HIGHWATER ETHANOL, LLC Results of Operations for the Fiscal Years Ended
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, gross profit, operating expenses, operating profit and other items to total revenues in our statements of operations for the fiscal years endedOctober 31, 2022 and 2021: 2022 2021 Statements of Operations Data Amount % Amount % Revenues$ 221,373,253 100.00 %$ 158,717,536 100.00 % Cost of Goods Sold 188,444,980 85.13 % 143,172,419 90.21 % Gross Profit 32,928,273 14.87 % 15,545,117 9.79 % Operating Expenses 3,988,371 1.80 % 3,234,524 2.03 % Operating Profit 28,939,902 13.07 % 12,310,593 7.76 % Other Income (Expense), Net 4,385,503 1.98 % 1,430,335 0.90 % Net Income$ 33,325,405 15.05 %$ 13,740,928 8.66 % 22
-------------------------------------------------------------------------------- The following table shows the sources of our revenues for the fiscal years endedOctober 31, 2022 and 2021. 2022 2021 Percentage of Percentage of Revenue Sources Amount Total Revenues Amount Total Revenues Ethanol Sales$ 172,742,300 78.03 %$ 122,902,729 77.43 % Modified Wet Distillers Grains Sales 8,979,383 4.06 % 4,899,649 3.09 % Dried Distillers Grains Sales 24,712,352 11.16 % 21,090,325 13.29 % Corn Oil Sales 14,939,218 6.75 % 9,824,833 6.19 % Total Revenues$ 221,373,253 100.00 %$ 158,717,536 100.00 % Revenues Ethanol Our total revenues were higher for the fiscal year endedOctober 31, 2022 , compared to the fiscal year endedOctober 31, 2021 . Revenue from ethanol sales increased by approximately 40.6% during the fiscal year endedOctober 31, 2022 compared to the fiscal year endedOctober 31, 2021 primarily due to an increase in the average price per gallon and number of gallons of ethanol sold during the fiscal year endedOctober 31, 2022 compared to the fiscal year endOctober 31, 2021 . The average ethanol sales price per gallon we received for the fiscal year endedOctober 31, 2022 was approximately 30.9% higher than the average price received for the fiscal year endedOctober 31, 2021 . Ethanol sales prices were higher for the current period due to higher corn and energy prices, increases in ethanol demand, global economic uncertainty and rising inflation and the Russian invasion ofUkraine . Factors likely to affect ethanol prices in the future include changes in domestic corn prices and corn supply, changes in energy prices, trade disputes with foreign governments, changes in domestic and foreign ethanol demand and our ability to receive a premium on ethanol shipped toCalifornia pursuant to the Low Carbon Fuel Standard (the "LCFS"). In addition, global economic uncertainty, rising inflation, market disruptions and increased volatility in commodity prices resulting in part from the Russian invasion ofUkraine and the lingering effects of the global response to the COVID-19 pandemic could continue to impact the market price of ethanol. Any actions by theEnvironmental Protection Agency orCongress which result in reduction of the renewable volume obligations under the Renewable Fuels Standard or the granting of exemptions from those obligations could also have a negative effect on ethanol prices. The number of gallons of ethanol sold increased by approximately 7.7% during the fiscal year endedOctober 31, 2022 , as compared to the fiscal year endedOctober 31, 2021 . Our ethanol production levels for the fiscal year endedOctober 31, 2022 are at an annual rate of approximately 68 million gallons. Management anticipates that the amount of ethanol sold may decrease in the future if current positive operating conditions worsen and we reduce ethanol production levels. Ethanol production could also decrease if delayed rail car shipments affect our ability to get sufficient rail cars to transport our ethanol. For the fiscal year endedOctober 31, 2022 andOctober 31, 2021 , we recorded gains due to changes in the fair value of our outstanding ethanol derivative positions of approximately$79,000 and$1,000 , respectively. These gains increased our ethanol revenue during these periods.
Distillers Grains
Revenue from distillers grains sales increased by approximately 29.6% during the fiscal year endedOctober 31, 2022 , compared to the fiscal year endedOctober 31, 2021 , due to an increase in the price of distillers grains and tons of distillers grains sold during the period. For the fiscal year endedOctober 31, 2022 , the average price per ton that we received for our dried distillers grains was approximately 14.5% higher than the average price we received during the fiscal year endedOctober 31, 2021 , due primarily to increases in the domestic prices of corn and soybeans for the period. For the fiscal year endedOctober 31, 2022 , the average price per ton that we received for our modified distillers grains was approximately 26.6% higher than during the fiscal year endedOctober 31, 2021 , due to increased demand in our local area. Distillers grains prices typically change in proportion to domestic corn and soybean prices. Domestic demand for distillers grains could decrease if corn or soybean prices decline and end-users switch to lower priced alternatives or if cattle 23 --------------------------------------------------------------------------------
numbers decrease due to droughts in the western and southern
Overall, the number of tons of distillers grains sold increased during our fiscal year endedOctober 31, 2022 , as compared to the fiscal year endedOctober 31, 2021 , due primarily to increased corn grind offset by higher corn oil production levels for the period which led to higher distillers grains production levels for the period. Management anticipates that the amount of distillers grains produced may decrease in the future if current positive operating conditions worsen and there is a reduction in ethanol production levels which would then have a corresponding effect on distillers grains. In addition, an increase in ethanol or corn oil yields could have a negative effect of distillers grains production levels.
Corn Oil
Revenue from corn oil sales increased by approximately 52.1% for the fiscal year endedOctober 31, 2022 , as compared to the fiscal year endedOctober 31, 2021 primarily due to increases in the price of corn oil and pounds of corn oil sold during the fiscal year endedOctober 31, 2022 , compared to the fiscal year endedOctober 31, 2021 . The average price per pound of corn oil sold during the fiscal year endedOctober 31, 2022 increased 43.8% due to an increase in the domestic prices of corn and soybeans and increased biodiesel production for the period. Factors likely to affect corn oil prices include biodiesel demand, prices of corn and soybeans, the status of the biodiesel blenders' tax credit and new crop corn oil content. The pounds of corn oil we sold during the fiscal year endedOctober 31, 2022 increased by approximately 6.8% as compared to the pounds of corn oil we sold for the fiscal year endedOctober 31, 2021 , due to increased corn grind and improved efficiencies leading to increased production for the period. Management anticipates that the amount of corn oil produced may decrease in the future if there is a reduction in ethanol production levels which would then have a corresponding effect on corn oil. However, an increase in corn oil yields due to improved efficiencies or a corn crop with higher oil content could contribute to higher corn oil production levels.
Cost of Goods Sold
Our two largest costs of production are corn (80.9% of cost of goods sold for the fiscal year endedOctober 31, 2022 ) and natural gas (3.1% of cost of goods sold for the fiscal year endedOctober 31, 2022 ). Our total cost of goods sold was approximately 31.6% more during the fiscal year endedOctober 31, 2022 , compared to the fiscal year endedOctober 31, 2021 .
Corn
Our average price per bushel of corn for the fiscal year endedOctober 31, 2022 increased by approximately 27% compared to the fiscal year endedOctober 31, 2021 primarily due to higher market value for corn as a result of increased demand which outpaced supply and volatility in commodity prices. We also used approximately 8.9% more bushels of corn in the fiscal year endedOctober 31, 2022 as compared to the fiscal year endedOctober 31, 2021 due to increased ethanol production. Management expects there to be an adequate corn supply available in our area to operate the ethanol plant. However, yields in our local area may be lower due to wet weather which delayed planting coupled with dry growing conditions which could have a negative affect on the price we pay for our corn. Corn prices are dependent on weather conditions, supply and demand, stocks and other factors which could contribute to price volatility and significantly impact our costs of production. In addition, corn prices could continue to be impacted in the future by the Russian invasion ofUkraine which has contributed to global economic uncertainty, rising inflation, market disruptions and increased volatility in commodity prices. AtOctober 31, 2022 , we had approximately 3,502,000 bushels of forward fixed basis corn purchase contracts and 1,918,000 bushels of forward fixed price corn purchase contracts valued at approximately$12,558,000 for various delivery periods throughDecember 2025 . For the fiscal year endedOctober 31, 2022 andOctober 31, 2021 , we recorded gains due to changes in the fair value of our outstanding corn derivative positions of approximately$1,018,000 and$353,000 , respectively. These gains reduced our cost of goods sold during these periods. 24 --------------------------------------------------------------------------------
Natural Gas
For the fiscal year ended
Our average price per MMBTU of natural gas increased by approximately 11.3% compared to the fiscal year endedOctober 31, 2021 due primarily to the Russian invasion ofUkraine . However, because we have sufficient forward natural gas purchase contracts in place for our current needs, we paid below market prices for our natural gas. Management anticipates that natural gas prices will continue at current levels as long as the Russian war inUkraine continues. Other factors such as industry production problems or large increases in natural gas demand could have a negative effect on natural gas prices.
At
For the fiscal year endedOctober 31, 2022 , we recorded losses of approximately$77,000 due to the change in fair value of our outstanding natural gas derivative positions which increased our cost of goods sold during this period. For the fiscal year endedOctober 31, 2021 , we recorded gains of approximately$24,000 due to the change in fair value of our outstanding natural gas derivative positions which reduced our cost of goods sold during this period.
Operating Expenses
We had operating expenses for the fiscal year ended
Other Income, Net
We had total other income for the fiscal year endedOctober 31, 2022 of$4,385,503 compared to total other income of$1,430,335 for the fiscal year endedOctober 31, 2021 . Our other income for the fiscal year endedOctober 31, 2022 , was higher due primarily to the award of approximately$4,100,000 received from the USDA Biofuel Producer Program.
Results of Operations for the Fiscal Years Ended
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, gross loss, operating expenses, operating loss and other items to total revenues in our statements of operations for the fiscal years endedOctober 31, 2021 and 2020: 2021 2020 Statements of Operations Data Amount % Amount % Revenues$ 158,717,536 100.00 %$ 97,256,146 100.00 % Cost of Goods Sold 143,172,419 90.21 % 99,813,857 102.63 % Gross Profit (Loss) 15,545,117 9.79 % (2,557,711) (2.63) % Operating Expenses 3,234,524 2.03 % 3,552,328 3.65 % Operating Profit (Loss) 12,310,593 7.76 % (6,110,039) (6.28) % Other Income (Expense), Net 1,430,335 0.90 % (256,127) (0.27) % Net Income (Loss)$ 13,740,928 8.66 %$ (6,366,166) (6.55) % 25
-------------------------------------------------------------------------------- The following table shows the sources of our revenues for the fiscal years endedOctober 31, 2021 and 2020. 2021 2020 Percentage of Percentage of Revenue Sources Amount Total Revenues Amount Total Revenues Ethanol Sales$ 122,902,729 77.43 %$ 75,161,967 77.28 % Modified Wet Distillers Grains Sales 4,899,649 3.09 % 4,163,426 4.28 % Dried Distillers Grains Sales 21,090,325 13.29 % 14,123,366 14.52 % Corn Oil Sales 9,824,833 6.19 % 3,807,387 3.92 % Total Revenues$ 158,717,536 100.00 %$ 97,256,146 100.00 % Revenues Ethanol Our total revenues were higher for the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 . Revenue from ethanol sales increased by approximately 63.5% during the fiscal year endedOctober 31, 2021 compared to the fiscal year endedOctober 31, 2020 primarily due to an increase in the average price per gallon and number of gallons of ethanol sold during the fiscal year endedOctober 31, 2021 compared to the fiscal year endOctober 31, 2020 . The average ethanol sales price per gallon we received for the fiscal year endedOctober 31, 2021 was approximately 56.6% higher than the average price received for the fiscal year endedOctober 31, 2020 due to higher corn prices and increases in demand during the during the fiscal year endedOctober 31, 2021 . Ethanol prices were lower during the fiscal year endedOctober 31, 2020 due to restrictions put in place in response to the COVID-19 pandemic. In addition, we received a premium on ethanol shipped toCalifornia during the fiscal year endedOctober 31, 2021 due to approval from CARB for our cellulosic pathway pursuant to the LCFS. The LCFS requires renewable fuels to meet certain standards in order to be sold intoCalifornia . However, this pathway does not guarantee a premium for ethanol shipped intoCalifornia . The number of gallons of ethanol sold increased by approximately 4.2% during the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 . Our ethanol production levels for the fiscal year endedOctober 31, 2021 are at an annual rate of approximately 64 million gallons. For the fiscal year endedOctober 31, 2021 , we recorded gains due to changes in the fair value of our outstanding ethanol derivative positions of approximately$1,000 which increased our ethanol revenue during this period. For the fiscal year endedOctober 31, 2020 , we recorded losses due to changes in the fair value of our outstanding ethanol derivative positions of approximately$623,000 which reduced our ethanol revenue during this period.
Distillers Grains
Revenue from distillers grains sales increased by approximately 42.1% during the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 , due to an increase in the price of distillers grains and tons of dried distillers grains sold during the period. For the fiscal year endedOctober 31, 2021 , the average price per ton that we received for our dried distillers grains was approximately 44.2% higher than the average price we received during the fiscal year endedOctober 31, 2020 , due primarily to increases in the domestic prices of corn and soybeans for the period. For the fiscal year endedOctober 31, 2021 , the average price per ton that we received for our modified distillers grains was approximately 18.5% higher than during the fiscal year endedOctober 31, 2020 , due to increases in the domestic prices of corn and soybeans. The tons of dried distillers grains sold during the fiscal year endedOctober 31, 2021 , increased by approximately 3.6% as compared to the tons of dried distillers grains we sold during the fiscal year endedOctober 31, 2020 . The tons of modified distillers grains we sold during the fiscal year endedOctober 31, 2021 , were similar when compared to the same period for 2020. Overall, the number of tons of distillers grains sold increased during our fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 , due primarily to increased corn grind offset by higher corn oil production levels for the period which led to higher production levels for the period. 26 --------------------------------------------------------------------------------
Corn Oil
Revenue from corn oil sales increased by approximately 158.0% for the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 primarily due to increases in the price of corn oil and pounds of corn oil sold during the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 . The average price per pound of corn oil sold during the fiscal year endedOctober 31, 2021 increased 100% due to increases in the price of corn and soybeans and increased biodiesel production for the period. The pounds of corn oil we sold during the fiscal year endedOctober 31, 2021 increased by approximately 29.7% as compared to the pounds of corn oil we sold for the fiscal year endedOctober 31, 2020 , due to increased corn grind and improved efficiencies leading to increased production for the period.
Cost of Goods Sold
Our two largest costs of production are corn (77.1% of cost of goods sold for the fiscal year endedOctober 31, 2021 ) and natural gas (3.5% of cost of goods sold for the fiscal year endedOctober 31, 2021 ). Our total cost of goods sold was approximately 43.4% more during the fiscal year endedOctober 31, 2021 , compared to the fiscal year endedOctober 31, 2020 .
Corn
Our average price per bushel of corn for the fiscal year endedOctober 31, 2021 increased by approximately 55.4% compared to the fiscal year endedOctober 31, 2020 primarily due to higher market value for corn as a result of increased demand which outpaced supply. We also used approximately 3.8% more bushels of corn in the fiscal year endedOctober 31, 2021 as compared to the fiscal year endedOctober 31, 2020 due to increased ethanol production. AtOctober 31, 2021 , we had approximately 1,824,000 bushels of forward fixed basis corn purchase contracts and 1,188,000 bushels of forward fixed price corn purchase contracts valued at approximately$6,100,000 for various delivery periods throughJanuary 2023 . We recorded gains due to changes in the fair value of our outstanding corn derivative positions for the fiscal year endedOctober 31, 2021 of approximately$353,000 which reduced our cost of goods sold during this period. We recorded losses due to changes in the fair value of our outstanding corn derivative positions for the fiscal year endedOctober 31, 2020 of approximately$845,000 which increased our cost of goods sold during this period. .
Natural Gas
For the fiscal year endedOctober 31, 2021 , we purchased approximately 4.7% more natural gas as compared to the same period of 2020. This increase in natural gas usage is primarily due to the increase in dried distillers grains production. Our average price per MMBTU of natural gas was approximately the same for the fiscal year endedOctober 31, 2021 compared to the fiscal year endedOctober 31, 2020 . AtOctober 31, 2021 , we had approximately 3,349,000 MMBTUs of forward natural gas fixed price purchase contracts valued at approximately$9,631,000 for delivery periods throughOctober 2024 . For the fiscal years endedOctober 31, 2021 and 2020, we recorded gains due to the change in fair value of our outstanding natural gas derivative positions of approximately$24,000 and$11,000 , respectively. These gains reduced our cost of goods sold during these periods.
Operating Expenses
We had operating expenses for the fiscal year ended
27
--------------------------------------------------------------------------------Other Income (Expense), Net
We had total other income for the fiscal year endedOctober 31, 2021 of$1,430,335 compared to total other expense of$256,127 for the fiscal year endedOctober 31, 2020 . Our other income for the fiscal year endedOctober 31, 2021 , consisted primarily of gain on extinguishment of debt related to the forgiveness of the PPP loan and the resale of natural gas.
Changes in Financial Condition for the Fiscal Years Ended
The following table highlights the changes in our financial condition for the fiscal year endedOctober 31, 2022 from our previous fiscal year endedOctober 31, 2021 : October 31, 2022 October 31, 2021 Current Assets$ 54,690,546 $ 31,173,692 Current Liabilities 21,872,751
21,322,079
Long-Term Liabilities 1,022,030 1,803,610
Current Assets. The increase in current assets was primarily the result of increases in cash and cash equivalents and inventories atOctober 31, 2022 , as compared toOctober 31, 2021 . This was partially offset by a decrease in accounts receivable. Current Liabilities. The increase in current liabilities was primarily the result of increases in accounts payable atOctober 31, 2022 , as as compared toOctober 31, 2021 . This was partially offset by a decreases in current maturities of long-term due to our having no borrowings atOctober 31, 2022 .
Long-Term Liabilities. Long-term debt decreased at
Liquidity and Capital Resources
Based on financial forecasts prepared by our management, we anticipate that we will have sufficient cash on hand, cash from our current credit facilities, and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not currently anticipate seeking additional equity or debt financing in the near term in order to fund operations. However, if market conditions worsen, we could have difficulty maintaining our liquidity and may need to rely on our revolving lines of credit or seek increases. The following table shows cash flows for the fiscal years endedOctober 31, 2022 and 2021:October 31, 2022 October 31, 2021
Net cash provided by operating activities
22,409,864
Net cash used in investing activities (1,360,170)
(6,827,516)
Net cash used in financing activities (21,865,021) (8,700,657) Cash Flow From Operations We had more cash from operations for the fiscal year endedOctober 31, 2022 , as compared to the fiscal year endedOctober 31, 2021 due to an increase in net income and changes in accounts receivables and accounts payable during the fiscal year endedOctober 31, 2022 .
Cash Flow From Investing Activities
We used less cash for investing activities during the fiscal year ended
28
--------------------------------------------------------------------------------Cash Flow From Financing Activities
We used more cash in financing activities during the fiscal year endedOctober 31, 2022 , as compared to the fiscal year endedOctober 31, 2021 . Our cash used in financing activities resulted primarily from member distributions during the fiscal year endedOctober 31, 2022 , as compared to net proceeds from long-term debt during the fiscal year endedOctober 31, 2021 . The following table shows cash flows for the fiscal years endedOctober 31, 2021 and 2020: October 31, 2021 October 31, 2020 Net cash provided by (used in) operating activities$ 22,409,864 $ (247,864) Net cash used in investing activities (6,827,516) (3,275,201) Net cash provided by (used in) financing activities (8,700,657) 2,551,268 Cash Flow From Operations We experienced a decrease in our cash provided by (used in) operating activities for the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 . This decrease was primarily due to changes in accounts receivables, inventories and accrued expense during the fiscal year endedOctober 31, 2021 .
Cash Flow From Investing Activities
We used more cash for investing activities during the fiscal year ended
Cash Flow From Financing Activities
We experienced an increase in our cash for financing activities during the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 . This increase was primarily a result of increased net borrowings on long-term debt during the fiscal year endedOctober 31, 2021 , as compared to the fiscal year endedOctober 31, 2020 .
Short-Term and Long-Term Debt Sources
Our loan facility with Compeer Financial f/k/aAgStar Financial Services , PCA ("Compeer") includes a$20,000,000 Term Revolving Loan and a Revolving Line of Credit Loan. OnFebruary 8, 2022 , we amended the loan facility to modify the interest rates for the Term Revolving Loan and the Revolving Line of Credit, effectiveMarch 1, 2022 , and extend the Revolving Line of Credit Loan toJanuary 22, 2023 . OnAugust 8, 2022 , we amended the loan facility to extend the maturity date of the Term Revolving Loan toNovember 1, 2027 . The amendment also extends the maturity date of the Revolving Line of Credit Loan toNovember 1, 2023 and provides that the maturity date may be extended for up to four additional one year terms upon written request which will be deemed automatically granted by Compeer upon written certification that there is no event of default. In addition, as explained in more detail below, the amendment amends certain financial covenants that restrict distributions and working capital requirements and eliminates the minimum debt service coverage requirement.
Our loan facility with Compeer is secured by substantially all business assets and also subjects the Company to various financial and non-financial covenants.
Term Revolving Loan
The Term Revolving Loan is for up to$20,000,000 with a variable interest rate based on theWall Street Journal's Prime Rate plus 10 basis points with a minimum interest rate of 2.10%. The applicable interest rate atOctober 31, 2022 was 5.60%. The Term Revolving Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Term Revolving Loan with payment of all amounts outstanding due onNovember 1, 2027 . The outstanding balance on this note was$0 atOctober 31, 2022 . We pay interest at a rate of 1.50% on amounts outstanding for letters of credit which also reduce the amount available under the Term Revolving Loan. We had no letters of credit outstanding atOctober 31, 2022 . We are also required to pay unused commitment fees for the Term Revolving Loan. 29 --------------------------------------------------------------------------------
Revolving Line of Credit Loan
The Revolving Line of Credit Loan is for an amount equal to the borrowing base, with a maximum limit of$10,000,000 with a variable interest rate based on theWall Street Journal's Prime Rate plus 10 basis points with a minimum interest rate of 2.10%. The amount available to borrow per the borrowing base calculations atOctober 31, 2022 was approximately$0 . The applicable interest rate atOctober 31, 2022 was 5.60%. The Revolving Line of Credit Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Revolving Line of Credit Loan with payment of all amounts outstanding due onNovember 1, 2023 . The outstanding balance on this note was$0 atOctober 31, 2022 . We are also required to pay unused commitment fees for the Revolving Line of Credit Loan.
Covenants and Other Miscellaneous Financing Agreement Terms
The loan facility with Compeer is secured by substantially all business assets. We executed a mortgage in favor of Compeer creating a first lien on our real estate and plant and a security interest in all personal property located on the premises and assigned in favor of Compeer, all rents and leases to our property, our marketing contracts, our risk management services contract, and our natural gas, electricity, water service and grain procurement agreements. We are also subject to various financial and non-financial covenants that limit distributions and new debt and require minimum debt service coverage and working capital requirements. We are limited to annual capital expenditures of$5,000,000 without prior approval, incurring additional debt over certain amounts without prior approval, and making additional investments as described in the Amended and Restated Credit Agreement without prior approval of Compeer. We are required to maintain a minimum working capital requirement of$9,000,000 , which is calculated as current assets plus the amount available for drawing under the Term Revolving Loan and undrawn amounts on outstanding letters of credit, less current liabilities, and is measured quarterly. We are allowed to make cash distributions to members as frequently as monthly in an amount equal to 75% of net income if working capital is greater than or equal to$9,000,000 , or an unlimited amount if working capital is greater than or equal to$12,000,000 . We are no longer required to maintain a minimum debt service coverage ratio. Presently, we are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements. We will continue to work with Compeer to try to ensure that the terms of our loan agreements are met going forward. However, we cannot provide any assurance that our actions will result in sustained profitable operations or that we will not be in violation of our loan covenants or in default on our principal payments in the future. Should unfavorable market conditions result in our violation of the terms or covenants of our loan and we fail to obtain a waiver of any such term or covenant, Compeer could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. In the event of a default, Compeer could also elect to proceed with a foreclosure action on our plant. Contractual Cash Obligations
In addition to our long-term debt obligations, we have certain other
contractual cash obligations and commitments. The following tables provide
information regarding our contractual obligations and approximate commitments as
of
Payment Due By Period
Less than One One to Three Three to Five After Five
Total Year Years Years Years
Long-Term Debt Obligations $ - $ - $ - $ - $ -
Operating Lease Obligations 280,800 168,480 112,320 - -
Finance Lease Obligations 1,251,600 178,800 357,600 357,600 357,600
Purchase Obligations 24,293,569 17,843,094 6,450,475 - -
Total Contractual Obligations $ 25,825,969 $ 18,190,374 $
6,920,395
Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our financial
statements in accordance with generally accepted accounting principles. These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Accounting estimates that are the most important to the
presentation of our results of operations and financial condition, and which
require the greatest use of
30
--------------------------------------------------------------------------------judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of carrying value of property and equipment to be a critical accounting estimate.
Inventory Valuation
We value our inventory at lower of cost or net realizable value. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. In our analysis, we consider corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realizable value on inventory to be a critical accounting estimate.
Derivatives
We are exposed to market risks from changes in interest rates, corn, natural gas, and ethanol prices. We may seek to minimize these commodity price fluctuation risks through the use of derivative instruments. In the event we utilize derivative instruments, we will attempt to link these instruments to financing plans, sales plans, market developments, and pricing activities. Such instruments in and of themselves can result in additional costs due to unexpected directional price movements. We have entered into ethanol, corn and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices. In practice, as markets move, we actively attempt to manage our risk and adjust hedging strategies as appropriate. We do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity contracts being hedged. Instead, we use fair value accounting for our hedge positions, which means that as the current market price of our hedge position changes, the gains and losses are immediately recognized in our statement of operations. The immediate recognition of hedging gains and losses under fair value accounting can cause net income (loss) to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. As ofOctober 31, 2022 , the fair values of our commodity-based derivative instruments are a net liability of approximately$1,102,000 . As the prices of the hedged commodity moves in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to protect the Company over the term of the contracts for the hedged amounts.
© Edgar Online, source
