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EX-32.2 - CERTIFICATION - Cardinal Ethanol LLCcopyof322certification33116.htm
EX-32.1 - CERTIFICATION - Cardinal Ethanol LLCcopyof321certification33116.htm
EX-31.2 - CERTIFICATION - Cardinal Ethanol LLCcopyof312certification33116.htm
EX-31.1 - CERTIFICATION - Cardinal Ethanol LLCcopyof311certification33116.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the quarterly period ended June 30, 2016.
 
 
 
OR
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
For the transition period from               to               .
 
 
COMMISSION FILE NUMBER 000-53036
 
CARDINAL ETHANOL, LLC
(Exact name of registrant as specified in its charter)
 
Indiana
 
20-2327916
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1554 N. County Road 600 E., Union City, IN 47390
(Address of principal executive offices)
 
(765) 964-3137
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x
Smaller Reporting Company o

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

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

As of August 8, 2016, there were 14,606 membership units outstanding.

1


INDEX



2


PART I        FINANCIAL INFORMATION

Item 1. Financial Statements

CARDINAL ETHANOL, LLC
Condensed Balance Sheets
 ASSETS
June 30, 2016
 
September 30, 2015

 (Unaudited)
 

Current Assets

 

Cash
$
9,416,718

 
$
20,827,614

Restricted cash
161,030

 
1,211,476

Trade accounts receivable
10,360,922

 
11,962,357

Miscellaneous receivables
265,060

 
384,705

Inventories
22,443,236

 
13,754,452

Prepaid and other current assets
397,519

 
506,197

Commodity derivative instruments
2,370,594

 

Total current assets
45,415,079

 
48,646,801



 

Property, plant, and equipment, net
106,535,780

 
107,998,425



 

Other Assets

 

Investment
938,251

 
823,494

Total other assets
938,251

 
823,494



 

Total Assets
$
152,889,110

 
$
157,468,720

LIABILITIES AND MEMBERS' EQUITY
 
 
 

 
 

Current Liabilities

 

Accounts payable
$
3,270,168

 
$
3,616,302

Accounts payable-corn
5,227,312

 
6,757,174

Accrued expenses
801,786

 
1,555,286

Commodity derivative instruments
225,025

 
68,479

Current maturities of long-term debt
1,330,417

 

Total current liabilities
10,854,708

 
11,997,241



 

Long-Term Debt
10,051,783

 
4,865,236



 

Commitments and Contingencies

 



 

Members’ Equity

 

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

 
70,912,213

Retained earnings
61,070,406

 
69,694,030

Total members' equity
131,982,619

 
140,606,243



 

Total Liabilities and Members’ Equity
$
152,889,110

 
$
157,468,720


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

3




CARDINAL ETHANOL, LLC
Condensed Statements of Operations (Unaudited)


Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended

June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
Revenues
$
53,951,547

 
$
53,978,969

 
$
163,086,506

 
$
179,781,777



 

 

 

Cost of Goods Sold
49,487,044

 
47,719,837

 
152,481,876

 
146,855,644



 

 

 

Gross Profit
4,464,503

 
6,259,132

 
10,604,630

 
32,926,133



 

 

 

Operating Expenses
1,226,744

 
1,139,587

 
4,082,555

 
3,641,614



 

 

 

Operating Income
3,237,759

 
5,119,545

 
6,522,075

 
29,284,519



 

 

 

Other Income (Expense)

 

 

 

Interest income

 

 
250

 

Interest expense

 

 
(143,567
)
 

Miscellaneous income
16,490

 
3,021

 
41,799

 
29,702

Total
16,490

 
3,021

 
(101,518
)
 
29,702



 

 

 

Net Income
$
3,254,249

 
$
5,122,566

 
$
6,420,557

 
$
29,314,221

 
 
 
 
 
 
 
 
Weight Average Units Outstanding - basic and diluted
14,606

 
14,606

 
14,606

 
14,606



 

 
 
 
 
Net Income Per Unit - basic and diluted
$
223

 
$
351

 
$
440

 
$
2,007

 
 
 
 
 
 
 
 
Distributions Per Unit
$
230

 
$
600

 
$
1,030

 
$
3,300

 
 
 
 
 
 
 
 


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





4



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

Nine Months Ended
 
Nine Months Ended

June 30, 2016
 
June 30, 2015
 

 

Cash Flows from Operating Activities
 
 
 
Net income
$
6,420,557

 
$
29,314,221

Adjustments to reconcile net income to net cash provided by operations:

 

Depreciation
6,849,622

 
6,704,141

Change in fair value of commodity derivative instruments
(4,020,591
)
 
2,174,945

Gain on sale of equipment

 
(11,827
)
Non-cash dividend income
(114,757
)
 
(104,941
)
Change in operating assets and liabilities:

 

Restricted cash
1,050,446

 
(858,617
)
Trade accounts receivables
1,601,435

 
9,787,628

Miscellaneous receivable
119,645

 
(76,779
)
Inventories
(8,688,784
)
 
(8,274,855
)
Prepaid and other current assets
108,678

 
(51,150
)
Commodity derivative instruments
1,806,543

 
(888,430
)
Accounts payable
(346,134
)
 
1,529,718

Accounts payable-corn
(1,529,862
)
 
679,135

Accrued expenses
(572,836
)
 
(3,381,048
)
Net cash provided by operating activities
2,683,962

 
36,542,141



 

Cash Flows from Investing Activities

 

Capital expenditures
(75,629
)
 
(27,686
)
Payments for construction in progress
(5,492,013
)
 
(5,980,542
)
Proceeds from sale of equipment

 
35,000

   Net cash used for investing activities
(5,567,642
)
 
(5,973,228
)


 

Cash Flows from Financing Activities

 

Distributions paid
(15,044,180
)
 
(48,199,797
)
Proceeds from long-term debt
6,516,964

 

Net cash used for financing activities
(8,527,216
)
 
(48,199,797
)


 

Net Decrease in Cash
(11,410,896
)
 
(17,630,884
)


 

Cash – Beginning of Period
20,827,614

 
27,731,976



 

Cash – End of Period
$
9,416,718

 
$
10,101,092


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



5



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

Nine Months Ended
 
Nine Months Ended

June 30, 2016
 
June 30, 2015
 
 
 
 
Supplemental Cash Flow Information

 

Interest paid
$
143,567

 
$



 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

     Construction in process included in accrued expenses and accounts payable
$
649,776

 
$
1,952,129


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


6


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended September 30, 2015, contained in the Company's annual report on Form 10-K.

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

Nature of Business

Cardinal Ethanol, LLC, (the “Company”) is an Indiana limited liability company currently producing fuel-grade ethanol, distillers grains, corn oil and carbon dioxide near Union City, Indiana and sells these products throughout the continental United States. The Company's plant has an approximate annual production capacity between 100 and 120 million gallons.

Accounting Estimates

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

Restricted Cash

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

Trade Accounts Receivable

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

Inventories

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


7


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


Property, Plant and Equipment

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

Long-Lived Assets

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

Investments

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

Revenue Recognition

The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. The Company believes that there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue. The Company's products are sold Free on Board (FOB) shipping point.

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees, commissions and freight due to the marketers are deducted from the gross sales price at the time incurred. Revenue is recorded net of these commissions and freight as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products.

Net Income per Unit

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

2. CONCENTRATIONS

Two major customers accounted for approximately 93% of the outstanding accounts receivable balance at June 30, 2016 and at September 30, 2015. These same two customers accounted for approximately 96% of revenue for the three and nine month periods ended June 30, 2016 and June 30, 2015.


8


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


3.  INVENTORIES

Inventories consist of the following as of:

 
June 30, 2016 (Unaudited)
 
September 30, 2015
 Raw materials
$
14,360,927

 
$
5,166,402

 Work in progress
1,125,746

 
1,320,961

 Finished goods
4,599,189

 
5,058,449

 Spare parts
2,357,374

 
2,208,640

 Total
$
22,443,236

 
$
13,754,452


In the ordinary course of business, the Company enters into forward purchase contracts for its commodity purchases and sales. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. At June 30, 2016, the Company had forward corn purchase contracts at various fixed prices for various delivery periods through October 2017 for approximately 6.2% of expected production needs for the next sixteen months. Approximately 17.0% of the forward corn purchases were with related parties. Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts using a methodology similar to that used in the lower of cost or net realizable value evaluation with respect to inventory valuation, and has determined that no impairment existed at June 30, 2016 or September 30, 2015. At June 30, 2016, the Company had forward dried distiller grains sales contracts for approximately 32.0% of expected production for the next three months at various fixed prices for various delivery periods through September 2016. At June 30, 2016, the Company had forward corn oil contracts for approximately 61.9% of expected production for the next two months at various prices for various delivery periods through August 2016. Also, at June 30, 2016, the Company had forward natural gas contracts for approximately 38.8% of expected purchases for the next twenty-one months at various prices for various delivery periods through March 2018.

4. DERIVATIVE INSTRUMENTS

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

Commodity Contracts

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

At June 30, 2016, the Company had a net short (selling) position of 6,024,250 bushels of corn under derivative contracts used to hedge its forward corn contracts, corn inventory and ethanol sales. The Company had a net short (selling) position of 3,080,000 bushels of corn under derivative contracts as of September 30, 2015. These corn derivatives are traded on the Chicago Board of Trade and are forecasted to settle for various delivery periods through December 2017, as of June 30, 2016. At June 30, 2016, the Company had a net short (selling) position of 9,450,000 gallons of ethanol under derivative contracts used to hedge its future ethanol sales. The Company had a net long (buying) position of 1,260,000 gallons of ethanol under derivative contracts as of September 30, 2015. These ethanol derivatives are traded on the New York Mercantile Exchange and are forecasted to settle for various delivery periods through September 2016, as of June 30, 2016. At June 30, 2016, the Company had a net long (buying) position of 860,000 MMBTUs of natural gas under derivative contracts used to hedge its forward natural gas purchases. These

9


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


natural gas derivatives are traded on the New York Mercantile Exchange. These derivatives have not been designated as an effective hedge for accounting purposes.

The following table provides balance sheet details regarding the Company's derivative financial instruments at June 30, 2016:

Instrument
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 
 
 
Ethanol derivative contracts
Commodity Derivative Instruments - Current
 
$

 
$
225,025

Corn derivative contracts
Commodity Derivative Instruments - Current
 
$
2,282,763

 
$

Natural gas derivative contracts
Commodity Derivative Instruments - Current
 
$
87,831

 
$


As of June 30, 2016 the Company had approximately $161,000 cash collateral (restricted cash) related to ethanol, corn and natural gas derivatives.

The following table provides balance sheet details regarding the Company's derivative financial instruments at September 30, 2015:
Instrument
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 
 
 
Ethanol derivative contracts
Commodity Derivative Instruments - Current
 
$

 
$
58,338

Corn derivative contracts
Commodity Derivative Instruments - Current
 
$

 
$
10,141


As of September 30, 2015 the Company had approximately $1,211,000 of cash collateral (restricted cash) related to ethanol and corn derivatives held by three brokers.

The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the three months ended June 30, 2016:

Instrument
Statement of Operations Location
Amount
Corn Derivative Contracts
Cost of Goods Sold
$
1,165,323

Ethanol Derivative Contracts
Revenues
(321,335
)
Natural Gas Derivative Contracts
Cost of Goods Sold
210,738

Totals
 
$
1,054,726


The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the three months ended June 30, 2015:

Instrument
Statement of Operations Location
Amount
Corn Derivative Contracts
Cost of Goods Sold
$
(781,964
)
Ethanol Derivative Contracts
Revenues
(1,519,061
)
Natural Gas Derivative Contracts
Cost of Goods Sold
(158,611
)
Totals
 
$
(2,459,636
)


The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the nine months ended June 30, 2016:


10


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


Instrument
Statement of Operations Location
Amount
Corn Derivative Contracts
Cost of Goods Sold
$
4,172,024

Ethanol Derivative Contracts
Revenues
(99,434
)
Natural Gas Derivative Contracts
Cost of Goods Sold
(51,999
)
Totals
 
$
4,020,591


The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the nine months ended June 30, 2015:

Instrument
Statement of Operations Location
Amount
Corn Derivative Contracts
Cost of Goods Sold
$
(820,659
)
Ethanol Derivative Contracts
Revenues
(1,285,652
)
Natural Gas Derivative Contracts
Cost of Goods Sold
(68,634
)
Totals
 
$
(2,174,945
)


5. FAIR VALUE MEASUREMENTS
 
The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of June 30, 2016:

Derivatives
Carrying Amount
Fair Value
Level 1
Level 2
Level 3
Corn Derivative Contracts
$
2,282,763

$
2,282,763

$
2,158,915

$
123,848


Ethanol Derivative Contracts
$
(225,025
)
$
(225,025
)
$
(225,025
)


Natural Gas Derivative Contracts
$
87,831

$
87,831

$
47,511

$
40,320



The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of September 30, 2015:

Derivatives
Carrying Amount
Fair Value
Level 1
Level 2
Level 3
Corn Derivative Contracts
$
(10,141
)
$
(10,141
)
$
(10,141
)


Ethanol Derivative Contracts
$
(58,338
)
$
(58,338
)
$
(58,338
)



We determine the fair value of commodity futures derivative instruments utilizing Level 1 inputs by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value of natural gas and corn Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

6.  BANK FINANCING

The Company has a loan agreement consisting of two loans, the Declining Revolving Loan (Declining Loan) and the Revolving Credit Loan in exchange for liens on all property (real and personal, tangible and intangible) which include, among other things, a mortgage on the property, a security interest on commodity trading accounts, and assignment of material contracts.
On May 6, 2016, the Company executed a Seventh Amendment of First Amended and Restated Construction Loan Agreement with First National Bank of Omaha ("FNBO") (the "Seventh Amendment"). The Seventh Amendment extended the draw period and conversion date of the Declining Loan to July 31, 2016 and also amended the definition of permitted liens effective March 1,

11


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


2016. On February 28, 2016, the Company executed a Sixth Amendment of First Amended and Restated Construction Loan Agreement with FNBO (the "Sixth Amendment"). The Sixth Amendment extended the termination date of the Revolving Credit Loan to February 28, 2017 and keeps all of the other previous terms agreed to in the Fifth Amendment. The interest rate on the Revolving Credit Loan is the 1-month LIBOR plus two hundred ninety basis points. On July 23, 2015, the Company executed a Fifth Amendment of First Amended and Restated Construction Loan Agreement with FNBO (the "Fifth Amendment") in order to obtain additional financing to fund a construction project which is expected to add storage capacity and increase production capacity at the plant. Please refer to Note 8 Commitments and Contingencies below for more information on the project. In connection therewith, the Company executed a Second Amended and Restated Declining Revolving Credit Note and a First Amended and Restated Construction Loan Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statements.
 
Declining Note

The Fifth Amendment increased the maximum availability of the Declining Loan for construction and working capital advances from $5,000,000 to $20,000,000 and lowers the interest rate on the Declining Loan to the 3-month LIBOR plus two hundred ninety basis points. The Seventh Amendment requires quarterly interest payments on the Declining Loan during the draw period and then the balance of the construction advances will be converted to term debt amortized over seven years on or before the draw period ending July 31, 2016, with a final maturity date of February 28, 2021. Any balance remaining after conversion of the principal balance of the construction advances will continue to be available for working capital purposes. The Fifth Amendment reinstates a prior requirement to maintain a minimum fixed charge coverage ratio of no less than 1.15:1.0 measured quarterly upon completion of the expansion project. The cost of the expansion project is excluded from the $5,000,000 annual limit on capital expenditures.

The interest rate on the Declining Loan at June 30, 2016 was 3.55%. There were borrowings in the amount of $11,382,200 outstanding on the Declining Loan at June 30, 2016 and borrowings in the amount of $4,865,236 at September 30, 2015. An additional $3,617,800 was drawn against the Declining Loan before the loan conversion date on July 31, 2016. Therefore, the total long-term debt amounts to $15,000,000 on the loan conversion date.

Revolving Credit Loan

The Revolving Credit Loan has a limit of $15,000,000 supported by a borrowing base made up of the Company's corn, ethanol, dried distillers grain and corn oil inventories reduced by accounts payable associated with those inventories having a priority. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds. The interest rate on the Revolving Credit Loan is based on the 1-month LIBOR plus two hundred ninety basis points. The interest rate at June 30, 2016 was 3.37%. There were no borrowings outstanding on the Revolving Credit Loan at June 30, 2016 or September 30, 2015.

These loans are subject to protective covenants, which require the Company to maintain various financial ratios. The covenants include a working capital requirement of $15,000,000, and a capital expenditures covenant that allows the Company $5,000,000 of expenditures per year without prior approval. 

Long-term debt, as discussed above, consists of the following at June 30, 2016:

Declining revolving note
$
11,382,200

Less amounts due within one year
1,330,417

       Net long-term debt
$
10,051,783



12


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


The estimated maturities of long-term debt at June 30, 2016 are as follows:

July 1, 2016 to June 30, 2017
$
1,330,417

July 1, 2017 to June 30, 2018
1,501,500

July 1, 2018 to June 30, 2019
1,556,444

July 1, 2019 to June 30, 2020
1,612,793

July 1, 2020 to June 30, 2021
5,381,046

Thereafter

Total long-term debt
$
11,382,200


7. LEASES

At June 30, 2016, the Company had the following commitments for payments of rentals under leases which at inception had a non-cancellable term of more than one year:

 
Total
July 1, 2016 to June 30, 2017
$
1,172,964

July 1, 2017 to June 30, 2018
1,172,964

July 1, 2018 to June 30, 2019
389,347

Total minimum lease commitments
$
2,735,275


8. COMMITMENTS AND CONTINGENCIES

Expansion Projects

The Board of Directors has approved a management proposal of projects which are expected to add storage capacity and also increase production capacity to near 135 million gallons over the next twelve months, up from fiscal year 2015 production of 117 million gallons per year. The projects are expected to cost approximately $18,200,000. In connection with the expansion, the Company executed a Construction Agreement dated April 15, 2015 with Custom Agri Builders, LLC to construct two grain bins, a grain dryer and an unloading pit at the plant for a fixed price of approximately $8,892,000, subject to execution of additional written change orders for modifications. The expansion projects, including the grain bins, grain dryer and unloading pit are ongoing and are expected to be completed by our 2016 fiscal year end.

Land Purchase

The Board of Directors has approved the purchase of approximately 64 acres of land adjacent to the current property. For consideration of this future purchase, the Company gave $100,000 of earnest money to the seller. The final purchase price and title will transfer after the crops have been harvested in the first quarter of fiscal year 2017. An additional $546,380 will be due upon closing.

Legal Proceedings

In February 2010, a lawsuit against the Company was filed by an unrelated party claiming the Company's operation of the oil separation system in a patent infringement. In connection with the lawsuit, in February 2010, the agreement for the construction and installation of the tricanter oil separation system was amended. In this amendment the manufacturer and installer of the tricanter oil separation system indemnifies the Company against all claims of infringement of patents, copyrights or other intellectual property rights from the Company's purchase and use of the tricanter oil system and agrees to defend the Company in the lawsuit filed at no expense to the Company. On October 23, 2014, the court granted summary judgment finding that all of the patents claimed were invalid and that the Company had not infringed. However, this ruling is subject to appeal. The manufacturer has, and the Company expects it will continue, to vigorously defend itself and the Company in these lawsuits and in any appeal filed.


13


CARDINAL ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
June 30, 2016


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

9. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS

The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, distillers grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales average approximately 77% of total revenues and corn costs average 81% of total cost of goods sold.

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


14


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

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended June 30, 2016, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

Forward Looking Statements

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

Reduction or elimination of the Renewable Fuel Standard;
Changes in the availability and price of corn and natural gas;
Our inability to secure credit or obtain additional equity financing we may require in the future to continue our operations;
Decreases in the price we receive for our ethanol, distiller grains and corn oil;
Our ability to satisfy the financial covenants contained in our credit agreements with our senior lender;
Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw material costs;
Negative impacts that our hedging activities may have on our operations;
Ethanol and distiller grains supply exceeding demand and corresponding price reductions;
Our ability to generate free cash flow to invest in our business and service our debt;
Changes in the environmental regulations that apply to our plant operations;
Changes in our business strategy, capital improvements or development plans;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
Lack of transport, storage and blending infrastructure preventing our products from reaching high demand markets;
Changes in federal and/or state laws;
Changes and advances in ethanol production technology;
Competition from alternative fuel additives;
Changes in interest rates or the lack of credit availability;
Changes in legislation benefiting renewable fuels;
Our ability to retain key employees and maintain labor relations;
Volatile commodity and financial markets; and
Limitations and restrictions contained in the instruments and agreements governing our indebtedness.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements even though our situation may change in the future.  We cannot guarantee future results, levels of activity, performance or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements with these cautionary statements.

Overview

Cardinal Ethanol, LLC is an Indiana limited liability company currently operating a 100 million gallon per year nameplate capacity ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol and distillers grains at the plant in November 2008. We are currently operating at above our 100 million gallons per year nameplate capacity and expect to continue to operate above our nameplate capacity into the near future.

Our revenues are primarily derived from the sale of our ethanol, distillers grains and corn oil. We market and sell our products primarily in the continental United States using third party marketers. Murex, LLC markets all of our ethanol. Our

15


distillers grains are marketed by CHS, Inc. We market and distribute all of the corn oil we produce directly to end users and third party brokers.    

On May 6, 2016, we executed a Seventh Amendment of First Amended and Restated Construction Loan Agreement with First National Bank of Omaha ("FNBO") (the "Seventh Amendment"). The Seventh Amendment extended the draw period and conversion date of the Declining Loan to July 31, 2016 and also amended the definition of permitted liens effective March 1, 2016.

On May 17, 2016, the board of directors declared a cash distribution. The details are in the table below:
Date Declared
 
Distribution Declared Per Unit
 
Total Distribution Amount
 
Month Distribution Paid
May 17, 2016
 
$
230

 
$
3,359,380

 
May 2016
    
We have recently added storage capacity to our plant and are in the process of increasing production capacity to approximately 135 million gallons. These projects are expected to cost approximately $18,200,000. The grain bins, grain dryer and unloading pit were substantially complete at the beginning of our third fiscal quarter. The remaining expansion projects are expected to be completed by the end of our fiscal year and we expect to increase our operating capacity during the first quarter of our fiscal year ended September 30, 2017.

The Board of Directors has approved the purchase of approximately 64 acres of land adjacent to the current property. For consideration of this future purchase, we have given $100,000 of earnest money to the seller. The final purchase price and title will transfer after the crops have been harvested in the first quarter of fiscal year 2017. An additional $546,380 will be due upon closing.

The ethanol industry is dependent on several economic incentives which if reduced or eliminated could significantly impact ethanol demand. One of these is the Renewable Fuels Standard (“RFS”) program which requires that, in each year, a certain amount of renewable fuels be used in the United States. However, the United States Environmental Protection Agency ("EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. 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 volume obligation. However, the EPA decided to delay finalizing the rule on the 2014 and 2015 RFS standards until after the end of 2014. On November 30, 2015, the EPA released the final renewable volume obligations for 2014, 2015 and 2016. The statutory volumes and the EPA's volumes for 2014, 2015 and 2016 (in billion gallons) are as follows:
 
 
Total Renewable Fuel Volume Requirement
Portion of Volume Requirement That Can Be Met By Corn-based Ethanol
2014
Statutory
18.15
14.40
EPA Rule 11/30/2015
16.28
13.61
2015
Statutory
20.50
15.00
EPA Rule 11/30/2015
16.93
14.05
2016
Statutory
22.25
15.00
EPA Rule 11/30/15
18.11
14.50

Certain industry groups as well as other interested parties have filed legal challenges to the EPA's final rules. If the EPA's decision to reduce the volume requirements under the RFS is allowed to stand, it could have an adverse effect on the market price and demand for ethanol which could negatively impact our financial performance.     

In addition, on May 18, 2016, the EPA released a proposed rule to set the renewable volume obligation for 2017. The EPA proposes to set the total volume obligation at 18.8 billion gallons of which 14.8 billion gallon could be met by corn-based

16


ethanol. A public hearing on the proposed rule was held in June and the public comment expired on July 11, 2016. The final rule is expected to be issued in November.

In the past, China has been the world's largest importer of distillers grains produced in the U.S. However, earlier this year, China began an antidumping and countervailing duty investigation related to distillers grains imported from the United States. These dumping allegations may lead to China imposing high tariffs on distiller grains that are produced in the United States and exported to China. While the distiller grains industry in the U.S. believes that China's dumping claims are without merit, this trade investigation has negatively impacted distiller grains exports to China. In addition, if China were to impose a high tariff on distiller grains exports from the U.S., it could negatively impact the market price of distiller grains in the U.S. which could negatively impact our financial performance.

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

Results of Operations for the Three Months Ended June 30, 2016 and 2015
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended June 30, 2016 and 2015:

 
2016
 
2015
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenue
$
53,951,547

 
100.00
 
$
53,978,969

 
100.00
Cost of Goods Sold
49,487,044

 
91.72
 
47,719,837

 
88.40
Gross Profit
4,464,503

 
8.28
 
6,259,132

 
11.60
Operating Expenses
1,226,744

 
2.28
 
1,139,587

 
2.12
Operating Income
3,237,759

 
6.00
 
5,119,545

 
9.48
Other Income (Expense), net
16,490

 
0.03
 
3,021

 
0.01
Net Income
$
3,254,249

 
6.03
 
$
5,122,566

 
9.49

Revenues

Our revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. Revenues also include net gains or losses from derivatives related to products sold. The following table shows the sources of our revenue for the three months ended June 30, 2016 and 2015:

 
2016
 
2015
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
41,792,178

77.46
%
 
$
38,742,262

71.78
%
Distillers Grains Sales
9,777,392

18.12

 
12,168,008

22.54

Corn Oil Sales
2,258,602

4.19

 
1,944,221

3.60

Carbon Dioxide Sales
123,375

0.23

 
242,530

0.45

Other Revenue


 
881,948

1.63

Total Revenues
$
53,951,547

100.00
%
 
$
53,978,969

100.00
%

Ethanol
    
Our revenues from ethanol increased for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. This increase in revenues is the result of an increase in the number of gallons of ethanol sold during the three months ended June 30, 2016 as compared to the same period in 2015.

We experienced an increase in ethanol gallons sold of approximately 5.8% for the three months ended June 30, 2016 as compared to the same period in 2015 resulting primarily from an increase in ethanol production. We are currently operating at approximately 23% above our nameplate capacity. Management anticipates that the gallons of ethanol sold by our plant will

17


increase due to our plans to increase our production capacity to approximately 135 million gallons during the first quarter of our fiscal year ended September 30, 2017.
 
The average market price per gallon of ethanol sold for the three months ended June 30, 2016 was approximately 2.0% higher than our average price per gallon of ethanol sold for the same period in 2015. This increase in average market price for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 is due to several factors. Industry-wide production outpaced domestic consumption during the quarter causing an increase in national ethanol supply restricting the growth of ethanol prices. On the other hand, domestic driving demand was greater and there was increased export demand, particularly from Asia. This increased demand put upward pressure on ethanol prices. The net effect of all of the factors was a slight increase in ethanol prices for three months ended June 30, 2016 as compared to the same period in 2015.

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. If crude oil and unleaded gasoline prices remain low or further decrease, that could have a significant negative impact on the market price of ethanol and our profitability particularly should ethanol stocks remain high. A decline in U.S. ethanol exports due to the premium on the price of ethanol as compared to unleaded gasoline or other factors may contribute to higher ethanol stocks unless additional demand can be created from other foreign markets such as South America or domestically due to increased demand for gasoline and ethanol spurred by low oil prices. In addition,the EPA's reduction of the renewable volume obligations set forth in the RFS may limit demand for ethanol negatively impacting ethanol prices.
    
Distillers Grains

Our revenues from distillers grains decreased in the three months ended June 30, 2016 as compared to the same period in 2015. This decrease in revenues is the result of a decrease in the average market price per ton of distillers grains sold for the period ended June 30, 2016 compared to the same period in 2015.

The average price per ton of distillers grains sold for the three months ended June 30, 2016 was approximately 21.1% lower than the average price per ton of distillers grains sold for the same period in 2015. This decline in the market price of distillers grains is due to lower export demand from China. The higher prices that had evolved from high Asian demand in 2015 had forced domestic producers to look for lower priced alternatives during the peak period. That domestic demand was just returning throughout the quarter, thus the significant drop in prices for the three months ended June 30, 2016 compared to the same period in 2015.

China has been a significant consumer of exported distillers grains particularly since December 2014 following the resolution of a dispute related to China's objection to the presence of an unapproved genetically modified organism in some U.S. shipments. However, a softening in export demand from China has had a negative effect on distillers grains prices. In addition, China has recently opened an anti-dumping investigation into distillers grains produced in the U.S. which has had a negative impact on export demand. If China were to impose anti-dumping tariffs on U.S. imports, or if demand in the export market remains low, distillers grains prices could continue to decline unless additional demand can be created from other foreign markets or domestically. Domestic demand for distillers grains prices could remain low if end-users switch to lower priced alternatives.
   
We sold approximately 2.0% more distillers grains in the three months ended June 30, 2016 as compared to the same period in 2015 due primarily to timing of shipments. Management anticipates that the distillers grains sold by our plant will increase due to our plans to increase our ethanol production capacity to approximately 135 million gallons during the first quarter of our fiscal year ended September 30, 2017 which would also increase our distillers grains production.

Corn Oil

Our revenues from corn oil sales increased approximately 16.2% in the three months ended June 30, 2016 as compared to the same period in 2015 which was primarily a result of an increase in the price of corn oil sold in the three months ended June 30, 2016 as compared to the same period in 2015. The average price per pound of corn oil was approximately 11.1% higher for the three months ended June 30, 2016 as compared to the same period in 2015 due to increased local supplies. We sold approximately 2.5% more tons of corn oil in the three months ended June 30, 2016 as compared to the same period in 2015 due primarily to increased oil extraction rates per bushel of corn.

Management expects corn oil prices to remain fairly steady or decrease slightly as biodiesel plants switch to lower priced alternatives such as soybean oil. In addition, corn oil prices are likely to decrease slightly as a result of increased production as ethanol plants increase their production rates, thus resulting in higher corn oil production. Management expects that our corn oil production will increase as we continue to work towards increasing our ethanol production capacity to approximately 135 million gallons during the first quarter of our fiscal year ended September 30, 2017, which would also increase our corn oil production.

18


Cost of Goods Sold

Our cost of goods sold as a percentage of revenues was approximately 91.7% for the three months ended June 30, 2016 as compared to approximately 88.4% for the same period in 2015. This increase in cost of goods sold as a percentage of revenues was the result of the narrowing of the margin between ethanol price relative to the cost of corn for the three months ended June 30, 2016 as compared to the same period in 2015. Our two largest costs of production are corn and natural gas. Cost of goods sold also includes net gains or losses from our commodity derivatives investment position.

Corn

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the three months ended June 30, 2016, we used approximately 4.8% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2015. During the three months ended June 30, 2016, our average price paid per bushel of corn increased approximately 1.6% as compared to the same period in 2015 in part due to volatility caused by the influence of institutional investors that have shown interest in the commodity markets. Corn supplies have been sufficient locally and we have had no difficulty sourcing corn during our third fiscal quarter.
 
Management expects that corn prices will be be influenced greatly by the summer weather, causing a potential for volatility during our fourth fiscal quarter. World supply and demand, current and anticipated stocks, agricultural policy and other factors can also contribute to volatility in corn prices. In addition, corn prices could increase if export demand were to increase. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Volatility in the price of corn could significantly impact our cost of goods sold.

Natural Gas

Our natural gas cost was lower during our three months ended June 30, 2016 as compared to the three months ended June 30, 2015. This decrease in cost of natural gas for the three months ended June 30, 2016 as compared to the same period in 2015 was primarily the result of a decrease of approximately 30.9% in the average price per MMBTU of our natural gas due to plentiful supply. We used approximately 11.3% more natural gas for the three months ended June 30, 2016 as compared to the same period in 2015 because of higher ethanol production.

Unless we experience a catastrophic weather event that would cause problems related to the supply of natural gas, management anticipates that natural gas prices will continue to remain at current levels due to a plentiful supply. However, natural gas prices could increase in the future due to producers shutting down wells resulting in lower natural gas production and to the conversion of power plants across the U.S. from coal to natural gas.

Derivatives

We enter into hedging instruments to minimize price fluctuations in the prices of our finished products and inputs. As the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our revenues and our cost of goods sold. These commodity-based derivatives are not designated as effective hedges for accounting purposes. Please refer to Item 3 - Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk for information on our derivatives.

Operating Expense

Our operating expenses as a percentage of revenues were approximately 2.3% for the three months ended June 30, 2016 compared to operating expenses of approximately 2.1% of revenues for the same period in 2015. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady throughout the remainder of the 2016 fiscal year.

Operating Income

Our income from operations for the three months ended June 30, 2016 was approximately 6.0% of our revenues compared to operating income of approximately 9.5% of revenues for the same period in 2015. The decrease in operating income for the three months ended June 30, 2016 was primarily the result of decreased ethanol and distillers grains prices relative to the price of corn.

19


Other Income

Our other income for the three months ended June 30, 2016 and for the same period in 2015 was minimal. Our other income for the three months ended June 30, 2016 consisted primarily of sales of excess methanator bugs. Our other income for the three months ended June 30, 2015 consisted primarily of miscellaneous and rent income.

Results of Operations for the Nine Months Ended June 30, 2016 and 2015
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the nine months ended June 30, 2016 and 2015:

 
2016
 
2015
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenue
$
163,086,506

 
100.00

 
$
179,781,777

 
100.00
Cost of Goods Sold
152,481,876

 
93.50

 
146,855,644

 
81.69
Gross Profit
10,604,630

 
6.50

 
32,926,133

 
18.31
Operating Expenses
4,082,555

 
2.50

 
3,641,614

 
2.03
Operating Income
6,522,075

 
4.00

 
29,284,519

 
16.28
Other Income (Expense), net
(101,518
)
 
(0.06
)
 
29,702

 
0.02
Net Income
$
6,420,557

 
3.94

 
$
29,314,221

 
16.30

Revenues

Our revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. Revenues also include net gains or losses from derivatives related to products sold. The following table shows the sources of our revenue for the nine months ended June 30, 2016 and 2015:

 
2016
 
2015
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
127,204,671

78.00
%
 
$
135,416,903

75.33
%
Distillers Grains Sales
29,257,953

17.94

 
36,552,613

20.33

Corn Oil Sales
6,041,061

3.70

 
6,278,692

3.49

Carbon Dioxide Sales
391,560

0.24

 
394,235

0.22

Other Revenue
191,261

0.12

 
1,139,334

0.63

Total Revenues
$
163,086,506

100.00
%
 
$
179,781,777

100.00
%

Ethanol
    
Our revenues from ethanol decreased for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015. This decrease in revenues is the result of a decrease in the average price per gallon of ethanol sold during the nine months ended June 30, 2016 as compared to the same period in 2015.

We experienced an increase in ethanol gallons sold of approximately 5.4% for the nine months ended June 30, 2016 as compared to the same period in 2015 resulting primarily from an increase in ethanol production yields and timing of ethanol shipments.
 
Our average price per gallon of ethanol sold for the nine months ended June 30, 2016 was approximately 10.6% lower than our average price per gallon of ethanol sold for the same period in 2015. This decline in average market price for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015 is due primarily to increased U.S. domestic ethanol stocks and a decline in gasoline prices and crude oil values. The reduction of the volume obligations set forth in the RFS by the EPA also had a negative effect on ethanol prices.




20


Distillers Grains

Our revenues from distillers grains decreased in the nine months ended June 30, 2016 as compared to the same period in 2015. This decrease in revenues is the result of both a decrease in the average market price per ton of distillers grains and a decrease in distillers grains sold for the period ended June 30, 2016 compared to the same period in 2015.

The average price per ton of distillers grains sold for the nine months ended June 30, 2016 was approximately 18.7% lower than the average price per ton of distillers grains sold for the same period in 2015. This decline in the market price of distillers grains is due to lower domestic and export demand which has resulted in a decline in the price of distillers grains as a percentage of corn values for the nine months ended June 30, 2016 as compared to the same period in 2015.

We sold approximately 1.2% fewer distillers grains in the nine months ended June 30, 2016 as compared to the same period in 2015 due to increased ethanol production yields which resulted in lower distiller grains yields.

Corn Oil

Our revenues from corn oil sales decreased approximately 3.8% in the nine months ended June 30, 2016 as compared to the same period in 2015 which was primarily a result of a decline in the average price per pound received for our corn oil in the six months ended June 30, 2016 as compared to the same period in 2015. The average price per pound of corn oil was approximately 7.1% lower for the nine months ended June 30, 2016 as compared to the same period in 2015 due to increased local supplies. We sold approximately 3.2% more corn oil in the nine months ended June 30, 2016 as compared to the same period in 2015 due primarily to increased oil extraction rates per bushel of corn.

Cost of Goods Sold

Our cost of goods sold as a percentage of revenues was approximately 93.5% for the nine months ended June 30, 2016 as compared to approximately 81.7% for the same period in 2015. This increase in cost of goods sold as a percentage of revenues was the result of the narrowing margin between ethanol price relative to the price of corn for the nine months ended June 30, 2016 as compared to the same period in 2015. Our two largest costs of production are corn and natural gas. Cost of goods sold also includes net gains or losses from our commodity derivatives investment position.

Corn

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the nine months ended June 30, 2016, we used approximately 1.4% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2015. During the nine months ended June 30, 2016, our average price paid per bushel of corn increased approximately 7.5% as compared to the same period in 2015 in part due to volatility caused by the influence of institutional investors that have shown interest in the commodity markets and lower corn yields locally as compared to the more plentiful 2014 corn crop. Corn prices also rose in response to stronger export demand. However, corn supplies have been sufficient locally and we have had no difficulty sourcing corn during our third fiscal quarter.
 
Natural Gas

Our natural gas cost was lower during our nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015. This decrease in cost of natural gas for the nine months ended June 30, 2016 as compared to the same period in 2015 was primarily the result of a decrease of approximately 37.7% in the average price per MMBTU of our natural gas due to plentiful supply. We used approximately 6.2% more natural gas for the nine months ended June 30, 2016 as compared to the same period in 2015 because of higher ethanol production.

Derivatives

We enter into hedging instruments to minimize price fluctuations in the prices of our finished products and inputs. As the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our revenues and our cost of goods sold. These commodity-based derivatives are not designated as effective hedges for accounting purposes. Please refer to Item 3 - Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk for information on our derivatives.


21


Operating Expense

Our operating expenses as a percentage of revenues were approximately 2.5% for the nine months ended June 30, 2016 compared to operating expenses of approximately 2.0% of revenues for the same period in 2015. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady throughout the remainder of the 2016 fiscal year.

Operating Income

Our income from operations for the nine months ended June 30, 2016 was approximately 4.0% of our revenues compared to operating income of approximately 16.0% of revenues for the same period in 2015. The decrease in operating income for the nine months ended June 30, 2016 was primarily the result of the decreased ethanol and distillers grains prices relative to the price of corn.

Other Income

Our other expense for the nine months ended June 30, 2016 and our other income the same period in 2015 were minimal. Our other expense for the nine months ended June 30, 2016 consisted primarily of interest expense due to our borrowing funds to pay for construction costs in connection with our ongoing expansion projects. Our other income for the nine months ended June 30, 2015 consisted primarily of miscellaneous and rent income.

Changes in Financial Condition for the Nine Months Ended June 30, 2016

The following table highlights the changes in our financial condition:

 
June 30, 2016
(Unaudited)
 
September 30, 2015
Current Assets
$
45,415,079

 
$
48,646,801

Current Liabilities
$
10,854,708

 
$
11,997,241

Long-Term Liabilities
10,051,783

 
$
4,865,236

Member's Equity
$
131,982,619

 
$
140,606,243


We experienced a decrease in our current assets at June 30, 2016 compared to September 30, 2015. This decrease was primarily driven by a decrease in our cash at June 30, 2016 as compared to September 30, 2015 due primarily to paying out distributions to members and paying for capital expenditures in relation to our expansion projects. We had a decrease in our restricted cash at June 30, 2016 as compared to September 30, 2015 because of corn market price movements decreasing our required margin requirements. These decreases were partially offset by an increase in our corn inventory due to the addition of two steel grain bins and an increase in our ethanol on hand based on timing of shipments causing an increase in our inventories at June 30, 2016 compared to September 30, 2015. We also experienced an increase in commodity derivative instruments at June 30, 2016 compared to September 30, 2015 due to price decreases in the corn futures markets.

We experienced a decrease in our total current liabilities at June 30, 2016 compared to September 30, 2015. This decrease was primarily due to a decrease in our accounts payable and accrued expenses at June 30, 2016 as compared to September 30, 2015 due to normal variations in the business cycle and from paying contractors for on-going capital projects. We also experienced a decrease in accounts payable for corn at June 30, 2016 compared to September 30, 2015 due to less vendor deferred payments at June 30, 2016 compared to September 30, 2015. These decreases were partially offset by an increase in current maturities of long-term debt and an increase in commodity derivative instruments at June 30, 2016 as compared to September 30, 2015 from falling natural gas prices.

We experienced an increase in our long-term liabilities as of June 30, 2016 compared to September 30, 2015. At June 30, 2016, we had $10,051,783 of outstanding borrowings in the form of long-term loans, compared to $4,865,236 at September 30, 2015. The increase is due to borrowing additional funds to pay for construction costs in connection with our ongoing expansion projects.


22


Liquidity and Capital Resources
    
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not anticipate seeking additional equity financing during our 2016 fiscal year. Operating margins increased towards the end of our third fiscal quarter and are expected to continue to be positive during our final fiscal quarter. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity and may need to rely on our revolving lines of credit for operations.
    
The following table shows cash flows for the nine months ended June 30, 2016 and 2015:
 
 
2016
 
2015
Net cash provided by operating activities
 
$
2,683,962

 
$
36,542,141

Net cash used for investing activities
 
$
(5,567,642
)
 
$
(5,973,228
)
Net cash used for financing activities
 
$
(8,527,216
)
 
$
(48,199,797
)
Net decrease in cash
 
$
(11,410,896
)
 
$
(17,630,884
)
Cash, beginning of period
 
$
20,827,614

 
$
27,731,976

Cash, end of period
 
$
9,416,718

 
$
10,101,092


Cash Flow from Operations

We experienced a decrease in our cash flow from operations for the nine months ended June 30, 2016 as compared to the same period in 2015. This was primarily the result of decreased ethanol and distillers grain prices relative to the cost of corn for the nine months ended June 30, 2016 compared with the same period in 2015.

Cash Flow used for Investing Activities

We used less cash in investing activities for the nine months ended June 30, 2016 as compared to the same period in 2015. Cash used in investing activities was used for payments for construction in progress due to our ongoing expansion project described below in Capital Improvements.
    
Cash Flow used for Financing Activities

We used less cash in financing activities for the nine months ended June 30, 2016 as compared to the same period in 2015. This decrease was the result of our making distributions of approximately $15,044,000 for the nine months ended June 30, 2016 as compared to distributions of approximately $48,200,000 for the nine months ended June 30, 2015. We also borrowed money on the Declining Revolving Loan for the expansion project which we had not done in the nine months ended June 30, 2015.

Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs.  Assuming future relative price levels for corn, ethanol and distillers grains remain consistent with the relative price levels as of June 30, 2016, we expect operations to generate adequate cash flows to maintain operations.
Short and Long Term Debt Sources

We have a loan agreement consisting of two loans, the Declining Revolving Loan ("Declining Loan") and the Revolving Credit Loan. In exchange, we granted liens on all property (real and personal, tangible and intangible) which include, among other things, a mortgage on the property, a security interest on commodity trading accounts, and assignment of material contracts.
On July 23, 2015, we executed a Fifth Amendment of First Amended and Restated Construction Loan Agreement with FNBO (the "Fifth Amendment") in order to obtain additional financing to fund a construction project which is expected to add storage capacity and increase production capacity at our plant. Please refer to Capital Improvements below for more information on our project. In connection therewith, we also executed a Second Amended and Restated Declining Revolving Credit Note and a First Amendment of Amended and Restated Construction Loan Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement. On February 28, 2016, we executed a Sixth Amendment of First Amended and Restated Construction Loan Agreement with FNBO (the "Sixth Amendment"). The Sixth Amendment extended the termination date of the

23


Revolving Credit Loan to February 28, 2017. On May 6, 2016, we executed a Seventh Amendment of First Amended and Restated Construction Loan Agreement with FNBO (the "Seventh Amendment"). The Seventh Amendment extended the draw period and conversion date on the Declining Loan to July 31, 2016 and also amended the definition of permitted liens effective March 1, 2016.

Declining Loan
    
The Fifth Amendment increases the maximum availability of the Declining Loan for construction and working capital advances from $5,000,000 to $20,000,000 and lowers the interest rate on the Declining Loan to the 3-month London Interbank Offered Rate ("LIBOR") plus two hundred ninety basis points. The Fifth Amendment provides for quarterly interest payments on the Declining Loan during the draw period and then the principal balance of the construction advances will be converted to term debt amortized over seven years on or before the draw period ending May 31, 2016, with a final maturity date of February 28, 2021. The Seventh Amendment extended the draw period and date of conversion to July 31, 2016. Any availability on the Declining Loan remaining after conversion of the principal balance of the construction advances will continue to be available for future capital expenditures. The interest rate at June 30, 2016 was 3.55%. There was $11,382,200 outstanding on the Declining Loan at June 30, 2016 and $4,865,236 outstanding at September 30, 2015. An additional $3,617,800 was drawn against the Declining Loan before the loan conversion date on July 31, 2016. Therefore, the total long-term debt amounts to $15,000,000.
    
Revolving Credit Loan

The Revolving Credit Loan has a limit of $15,000,000 supported by a borrowing base made up of our corn, ethanol, dried distillers grain and corn oil inventories reduced by accounts payable associated with those inventories having a priority over FNBO. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds. The interest rate on the Revolving Credit Loan is the 1-month LIBOR plus two hundred ninety basis points. The interest rate at June 30, 2016 was 3.37%. There were no borrowings outstanding on the Revolving Credit Note at June 30, 2016 or September 30, 2015.
    
Covenants

During the term of the loans, we will be subject to certain financial covenants. Our minimum working capital is $15,000,000, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities. The Fifth Amendment reinstates a prior requirement to maintain a minimum fixed charge coverage ratio of no less than 1.15:1.0 measured quarterly upon completion of the expansion project.

Our loan agreement also requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures exceeding an aggregate amount of $5,000,000 in any single fiscal year. The cost of the expansion project is excluded from the $5,000,000 annual limit on capital expenditures.

We are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements at June 30, 2016. Based on current management projections, we anticipate that future operations will be sufficient to generate enough cash flow to maintain operations, service any new debt and comply with our financial covenants and other terms of our loan agreements through June 30, 2016. Should market conditions deteriorate in the future, circumstances may develop which could result in us violating the financial covenants or other terms of our loan agreements. Should we violate the terms or covenants of our loan or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans if we have a balance outstanding. In that event, our lender could also elect to proceed with a foreclosure action on our plant.
Tax Abatement

In October 2006, the real estate that our plant was constructed on was determined to be an economic revitalization area, which qualified us for tax abatement. The abatement period is for a ten year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. We must apply annually and meet specified criteria to qualify for the abatement program.

Capital Improvements

We began a project during our third fiscal quarter 2015 which added storage capacity and is expected to also increase production capacity to approximately 135 million gallons over the next twelve months. The project is expected to cost approximately $18,200,000 and will be funded by cash from our operations and our expanded credit facilities. Please refer to

24


Short and Long Term Debt Sources above for information on our credit facilities. In connection with the expansion, we executed a Construction Agreement dated April 15, 2015 with Custom Agri Builders, LLC to construct two grain bins, a grain dryer and an unloading pit at our plant. The fixed price is currently approximately $8,892,000, subject to execution of additional written change orders for modifications. All of the projects, except for a boiler installation are now complete.

Critical Accounting Estimates

Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Our most critical accounting estimates, which require the greatest use of judgment by management, are designated as critical accounting estimates and include policies related to the useful lives of fixed assets; the valuation of basis and delay price contracts on corn purchases; derivatives; inventory; patronage dividends, long-lived assets and inventory purchase commitments.  An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015.  Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed financial statements in accordance with generally accepted accounting principles.  There have been no changes in the policies for our accounting estimates for the nine months ended June 30, 2016.
Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our Declining Loan and our Revolving Credit Loan which bear variable interest rates.  The interest rate for the Declining Loan is the 3-month LIBOR rate plus 290 basis points with no minimum. There were borrowings in the amount of $11,382,200 outstanding on the Declining Loan and the applicable interest rate was 3.55% at June 30, 2016. The interest rate for the Revolving Credit Loan is the 1-month LIBOR rate plus 290 basis points with no minimum. There were no outstanding balances on the Revolving Credit Loan at June 30, 2016. The specifics of the Declining Loan and the Revolving Credit Loan are discussed in greater detail above. If we were to experience a 10% adverse change in LIBOR, the annual effect such change would have on our statement of operations, based on the amount we had outstanding on our variable interest rate loans at June 30, 2016, would be approximately $40,000.

Commodity Price Risk

We expect to be exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller's grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

We enter into forward contracts for our commodity purchases and sales on a regular basis.  It is our intent that, as we enter in to these contracts, we will use various hedging instruments to maintain a near even market position.  For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset

25


our price risk relative to those bushels we have under fixed price contracts.  Because our ethanol marketing company is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.

At June 30, 2016, we had a net short (selling) position of 9,450,000 gallons of ethanol under derivative contracts used to hedge our future ethanol sales for various delivery periods through September 2016, a net short (selling) position of 6,024,250 bushels of corn under derivative contracts used to hedge our forward corn contracts, corn inventory and ethanol sales for various delivery periods through December 2017, and a net long (buying) position of 860,000 MMBTUs of natural gas under derivative contracts used to hedge our forward natural gas purchases. These derivatives have not been designated as an effective hedge for accounting purposes. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above. The following table provides details regarding the gains and (losses) from our derivative instruments in the statements of operations, none of which are designated as hedging instruments, for the three and nine months ended June 30, 2016:

 
Three Months Ended
Three Months Ended
Nine Months Ended
Nine Months Ended
 
June 30, 2016
June 30, 2015
June 30, 2016
June 30, 2015
Corn Derivative Contracts
$
1,165,323

$
(781,964
)
$
4,172,024

$
(820,659
)
Ethanol Derivative Contracts
(321,335
)
(1,519,061
)
(99,434
)
(1,285,652
)
Natural Gas Derivative Contracts
210,738

(158,611
)
(51,999
)
(68,634
)
Totals
$
1,054,726

$
(2,459,636
)
$
4,020,591

$
(2,174,945
)

At June 30, 2016, we had forward corn purchase contracts at various fixed prices for various delivery periods through October 2017 for approximately 6.2% of our expected production needs for the next sixteen months, forward dried distiller grains sales contracts at various fixed prices for various delivery periods through September 2016 for approximately 32.0% of expected production for the next three months and forward corn oil contracts at various prices for various delivery periods through August 2016 for approximately 61.9% of expected production for the next two months. Also, at June 30, 2016, we had forward natural gas contracts for approximately 38.8% of expected purchases for the next twenty-one months at various prices for various delivery periods through March 2018. As contracts are delivered, any gains or losses realized will be recognized in our gross margin.  Due to the volatility and risk involved in the commodities market, we cannot be certain that these gains or losses will be realized. 

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, distillers grains, corn oil, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas and average ethanol, distillers grains and corn oil prices as of June 30, 2016 net of the forward and future contracts used to hedge our market risk. The volumes are based on our expected use and sale of these commodities for a one year period from June 30, 2016. The results of this analysis, which may differ from actual results, are approximately as follows:

 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Hypothetical Adverse Change in Price as of
June 30, 2016
Approximate Adverse Change to Income
Natural Gas
1,661,000

MMBTU
10
%
 
$
434,000

Ethanol
120,000,000

Gallons
10
%
 
$
19,740,000

Corn
37,952,000

Bushels
10
%
 
$
1,381,000

DDGs
29,000

Tons
10
%
 
$
4,636,000

Corn Oil
27,980,000

Pounds
10
%
 
$
783,000



26


Liability Risk

We participate in a captive reinsurance company (the “Captive”).  The Captive re-insures losses related to worker's compensation, commercial property and general liability.  Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive re-insurer.  The Captive re-insures catastrophic losses in excess of a predetermined amount.  Our premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage.  The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed in excess of the amount in the collateral fund.

Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures

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

Our management, including our Chief Executive Officer (the principal executive officer), Jeff Painter, along with our Chief Financial Officer (the principal financial officer), William Dartt, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of June 30, 2016.  Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our third quarter of our 2016 fiscal year that have materially affected, or are likely to materially affect, our internal control over financial reporting.

PART II.     OTHER INFORMATION

Item 1. Legal Proceedings

Patent Infringement

On June 27, 2008, we entered into a Tricanter Purchase and Installation Agreement with ICM, Inc. for the construction and installation of a Tricanter Oil Separation System. On February 12, 2010, GS CleanTech Corporation ("GS CleanTech") filed a lawsuit in the United States District Court for the Southern District of Indiana, claiming that the Company's operation of the oil recovery system manufactured and installed by ICM, Inc. infringes a patent claimed by GS CleanTech. GS CleanTech sought royalties and damages associated with the alleged infringement, as well as attorney's fees from the Company. GS CleanTech subsequently filed actions against at least fourteen other ethanol producing companies for infringement of its patent rights, adding several additional patents. GS CleanTech successfully petitioned for the cases to be joined in a multi-district litigation ("MDL") which was assigned to the United States District Court for the Southern District of Indiana (Case No. 1:10-ml-02181). We subsequently answered and counterclaimed that the patent claims at issue are invalid and that the Company is not infringing.

Motions for summary judgment were filed by the defendants, including the Company, and GS CleanTech. Meanwhile, GS Cleantech filed suit against another group of defendants which were joined with the MDL. On October 23, 2014, the United States District Court granted summary judgment finding that all of the patents claimed by GS CleanTech were invalid and that the Company had not infringed. We expect that GS CleanTech will appeal the ruling on the motions for summary judgment. However, no appeal has yet been filed as we are currently awaiting a ruling from the United States District Court on one counterclaim related to allegations of inequitable conduct by GS CleanTech that was not resolved by the rulings on summary judgment.


27


On February 16, 2010, ICM, Inc. agreed to indemnify the Company from and against all claims, demands, liabilities, actions, litigations, losses, damages, costs and expenses, including reasonable attorney's fees arising out of any claim of infringement of patents, copyrights or other intellectual property rights by reason of our purchase and use of the oil recovery system and agrees to defend the Company. Several of the other defendants also use equipment and processes provided by ICM, Inc. ICM, Inc. has, and we expect it will continue, to vigorously defend itself and the Company in this lawsuit and in any appeal filed by GS CleanTech. If GS CleanTech were to be successful in any appeal filed and allowed to continue to pursue its claims, we estimate that damages, if awarded, would be based on a reasonable royalty to, or lost profits of, GS CleanTech. Because of its October 23, 2014 ruling, it seems unlikely that the District Court would deem the case exceptional. However, in the event it would be deemed to be exceptional, attorney's fees may be awarded and are likely to be $1,000,000 or more. ICM, Inc. has also agreed to indemnify us. However, in the event that damages were to be awarded, if ICM, Inc. does not fully indemnify us for any reason, we could be liable and could also be required to cease use of our oil separation process and seek out a replacement or cease oil production altogether.

Item 1A.    Risk Factors
    
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended September 30, 2015, included in our annual report on Form 10-K.

Distillers grains demand and prices may be negatively impacted by the Chinese antidumping and countervailing duty investigation. China is the world's largest importer of distillers grains produced in the United States. On January 12, 2016, the Chinese government commenced an antidumping and countervailing duty investigation related to distillers grains imported from the United States. The investigation has resulted in a reduction in distillers grains exports to China. Further, if China introduces a tariff on distillers grains produced in the United States and exported to China, it could remove the largest source of export demand for distillers grains. This antidumping and countervailing duty investigation could significantly decrease demand and prices for distillers grains produced in the United States. This potential reduction in demand along with lower domestic corn prices could negatively impact our ability to profitably operate the ethanol plant.

Additional Iranian oil may enter the market and negatively impact gasoline and ethanol prices. Recently, the United States lifted sanctions on Iran which previously prevented Iranian oil from being imported into the United States. Further, many other nations had similar bans on Iranian oil which prevented Iran from exporting a significant amount of oil into the world market. However, as a result of the lifting of sanctions, additional Iranian oil may be introduced into the world market which could result in lower oil prices. These Iranian oil exports may come at a time when oil prices are very low and world supplies of oil are high. The lower priced oil has resulted in lower priced gasoline, which has negatively impacted ethanol prices and demand. If these lower gasoline prices continue, it could negatively impact our ability to profitably operate the ethanol plant.

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits.

(a)
The following exhibits are filed as part of this report.

28


Exhibit No.
 
Exhibit
31.1

 
Certificate Pursuant to 17 CFR 240.13a-14(a)*
31.2

 
Certificate Pursuant to 17 CFR 240.13a-14(a)*
32.1

 
Certificate Pursuant to 18 U.S.C. Section 1350*
32.2

 
Certificate Pursuant to 18 U.S.C. Section 1350*
101

 
The following financial information from Cardinal Ethanol, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of June 30, 2016 and September 30, 2015, (ii) Condensed Statements of Operations and Comprehensive Income for the three and nine months ended June 30, 2016 and 2015, (iii) Statements of Cash Flows for the nine months ended June 30, 2016 and 2015, and (iv) the Notes to Condensed Financial Statements.**

*    Filed herewith.
**    Furnished herewith.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CARDINAL ETHANOL, LLC
 
 
 
 
Date:
August 8, 2016
 
/s/ Jeff Painter
 
 
 
Jeff Painter
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 8, 2016
 
/s/ William Dartt
 
 
 
William Dartt
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
    

29