assets
170,953

 
253,791

Futures & Options Derivatives
281,438

 
489,531

Forward Purchase/Sales Derivatives
49,302

 
3,311

Total current assets
46,351,013

 
50,139,370


 
 

Property, Plant, and Equipment
 
 

Land and land improvements
22,507,849

 
22,454,661

Plant and equipment
158,084,612

 
156,035,099

Building
7,018,061

 
7,018,061

Office equipment
814,842

 
814,842

Vehicles
31,928

 
31,928

Construction in process
48,429

 
1,522,246


188,505,721

 
187,876,837

Less accumulated depreciation
(91,557,050
)
 
(79,940,448
)
Property, Plant, and Equipment, Net
96,948,671

 
107,936,389


 
 

Other Assets
 
 

Investment
1,295,192

 
1,096,237

Total other assets
1,295,192

 
1,096,237


 
 

Total Assets
$
144,594,876

 
$
159,171,996



Notes to Financial Statements are an integral part of this Statement.
















40



CARDINAL ETHANOL, LLC
Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
September 30, 2018
 
September 30, 2017

 
 

Current Liabilities
 
 

Accounts Payable
$
2,711,578

 
$
3,983,923

Accounts Payable - Grain
9,597,822

 
8,378,095

Accrued Expenses
1,289,929

 
1,381,734

Futures & Options Derivatives
274,118

 
264,357

Forward Purchase/Sales Derivatives
1,639,795

 
249,472

Current maturities of long-term debt
1,428,571

 
3,749,826

Total current liabilities
16,941,813

 
18,007,407


 
 

Long-term debt, net of current maturities
7,314,867

 
14,581,758


 
 

Commitments and Contingencies

 


 
 

Members’ Equity
 
 

Member contributions net of cost of raising capital, 14,606 units authorized, issued and outstanding
70,912,213

 
70,912,213

Retained earnings
49,425,983

 
55,670,618

Total members' equity
120,338,196

 
126,582,831


 
 
 
Total Liabilities and Members’ Equity
$
144,594,876

 
$
159,171,996



Notes to Financial Statements are an integral part of this Statement.


41


CARDINAL ETHANOL, LLC
Statements of Operations

 
Fiscal Year Ended
 
Fiscal Year Ended
 
Fiscal Year Ended

 
September 30, 2018
 
September 30, 2017
 
September 30, 2016

 
 
 

 

Revenues
 
$
266,858,452

 
$
228,496,827

 
$
222,895,449


 

 

 

Cost of Goods Sold
 
251,670,473

 
209,241,617

 
204,014,877


 

 

 

Gross Profit
 
15,187,979

 
19,255,210

 
18,880,572


 

 

 

Operating Expenses
 
6,778,756

 
5,520,971

 
5,233,634


 

 

 

Operating Income
 
8,409,223

 
13,734,239

 
13,646,938


 
 
 

 

Other Income (Expense)
 
 
 

 

Interest income
 

 

 
250

Interest expense
 
(858,725
)
 
(362,188
)
 
(185,870
)
Miscellaneous income
 
80,567

 
52,573

 
60,477

Total
 
(778,158
)
 
(309,615
)
 
(125,143
)

 
 
 
 
 
 
Net Income
 
$
7,631,065

 
$
13,424,624

 
$
13,521,795

 
 
 
 

 

Weight Average Units Outstanding - basic and diluted
 
14,606

 
14,606

 
14,606


 

 

 

Net Income Per Unit - basic and diluted
 
$
522

 
$
919

 
$
926

 
 

 

 

Distributions Per Unit
 
$
950

 
$
1,175

 
$
1,630



Notes to Financial Statements are an integral part of this Statement.






42


CARDINAL ETHANOL, LLC
Statements of Cash Flows

Fiscal Year Ended
 
Fiscal Year Ended
 
Fiscal Year Ended

September 30, 2018
 
September 30, 2017
 
September 30, 2016
 

 

 
 
Cash Flows from Operating Activities
 
 
 
 
 
Net income
$
7,631,065

 
$
13,424,624

 
$
13,521,795

Adjustments to reconcile net income to net cash provided by operations:

 

 
 
Depreciation
11,624,076

 
10,876,179

 
9,698,309

Change in fair value of commodity derivative instruments
1,562,186

 
(305,963
)
 
258,471

Gain on disposal of fixed asset
(9,560
)
 
(6,600
)
 

Non-cash dividend income
(198,955
)
 
(157,986
)
 
(114,757
)
Change in operating assets and liabilities:
 
 

 
 

 
 

 

Trade accounts receivables
5,467,086

 
(3,431,246
)
 
387,510

Miscellaneous receivable
(135,213
)
 
(248,991
)
 
249,188

Inventories
(1,947,625
)
 
(2,511,506
)
 
1,660,983

Prepaid and other current assets
82,838

 
(4,792
)
 
257,198

Accounts payable
165,294

 
1,511,712

 
(1,144,090
)
Accounts payable-corn
1,219,727

 
3,616,548

 
(1,995,627
)
Accrued expenses
(91,805
)
 
(1,226,737
)
 
428,512

Net cash provided by operating activities
25,369,114

 
21,535,242

 
23,207,492


 
 

 
 
Cash Flows from Investing Activities
 
 

 
 
Capital expenditures
(118,953
)
 
(571,366
)
 
(6,452,884
)
Payments for construction in process
(1,955,484
)
 
(12,385,407
)
 
(478,123
)
Proceeds from sale of equipment
10,000

 
6,600

 

   Net cash used for investing activities
(2,064,437
)
 
(12,950,173
)
 
(6,931,007
)

 
 

 
 
Cash Flows from Financing Activities
 
 

 
 
Distributions paid
(13,875,700
)
 
(17,162,050
)
 
(23,807,781
)
Proceeds from line of credit
10,349,708

 

 

Repayment on line of credit
(10,349,708
)
 

 

Proceeds from long-term debt
3,524,048

 
6,475,952

 
10,134,764

Payments on long-term debt
(13,112,194
)
 
(2,964,721
)
 
(179,647
)
Net cash used for financing activities
(23,463,846
)
 
(13,650,819
)
 
(13,852,664
)

 
 

 
 
Net Increase (Decrease) in Cash and Restricted Cash
(159,169
)
 
(5,065,750
)
 
2,423,821



 

 
 
Cash and Restricted Cash – Beginning of Period
19,397,161

 
24,462,911

 
22,039,090


 
 

 
 
Cash and Restricted Cash – End of Period
$
19,237,992

 
$
19,397,161

 
$
24,462,911



Notes to Financial Statements are an integral part of this Statement.

43


CARDINAL ETHANOL, LLC
Statements of Cash Flows

Fiscal Year Ended
 
Fiscal Year Ended
 
Fiscal Year Ended

September 30, 2018
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
Reconciliation of Cash and Restricted Cash
 
 
 
 
 
Cash - Balance Sheet
$
17,989,013

 
$
18,995,755

 
$
23,002,139

Restricted Cash - Balance Sheet
1,248,979

 
401,406

 
1,460,772

Cash and Restricted Cash
$
19,237,992

 
$
19,397,161

 
$
24,462,911

 
 
 
 
 
 
Supplemental Cash Flow Information

 

 
 
Interest paid
$
883,972

 
$
613,856

 
$
320,323



 

 
 
Supplemental Disclosure of Noncash Investing and Financing Activities

 

 
 
Construction costs included in accrued expenses and accounts payable
$
23,643

 
$
1,461,282

 
$
66,564

Construction period interest capitalized in property, plant and equipment
$
14,912

 
$
263,261

 
$
174,594



Notes to Financial Statements are an integral part of this Statement.



44


CARDINAL ETHANOL, LLC
Statements of Changes in Members' Equity

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Member
 
 Retained
 
 
 
Contributions
 
 Earnings
 
Balance - September 30, 2015