10-Q 1 a10-qfqe3x31x19.htm 10-Q FQE 3-31-2019 Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the quarterly period ended March 31, 2019.
 
 
 
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)
 
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 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 such files).
x Yes     o No

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 

As of May 3, 2019, there were 14,606 membership units outstanding.

1


INDEX



2


PART I.        FINANCIAL INFORMATION

Item 1. Financial Statements

CARDINAL ETHANOL, LLC
Condensed Balance Sheets
 ASSETS
March 31, 2019
 
September 30, 2018

 (Unaudited)
 

Current Assets

 

Cash
$
736,777

 
$
17,989,013

Restricted cash
1,240,939

 
1,248,979

Trade accounts receivable
13,097,226

 
9,539,007

Miscellaneous receivables
780,005

 
519,721

Inventories
28,895,643

 
16,552,600

Prepaid and other current assets
354,833

 
170,953

Futures & options derivatives
619,113

 
281,438

Forward purchase/sales derivatives
23,291

 
49,302

Total current assets
45,747,827

 
46,351,013


 
 

Property, plant, and equipment, net
93,002,332

 
96,948,671


 
 

Other Assets
 
 

Investment
1,295,192

 
1,295,192

Total other assets
1,295,192

 
1,295,192


 
 

Total Assets
$
140,045,351

 
$
144,594,876

LIABILITIES AND MEMBERS' EQUITY
 
 
 

 
 

Current Liabilities

 

Checks written in excess of bank balances
$
2,946,560

 
$

Contract liabilities
1,035,952

 

Accounts payable
2,466,537

 
2,711,578

Accounts payable-grain
6,095,468

 
9,597,822

Accrued expenses
1,332,896

 
1,289,929

Futures & options derivatives
544,847

 
274,118

Forward purchase/sales derivatives
281,816

 
1,639,795

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

 
1,428,571

Total current liabilities
16,132,647

 
16,941,813



 

Long-Term Debt, net of current maturities
6,306,009

 
7,314,867



 

Commitments and Contingencies

 



 

Members’ Equity

 

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

 
70,912,213

Retained earnings
46,694,482

 
49,425,983

Total members' equity
117,606,695

 
120,338,196



 

Total Liabilities and Members’ Equity
$
140,045,351

 
$
144,594,876

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

3




CARDINAL ETHANOL, LLC
Condensed Statements of Operations (Unaudited)

Three Months Ended
 
Six Months Ended

March 31, 2019
 
March 31, 2018
 
March 31, 2019
 
March 31, 2018
 

 

 

 

Revenues
$
64,371,953

 
$
65,712,336

 
$
114,506,420

 
$
121,567,824



 

 
 
 
 
Cost of Goods Sold
62,407,751

 
62,569,584

 
113,402,606

 
115,023,721


 
 

 

 
 
Gross Profit
1,964,202

 
3,142,752

 
1,103,814

 
6,544,103


 
 

 

 
 
Operating Expenses
1,935,894

 
1,687,267

 
3,676,673

 
3,326,016


 
 

 
 
 
 
Operating Income (Loss)
28,308

 
1,455,485

 
(2,572,859
)
 
3,218,087


 
 

 
 
 
 
Other Income (Expense)
 
 

 
 
 
 
Interest expense
(96,443
)
 
(236,627
)
 
(207,764
)
 
(425,493
)
Miscellaneous Income
6,674

 
30,011

 
49,120

 
60,782

Total
(89,769
)
 
(206,616
)
 
(158,644
)
 
(364,711
)

 
 

 
 
 
 
Net Income (Loss)
$
(61,461
)
 
$
1,248,869

 
$
(2,731,503
)
 
$
2,853,376

 
 
 
 
 
 
 
 
Weight Average Units Outstanding - basic and diluted
14,606

 
14,606

 
14,606

 
14,606


 
 

 
 
 
 
Net Income (Loss) Per Unit - basic and diluted
$
(4
)
 
$
86


$
(187
)
 
$
195

 
 
 
 
 
 
 
 
Distributions Per Unit
$

 
$
200

 
$

 
$
600

 
 
 
 
 
 
 
 

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





4


CARDINAL ETHANOL, LLC
Condensed Statements of Cash Flows (Unaudited)

Six Months Ended
 
Six Months Ended

March 31, 2019
 
March 31, 2018
 

 

Cash Flows from Operating Activities
 
 
 
Net income (loss)
$
(2,731,503
)
 
$
2,853,376

Adjustments to reconcile net income (loss) to net cash used in operations:

 

Depreciation
5,652,309

 
5,799,420

Change in fair value of commodity derivative instruments
(1,398,914
)
 
347,710

Loss (gain) on sale of equipment
1,218

 
(9,561
)
Non-cash dividend income

 
(198,955
)
Change in operating assets and liabilities:
 
 

Trade accounts receivables
(3,558,218
)
 
1,091,226

Miscellaneous receivable
(260,284
)
 
190,599

Inventories
(12,343,043
)
 
(15,684,743
)
Prepaid and other current assets
(183,880
)
 
(147,476
)
Commodity derivative instruments

 
(302,748
)
Contract liabilities
1,035,952

 
891,427

Accounts payable
(518,751
)
 
(1,846,544
)
Accounts payable-grain
(3,502,354
)
 
(5,915,052
)
Accrued expenses
42,968

 
1,376,374

Net cash used in operating activities
(17,764,500
)
 
(11,554,947
)

 
 

Cash Flows from Investing Activities
 
 

Capital expenditures
(1,437,278
)
 
(1,749,054
)
Payments for construction in progress

 
(89,525
)
Proceeds from sale of equipment
3,800

 
10,000

   Net cash used for investing activities
(1,433,478
)
 
(1,828,579
)

 
 

Cash Flows from Financing Activities
 
 

Checks written in excess of bank balances
2,946,560

 
2,920,987

Distributions paid

 
(8,763,600
)
Proceeds from revolving credit loan
1,329,925

 

Payments against revolving credit loan
(1,329,925
)
 

Proceeds from long-term debt

 
12,020,863

Payments on long-term debt
(1,008,858
)
 
(10,376,980
)
Net cash provided by (used for) financing activities
1,937,702

 
(4,198,730
)

 
 

Net Decrease in Cash and Restricted Cash
(17,260,276
)
 
(17,582,256
)


 

Cash and Restricted Cash – Beginning of Period
19,237,992

 
19,397,161



 

Cash and Restricted Cash – End of Period
$
1,977,716

 
$
1,814,905


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


5



CARDINAL ETHANOL, LLC
Condensed Statements of Cash Flows (Unaudited)

Six Months Ended
 
Six Months Ended

March 31, 2019
 
March 31, 2018
Reconciliation of Cash and Restricted Cash
 
 
 
Cash - Balance Sheet
$
736,777

 
$
297,191

Restricted Cash - Balance Sheet
1,240,939

 
1,517,714

Cash and Restricted Cash
1,977,716

 
1,814,905

 
 
 
 
Supplemental Cash Flow Information
 
 

Interest paid
$
226,065

 
$
402,246


 
 

Supplemental Disclosure of Non-cash Investing and Financing Activities
 
 

     Construction in process included in accrued expenses and accounts payable
$
297,353

 
$
59,168


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



6


CARDINAL ETHANOL, LLC
Condensed Statements of Changes in Members' Equity (Unaudited)
 
Member
Contributions
 
Retained
Earnings
September 30, 2017
$70,912,213
 
$55,670,618
 
 
 
 
Net Income
 
1,604,507
Member Distributions
 
(5,842,400)
 
 
 
 
December 31, 2017
70,912,213
 
51,432,725
 
 
 
 
Net Income
 
1,248,869
Member Distributions
 
(2,921,200)
 
 
 
 
March 31, 2018
$70,912,213
 
$49,760,394
 
 
 
 
September 30, 2018
$70,912,213
 
$49,425,983
 
 
 
 
Net Loss
 
(2,670,040)
 
 
 
 
December 31, 2018
70,912,213
 
46,755,943
 
 
 
 
Net Loss
 
(61,461)
 
 
 
 
March 31, 2019
$70,912,213
 
$46,694,482


7


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended September 30, 2018, contained in the Company's annual report on Form 10-K.

In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation.

Nature of Business

Cardinal Ethanol, LLC, (the “Company”) is an Indiana limited liability company currently producing fuel-grade ethanol, distillers grains, corn oil and carbon dioxide near Union City, Indiana and sells these products throughout the continental United States. During the six months ended March 31, 2019 and 2018, the Company produced approximately 63,685,000 and 64,816,000 gallons of ethanol, respectively.

Reportable Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. 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 related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

Ethanol Production Division. Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

Trading Division. During 2017, the Company constructed a grain loading facility within our single site to buy, hold and sell inventories of agricultural grains, primarily soybeans. We perform no additional processing of these grains, unlike the corn inventory we hold and use in ethanol production. The activities of buying, selling and holding of grains other than for ethanol and co-product production comprise this financial reporting segment.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, the valuation of inventory purchase and sale commitments derivatives, inventory, patronage dividends, long-lived assets and inventory purchase commitments. Actual results may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

Restricted Cash

As a part of its commodities hedging activities, the Company is required to maintain cash balances with our commodities trading companies for initial and maintenance margins on a per futures contract basis. Changes in the market value of contracts may increase these requirements. As the futures contracts expire, the margin requirements also expire. Accordingly, we record the cash maintained with the traders in the margin accounts as restricted cash. Since this cash is immediately available to us upon request when there is a margin excess, we consider this restricted cash to be a current asset.


8


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

Trade Accounts Receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Amounts considered uncollectible are written off. The Company's estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At March 31, 2019 and September 30, 2018, the Company determined that an allowance for doubtful accounts was not necessary.

Contract Liabilities

The Company receives cash from time to time from customers before it fulfills its performance obligations to those customers. In those cases, the company records those advance payments as a current liability. The Company has not yet received advances that are expected to remain open beyond one year.

Inventories

Ethanol production division inventories consist of raw materials, work in process, finished goods and parts. Corn is the primary raw material. Finished goods consist of ethanol, dried distiller grains and corn oil. Inventories are stated at the lower of weighted average cost or net realizable value. Net realizable value is the estimated selling prices in the normal course of business, less reasonably predictable selling costs.

Trading division inventories consist of grain. Soybeans were the only grains held and traded at March 31, 2019 and September 30, 2018. These inventories are stated at market value, which may include reductions for quality.

Property, Plant and Equipment

Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line depreciation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.

On November 6, 2018, we experienced an explosion in one of our distillers grain silos. There were no injuries related to the incident and the damage was limited to the distillers grains silos and the associated materials handling equipment. Operations at the plant were temporarily suspended for four days pending an evaluation and assessment of the situation. The plant resumed operations but did not return to full production rates until mid to late December. The net book value of the damaged silos was approximately $1,200,000 at March 31, 2019. The extent of the monetary damages related to the incident has not yet been determined. We may decide to repair or abandon and replace the silo. We have presently engaged an engineering firm to help us assess the extent of the damage and cost of repairs needed and to assist us with substantiating the claims with the insurance carrier. We believe that our policies cover the damages to the silo and the business interruption costs, net of our policies' deductibles.

The company has various capital projects scheduled for the 2019 fiscal year in order to make certain improvements to our ethanol plant. We have executed an agreement with Nelson Engineering to construct an additional liquefaction tank and fermenter which are expected to cost approximately $3,200,000. We expect to use funds from operations and our existing debt facilities to fund these improvements.

Long-Lived Assets

The Company reviews its long-lived assets, such as property, plant and equipment and financing costs, subject to depreciation and amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

9


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

Investments

Investments consist of the capital stock and patron equities of the Company's distillers grains marketer. The investments are stated at the lower of cost or fair value and adjusted for non cash patronage equities received. Patronage dividends are recognized when received and included within revenue in the condensed statements of operations.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and other customers as described below. Our performance obligations consist of the delivery of ethanol, distillers' grains, corn oil, soybeans and carbon dioxide to our customers. The consideration we receive for these products is fixed based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. We sell each of the products via different marketing channels as described below.

Ethanol. The Company sells its ethanol via a marketing agreement with Murex, LLC. Murex sells one hundred percent of the Company's ethanol production based on agreements with end users at prices agreed upon mutually among the end user, Murex and the Company. Murex then provides a schedule of deliveries required and an order for each rail car or tankers needed to fulfill their commitment with the end user. These are individual performance obligations of the Company. The marketing agreement calls for control and title to pass when the delivery vehicle is filled. Revenue is recognized then at the price in the agreement with the end user, net of commissions, freight, and insurance.

Distillers grains. The Company engages another third-party marketing company, CHS, Inc, to sell one hundred percent of the distillers grains it produces at the plant. The process for selling the distillers grains is like that of ethanol, except that CHS takes title and control once a rail car is released to the railroad or a truck is released from the Company's scales. Prices are agreed upon among the three parties and CHS provides schedules and orders representing performance obligations. Revenue is recognized net of commissions, freight and fees.

Distillers corn oil (corn oil). The Company sells its production of corn oil directly to commercial customers. The customer is provided with a delivery schedule and pick up orders representing performance obligations are fulfilled when the customer’s driver picks up the scheduled load. The price is agreed upon at the time each contract is made, and the Company recognizes revenue at the time of delivery at that price.

Carbon dioxide. The Company sells a portion of the carbon dioxide it produces to a customer that maintains a plant on-site for a set price per ton. Delivery is defined as transference of the gas from our stream to their plant.

Soybeans and other grains. The Company sells soybeans exclusively to commercial mills, processors or grain traders. Contracts are negotiated directly with the parties at prices based on negotiated prices.

Derivative Instruments

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in the statement of operations, depending on the item being hedged.

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and

10


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

The Company has elected for its Ethanol Division to apply the normal purchase normal sale exemption to all forward commodity contracts. For the Trading Division, the Company has elected not to apply the normal purchase normal sale exemption to its forward purchase and sales contracts and therefore marks these derivative instruments to market.

Net (Loss) per Unit

Basic net (loss) per unit is computed by dividing net (loss) by the weighted average number of members' units outstanding during the period. Diluted net (loss) per unit is computed by dividing net (loss) by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net (loss) per unit are the same.

Recently Issued or Adopted Accounting Pronouncements

Accounting for Leases (Evaluating)

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments. The accounting guidance for lessors is largely unchanged. The ASU is effective for the Company beginning in October 2019. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of this guidance will have on the Company’s financial statements and anticipates the new guidance will significantly impact its financial statements given the Company has leased a significant number of rail cars for transporting ethanol and Dried Distillers' Grains with Solubles (DDGS) to its customers.

Revenue Recognition (Adopted)

Effective October 1, 2018, the Company adopted the amended guidance in ASC Topic 606, Revenue from Contracts with Customers. Refer to Note 1 - Accounting policies and Note 2 - Revenue for further details.

2.  REVENUE

Adoption of ASC Topic 606

On October 1, 2018, the Company adopted the amended guidance in ASC Topic 606, Revenue from Contracts with Customers, and all related amendments (“new revenue standard”) and applied it to all contracts using the modified retrospective transition method. There were no adjustments to the October 1, 2018 balance sheet for the adoption of the new revenue standard. As such, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. In addition, there was no impact of adoption on the statements of operations or balance sheets for the three and six months ended March 31, 2019 and 2018.

Revenue Recognition

Revenue is recognized at a single point in time when the Company satisfies its performance obligation under the terms of a contract with a customer. Generally, this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration expected, as specified in the contract with a customer, to be received in exchange for transferring goods or providing services.





11


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

Revenue by Source

All revenues from contracts with customers under ASC Topic 606 are recognized at a point in time. The following tables disaggregate revenue by major source for the three and six month periods ended March 31, 2019:

Three Months Ended March 31, 2019
 
Ethanol Production
 
Grain Trading
 
Total
Revenues from contracts with customers under ASC Topic 606
 
 
 
 
 
Ethanol
$
45,212,248

 
$

 
$
45,212,248

Distillers' grains
11,377,793

 

 
11,377,793

Corn Oil
1,871,635

 

 
1,871,635

Carbon Dioxide
123,375

 

 
123,375

Other
15,050

 
4,400

 
19,450

Total revenues from contracts with customers
58,600,101

 
4,400

 
58,604,501

 
 
 
 
 
 
Revenues from contracts accounted for as derivatives under ASC Topic 815 (1)
 
 
 
 
 
Soybeans and other grains

 
5,767,452

 
5,767,452

Total revenues from contracts accounted for as derivatives

 
5,767,452


5,767,452

Total Revenues
$
58,600,101

 
$
5,771,852

 
$
64,371,953


Six Months Ended March 31, 2019
 
Ethanol Production
 
Grain Trading
 
Total
Revenues from contracts with customers under ASC Topic 606
 
 
 
 
 
Ethanol
$
77,825,727

 
$

 
$
77,825,727

Distillers' grains
21,543,872

 

 
21,543,872

Corn Oil
3,638,919

 

 
3,638,919

Carbon Dioxide
262,895

 

 
262,895

Other
29,200

 
8,900

 
38,100

Total revenues from contracts with customers
103,300,613

 
8,900

 
103,309,513

 
 
 
 
 
 
Revenues from contracts accounted for as derivatives under ASC Topic 815 (1)
 
 
 
 
 
Soybeans and other grains

 
11,196,907

 
11,196,907

Total revenues from contracts accounted for as derivatives

 
11,196,907

 
11,196,907

Total Revenues
$
103,300,613

 
$
11,205,807

 
$
114,506,420


(1) Revenues from contracts accounted for as derivatives represent physically settled derivative sales that are outside the scope of ASC Topic 606, Revenue from Contracts with Customers (ASC Topic 606), where the company recognizes revenue when control of the inventory is transferred within the meaning of ASC Topic 606 as required by ASC Topic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets.





12


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

Payment Terms

The Company has contractual payment terms with each respective marketer that sells ethanol and distillers grains. These terms are generally 10 - 20 days after the week of the transfer of control.

The Company has standard payment terms of net 10 days for its invoices for corn oil.

The Company has standard payments terms due upon delivery for its invoices of soybeans.
The contractual terms with the carbon dioxide customer calls for an annual settlement.

Shipping and Handling Costs

Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of goods sold. Accordingly, amounts billed to customers for such costs are included as a component of revenue.

Contract Liabilities

The Company records unearned revenue when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of its contracts with customers.

3. CONCENTRATIONS

Two major customers accounted for approximately 88% of the outstanding accounts receivable balance at March 31, 2019 and 87% at September 30, 2018. These same two customers accounted for approximately 87.9% of revenue for the three and six month periods ended March 31, 2019 and 81.5% of revenue for the three and six month periods ended March 31, 2018.

4.  INVENTORIES

Inventories consist of the following as of:
 
March 31, 2019 (Unaudited)
 
September 30, 2018
Ethanol Division:
 
 
 
 Raw materials
$
9,939,823

 
$
7,053,371

 Work in progress
1,374,080

 
1,299,716

 Finished goods
2,124,018

 
1,929,177

 Spare parts
3,247,874

 
2,927,438

Ethanol Division Subtotal
$
16,685,795

 
$
13,209,702

Trading Division:
 
 
 
Grain inventory
$
12,209,848

 
$
3,342,898

Trading Division Subtotal
$
12,209,848

 
$
3,342,898

Total Inventories
$
28,895,643

 
$
16,552,600


The Company had a net realizable value write-down of Ethanol Division inventory of approximately $167,000 and $0 for the three months ended March 31, 2019, and 2018, respectively and $784,000 and $83,000 for the six months ended March 31, 2019, and 2018.

In the ordinary course of business, the Company enters into forward purchase contracts for its commodity purchases and sales. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. At March 31, 2019, the Company had forward corn purchase contracts at various fixed prices for various delivery

13


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

periods through May 2020 for approximately 6.6% of expected production needs for the next 14 months. Approximately 5.6% of the forward corn purchases were with related parties. Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts using a methodology similar to that used in the lower of cost or net realizable value evaluation with respect to inventory valuation, and has determined that no impairment existed at March 31, 2019 or September 30, 2018. The Company has elected not to apply the normal purchase and sale exemption to its forward soybean contracts and therefore treats them as derivative instruments.

At March 31, 2019, the Ethanol Division had forward dried distiller grains sales contracts for approximately 40.9% of expected production for the next 3 months at various fixed prices for delivery periods through June 2019. At March 31, 2019, the Company had forward corn oil contracts for approximately 76.1% of expected production for the next 2 months at various fixed prices for delivery through May 2019. Also, at March 31, 2019, the Company had forward natural gas contracts for approximately 21.8% of expected purchases for the next 19 months at various prices for various delivery periods through October 2020. Additionally, at March 31, 2019, the Trading Division had forward soybean purchase contracts for various delivery periods through March 2020 . Approximately 7.2% of the forward soybean purchases were with related parties.

5. DERIVATIVE INSTRUMENTS

The Company enters into corn, ethanol, natural gas and soybean derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the balance sheet. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure. The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis.

Commodity Contracts

The Company enters into commodity-based derivatives, for corn, ethanol, natural gas and soybeans in order to protect cash flows from fluctuations caused by volatility in commodity prices. This is also done to protect gross profit margins from potentially adverse effects of market and price volatility on commodity based purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. The changes in the fair market value of ethanol derivative instruments are included as a component of revenue.  The changes in the fair market value of corn, natural gas, and soybean derivative instruments are included as a component of cost of goods sold.

At March 31, 2019, the Ethanol Division had a net short (selling) position of 2,527,676 bushels of corn under derivative contracts used to hedge its forward corn contracts, corn inventory and ethanol sales. These corn derivatives are traded on the Chicago Board of Trade as of March 31, 2019 and are forecasted to settle for various delivery periods through May 2020. At March 31, 2019, the Company had a net short (selling) position of 6,930,000 gallons of ethanol under derivative contracts used to hedge its future ethanol sales. These ethanol derivatives are traded on the New York Mercantile Exchange and are forecasted to settle for various delivery periods through December 2019. At March 31, 2019, the Trading Division also had a net short (selling) position of 2,167,955 bushels of soybeans under derivative contracts used to hedge its forward soybean contract purchases. These soybean derivatives are traded on the Chicago Board of Trade and are, as of March 31, 2019, forecasted to settle for various delivery periods through March 2020. These derivatives have not been designated as effective hedges for accounting purposes.


14


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

The following table provides balance sheet details regarding the Company's derivative financial instruments at March 31, 2019:

Instrument
Balance Sheet Location
 
Assets
 
Liabilities
Ethanol Futures and Options Contracts
Futures & Options Derivatives
 
$

 
$
3,486

Corn Futures and Options Contracts
Futures & Options Derivatives
 
$

 
$
541,361

Soybean Futures and Options Contracts
Futures & Options Derivatives
 
$
619,113

 
$

Soybean Forward Purchase and Sales Contracts
Forward Purchase/Sales Derivatives
 
$
23,291

 
$
281,816

Totals
 
 
$
642,404

 
$
826,663


As of March 31, 2019, the Company had approximately $1,241,000 cash collateral (restricted cash) related to ethanol, corn, and soybean derivatives held by four brokers.

The following table provides balance sheet details regarding the Company's futures and options derivative financial instruments at September 30, 2018:
Instrument
Balance Sheet Location
 
Assets
 
Liabilities
Ethanol Futures and Options Contracts
Futures & Options Derivatives
 
$

 
$
118,062

Corn Futures and Options Contracts
Futures & Options Derivatives
 
$

 
$
156,056

Soybean Futures and Options Contracts
Futures & Options Derivatives
 
$
281,438

 
$

Soybean Forward Purchase and Sales Contracts
Forward Purchase/Sales Derivatives
 
$
49,302

 
$
1,639,795

Totals
 
 
$
330,740

 
$
1,913,913


As of September 30, 2018, the Company had approximately $1,249,000 of cash collateral (restricted cash) related to ethanol, corn and soybean derivatives held by two brokers.

The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments:
Instrument
Statement of Operations Location
 Three Months Ended March 31, 2019
Six Months Ended
March 31, 2019
 Three Months Ended March 31, 2018
Six Months Ended
March 31, 2018
Corn Futures and Options Contracts
Cost of Goods Sold
$
(254,158
)
$
(328,612
)
$
(437,723
)
$
(181,388
)
Ethanol Futures and Options Contracts
Revenues
163,702

185,440

(252,292
)
(325,076
)
Natural Gas Futures and Options Contracts
Cost of Goods Sold

37,727

36,584

157,013

Soybean Futures and Options Contracts
Cost of Good Sold
487,494

287,892

(753,160
)
(929,987
)
Soybean Forward Purchase Contracts
Cost of Goods Sold
(147,839
)
1,502,007

804,575

931,728

Totals
 
$
249,199

$
1,684,454

$
(602,016
)
$
(347,710
)



15


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

6. FAIR VALUE MEASUREMENTS
 
The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of March 31, 2019:
Instruments
Carrying Amount
Fair Value
Level 1
Level 2
Level 3
Corn Futures and Options Contracts
$
(541,361
)
$
(541,361
)
$
(643,562
)
$
102,201

$

Ethanol Futures and Options Contracts
$
(3,486
)
$
(3,486
)
$
(3,486
)
$

$

Soybean Futures and Options Contracts
$
619,113

$
619,113

$
520,662

$
98,451

$

Soybean Forward Purchase Contracts
$
(258,525
)
$
(258,525
)
$

$
(258,525
)
$

Soybean Inventory
$
12,209,848

$
12,209,848

$

$
12,209,848

$


The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of September 30, 2018:

Instruments

Carrying Amount
Fair Value
Level 1
Level 2
Level 3
Corn Futures and Options Contracts
$
(156,056
)
$
(156,056
)
$
(164,625
)
$
8,569

$

Ethanol Futures and Options Contracts
$
(118,062
)
$
(118,062
)
$
(118,062
)
$

$

Soybean Futures and Options Contracts
$
281,438

$
281,438

$
281,438

$

$

Soybean Forward Purchase Contracts
$
(1,590,493
)
$
(1,590,493
)
$

$
(1,590,493
)
$

Soybean Inventory
$
3,342,898

$
3,342,898

$

$
3,342,898

$


We determine the fair value of commodity futures derivative instruments utilizing Level 1 inputs by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. Corn and soybean futures and options and soybean forward purchase contracts are reported at fair value utilizing Level 2 inputs from current contract prices that are being issued by the Company. Estimated fair values for inventories carried at market are based on exchange-quoted prices, adjusted for differences in local markets and quality.

7.  BANK FINANCING

The Company has a loan agreement consisting of three loans, the Declining Revolving Loan (Declining Loan), the Revolving Credit Loan and the Grain Loadout Facility Loan (formerly the Construction Loan) in exchange for 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 assignment of material contracts. The loan agreement assigns an interest rate of LIBOR plus 290 basis points (2.9%) to each of the individual loans. The Revolving Credit Loan is assigned the one month LIBOR rate which changes on the first day of every month. The Declining Loan and the Grain Loadout Facility Loan each have interest charged based on the ninety day (three month) LIBOR rate. The interest rate is assigned at the beginning of the ninety day period and not all of the loans have the same interest rate beginning and ending dates. The Company amended the loan agreement effective as of February 28, 2019, to extend the termination date of the Revolving Credit Loan from February 28, 2019 to February 28, 2020.
Declining Note

The maximum availability of the Declining Loan is $5,000,000 with such amount to be available for working capital purposes.

16


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

The interest rate on the Declining Loan at March 31, 2019 was 5.30% and at September 30, 2018 was 5.24%. There were no borrowings outstanding on the Declining Loan at March 31, 2019 or at September 30, 2018.

Revolving Credit Loan

The Revolving Credit Loan has a limit of $15,000,000 supported by a borrowing base made up of the Company's corn, ethanol, dried distillers grain, corn oil and soybean inventories reduced by accounts payable associated with those inventories having a priority. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds.The interest rate at March 31, 2019 was 5.39% and at September 30, 2018 was 5.01%. There were no borrowings outstanding on the Revolving Credit Loan at March 31, 2019 or at September 30, 2018.

Grain Loadout Facility Loan

The Grain Loadout Facility Loan (formerly Construction Loan) had a limit of $10,000,000. The interest rate at March 31, 2019 was 5.53% and at September 30, 2018 was 5.23%. There were borrowings in the amount of approximately $7,735,000 and $8,743,000 outstanding on the Grain Loadout Facility Loan at March 31, 2019 and September 30, 2018, respectively. 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 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.

These loans are subject to protective covenants, which require the Company to maintain various financial ratios. The covenants include a working capital requirement of $15,000,000, and a capital expenditures covenant that allows the Company $5,000,000 of expenditures per year without prior approval. There is also a requirement to maintain a minimum fixed charge coverage ratio of no less than 1.15:1.0 measured quarterly on a rolling four quarter basis.

Long-term debt, as discussed above, consists of the following at March 31, 2019:
Grain Loadout facility loan
$
7,734,580

Less amounts due within one year
$
1,428,571

       Net long-term debt
$
6,306,009


The estimated maturities of long-term debt at March 31, 2019 are as follows:
April 1, 2019 to March 31, 2020
$
1,428,571

April 1, 2020 to March 31, 2021
1,428,571

April 1, 2021 to March 31, 2022
1,428,571

April 1, 2022 to March 31, 2023
3,448,867

Total long-term debt
$
7,734,580


8. LEASES

At March 31, 2019, the Company had entered into an agreement with its ethanol marketer to lease 225 tank cars needed for ethanol rail transportation at a rate up to current market rates per tank car per month through November 2022. The ethanol purchase and sale agreement was amended from the previous agreement which charged the Company a fixed price per gallon of ethanol through July 27, 2018. This amendment results in a commitment classified as an operating lease as reported in the table below.


17


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

At March 31, 2019, the Company had the following operating lease minimum commitments for payments of rentals under leases which at inception had a non-cancellable term of more than one year:
 
Total
April 1, 2019 to March 31, 2020
$
3,227,112

April 1, 2020 to March 31, 2021
3,227,112

April 1, 2021 to March 31, 2022
2,844,612

April 1, 2022 to March 31, 2023
1,539,408

Total minimum lease commitments
$
10,838,244


9. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Patent Infringement

In February 2010, a lawsuit against the Company was filed by an unrelated party claiming the Company's operation of the oil separation system in a patent infringement. In connection with the lawsuit, in February 2010, the agreement for the construction and installation of the tricanter oil separation system was amended. In this amendment the manufacturer and installer of the tricanter oil separation system indemnifies the Company against all claims of infringement of patents, copyrights or other intellectual property rights from the Company's purchase and use of the tricanter oil system and agrees to defend the Company in the lawsuit filed at no expense to the Company. On October 23, 2014, the court granted summary judgment finding that all of the patents claimed 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. The Company has since settled with the attorneys for the inventors. A motion to reconsider the decision regarding inequitable conduct is pending. In addition, an appeal regarding the current ruling on inequitable conduct has been filed. The manufacturer has, and the Company expects it will continue, to vigorously defend itself and the Company in these lawsuits and in any appeal filed.

If the ruling was to be successfully appealed, the Company estimates that damages sought in this litigation if awarded would be
based on a reasonable royalty to, or lost profits of, the plaintiff. If the court deems the case exceptional, attorney's fees may be awarded and are likely to be $1,000,000 or more. The manufacturer has also agreed to indemnify the Company for these fees. However, in the event that damages are awarded and if the manufacturer is unable to fully indemnify the Company for any reason, the Company could be liable. In addition, the Company may need to cease use of its current oil separation process and seek out a replacement or cease oil production altogether.

Air Permit

On January 4, 2018, the Company received a letter from the Indiana Department of Environmental Management, Office of Air Quality (“IDEM”) alleging violations of the Company's 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 bag houses instead of one larger bag house); (iii) constructed and operated emission units (steel bins) without emission controls; and (iv) operated emission units above the emission limits. The Company entered into a settlement of this matter with IDEM in April 2019 and as part of that settlement paid a civil penalty in the amount of $27,000.

10. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS

The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are primarily derived from the sale and distribution of ethanol, distillers grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales average approximately 68% of total revenues and corn costs average 69% of total cost of goods sold.


18


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol, distillers grains and corn oil, and the related cost of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and the unleaded gasoline and the petroleum markets, although, since 2005, the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.

11. BUSINESS SEGMENTS

Based on the growth of the Company's Trading Division during the first quarter of fiscal 2018 and operations in fiscal 2018, the Company has determined it now has two reportable operating segments. Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Segment income or loss does not include any allocation of shared-service costs.  Segment assets are those that are directly used in or identified with segment operations. Inter-segment balances and transactions have been eliminated.
 
The following tables summarize financial information by segment and provide a reconciliation of segment revenue, gross profit, grain inventories, operating income, and total assets: 
 
Three Months Ended
 
Six Months Ended
 
March 31, 2019
 
March 31, 2018
 
March 31, 2019
 
March 31,2018
Revenue:
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Ethanol production
$
58,600,101

 
$
55,705,899

 
$
103,300,613

 
$
106,424,886

Grain trading
$
5,771,852

 
$
10,006,437

 
$
11,205,807

 
$
15,142,938

Total Revenue
$
64,371,953

 
$
65,712,336

 
$
114,506,420

 
$
121,567,824

 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
March 31, 2019
 
March 31, 2018
 
March 31, 2019
 
March 31, 2018
Gross Profit:
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Ethanol production
$
1,895,445

 
$
3,167,673

 
$
1,185,882

 
$
6,219,334

Grain Trading
$
68,757

 
$
(24,921
)
 
$
(82,068
)
 
$
324,769

Total Gross Profit
$
1,964,202

 
$
3,142,752

 
$
1,103,814

 
$
6,544,103

 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
March 31, 2019
 
March 31, 2018
 
March 31, 2019
 
March 31, 2018
Operating Income (Loss):
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Ethanol production
$
276,794

 
$
1,676,267

 
$
(1,856,306
)
 
$
3,273,745

Grain trading
$
(248,486
)
 
$
(220,782
)
 
$
(716,553
)
 
$
(55,658
)
Total Operating Income (Loss)
$
28,308

 
$
1,455,485

 
$
(2,572,859
)
 
$
3,218,087


19


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
March 31, 2019

 
March 31, 2019
 
September 30, 2018
Grain Inventories:
(unaudited)
 

Ethanol production
$
9,939,823

 
$
7,053,371

Grain trading
$
12,209,848

 
$
3,342,898

Total Grain Inventories
$
22,149,671

 
$
10,396,269

 
 
 
 
 
March 31, 2019
 
September 30, 2018
Total Assets:
(unaudited)
 

Ethanol production
$
115,233,230

 
$
128,960,169

Grain trading
$
24,812,121

 
$
15,634,707

Total Assets
$
140,045,351

 
$
144,594,876


20


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

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month periods ended March 31, 2019, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

Forward Looking Statements

This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions.  In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings. 

Reduction, delay, or elimination of the Renewable Fuel Standard;
Changes in the availability and price of corn, natural gas and other grains;
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, distiller grains,corn oil and other grains;
Our ability to satisfy the financial covenants contained in our credit agreements with our senior 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 distiller grains supply exceeding demand and corresponding price reductions;
Our ability to generate free cash flow to invest in our business and service our 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 our indebtedness; and
Decreases in export demand due to the imposition of tariffs by foreign governments on ethanol and distillers grains 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.  We cannot guarantee future results, 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 with these cautionary statements.

Overview

Cardinal Ethanol, LLC is an Indiana limited liability company operating an ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol, distillers grains and corn oil at the plant in November 2008. In addition, we procure, transport and sell grain commodities through our grain trading business which began operations at the end of our fourth fiscal quarter of 2017.
    

21


On November 6, 2018, we experienced an explosion in one of our distillers grains silos. There were no injuries related to the incident and the damage was limited to the distillers grains silos and the associated materials handling equipment. Operations at the plant were temporarily suspended for four days pending an evaluation and assessment of the situation. The plant resumed operations but did not return to full production rates until mid to late December. The net book value of the damaged silos was approximately $1,200,000 at March 31, 2019. The extent of monetary damages related to the incident has not yet been determined. We may decide to repair or abandon and replace the silo. We have presently engaged an engineering firm to help us assess the extent of the damage and cost of repairs needed and to assist us with substantiating the claims with the insurance carrier. We believe that our policies cover the damages to the silo and the business interruption costs, net of our policies' deductibles.

On February 19, 2019, we announced that our board of directors has decided to explore strategic options including the potential sale of our facility. As of the date of this report, we have not entered into a definitive agreement to sell the facility.

On February 19, 2019, as a result of the exploration of the strategic option of a potential sale, the board of directors anticipated there would be insufficient material information available to all members on a equal basis, therefore the Company suspended all trading through FNC Ag Stock, LLC trading service.

On March 8, 2019, we executed a Fourteenth Amendment of First Amended and Restated Construction Loan Agreement to be effective as of February 28, 2019, which amends the First Amended and Restated Construction Loan Agreement dated June 10, 2013 (the "Amendment") with our primary lender, First National Bank of Omaha (the "Bank"). The primary purpose of the Amendment was to extend the termination date of the Revolving Credit Loan from February 28, 2019 to February 28, 2020. In connection with the Amendment, we also executed a Security Agreement and Assignment of Hedging Accounts granting the Bank a security interest in our accounts at Marex North America, LLC.

We expect to fund our operations during the next 12 months using cash flow from our continuing operations and our current credit facilities as amended. However, should we experience unfavorable operating conditions, we may need to seek additional funding.

Results of Operations for the Three Months Ended March 31, 2019 and 2018

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 three months ended March 31, 2019 and 2018:
 
2019
 
2018
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenue
$
64,371,953

 
100.0

 
$
65,712,336

 
100.0

Cost of Goods Sold
62,407,751

 
96.9

 
62,569,584

 
95.2

Gross Profit
1,964,202

 
3.1

 
3,142,752

 
4.8

Operating Expenses
1,935,894

 
3.1

 
1,687,267

 
2.6

Operating Income (Loss)
28,308

 

 
1,455,485

 
2.2

Other Expense, Net
(89,769
)
 
(0.1
)
 
(206,616
)
 
(0.3
)
Net Income (Loss)
$
(61,461
)
 
(0.1
)
 
$
1,248,869

 
1.9


Revenue

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 two separate operating 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.

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.  Refer to Note 11, “Business Segments”, of the notes to the condensed unaudited financial statements for financial information about our financial reporting segments. Revenues in each division also include net gains or losses from derivatives related to products sold.

22


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 three months ended March 31, 2019 and 2018:
 
2019
 
2018
Revenue:
Amount
% of Total Revenues
 
Amount
% of Total Revenues
Ethanol production
$
58,600,101

91.0
%
 
55,705,899

84.8
%
Grain trading
5,771,852

9.0

 
10,006,437

15.2

Total Revenue
$
64,371,953

100.0
%
 
$
65,712,336

100.0
%

Ethanol Division

The following table shows the sources of our revenues from our Ethanol Division for the three months ended March 31, 2019 and 2018:
 
2019
 
2018
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
45,212,248

77.2
%
 
$
42,657,305

76.6
%
Distillers Grains Sales
11,377,793

19.4

 
10,889,653

19.5

Corn Oil Sales
1,871,635

3.2

 
1,805,210

3.2

Carbon Dioxide Sales
123,375

0.2

 
123,375

0.3

Other Revenue
15,050


 
230,356

0.4

Total Revenues
$
58,600,101

100.0
%
 
$
55,705,899

100.0
%
Ethanol
    
Our revenues from ethanol increased in the three months ended March 31, 2019 as compared the to the same period in 2018.

We experienced an increase in ethanol gallons sold of approximately 9.79% for the three months ended March 31, 2019 as compared to the same period in 2018 resulting primarily from increased ethanol production rates for the quarter. We are currently operating at approximately 35% above our nameplate capacity. Management expects ethanol production will increase going forward due to plans for completion of various projects which are expected to increase our annual ethanol production rate to approximately 140 million gallons unless we experience unfavorable operating conditions in the ethanol industry that result in our limiting production.

The average price per gallon of ethanol sold for the three months ended March 31, 2019 was approximately 3.49% lower than our average price per gallon of ethanol sold for the same period in 2018. Ethanol market prices overall have declined because months of increased industry-wide production in excess of demand have caused ethanol stocks in the United States to become extremely high, inhibiting the growth of prices domestically. Recent trade disputes with countries such as China, Mexico and the European Union and the imposition of tariffs on products produced in the United States have also had a negative effect on ethanol prices. However, recent flooding in the upper Midwest has forced some plants to curtail production which had a positive effect on ethanol prices towards the end of the period.

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 decrease, that could have a significant negative impact on the market price of ethanol and our profitability, particularly should ethanol stocks remain high as flooding subsides in the upper Midwest and plants there return to full production levels. 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 is created domestically due to seasonal demand or year round sales of E-15. Finally, the granting of additional EPA waivers to refiners would have a negative effect on ethanol prices.

Distillers Grains

Our revenues from distillers grains increased in the three months ended March 31, 2019 as compared to the same period in 2018. This increase in revenues is the result of an increase in the average market price per ton and in the tons of distillers grains sold for the period ended March 31, 2019 as compared to the same period in 2018.

23


The average price per ton of distillers grains sold for the three months ended March 31, 2019 was approximately 0.15% higher than the average price per ton of distillers grains sold for the same period in 2018. While the market price of distillers grains was slightly higher for the period ended March 31, 2019 as compared to the same period in 2018, the market price of distillers grains prices overall has been decreasing due to end-users switching to lower priced alternatives.

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 prices for distillers grains could also decrease due to expansion of production capacity in the ethanol industry combined with stagnate demand or if lower corn or soybean prices result in end-users continuing to use 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 sold approximately 3.98% more tons of distillers grains in the three months ended March 31, 2019 as compared to the same period in 2018 resulting primarily from higher ethanol production levels for the period which resulted in increased distillers grains production. Management expects that our annual distillers grains production volume will increase going forward due to plans for completion of various projects which are expected to increase our annual ethanol production rate to approximately 140 million gallons unless we experience unfavorable operating conditions in the ethanol industry that result in our limiting production.

Corn Oil

Our revenues from corn oil sales increased in the three months ended March 31, 2019 as compared to the same period in 2018 which was mainly the result of higher corn oil prices. The average price per pound of corn oil was approximately 14.79% higher for the three months ended March 31, 2019 as compared to the same period in 2018 due primarily to the depressed state of prices in 2018. We sold approximately 9.67% less tons of corn oil in the three months ended March 31, 2019 as compared to the same period in 2018 due to lower corn oil yield resulting in lower corn oil production.
    
Management anticipates that higher production and an over-supply will keep prices consistent in the near term. Corn oil prices may be negatively affected 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 going forward due to plans for completion of various projects which are expected to increase our annual ethanol production rate to approximately 140 million gallons unless we experience unfavorable operating conditions that result in our limiting production.

Trading Division

The following table shows the sources of our revenues from our Trading Division for the three months ended March 31, 2019 and 2018:
 
2019
 
2018
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Soybean Sales
$
5,767,452

99.9
%
 
$
10,006,437

100.0
%
Other Revenue
4,400

0.1

 
$


Total Revenues
$
5,771,852

100.0
%
 
$
10,006,437

100.0
%

Soybeans

During the three months ended March 31, 2019 our revenues were derived primarily from transporting and selling soybeans. Our revenues from soybeans sales decreased in the three months ended March 31, 2019 as compared the to the same period in 2018. This decrease in revenues is the result of a decrease in bushels of soybeans sold of approximately 32.25% for the three months ended March 31, 2019 as compared to the same period in 2018 resulting primarily from smaller ending stocks, commonly referred to as carryout in the grain industry, in the local region for the three months ending March 31, 2019.
  

24


We experienced a decrease in the average price per bushel of soybeans sold for the three months ended March 31, 2019 that was approximately 11.60% lower than our average price per bushel of soybeans sold for the same period in 2018 due to ample harvest in both 2017 and 2018 resulting in a large carryout. Also international trade disputes caused weaker export demand. We expect that soybean prices will rise into the summer growing months. Summer growing season conditions will determine prices thereafter unless trade disputes cause unusual disruption.

Cost of Goods Sold

Ethanol Division

Our cost of goods sold for this division as a percentage of its total revenues was approximately 96.8% for the three months ended March 31, 2019 as compared to approximately 94.3% for the same period in 2018. 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 three months ended March 31, 2019 as compared to the same period in 2018. 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 our commodities purchases.

Corn

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the three months ended March 31, 2019, we used approximately 4.86% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2018 due to higher ethanol production levels for the period. During the three months ended March 31, 2019, our average price paid per bushel of corn was approximately 6.34% higher as compared to the same period in 2018. Increased volatility in corn prices during the three months ended March 31, 2019, was primarily due to producers storing grain and wet weather hampering harvest. Corn supplies have been sufficient locally and we have had no difficulty sourcing corn during our second fiscal quarter.
 
Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. Recent flooding in the upper Midwest may result in higher 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.
    
Natural Gas

Our natural gas cost after hedging was higher during the three months ended March 31, 2019 as compared to the same period in 2018. This increase in cost of natural gas for the three months ended March 31, 2019 as compared to the same period in 2018 was primarily the result of a increase of approximately 6.00% in the average price per MMBTU of natural gas. We also used approximately 2.49% more natural gas for the three months ended March 31, 2019 as compared to the same period in 2018, mostly because of cold weather experienced during the period.

Natural gas prices will be dependent upon summer temperatures as hot weather increases natural gas demand. 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 three months ended March 31, 2019 and 2018:
 
2019
 
2018
 
Amount
% of Revenues
 
Amount
% of Revenues
Soybeans
$
5,703,095

100.0
%
 
$
10,031,358

100.0
%
Total Cost of Goods Sold
$
5,703,095

100.0
%
 
$
10,031,358

100.0
%

Soybeans

During the three months ended March 31, 2019, our cost was primarily the procurement of soybeans sold. During the three months ended March 31, 2019, our average price paid per bushel of soybeans was approximately 10.55% lower as compared

25


to the same period in 2018 due to ample harvest in both 2017 and 2018 resulting in a large carryout. Also international trade disputes caused weaker export demand.

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 3 - 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 3.0% for the three months ended March 31, 2019 as compared to operating expenses of approximately 2.6% of revenues for the same period in 2018. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs.

Operating Income

Our operating loss for the three months ended March 31, 2019 was approximately 0.0% of revenues as compared to operating income of approximately 2.2% of revenues for the same period in 2018. The decrease in operating income for the three months ended March 31, 2019 was primarily the result of decreased ethanol prices relative to the cost of corn.

Other Expense

Our other expense for the three months ended March 31, 2019 and 2018 was minimal and consisted primarily of interest expense.

Results of Operations for the Six Months Ended March 31, 2019 and 2018

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 six months ended March 31, 2019 and 2018:

 
2019
 
2018
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenue
$
114,506,420

 
100.0

 
$
121,567,824

 
100.0

Cost of Goods Sold
113,402,606

 
99.0

 
115,023,721

 
94.6

Gross Profit
1,103,814

 
1.0

 
6,544,103

 
5.4

Operating Expenses
3,676,673

 
3.2

 
3,326,016

 
2.7

Operating Income (Loss)
(2,572,859
)
 
(2.5
)
 
3,218,087

 
2.6

Other Expense, Net
(158,644
)
 
(0.1
)
 
(364,711
)
 
(0.3
)
Net Income (Loss)
$
(2,731,503
)
 
(2.4
)
 
$
2,853,376

 
2.3


Revenue

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 two separate operating 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.


26


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.  Refer to Note 11, “Business Segments”, of the notes to the condensed unaudited financial statements for financial information about our financial reporting segments. 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 six months ended March 31, 2019 and 2018:
 
2019
 
2018
Revenue:
Amount
% of Total Revenues
 
Amount
% of Total Revenues
Ethanol production
$
103,300,613

90.2
%
 
$
106,424,886

87.5
%
Grain trading
$
11,205,807

9.8

 
$
15,142,938

12.5

Total Revenue
$
114,506,420

100.0
%
 
$
121,567,824

100.0
%

Ethanol Division

The following table shows the sources of our revenues from our Ethanol Division for the six months ended March 31, 2019 and 2018:
 
2019
 
2018
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
77,825,727

75.3
%
 
$
82,506,875

77.5
%
Distillers Grains Sales
$
21,543,872

20.9

 
19,384,679

18.2

Corn Oil Sales
$
3,638,919

3.5

 
4,056,549

3.8

Carbon Dioxide Sales
$
262,895

0.3

 
246,750

0.3

Other Revenue
$
29,200


 
230,033

0.2

Total Revenues
$
103,300,613

100.0
%
 
$
106,424,886

100.0
%
    
Ethanol
    
Our revenues from ethanol decreased in the six months ended March 31, 2019 as compared the to the same period in 2018.

The average price per gallon of ethanol sold for the six months ended March 31, 2019 was approximately 6.07% lower than our average price per gallon of ethanol sold for the same period in 2018. This decrease in average market price for the six months ended March 31, 2019 as compared to the same period in 2018 is due to lower prices during the period in 2019. Ethanol prices overall have been declined because months of increased industry-wide production in excess of demand have caused ethanol stocks in the United States to become extremely high, inhibiting current domestic demand. In addition, the drop in crude oil and gasoline prices and recent trade disputes with countries such as China, Mexico and the European Union and the imposition of tariffs on products produced in the United States have had a negative effect on ethanol prices. However, recent flooding in the upper Midwest has forced some plants to curtail production which had a positive effect on ethanol prices towards the end of the period.

We experienced an increase in ethanol gallons sold of approximately 0.41% for the six months ended March 31, 2019 as compared to the same period in 2018 resulting primarily from higher ethanol production for the period. We are currently operating at approximately 37% above our nameplate capacity. Management expects ethanol production will increase going forward due to plans for completion of various projects which are expected to increase our annual ethanol production rate to approximately 140 million gallons unless we experience unfavorable operating conditions in the ethanol industry that result in our limiting production. In addition, this expected increase may be partially offset by the lower production we experienced in the six months ended March 31, 2019 due to the silo accident temporarily delaying production in the Fall of 2018.

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 decrease, that could have a significant negative impact on the market price of ethanol and our profitability, particularly should ethanol stocks remain high as flooding subsides in the upper Midwest and plants there return to full production levels. A decline in ethanol exports due to trade disputes resulting in tariffs imposed on ethanol produced in the

27


United States would also likely contribute to higher ethanol stocks unless additional demand is created domestically due to seasonal demand or year round sales of E-15. Finally, the granting of additional EPA waivers to refiners would have a negative effect on ethanol prices.

Distillers Grains

Our revenues from distillers grains increased in the six months ended March 31, 2019 as compared to the same period in 2018. 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 March 31, 2019 as compared to the same period in 2018.

The average price per ton of distillers grains sold for the six months ended March 31, 2019 was approximately 10.23% higher than the average price per ton of distillers grains sold for the same period in 2018. This increase in the market price of distillers grains is primarily due to a seasonal increase in demand for distillers grains and higher soybean prices resulting in a switch to distillers grains as a lower priced alternative towards the beginning of the six months ended March 31, 2019.

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 prices for distillers grains could also decrease due to expansion of production capacity in the ethanol industry combined with stagnate demand 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 sold approximately 0.82% more tons of distillers grains in the six months ended March 31, 2019 as compared to the same period in 2018 resulting primarily from slightly higher ethanol production levels for the period which resulted in increased distillers grains production. However, the slight increase in production in the six months ended March 31, 2019 was lower than expected given the down time from the silo accident in the Fall of 2018. Management expects that our annual distillers grains production volume will increase going forward due to plans for completion of various projects which are expected to increase our annual ethanol production rate to approximately 140 million gallons unless we experience unfavorable operating conditions in the ethanol industry that result in our limiting production.
Corn Oil

Our revenues from corn oil sales decreased in the six months ended March 31, 2019 as compared to the same period in 2018 which was mainly the result of a decrease in quantity sold. The average price per pound of corn oil was approximately 3.36% higher for the six months ended March 31, 2019 as compared to the same period in 2018 due primarily to depressed state of prices in 2018. We sold approximately 13.22% less tons of corn oil in the six months ended March 31, 2019 as compared to the same period in 2018 due to lower corn oil yield for the period which resulted in lower corn oil production.

Management anticipates that higher production and an over-supply will keep prices low in the near term. Corn oil prices may be negatively affected 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 going forward due to plans for completion of various projects which are expected to increase our annual ethanol production rate to approximately 140 million gallons unless we experience unfavorable operating conditions that result in our limiting production.

Trading Division

The following table shows the sources of our revenues from our Trading Division for the six months ended March 31, 2019 and 2018:
 
2019
 
2018
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Soybean Sales
$
11,196,907

99.9
%
 
$
15,142,938

100.0
%
Other Revenue
$
8,900

0.1

 
 

Total Revenues
$
11,205,807

100.0
%
 
$
15,142,938

100.0
%

28


Soybeans

During the six months ended March 31, 2019 our revenues were derived primarily from transporting and selling soybeans. Our revenues from soybeans sales decreased in the six months ended March 31, 2019 as compared the to the same period in 2018. This decrease in revenues is the result of a decrease in bushels of soybeans sold of approximately 13.77% for the six months ended March 31, 2019 as compared to the same period in 2018 resulting primarily from smaller ending stocks, commonly referred to as carryout in the grain industry for the period ended March 31, 2019.
  
We experienced a decrease in the average price per bushel of soybeans sold for the six months ended March 31, 2019 that was approximately 13.09% lower than our average price per bushel of soybeans sold for the same period in 2018 due to ample harvest in both 2017 and 2018 resulting in a large carryout. Also international trade disputes caused weaker export demand. We expect that soybean prices will rise into the summer growing months. Summer growing season conditions will determine prices thereafter unless trade disputes cause unusual disruption.

Cost of Goods Sold

Ethanol Division

Our cost of goods sold for this division as a percentage of its total revenues was approximately 99.04% for the six months ended March 31, 2019 as compared to approximately 89.18% for the same period in 2018. 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 six months ended March 31, 2019 as compared to the same period in 2018. 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 our commodities purchases.

Corn

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the six months ended March 31, 2019, we used approximately 0.14% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2018 due to increased ethanol production levels for the period. During the six months ended March 31, 2019, our average price paid per bushel of corn was approximately 2.43% higher as compared to the same period in 2018. Increased volatility in corn prices during the six months ended March 31, 2019, was primarily due to producers storing grain and wet weather hampering harvest. Corn supplies have been sufficient locally and we have had no difficulty sourcing corn during our third fiscal quarter.
 
Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. Recent flooding in the upper Midwest may result in higher 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.

Natural Gas

Our natural gas cost after hedging was lower during the six months ended March 31, 2019 as compared to the six months ended December 31, 2018. This decrease in cost of natural gas for the six months ended March 31, 2019 as compared to the same period in 2018 was primarily the result of a decrease of approximately 2.85% in the average price per MMBTU of natural gas. We also used approximately 0.65% less natural gas for the six months ended March 31, 2019 as compared to the same period in 2018, mostly because of improved efficiencies in ethanol production levels for the period.

Natural gas prices will be dependent upon summer temperatures as hot weather increases natural gas demand. 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.


29


Trading Division

The following table shows the costs incurred to procure various agricultural commodities for our Trading Division for the six months ended March 31, 2019 and 2018:
 
2019
 
2018
 
Amount
% of Revenues
 
Amount
% of Revenues
Soybeans
$
11,287,875

100.0
%
 
$
14,818,169

100.0
%
Total Cost of Goods Sold
$
11,287,875

100.0
%
 
$
14,818,169

100.0
%
    
Soybeans

During the six months ended March 31, 2019, our cost was primarily the procurement of soybeans sold. During the six months ended March 31, 2019, our average price paid per bushel of soybeans was approximately 11.45% lower as compared to the same period in 2018 due to ample harvest in both 2017 and 2018 resulting in a large carryout. Also international trade disputes caused weaker export demand.

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 3 - 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 3.21% for the six months ended March 31, 2019 as compared to operating expenses of approximately 2.74% of revenues for the same period in 2018. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. We expect our operating expenses to remain relatively consistent throughout our 2019 fiscal year.

Operating Income

Our operating loss for the six months ended March 31, 2019 was approximately 2.10% of revenues as compared to operating income of approximately 2.60% of revenues for the same period in 2018. The decrease in operating income for the six months ended March 31, 2019 was primarily the result of decreased ethanol prices relative to the cost of corn.
Other Expense

Our other expense for the six months ended March 31, 2019 and 2018 was minimal and consisted primarily of interest expense.

Changes in Financial Condition for the Six Months Ended March 31, 2019

The following table highlights the changes in our financial condition:
 
March 31, 2019
(Unaudited)
 
September 30, 2018
Current Assets
$
45,747,827

 
$
46,351,013

Current Liabilities
$
16,132,647

 
$
16,941,813

Long-Term Liabilities
$
6,306,009

 
$
7,314,867

Member's Equity
$
117,606,695

 
$
120,338,196


We experienced a decrease in our current assets at March 31, 2019 as compared to September 30, 2018. This decrease was primarily driven by a decrease in our cash at March 31, 2019 as compared to September 30, 2018 due mostly to cash expended to pay down our liability for grain received, but for which payment had been previously deferred by our farmer producers until January 2019. This decrease was partially offset by an increase in trade accounts receivable and inventories due to higher levels

30


of production. We also experienced an increase in our commodity derivative instrument assets. The value of our derivative instruments is most affected by movements in market prices.
    
We experienced a decrease in our total current liabilities at March 31, 2019 as compared to September 30, 2018. This decrease was primarily because of a decrease in grain accounts payable due to the deferred payments for grain until January 2019 as explained above and a decrease in our commodity derivative instrument liability position at March 31, 2019 as compared to September 30, 2018.

We experienced a decrease in our long-term liabilities as of March 31, 2019 as compared to September 30, 2018 as a result of scheduled principal payments on our outstanding debt.

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 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 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.
    
The following table shows cash flows for the six months ended March 31, 2019 and 2018:
 
 
2019
 
2018
Net cash used in operating activities
 
$
(17,764,500
)
 
$
(11,554,947
)
Net cash used for investing activities
 
$
(1,433,478
)
 
$
(1,828,579
)
Net cash provided by (used in) financing activities
 
$
1,937,702

 
$
(4,198,730
)
Net decrease in Cash and Restricted cash
 
$
(17,260,276
)
 
$
(17,582,256
)
Cash and Restricted cash, beginning of period
 
$
19,237,992

 
$
19,397,161

Cash and Restricted cash, end of period
 
$
1,977,716

 
$
1,814,905


Cash Flow from and used in Operations

We used more cash for operations for the six months ended March 31, 2019 as compared to the same period in 2018. This was primarily the result of decreased net income resulting from the narrow to negative spread ethanol and the cost of corn. Our increased production rates also increased the need for cash used for inventory and other working capital components for the six months ended March 31, 2019 compared with the same period in 2018.
Cash Flow used for Investing Activities

We used less cash in investing activities for the six months ended March 31, 2019 as compared to the same period in 2018. This decrease was primarily the result of decreased payments for capital expenditures because we had no large projects or other large capital equipment purchases during the period ended March 31, 2019.
    
Cash Flow used for Financing Activities

We used less cash in financing activities for the six months ended March 31, 2019 as compared to the same period in 2018. This decrease was mainly the result of no distributions in our 2019 fiscal year, and lower principal on long term debt as we reduce borrowing for the Grain Loadout Facility Loan during the six months ended March 31, 2019 compared with the same period in 2018.

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 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 and distillers grains improve relative to price levels as of March 31, 2019 as the markets indicate, we expect operations to generate adequate cash flows to maintain operations.

31


Short and Long Term Debt Sources

We have a loan agreement consisting of three loans, 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 assignment of material contracts. Please refer to Item 1 - Financial Statements, Note 6 - Bank Financing for additional details.
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 March 31, 2019 was 5.30%. There was no borrowings outstanding on the Declining Loan at March 31, 2019 or September 30, 2018.
    
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, corn oil and soybean inventories reduced by accounts payable associated with those inventories having a priority. 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 based on the 1-month LIBOR plus two hundred ninety basis points. The interest rate at March 31, 2019 was 5.39%. There were no borrowings outstanding on the Revolving Credit Note at March 31, 2019 or September 30, 2018. 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 March 31, 2019 was 5.53%. There were borrowings in the amount of approximately $7,735,000 outstanding on the Grain Loadout Facility Loan at March 31, 2019. There were borrowings of $8,743,438 on the Grain Loadout Facility Loan at September 30, 2018. 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 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.
    
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 March 31, 2019. 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 March 31, 2020. 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.
Capital Improvements

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 executed an agreement with Nelson Engineering to construct an additional liquefaction tank and fermenter which are expected to cost approximately $3,200,000. We expect to use funds from operations and our existing debt facilities to fund these improvements. We do not intend to start construction of these projects until we have received certain

32


approvals from the Indiana Department of Environmental Management, Office of Air Quality (“IDEM”) related to our air permit. We anticipate these approvals will be received sometime late in Spring 2019.

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 that our plant was constructed on 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.

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. Our most critical accounting estimates, which require the greatest use of judgment by management, are designated as critical accounting estimates and include policies related to the useful lives of fixed assets; allowance for doubtful accounts; the valuation of basis and delay price contracts on corn purchases; derivatives; inventory; patronage dividends, long-lived assets and inventory purchase commitments.  An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.  Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed financial statements in accordance with generally accepted accounting principles.  There have been no changes in the policies for our accounting estimates for the six months ended March 31, 2019.
Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.    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 5.30% at March 31, 2019. 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 March 31, 2019 and the applicable interest rate was 5.39%. 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 $7,735,000 outstanding on the Grain Loadout Facility Loan and the applicable interest rate was 5.53% at March 31, 2019. The specifics of the 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 March 31, 2019, would be approximately $43,000.

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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 distiller's 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.

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 three and six months ended March 31, 2019 and 2018:
 
Three Months Ended March 31, 2019
Six Months Ended March 31, 2019
Three Months Ended March 31, 2018
Six Months Ended March 31, 2018
Corn Futures and Options Contracts
$
(254,158
)
$
(328,612
)
$
(437,723
)
$
(181,388
)
Ethanol Futures and Options Contracts
163,702

185,440

(252,292
)
(325,076
)
Natural Gas Futures and Options Contracts

37,727

36,584

157,013

Soybean Futures and Options Contracts
487,494

287,892

(753,160
)
(929,987
)
Soybean Forward Purchase Contracts
(147,839
)
1,502,007

804,575

931,728

Totals
$
249,199

$
1,684,454

$
(602,016
)
$
(347,710
)

These soybean contracts will be marked to market as the contract periods expire. This means that any gains or losses realized will be recognized in our gross margin at each month end until they are delivered upon.  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.


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A sensitivity analysis has been prepared to estimate our exposure to ethanol, distillers grains, corn oil, corn and natural gas 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 and corn oil prices as of March 31, 2019 net of the forward and future contracts used to hedge our market risk. The volumes are based on our expected use and sale of these commodities for a one year period from March 31, 2019. The results of this analysis, which may differ from actual results, are 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 March 31, 2019
Approximate Adverse Change to Income
Natural Gas
3,300,000

MMBTU
10%
$
541,336

Ethanol
135,000,000

Gallons
10%
$
18,049,500

Corn
43,170,488

Bushels
10%
$
14,274,768

DDGs
324,000

Tons
10%
$
4,073,720

Corn Oil
31,500,000

Pounds
10%
$
687,423

Soybeans
5,000,000

Bushels
10%
$
3,911,346


Liability Risk

We participate in a captive reinsurance company (the “Captive”).  The Captive re-insures 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 re-insurer.  The Captive re-insures 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.

Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures

Our management is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.

Our management, including our Chief Executive Officer (the principal executive officer), Jeffrey Painter, along with our Chief Financial Officer (the principal financial officer), William Dartt, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of March 31, 2019.  Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our second quarter of our 2019 fiscal year that have materially affected, or are likely to materially affect, our internal control over financial reporting.


35


PART II.     OTHER INFORMATION

Item 1. 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.  We entered into a settlement of this matter with IDEM in April 2019 and as part of that settlement we paid a civil penalty in the amount of $27,000.

Item 1A.    Risk Factors
    
None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
None.

Item 3. Defaults Upon Senior Securities

None.



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Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits.

(a)
The following exhibits are filed as part of this report.
Exhibit No.
 
Exhibit
31.1

 
31.2

 
32.1

 
32.2

 
101

 
The following financial information from Cardinal Ethanol, LLC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of March 31, 2019 and September 30, 2018, (ii) Condensed Statements of Operations for the three and six months ended March 31, 2019 and 2018, (iii) Condensed Statements of Cash Flows for the six months ended March 31, 2019 and 2018, (iv) Condensed Statements of Changes in Members' Equity for the three months and six ended March 31, 2019 and 2018, and (v) the Notes to Condensed Unaudited Financial Statements.**

*    Filed herewith.
**    Furnished herewith.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CARDINAL ETHANOL, LLC
 
 
 
 
Date:
May 3, 2019
 
/s/ Jeffrey Painter
 
 
 
Jeffrey Painter
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
May 3, 2019
 
/s/ William Dartt
 
 
 
William Dartt
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
    

37