UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2017
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________________ to _______________________
 
Commission File Number: 000-51764

LINCOLNWAY ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
Iowa
20-1118105
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
59511 W. Lincoln Highway, Nevada, Iowa
50201
(Address of principal executive offices)
(Zip Code)
515-232-1010
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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.
þ  Yes     o   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ   Yes     o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
Accelerated filer  o
 
 
 
 
Non-accelerated filer þ
Smaller reporting company  o
 
 
 
 
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 42,049 membership units outstanding at August 11, 2017.



LINCOLNWAY ENERGY, LLC
FORM 10-Q
For the Quarter Ended June 30, 2017

INDEX

 
 
 
Page
 
 
 
 
Part I.
Financial Information
 
 
 
 
 
 
Item 1.
Unaudited Financial Statements
 
 
 
 
 
 
 
a)   Balance Sheets
 
 
b)   Statements of Operations
 
 
c)   Statements of Cash Flows
 
 
d)   Notes to Unaudited Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 
 
 
 
Exhibits Filed With This Report
 
 
Rule 13a-14(a) Certification of President and Chief Executive Officer
E-1
 
Rule 13a-14(a) Certification of Director of Finance
E-2
 
Section 1350 Certification of President and Chief Executive Officer
E-3
 
Section 1350 Certification of Director of Finance
E-4
 
Interactive Data Files (filed electronically herewith)
 




PART I - FINANCIAL INFORMATION

Item 1.    Unaudited Financial Statements.


Lincolnway Energy, LLC
Balance Sheets
 
June 30, 2017
 
September 30, 2016
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
605,454

 
$
613,139

Derivative financial instruments (Note 8 and 9)
251,732

 
497,677

Trade and other accounts receivable (Note 7)
2,907,129

 
3,088,958

Inventories (Note 3)
5,243,537

 
5,726,606

Prepaid expenses and other
420,654

 
388,567

Total current assets
9,428,506

 
10,314,947

 
 
 
 
PROPERTY AND EQUIPMENT
 
 
 
Land and land improvements
7,148,360

 
6,982,287

Buildings and improvements
3,220,876

 
3,158,371

Plant and process equipment
80,554,897

 
78,010,712

Office furniture and equipment
472,216

 
460,486

Construction in progress
4,920,610

 
820,036

 
96,316,959

 
89,431,892

Accumulated depreciation
(57,076,142
)
 
(54,502,768
)
Total property and equipment
39,240,817

 
34,929,124

 
 
 
 
OTHER ASSETS
818,466

 
841,367

 
 
 
 
Total assets
$
49,487,789

 
$
46,085,438


See Notes to Unaudited  Financial Statements.

2


 
Lincolnway Energy, LLC
Balance Sheets (continued)

 
June 30, 2017
 
September 30, 2016
 
(Unaudited)
 
 
LIABILITIES AND MEMBERS' EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$1,812,902
 
$3,166,407
Accounts payable, related party (Note 6)
759,144

 
780,303

Current maturities of long-term debt (Note 5)

 
27,571

Accrued expenses
1,297,633

 
1,074,774

Total current liabilities
3,869,679

 
5,049,055

 
 
 
 
NONCURRENT LIABILITIES
 
 
 
Long-term debt, less current maturities (Note 5)
5,400,000

 
2,500,000

Deferred revenue
481,481

 
592,593

Other
486,387

 
450,000

Total noncurrent liabilities
6,367,868

 
3,542,593

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Notes 7)


 


 
 
 
 
MEMBERS' EQUITY
 
 
 
Member contributions, 42,049 units issued and outstanding
38,990,105

 
38,990,105

Retained earnings (deficit)
260,137

 
(1,496,315
)
Total members' equity
39,250,242

 
37,493,790

 
 
 
 
Total liabilities and members' equity
$
49,487,789

 
$
46,085,438




3


Lincolnway Energy, LLC
Statements of Operations

 
Three Months Ended
 
Nine Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
(Unaudited)
 
(Unaudited)
Revenues (Notes 2 and 7)
$
26,292,741

 
$
27,479,673

 
$
82,171,442

 
$
74,343,914

 
 
 
 
 
 
 
 
Cost of goods sold (Note 7)
26,373,459

 
25,741,335

 
77,923,482

 
75,195,236

 
 
 
 
 
 
 
 
Gross profit (loss)
(80,718
)
 
1,738,338

 
4,247,960

 
(851,322
)
 
 
 
 
 
 
 
 
General and administrative expenses
841,842

 
633,917

 
2,424,853

 
2,109,573

 
 
 
 
 
 
 
 
Operating income (loss)
(922,560
)
 
1,104,421

 
1,823,107

 
(2,960,895
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest income
680

 
668

 
1,662

 
2,981

Interest expense
(38,943
)
 
(26,749
)
 
(68,317
)
 
(53,822
)
 
(38,263
)
 
(26,081
)
 
(66,655
)
 
(50,841
)
 
 
 
 
 
 
 
 
Net income (loss)
$
(960,823
)
 
$
1,078,340

 
$
1,756,452

 
$
(3,011,736
)
 
 
 
 
 
 
 
 
Weighted average units outstanding
42,049

 
42,049

 
42,049

 
42,049

 
 
 
 
 
 
 
 
Net income (loss) per unit - basic and diluted
$
(22.85
)
 
$
25.64

 
$
41.77

 
$
(71.62
)


See Notes to Unaudited Financial Statements.

 





4



Lincolnway Energy, LLC
Nine Months Ended
 
Nine Months Ended
Statements of Cash Flows
June 30, 2017
 
June 30, 2016
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
1,756,452

 
$
(3,011,736
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,891,241

 
4,876,626

Loss on disposal of property and equipment
16,001

 

Gain on equity dividend
(3,614
)
 

Changes in working capital components:
 
 
 
Trade and other accounts receivable
181,829

 
(1,194,732
)
Inventories
482,566

 
25,446

Prepaid expenses and other
4,513

 
(3,354
)
Accounts payable
(1,462,769
)
 
(422,001
)
Accounts payable, related party
(21,159
)
 
(237,549
)
Accrued expenses and deferred revenue
110,763

 
(35,855
)
Derivative financial instruments
245,945

 
(501,443
)
Net cash provided by (used in) operating activities
4,201,768

 
(504,598
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of property and equipment
(7,081,882
)
 
(3,438,710
)
Net cash (used in) investing activities
(7,081,882
)
 
(3,438,710
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Checks in excess of bank balance

 
(1,656,923
)
Proceeds from long-term borrowings
44,500,000

 
4,500,000

Payments on long-term borrowings
(41,627,571
)
 
(54,281
)
Net cash provided by financing activities
2,872,429

 
2,788,796

 
 
 
 
Net (decrease) in cash and cash equivalents
(7,685
)
 
(1,154,512
)
 
 
 
 
CASH AND CASH EQUIVALENTS
 
 
 
Beginning
613,139

 
1,502,498

Ending
$
605,454

 
$
347,986

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 
 
 
INFORMATION, cash paid for interest, including capitalized interest for 2017 of $24,467 and 2016 of none
$
55,657

 
$
41,516

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH
 
 
 
INVESTING AND FINANCING ACTIVITIES
 
 
 
Construction in progress included in accounts payable
$
145,706

 
$
108,428

Construction in progress included in accrued expenses
2,228

 


See Notes to Unaudited  Financial Statements.

5

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
_____________________________________________________________________________________________________



Note 1.    Nature of Business and Significant Accounting Policies

Principal business activity:  Lincolnway Energy, LLC (the "Company"), located in Nevada, Iowa, was formed in May 2004 to build and operate a 50 million gallon annual production dry mill corn-based ethanol plant.  The Company began making sales on May 30, 2006 and became operational during the quarter ended June 30, 2006. The Company is directly influenced by commodity markets and the agricultural and energy industries and, accordingly, its results of operations and financial condition may be significantly affected by cyclical market trends and the regulatory, political and economic conditions in these industries.

Basis of presentation and other information: The balance sheet as of September 30, 2016 was derived from the Company's audited balance sheet as of that date.  The accompanying financial statements as of June 30, 2017 and for the three and nine months ended June 30, 2017 and 2016 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods.  These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the year ended September 30, 2016 contained in the Company's Annual Report  on Form 10-K.  The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Use of estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Although the Company maintains its cash accounts in one bank, the Company believes it is not exposed to any significant credit risk on cash and cash equivalents. At September 30, 2016, the Company closed all repurchase agreements. Prior to September 30, 2016 the Company utilized the repurchase account to invest excess cash in a bank overnight repurchase account.

Trade accounts receivable: Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering customers financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables written off are recorded when received. A receivable is considered past due if any portion of the receivable is outstanding more than 90 days. There was no allowance for doubtful account balance as of June 30, 2017 and September 30, 2016.

Inventories:  Inventories are stated at the lower of weighted average cost or net realizable value using the first-in, first-out method.  In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.

Derivative financial instruments:  The Company periodically enters into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales.  The Company does not typically enter into derivative instruments other than for hedging purposes.  All the derivative contracts are recognized on the balance sheet at their fair market value.  Although the Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes.   Accordingly, any realized or unrealized gain or loss related to corn and natural gas derivatives is recorded in the statement of operations as a component of cost of goods sold.  Any realized or unrealized gain or loss related to ethanol derivative instruments is recorded in the statement of operations as a component of revenue. The Company reports all contracts with the same counter party on a net basis on the balance sheet. Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company’s financial statements, but are subject to a lower of cost or market assessment.   

Revenue recognition:  Revenue from the sale of the Company’s ethanol and distillers grains is recognized at the time title and all risks of ownership transfer to the customers.  This generally occurs upon the loading of the product.  For ethanol, title passes at the time the product crosses the loading flange in either a railcar or truck.  For distillers grain, title passes upon the loading into trucks or railcars.    Shipping and handling costs incurred by the Company for the sale of distillers grain are included in costs of goods sold. Ethanol revenue is reported free on board (FOB) and all shipping and handling costs are incurred by the ethanol marketer. Commissions for the marketing and sale of ethanol and distiller grains are included in costs of goods sold.


6


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Deferred revenue: Deferred revenue represents fees received under a service agreement in advance of services being performed. The related revenue is deferred and recognized as the services are performed over the 10 year agreement.
 
Income taxes:  The Company is organized as a partnership for federal and state income tax purposes and generally does not incur income taxes.  Instead, the Company’s earnings and losses are included in the income tax returns of the members.  Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

Earnings per unit:  Basic and diluted net income (loss) per unit have been computed on the basis of the weighted average number of units outstanding during each period presented.



7


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Note 2.    Revenues

Components of revenues are as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2017
 
June 30, 2016

 
June 30, 2017
 
June 30, 2016

Ethanol, net of hedging gain (loss)
$
21,085,207


$
21,458,476

 
$
66,205,355

 
$
57,752,939

Distillers Grains
3,223,158


4,534,953

 
10,212,515

 
12,726,044

Other
1,984,376


1,486,244

 
5,753,572

 
3,864,931

Total
$
26,292,741

 
$
27,479,673

 
$
82,171,442

 
$
74,343,914


Note 3.    Inventories

Inventories consist of the following:
 
June 30,
2017
 
September 30,
2016
 
 
 
 
Raw materials, including corn, chemicals and supplies
$
4,032,365

 
$
4,585,986

Work in process
748,340

 
668,153

Ethanol and distillers grains
462,832

 
472,467

Total
$
5,243,537

 
$
5,726,606



Note 4.    Revolving Credit Loan and Subsequent Event
 
As of June 30, 2017, the Company had a monitored revolving credit loan, with a bank, for up to $8,500,000. The Company paid interest monthly on the unpaid balance at a variable rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 2.90%. The Company also paid a commitment fee on the average daily unused portion of the loan at the rate of .20% per annum, payable monthly. The loan was secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master loan agreement. There was no outstanding balance on the revolving credit loan as of June 30, 2017 and September 30, 2016. Subsequent to the end of the quarter ended June 30, 2017, the loan expired and the Company did not renew or extend the loan.



8


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


Note 5.    Long-Term Debt and Subsequent Event

As of June 30, 2017, the Company had a revolving term loan, with a bank, available for up to $11,000,000. The Company paid interest on the unpaid balance at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.15%. The Company also paid a commitment fee on the average daily unused portion of the loan at the rate of .50% per annum, payable monthly. There were outstanding borrowings of $5,400,000 and $2,500,000, respectively, on the revolving term loan at June 30, 2017 and September 30, 2016.

Subsequent to the end of the quarter ended June 30, 2017, the Company amended the revolving credit loan. Under the amendment, the revolving credit loan has maximum borrowings of $18,000,000 which will be reduced by $3,600,000 every year starting July 1, 2019 until July 1, 2022 when the loan expires. The Company will pay interest monthly on the unpaid balance at a variable rate (adjusted on a weekly basis) based upon the one-month LIBOR rate plus 3.15%, with a .50% commitment fee. The loan is secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master credit agreement.

Note 6.    Related-Party Transactions

The Company had the following related-party activity with members during the nine months ended June 30, 2017 and 2016:

Corn Commitment:
June 30, 2017
 
 
 
 
 
 
Corn Forward Purchase Commitment
Basis Corn Commitment (Bushels)
Commitment Through
Amount Due
Related Parties
$
4,224,695

875,000

May 2018
$
759,144


Corn Purchased:
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
Nine Months Ended June 30, 2017
Nine Months Ended June 30, 2016
Related Parties
$
12,174,539

$
12,266,960

$
31,826,145

$
35,469,145





Note 7.    Commitments, Major Customers and Subsequent Event

The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the ethanol produced by the Company. Revenues from this entity were $21,096,610 and $66,369,245, respectively, for the three and nine months ended June 30, 2017. Revenues with this entity were $21,555,893 and $57,777,246, respectively, for the three and nine months ended June 30, 2016. Trade accounts receivable of $1,874,151 were due from this entity as of June 30, 2017. As of June 30, 2017, the Company had ethanol unpriced sales commitments with this entity of approximately 15.0 million gallons through September 2017.

The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the distillers grains produced by the Company. Revenues from this entity including both distiller's grains and corn oil were $3,769,434 and $10,918,329,

9

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
_____________________________________________________________________________________________________

respectively, for the three and nine months ended June 30, 2017. Revenues with this entity were $4,772,988 and $13,469,206, respectively, for the three and nine months ended June 30, 2016. The Company sells corn oil to this entity as a third party broker independent of its agreement with the entity relating to distillers grain sales. Trade accounts receivable of $527,475 were due from this entity as of June 30, 2017. The Company had distillers grain sales commitments with this entity of approximately 11,450 tons, for a total sales commitment of approximately $1.1 million.

As of June 30, 2017, the Company had purchase commitments for corn forward contracts with various unrelated parties, at a corn commitment total of approximately $5.0 million. These contracts mature at various dates through June 2018. The Company also had basis contract commitments with unrelated parties to purchase 95,000 bushels of corn. These contracts mature at various dates through August 2017.
  
The Company has an agreement with an unrelated party for the transportation of natural gas to the Company's ethanol plant. Under the agreement, the Company is committed to future monthly usage fees totaling approximately $3.6 million over the 10 year term which commenced in November 2014. On June 30, 2016, the Company assigned an irrevocable standby letter of credit to the counter-party to stand as security for the Company's obligation under the agreement. The letter of credit will be reduced over time as the Company makes payments under the agreement. At June 30, 2017, the remaining commitment was approximately $2.1 million. Subsequent to the quarter ended June 30, 2017, in conjunction with the amended revolving credit loan agreement, the Company amended the letter of credit and extended the maturity to May 2021.

As of June 30, 2017, the Company had purchased commitments for natural gas basis contracts with an unrelated party totaling 614,775 MMBtu's maturing at various dates through March 2018.

On March 10, 2017, the Company signed a contract with an unrelated party for the installation of a grain drying and cooling system. The total commitment is for $4.8 million plus a potential performance bonus of $450,000. The Company made progress payments of $3.6 million under this contract through June 30, 2017. The remaining payments will be made as invoiced throughout the life of the project. The project is estimated to be completed in the first quarter of fiscal year 2018.





10


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


Note 8.    Risk Management

The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices.  These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program.  The Company's risk management program focuses on the unpredictability of commodity markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations.  The Company's specific goal is to protect the Company from large moves in the commodity costs.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures and options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward purchase and sale contracts.  Exchange traded futures and options contracts are designated as non-hedge derivatives and are valued at market price with changes in market price recorded in operating income through cost of goods sold for corn derivatives and through revenue for ethanol derivatives. The Company treats all contracts with the same counterparty on a net basis on the balance sheet.

Derivatives not designated as hedging instruments are as follows:

 
June 30, 2017
 
September 30, 2016
Derivative assets - corn contracts
$
189,025

 
$
1,179,588

Derivative assets - ethanol contracts
960

 
38,325

Derivative liabilities - corn contracts
(167,900
)
 
(118,750
)
Derivative liabilities - ethanol contracts
(2,814
)
 
(165,870
)
Cash held by (due to) broker
232,461

 
(435,616
)
Total
$
251,732

 
$
497,677


























11


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

The effects on operating income from derivative activities is as follows:

 
Three Months Ended
 
Nine Months Ended
 
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017

 
June 30, 2016

 
Gains (losses) in revenues due to derivatives related to ethanol sales:
 
 
 
 
 
 
 
 
Realized (loss)
$
(74,949
)
 
$
(78,288
)
 
$
(288,621
)
 
$
(7,945
)
 
Unrealized gain (loss)
63,546

 
(19,129
)
 
124,731

 
(16,362
)
 
Total effect on revenues
(11,403
)
 
(97,417
)
 
(163,890
)
 
(24,307
)
 
 
 
 
 
 
 
 
 
 
Gains (losses) in cost of goods sold due to derivatives related to corn costs:
 
 
 
 
 
 
 
 
Realized gain (loss)
120,488

 
(291,288
)
 
1,304,969

 
742,156

 
Unrealized gain (loss)
(27,550
)
 
1,281,778

 
(1,039,713
)
 
1,103,059

 
Total effect on corn cost
92,938

 
990,490

 
265,256

 
1,845,215

 
Gains in cost of goods sold due to derivatives related to natural gas costs:
 
 
 
 
 
 
 
 
Realized gain (loss)
2,500

 
(53,840
)
 
5,490

 
70,960

 
Unrealized gain
960

 
48,750

 
960

 
1,880

 
Total effect on natural gas cost
3,460

 
(5,090
)
 
6,450

 
72,840

 
    Total effect on cost of goods sold
96,398

 
985,400

 
271,706

 
1,918,055

 
Total gain due to derivative activities
$
84,995

 
$
887,983

 
$
107,816

 
$
1,893,748

 

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company's financial statements but are subject to a lower of cost or market assessment.



Note 9.    Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according

12


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 -
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 -
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.
 
Derivative financial instruments:  Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs.  For these contracts, the Company obtains 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 CME and NYMEX markets.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. 

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and September 30, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
June 30, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets, derivative financial instruments
 
$
189,985

 
$
189,985

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities, derivative financial instruments
 
$
170,714

 
$
170,714

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets, derivative financial instruments
 
$
1,217,913

 
$
1,217,913

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities, derivative financial instruments
 
$
284,620

 
$
284,620

 
$

 
$




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


General

The following discussion and analysis provides information which management of Lincolnway Energy, LLC (the “Company”, “we,” “us,” and “our”) believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year ended September 30, 2016 ("Fiscal 2016") including the financial statements, accompanying notes and the risk factors contained herein.

Cautionary Statement on Forward-Looking Statements

13



Various discussions and statements in this quarterly report are or contain forward-looking statements that express our current beliefs, forecasts, projections and predictions about future events.  All statements other than statements of historical fact are forward-looking statements, and include statements with respect to financial results and condition; anticipated trends in business, revenues, net income, net profits or net losses; projections concerning ethanol prices, distillers grain prices, corn prices, gas prices, operations, capital needs and cash flow; investment, business, growth, joint venture, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections, predictions and statements of expectation.  Words such as "expects," "anticipates," "estimates," "plans," "may," "will," "contemplates," "forecasts," "strategy," "future," "potential," "predicts," "projects," "prospects," "possible," "continue," "hopes," "intends," "believes," "seeks," "should," "could," "thinks," "objectives" and other similar expressions or variations of those words or those types of words help identify forward-looking statements.

Actual future performance, outcomes and results may differ materially from those suggested by or expressed in forward-looking statements as a result of numerous and varied factors, risks and uncertainties, some that are known and some that are not, and many of which are beyond the control of the Company and its management.  We cannot guarantee our future results, performance or business conditions, and strong or undue reliance must not be placed on any forward-looking statements, which speak only as of the date of this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by the Company include:

Changes in the availability and price of corn and natural gas;
Negative impacts resulting from reductions in, or other modifications to, the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency;
Changes in federal mandates relating to the blending of ethanol with gasoline, including, without limitation reductions to, or the elimination of, the Renewable Fuel Standard volume obligations;
The inability to comply with the covenants and other requirements of our various loan agreements;
Negative impacts that hedging activities may have on our operations or financial condition;
Decreases in the market prices of ethanol and distiller’s grains;
Ethanol supply exceeding demand and corresponding ethanol price reductions;
Changes in the environmental regulations that apply to our plant operations;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
Changes in other federal or state laws and regulations relating to the production and use of ethanol;
Changes and advances in ethanol production technology;
Competition from larger producers as well as completion from alternative fuel additives;
Changes in interest rates and lending conditions of the loan covenants in the Company loan agreements;
Volatile commodity and financial markets;
Disruptions, failures or security breaches relating to our information technology infrastructure; and

14


Negative impacts on distillers grain prices and demand resulting from the Chinese antidumping and countervailing duty investigation.


These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report.   Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.  We undertake no obligation to revise or update any forward-looking statements.  The forward-looking statements contained in this report are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

General Overview

Lincolnway Energy is an Iowa limited liability company that operates a dry mill, natural gas fired ethanol plant located in Nevada, Iowa.  We have been processing corn into fuel grade ethanol and distillers grains at the ethanol plant since May 22, 2006.  Our ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year.

All of the ethanol we produce is marketed by Eco-Energy, LLC (“Eco-Energy”) and all of our distillers grains are marketed by Gavilon Ingredients, LLC (“Gavilon”). Our revenues are derived primarily from the sale of our ethanol and distillers grains.

We also extract corn oil from the syrup generated in the production of ethanol. We market and distribute all of our corn oil directly to end users and third party brokers within the domestic market.

Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. (“Air Products”), has a plant located on the Company’s site that collects the carbon dioxide gas that is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. Air Products also markets and sells the liquid carbon dioxide.

We expect to fund our operations during the next 12 months using cash flow from continuing operations and the revolving term loan that is available to us.

Recent Regulatory Developments


The ethanol industry is dependent on the Federal Renewable Fuels Standard (the “RFS”) , a federal ethanol support and economic incentive which mandates ethanol use, and the RFS continues to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective.   The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

On February 3, 2010, the EPA implemented new regulations governing the RFS which are referred to as “RFS2.” The RFS2 requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels.  Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.


15


Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable obligation. In May 2015, the EPA released proposed rules for the 2014, 2015 and 2016 renewable volume obligations which proposed significant reductions in the total renewable fuel volume requirements from the statutory mandates initially set by Congress. On November 30, 2015, the EPA issued its final rules in response to the public comments received relating to the reductions in its proposed rules (the “Final 2014-2016 Rule”); however, the Final 2014-2016 Rule maintained significant reductions to the statutorily mandated volume requirements.

On May 18, 2016, the EPA released a proposed rule to set 2017 renewable volume requirements under RFS2 which set the annual volume requirement for renewable fuels at 18.8 billion gallons per year, of which 14.8 billion gallons may be met with corn-based ethanol. In November 2016, the EPA issued the final rule for 2017 and increased the total volume requirements from 18.8 billion gallons to 19.28 billion gallons (the "Final 2017 Rule"). Although the volume requirements set forth in the Final 2017 Rule are a significant increase over the 2016 volume requirements and the 2017 requirements originally proposed in May 2016, the 2017 volume requirements are still below the 2017 statutory mandate of 24 billion gallons per year. However, in connection with the issuance of the Final 2017 Rule, the EPA increased the number of gallons which may be met by corn-based ethanol from 14.8 billion gallons to 15 billion gallons. This brings the renewable volume obligations for conventional renewable fuels that can be met by corn-based ethanol back to the levels called for in the statutory mandate for 2017. Although this signals a sign of support of the RFS2 by the EPA and a rejection of arguments by the oil industry relating to the "blend wall," there is no guarantee that for future years the EPA will adhere to the statutory mandate for conventional renewable fuels.

On July 5, 2017 the EPA released a proposed rule to set the 2018 renewable volume requirement which would set the annual volume requirement for renewable fuel at 19.24 billion gallons of renewable fuels (the "Proposed 2018 Rule"). Although the volume requirements set forth in the Proposed 2018 Rule are only slightly down from the 19.28 billion gallons required under the Final 2017 Rule, the proposed volume requirements are significantly below the 26 billion gallons statutory mandate for 2018. However, the Proposed 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons. The Proposed 2018 Rule is open for public comment and we anticipate the EPA will issue a final rule later this year.

The following chart sets forth the statutory volumes (in billion gallons) for 2014, 2015, 2016, 2017 and 2018 and the volumes required under the Final 2014-2016 Rule, the Final 2017 Rule and the Proposed 2018 Rule:

 
 
Total Renewable Fuel Volume Requirement
Portion of Volume Requirement That Can Be Met By Corn-based Ethanol
2014
Statutory
18.15
14.10
Final 2014-2016 Rule
16.28
13.61
2015
Statutory
20.50
15.00
Final 2014-2016 Rule
16.93
14.05
2016
Statutory
22.25
15.00
Final 2014-2016 Rule
18.11
14.50
 
Statutory
24
15.00
2017
Final 2017 Rule
19.28
15.00
2018
Statutory
26
15.00
Proposed 2018 Rule
19.24
15.00

    

The volume requirements mandated in the Final 2014-2016 Rule, the Final 2017 Rule and the Proposed 2018 Rule are still below the volume requirements statutorily mandated by Congress. These reduced volume requirements, combined with the potential elimination of such requirements by the exercise of the EPA waiver authority or by Congress, could decrease the market price and demand for ethanol which will negatively impact the Company’s financial performance.

Beginning in January 2016, various ethanol and agricultural industry groups petitioned a federal appeals court to hear a legal challenge to the Final 2014-2016 Rule. In addition, various representatives of the oil industry have also filed challenges to the Final 2014-2016 Rule. Management anticipates that there will be further legal challenges to the EPA's reduction in the volume requirements, including, the Final 2017 Rule. On July 28, 2017, the Washington D.C. Circuit Court of Appeals vacated the EPA's decision to reduce the total volume requirements for 2016. The EPA must now reconsider the volume requirements set forth in the Final 2014-2016 Rule that were already implemented, although it is not clear what this will mean for the biofuel and oil industries. Although this recent decision is viewed as a victory for the RFS2, if the EPA's decision to reduce the volume requirements under the RFS2 for 2017 and 2018 is allowed to stand, or if the volume requirements are further reduced for subsequent years, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Although the release of the Proposed 2018 Rule and the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS2 and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however, any such reform could adversely affect the demand and price for ethanol and our profitability.



Executive Summary

Highlights for the three months ended June 30, 2017, are as follows:

Total revenues decreased 4.3%, or $1.2 million, compared to the 2016 comparable period.

Total cost of goods sold increased 2.5%, or $.6 million, compared to the 2016 comparable period.
        
Net (loss) was approximately -$.9 million, which was a decrease of $2.0 million when compared to the net income of $1.1 million for the 2016 comparable period.

16




On March 10, 2017, the Company entered into an agreement with a third party for the installation of a grains drying and cooling system. The total commitment is for $4.8 million plus a potential performance bonus of $450,000. The Company made progress payments of $3.6 million under this contract during the nine months ended June 30, 2017. The remaining payments will be made as invoiced throughout the life of the project. The project is estimated to be completed in the first quarter of fiscal year 2018. This new drying and cooling system will aid in our development of a new high quality species specific animal feed which we have branded as PureStream™ protein.  We currently intend to market this new product to the growing swine and poultry markets in Iowa.  When compared to traditional distillers grains, our new PureStream™ protein animal feed products are expected to be higher in crude protein and richer in the essential amino acids that drive growth in swine and poultry.

Shortly after the end of the quarter ended June 30, 2017, the Company entered into a Credit Agreement (the “Credit Agreement”) with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, the “Lender”) dated July 3, 2017 which amended, restated and superseded the Master Loan Agreement between the Company and the Lender dated August 21, 2012, as amended (the “Prior Agreement”). CoBank, ACB (“CoBank”) continues to have a participation interest in the underlying loans issued under the Credit Agreement and continues to serve as administrative agent for the Credit Agreement. The terms of the Credit Agreement will apply to all supplements and promissory notes entered into between the parties pursuant to the Prior Agreement and to any new supplements and promissory notes that may be issued under the Credit Agreement in the future.

In connection with the execution of the Credit Agreement, the Company and Lender entered into an Amended and Restated Revolving Term Promissory Note dated July 3, 2017 (the “Revolving Term Note”) which amended, restated and superseded the Revolving Term Loan Supplement dated June 2, 2016 entered into under the Prior Agreement (the “Prior Revolving Term Supplement”). The Revolving Term Note will expire on July 1, 2022. The Revolving Term Note provides that the aggregate principal amount that Lender may loan to the Company under the Revolving Term Note shall not exceed $18,000,000 which maximum commitment amount will reduce during the term of the Revolving Term Note as follows:

    
Maximum Commitment Amount
From
Up to and Including
$14,400,000
July 1, 2019
June 30, 2020
$10,800,000
July 1, 2020
June 30, 2021
$7,200,000
July 1, 2021
July 1, 2022

Consistent with the terms of the Prior Revolving Term Supplement, outstanding amounts under the Revolving Term Note will continue to accrue interest at a variable interest rate (adjusting on a weekly basis) based upon the one-month LIBOR index rate plus 3.15%. As of July 3, 2017, the outstanding amount payable by the Company under the Revolving Letter of Credit Note was $5,400,000.

In connection with the execution of the Credit Agreement, the Company and Lender also entered into an Amended and Restated Letter of Credit Promissory Note dated July 3, 2017 (“Revolving Letter of Credit Note”) which amended, restated and superseded the Revolving Credit Supplement dated June 2, 2016 entered into under the Prior Agreement (the “Prior Letter of Credit Supplement”). The term of the Revolving Letter of Credit Note expires on May 1, 2021. The Revolving Letter of Credit Note provides that the aggregate principal amount the Lender may loan to the Company under the Revolving Letter of Credit Note shall not exceed $2,134,000. Consistent with the terms of the Prior Letter of Credit Supplement, outstanding amounts under the Revolving Letter of Credit Note will continue to accrue interest at a variable interest rate (adjusting on a weekly basis) based upon the one-month LIBOR index rate plus 3.15%. The Revolving Letter of Credit Note continues to serve as security for the Company’s natural gas transportation agreement. As of July 3, 2017, the outstanding amount payable by the Company under the Revolving Letter of Credit Note was $2,134,000.

The Credit Agreement contains certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings, including in connection with the disbursement of the loan. The financial covenants set forth in the Credit Agreement require the Company to maintain a minimum working capital, as defined in the agreement and a minimum net worth of $35,000,000. The Credit Agreement and all loans made thereunder, including the Revolving Term Note and the Revolving Letter of Credit Note, are secured by first priority liens covering all of the Company’s assets and properties, including the Company's inventory, receivables, plant, real estate and commodity trading accounts.


17


Under the Prior Agreement, the Company had also entered into a Revolving Credit Supplement dated June 2, 2016 which provided for a maximum loan in an aggregate principal amount not to exceed $8,500,000 (the “Revolving Credit Supplement”). The Revolving Credit Supplement had a term that expired on July 1, 2017 (the “Expiration Date”). The Company did not extend, amend or restate the Revolving Credit Supplement under the Credit Agreement and therefore, the Revolving Credit Supplement expired in accordance with its terms on the Expiration Date.



18


Results of Operations

The following table shows the results of operations and the percentages of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three and nine months ended June 30, 2017 and 2016 (dollars in thousands):
 
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
(Unaudited)
 
(Unaudited)
Income Statement Data
 
2017

2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$26,293
 
100.0
 %
 
$27,479
 
100.0
 %
 
$82,171
 
100.0
 %
 
$74,344
 
100.0
 %
Cost of goods sold
 
26,374

 
100.3
 %
 
25,741

 
93.7
 %
 
77,923

 
94.8
 %
 
75,195

 
101.1
 %
Gross profit (loss)
 
(81
)
 
(0.3
)%
 
1,738

 
6.3
 %
 
4,248

 
5.2
 %
 
(851
)
 
(1.1
)%
General and administrative expenses
 
842

 
3.2
 %
 
634

 
2.3
 %
 
2,425

 
3.0
 %
 
2,110

 
2.8
 %
Operating income (loss)
 
(923
)
 
(3.5
)%
 
1,104

 
4.0
 %
 
1,823

 
2.2
 %
 
(2,961
)
 
(3.9
)%
Other income (expense), net
 
(38
)
 
(0.1
)%
 
(26
)
 
(0.1
)%
 
(67
)
 
(0.1
)%
 
(51
)
 
(0.1
)%
Net income (loss)
 
$
(961
)
 
(23.4
)%
 
$
1,078

 
3.9
 %
 
$
1,756

 
2.1
 %
 
$
(3,012
)
 
(4.0
)%


Results of Operations for the Three Months Ended June 30, 2017 as Compared to the Three Months Ended June 30, 2016
 
Revenues. Total revenues decreased by 4.3% for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. Ethanol sales decreased by 2.1% and sales from co-products decreased by 19.7% for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. The change in ethanol revenue was a result of a 6.1% decrease in the price per gallon received which was partially offset by a 4.7% increase in production volume for the three months ended June 30, 2017, when compared to the three months ended June 30, 2016. Ethanol prices decreased due to relatively high inventories in the domestic market coupled with ongoing record production of ethanol. Our sales volume increased due to better production rates with the implementation of new process improvements. Ethanol revenue for the three months ended June 30, 2017 also included a $11,403 net loss for ethanol derivatives, compared to a $97,417 net loss in the same quarter for the prior year.

Sales from co-products decreased by 19.7% for the three months ended June 30, 2017 from the three months ended June 30, 2016. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide. The change in co-product sales was primarily due to a $1.3 million decrease in distillers grain revenue offset by a $.5 million increase in corn oil sales. Distillers grain revenue declined as prices dropped due to lower corn prices and decreased domestic and export market demand principally relating to the decreased demand from China resulting from the antidumping and countervailing investigations and the implementation of significant duties on distillers grains produced in the United States. In January 2017, China announced a final ruling which set the antidumping duties at a range between 42.2% and 53.7%, an increase over the 33.5% duty set forth in its preliminary decision.  China also increased the anti-subsidy duties from a range from 10.0%-10.7% in its preliminary decision to a range from 11.2% to 12.0%. Management believes that distillers grain prices will likely continue to be impacted by lower corn prices during Fiscal 2017 as well as decreased export demand. If corn prices remain low and additional demand for distillers grain cannot be developed either in additional export markets or domestically, distillers grain prices will be adversely impacted which would negatively impact our profitability.

The 50.0% increase in corn oil revenue was due to an increase in production and sales volume after the implementation of several process improvements partially offset by a slight decrease in market prices. Management expects corn oil production throughout Fiscal 2017 to be higher than production in Fiscal 2016 as a result of these process improvements; however, corn oil prices will continue to be impacted by changes in corn and soybean prices, soybean supply and market demand for corn oil which could decrease as a result of the expiration of the biodiesel blenders' tax credit. Corn oil prices may be adversely impacted by the oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil, primiarly for biodiesel production. Despite the nonrenewal of the biodiesel blenders' tax credit for 2017, the higher biodiesel and advanced biofuel mandates under the RFS2 could drive increased biodiesel production which could increase demand for corn oil and positively impact the price of corn oil. However, the Proposed 2018 Rule included significant reductions in the mandates for higher biodiesel and advanced biofuels and if these lower mandates are maintained in the final rule for 2018, biodiesel production may not grow and the demand and price for corn oil could be adversely impacted.

Cost of goods sold. Cost of goods sold increased by 2.5% or approximately $.6 million, for the three months ended June 30, 2017 from the three months ended June 30, 2016. The increase was primarily due to increases in corn costs, natural gas as well as repairs and maintenance offset by a decrease in depreciation. Cost of goods sold includes corn costs, process chemicals, denaturant, natural gas costs, electricity, production labor, repairs and maintenance, and depreciation.

Corn costs, including hedging, increased approximately $.1 million or .8% for the three months ended June 30, 2017 compared to the three months ended June 30, 2016. Decreased costs from a 7.5% decrease in corn prices were offset by higher production and bushels used and lower hedging gains. For the three months ended June 30, 2017 corn costs included a $.1 million net gain for derivatives relating to corn costs, compared to a $1.0 million net gain in the same quarter for the prior year. Corn costs represented 69.5% of cost of goods sold for the three months ended June 30, 2017, compared to 70.6% for the three months ended June 30, 2016.

Natural gas costs increased approximately 35.9% or $.4 million for the three months ended June 30, 2017 from the three months ended June 30, 2016. The increase was due to increased usage from higher production levels and higher natural gas prices.

Repairs and maintenance increased approximately $.4 million or 37.0% for the three months ended June 30, 2017 from the three months ended June 30, 2016. Much of our equipment is now over 10 years old and more repairs are common. A larger focus has also been made on preventative maintenance to reduce downtime and maintain higher production rates.

Depreciation totaled approximately $.8 million a decrease of $.5 million for the three months ended June 30, 2017 from the three months ended June 30, 2016. The decrease in depreciation resulted from the fact that the plant has completed 10 years of operation and a majority of the original assets are now fully depreciated.

General and administrative costs increased by $.2 million or 32.8% for the three months ended June 30, 2017 from the three months ended June 30, 2016. The increase is due to research and development costs and well as relocation fees.

19



Results of Operations for the Nine Months Ended June 30, 2017 as Compared to the Nine Months Ended June 30, 2016

Revenues. Revenues increased by $7.8 million, or 10.5%, for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. There was an increase in ethanol sales of $8.6 million, or 14.9%, for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. The average price per gallon of ethanol sold increased 4.3% for the nine months ended June 30, 2017 compared to the nine months ended June 30, 2016. Ethanol prices increased due to higher gasoline demand as well as increased exports earlier in the year. Ethanol sales volume increased approximately 10.3% for the nine months ended June 30, 2017, when compared to the nine months ended June 30, 2016. The increase was due to better production rates with the optimization of the production process. The nine months ended June 30, 2017 also included a $163,890 net loss for derivatives related to ethanol sales, compared to a $24,307 net loss in the prior period.

Sales from co-products decreased by 3.8%, or $.6 million, for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide. Decreases in dried distillers grains revenue offset by an increase in corn oil revenue resulted in the co-product decrease in revenues for the nine months ended June 30, 2017 compared to the nine months ended June 30, 2016.

Distillers grain revenue decreased $2.5 million primarily due to the reduction in market prices resulting from lower corn prices and decreased export demand, principally resulting from the China anti-dumping and countervailing duties during the nine months ended June 30, 2017 from the nine months ended June 30, 2016.

Corn oil revenue increased $1.8 million due to an increase in sales volume after the implementation of several process improvements as well as 7.7% increase in market price resulting from increased demand from the biodiesel industry prior to the expiration of biodiesel blenders' tax credit and increased demand from the corn oil feed market.

Cost of goods sold. Cost of goods sold increased by 3.6% or $2.7 million for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. The increase was primarily due to increases in corn costs, natural gas as well as repairs and maintenance offset by a decrease in depreciation. Increases in other categories were fairly small and considered immaterial. Cost of goods sold includes corn costs, process chemicals, denaturant, natural gas, electricity, production labor, repairs and maintenance, and depreciation.

Corn costs, including hedging, increased by $1.7 million, or 3.3%, for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. Increased costs from higher production and bushels used was offset by lower hedging gains. For the nine months ended June 30, 2017, corn costs included a $.3 million net gain for derivatives relating to future contracts, compared to a $1.8 million gain for the nine months ended June 30, 2016. Corn costs represented 69.6% of cost of goods sold for the nine months ended June 30, 2017, compared to 69.8% for the nine month June 30, 2016.

Natural gas costs increased approximately 19.6% or $.8 million for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. The increase was due to higher production levels and increased natural gas prices.

Repairs and maintenance increased approximately $1.1 million or 64.1% for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. Much of our equipment is now over 10 years old and more repairs are common. A larger focus has also been made on preventative maintenance to reduce downtime and maintain higher production rates.

Depreciation totaled approximately $2.4 million, a decrease of $2.0 million for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. The decrease in depreciation resulted from the fact that the plant has completed 10 years of operation and a majority of the original assets are now fully depreciated.

General and administrative costs increased by $.3 million or 14.9% for the nine months ended June 30, 2017 from the nine months ended June 30, 2016. The increase is due to research and development costs and well as relocation fees.


20



Industry Factors that May Affect Future Operating Results

During the three months ended June 30, 2017, the ethanol industry experienced generally declining ethanol margins as a result of a combination of factors including the following:

Corn prices were choppy but generally stable during the three months ended June 30, 2017. The price per bushel ranged narrowly for most of the quarter as the market absorbed the impact of much higher South American corn production and the resulting fall in U.S. export demand, a moist early U.S. growing season and a significant reduction in U.S. corn plantings. The corn basis declined to record lows during the quarter ended June 30, 2017.

The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the "USDA") forecast 2017 and 2018 ending corn stocks of over 2.3 billion bushels, suggesting stable to lower corn prices. In response to these estimates, corn prices declined.

Gasoline demand decreased to below 2016 levels despite low gasoline prices and a firm economy which led to decreased demand for ethanol and negatively impacted the market price for ethanol. With gasoline production down more than 2% during the three months ended June 30, 2017, ethanol inventories stagnated at high levels during the three months ended June 30, 2017. The relatively high stocks of ethanol coupled with ongoing record production of ethanol have continually weighed on margins in 2017.

Robust export sales of U.S. ethanol to a variety of foreign consumers, especially Brazil, resulted from stable petroleum prices and comparatively high Brazilian ethanol prices. But the attractiveness of U.S. ethanol in world markets appeared to be waning near the end of the quarter as the Brazilian currency collapsed and Brazilian ethanol imports began to enter the U.S. market for delivery in the third quarter of calendar year 2017.

Global ethanol demand as reported by the U.S. Department of Energy’s Energy Information Administration (the “EIA”) continues to increase with increased exports to various foreign markets, including Brazil, Canada and Mexico, in response to higher blending mandates and demand within the foreign countries. According to the EIA, through the first four months of 2017, U.S. gross ethanol exports were 40% higher than exports during the same period in 2016 and the EIA forecasts that U.S. ethanol net exports in 2017 will likely surpass the previous record set in 2011. Brazil represents the most significant importer of U.S. ethanol; however, the recovery in Brazilian sugar production and weakness in their currency has resulted in more aggressive Brazilian pricing into global markets and a decline in U.S. market share of ethanol imports to Brazil. If this continues, ethanol exports to Brazil may decrease which could adversely impact the market price of ethanol unless domestic demand increases or foreign markets are developed.

Ethanol is now trading even to or at a modest premium to gasoline which has eroded export demand somewhat, particularly among price opportunistic buyers.

The EPA’s maintenance in the Proposed 2018 Rule of the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons signals continued support by the administration of the RFS for ethanol and could encourage investment in infrastructure to accommodate higher ethanol blends which would lead to increased demand for ethanol.

Although the Brazilian Agricultural Minister withdrew his most recent request to the Brazil trade counsel that Brazil impose a tariff on ethanol imports from the U.S., in response to pressure from the Brazilian sugarcane industry, Brazil continues to consider the imposition of a significant tariff on U.S. ethanol imports. Industry groups including, Growth Energy, Renewable Fuels Association and the U.S. Grains Council are maintaining lobbying efforts in Brazil to avert the imposition of this type of tariff.

We use futures and options strategies on the Chicago Mercantile Exchange to hedge some of the risk involved with changing corn prices, as well as the purchase and physical delivery of corn contracts from area farmers and commercial suppliers. We also incorporate risk management strategies to cover some of the risk involved with changing ethanol and distillers market prices. We continue to monitor the markets and attempt to provide for an adequate supply of corn and protection against rapid price increases for corn and price decreases for ethanol and distillers grains.

Management currently believes that our margins will improve modestly during the remainder of Fiscal 2017 but continued low crude oil and unleaded gasoline prices or further decreases in the price of such commodities could have a moderately negative impact on the market price of ethanol which could adversely impact our profitability. This negative impact could worsen in the event that domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline. The ethanol industry is currently experiencing growth in production

21


capacity principally through plant optimization and expansion as opposed to new construction. The EIA has reported that during the first half of calendar 2017, increasing ethanol production rates have outpaced domestic E10 gasoline demand and export growth, leading to elevated ethanol inventory levels at a time when they are typically falling to meet peak driving demand. According to the EIA, as of July 14, 2017, weekly ending stocks of ethanol were 5% higher than the same time last year and 13% higher than the previous five-year average. Although ethanol exports have provided some support for ethanol prices with the increase in export demand resulting from the lower domestic ethanol prices, if ethanol prices increase, this could negatively impact export demand. In addition, ethanol exports to China are likely to decrease as a result of the restoration of a 30% tariff on ethanol imports from the U.S. During 2016, the tariff was reduced to 5% which resulted in increased exports of U.S. ethanol to China. The recent reductions in the renewable volume obligations by the EPA also may result in an oversupply of renewable fuel credits which could decrease demand for corn-based ethanol despite the increase back to statutory requirements set forth in the Final 2017 Rule. Unless additional demand can be found in foreign or domestic markets, a continued level of current ethanol stocks or any increase in domestic ethanol supply could further adversely impact the price of ethanol.

Our margins have been, and could continue to be, negatively impacted due to the lower prices received for our distillers grains as a result of increased world corn and wheat supplies. The increased supplies of corn and wheat results in lower feed grain prices which adversely impacts the price of corn and demand for distillers grains which are an animal feed substitute for corn. Demand and prices for distillers grains may experience further declines in the near term due to potential decreased exports to China as a result of the Chinese imposition of antidumping and countervailing duties on distillers grains produced in the U.S. China has historically been one of the largest importers of domestically produced distillers grains. At this time, management believes that the impact of reduced demand from China has been fully discounted in the market and that while not a positive to distillers grain pricing, this development is now a neutral for margins and distillers grain prices.

The Proposed 2018 Rule reduces the renewable volume requirements for higher biodiesel and advanced biofuels from the statutory mandate which, if such reductions are maintained in the final rule, could negatively impact the demand for corn oil. On the other hand, world oilseed supplies are projected to be stable to slightly higher. Most important is the uncertainty about what the United States may do to affect international biodiesel flows. Large amounts of biodiesel regularly flow into the U.S. from Argentina and the Far East. Were the U.S. to move through some type of trade action to significantly reduce those flows, the impact on U.S. biodiesel production, biodiesel production margins and corn oil prices would likely be substantial.




Credit and Counterparty Risks

Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities.  We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations.  The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts).   Part of our risk management strategy requires that we actively monitor credit and counterparty risk through credit analysis.


Liquidity and Capital Resources

Based on the financial projections prepared by management, we anticipate that we will have sufficient cash from existing cash, our current credit facilities, and cash from operations to continue to operate the ethanol plant for the next 12 months. Management believes that an abundant corn supply will cause corn prices to remain near current levels and an anticipated increase in the supply of ethanol will cause ethanol prices to stay near current levels. Working capital was approximately $5.6 million as of June 30, 2017 and is projected to be sufficient with current cash balances and credit facilities available for the remainder of the fiscal year. Management continues to monitor our liquidity position on a weekly basis.
Our financial position and liquidity are, and will continue to be, influenced by a variety of factors, including, without limitation:

our ability to generate cash flows from operations;

the level of our outstanding indebtedness and the interest we are obligated to pay;


22


our capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies; and

our margin maintenance requirements on all commodity trading accounts.

The following table summarizes our sources and uses of cash and cash equivalents from the unaudited statement of cash flows for the periods presented:
 
 
 
Nine Months Ended June 30,
 
 
(Unaudited)
Cash Flow Data:
 
2017
 
2016
Net cash provided by (used in) operating activities
 
$
4,201,768

 
$
(504,598
)
Net cash (used in) investing activities
 
(7,081,882
)
 
(3,438,710
)
Net cash provided by financing activities
 
2,872,429

 
2,788,796

Net (decrease) in cash and cash equivalents
 
$
(7,685
)
 
$
(1,154,512
)


Cash Flow from Operations

For the nine months ended June 30, 2017, net cash provided by operating activities increased by $4.7 million when compared to net cash used in operating activities for the nine months ended June 30, 2016. The increase in cash provided by operating activities is due to net income and the timing in working capital components.

Cash Flow Used in Investing Activities

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant. Net cash used in investing activities increased by $3.6 million for the nine months ended June 30, 2017 compared to the nine months ended June 30 2016. The increase is due to initial progress payments on the installation of a grains drying and cooling system. The project is estimated to be completed in the first quarter of fiscal year 2018.

Cash Flow Used in Financing Activities

Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash provided by financing activities stayed relatively the same, increasing only $83,633 for the nine months ended June 30, 2017, compared to the nine months ended June 30, 2016.
Critical Accounting Estimates and Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.

Revenue Recognition

Revenue from the sale of our ethanol and distillers grains is recognized at the time title and all risks of ownership transfer to the marketing company. This generally occurs upon the loading of the product. For ethanol, title passes from the Company at the time the product crosses the loading flange into either a railcar or truck. For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that the railcars have been loaded and are available for billing. For distillers grains, title passes upon the loading of distillers grains into trucks. Shipping and handling costs incurred by us for the sale of ethanol and distillers grain are included in costs of goods sold.

All of our ethanol production is sold to Eco-Energy. The purchase price payable to us under our agreement with Eco-Energy is the purchase price set forth in the applicable purchase order, less a marketing fee payable to Eco-Energy.

We have an agreement with Gavilon to purchase all of the distillers grains produced at our ethanol plant. The purchase price payable to us is the corresponding price being paid to Gavilon for the distillers grains, less certain logistics costs and a service fee.

Derivative Instruments

We enter into derivative contracts to hedge our exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales. We do not typically enter into derivative instruments other than for hedging purposes. All future derivative contracts are recognized on the June 30, 2017 balance sheet at their fair value. Although we believe our derivative positions are economic hedges, none have been designated as a hedge for accounting purposes. Accordingly, any realized or unrealized gain or loss related to these derivative instruments is recorded in the statement of operations as a component of cost of goods sold for corn contracts and as a component of revenue for ethanol contracts.

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in our financial statements but are subject to a lower of cost or market assessment.

Inventories and Lower of Cost or Market

Inventories are stated at the lower of weighted average cost or net realizable value using the first-in, first-out method.  In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

23


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

In addition to the various risks inherent in the ethanol industry and our operations, we are exposed to various market risks.  The primary market risks arise as a result of possible changes in certain commodity prices and changes in interest rates.

Commodity Price Risk

We are exposed to market risk with respect to the price of ethanol, which is our principal product, and the price and availability of corn and natural gas, which are the principal commodities we use to produce ethanol.  Our other primary product is distillers grains, and we are also subject to market risk with respect to the price for distillers grains.  The prices for ethanol, distillers grains, corn and natural gas are volatile, and we may experience market conditions where the prices we receive for our ethanol and distillers grains are declining, but the price we pay for our corn, natural gas and other inputs is increasing. Our results will therefore vary substantially over time, and include the possibility of losses, which could be substantial.

In general, rising ethanol and distillers grains prices result in higher profit margins, and therefore represent favorable market conditions.  We are, however, subject to various material risks related to our production of ethanol and distillers grains and the price for ethanol and distillers grains.  For example, ethanol and distillers grains prices are influenced by various factors beyond the control of our management, including the supply and demand for gasoline, the availability of substitutes, international trade and the effects of domestic and foreign laws, regulations and government policies.

In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions.  We will generally not be able to pass along increased corn costs to our ethanol customers.  We are subject to various material risks related to the availability and price of corn, many of which are beyond our control.  For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture, and local, regional, national and international trade, demand and supply. If our corn costs were to increase $.10 per bushel from one year to the next, the impact on costs of goods sold would be approximately $2.3 million for the year, assuming corn use of 23 million bushels during the year.

During the quarter ended June 30, 2017, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $3.56 per bushel for July 2017 delivery to a high of $3.92 per bushel for July 2017 delivery.  The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended June 30, 2016 ranged from a low of $3.51 per bushel for July 2016 delivery to a high of $4.39 per bushel for July 2016 delivery.

The average price we received for our ethanol during the three months ended June 30, 2017 was $1.38 per gallon, a reduction as compared to $1.47 per gallon during the three months ended June 30, 2016.

During the quarter ended June 30, 2017, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.45 per gallon for July 2017 delivery to a high of $1.62 per gallon for July 2017 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended June 30, 2016 ranged from a low of $1.45 per gallon for July 2016 delivery to a high of $1.74 per gallon for July 2016 delivery.

We may from time to time take various cash, futures, options or other positions in an attempt to minimize or reduce our price risks related to corn and ethanol. The extent to which we enter into such positions may vary substantially from time to time and based on various factors, including seasonal factors and our views as to future market trends. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn and ethanol markets are highly volatile and are influenced by many factors and occurrences that are beyond our control. We could incur substantial losses on our cash, futures, options or other positions.

Although we intend our futures and option positions to accomplish an economic hedge against our future purchases of corn or futures sales of ethanol, we have chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged.  To avoid the higher costs associated with hedge accounting, we are instead using fair value accounting for the positions. Generally that means as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in our costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions.  The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged.  For example, our net gain on corn derivative financial instruments that was included in our cost of goods sold for the three months ended June 30, 2017 was $92,938, as opposed to a net gain of $990,490 for the three months ended June 30, 2016.


24


We attempt to offset or hedge some of the risk involved with changing corn prices through the trading of futures and options on the Chicago Mercantile Exchange, as well as through purchase and physical delivery contracts from suppliers. We continue to stay at a near neutral corn position due to an uptrend in ethanol sales margins. We continue to monitor and attempt to ensure adequate corn supply and protection against rapid price increases. As noted above those activities are, however, subject to various material risks, including that price movements in the cash corn and corn futures markets are highly volatile and are influenced by many factors and occurrences which are beyond our control.

Another important raw material for our production of ethanol is natural gas. Our cost per MMBTU is subject to various factors that are outside of the control of our management. The factors include changes in weather, increase in transportation costs and the overall economic activity.  Our natural gas costs will therefore vary, and the variations could be material.  Our natural gas costs for the three months ended June 30, 2017 represented approximately 5.7% of our total cost of goods sold for that period.



Interest Rate Risk

We have various outstanding loan agreements that expose us to market risk related to changes in the interest rate imposed under the loan agreement and promissory notes.

We have entered into loan agreements, including an irrevocable letter of credit, with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, "Farm Credit"). The interest rate on the Farm Credit monitored revolving credit loan is a variable interest rate loan based on the one month LIBOR index rate plus 2.90%, adjusted weekly. The interest rate on the Farm Credit revolving term loan and irrevocable letter of credit is a variable interest rate based on the one-month LIBOR index plus 3.15%. We do not anticipate any significant increase in interest rates during Fiscal 2017.




25


Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our  management,  under the supervision and with  the  participation  of  our President and Chief Executive Officer and our Director of Finance (our principal financial officer), have evaluated the  effectiveness of our disclosure  controls  and  procedures  (as defined in Rule  13a-15(e) under the Securities  Exchange  Act of 1934) as of the end of the  period covered by this quarterly report.  Based on that evaluation,  our President and Chief Executive Officer and our Director of Finance have  concluded  that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures have been effective to provide  reasonable  assurance that the information required to be disclosed in the reports our  files or submits  under the Securities Exchange  Act of 1934 is (i)  recorded,  processed, summarized and reported within the time  periods  specified  in the  Securities  and  Exchange Commission's   rules  and  forms,  and  (ii)  accumulated  and  communicated  to management,  including our  principal executive and principal financial officers or persons performing such functions,  as appropriate,  to allow timely decisions regarding  disclosure.  We believe that a control system, no matter how well designed and operated, cannot provide absolute  assurance that the  objectives of the control system are met, and no evaluation of controls can provide  absolute  assurance that all control issues and instances of fraud,  if any, within a company have been detected.
 
No Changes in Internal Control Over Financial Reporting
 
No change in our internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings.

From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. None of these matters, either individually or in the aggregate, currently is material to the Company except as reported in the Company's annual report on Form 10-K for the year ended September 30, 2016 and there were no material developments to such matters.

26


Item 1A. Risk Factors.


There have been no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Additional risks and uncertainties, including risk and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and results of operations.


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


Item 3.    Defaults Upon Senior Securities.

None.

Item 4.     Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

None.


27


Item 6.    Exhibits.

The following exhibits are filed as part of this quarterly report.


Description of Exhibit
 
 
Page
 
 
 
 
10
10.1
Credit Agreement dated July 3, 2017 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA.
*
 
10.2
Amended and Restated Revolving Term Promissory Note dated July 3, 2017 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA
*
 
10.3
Amended and Restated Letter of Credit Promissory Note dated July 3, 2017 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA
*
 
 
 
 
31
 
Rule 13a-14(a)/15d-14(a) Certifications
 
 
 
 
 
 
31.1
 
Rule 13a-14(a) Certification of President and Chief Executive Officer
E-1
 
31.2
 
Rule 13a-14(a) Certification of Director of Finance
E-2
 
 
 
 
32
 
Section 1350 Certifications
 
 
 
 
 
 
32.1
 
Section 1350 Certification of President and Chief Executive Officer †
E-3
 
32.2
 
Section 1350 Certification of Director of Finance†
E-4
 
 
 
 
101
 
Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T)
 
 
 
 
 
* Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Committee on July 18, 2017.
† This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.


28


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
LINCOLNWAY ENERGY, LLC
 
 
 
August 11, 2017
By:
/s/   Eric Hakmiller
 
Name:    Eric Hakmiller
 
Title:     President and Chief Executive Officer
 
 
 
 
 
August 11, 2017
By:
/s/   Kristine Strum
 
Name:    Kristine Strum
 
Title:      Director of Finance (Principal Financial Officer)



29


EXHIBIT INDEX

Exhibits Filed With Form 10-Q
of Lincolnway Energy, LLC
For the Quarter Ended June 30, 2017


Description of Exhibit
 
 
Page
 
 
 
 
10
10.1
Credit Agreement dated July 3, 2017 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA.
*
 
10.2
Amended and Restated Revolving Term Promissory Note dated July 3, 2017 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA
*
 
10.3
Amended and Restated Letter of Credit Promissory Note dated July 3, 2017 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA
*
 
 
 
 
31
 
Rule 13a-14(a)/15d-14(a) Certifications
 
 
 
 
 
 
31.1
 
Rule 13a-14(a) Certification of President and Chief Executive Officer
E-1
 
31.2
 
Rule 13a-14(a) Certification of Director of Finance
E-2
 
 
 
 
32
 
Section 1350 Certifications
 
 
 
 
 
 
32.1
 
Section 1350 Certification of President and Chief Executive Officer †
E-3
 
32.2
 
Section 1350 Certification of Director of Finance†
E-4
 
 
 
 
101
 
Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T)
 
 
 
 
 
* Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Committee on July 18, 2017.
† This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.


30