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. Furthermore, we cannot guarantee future results, events, 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 by these cautionary statements.

Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, LLC. Dakota Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 90 million gallons of ethanol per year. Lake Area Corn Processors, LLC is referred to in this report as "LACP," the "company," "we," or "us." Dakota Ethanol, LLC is referred to in this report as "Dakota Ethanol" "we" "us" or the "ethanol plant."

Our revenue is derived from the sale and distribution of our ethanol, distillers grains and corn oil.  The ethanol plant recently increased its nameplate capacity from 50 million gallons per year to 90 million gallon per year.  Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market. We have engaged Renewable Products Marketing Group, Inc. ("RPMG, Inc.") to market all of the ethanol and corn oil that we produce at the ethanol plant. Further, RPMG, Inc. markets all of the distillers grains that we produce that we do not market internally to local customers.

 

 

    

Our total distillers grains revenue was approximately 18%55% greater during our secondthird quarter of 2019 compared to the same period of 2018, due primarily to increased market modified distillers grains prices due to higher corn prices locally along with decreased dried distillers grains prices due to increase supplies of distillers grainsoverall production at the plant due to our expansion.expansion project. We sold approximately 25%51% more total tons of distillers grains during our secondthird quarter of 2019 compared to the same period of 2018 due to increased production at the plant.

The average price we received for our dried distillers grains was approximately 30%3% less during our secondthird quarter of 2019 compared to the same period of 2018, a decrease of approximately $48$4 per ton. Management attributes the decrease in dried distillers grains prices during the secondthird quarter of 2019 with an increase in the availability ofsofter distillers grains in our market due to our plant expansion project.export demand. The average price we received for our modified/wet distillers grains, on a dry-equivalent basis, was approximately 2%6% greater for our secondthird quarter of 2019 compared to the same period of 2018, an increase of approximately $3$8 per ton. Management attributes this increase in modified/wet distillers grains prices with higher corn prices locally which impacts modified distillers grains prices which are primarily used in our local

    

The average price per pound we received for our corn oil was approximately 6% greaterslightly less for our secondthird quarter of 2019 compared to the same period of 2018. The increasedecrease in price is related to increased crudedecreased biodiesel demand which negatively impacts corn oil prices. Corndemand as corn oil is frequently used as a raw material infeedstock for biodiesel production. Management expects corn oil prices to decrease for the rest of our 2019 fiscal year due to uncertainty in the biodiesel industry which is a significant source of corn oil demand.

The primary raw materials we use to produce ethanol and distillers grains are corn and natural gas.

We had higher interest expense during our secondthird quarter of 2019 compared to the same period of 2018 due to our plant expansion project. We were capitalizing interest in previous periods when our expansion project was under construction. Our

The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of income for the sixnine months ended JuneSeptember 30, 2019 and 2018:

Revenue from ethanol sales increased by approximately 18%36% during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018. Revenue from distillers grains sales increased by approximately 20%32% during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018. Revenue from corn oil sales increased by approximately 66%84% during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018.

 

Our ethanol revenue was approximately $5,638,000$16,603,000 greater during our sixnine months ended JuneSeptember 30, 2019 compared to the sixnine months ended JuneSeptember 30, 2018, an increase of approximately 18%36%. This increase in ethanol revenue was due primarily to an increase in the volume of ethanol we sold and a decreasealong with an increase in the average price we received per gallon of ethanol sold during the sixnine months ended JuneSeptember 30, 2019 compared to the sixnine months ended JuneSeptember 30, 2018. We sold approximately 21%34% more gallons of ethanol during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018, an increase of approximately 5,054,00012,065,000 gallons, due to increased production at the plant following completion of our plant expansion project. Management anticipates increased ethanol production and sales during the remainder of our 2019 fiscal year due to our plant expansion project.

 

The average price we received for our ethanol was approximately $0.04 less$0.02 greater per gallon during the sixnine months ended JuneSeptember 30, 2019 compared to the sixnine months ended JuneSeptember 30, 2018, a decreasean increase of approximately 3%2%. Management attributes this decreaseincrease in ethanol prices with greaterhigher corn prices and decreased market supply of ethanol in the market which was not met by higheras some ethanol demand which impacted ethanol pricesproducers reduced production or ceased operations during the sixnine months ended JuneSeptember 30, 2019.

Our total distillers grains revenue was approximately 20%32% greater during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018 due to increased total production and increased modified distillers grains prices, partially offset by lower dried distillers grains prices. We sold approximately 14%27% more total tons of distillers grains during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018 due to increased overall production at the ethanol plant due to our plant expansion project. Management decides the relative production of dried distillers grains versus modified distillers grains based on market conditions favoring each of these products.

The average price we received for our dried distillers grains was approximately 19%10% less during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018, a decrease of approximately $29$14 per ton. Management attributes the decrease in dried distillers grains prices during the sixnine months ended JuneSeptember 30, 2019 with lower prices which resulted fromto increased supply following completion of our plant expansion project. The average price we received for our modified/wet distillers grains, on a dry-equivalent basis,

    

Our total pounds of corn oil sold increased by approximately 53%75% during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018, an increase of approximately 2,527,0005,379,000 pounds, primarily due to increased overall production and improved corn oil extraction efficiency.

The average price per pound we received for our corn oil was approximately 8%5% greater for the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018. The increase in our average corn oil price is related to higher crude oil prices.

Our cost of revenues relating to corn was approximately 31%58% greater for the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018 due to increased corn bushels used due to the plant expansion project along with higher corn costs per bushel during the 2019 period.

Our average cost per bushel of corn increased by approximately 8%18% for the sixnine months ended JuneSeptember 30, 2019 compared to the sixnine months ended JuneSeptember 30, 2018. We consumed approximately 21%33% more bushels of corn during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018. Management attributes the increased corn cost per bushel to unfavorable weather conditions during our 2019 fiscal year which included a significant amount of snow along with wet weather which delayed planting, potentially impacting the amount of corn which will be harvested in 2019. Further, poor weather conditions have resulted in a late harvest in the fall of 2019 which may further impact market corn prices. Management anticipates that our corn consumptionprices will beremain higher duringfor the remaining quartersrest of our 2019 fiscal year due to expected increases in production fromand into our plant expansion project.2020 fiscal year.

Our cost of revenues related to natural gas increased by approximately $286,000,$569,000, an increase of approximately 15%21%, for the sixnine months ended JuneSeptember 30, 2019 compared to the sixnine months ended JuneSeptember 30, 2018. This increase was due to increased natural gas consumption, partially offset by lower natural gas prices per MMBtu during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018.

Our average cost per MMBtu of natural gas during the sixnine months ended JuneSeptember 30, 2019 was approximately 6%12% less compared to the cost per MMbtu for the sixnine months ended JuneSeptember 30, 2018. Management attributes this decrease in our average natural gas costs with generally lower natural gas prices in 2019.

The volume of natural gas we used increased by approximately 22%37% during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018 due primarily to increased production due to our plant expansion project. Management anticipates that our natural gas consumption will be higher for the rest of our 2019 fiscal year.

Our operating expenses were lowergreater for the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018 due primarily to decreased professional fees and environmental costs offset by increased wage and benefit expenses related to increases in staff from our plant expansion.

We had less earnings on our investments during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018 due to decreased profitability in the ethanol industry. We had more interest expense during the sixnine months ended JuneSeptember 30, 2019 compared to the same period of 2018 because we were capitalizing interest on our expansion project until it was completed during our second quarter of 2019.

Our cash on hand at JuneSeptember 30, 2019 was greater compared to December 31, 2018 due to timing of the quarter end and larger checks we had outstanding in excess of our bank accounts. We had more accounts receivable at JuneSeptember 30, 2019 compared to December 31, 2018 due to the timing of our quarter end and the payments related to the shipments of our products.products in addition to the increased sales from our expansion. The value of our inventory was greater at JuneSeptember 30, 2019 compared to December 31, 2018 due to increased corn inventory.inventory for our expansion. The asset value of our derivative instruments was greaterless at JuneSeptember 30, 2019 compared to December 31, 2018 due to recent corn price increaseschanges which resulted in forward contract gains.impacted our derivative instruments. We also had more cash held by our commodities broker in our margin account Juneless prepaid expenses at September 30, 2019 compared to December 31, 2018.2018 due to amortization of our insurance premiums.

Our long-term liabilities were greater at JuneSeptember 30, 2019 compared to December 31, 2018 due to borrowing related to our plant expansion project.

Our main sources of liquidity are cash from our continuing operations, distributions we receive from our investments and amounts we have available to draw on our revolving credit facilities. Management does not anticipate that we will need to raise additional debt or equity financing in the next twelve months and management believes that our current sources of liquidity will be sufficient to continue our operations during that time period. We anticipate that any capital expenditures we undertake related to our expansion project will be paid out of cash from operations and existing loans, and will not require any additional debt or equity financing.

We entered into a comprehensive credit facility with Farm Credit Services of America, PCA and Farm Credit Services of America, FLCA (collectively "FCSA"). We have a $10 million revolving operating line of credit (the "Operating Line") and a $40 million reducing revolving loan (the "Reducing Revolving Loan"). All of our assets, including the ethanol plant and equipment, its accounts receivable and inventory, serve as collateral for our loans with FCSA.

On August 1, 2017, we executed an amendment to our credit agreement to create a new $8 million term loan which we used to finance a portion of our investment in Ring-neck Energy & Feed, LLC.

On February 6, 2018, we executed an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") with FCSA. Pursuant to the Amended and Restated Credit Agreement, we increased our total credit availability to $40 million to support our expansion project. Further, the maturity date of this increased credit availability under our Amended and Restated Credit Agreement was extended to January 1, 2026. Until February 1, 2023, interest will accrue pursuant to the Amended and Restated Credit Agreement on our increased credit availability at the one month London Interbank Offered Rate ("LIBOR") plus 3.25% per year. We agreed to pay a fee of 0.50% on the unused portion of the increased credit availability.  

On February 6, 2018, Dakota Ethanol executed a revolving promissory note from Farm Credit Services of America (FCSA) in thean amount up to $10,000,000 or the amount available in accordance with the borrowing base calculation, whichever is less. Interest on the outstanding principal balance will accrue at 300 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 5.45%5.10% at JuneSeptember 30, 2019. There is a non-use fee of 0.25% on the unused portion of the $10,000,000 availability. The note is collateralized by substantially all assets of the Company. The note expires on November 1, 2019.2021. On JuneSeptember 30, 2019, Dakota Ethanol had $0 outstanding and $6,099,000$5,281,000 available to be drawn on the revolving promissory note under the borrowing base.

On February 6, 2018, Dakota Ethanol executed a reducing revolving promissory note from FCSA in the amount up to $40,000,000 or the amount available in accordance with the borrowing availability under the credit agreement. The amount Dakota Ethanol can borrow on the note decreases by $1,750,000 semi-annually starting on January 1, 20202021 until the maximum balance reaches $26,000,000 on July 1, 2023.2024. The note matures on January 1, 2026. Interest on the outstanding principal balance will accrue at 325 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 5.70%5.35% at JuneSeptember 30, 2019. The note contains a non-use fee of 0.50% on the unused portion of the note. On JuneSeptember 30, 2019, Dakota Ethanol had $29,000,000$33,000,000 outstanding and $11,000,000$7,000,000 available to be drawn on the note.

On August 1, 2017, Dakota Ethanol executed a term note with FCSA in the amount of $8 million. Dakota Ethanol agreed to make monthly interest payments starting September 1, 2017 and annual principal payments of $1,000,000 starting on August

Our credit facilities with FCSA are subject to various loan covenants. If we fail to comply with these loan covenants, FCSA can declare us to be in default of our loans. The material loan covenants applicable to our credit facilities are our working capital covenant, local net worth covenant and our debt service coverage ratio. We are required to maintain working capital (current assets minus current liabilities plus availability on our revolving loan) of at least $13.5 million. We are required to maintain local net worth (total assets minus total liabilities minus the value of certain investments) of at least $28 million. We are required to maintain a debt service coverage ratio of at least 1.25:1.00.

As of JuneSeptember 30, 2019, we were in compliance with all of our loan covenants. Management's current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter. Management does not believe that it is reasonably likely that we will fall out of compliance with our material loan covenants in the next 12 months. If we fail to comply with the terms of our credit agreements with FCSA, and FCSA refuses to waive the non-compliance, FCSA may require us to immediately repay all amounts outstanding on our loans.

Management uses estimates and assumptions in preparing our consolidated 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. Of the significant accounting policies described in the notes to our consolidated financial statements, we believe that the following are the most critical:

We enter into short-term forward grain, option and futures contracts as a means of securing corn for the ethanol plant and managing exposure to changes in commodity prices. We enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in commodity prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as nor accounted for as hedging instruments.

As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce our risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using cash and futures contracts and options.

Unrealized gains and losses related to derivative contracts for corn purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements. The fair values of derivative contracts are presented on the accompanying balance sheets as derivative financial instruments.

Annually, as well as when an event triggering impairment may have occurred, the Company performs an impairment test on goodwill. The Company performs a quantitative analysis that tests for impairment. The second step, if necessary, measures the impairment. The Company performs the annual analysis onas of December 31 of each fiscal year.

Inventories are generally valued using methods which approximate the lower of cost (first-in, first-out) or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is based on estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.

The Company generally recognizes revenue at a point in time when performance obligations are satisfied. Revenue from the production of ethanol and related products is recorded when control transfers to customers. Generally, ethanol and related

Shipping costs incurred by the Company in the sale of ethanol, dried distillers grains and corn oil are not specifically identifiable and as a result, revenue from the sale of those products is recorded based on the net selling price reported to the Company from the marketer.

We are exposed to the impact of market fluctuations associated with commodity prices and interest rates 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.

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding loans which bear variable interest rates. As of JuneSeptember 30, 2019, we had $36,000,000$39,000,000 outstanding on our variable interest rate loans with interest accruing at a rate of 5.70%5.35%. Our variable interest rates are calculated by adding a set basis to LIBOR. If we were to experience a 10% increase in LIBOR, the annual effect such change would have on our income statement, based on the amount we had outstanding on our variable interest rate loans as of JuneSeptember 30, 2019, would be approximately $88,000.$82,000.

We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn and natural gas 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, they are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged.  We are marking to market our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of 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 recorded a combined decreaseincrease to our cost of revenues of approximately $1,112,000$1,213,000 related to derivative instruments for the quarter ended JuneSeptember 30, 2019. We recorded a combined decreaseincrease to our cost of revenues of approximately $405,000$82,000 related to derivative instruments for the quarter ended JuneSeptember 30, 2018. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.

As of JuneSeptember 30, 2019, we were committed to purchasing approximately 3.91.7 million bushels of corn with an average price of $4.07$3.74 per bushel. These corn purchases represent approximately 13%6% of our project plant corn usage for the next 12 months.

As of JuneSeptember 30, 2019, we were committed to purchasing approximately 833,000652,000 MMBtus of natural gas with an average price of $2.60$2.64 per MMBtu. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time the price is fixed and the time the natural gas is delivered. The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market. The natural gas purchases represent approximately 40%32% of the projected annual plant requirements.