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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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| For the quarterly period ended March 31, 2024 |
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| OR |
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☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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For the transition period from to . |
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COMMISSION FILE NUMBER 000-53036 |
CARDINAL ETHANOL, LLC
(Exact name of registrant as specified in its charter)
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Indiana | | 20-2327916 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1554 N. County Road 600 E., Union City, IN 47390
(Address of principal executive offices)
(765) 964-3137
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None.
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Securities registered pursuant to Section 12(g) of the Act: Membership Units.
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:
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Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
Non-Accelerated Filer | x | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes x No
As of May 13, 2024, there were 14,606 membership units outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Consolidated Condensed Balance Sheets | | | | | | | | | | | |
ASSETS | March 31, 2024 | | September 30, 2023 |
| (Unaudited) | | |
Current Assets | | | |
Cash and cash equivalents | $ | 50,273,944 | | | $ | 69,859,066 | |
Restricted cash | 11,273,803 | | | 13,425,343 | |
| | | |
Investments in available-for-sale debt securities | — | | | 12,407,939 | |
Trade accounts receivable | 13,121,343 | | | 18,407,126 | |
Miscellaneous receivables | 2,145,200 | | | 478,069 | |
Inventories | 28,433,624 | | | 15,103,440 | |
Prepaid and other current assets | 2,330,783 | | | 298,635 | |
Futures and options derivatives | 88,204 | | | 352,464 | |
Forward purchase/sales derivatives | 63,700 | | | 66,825 | |
Total current assets | 107,730,601 | | | 130,398,907 | |
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Property, Plant, and Equipment, Net | 137,052,590 | | | 92,323,559 | |
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Other Assets | | | |
Operating lease right of use asset, net | 11,341,422 | | | 3,012,582 | |
Investments | 10,134,153 | | | 7,033,199 | |
Total other assets | 21,475,575 | | | 10,045,781 | |
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Total Assets | $ | 266,258,766 | | | $ | 232,768,247 | |
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LIABILITIES AND MEMBERS' EQUITY | | | |
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Current Liabilities | | | |
Advances from customer | $ | 1,598,743 | | | $ | — | |
Due to broker | 461,112 | | | 1,232,522 | |
Accounts payable | 5,406,948 | | | 3,171,886 | |
Accounts payable - grain | 11,491,564 | | | 11,005,387 | |
Accrued expenses | 5,693,374 | | | 4,695,515 | |
Futures and options derivatives | 3,992,024 | | | 3,817,921 | |
Forward purchase/sales derivatives | 114,295 | | | 356,177 | |
Operating lease liability current | 4,026,141 | | | 2,611,799 | |
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Current maturities of long-term debt | 5,865,143 | | | 1,136,681 | |
Total current liabilities | 38,649,344 | | | 28,027,888 | |
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Long-Term Liabilities | | | |
Long-term debt, net of current maturities | 51,267,399 | | | 29,432,277 | |
Operating lease long-term liabilities | 7,329,138 | | | 416,931 | |
Liability for railcar rehabilitation costs | 2,490,381 | | | 2,358,134 | |
Other long-term liabilities | 17,873 | | | — | |
Total long-term liabilities | 61,104,791 | | | 32,207,342 | |
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Commitments and Contingencies | | | |
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Members’ Equity | | | |
Members' contributions, net of cost of raising capital, 14,606 units authorized, issued and outstanding | 70,912,213 | | | 70,912,213 | |
Accumulated other comprehensive loss | — | | | (10,671) | |
Retained earnings | 95,592,418 | | | 101,631,475 | |
Total members' equity | 166,504,631 | | | 172,533,017 | |
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Total Liabilities and Members’ Equity | $ | 266,258,766 | | | $ | 232,768,247 | |
Notes to Consolidated Condensed Unaudited Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Consolidated Condensed Statements of Operations (Unaudited)
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| Three Months Ended | | Six Months Ended |
| March 31, 2024 | | March 31, 2023 | | March 31, 2024 | | March 31, 2023 |
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Revenues | $ | 79,431,262 | | | $ | 130,771,456 | | | $ | 148,542,857 | | | $ | 265,719,575 | |
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Cost of Goods Sold | 78,358,520 | | | 115,334,588 | | | 141,947,079 | | | 232,343,763 | |
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Gross Profit | 1,072,742 | | | 15,436,868 | | | 6,595,778 | | | 33,375,812 | |
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Operating Expenses | 3,493,782 | | | 2,354,767 | | | 6,133,148 | | | 4,627,371 | |
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Operating Income (Loss) | (2,421,040) | | | 13,082,101 | | | 462,630 | | | 28,748,441 | |
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Other Income | | | | | | | |
Interest income | 745,589 | | | 451,165 | | | 1,946,099 | | | 872,897 | |
Interest expense | (1,011,146) | | | — | | | (1,011,146) | | | — | |
Miscellaneous income (expense) | 1,185,540 | | | 37,298 | | | (64,894) | | | 85,997 | |
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Loss on equity method investment | (35,322) | | | (95,878) | | | (149,046) | | | (326,984) | |
Total | 884,661 | | | 392,585 | | | 721,013 | | | 631,910 | |
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Net Income (Loss) | $ | (1,536,379) | | | $ | 13,474,686 | | | $ | 1,183,643 | | | $ | 29,380,351 | |
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Weighted Average Units Outstanding - basic and diluted | 14,606 | | | 14,606 | | | 14,606 | | | 14,606 | |
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Net Income (Loss) Per Unit - basic and diluted | $ | (105) | | | $ | 923 | | | $ | 81 | | | $ | 2,012 | |
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Distributions Per Unit | $ | 150 | | | $ | 500 | | | $ | 450 | | | $ | 1,000 | |
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Unrealized gain on available-for-sale debt securities | — | | | 7,804 | | | 10,671 | | | 98 | |
Total comprehensive income | — | | | 7,804 | | | 10,671 | | | 98 | |
Net Comprehensive Income (Loss) | $ | (1,536,379) | | | $ | 13,482,490 | | | $ | 1,194,314 | | | $ | 29,380,449 | |
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Notes to Consolidated Condensed Unaudited Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited)
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| Six Months Ended March 31, 2024 | | Six Months Ended March 31, 2023 |
Cash Flows from Operating Activities | | | |
Net income | $ | 1,183,643 | | | $ | 29,380,351 | |
Adjustments to reconcile net income to net cash provided by operations: | | | |
Depreciation and amortization | 5,005,950 | | | 5,765,691 | |
Loss on sale of equipment | 103,832 | | | — | |
Change in fair value of commodity derivative instruments | 199,606 | | | (2,224,976) | |
Non-cash dividend income | — | | | (155,862) | |
Accrued interest income | — | | | (171,368) | |
Earnings on available-for-sale debt securities | (81,390) | | | — | |
Non-cash lease expense | — | | | 16,341 | |
Loss from equity method investment | 149,046 | | | 326,984 | |
Amortization of deferred financing cost | 8,760 | | | — | |
Change in operating assets and liabilities, net of asset acquisition: | | | |
Trade accounts receivable | 5,285,783 | | | (5,422,463) | |
Miscellaneous receivables | (467,131) | | | 638,960 | |
Inventories | (11,018,457) | | | (23,357,068) | |
Prepaid and other current assets | (2,032,148) | | | (618,432) | |
Due to broker | (771,410) | | | 356,704 | |
Accounts payable | 186,552 | | | (1,711,116) | |
Accounts payable - grain | 486,177 | | | (323,985) | |
Accrued expenses | 3,186,512 | | | (1,657,079) | |
Liability for railcar rehabilitation costs | 132,247 | | | 155,685 | |
Other long-term liabilities | 17,873 | | | — | |
Advances from customers | 1,598,743 | | | — | |
Net cash provided by operating activities | 3,174,188 | | | 998,367 | |
Cash Flows from Investing Activities | | | |
Payments for capital assets of subsidiary | (42,373,598) | | | — | |
Payments for inventory of subsidiary | (2,311,727) | | | |
Payments for construction in progress | (7,407,649) | | | (9,642,446) | |
Proceeds from maturities of available-for-sale debt securities | 12,500,000 | | | — | |
Proceeds from investments in debt securities | — | | | (11,340,468) | |
Investment in Cardinal One Carbon Holdings, LLC | (3,250,000) | | | (1,350,000) | |
Net cash used for investing activities | (42,842,974) | | | (22,332,914) | |
Cash Flows from Financing Activities | | | |
Distributions paid | (8,622,700) | | | (14,606,000) | |
Proceeds from revolving credit loan | 29,226,683 | | | 21,968,768 | |
Payments on revolving credit loan | (29,226,683) | | | (21,968,768) | |
Payments for deferred financing costs | (280,319) | | | — | |
Proceeds from economic development fund | — | | | 2,950,000 | |
Proceeds from long-term debt | 26,835,143 | | | 7,185,919 | |
Net cash provided by (used for) financing activities | 17,932,124 | | | (4,470,081) | |
Notes to Consolidated Condensed Unaudited Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited)
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| Six Months Ended March 31, 2024 | | Six Months Ended March 31, 2023 |
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Net Decrease in Cash, Cash Equivalents, and Restricted Cash | (21,736,662) | | | (25,804,628) | |
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Cash, Cash Equivalents, and Restricted Cash – Beginning of Period | 83,284,409 | | | 63,239,614 | |
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Cash, Cash Equivalents, and Restricted Cash – End of Period | $ | 61,547,747 | | | $ | 37,434,986 | |
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Reconciliation of Cash, Cash Equivalents, and Restricted Cash | | | |
Cash and Cash Equivalents - Balance Sheet | $ | 50,273,944 | | | $ | 30,118,147 | |
Restricted Cash - Balance Sheet | 11,273,803 | | | 7,316,839 | |
Cash, Cash Equivalents, and Restricted Cash | $ | 61,547,747 | | | $ | 37,434,986 | |
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Supplemental Cash Flow Information | | | |
Interest paid | $ | 1,481,182 | | | $ | 435,611 | |
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Supplemental Disclosure of Non-cash Investing and Financing Activities | | | |
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Construction in progress included in accrued expenses and accounts payable | $ | 2,172,820 | | | $ | 178,839 | |
Construction period interest capitalized in property, plant and equipment | $ | 684,585 | | | $ | 511,395 | |
Accrued distributions included in accrued expenses | $ | 700,000 | | | $ | 2,750,000 | |
Proceeds to be received from sale of equipment in miscellaneous receivables | $ | 1,200,000 | | | $ | — | |
Notes to Consolidated Condensed Unaudited Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Consolidated Condensed Statements of Changes in Members' Equity (Unaudited)
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| Member Contributions | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | |
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Balance September 30, 2022 | $ | 70,912,213 | | | $ | 76,358,279 | | | $ | — | | | $ | 147,270,492 | | | |
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Net Income | — | | | 15,905,665 | | | — | | | 15,905,665 | | | |
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Member Distributions | — | | | (7,303,000) | | | — | | | (7,303,000) | | | |
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Unrealized Loss on Available-For-Sale Debt Securities | — | | | — | | | (7,706) | | | (7,706) | | | |
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Balance December 31, 2022 | $ | 70,912,213 | | | $ | 84,960,944 | | | $ | (7,706) | | | $ | 155,865,451 | | | |
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Net Income | — | | | 13,474,686 | | | — | | | 13,474,686 | | | |
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Member Distributions | — | | | (10,053,000) | | | — | | | (10,053,000) | | | |
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Unrealized Gain on Available-For-Sale Debt Securities | — | | | — | | | 7,804 | | | 7,804 | | | |
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Balance March 31, 2023 | $ | 70,912,213 | | | $ | 88,382,630 | | | $ | 98 | | | $ | 159,294,941 | | | |
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| Member Contributions | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | |
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Balance September 30, 2023 | $ | 70,912,213 | | | $ | 101,631,475 | | | $ | (10,671) | | | $ | 172,533,017 | | | |
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Net Income | — | | | 2,720,022 | | | — | | | 2,720,022 | | | |
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Member Distributions | — | | | (4,481,800) | | | — | | | (4,481,800) | | | |
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Unrealized Gain on Available-For-Sale Debt Securities | — | | | — | | | 10,671 | | | 10,671 | | | |
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Balance December 31, 2023 | $ | 70,912,213 | | | $ | 99,869,697 | | | $ | — | | | $ | 170,781,910 | | | |
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Net Loss | — | | | (1,536,379) | | | — | | | (1,536,379) | | | |
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Member Distributions | — | | | (2,740,900) | | | — | | | (2,740,900) | | | |
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Balance March 31, 2024 | $ | 70,912,213 | | | $ | 95,592,418 | | | $ | — | | | $ | 166,504,631 | | | |
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Notes to Consolidated Condensed Unaudited Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated condensed financial statements (the "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 consolidated financial statements and notes thereto included in the Company's audited consolidated financial statements for the year ended September 30, 2023, 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 and Subsidiaries (the “Company”) is an Indiana limited liability company currently producing fuel-grade ethanol, distillers grains, corn fermented protein ("CFP"), corn oil and carbon dioxide near Union City, Indiana (the "Indiana Plant" or "Union City" or "Indiana") and sells these products throughout the continental United States. During the six months ended March 31, 2024 and 2023, the Company produced approximately 49,628,000 and 69,568,000 gallons of ethanol, respectively.
In addition, the Company procures, transports, and sells grain commodities through grain operations.
Basis of Accounting
The Company prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The consolidated financial statements include the operations, assets and liabilities of the Company. In the opinion of the Company's management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to fairly present the accompanying consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cardinal Ethanol, LLC and its wholly owned subsidiaries, Cardinal Ethanol Export Sales, Inc., Cardinal One Carbon Holdings, LLC, and Cardinal Colwich, LLC ("Cardinal Colwich"), (collectively, the Company). Cardinal Ethanol Export Sales, Inc. is an Interest Charge Domestic to International Sales Company ("IC-DISC") designed to take advantage of certain tax incentives for export sales to other countries. Cardinal One Carbon Holdings, LLC was formed to hold the partnership interest for the investigation and pursuit of carbon dioxide capture and sequestration. Cardinal Colwich was formed to purchase the assets of an ethanol plant in Colwich, Kansas (the "Kansas Plant" or "Colwich" or "Kansas"). Subsequent to the purchase, the intention is to use the assets to produce fuel-grade ethanol, distillers grains, CFP, corn oil, and carbon dioxide. All inter-company balances and transactions have been eliminated in consolidation.
On October 23, 2023, the Company made an initial down payment required to purchase the assets of an ethanol plant by the asset purchase agreement for $3,250,000. On January 31, 2024, the purchase transaction was completed. The transaction was funded by a $22,000,000 loan from the Company's primary lender and the remaining $22,000,000 was funded by operations. Additionally, the Company paid approximately $1,025,000 in additional fees, expenditures to cure liabilities associated with contracts the Company was assuming and to fund the purchase of necessary equipment owned by third parties. These amounts came from the Company's cash reserves. The transaction will be reported as an asset purchase under regulation SX rule 11-01(d) as the plant was idled since April 2023. The prior owner is defunct, and the assets turned over to a receiver from whom the Company purchased them. The Company will establish its own producer base, customer base and employee base to establish this subsidiary as a business.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
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 Division. Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plants, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.
•Trading Division. The Company has a grain loading facility within the Company's Union City, Indiana site to buy, hold and sell inventories of agricultural grains, primarily soybeans. The Company performs no additional processing of these grains, unlike the corn inventory the Company holds and uses 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 consolidated financial statements in accordance with U.S. GAAP. 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 Ethanol Division uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, valuation of inventories, the assumptions used in the analysis of the impairment of long-lived assets, allowance for credit losses, railcar rehabilitation costs, asset purchase price allocation, and inventory purchase commitments.
The Trading Division uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, allowance for credit losses, the valuation of inventory purchase and sale commitment derivatives and inventory at market.
Actual results may differ from previously estimated amounts, and such differences may be material to the consolidated 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. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
The Company maintains its accounts primarily at three financial institutions. At times throughout the year the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation. Cash equivalents represent money market funds or short-term investments with original maturities of three months or less from the date of purchase, except for those amounts that are held in the investment portfolio for long-term investment. There were no cash equivalents at March 31, 2024. At September 30, 2023, cash equivalents were approximately $33,229,000 and consisted of investments in treasury bills.
Restricted Cash
As a part of its commodities hedging activities, the Company is required to maintain cash balances with its 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, the Company records the cash maintained with the traders in the margin accounts as restricted cash. Since this cash is immediately available upon request when there is a margin excess, the Company considers this restricted cash to be a current asset.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
Investments in Available-for-Sale Debt Securities
The Company holds funds in short-term investments in debt securities, such as U.S. treasury bills or treasury notes. As some of the investments in debt securities have an original maturity date greater than three months, these investments are classified as available-for-sale. The Company holds these short-term investments until maturity or for sale in the event cash is needed. Unrealized gains and losses on the Company's investments classified as available-for-sale are recognized in other comprehensive income (loss) until realized.
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. The Company maintains an allowance for credit losses for accounts receivable, which is recorded as an offset to accounts receivable, and changes in such are included as a component of operating expenses in the consolidated statements of operations. The Company assesses collectibility by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when the Company identifies specific customers with known disputes or collectibility issues. In determining the amount of the allowance for credit losses, the Company considers historical collectibility based on past due status and make judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company also considers customer-specific information, current market conditions, and reasonable and supportable forecasts of future economic conditions. At March 31, 2024 and September 30, 2023, the Company determined that an allowance for credit losses was not necessary.
Inventories
Ethanol Division (see Reportable Segments) inventories consist of raw materials, work in process, finished goods and spare 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 (see Reportable Segments) inventories consist of grain. Soybeans were the only grains held and traded at March 31, 2024 and September 30, 2023. These inventories are stated at market value less estimated selling costs, 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.
The Company is planning various capital projects scheduled for the 2024 fiscal year in order to make certain improvements to the ethanol plants and maintain the facilities. These improvements at the Indiana Plant include an additional cooling tower pump, drainage work, and other small miscellaneous projects. The Indiana Plant installed a high protein feed system to produce corn fermented protein (CFP), costing approximately $50,000,000, including recent change orders, during the first quarter of fiscal 2024. The project was funded from operations and from current credit facilities as amended. The system is operational and the Indiana Plant and the manufacturer are testing and modifying the installation to meet guaranteed and optimal rates. This project was placed into service in December 2023. The improvements at the Kansas Plant include working on bringing the plant on-line.
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
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
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. Management evaluated and determined no impairments were considered necessary for the six months ended March 31, 2024 and 2023.
Investments
Investments consist of the capital stock and patron equities of the Company's distillers grains marketer. The investment is stated at the lower of cost or fair value and adjusted for non-cash patronage equities and cash equity redemptions received. Non-cash patronage dividends are recognized when received and included within revenue in the consolidated statements of operations.
The Company has also created certain subsidiaries to achieve some of its varying business interests that are not directly related to ethanol production or trading of grain. One has been formed as a corporation, while the other has been formed as a limited liability company (LLC) to hold interests in affiliated companies for carbon capture and underground sequestration (CCS). Through its LLC, the Company owns a fifty percent interest in a joint venture which is accounted for as an equity method investment as described in detail in Note 12 - Equity Method Investments.
Passthrough Entity Tax
The Company records Indiana passthrough entity tax in accordance with ASC 740 and has elected to account for the payments as an equity transaction through member distributions. At March 31, 2024, accrued distributions for Indiana passthrough entity tax was $700,000 as compared to $2,750,000 at March 31, 2023. The Company paid approximately $2,050,000 for 2023 taxes during the six months ended March 31, 2024 and paid approximately $2,300,000 for 2022 taxes during the six months ended March 31, 2023.
Economic Development Fund
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 paid towards property tax 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 Union City, Indiana plant (the "Indiana Plant"). The Company does not have title to or control over the funds in the acquisition account.
On February 14, 2023, the Company received $2,950,000 from the Commission. The Company has elected to account for this transaction under the International Accounting Standard (IAS) No. 20 Accounting for Government Grants and Disclosure of Government Assistance as U.S. GAAP does not contain explicit guidance. The Company reported this transaction in the consolidated statement of cash flows as proceeds from the economic development fund, and in the consolidated balance sheet as a reduction of payments for construction in progress during the three months ended March 31, 2023.
Deferred Financing Costs
Deferred financing costs are presented as a reduction to the debt and amortized as interest expense over the term of the underlying debt agreement by use of the straight-line method, which approximates the effective interest method. Unamortized deferred financing costs are fully amortized to interest expense when debt is retired before maturity.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company's contracts primarily
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
consist of agreements with marketing companies and other customers as described below. The Company's performance obligations consist of the delivery of ethanol, distillers grains, CFP, corn oil, soybeans and carbon dioxide to its customers. The consideration the Company receives for these products is fixed based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. The Company's 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. The Company sells 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 markets 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 market one hundred percent of the distillers grains it produces at the plants. 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.
•Corn fermented protein. The Company also engages CHS, Inc. to market one hundred percent of the CFP it produces at the plants. The process for selling the CFP is like that of dried distillers grains.
•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. These 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 at the Indiana Plant to a customer that maintains a plant on-site for a set price per ton. Delivery is defined as transference of the gas from the Indiana Plant's stream to their plant.
•Soybeans and other grains. The Indiana Plant sells soybeans exclusively to commercial mills, processors or grain traders. Contracts are negotiated directly with the parties at prices based on negotiated prices.
Cost of Goods Sold
Cost of goods sold include corn, trading division grains, natural gas and other components which includes processing ingredients, electricity, railcar lease, railcar maintenance, depreciation of ethanol production fixed assets and wages, salaries and benefits of production personnel.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
Operating Expenses
Operating expenses include wages, salaries and benefits of administrative employees at the plants, insurance, professional fees, depreciation of trading division fixed assets, property taxes and similar costs.
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 consolidated 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 consolidated 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 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 the consolidated 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 Income (Loss) per Unit
Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members' units outstanding during the period. Diluted net income (loss) per unit is computed by dividing net income (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 income (loss) per unit are the same.
2. REVENUE
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.
Revenue by Source
All revenues from contracts with customers under ASC Topic 606 are recognized at a point in time.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
The following tables disaggregate revenue by major source for the three and six months ended March 31, 2024 and 2023:
Three Months Ended March 31, 2024 (Unaudited)
| | | | | | | | | | | | | | | | | |
| Ethanol Division | | Trading Division | | Total |
Revenues from contracts with customers under ASC Topic 606 | | | | | |
Ethanol | $ | 44,029,600 | | | $ | — | | | $ | 44,029,600 | |
Distillers Grains | 11,802,911 | | | — | | | 11,802,911 | |
CFP | 118,609 | | | — | | | 118,609 | |
Corn Oil | 3,401,224 | | | — | | | 3,401,224 | |
Carbon Dioxide | 112,201 | | | — | | | 112,201 | |
| | | | | |
| | | | | |
Total revenues from contracts with customers | 59,464,545 | | | — | | | 59,464,545 | |
| | | | | |
Revenues from contracts accounted for as derivatives under ASC Topic 815 (1) | | | | | |
Soybeans and Other Grains | — | | | 19,966,717 | | | 19,966,717 | |
Total revenues from contracts accounted for as derivatives | — | | | 19,966,717 | | | 19,966,717 | |
Total Revenues | $ | 59,464,545 | | | $ | 19,966,717 | | | $ | 79,431,262 | |
Six Months Ended March 31, 2024 (Unaudited)
| | | | | | | | | | | | | | | | | |
| Ethanol Division | | Trading Division | | Total |
Revenues from contracts with customers under ASC Topic 606 | | | | | |
Ethanol | $ | 86,249,710 | | | $ | — | | | $ | 86,249,710 | |
Distillers Grains | 20,545,363 | | | — | | | 20,545,363 | |
CFP | 118,609 | | | — | | | 118,609 | |
Corn Oil | 6,698,429 | | | — | | | 6,698,429 | |
Carbon Dioxide | 184,518 | | | — | | | 184,518 | |
| | | | | |
| | | | | |
Total revenues from contracts with customers | 113,796,629 | | | — | | | 113,796,629 | |
| | | | | |
Revenues from contracts accounted for as derivatives under ASC Topic 815 (1) | | | | | |
Soybeans and Other Grains | — | | | 34,746,228 | | | 34,746,228 | |
Total revenues from contracts accounted for as derivatives | — | | | 34,746,228 | | | 34,746,228 | |
Total Revenues | $ | 113,796,629 | | | $ | 34,746,228 | | | $ | 148,542,857 | |
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
Three Months Ended March 31, 2023 (Unaudited)
| | | | | | | | | | | | | | | | | |
| Ethanol Division | | Trading Division | | Total |
Revenues from contracts with customers under ASC Topic 606 | | | | | |
Ethanol | $ | 79,548,471 | | | $ | — | | | $ | 79,548,471 | |
Distillers Grains | 18,221,222 | | | — | | | 18,221,222 | |
Corn Oil | 7,736,636 | | | — | | | 7,736,636 | |
Carbon Dioxide | 113,641 | | | — | | | 113,641 | |
| | | | | |
Other Revenue | 273,192 | | | — | | | 273,192 | |
Total revenues from contracts with customers | 105,893,162 | | | — | | | 105,893,162 | |
| | | | | |
Revenues from contracts accounted for as derivatives under ASC Topic 815 (1) | | | | | |
Soybeans and Other Grains | — | | | 24,878,294 | | | 24,878,294 | |
Total revenues from contracts accounted for as derivatives | — | | | 24,878,294 | | | 24,878,294 | |
Total Revenues | $ | 105,893,162 | | | $ | 24,878,294 | | | $ | 130,771,456 | |
Six Months Ended March 31, 2023 (Unaudited)
| | | | | | | | | | | | | | | | | |
| Ethanol Division | | Trading Division | | Total |
Revenues from contracts with customers under ASC Topic 606 | | | | | |
Ethanol | $ | 165,859,716 | | | $ | — | | | $ | 165,859,716 | |
Distillers Grains | 33,585,173 | | | — | | | 33,585,173 | |
Corn Oil | 15,766,277 | | | — | | | 15,766,277 | |
Carbon Dioxide | 234,735 | | | — | | | 234,735 | |
| | | | | |
Other Revenue | 273,192 | | | — | | | 273,192 | |
Total revenues from contracts with customers | 215,719,093 | | | — | | | 215,719,093 | |
| | | | | |
Revenues from contracts accounted for as derivatives under ASC Topic 815 (1) | | | | | |
Soybeans and Other Grains | — | | | 50,000,482 | | | 50,000,482 | |
Total revenues from contracts accounted for as derivatives | — | | | 50,000,482 | | | 50,000,482 | |
Total Revenues | $ | 215,719,093 | | | $ | 50,000,482 | | | $ | 265,719,575 | |
(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.
Payment Terms
The Company has contractual payment terms with each respective marketer that sells ethanol and distillers grains. These terms are generally 7 - 14 days after the week of the transfer of control.
The Company has standard payment terms of net 10 days for its sale for corn oil.
The Company has standard payments terms due upon delivery for its sale of soybeans.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
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. The Company recorded advances from customers for approximately $1,599,000 at March 31, 2024. There were no advances from customers as of September 30, 2023.
3. CONCENTRATIONS
Two major customers accounted for approximately 91% and 86% of the outstanding accounts receivable balance at March 31, 2024 and September 30, 2023, respectively. These same two customers accounted for approximately 72% and 75% of revenue for the six months ended March 31, 2024 and March 31, 2023, respectively.
4. INVENTORIES
Inventories consist of the following as of:
| | | | | | | | | | | |
| March 31, 2024 (Unaudited) | | September 30, 2023 |
Ethanol Division: | | | |
Raw materials | $ | 13,026,409 | | | $ | 3,517,682 | |
Work in progress | 1,753,332 | | | 1,848,663 | |
Finished goods | 4,347,672 | | | 4,638,966 | |
Spare parts | 7,981,702 | | | 4,789,021 | |
Ethanol Division Subtotal | $ | 27,109,115 | | | $ | 14,794,332 | |
Trading Division: | | | |
Grain inventory | $ | 1,324,509 | | | $ | 309,108 | |
Trading Division Subtotal | 1,324,509 | | | 309,108 | |
Total Inventories | $ | 28,433,624 | | | $ | 15,103,440 | |
The Company had a net realizable value write-down for ethanol inventory of approximately $1,369,000 and $872,000 for the six months ended March 31, 2024 and 2023, respectively.
In the ordinary course of its ethanol business, the Company enters into forward purchase contracts for its commodity purchases and sales. Certain contracts for the ethanol division that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. At March 31, 2024, the Company had forward corn purchase contracts at various fixed prices for various delivery periods through December 2025 for approximately 4% of expected production needs for the next 21 months. Approximately 2% of the forward corn purchases were with related parties. Given the uncertainty of future commodity prices, the Company could incur a loss on the outstanding purchase contracts in future periods. Management has evaluated these forward contracts using the lower of cost or net realizable value evaluation, and the Company recognized a write-down of $1,981,000 at March 31, 2024 and recognized no write-down at March 31, 2023. The
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
Company has elected not to apply the normal purchase and sale exemption to its forward soybean contracts of the trading division and therefore, treats them as derivative instruments.
At March 31, 2024, the Ethanol Division had forward dried distiller grains contracts for approximately 84% of expected production for the next month at various fixed prices for delivery through April 2024. At March 31, 2024, the Company had forward CFP contracts for approximately 31% of expected production for the next two months at various fixed prices for delivery through May 2024. At March 31, 2024, the Company had forward corn oil contracts for approximately 42% of expected production for the next month at various fixed prices for delivery through April 2024. Additionally, at March 31, 2024, the Trading Division had forward soybean purchase contracts for approximately 6% of expected origination for various delivery periods through January 2025. Approximately 15% of the forward soybean purchases were with related parties.
5. DERIVATIVE INSTRUMENTS
The Company enters into corn, ethanol, natural gas, soybean oil and soybean derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the consolidated 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.
Commodity Contracts
The Company enters into commodity-based derivatives, for corn, ethanol, natural gas, soybean oil and soybeans in order to protect cash flows from fluctuations caused by volatility in commodity prices and 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, soybean oil, and soybean derivative instruments are included as a component of cost of goods sold.
At March 31, 2024, the Ethanol Division had a net short (selling) position of 8,600,001 bushels of corn under derivative contracts used to hedge its forward corn purchase contracts, corn inventory and ethanol sales. These corn derivatives are traded on the Chicago Board of Trade and other markets as of March 31, 2024 and are forecasted to settle for various delivery periods through December 2025. The Ethanol Division had a net short (selling) position of 9,030,000 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 2024. The Ethanol Division had a net long (buying) position of 600,000 pounds of soybean oil under derivative contracts as of March 31, 2024. These soybean oil derivatives are traded on the Chicago Board of Trade and are forecasted to settle through August 2024. At March 31, 2024, the Ethanol Division had no open positions of natural gas. At March 31, 2024, the Trading Division had a net long (buying) position of 5,001 bushels of soybeans under derivative contracts used to hedge its forward soybean purchase contracts. These soybean derivatives are traded on the Chicago Board of Trade and are, as of March 31, 2024, forecasted to settle for various delivery periods through March 2025. These derivatives have not been designated as effective hedges for accounting purposes.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
The following table provides balance sheet details regarding the Company's derivative financial instruments at March 31, 2024:
| | | | | | | | | | | | | | | | | |
Instrument | Balance Sheet Location | | Assets | | Liabilities |
Ethanol Futures and Options Contracts | Futures and Options Derivatives | | $ | — | | | $ | 3,806,204 | |
Corn Futures and Options Contracts | Futures and Options Derivatives | | $ | — | | | $ | 185,820 | |
Soybean Oil Futures and Options Contracts | Futures and Options Derivatives | | $ | 19,800 | | | $ | — | |
| | | | | |
Soybean Futures and Options Contracts | Futures and Options Derivatives | | $ | 68,404 | | | $ | — | |
Soybean Forward Purchase and Sales Contracts | Forward Purchase/Sales Derivatives | | $ | 63,700 | | | $ | 114,295 | |
| | | | | |
As of March 31, 2024, the Company had approximately $11,274,000 of cash collateral (restricted cash) related to ethanol, corn, soybean oil, and soybean derivatives held by three brokers.
The following table provides balance sheet details regarding the Company's derivative financial instruments at September 30, 2023:
| | | | | | | | | | | | | | | | | |
Instrument | Balance Sheet Location | | Assets | | Liabilities |
| | | | | |
Ethanol Futures and Options Contracts | Futures and Options Derivatives | | $ | — | | | $ | 3,513,693 | |
Corn Futures and Options Contracts | Futures and Options Derivatives | | $ | — | | | $ | 29,108 | |
Natural Gas Futures and Options Contracts | Futures and Options Derivatives | | $ | — | | | $ | 253,586 | |
Soybean Oil Futures and Options Contracts | Futures and Options Derivatives | | $ | — | | | $ | 21,534 | |
Soybean Futures and Options Contracts | Futures and Options Derivatives | | $ | 352,464 | | | $ | — | |
Soybean Forward Purchase and Sales Contracts | Forward Purchase/Sales Derivatives | | $ | 66,825 | | | $ | 356,177 | |
| | | | | |
As of September 30, 2023, the Company had approximately $13,425,000 of cash collateral (restricted cash) related to ethanol, corn, soybean oil, natural gas, and soybean derivatives held by three brokers.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
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, 2024 | | Six Months Ended March 31, 2024 | | Three Months Ended March 31, 2023 | | Six Months Ended March 31, 2023 |
Corn Futures and Options Contracts | Cost of Goods Sold | $ | 3,005,538 | | | $ | 5,690,854 | | | $ | 5,295,581 | | | $ | 7,441,433 | |
Ethanol Futures and Options Contracts | Revenues | 494,611 | | | 362,114 | | | 828,850 | | | 5,159,457 | |
Natural Gas Futures and Options Contracts | Cost of Goods Sold | 20,680 | | | (519,979) | | | (1,517,137) | | | (2,293,188) | |
Soybean Oil Futures and Options Contracts | Cost of Goods Sold | (3,022) | | | (11,842) | | | (60,859) | | | (77,786) | |
Soybean Futures and Options Contracts | Cost of Goods Sold | 276,323 | | | 71,802 | | | 398,834 | | | (1,153,503) | |
Soybean Forward Purchase and Sales Contracts | Cost of Goods Sold | (163,866) | | | 241,640 | | | (263,080) | | | 286,963 | |
Totals | | $ | 3,630,264 | | | $ | 5,834,589 | | | $ | 4,682,189 | | | $ | 9,363,376 | |
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, 2024:
| | | | | | | | | | | | | | | | | |
Instruments | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 |
Corn Futures and Options Contracts | $ | (117,982) | | $ | (117,982) | | $ | (87,868) | | $ | (30,114) | | $ | — | |
Ethanol Futures and Options Contracts | $ | (3,806,204) | | $ | (3,806,204) | | $ | (3,806,204) | | $ | — | | $ | — | |
Soybean Oil Futures and Options Contracts | $ | 19,800 | | $ | 19,800 | | $ | 19,800 | | $ | — | | $ | — | |
| | | | | |
Soybean Futures and Options Contracts | $ | 68,404 | | $ | 68,404 | | $ | 74,563 | | $ | (6,159) | | $ | — | |
Soybean Forward Purchase Contracts | $ | (50,595) | | $ | (50,595) | | $ | — | | $ | (50,595) | | $ | — | |
Soybean Inventory | $ | 1,324,509 | | $ | 1,324,509 | | $ | — | | $ | 1,324,509 | | $ | — | |
Accounts Payable | $ | (12,320,549) | | $ | (12,320,549) | | $ | — | | $ | (12,320,549) | | $ | — | |
| | | | | |
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of September 30, 2023:
| | | | | | | | | | | | | | | | | |
Instruments | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 |
Corn Futures and Options Contracts | $ | (29,108) | | $ | (29,108) | | $ | (60,637) | | $ | 31,529 | | $ | — | |
Ethanol Futures and Options Contracts | $ | (3,513,693) | | $ | (3,513,693) | | $ | (3,513,693) | | $ | — | | $ | — | |
Natural Gas Futures and Options Contracts | $ | (253,586) | | $ | (253,586) | | $ | (39,300) | | $ | (214,286) | | $ | — | |
Soybean Oil Futures and Options Contracts | $ | (21,534) | | $ | (21,534) | | $ | (21,534) | | $ | — | | $ | — | |
Soybean Futures and Options Contracts | $ | 352,464 | | $ | 352,464 | | $ | 352,464 | | $ | — | | $ | — | |
Soybean Forward Purchase Contracts | $ | (289,352) | | $ | (289,352) | | $ | — | | $ | (289,352) | | $ | — | |
Soybean Inventory | $ | 309,108 | | $ | 309,108 | | $ | — | | $ | 309,108 | | $ | — | |
Accounts Payable | $ | (3,908,868) | | $ | (3,908,868) | | $ | — | | $ | (3,908,868) | | $ | — | |
Treasury Bills (classified as cash equivalents) | $ | 12,407,939 | | $ | 12,407,939 | | $ | 12,407,939 | | $ | — | | $ | — | |
The Company determines 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.
The Company determines the fair value of treasury bills utilizing Level 1 inputs by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data based on quoted market prices in active markets.
The Company determines the fair value of corn and soybean futures and options Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above. Soybean forward purchase and sale contracts are reported at fair value using Level 2 inputs from current contract prices that are being issued by the Company.
Soybean inventory held in the trading division is reported at fair value using Level 2 inputs which are based on purchases and sales transactions that occurred on or near March 31, 2024 and September 30, 2023.
Accounts payable is generally stated at historical amounts, with the exception of approximately $12,321,000 and $3,909,000 at March 31, 2024 and September 30, 2023, respectively, related to certain delivered inventory for which the payable fluctuates based on changes in commodity prices. These payables are hybrid financial instruments for which the Company has elected the fair value option.
The Company believes the fair value of its long-term debt to be the carrying value of approximately $57,133,000 and $30,569,000 at March 31, 2024 and September 30, 2023, respectively. The Company considers this to be a Level 2 input. The fair values and carrying values consider the terms of the related debt and exclude the impacts of discounts and derivative/hedging activity.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
7. BANK FINANCING
The Company formerly had a loan agreement consisting of two loans, the Declining Revolving Loan (Declining Loan) and the Revolving Credit 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 based upon the U.S. prime rate published in the Wall Street Journal to each of the individual loans. The interest rates on each of the loans changes daily. On January 31, 2024, the Company amended the loan agreement. The primary purpose of the amendment was to provide additional financing to Cardinal Colwich to fund a portion of the funds needed to complete the purchase of the Kansas Plant, permit the Company to use funds from the Revolving Credit Loan to support Cardinal Colwich's working capital needs and capital expenditures and to allow the Company to request an additional $10,000,000 of maximum available credit on the Revolving Credit Loan. On April 30, 2024, the Company amended the loan agreement to extend the time period for the Company to provide consents from counterparties to material contracts collaterally assigned to the lender.
Declining Loan
The maximum availability of the Declining Loan was formerly $5,000,000 and such amount was to be available for working capital purposes. However, the maximum availability of the Declining Loan was increased from $5,000,000 to $39,000,000 in order to provide financing to fund the construction and installation of a high protein feed system at the Indiana Plant. The interest rate on the Declining Loan is currently based on the prime rate minus five basis points (.05%) subject to a floor of 2.85%. The interest rate was 8.45% at March 31, 2024 and September 30, 2023. The Company is required to make monthly interest payments on the Declining Loan during the draw period. The principal balance of the Declining Loan is expected to be converted to term debt on or before May 1, 2024, to be repaid in 60 equal monthly installments based on a ten year amortization period. In addition, the Company will be required to make mandatory annual prepayments on the term debt within 120 days following the end of each fiscal year beginning with the fiscal year ended September 30, 2024. The annual prepayment will be in the amount of the lesser of 40% of excess cash flow or $7,200,000, up to an aggregate amount paid of $18,000,000. The Company had borrowings outstanding of approximately $35,404,000 and $30,568,958 on the Declining Loan at March 31, 2024 and September 30, 2023, respectively.
Revolving Credit Loan
The Revolving Credit Loan has a limit of $20,000,000 supported by a borrowing base made up of the Company's corn, ethanol, dried distillers grain, CFP, 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 the prime rate minus twenty-five basis points (.25%) and is subject to a floor of 2.75%. The interest rate was 8.25% at March 31, 2024 and September 30, 2023. There were no borrowings outstanding on the Revolving Credit Loan at March 31, 2024 and September 30, 2023. The Revolving Credit Loan was set to mature on February 28, 2024. The amendment provides that the Company may request a $10,000,000 increase in the maximum commitment under the Revolving Credit Loan, subject to approval of the lender, and may use funds from the Revolving Credit Loan to support Cardinal Colwich's working capital needs and capital expenditures. The borrowing base calculation used to determine the amount available under the Revolving Credit Loan has also been amended to include Cardinal Colwich's corn, ethanol, dried distillers grain, CFP and corn oil inventories, eligible accounts receivable and commodity trading account excess margin funds. The amendment extends the termination date of the Revolving Credit Loan to February 28, 2025.
Term Loan
The amendment provides for a new $22,000,000 Term Loan to the Company with an interest rate based on the prime rate plus twenty-five basis points (.25%) subject to a floor of 3.25%. The interest rate was 8.75% at March 31, 2024. The Company incurred approximately $280,000 of costs in connection with the amendment of the Term Loan, which are recorded as deferred financing costs. The Company is required to make monthly interest payments on the Term Loan until June 1, 2024. Commencing on July 1, 2024, the Term Loan is to be repaid by the Company in fifty-nine equal monthly installments based on
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
a seven year amortization until March 1, 2029, when the outstanding principal balance together with accrued and unpaid interest will be due. The Company had borrowings outstanding of approximately $21,728,000 on the Term Loan at March 31, 2024.
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 $6,000,000 of expenditures per year without prior approval. The cost of the high protein feed system is excluded from the capital expenditures calculation until the principal balance of the Declining Loan converts to term debt. There is also a requirement to maintain a minimum fixed charge coverage ratio of no less than 1.15:1.0 measured quarterly. A debt service charge coverage ratio of no less than 1.25:1.0 in lieu of the fixed charge coverage ratio will apply for any reporting period that working capital is equal to or more than $23,000,000. The amendment modifies these covenants to provide for a consolidated minimum working capital requirement of $25,000,000, and a capital expenditures covenant that allows the Company $10,000,000, in the aggregate, of expenditures per year without prior approval. There is also a requirement to maintain a minimum consolidated fixed charge coverage ratio of no less than 1.15:1.0 measured quarterly. A consolidated debt service charge coverage ratio of no less than 1.25:1.0 in lieu of the fixed charge coverage ratio will apply for any reporting period that consolidated working capital is equal to or more than $35,000,000.
The consolidated estimated maturities of long-term debt at March 31, 2024 are as follows:
| | | | | | | | | | | | | | | | | |
| Principal | | Amortization of Deferred Financing Costs | | Total |
April 1, 2024 to March 31, 2025 | $ | 5,917,703 | | | $ | (52,560) | | | $ | 5,865,143 | |
April 1, 2025 to March 31, 2026 | 8,233,631 | | | (52,560) | | | 8,181,071 | |
April 1, 2026 to March 31, 2027 | 8,975,370 | | | (52,560) | | | 8,922,810 | |
April 1, 2027 to March 31, 2028 | 9,779,531 | | | (52,560) | | | 9,726,971 | |
April 1, 2028 to March 31, 2029 | 10,664,966 | | | (52,560) | | | 10,612,406 | |
Thereafter | 13,832,900 | | | (8,759) | | | 13,824,141 | |
Total long-term debt | $ | 57,404,101 | | | $ | (271,559) | | | $ | 57,132,542 | |
8. LEASES
The Company leases rail cars for its facility to transport ethanol and dried distillers grains to its end customers. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. As of March 31, 2024, the Company’s weighted average discount rate was 8.25%. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 5 years, which may include options to extend the lease when it is reasonably certain the Company will exercise those options. As of March 31, 2024, the weighted average remaining lease term was 3.51 years. The Company does not have lease arrangements with residual value guarantees, sale leaseback terms or material restrictive covenants. The Company does not have any material finance lease obligations nor sublease agreements.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
The following table summarizes the remaining maturities of the Company’s operating lease liabilities as of March 31, 2024:
| | | | | |
| |
April 1, 2024 to March 31, 2025 | $ | 4,771,220 | |
April 1, 2025 to March 31, 2026 | 3,132,900 | |
April 1, 2026 to March 31, 2027 | 2,225,700 | |
April 1, 2027 to March 31, 2028 | 1,772,100 | |
April 1, 2028 to March 31, 2029 | 1,181,400 | |
Totals | 13,083,320 | |
Amount representing interest | (1,728,041) | |
Lease liabilities | $ | 11,355,279 | |
For the six months ended March 31, 2024, the Company recorded operating lease costs of approximately $2,186,000 in cost of goods sold in the Company’s consolidated statement of operations. Cash paid for the operating leases was approximately $1,999,000 for the six months ended March 31, 2024.
9. COMMITMENTS AND CONTINGENCIES
Marketing Agreements
The Company entered into an agreement with an unrelated company for the purpose of marketing and selling all the distillers grains the Company is expected to produce at the Indiana Plant. The buyer agrees to remit a fixed percentage rate of the actual selling price to the Company for distillers dried grain solubles and wet distiller grains. The agreement may be terminated by either party at its unqualified option, by providing written notice of not less than 120 days to the other party.
The Company entered into an agreement with an unrelated third party for the purpose of marketing and selling all of the distillers products the Company is expected to produce at the Kansas Plant. The initial term of the agreement commences as of the effective date, to be renewed thereafter automatically for additional periods unless either party gives notice of non-renewal in accordance with the terms of the agreement. The agreement may be terminated by mutual agreement, upon the default of one of the parties as set forth in the agreement, due to the bankruptcy or insolvency of a party or due to force majeure. In addition, the marketer may terminate due to changes or events in the U.S. government or regulatory structure likely to cause conditions under which it would be unable to perform its obligations, if it is unable to secure adequate buyers having acceptable credit risk, or if the value of the distillers products significantly changes as a result of a change in government programs and the parties are unable to agree on a revised formula for determining the purchase price. The Company will receive a purchase price less certain agreed-upon amounts. The marketer may purchase on its own account upon notice and will be responsible for all transportation arrangements.
The Company entered into an agreement with an unrelated company to sell all of the ethanol the Company produces at the Indiana Plant. The Company agrees to pay a commission of a fixed percent of the net purchase price for marketing and distribution. In July 2009, the initial term of the agreement was extended to eight years and the commission increased in exchange for reducing the payment terms from 14 days to 7 days after shipment. In November 2012, the Company amended this agreement to extend the initial term of the agreement to eleven years, expiring in 2019, in exchange for capping the commissions at $1,750,000 per year. Effective November 18, 2018, the two companies amended the marketing agreement. The amendment added a renewal term to the initial agreement that extended the contract until November 30, 2022. It provided for the payment of the commission to be calculated on each net gallon of ethanol taken under the agreement. It modified how the cost of rail car shipments are charged to the Company, moving from a per gallon fee to requiring that the marketer provide a minimum 225 rail cars to the Company on a per car per month lease basis as described in Note 8. Finally, it reduced the delivery to payment period. On September 14, 2022, the Company executed an amendment to extend the term until December 31, 2024, subject to automatic renewals thereafter for one-year periods unless either party gives notice of non-renewal at least 90 days prior to the end of the current term. The agreement may also be terminated due to the insolvency or intentional misconduct of either party or upon the default of one of the parties as set forth in the agreement. In addition, the amendment
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
added a provision that allows the Company to terminate the agreement on 90 days prior written notice upon a "Material Change in Control". Upon termination of the agreement for any reason, the Company may be obligated to continue to deliver ethanol for a period of time to cover certain contractual commitments for which the Company gave prior written approval. The amendment also provides for certain adjustments to the purchase price for sales made to the marketer for its own account or for sales of exported ethanol. If this adjusted price can not be finalized at time of payment, the parties may agree upon a provisional price which shall be trued up later. The amendment was effective on December 1, 2022. On April 26, 2024, the Company executed an amendment to extend the term of the agreement, to be renewed thereafter automatically for one-year periods unless either party gives notice of non-renewal in accordance with the terms of the amendment.
The Company entered into an agreement with an unrelated company for the purpose of marketing and distributing all of the ethanol the Company produces at the Kansas Plant. The initial term of the agreement begins on the date when ethanol produced at the Kansas Plant is available for delivery, to be renewed thereafter automatically for additional periods unless either party gives notice of non-renewal in accordance with the terms of the agreement. The agreement may be terminated due to the insolvency or intentional misconduct of either party, upon a "Material Change in Control" or upon the default of one of the parties as set forth in the agreement. The Company will be paid the purchase price invoiced to the third-party purchaser less certain agreed-upon amounts. The marketer has agreed to purchase on its own account and at market price any ethanol which it is unable to sell to a third party purchaser and to use its best efforts to obtain the best purchase price available for the ethanol. The marketer is responsible for all transportation arrangements.
Rail Car Rehabilitation Costs
The Company leased 180 hopper rail cars for use in the Indiana Plant under a multi-year agreement which ended in November 2023. The Company executed a renewal to lease 179 hopper rail cars under a multi-year agreement effective December 2023 and ending in November 2028. Under the agreement, the Company is required to pay to rehabilitate each car for "damage" that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease.
Company management has estimated total costs to rehabilitate the cars at March 31, 2024, to be approximately $2,490,000. During the six months ended March 31, 2024, the Company has recorded a corresponding expense in cost of goods sold of approximately $179,000. The Company accrues the estimated cost of railcar damages over the term of the lease.
High Protein System Installation Agreement
On January 20, 2022, the Company contracted with ICM, Inc. to install a system to produce high protein feed, also known as corn fermented protein or CFP, which cost approximately $50,000,000, including change orders, and was funded from operations and from our current credit facilities as amended. This project was placed into service in December 2023 and is currently operational. ICM and the Company are in the process of making adjustments to optimize production to meet guarantees and specifications within the contract. The Company sold approximately $119,000 of CFP during the six months ended March 31, 2024.
Asset Purchase Agreement
On October 23, 2023, Cardinal Colwich, a wholly owned subsidiary of the Company, entered into an Asset Purchase Agreement (the "APA") with Element, LLC ("Seller") by and through Creative Planning Business Alliance, LLC (the "Receiver") acting in its capacity as the court-appointed receiver. The APA provides for the purchase of substantially all of the assets of Seller used in connection with the production of ethanol, high protein distillers grains and corn oil as set forth in more detail in the APA (the "Purchased Assets") free and clear of any claims, restrictions, mortgages, security interest, demands, charges and encumbrances. The facility was constructed by ICM, Inc. with a name plate capacity to produce 70 million gallons of ethanol annually and is located in Colwich, Kansas. The cash purchase price for the Purchased Assets is $44,000,000. In addition, Cardinal Colwich will assume certain liabilities specified in the APA. On January 31, 2024, the transaction was completed. The transaction was funded by a $22,000,000 loan from the Company's primary lender and the remaining $22,000,000 was funded by operations. Additionally, the Company paid approximately $1,025,000 in additional fees, expenditures to cure liabilities associated with contracts the Company was assuming, and to fund the purchase of necessary equipment owned by third parties. These amounts came from the Company's cash reserves.
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
The following table outlines the assets capitalized from the transaction:
| | | | | |
Land | $ | 1,955,896 | |
Land improvements | 2,934,077 | |
Office buildings | 321,893 | |
Plant buildings | 3,359,087 | |
Plant and equipment | 32,916,181 | |
Vehicles | 9,515 | |
Computer equipment and software | 191,624 |
Spare Parts | 2,311,727 | |
| $ | 44,000,000 | |
The additional fees paid associated with the transaction were as follows:
| | | | | |
Deferred financing costs | $ | 280,319 | |
Plant and equipment from third parties | 685,325 | |
Other fees | 59,088 | |
| $ | 1,024,732 | |
In connection with the acquisition, the Company assumed, through its wholly owned subsidiary, certain material contracts. On January 31, 2024, the Company assumed a license agreement which provides a revocable, royalty-free, non-assignable, non-exclusive license to use certain proprietary technologies and information in connection with the ownership, operation and maintenance of the Kansas Plant. The license agreement may be terminated for an unauthorized usage of the proprietary property, an unauthorized disclosure of the proprietary property or a breach of the license agreement and failure to cure as provided.
On January 31, 2024, the Company also assumed a water sharing agreement to permit it to use water for operations at the Kansas Plant from a water right owned by an unrelated party subject to certain restrictions on rates of diversion and consumption and cumulative amounts used. The Company will be required pay certain costs, expenses, fees, assessments and charges and pay an annual fee for the use of the water. The water sharing agreement as amended, provides that it can be terminated by the owner of the water right after an initial period upon written notice of a specified time before such termination goes into effect. In addition, if the owner of the water right needs the water for its operations, it can also recall the water or reduce the amounts used after an initial period upon written notice of a specified time before such recall or reduction goes into effect. The water sharing agreement may also be terminated upon the Company's breach, and failure to cure, as provided therein.
Tank Rail Car Lease
On January 31, 2024, the Company assumed a lease for 210 tank rail cars for use in the Kansas Plant under a multi-year agreement ending in June 2026, to continue thereafter on a month to month basis unless terminated upon 30 days written notice by either party. Under the agreement, the Company is required to return, at its expense, each car in good working order, ordinary wear and tear excepted, at the termination of the lease.
10. RISKS AND 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, CFP and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plants primarily
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
from local agricultural producers and from purchases on the open market. During the six months ended March 31, 2024, ethanol sales averaged approximately 58% of total revenues and corn costs averaged 56% of total cost of goods sold.
The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol, distillers grains, CFP 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 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.
Economic conditions during the quarter were good, but not as robust as in the past two years. Good corn crops contributed to lower input costs. The high margin environment that pervaded in the industry leading up to the quarter provided incentive to ethanol refiners to produce at high levels, reducing ethanol prices. These contributed to somewhat lower margins in the quarter. Natural gas prices have been volatile as well during the quarter and to the date of this report. However, the military invasion of Ukraine by Russia in the second quarter of fiscal year 2022 and sanctions imposed by other countries as a result have created global economic uncertainty and contributed to increased inflation, significant market disruptions and increased volatility in commodity prices such as corn, oil and natural gas. The economic impact of this war and the potential effects on the Company's operating and financial performance is currently unknown. Additionally, there have been economic indicators that the United States could be facing a possible recession which have primarily resulted in interest rate hikes by the Federal Reserve in an attempt to reduce inflation. The Company continues to monitor economic conditions that might affect our profitability. The Company believes that its cash on hand and available debt from its lender will provide sufficient liquidity to meets its anticipated working capital, debt service and other liquidity needs through the next twelve months. If market conditions worsen affecting the Company's ability to profitably operate the plant or if the Company is unable to transport ethanol, it may be forced to further reduce the ethanol production rate or even temporarily shut down ethanol production altogether.
11. BUSINESS SEGMENTS
The Company 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:
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | |
| March 31, 2024 | | March 31, 2023 | | March 31, 2024 | | March 31, 2023 | | | | |
Revenue: | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | |
Ethanol division | $ | 59,464,545 | | | $ | 105,893,162 | | | $ | 113,796,629 | | | $ | 215,719,093 | | | | | |
Trading division | 19,966,717 | | | 24,878,294 | | | 34,746,228 | | | 50,000,482 | | | | | |
Total Revenue | $ | 79,431,262 | | | $ | 130,771,456 | | | $ | 148,542,857 | | | $ | 265,719,575 | | | | | |
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | |
| March 31, 2024 | | March 31, 2023 | | March 31, 2024 | | March 31, 2023 | | | | |
Gross Profit: | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | |
Ethanol division | $ | 814,790 | | | $ | 14,380,601 | | | $ | 5,561,098 | | | $ | 31,951,781 | | | | | |
Trading division | 257,952 | | | 1,056,267 | | | 1,034,680 | | | 1,424,031 | | | | | |
Total Gross Profit | $ | 1,072,742 | | | $ | 15,436,868 | | | $ | 6,595,778 | | | $ | 33,375,812 | | | | | |
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | |
| March 31, 2024 | | March 31, 2023 | | March 31, 2024 | | March 31, 2023 | | | | |
Operating Income (Loss): | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | |
Ethanol division | $ | (2,466,750) | | | $ | 12,343,077 | | | $ | (42,564) | | | $ | 27,958,896 | | | | | |
Trading division | 45,710 | | | 739,024 | | | 505,194 | | | 789,545 | | | | | |
Total Operating Income (Loss) | $ | (2,421,040) | | | $ | 13,082,101 | | | $ | 462,630 | | | $ | 28,748,441 | | | | | |
| | | | | | | | | | | |
| March 31, 2024 | | September 30, 2023 |
Grain Inventories: | (unaudited) | | |
Ethanol division | $ | 13,026,409 | | | $ | 3,517,682 | |
Trading division | 1,324,509 | | | 309,108 | |
Total Grain Inventories | $ | 14,350,918 | | | $ | 3,826,790 | |
| | | |
| March 31, 2024 | | September 30, 2023 |
Total Assets: | (unaudited) | | |
Ethanol division | $ | 260,747,010 | | | $ | 234,913,852 | |
Trading division | 5,511,756 | | | (2,145,605) | |
Total Assets | $ | 266,258,766 | | | $ | 232,768,247 | |
12. EQUITY METHOD INVESTMENTS
The Company, through its wholly owned subsidiary, Cardinal One Carbon Holdings, LLC, owns a fifty percent interest in a limited partnership. That partnership was formed as a joint venture with another unrelated investor to investigate and pursue carbon dioxide capture and underground sequestration. The Company accounts for this investment using joint venture accounting and, therefore, under the equity method. Cardinal One Carbon Holdings, LLC was formed on June 22, 2022 to hold the partnership interest in the limited partnership and began its administrative operations on September 1, 2022.
The Company's policy related to investments in both common stock and in-substance common stock that give the Company the ability to exercise significant influence over the operating and financial polices of an entity in which it invests even though the
CARDINAL ETHANOL, LLC AND SUBSIDIARIES
Notes to Consolidated Condensed Unaudited Financial Statements
March 31, 2024
Company holds 50% or less of the common stock or in-substance common stock (or both common and in-substance common stock) is to account for such investment under the equity method. The Company considers its financial position and results of operations in evaluating the extent of disclosures of the financial position and results of operations of an entity in which the Company invests.
As the Company owns a fifty percent interest in the limited partnership, an investment in affiliate of approximately $8,752,000 and $5,651,000 was reflected on the consolidated balance sheet as of March 31, 2024, and September 30, 2023, respectively. Losses on equity method investment of approximately $149,000 and $327,000 was reflected on the consolidated statement of operations for the three and six months ended March 31, 2024, respectively.
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 six month period ended March 31, 2024, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the consolidated condensed financial statements (the "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, 2023. References to “we,” “us,” “our,” “Cardinal Ethanol” and the “Company” collectively refer to Cardinal Ethanol, LLC and its wholly owned subsidiaries, Cardinal Ethanol Export Sales, Inc., Cardinal One Carbon Holdings, LLC, and Cardinal Colwich, LLC, except where otherwise noted.
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, distillers grains, high protein feed, 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 our ethanol plants 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 operations;
•Changes in our business strategy, capital improvements or development plans;
•Changes in production capacity of our plants or technical difficulties in operating our plants;
•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;
•Competition from the increased use of electric vehicles;
•Our ability to hire and retain key employees and maintain labor relations;
•Volatile commodity and financial markets;
•Limitations and restrictions contained in the instruments and agreements governing our indebtedness;
•Decreases in export demand due to the imposition of tariffs by foreign governments on ethanol, distillers grains and soybeans produced in the United States;
•Use by the EPA of small refinery exemptions;
•A slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from pandemics, including COVID-19;
•Global economic uncertainty, inflation, market disruptions and increased volatility in commodity prices caused in part by the Russian invasion of Ukraine and resulting sanctions by the United States and other countries;
•Decreases in production rates due to installation of our high protein feed system;
•Changes in our ability to secure adequate water supply to satisfy our plants’ requirements;
•Our ability to start up our plant in Kansas and commence operations on a commercial scale; and
•Our ability to secure and maintain appropriate permits to operate our plants.
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 (the "Indiana Plant"). We began producing ethanol, distillers grains and corn oil 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.
On January 20, 2022, we entered into an Equipment Purchase and Installation Agreement (the "EPC Agreement") with ICM, Inc. pursuant to which ICM has agreed to engineer, procure, construct, and install its high protein feed system at the Indiana Plant and license to us its proprietary, patent-protected technology to use, operate and maintain the system. Pursuant to the EPC Agreement and subsequent adjustments due to change orders executed by the parties, which cost approximately $50,000,000, including change orders, which is payable in installments. We will also pay license fees of $10 per ton of PROTOMAX™, a high protein feed product, produced by the system for a period of 10 years. We funded the project from operations and from our current credit facilities as amended. We began installation of the system during the fourth quarter of our fiscal year 2023 and the system was placed into service in December 2023. We had sales of approximately $119,000 of CFP during the six months ended March 31, 2024. We experienced a shutdown of the Indiana Plant during the six months ended March 31, 2024 in connection with the installation of our high protein feed system which resulted in a reduction in gallons of ethanol, tons of distillers grains and pounds of corn oil produced during the period. We also expect that there will be a period of time of up to three months before our production rates of ethanol and corn oil production will return to historic levels. In addition, our distillers grains production is transitioning and is expected to be replaced with a high protein feed product and fiber meal once the project ramps up to expected rates. However, the overall reduction in production of our products caused by the installation of the system may be significant and could adversely impact our profitability.
We have engaged with an unrelated third party to pursue the possible joint development of integrated carbon dioxide facilities, transportation infrastructure and a carbon sequestration site for the carbon dioxide emissions produced by our Indiana Plant (the "CCS Project"). On January 16, 2023, Cardinal One Carbon Holdings, LLC, a wholly owned subsidiary of Cardinal Ethanol, LLC, entered into a Partnership Agreement (the "LPA") with Vault CCS Holdings LP pursuant to which Cardinal One Carbon Holdings, LLC and Vault CCS Holdings LP formed a joint venture operating under the name of One Carbon Partnership Holdings LP (the "Limited Partnership") to pursue the CCS Project. The LPA governs the rights, duties and responsibilities of the parties in connection with the ownership of the Limited Partnership. In addition, on the same date, Cardinal One Carbon Holdings, LLC and Vault CCS Holdings LP entered into an Amended and Restated Limited Liability Company Agreement of One Carbon Partnership GP LLC (the "GP"). The purpose of the GP is to serve as the general partner of the Limited Partnership. The CCS Project is still in its early stages and is subject to many variables that could have a material effect on its feasibility and the parties' ability to complete the CCS Project. Please refer to Item 1 - Financial Statements - Note 12 - Equity Method Investments for more information.
On October 23, 2023, Cardinal Colwich, LLC ("Cardinal Colwich"), a wholly owned subsidiary of Cardinal Ethanol, LLC, entered into an Asset Purchase Agreement with Element, LLC ("Seller") by and through Creative Planning Business Alliance, LLC (the "Receiver") acting in its capacity as the court-appointed receiver to purchase substantially all of the assets of Seller used in connection with the production of ethanol, high protein distillers grains and corn oil free and clear of any claims, restrictions, mortgages, security interest, demands, charges and encumbrances. The facility was constructed by ICM, Inc. with
a name plate capacity to produce 70 million gallons of ethanol annually and is located in Colwich, Kansas (the "Kansas Plant"). On January 31, 2024, the purchase transaction was completed. The cash purchase price was $44,000,000. In addition, Cardinal Colwich assumed certain liabilities specified in the APA. The transaction was funded by a $22,000,000 loan from the Company's primary lender and the remaining $22,000,000 was funded by operations. Additionally, the Company paid approximately $1,025,000 in additional fees, expenditures to cure liabilities associated with assumed contracts, and to fund the purchase of necessary equipment owned by third parties. These amounts came from cash reserves. The Kansas Plant has not operated since April of 2023 when it went into receivership and was purchased by us in an idled state.
On January 31, 2024, the Company entered into a Second Amended and Restated Construction Loan Agreement (the "Second Amended Credit Agreement"), which amends and restates the First Amended and Restated Construction Loan Agreement dated June 10, 2013, as amended (the "First Amended Credit Agreement"), with First National Bank of Iowa ("FNBO"). The primary purpose of the Second Amended Credit Agreement was to provide additional financing to the Company to fund a portion of the funds needed to complete the acquisition of the Kansas Plant, permit the Company to use funds from the Revolving Credit Loan to support Cardinal Colwich's working capital needs and capital expenditures and to allow the Company to request an additional $10,000,000 of maximum available credit on the Revolving Credit Loan. Please refer to Item 1 - Financial Statements - Note 7 - Bank Financing for more information.
In connection with the acquisition of the Kansas Plant, Cardinal Colwich assumed, certain material contracts. On January 31, 2024, Cardinal Colwich assumed the Owner's License Agreement dated March 2, 2018 between Element, LLC and ICM, Inc. as amended on December 16, 2020 and March 25, 2022 (collectively, the "License Agreement"). The License Agreement provides a revocable, royalty-free, non-assignable, non-exclusive license by ICM, Inc. to use certain proprietary technologies and information as defined in the License Agreement to produce ethanol, RINS, carbon credits, corn oil, feed products and other products in connection with the ownership, operation maintenance and repair of the Kansas Plant. ICM may terminate the License Agreement if Cardinal Colwich uses the proprietary property for any unauthorized purpose or in violation of the License Agreement, discloses the proprietary property to anyone other than permitted by the License Agreement or upon Cardinal Colwich's breach of and failure to cure the License Agreement as provided.
On January 31, 2024, Cardinal Colwich also assumed the Water Sharing Agreement dated February 28, 2018 between Element, LLC and Kansas Gas & Electric Company, now Evergy Kansas South, Inc. ("Evergy"), as amended on January 31, 2024 (collectively, the "Water Sharing Agreement"). The Water Sharing Agreement provides Cardinal Colwich with the right to use water for operations at the Kansas Plant from a Water Right owned by Evergy, subject to certain restrictions on rates of diversion and consumption and cumulative amounts used. As amended, the Water Sharing Agreement provides that Evergy can terminate the Water Sharing Agreement after an initial period upon written notice to Cardinal Colwich of a specified time before such termination goes into effect. In addition, if Evergy needs the water for its operations, it can recall the water (a "Temporary Total Restriction") or reduce the amounts Cardinal Colwich can use (a "Temporary Partial Restriction") after an initial period upon written notice to Cardinal Colwich of a specified time before such recall or reduction goes into effect. In exchange for the use of the water, Cardinal Colwich will reimburse Evergy for certain costs, expenses, fees, assessments and charges and pay an annual fee. Evergy may also terminate the Water Sharing Agreement upon Cardinal Colwich's breach of, and failure to cure, the Water Sharing Agreement as provided therein. Cardinal Colwich has the responsibility to maintain and repair the wells, pipes and related equipment and report the volume of water used from the Water Right to Evergy.
On February 13, 2024, our board of directors declared a cash distribution of $150 per membership unit to the holders of units of record at the close of business on February 13, 2024 for a total distribution of $2,190,900. The distribution was paid on March 5, 2024.
On April 12, 2024, we entered into a Co-Product Marketing Agreement with CHS Inc. ("CHS") for the purpose of marketing and distributing all of the distillers products we produce at the Kansas Plant. The initial term of the agreement commences as of the effective date, to be renewed thereafter automatically for additional periods unless either party gives notice of non-renewal in accordance with the terms of the agreement. The agreement may be terminated by mutual agreement, upon the default of one of the parties as set forth in the agreement, due to the bankruptcy or insolvency of a party or due to force majeure. In addition, CHS may terminate due to changes or events in the U.S. government or regulatory structure likely to cause conditions under which CHS would be unable to perform its obligations, if CHS is unable to secure adequate buyers having acceptable credit risk, or if the value of the distillers products significantly changes as a result of a change in
government programs and the parties are unable to agree on a revised formula for determining the purchase price. CHS will market our distillers products and we will receive the purchase price less certain agreed-upon amounts. CHS may purchase on its own account upon notice to us. In addition, CHS has agreed to promptly notify us of any and all price arbitrage opportunities. Under the agreement, CHS will be responsible for all transportation arrangements.
On April 26, 2024, we entered into Amendment No. 5 to the Ethanol Purchase and Sale Agreement with Murex LLC ("Murex") for the purpose of marketing and distributing all of the ethanol we produce at the Indiana Plant. The amendment amends the Ethanol Purchase and Sale Agreement dated December 18, 2006, as amended. The amendment extends the term of the agreement, to be renewed thereafter automatically for one-year periods unless either party gives notice of non-renewal in accordance with the terms of the amendment. The amendment provides that Murex will provide and lease a minimum number of tank cars for rail transportation and manage the tank car fleet. We will pay a monthly amount to Murex on or before the first of each month for each rail car leased.
On April 26, 2024, we entered into an Ethanol Purchase and Sale Agreement with Murex for the purpose of marketing and distributing all of the ethanol we produce at the Kansas Plant. The initial term of the agreement begins on the date when ethanol produced at the Kansas Plant is available for delivery, to be renewed thereafter automatically for additional periods unless either party gives notice of non-renewal in accordance with the terms of the agreement. The agreement may be terminated due to the insolvency or intentional misconduct of either party, upon a material change in control or upon the default of one of the parties as set forth in the agreement. Under the terms of the agreement, Murex will market all of our ethanol produced at the Kansas Plant unless we choose to sell a portion at a retail fueling station owned by us or one of our affiliates. Murex will pay to us the purchase price invoiced to the third-party purchaser less certain agreed-upon amounts. Murex has agreed to purchase on its own account and at market price any ethanol which it is unable to sell to a third party purchaser. Murex has agreed to use its best efforts to obtain the best purchase price available for our ethanol. In addition, Murex has agreed to promptly notify us of any and all price arbitrage opportunities. Under the agreement, Murex will be responsible for all transportation arrangements.
On April 30, 2024, Cardinal Ethanol and Cardinal Colwich executed a First Amendment of Second Amended and Restated Construction Loan Agreement, which amends the Second Amended Credit Agreement to extend the time period for the Company to provide consents from counterparties to material contracts collaterally assigned to FNBO.
We record Indiana passthrough entity tax in accordance with ASC 740 and have elected to account for the payments as an equity transaction through member distributions. At March 31, 2024, accrued distributions for passthrough entity tax was $700,000 and cash payments made for distributions for passthrough entity tax was $2,050,000.
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. If market conditions worsen affecting our ability to profitably operate the plant or if we are unable to transport ethanol, we may be forced to further reduce our ethanol production rate or even temporarily shut down ethanol production altogether.
Results of Operations for the Three Months Ended March 31, 2024 and 2023
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 consolidated statement of operations for the three months ended March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2024 | | 2023 |
Statement of Operations Data | Amount | | % | | Amount | | % |
Revenue | $ | 79,431,262 | | | 100.0 | | | $ | 130,771,456 | | | 100.0 | |
Cost of Goods Sold | 78,358,520 | | | 98.6 | | | 115,334,588 | | | 88.2 | |
Gross Profit | 1,072,742 | | | 1.4 | | | 15,436,868 | | | 11.8 | |
Operating Expenses | 3,493,782 | | | 4.4 | | | 2,354,767 | | | 1.8 | |
Operating Income (Loss) | (2,421,040) | | | (3.0) | | | 13,082,101 | | | 10.0 | |
Other Income | 884,661 | | | 1.1 | | | 392,585 | | | 0.3 | |
Net Income (Loss) | $ | (1,536,379) | | | |