Forward-Looking Statements The information in this quarterly report on Form 10-Q for the nine-month period endedSeptember 30, 2021 , (including reports filed with theSecurities and Exchange Commission (the "SEC" or "Commission"), contains "forward-looking statements" that deal with future results, expectations, plans and performance, and should be read in conjunction with the financial statements and Annual Report on Form 10-K for the year endedDecember 31, 2020 . Forward-looking statements may include statements which use words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "predict," "hope," "will," "should," "could," "may," "future," "potential," or the negatives of these words, and all similar expressions. Forward-looking statements involve numerous assumptions, risks and uncertainties. Actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements are identified in our Form 10-K for the year endedDecember 31, 2020 . We are not under any duty to update the forward-looking statements contained in this report, nor do we guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Executive Overview and Summary We recorded a net income of$21.8 million for the nine-month period endedSeptember 30, 2021 , compared to$7.1 million during the same period in 2020. The$14.7 million increase in net income was largely due to an increased demand for soybean oil along with an improvement in the quantity and quality of the local soybean crop. Demand for soybean oil increased significantly in 2021 due to increased consumption in the biofuel industry. In addition, soybean production inSouth Dakota rebounded in 2020 which resulted in a substantial fall harvest and improvement in soybean supply locally compared to 2019. The oil protein and moisture content of this crop also improved, further boosting profits during the year. Despite one of the largest on record soybean crops in 2020, concerns about the prospect of running out of soybeans to process prior to the 2021 harvest kept soybean meal values in line with previous years. These same concerns negatively impacted margins as local producers were reluctant to sell their soybeans during the months leading up to harvest. Looking ahead, we anticipate above average processing margins for the remainder of 2021 and into 2022. A number of new renewable diesel plants in theWestern U.S. are slated to begin production in 2022 which should keep soybean oil demand well above historical levels. Yet, we are concerned about the local soybean supply especially during the third quarter of 2022. Drought conditions this past summer have made it very difficult to accurately measure the quantity available for purchase until new crop supplies become available. Meal premiums are forecast to remain near average at least until the end of the first quarter 2022. South American supplies are anticipated to add pressure to theU.S. soybean meal export market during the second and third quarters in 2022 which may negatively affect our margins. 18 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Comparison of the three months endedSeptember 30, 2021 and 2020 Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 $ % of Revenue $ % of Revenue Revenue$ 147,796,292 100.0$ 104,454,116 100.0 Cost of revenues (131,800,191) (89.2) (102,048,821) (97.7) Gross profit 15,996,101 10.8 2,405,295 2.3 Operating expenses (1,220,595) (0.8) (857,116) (0.8) Interest expense (470,522) (0.3) (238,984) (0.2) Other non-operating income (expense) 162,306 0.1 83,534 0.1 Net income$ 14,467,290 9.8$ 1,392,729 1.3 Revenue - Revenue increased$43.3 million , or 41.5%, for the three-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increase in revenues was primarily due to increases in the average sales prices of all soybean products, especially refined soybean oil. Oil prices doubled in 2021 due to surging demand for soybean oil from the renewable diesel and food sectors. In addition, soybean meal prices increased approximately 25% during the three-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increase in meal prices was due to concerns about the prospect of a heavily diminished soybean supply prior to the 2021 harvest as a result of a very strong demand in the soybean export sector. Gross Profit/Loss - Gross profit increased$13.6 million , or 565.0%, for the three months endedSeptember 30, 2021 , compared to the same period in 2020. The increase in gross profit was primarily due to surging demand for oil from the renewable diesel sector as more diesel plants opened. In addition, the quantity and quality of soybeans grown in theU.S. , especially in our local procurement area, improved in 2020 from 2019 due to more favorable weather conditions. Operating Expenses - Administrative expenses, including selling, general and administrative expenses, increased approximately$363,000 , or 42.4%, during the three-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increase was primarily due to an increase in personnel costs. Interest Expense - Interest expense increased$232,000 , or 96.9%, during the three months endedSeptember 30, 2021 , compared to the same period in 2020. The increase in interest expense was due primarily to an increase in borrowings from our lines of credit, as we borrowed more due to higher commodity prices and to pay for capital improvements. The average debt level during the three-month period endedSeptember 30, 2021 was approximately$71.6 million , compared to$31.9 million for the same period in 2020. Other Non-Operating Income - Other non-operating income (expense), including patronage dividend income, increased$79,000 during the three-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increase in other non-operating income was primarily due to a$54,000 increase in gains on sales of property and equipment. During the three-month period endedSeptember 30, 2021 , gains on sales of property and equipment totaled$94,000 , compared to$40,000 during the same period in 2020. Net Income/Loss - During the three-month period endedSeptember 30, 2021 , we generated a net income of$14.5 million , compared to$1.4 million for the same period in 2020. The$13.1 million increase was primarily attributable to an increase in gross profit. 19 --------------------------------------------------------------------------------
Comparison of the nine months ended
Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 $ % of Revenue $ % of Revenue Revenue$ 431,696,940 100.0$ 296,445,621 100.0 Cost of revenues (405,925,495) (94.0) (285,643,013) (96.4) Gross profit 25,771,445 6.0 10,802,608 3.6 Operating expenses (3,295,243) (0.8) (2,780,612) (0.9) Interest expense (1,280,832) (0.3) (897,325) (0.3) Other non-operating income (expense) 622,069 0.1 (22,245) - Net income$ 21,817,439 5.1$ 7,102,426 2.4 Revenue - Revenue increased$135.3 million , or 45.6%, for the nine-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increase in revenues was primarily due to increases in the average sales prices of all soybean products, especially refined soybean oil. The average sales price of soybean oil increased approximately 70% in the nine months endedSeptember 30, 2021 , compared to the same period in 2020, due to surging demand for soybean oil from the renewable diesel and food sectors. In addition, soybean meal prices increased approximately 30% during the nine-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increased meal prices were due to concerns about the prospect of a heavily diminshed soybean supply prior to the 2021 harvest as a result of strong demand in the soybean export sector. Gross Profit/Loss - Gross profit increased$15.0 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020. The increase in gross profit was primarily due to surging in demand for oil from the renewable diesel sector as more diesel plants were opened. In addition, the quantity and quality of soybeans grown in theU.S. , especially in our local procurement area, improved in 2020 from 2019 due to more favorable weather conditions. Operating Expenses - Administrative expenses, including all selling, general and administrative expenses, increased approximately$515,000 , or 18.5%, during the nine-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increase was primarily due to increases in personnel costs and professional fees. Interest Expense - Interest expense increased$384,000 , or 42.7%, during the nine months endedSeptember 30, 2021 , compared to the same period in 2020. The increase in interest expense was due primarily to an increase in borrowings from our lines of credit, as borrowed more due to higher commodity prices and to pay for capital improvements. The average debt level during the nine-month period endedSeptember 30, 2021 was approximately$65.8 million , compared to$35.9 million for the same period in 2020. Other Non-Operating Income - Other non-operating income (expense), including patronage dividend income, improved$644,000 during the nine-month period endedSeptember 30, 2021 , compared to the same period in 2020. The increase in other non-operating income was due to a$556,000 improvement in gains (losses) on our interest rate hedge instruments. During the nine-month period endedSeptember 30, 2021 , gains on interest rate hedges totaled$135,000 , compared to losses of$421,000 during the same period in 2020. Net Income/Loss - During the nine-month period endedSeptember 30, 2021 , we generated a net income of$21.8 million , compared to$7.1 million for the same period in 2020. The$14.7 million increase was primarily attributable to an increase in gross profit and other non-operating income. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash provided by operations and borrowings under our two lines of credit which are discussed below under "Indebtedness." OnSeptember 30, 2021 , we had working capital, defined as current assets less current liabilities, of approximately$37.5 million , compared to$23.7 million onSeptember 30, 2020 . Working capital increased$13.8 million between periods primarily due to increases in net income during that period. 20 --------------------------------------------------------------------------------
Based on current plans, we will continue funding our capital and operating needs
from cash from operations and revolving lines of credit.
Comparison of the Nine Months Ended
2021
2020
Net cash provided by (used for) operating activities$ (39,899,796) $ (1,428,797) Net cash provided by (used for) investing activities (7,004,786) (4,455,263) Net cash provided by (used for) financing activities 43,588,663
9,090,315
Cash Flows Used For Operations The$38.5 million increase in cash flows used for operating activities was due to a$36.0 million increase in inventories which were largely the result of increased commodity prices in our industry. During the nine-month period endedSeptember 30, 2021 , we increased inventories by$59.1 million , compared to$23.1 million during the same period in 2020. Cash Flows Used For Investing Activities The$2.5 million increase in cash flows used for investing activities during the nine-month period endedSeptember 30, 2021 , compared to the same period in 2020, was due to an$3.0 million increase in capital improvements. During the nine months endedSeptember 30, 2021 , we spent$7.2 million on capital improvements, compared to$4.2 million during the same period in 2020. Partially offsetting the increase in capital improvements was a$0.4 million decrease in investment purchases. During the nine months endedSeptember 30, 2021 , we made no new investments inPrairie AquaTech Manufacturing, LLC , compared to$0.4 million during the same period in 2020. Cash Flows Provided By (Used For) Financing Activities The$34.5 million increase in cash flows provided by financing activities was principally due to a$44.3 million increase in net proceeds on borrowings. During the nine months endedSeptember 30, 2021 , net proceeds on borrowings increased$49.1 million , compared to$4.8 million during the same period in 2020. Partially offsetting the increase in net borrowings was a$7.1 million decrease in outstanding checks over bank balance and a$2.7 million increase in cash distributions to our members during the nine-month period endedSeptember 30, 2021 , compared to the same period in 2020. Indebtedness We have two lines of credit with CoBank, our primary lender, to meet the short and long-term needs of our operations. The first credit line is a revolving long-term loan. Under this loan, we may borrow funds as needed up to the credit line maximum, or$26.0 million , and then pay down the principal whenever excess cash is available. Repaid amounts may be borrowed up to the available credit line. OnMarch 20, 2020 , the available credit line decreased by$2.0 million , and decreases continually by the same amount every six months until the credit line's maturity onSeptember 20, 2023 at which time we will be required to make a balloon payment for the remaining balance. We pay a 0.40% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan was$18.0 million and$17.5 million as ofSeptember 30, 2021 andDecember 31, 2020 . Under this loan, there were no additional funds available to borrow as ofSeptember 30, 2021 . The second credit line is a revolving working capital (seasonal) loan. The primary purpose of this loan, which matures onDecember 1, 2021 , is to finance our operating needs. The maximum amount we can borrow under this credit line is$70.0 million . We pay a 0.20% annual commitment fee on any funds not borrowed; however, we have the option to reduce the credit line during any given commitment period listed in the credit agreement to avoid the commitment fee. As ofSeptember 30, 2021 andDecember 31, 2020 , the principal balance outstanding on this credit line was$48.6 million and$0 , respectively, allowing us to borrow an additional$21.4 million as ofSeptember 30, 2021 . 21
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Both the revolving and seasonal loans with CoBank are set up with a variable rate option. The variable rate is set by CoBank and changes weekly on the first business day of each week. We also have a fixed rate option on both loans, allowing us to fix rates for any period between one day and the entire commitment period. The annual interest rate on the revolving term loan was 2.54% and 2.60% as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , the interest rate on the seasonal loan was 2.29% and 2.35%, respectively. We were in compliance with all covenants and conditions with CoBank as ofSeptember 30, 2021 . OnApril 20, 2020 , we entered into an unsecured promissory note for$1,215,700 under theU.S. Small Business Administration's Paycheck Protection Program ("PPP Loan"), a loan program created under the Coronavirus Aid, Relief and Economic Security (the "CARES Act"). The PPP Loan, which was scheduled to mature onJuly 20, 2022 and had a 1.0% interest rate, was made throughFirst Bank & Trust, N.A. ,Brookings, South Dakota . The PPP Loan has since been forgiven in full by the SBA, with$1,205,700 being forgiven onNovember 25, 2020 and$10,000 being forgiven inFebruary 2021 .
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