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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
September 30, 2022
 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: 000-50254
LAKE AREA CORN PROCESSORS, LLC
(Exact name of registrant as specified in its charter)
 
South Dakota 46-0460790
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer Identification No.)
 
46269 SD Highway 34Wentworth,SD
P.O. Box 10057075
(Zip Code)
(Address of principal executive offices)
(605)483-2676
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered

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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  o
Accelerated filer
  o
Non-accelerated filer
 x
Smaller Reporting Company
  o
Emerging Growth Company
  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
 
As of November 14, 2022, there are 29,620,000 membership units of the registrant outstanding.




2
PART I.        FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
September 30, 2022December 31, 2021*
 ASSETS(unaudited)
CURRENT ASSETS
Cash and cash equivalents$9,765,084 $37,995,310 
Accounts receivable807,887 876,949 
Accounts receivable (related party)8,165,209 1,032,541 
Inventory9,643,964 16,410,437 
Derivative financial instruments3,554,362 2,886,831 
Prepaid expenses205,462 733,189 
Total current assets32,141,968 59,935,257 
PROPERTY AND EQUIPMENT
Land874,473 874,473 
Land improvements8,751,733 8,738,063 
Buildings9,316,576 9,316,576 
Equipment99,868,211 96,159,927 
Construction in progress6,950,903 1,669,148 
125,761,896 116,758,187 
Less accumulated depreciation(62,279,776)(58,706,491)
Net property and equipment63,482,120 58,051,696 
OTHER ASSETS
Goodwill10,395,766 10,395,766 
Investments16,141,909 20,504,842 
Other2,720,308 65,302 
Total other assets29,257,983 30,965,910 
TOTAL ASSETS$124,882,071 $148,952,863 
* Derived from audited financial statements.

See Notes to Unaudited Consolidated Financial Statements.







3
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
September 30, 2022December 31, 2021*
LIABILITIES AND MEMBERS’ EQUITY(unaudited)
CURRENT LIABILITIES
Outstanding checks in excess of bank balance$2,706,757 $2,228,284 
Accounts payable10,958,544 25,855,071 
Accrued liabilities738,312 914,994 
Derivative financial instruments620,123 1,490,510 
Current portion of notes payable1,000,000 1,000,000 
Total current liabilities16,023,736 31,488,859 
LONG-TERM LIABILITIES
Notes payable2,997,792 3,995,139 
Total long-term liabilities2,997,792 3,995,139 
MEMBERS' EQUITY (29,620,000 units issued and outstanding)
105,860,543 113,468,865 
TOTAL LIABILITIES AND MEMBERS' EQUITY$124,882,071 $148,952,863 
* Derived from audited financial statements.

See Notes to Unaudited Consolidated Financial Statements.
4
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
REVENUES$74,210,499 $63,794,494 $214,098,692 $176,648,273 
COSTS OF REVENUES66,808,651 54,753,379 195,168,386 151,181,885 
GROSS PROFIT7,401,848 9,041,115 18,930,306 25,466,388 
OPERATING EXPENSES1,268,468 1,249,243 3,668,362 3,776,472 
INCOME FROM OPERATIONS6,133,380 7,791,872 15,261,944 21,689,916 
OTHER INCOME (EXPENSE)
Interest and other income61,607 21,723 1,559,100 1,328,326 
Equity in net income of investments315,273 1,135,138 2,542,068 3,072,697 
Interest expense(568)(136,176)(65,247)(684,200)
Total other income376,312 1,020,685 4,035,921 3,716,823 
NET INCOME$6,509,692 $8,812,557 $19,297,865 $25,406,739 
BASIC AND DILUTED EARNINGS PER UNIT$0.22 $0.30 $0.65 $0.86 
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS PER UNIT29,620,000 29,620,000 29,620,000 29,620,000 
DISTRIBUTIONS DECLARED PER UNIT$0.40 $0.10 $0.91 $0.10 

See Notes to Unaudited Consolidated Financial Statements.
5
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Changes in Members' Equity (Unaudited)


Members' Equity
Balance - December 31, 2020$65,268,579 
Net income for the three-month period ended March 31, 20216,535,530 
Balance - March 31, 202171,804,109 
Net income for the three-month period ended June 30, 202110,058,652 
Balance - June 30, 202181,862,761 
Net income for the three-month period ended September 30, 20218,812,557 
Member Distributions(2,962,000)
Balance - September 30, 2021$87,713,318 


Members' Equity
Balance - December 31, 2021$113,468,865 
Net income for the three-month period ended March 31, 20221,665,199 
Member Distributions(15,056,167)
Balance - March 31, 2022100,077,897 
Net income for the three-month period ended June 30, 202211,122,974 
Balance - June 30, 2022111,200,871 
Net income for the three-month period ended September 30, 20226,509,692 
Member Distributions(11,850,020)
Balance - September 30, 2022$105,860,543 

See Notes to Unaudited Consolidated Financial Statements.

6
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
OPERATING ACTIVITIES
Net income$19,297,865 $25,406,739 
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization3,716,018 4,169,044 
Distributions in excess of earnings (earnings in excess of distributions) from investments4,362,932 (372,697)
Loss on disposal of property and equipment49,842 — 
(Increase) decrease in
Accounts receivable(7,063,606)(2,630,718)
Inventory6,766,473 (2,836,912)
Prepaid expenses527,727 445,707 
Derivative financial instruments(1,537,918)(1,167,238)
Increase (decrease) in
Accounts payable(15,670,376)(6,353,567)
Accrued and other liabilities(176,682)72,397 
NET CASH PROVIDED BY OPERATING ACTIVITIES10,272,275 16,732,755 
INVESTING ACTIVITIES
Natural gas transportation prepayment
(2,667,000)— 
Purchase of property and equipment(8,408,787)(340,540)
NET CASH USED IN INVESTING ACTIVITIES(11,075,787)(340,540)
FINANCING ACTIVITIES
Increase in outstanding checks in excess of bank balance478,473 3,037,816 
Borrowings on notes payable13,498,000 20,229,600 
Payments on notes payable(14,497,000)(52,000,000)
Distributions paid to members(26,906,187)(2,962,000)
NET CASH USED IN FINANCING ACTIVITIES(27,426,714)(31,694,584)
NET DECREASE IN CASH AND CASH EQUIVALENTS(28,230,226)(15,302,369)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD37,995,310 18,637,811 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$9,765,084 $3,335,442 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest of $87,847 and $1,291 in 2022 and 2021, respectively.$92,619 $753,728 
Capital expenditures in accounts payable773,849 — 

See Notes to Unaudited Consolidated Financial Statements
7
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021




NOTE 1    .    NATURE OF OPERATIONS

Principal Business Activity

Lake Area Corn Processors, LLC (the "Company") and its wholly owned subsidiary, Dakota Ethanol, LLC ("Dakota Ethanol") are both South Dakota limited liability companies.

The Company owns and manages Dakota Ethanol, a 90 million-gallon (annual nameplate capacity) ethanol plant, located near Wentworth, South Dakota. Dakota Ethanol sells ethanol and related products to customers located in North America.

In addition, the Company has investment interests in five companies in related industries. See Note 5 to the Consolidated Financial Statements of the Company for further details.

NOTE 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. All adjustments are of a normal and recurring nature. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for a full year.

These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2021, contained in the Company's annual report on Form 10-K for 2021 filed with the SEC on March 3, 2022.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.

Revenue Recognition

ASC Topic 606, Revenue from Contracts with Customers requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company generally recognizes revenue at one point in time, as more thoroughly described below. The Company's contracts with customers generally have one performance obligation and a contract duration of one year or less.

The following is a description of principal activities from which we generate revenue:

•sales of ethanol
•sales of distillers grains
•sales of distillers corn oil

We recognize revenue when control of the promised goods or services under our contracts are transferred to our customers in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. Generally, ethanol and related products are shipped free on board ("FOB") and the control of the goods is transferred to our customers either when the
8
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



goods are loaded into trucks or rail cars are released to the railroad. Consideration is based on predetermined contractual prices or on current market prices.

Disaggregation of revenue:

All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line:
Three Months Ended September 30Nine Months Ended September 30,
2022202120222021
Revenues ethanol$56,385,702 $49,995,030 $162,164,019 $136,992,923 
Revenues distillers grains12,922,675 9,731,338 37,962,783 29,806,883 
Revenues distillers corn oil4,902,122 4,068,126 13,971,890 9,848,467 
$74,210,499 $63,794,494 $214,098,692 $176,648,273 

Contract assets and contract liabilities:

The Company receives payments from customers based on contractual billing schedules and accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract.

The Company has no significant contract assets or contract liabilities from contracts with customers at September 30, 2022 and December 31, 2021.

Shipping costs

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.

When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.

Reporting Segment

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance. The Company has determined that it has six (6) operating segments that give rise to two (2) reportable segments. See "Note 3 - Segments" in our Notes to Consolidated Financial Statements.

Costs of Revenues

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

Electricity, raw materials expense (chemicals and denaturant), direct labor costs, and shipping costs on modified and wet distiller's grains are included in cost of revenues.




9
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



Other Income

Through the BioFuel Producer Program, the United States Department of Agriculture (the "USDA") is making up to $700,000,000.00 in direct payment available for biofuel producers who faces unexpected market losses due to the COVID-19 pandemic. On May 23, 2022, the Company received a payment from the USDA Biofuel Producer Program in the amount of approximately $1,200,000 that was recorded in interest and other income on the statement of operations during the nine months ended September 30, 2022.

Inventory Valuation

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.

Receivables and Credit Policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within fifteen days from the invoice date. Unpaid accounts receivable with invoice dates over thirty days old bear interest at 1.5% per month. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

The carrying amount of trade receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. Management regularly reviews trade receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The allowance was $0 as of September 30, 2022 and December 31, 2021.

Investment in commodities contracts, derivative instruments and hedging activities

The Company is exposed to certain risks related to its ongoing business operations including price risks on anticipated purchases of corn, natural gas, the sale of ethanol, distillers grains and distillers corn oil.  The Company manages these risks by using forward or derivative instruments.
 
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material the Company uses to produce ethanol and ethanol by-products.  In general, unfavorable market conditions result from rising corn prices.  This is especially true when market conditions do not allow us to pass along increased corn costs to our customers.  The availability and price of corn are subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply. Additionally, the recent crisis in Ukraine may effect the price of corn, and by extension, our business.

Certain contracts that meet the definition of a derivative may be exempt from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.  Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.

The Company does not apply the normal purchase and sales exemption for forward corn purchase contracts. As of September 30, 2022, the Company was committed to purchasing approximately 5.2 million bushels of corn on a forward contract basis with an average price of $6.33 per bushel. The total corn purchase contracts represent approximately 17% of the annual projected plant corn usage.

The Company enters into firm-price purchase commitments with natural gas suppliers under which the Company agrees to buy natural gas at a price set in advance of the actual delivery.  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.  At September 30, 2022, the Company is committed to purchasing approximately 1,385,000 MMBtus of natural gas with an
10
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



average price of $4.49 per MMBtu.  The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market. The natural gas purchase contracts represent approximately 68% of the annual plant requirements.

The Company enters into firm-price sales commitments with distillers grains customers under which the Company agrees to sell distillers grains at a price set in advance of the actual delivery.  Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers grain between the time the price is fixed and the time the distillers grains are delivered.  At September 30, 2022, the Company was committed to selling approximately 69,000 dry equivalent tons of distillers grains with an average price of $234 per ton.  The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers grains sales represent approximately 32% of the projected annual plant production.

The Company enters into firm-price sales commitments with distillers corn oil customers under which the Company agrees to sell distillers corn oil at a price set in advance of the actual delivery.  Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers corn oil between the time the price is fixed and the time the distillers corn oil is delivered.  At September 30, 2022, the Company was committed to selling approximately 2.7 million pounds of distillers corn oil with an average price of $0.76 per pound.  The Company accounts for these transactions as normal sales, and accordingly, does not mark these transactions to market. The distillers corn oil sales represent approximately 12% of the projected annual plant production.

The Company did not have any firm-priced sales commitments for ethanol as of September 30, 2022.

The Company enters into short-term forward, option and futures contracts for corn and natural gas as a means of managing exposure to changes in commodity and energy prices. All of the Company's 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 and accounted for as hedging instruments.

As part of our trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk of loss in the market value of inventories and purchase commitments.

Derivatives not designated as hedging instruments at September 30, 2022 and December 31, 2021 were as follows:
Balance Sheet ClassificationSeptember 30, 2022December 31, 2021*
Forward contracts in gain position$2,103,381 $892,509 
Futures contracts in gain position126,400 140,863 
Futures contracts in loss position(459,363)(1,238,560)
Total forward, futures and options contracts1,770,418 (205,188)
Cash held by broker1,783,944 3,092,019 
Current Assets$3,554,362 $2,886,831 
Forward contracts in loss positionCurrent Liabilities$(620,123)$(1,490,510)

*Derived from audited financial statements

Futures contracts and cash held by broker are all with one party, and the right of offset exists. Therefore, on the balance sheet, these items are netted in one balance regardless of position.

Forward contracts are with multiple parties, and the right of offset does not exist. Therefore, these contracts are reported at the gross amounts on the balance sheet.

11
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



Gains and losses related to derivative contracts related to corn and natural gas are included as a component of costs of revenues.

 Statement of OperationsThree Months Ended September 30,
Classification20222021
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contractsCost of Revenues$(1,940,249)$2,017,814 
Forward contractsCost of Revenues1,405,821 (1,774,753)
 Statement of OperationsNine Months Ended September 30,
Classification20222021
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contractsCost of Revenues$(7,342,878)$(9,208,060)
Forward contractsCost of Revenues2,796,694 8,329,573 

Investments

The Company has investment interests in five (5) companies in related industries. All of these interests are at ownership shares less than 20%. These investments are flow-through entities and are being accounted for by the equity method of accounting under which the Company's share of net income of the underlying five (5) companies is recognized as income in the Company's statements of operations and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data.

Goodwill

Annually, as well as when an event triggering impairment may have occurred, the Company performs an impairment test on goodwill, which compares the fair value of the reporting unit with its carrying amount. An impairment charge is recognized, if necessary, for the amount by which the carrying value exceeds the fair value up to the amount of the goodwill attributed to the reporting unit. The Company performs the annual analysis as of December 31 of each fiscal year. The Company determined that there was no impairment of goodwill at December 31, 2021 or through September 30, 2022 on the basis that no triggering events were noted.
 
Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the fair value of derivative financial instruments, lower of cost or net realizable value accounting for inventory, and goodwill impairment evaluation.

Risks and Uncertainties

The Company has certain risks and uncertainties that it will experience 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 and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three months ended September 30, 2022, ethanol sales averaged approximately 76% of total revenues, while approximately 17% of revenues were generated from the sale of distillers
12
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



grains and 7% of revenues were generated from the sale of corn oil. For the nine months ended September 30, 2022, ethanol sales averaged approximately 76% of total revenues, while approximately 18% of revenues were generated from the sale of distiller grains and 6% of revenues were generated from the sale of corn oil.

The Company's operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, unleaded gasoline and the petroleum markets, government programs, global political or economic issues, including but not limited to, the war in Ukraine including sanctions associated therewith, shortages, export prices, crude oil prices, currency valuations and government policies in the United States and around the world, over which we have no control. 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, and government programs, global political or economic issues, including but not limited to the war in Ukraine including sanctions associated therewith, or global damaging growing conditions, such as plant disease or adverse weather, including drought, increased fertilizer costs as well as global conflicts. The Company's risk management program is used to protect against the price volatility of these commodities.

On January 30, 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a “Public Health Emergency of International Concern” and on March 11, 2020, declared COVID-19 a pandemic. Quarantines, labor shortages, and other disruptions to the Company’s operations, and those of its customers, adversely impacted the Company’s revenues, ability to provide its services and operating results. Any future quarantines, labor shortages, or other disruptions to the Company's operations, or those of its customers may adversely impact the Company's revenues, ability to provide its services and operating results. Like the COVID-19 pandemic, any significant outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the geographical area in which the Company operates, resulting in an economic downturn that could affect demand for its goods and services. The extent to which COVID-19 will impact the Company’s long-term results will depend on future developments, which are highly uncertain and cannot be predicted, including but not limited to, new developments regarding continued distribution of the COVID-19 vaccine and boosters, new information which may emerge concerning the severity of the coronavirus, prevalence of new COVID-19 cases and variants and actions taken to contain the coronavirus or its impact.

NOTE 3.    SEGMENT REPORTING

The Company reports its financial and operating performance in two segments: (1) production, which includes the manufacturing and marketing of fuel-grade ethanol and co-products of the ethanol production process and (2) ethanol producing equity method investments, which consists of the aggregation of the Company's two equity method operating segments of investment in Guardian Hankinson, LLC and investment in Ring-neck Energy & Feed, LLC. The Company discloses its other identified operating segments in an all other category ("All Other"), which consists of the Company's investments in RPMG, LLC, Lawrenceville Tank, LLC, and Guardian Energy Management, LLC.

The Company’s two reportable segments have been identified based on their unique characteristics. Our production segment is the Company’s ethanol plant that is operated in a manner chosen by our chief decision making team. The ethanol producing equity method segment consists of aggregated operating segments investments that have exceeded the quantitative thresholds for reportable segments which have similar economic characteristics but our chief decision making team does not have input into the daily operations of those entities. The All Other is comprised of investments that fall below the quantitative thresholds for reporting segments and the Company's chief decision making team has no input into their daily operations. Production includes the core operating drivers of the Company’s consolidated financial statements which consist of the production and sale of ethanol and its co-products. Ethanol producing equity method investments derive their revenues from the production and sale of ethanol and its co-products. The All Other receives its revenues from marketing fees, management fees, and storage fees. The reconciliation item is necessary due to reportable segments not being consolidated in the financial statements, but rather are reflected as equity method investments.

13
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



The segments were identified using standards under ASC 280-10-50. They each engage in business activities, the operating results are reviewed by the Company’s chief operating decision maker, and discrete financial information is available for each segment.

The following tables set forth certain financial data for the Company's operating segments:

Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
unauditedunauditedunauditedunaudited
Net Sales
Production$74,210,499 $63,794,494 $214,098,692 $176,648,273 
Ethanol Producing Equity Method Investments180,869,554 146,800,703 545,640,321 439,148,984 
All Other4,553,075 4,140,757 13,334,531 12,356,312 
Total259,633,128 214,735,954 773,073,544 628,153,569 
Reconciliation(185,422,629)(150,941,460)(558,974,852)(451,505,296)
Consolidated$74,210,499 $63,794,494 $214,098,692 $176,648,273 
Gross Profit:
Production$7,401,848 $9,041,115 $18,930,306 $25,466,388 
Ethanol Producing Equity Method Investments7,747,126 15,674,893 31,919,797 42,997,910 
All Other2,982,259 2,537,782 8,922,437 7,790,640 
Total18,131,233 27,253,790 59,772,540 76,254,938 
Reconciliation(10,729,385)(18,212,675)(40,842,234)(50,788,550)
Consolidated$7,401,848 $9,041,115 $18,930,306 $25,466,388 
Net Income:
Production$6,509,692 $8,812,557 $19,297,865 $25,406,739 
Ethanol Producing Equity Method Investments1,863,817 10,584,904 21,973,160 27,888,935 
All Other1,384,948 747,045 3,625,905 3,407,283 
Total9,758,457 20,144,506 44,896,930 56,702,957 
Reconciliation(3,248,765)(11,331,949)(25,599,065)(31,296,218)
Consolidated$6,509,692 $8,812,557 $19,297,865 $25,406,739 

September 30, 2022December 31, 2021
unauditedaudited
Total Assets
Production$124,882,071 $148,952,863 
Ethanol Producing Equity Method Investments227,125,159 261,642,408 
All Other319,515,750 283,835,871 
Total671,522,980 694,431,142 
Reconciliation(546,640,909)(545,478,279)
Consolidated$124,882,071 $148,952,863 

14
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



NOTE 4.     INVENTORY

Inventory consisted of the following as of September 30, 2022 and December 31, 2021:
September 30, 2022December 31, 2021*
Raw materials$4,247,941 $7,278,381 
Finished goods2,067,174 6,195,222 
Work in process1,767,207 1,779,170 
Parts inventory1,561,642 1,157,664 
$9,643,964 $16,410,437 
*Derived from audited financial statements.

As of September 30, 2022 and December 31, 2021, the Company evaluated inventory for a lower of cost or net realizable value write-down on inventory. The Company determined no write-down was necessary.

NOTE 5.    INVESTMENTS

Dakota Ethanol has a 5% investment interest in the Company’s ethanol marketer, Renewable Products Marketing Group, LLC ("RPMG").  The net income, which is reported in the Company’s income statement for RPMG, is based on RPMG’s June 30, 2022 unaudited interim results. The carrying amount of the Company’s investment was approximately $1,747,000 and $1,709,000 as of September 30, 2022 and December 31, 2021, respectively.

Dakota Ethanol has a 10% investment interest in Lawrenceville Tanks, LLC ("LT"), a partnership which operates an ethanol storage terminal in Georgia.  The net income, which is reported in the Company’s income statement for LT, is based on LT’s September 30, 2022 unaudited interim results. The carrying amount of the Company’s investment was approximately $250,000 and $215,000 as of September 30, 2022 and December 31, 2021, respectively.

Lake Area Corn Processors has a 10% investment interest in Guardian Hankinson, LLC ("GH"), a partnership which operates an ethanol plant in North Dakota.  The net income, which is reported in the Company’s income statement for GH, is based on GH’s September 30, 2022 unaudited interim results. The carrying amount of the Company’s investment was approximately $1,286,000 and $5,714,000 as of September 30, 2022 and December 31, 2021, respectively.

Lake Area Corn Processors has a 17% investment interest in Guardian Energy Management, LLC ("GEM"), a partnership to provide management services to ethanol plants.  The net income, which is reported in the Company’s income statement for GEM, is based on GEM’s September 30, 2022 unaudited interim results. The carrying amount of the Company’s investment was approximately $90,000 as of September 30, 2022 and December 31, 2021, respectively.

Lake Area Corn Processors has an 11% investment interest in Ring-neck Energy and Feeds, LLC ("REF"), a partnership which operates an ethanol plant in South Dakota.  The net income, which is reported in the Company’s income statement for REF, is based on REF’s September 30, 2022 unaudited interim results. The carrying amount of the Company’s investment was approximately $12,770,000 and $12,778,000 as of September 30, 2022 and December 31, 2021, respectively. The carrying amount of the investment exceeds the underlying equity in net assets by approximately $957,000. The excess is comprised of a basis adjustment of approximately $393,000 and capitalized interest of $564,000. The excess is amortized over 20 years from May 2019, the time the plant became operational.


15
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



Condensed, combined unaudited financial information of the Company’s investments in RPMG, LT, GH, GEM and REF are as follows:
Balance SheetSeptember 30, 2022December 31, 2021
Current Assets$384,975,099 $370,470,221 
Other Assets161,665,810 179,230,853 
Current Liabilities326,459,139 308,504,144 
Long-term Liabilities65,890,393 44,248,272 
Members' Equity154,291,377 196,948,658 
Three Months Ended
Income StatementSeptember 30, 2022September 30, 2021
Revenue$185,422,629 $150,941,460 
Gross Profit10,729,385 18,212,675 
Net Income3,248,765 11,331,949 
Nine Months Ended
Income StatementSeptember 30, 2022September 30, 2021
Revenue$558,974,852 $451,505,296 
Gross Profit40,842,234 50,788,550 
Net Income (Loss)25,599,065 31,296,218 
The following table shows the condensed financial information of GH; the investment which represents greater than 10% of the Company's income as of September 30, 2022.
Balance SheetSeptember 30, 2022December 31, 2021
Current Assets$39,446,104 $43,793,006 
Other Assets42,469,659 54,451,233 
Current Liabilities31,068,150 34,990,527 
Long-term Liabilities37,987,741 6,115,092 
Members' Equity12,859,872 57,138,620 
Three Months Ended
Income StatementSeptember 30, 2022September 30, 2021
Revenue$120,022,746 $102,483,876 
Gross Profit708,454 9,516,911 
Net Income (Loss)(761,923)8,458,155 
Nine Months Ended
Income StatementSeptember 30, 2022September 30, 2021
Revenue$358,507,931 $297,952,764 
Gross Profit13,596,079 20,060,049 
Net Income16,721,254 18,143,266 

16
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



The following table shows the condensed financial information of REF; the investment which represents greater than 10% of the Company's assets as of September 30, 2022.
Balance SheetSeptember 30, 2022December 31, 2021
Current Assets$27,628,293 $44,893,050 
Other Assets117,581,103 122,727,914 
Current Liabilities17,620,815 23,595,688 
Long-term Liabilities27,902,652 38,133,180 
Members' Equity99,685,929 105,892,096 
Three Months Ended
Income StatementSeptember 30, 2022September 30, 2021
Revenue$60,846,808 $44,316,827 
Gross Profit7,038,672 6,157,982 
Net Income2,625,740 2,126,749 
Nine Months Ended
Income StatementSeptember 30, 2022September 30, 2021
Revenue$187,132,390 $141,196,220 
Gross Profit18,323,718 22,937,861 
Net Income5,251,906 9,745,669 

The Company recorded equity in net income of investment at approximately $2,542,000 and $3,073,000 from our investments for the nine months ended September 30, 2022, and 2021, respectively. The Company recorded equity in net income of approximately $315,000 and $1,135,000 from our investments for the three months ended September 30, 2022, and 2021, respectively.

NOTE 6.    REVOLVING PROMISSORY NOTE

On February 6, 2018, Dakota Ethanol executed a revolving promissory note with Farm Credit Services of America ("FCSA") in the amount up to $10,000,000 or the amount available in accordance with the borrowing base calculation, whichever is less. Dakota Ethanol amended the note agreement with FCSA in June of 2020 and October of 2021. Under the amendments, the available credit under the revolving operating note was reduced to $2,000,000. There is a non-use fee of 0.25% per annum on the unused portion of the $2,000,000 availability. The note is collateralized by substantially all of the assets of the Company. The note expires on November 1, 2023. Interest on the outstanding principal balance will accrue at 305 basis points above the Secured Overnight Financing 30-day Average Rate ("SOFR 30"). The interest rate is not subject to a floor. The rate was 5.35% at September 30, 2022. On September 30, 2022, Dakota Ethanol had no balance outstanding and approximately $2,000,000 available to be drawn on the revolving promissory note.

NOTE 7.    LONG-TERM NOTES PAYABLE

On August 1, 2017, Dakota Ethanol executed a term note from FCSA in the amount of $8,000,000. Dakota Ethanol agreed to make monthly interest payments starting September 1, 2017 and annual principal payments of $1,000,000 starting on August 1, 2018. The annual principal payment on August 1, 2020 was deferred after the note was amended with FCSA and is now due on August 1, 2025. The note matures on August 1, 2025. Interest on the outstanding principal balance will accrue at 330 basis points above the SOFR 30. The interest rate is not subject to a floor. The rate was 5.60% at September 30, 2022. On September 30, 2022, Dakota Ethanol had $4,000,000 outstanding on the note.

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. Dakota Ethanol
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



amended the note agreement with FCSA in June of 2020. The amendment increased the available credit on the reducing revolving note to $48,000,000. The amount Dakota Ethanol can borrow on the note decreases by $1,750,000 semi-annually starting on July 1, 2021 until the maximum balance reaches $32,250,000 on July 1, 2025. The note matures on January 1, 2026. Interest on the outstanding principal balance will accrue at 330 basis points above the SOFR 30. The interest rate is not subject to a floor. The rate was 5.60% at September 30, 2022. The note contains a non-use fee of 0.50% per annum on the unused portion of the note. The loan was amended with FCSA on October 11, 2021 and the amendment was filed with the Securities Exchange Commission as Exhibit 10.1 to the Company's Form 10-Q on November 12, 2021. Under the amendment, the interest accrual will be measured using the SOFR 30. On September 30, 2022, Dakota Ethanol had $1,000 outstanding and $42,749,000 available to be drawn on the note.

As part of the notes payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing financial reporting requirements, distribution and capital expenditure limits, minimum debt service coverage ratios, net worth and working capital requirements. The note is collateralized by substantially all assets of the Company. The note payable agreement was amended in October 2021 with modifications to the requirements. The working capital covenant was increased to $13,500,000 and the net worth covenant was increased to $28,000,000.

The balances of the notes payable are as follows. The balances reflect the updated agreement:
September 30, 2022December 31, 2021
Notes Payable - FCSA$4,001,000 $5,000,000 
Less unamortized debt issuance costs(3,208)(4,861)
3,997,792 4,995,139 
Less current portion(1,000,000)(1,000,000)
$2,997,792 $3,995,139 
*Derived from audited financial statements

Principal maturities for the remainder of the Note are estimated as follows.
Periods Ending September 30,Principal
2023$1,000,000 
20241,000,000 
20252,001,000 
$4,001,000 


NOTE 8.    FAIR VALUE MEASUREMENTS

The Company complies with the fair value measurements and disclosures standard, which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.

The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 uses unobservable inputs that are not corroborated by market data.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021




A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Derivative financial instruments. Commodity futures contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade ("CBOT") and New York Mercantile Exchange ("NYMEX") markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 Total Level 1 Level 2 Level 3
September 30, 2022
Assets:
Derivative financial instruments, futures and options contracts$126,400 $126,400 $— $— 
Forward contracts$2,103,381 $— $2,103,381 $— 
Liabilities:
Derivative financial instruments, futures and options contracts$459,363 $459,363 $— $— 
Forward contracts$620,123 $— $620,123 $— 
December 31, 2021*
Assets:
Derivative financial instruments, futures and options contracts$140,863 $140,863 $— $— 
Forward contracts$892,509 $— $892,509 $— 
Liabilities:
Derivative financial instruments, futures and options contracts$1,238,560 $1,238,560 $— $— 
Forward contracts$1,490,510 $— $1,490,510 $— 

*Derived from audited financial statements.

During the nine months ended September 30, 2022, the Company did not make any changes between Level 1 and Level 2 assets and liabilities. As of September 30, 2022 and December 31, 2021, the Company did not have any Level 3 assets or liabilities.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example,
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at September 30, 2022 and December 31, 2021.

Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.

The Company believes the carrying amount of cash and cash equivalents (level 1), accounts receivable (level 2), accounts payable and accruals (level 2) and short-term debt (level 3) approximates fair value.

The carrying amount of long-term obligations (level 3) at September 30, 2022 of $4,001,000 had an estimated fair value of approximately $4,001,000 based on estimated interest rates for comparable debt. The carrying amount of long-term obligations at December 31, 2021 of $4,000,000 had an estimated fair value of approximately $4,000,000.

NOTE 9.    RELATED PARTY TRANSACTIONS

Dakota Ethanol has a 5% interest in RPMG, and Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol, dried distiller's grains and corn oil inventories produced by Dakota Ethanol.  The marketing fees are included in net revenues. The Company also purchases denaturant from RPMG.
Revenues and marketing fees related to the agreements as well as denaturant purchases are as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenues ethanol$56,461,839 $50,058,768 $162,392,421 $137,184,137 
Revenues distillers dried grains4,969,228 3,422,681 12,353,408 9,758,249 
Revenues corn oil4,917,518 4,082,593 14,015,718 9,889,836 
Marketing fees ethanol76,137 63,738 228,402 191,214 
Marketing fees distillers dried grains22,103 15,848 54,784 47,558 
Marketing fees corn oil15,396 14,468 43,829 41,369 
Denaturant purchases552,843 914,355 1,871,487 2,547,836 
September 30, 2022December 31, 2021*
Amounts due to RPMG$71,646 $79,909 
*Derived from audited financial statements.
The Company purchased corn and services from members of its Board of Managers that farm and operate local businesses. Corn purchases from these related parties during the nine months ended September 30, 2022 and 2021 totaled approximately $1,657,000 and $1,506,000, respectively. Corn purchases from these related parties during the three months ended September 30, 2022 and 2021 totaled approximately $1,093,000 and $1,037,000, respectively. As of September 30, 2022 and December 31, 2021, the Company had no outstanding obligations to these related parties.





20
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2022 AND 2021



NOTE 10 - COMMITMENTS, CONTINGENCIES AND AGREEMENTS

Capital Expenditures
Dakota Ethanol has committed to a contract for the design and construction of a new 2 million gallon ethanol storage tank. The value of the construction is approximately $2.2 million, of which approximately $0 is outstanding as of September 30, 2022. The 2 million gallon ethanol storage tank is expected to be placed into service in the fourth quarter. The Company has also committed to a contract for the design and construction of an additional grain storage bin. The value of the contracted construction is approximately $5.8 million, of which approximately $1.6 million is outstanding as of September 30, 2022. The additional grain storage bin project is expected to be completed during the fourth quarter of 2022.
Agreements
On June 24, 2022, Dakota Ethanol, LLC, entered into the Precedent Agreement West Leg 2023 Expansion between Northern Natural Gas Company and the Dakota Ethanol (the "West Leg Agreement"). Pursuant to the West Leg Agreement, Dakota Ethanol will receive additional firm commitment natural gas transportation services. In order to secure these firm commitment natural gas transportation services, Dakota Ethanol agrees to pay Northern Natural Gas Company a contribution to the cost of constructing certain additional natural gas pipeline and storage facilities. Dakota Ethanol's contribution is estimated to be $8,890,000, of which $6,223,000 is outstanding as of September 30, 2022. Additional payments of 30% and 40% of the total contribution are scheduled to be made on December 31, 2022 and March 31, 2023, respectively. For a period of five years beginning on November 1, 2023, Dakota Ethanol is entitled to a firm natural gas commitment of 7,000 decatherms per day during the winter months (between November 1 and March 31 each year), and firm commitment of 4,340 decatherms per day during the summer months.
NOTE 11 - SUBSEQUENT EVENTS
During November 2022, the Company declared a distribution to its members of $5,924,000 or $0.20 per capital unit, to unit holders of record as of October 1, 2022.
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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 September 30, 2022, compared to the same period of the prior year. This discussion should be read in conjunction with the consolidated financial statements and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2021, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 which was filed with the SEC on March 3, 2022.

Disclosure Regarding Forward-Looking Statements

This report contains historical information, as well as forward-looking statements that involve known and unknown risks, including the growing crisis in Ukraine, and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report and our annual report on Form 10-K for the fiscal year ended December 31, 2021.

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.
 
Overview
 
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" or the "ethanol plant."

Our revenue is derived from the sale and distribution of our ethanol, distillers grains and corn oil.  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.


22
Results of Operations

Comparison of the Three Months Ended September 30, 2022 and 2021

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 three months ended September 30, 2022 and 2021:
20222021
Income Statement DataAmount%Amount%
Revenues$74,210,499 100.0 $63,794,494 100.0 
Cost of Revenues66,808,651 90.0 54,753,379 85.8 
Gross Profit7,401,848 10.0 9,041,115 14.2 
Operating Expense1,268,468 1.7 1,249,243 2.0 
Income from Operations6,133,380 8.3 7,791,872 12.2 
Other Income (Expense)376,312 0.5 1,020,685 1.6 
Net Income$6,509,692 8.8 $8,812,557 13.8 


The following table depicts the disaggregation of revenue according to product line:
Three Months Ended September 30
20222021
Revenues ethanol$56,385,702 $49,995,030 
Revenues distillers grains12,922,675 9,731,338 
Revenues distillers corn oil4,902,122 4,068,126 
$74,210,499 $63,794,494 

Revenues

Revenue from sales increased by approximately 16.3% during the three months ended September 30, 2022 compared to the same period of 2021 due to increased prices that we received for our ethanol during the 2022 period along with increased gallons of ethanol sold. Revenue from distillers grains sales increased by approximately 32.8% during the three months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices that we received for our distillers grains along with more tons of distillers grains sold. Revenue from corn oil sales increased by approximately 20.5% during the three months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices that we received for corn oil sold during the 2022 period along with more pounds of corn oil sold.
Ethanol

Our ethanol revenue was approximately $6.4 million higher during our three months ended September 30, 2022 compared to the three months ended September 30, 2021, an increase of approximately 12.8%. This increase in ethanol revenue was due primarily to an increase in the gallons sold and price that we received per gallon of ethanol sold during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The average price we received for our ethanol was approximately $0.11 higher per gallon during the three months ended September 30, 2022
23
compared to the three months ended September 30, 2021, an increase of approximately 4.8%. Management attributes this increase in ethanol prices during the three months ended September 30, 2022 to higher gasoline prices generally which increases the price of ethanol. Since ethanol is blended with gasoline, when gasoline price and demand are higher it has a corresponding impact on ethanol price and demand. Management also believes that higher corn prices during the 2022 period had an impact on ethanol prices.

We sold approximately 7.6% more gallons of ethanol during the three months ended September 30, 2022 compared to the same period of 2021, an increase of approximately 1,673,000 gallons. The increase is due primarily to increased production and sales of ethanol inventory during the three months ended September 30, 2022. Management expects relatively stable ethanol production for the rest of our 2022 fiscal year.    

Distillers Grains

    Our total distillers grains revenue was approximately 32.8% higher during the three months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices received for our distillers grains along with more tons of distillers grain sold. The average price we received for our dried distillers grains was approximately 9.7% higher during the three months ended September 30, 2022 compared to the same period of 2021, an increase of approximately $19.71 per ton. Management attributes the increase in dried distillers grains prices during the three months ended September 30, 2022 to increases in the domestic price of corn. The average price we received for our modified/wet distillers grains was approximately 10.4% higher for the three months ended September 30, 2022 compared to the same period of 2021, an increase of approximately $22.47 per ton. Management attributes this increase in modified/wet distillers grains prices with higher corn prices in the market.

We sold approximately 20.8% more total tons of distillers grains during the three months ended September 30, 2022 compared to the same period of 2021 due primarily to increased production and sales of distillers grain inventory.
    
    Corn Oil

    Our total corn oil revenue was approximately 20.5% higher during the three months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices received for our corn oil. The average price per pound we received for our corn oil was higher by approximately 15.9% for the three months ended September 30, 2022 compared to the same period of 2021 due primarily to demand from the renewable diesel industry for corn oil along with higher soybean oil prices.

Our total pounds of corn oil sold increased by approximately 3.9% during the three months ended September 30, 2022 compared to the same period of 2021 due primarily to increased production and sales of corn oil inventory.

Cost of Revenues

Corn

Our cost of revenues relating to corn was approximately 24.3% higher for the three months ended September 30, 2022 compared to the same period of 2021 due to significantly increased corn prices and corn usage during the 2022 period.

Our average cost per bushel of corn increased by approximately 13.0% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. We consumed approximately 10.0% more bushels of corn during the three months ended September 30, 2022 compared to the same period of 2021 that contributed to higher corn cost. Management attributes the increased corn cost per bushel to significantly higher market corn prices and decreased corn availability during our 2022 fiscal period. Management anticipates corn prices to remain higher into our 2023 fiscal year due to drought conditions in the area that surrounds our plant and global uncertainty in the commodities markets.


24
Natural Gas

Our cost of revenues related to natural gas increased by approximately $529,000, an increase of approximately 24.9%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. This increase was due to higher natural gas costs per MMBtu during the three months ended September 30, 2022 compared to the same period of 2021.

Our average cost per MMBtu of natural gas during the three months ended September 30, 2022 was approximately 20.0% more compared to the cost per MMbtu for the three months ended September 30, 2021. Management attributes this increase in our average natural gas costs to higher market natural gas prices due to high export demand and supply shortages caused by the Russian invasion of Ukraine.

The volume of natural gas we used increased by approximately 4.1% during the three months ended September 30, 2022 compared to the same period of 2021 due to increased production at the plant.

Operating Expenses

Our operating expenses were comparable for the three months ended September 30, 2022 compared to the same period of 2021 due primarily to decreased wages and benefits offset by increased professional fees.

Other Income and Expense

Our other income decreased during the three months ended September 30, 2022 compared to the same period of 2021 due primarily to decreased income from our investments. We had more interest income during the three months ended September 30, 2022 compared to the same period of 2021 due to having more cash on hand during the 2022 period. We had less income from our investments during the three months ended September 30, 2022 compared to the same period of 2021 due to decreased profitability in the ethanol sector. We had less interest expense during the three months ended September 30, 2022 compared to the same period of 2021 due to the capitalization of interest expense on current construction projects.

Comparison of the Nine Months Ended September 30, 2022 and 2021

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 nine months ended September 30, 2022 and 2021:
20222021
Income Statement DataAmount%Amount%
Revenues$214,098,692 100.0 $176,648,273 100.0 
Cost of Revenues195,168,386 91.2 151,181,885 85.6 
Gross Profit18,930,306 8.8 25,466,388 14.4 
Operating Expense3,668,362 1.7 3,776,472 2.1 
Income from Operations15,261,944 7.1 21,689,916 12.3 
Other Income (Expense)4,035,921 1.9 3,716,823 2.1 
Net Income$19,297,865 9.0 $25,406,739 14.4 




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The following table depicts the disaggregation of revenue according to product line:
Nine Months Ended September 30,
20222021
Revenues ethanol$162,164,019 $136,992,923 
Revenues distillers grains37,962,783 29,806,883 
Revenues distillers corn oil13,971,890 9,848,467 
$214,098,692 $176,648,273 

Revenues

Revenue from ethanol sales increased by approximately 18.4% during the nine months ended September 30, 2022 compared to the same period of 2021 due to increased prices that we received for our ethanol during the 2022 period along with an increase in the gallons of ethanol we sold. Revenue from distillers grains sales increased by approximately 27.4% during the nine months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices that we received for our distillers grains and increased tons of distillers grains sold. Revenue from corn oil sales increased by approximately 41.9% during the nine months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices that we received for corn oil sold during the 2022 period along with more pounds of corn oil sold.
Ethanol

Our ethanol revenue was approximately $25 million higher during our nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, an increase of approximately 18.4%. This increase in ethanol revenue was due primarily to an increase in the price that we received per gallon of ethanol sold and increased gallons of ethanol sold during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
The average price we received for our ethanol was approximately $0.27 higher per gallon during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, an increase of approximately 12.9%. Management attributes this increase in ethanol prices during the nine months ended September 30, 2022 to higher oil prices. Management also believes that higher corn prices during the 2022 period had an impact on ethanol prices.

We sold approximately 4.6% more gallons of ethanol during the nine months ended September 30, 2022 compared to the same period of 2021, an increase of approximately 3,012,000 gallons. The increase is due primarily to increased sales of ethanol inventory during the nine months ended September 30, 2022.
        
Distillers Grains

    Our total distillers grains revenue was approximately 27.4% higher during the nine months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices received for our distillers grains.

    The average price we received for our dried distillers grains was approximately 15.0% higher during the nine months ended September 30, 2022 compared to the same period of 2021, an increase of approximately $29.20 per ton. Management attributes the increase in dried distillers grains prices during the nine months ended September 30, 2022 to increases in the domestic price of corn. The average price we received for our modified/wet distillers grains was approximately 17.4% higher for the nine months ended September 30, 2022 compared to the same period of 2021, an increase of approximately $35.36 per ton. Management attributes this increase in modified/wet distillers grains prices with higher corn prices in the market.

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We sold approximately 9.3% more total tons of distillers grains during the nine months ended September 30, 2022 compared to the same period of 2021 primarily due to increased sales of distillers grain inventory.
    
    Corn Oil

    Our total corn oil revenue was approximately 41.9% higher during the nine months ended September 30, 2022 compared to the same period of 2021 due primarily to increased prices received for our corn oil along with increased pounds of corn oil sold. Our total pounds of corn oil sold increased by approximately 3.5% during the nine months ended September 30, 2022 compared to the same period of 2021, an increase of approximately 686,000 pounds. We produced more corn oil due to increased oil extraction proficiency during the 2022 period compared to the nine months ended September 30, 2021.

    The average price per pound we received for our corn oil was higher by approximately 38.0% for the nine months ended September 30, 2022 compared to the same period of 2021 due primarily to demand from the renewable diesel industry for corn oil along with higher soybean oil prices.

Cost of Revenues

Corn

Our cost of revenues relating to corn was approximately 31.3% higher for the nine months ended September 30, 2022 compared to the same period of 2021 due to significantly increased corn prices during the 2022 period along with increased corn usage.

Our average cost per bushel of corn increased by approximately 21.7% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. We consumed approximately 7.9% more bushels of corn during the nine months ended September 30, 2022 compared to the same period of 2021 that contributed to higher corn cost. Management attributes the increased corn cost per bushel to significantly higher market corn prices and decreased corn availability during our 2022 fiscal period. Management anticipates corn prices to remain higher into our 2023 fiscal year.

Natural Gas

Our cost of revenues related to natural gas increased by approximately $1,963,000, an increase of approximately 35.7%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This increase was due to higher natural gas costs per MMBtu during the nine months ended September 30, 2022 compared to the same period of 2021.

Our average cost per MMBtu of natural gas during the nine months ended September 30, 2022 was approximately 32.6% higher compared to the cost per MMbtu for the nine months ended September 30, 2021. Management attributes this increase in our average natural gas costs to higher market natural gas prices due to high demand and supply shortages.

The volume of natural gas we used was similar during the nine months ended September 30, 2022 compared to the same period of 2021.

Operating Expenses

Our operating expenses were less for the nine months ended September 30, 2022 compared to the same period of 2021 due primarily to decreased wages and benefits offset by increased professional fees.

Other Income and Expense

Our other income increased during the nine months ended September 30, 2022 compared to the same period of 2021 due primarily to less interest expense and the USDA Biofuel Producer Relief Program payment awarded during the nine months ended September 30, 2022. We had more interest income during the nine months ended September 30, 2022 compared to the same period of 2021 due to having more cash on hand during the 2022 period. We had less income from our investments
27
during the nine months ended September 30, 2022 compared to the same period of 2021 due to decreased profitability in the ethanol sector. We had less interest expense during the nine months ended September 30, 2022 compared to the same period of 2021 due to lower carrying balances on outstanding debt.

Changes in Financial Condition for the Nine Months Ended September 30, 2022

Current Assets

    Our cash on hand at September 30, 2022 was less compared to December 31, 2021 due to deferred corn payments and member distribution payments. We had more accounts receivable at September 30, 2022 compared to December 31, 2021 due to the timing of our quarter end and the payments received related to the shipments of our products. The value of our inventory was less at September 30, 2022 compared to December 31, 2021 due to decreased quantities of corn and finished goods inventory. The asset value of our derivative instruments was greater at September 30, 2022 compared to December 31, 2021 due to recent corn price changes which impacted our derivative instruments. We had less prepaid expenses at September 30, 2022 compared to December 31, 2021 due to amortization of our insurance premiums.

Property and Equipment

    The value of our property and equipment was higher at September 30, 2022 compared to December 31, 2021 primarily as a result of the new construction of an additional fermentor as well as construction currently in progress for an additional grain bin and ethanol storage tank.

Other Assets

    The value of our investments was lower at September 30, 2022 compared to December 31, 2021 due to distributions in excess of earnings from our investments during the nine months ended September 30, 2022. We had significantly more other assets at September 30, 2022 compared to December 31, 2021 due primarily to the prepayment for the firm commitment on natural gas transportation with Northern Natural Gas.

Current Liabilities

    We had more outstanding checks in excess of bank balances at September 30, 2022 compared to December 31, 2021 due to the timing of our quarter end and payments issued. We use our revolving loan to pay any checks that are presented for payment which exceed the cash we have available in our accounts. Our accounts payable were lower at September 30, 2022 compared to December 31, 2021 due primarily to decreased corn payables at September 30, 2022 compared to December 31, 2021 as the deferred payments were paid during the first quarter of 2022. Our derivative instrument liability was lower at September 30, 2022 compared to December 31, 2021 due to corn price changes, which impacted our derivative instruments. The current portion of our notes payable was unchanged at September 30, 2022 compared to December 31, 2021.

Long-Term Liabilities

    Our long-term liabilities were less at September 30, 2022 and December 31, 2021 due to our annual $1,000,000 principal payment which was made in August 2022.

Liquidity and Capital Resources

    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 will be paid out of cash from operations and existing loans and will not require any additional debt or equity financing.

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    Currently, we have two revolving loans, which allow us to borrow funds for working capital. These loans are described in greater detail below in the section entitled "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness." As of September 30, 2022, we had $1,000 outstanding and $44,749,000 available to be drawn on our revolving loans, after taking into account the borrowing base calculation. Management anticipates that this is sufficient to maintain our liquidity and continue our operations for the next twelve months.

The following table shows cash flows for the nine months ended September 30, 2022 and 2021:
Nine Months Ended September 30,
20222021
Net cash provided by operating activities$10,272,275 $16,732,755 
Net cash (used in) investing activities(11,075,787)(340,540)
Net cash (used in) financing activities(27,426,714)(31,694,584)

Cash Flow From Operations. Our operating activities provided less cash during the nine months ended September 30, 2022 compared to the same period of 2021, due primarily to decreased net income, a larger increase in accounts receivable, and a larger decrease in accounts payable during the 2022 period partially offset by distributions in excess of earnings on investments and a decrease in inventory.

    Cash Flow From Investing Activities. Our investing activities used more cash during the nine months ended September 30, 2022 compared to the same period of 2021, due to the construction of an additional grain bin, ethanol storage tank, and additional fermentor as well as prepayment for our natural gas transportation services agreement.

Cash Flow From Financing Activities. Our financing activities used less cash during the nine months ended September 30, 2022 compared to the same period of 2021, due primarily to less payments on long-term debt partially offset by increased distributions paid to members during the 2022 period.

Plans for Cash in the Short Term and in the Long Term

In the next 12 months, the Company plans to reinvest its cash into current business operations and to use cash for the design and construction of an additional grain storage bin. The Company will also use its cash for prepayments for the firm commitment of natural gas transportation from Northern Natural Gas and may provide further distributions to its members. In the long term, the Company plans to reinvest its cash into current business operations and may provide further distributions to its members.

Indebtedness
 
We maintain a comprehensive credit facility with Farm Credit Services of America, PCA and Farm Credit Services of America, FLCA (collectively "FCSA"). All of our assets, including the ethanol plant and equipment, its accounts receivable and inventory, serve as collateral for our loans with FCSA.

On October 11, 2021, we entered into a Fourth Amendment to the credit agreement (the "Fourth Amendment"). Under the Fourth Amendment, the operating lines' maturity date was extended to November 1, 2023. Interest on the outstanding principal balance of the operating line will accrue at the SOFR 30 plus 305 basis points. The available credit on the reducing revolving note is $42,749,000. Interest on the outstanding principal balance of the revolving loan and term loan will accrue at the SOFR 30 plus 330 basis points. The working capital covenant was increased to $13,500,000, and the net worth covenant was increased to $28,000,0000. Dakota Ethanol may make distributions in an amount up to 75% of our prior year's net income, so long as the Company's working capital stays above $18,000,000 post distribution. The combined distributions for 2021 and 2022 shall also be limited to 75% of the combined net income of 2020 and 2021.


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Operating Line

    Dakota Ethanol has a revolving promissory note from FCSA in an amount up to $2,000,000 or the amount available in accordance with the borrowing base calculation, whichever is less. Interest on the outstanding principal balance will accrue at 305 basis points above the SOFR 30 and is not subject to a floor. The rate was 5.35% at September 30, 2022. There is a non-use fee of 0.25% per anuum on the unused portion of the availability. The note is collateralized by substantially all assets of the Company. The note expires on November 1, 2023. On September 30, 2022, Dakota Ethanol had $0 outstanding and $2,000,000 available to be drawn on the revolving promissory note under the borrowing base.

Reducing Revolving Loan

    Dakota Ethanol has a reducing revolving promissory note from FCSA in the amount up to $46,250,000 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 July 1, 2021 until the maximum balance reaches $32,250,000 on July 1, 2025. The note matures on January 1, 2026. Interest on the outstanding principal balance will accrue at the SOFR 30 plus 330 basis points. The interest rate is not subject to a floor. The rate was 5.60% at September 30, 2022. The note contains a non-use fee of 0.5% per annum on the unused portion of the note. On September 30, 2022, Dakota Ethanol had $1,000 outstanding and $42,749,000 available to be drawn on the note.

2017 Term Loan

    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 1, 2018. The payment that was due in August 2020 was deferred to August 2025. The notes matures on August 1, 2025. Interest on the outstanding principal balance will accrue at 330 basis points above the SOFR 30 and is not subject to a floor. The rate was 5.60% at September 30, 2022. On September 30, 2022, Dakota Ethanol had $4,000,000 outstanding on the note.

Covenants

    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. Dakota Ethanol may make distributions in an amount up to 75% of prior year's net income, so long as the Company's working capital stays above $18,000,000 post distribution. The combined distributions for 2021 and 2022 shall also be limited to 75% of the combined net income of 2020 and 2021.

    As of September 30, 2022, we were in compliance with our financial covenants under the FCSA loans. 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.

Application of Critical Accounting Policies

    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:

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Derivative Instruments

    We enter into short-term forward 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 or treated as normal purchases and sales contracts and analyzed for inherent losses. 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 and natural gas 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.

Goodwill

    Annually, as well as when an event triggering impairment may have occurred, the Company performs an impairment test on goodwill which compares the fair value of the reporting unit with its carrying amount. An impairment charge is recognized, if necessary, for the amount by which the carrying value exceeds the fair value up to the amount of the goodwill attributed to the reporting unit. The Company performs the annual analysis as of December 31 of each fiscal year.

Inventory Valuation

    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.

Revenue Recognition

    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 products are shipped FOB shipping point, based on written contract terms between Dakota Ethanol and its customers. Collectability of revenue is reasonably assured based on historical evidence of collectability between Dakota Ethanol and its customers. Interest income is recognized as earned.

    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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Interest Rate Risk

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    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 September 30, 2022, we had $4,001,000 outstanding on our variable interest rate loans with interest accruing at a rate of 5.60%. Our variable interest rates are calculated by adding a set basis to the SOFR 30. If we were to experience a 10% increase in the SOFR 30, 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 September 30, 2022, would be approximately $9,200.

Commodity Price Risk
 
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. Our exposure to commodity price risk may be heightened due to the crisis in Ukraine.

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 increase to our cost of revenues of approximately $534,000 related to derivative instruments for the quarter ended September 30, 2022. We recorded a combined decrease to our cost of revenues of approximately $243,000 related to derivative instruments for the quarter ended September 30, 2021. 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 September 30, 2022, we were committed to purchasing approximately 5.2 million bushels of corn with an average price of $6.33 per bushel. These corn purchases represent approximately 17% of our projected plant corn usage for the next 12 months.

As of September 30, 2022, we were committed to purchasing approximately 1,385,000 MMBtus of natural gas with an average price of $4.49 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 68% of the projected annual plant requirements.

As of September 30, 2022, we were committed to selling approximately 69,000 dry equivalent tons of distillers grains with an average price of $234 per ton. The distillers grains sales represent approximately 32% of the projected annual plant production.

As of September 30, 2022, we were committed to selling approximately 2.7 million pounds of distillers corn oil with an average price of $0.76 per pound.  The distillers corn oil sales represent approximately 12% of the projected annual plant production.

    We did not have any firm-priced sales commitments for ethanol as of September 30, 2022.

A sensitivity analysis has been prepared to estimate our exposure to corn, natural gas and ethanol 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 prices and average ethanol price as of September 30, 2022, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from September 30, 2022. The results of this analysis, which may differ from actual results, are as follows:
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Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)Unit of MeasureHypothetical Adverse Change in PriceApproximate Adverse Change to Income
Ethanol92,000,000 Gallons10 %$21,712,000 
Corn27,784,687 Bushels10 %$18,821,347 
Natural Gas685,500 MMBTU10 %$467,511 

For comparison purposes, our sensitivity analysis for our quarter ended September 30, 2021 is set forth below.
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)Unit of MeasureHypothetical Adverse Change in PriceApproximate Adverse Change to Income
Ethanol92,000,000 Gallons10 %$22,080,000 
Corn30,666,667 Bushels10 %$14,741,103 
Natural Gas2,070,000 MMBTU10 %$730,014 

ITEM 4. CONTROLS AND PROCEDURES

    We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

    Our management, including our Chief Executive Officer (the principal executive officer), Scott Mundt, along with our Chief Financial Officer (the principal financial officer), Rob Buchholtz, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.

    For the fiscal quarter ended September 30, 2022, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.    OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    From time to time in the ordinary course of business, Dakota Ethanol or Lake Area Corn Processors may be named as a defendant in legal proceedings related to various issues, including, worker's compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of material legal proceedings.

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 for the fiscal year ended December 31, 2021. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section included in our annual report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities Exchange Commission on March 3, 2021.

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The Company faces risks related to international conflicts, such as the ongoing conflict between Russia and Ukraine, that may adversely impact the Company's financial condition or results of operations.

In late February of 2022, Russia initiated a military operation in Ukraine. The Black Sea region is a key international grain and fertilizer export market and the conflict between Russia and Ukraine could continue to disrupt supply and logistics, cause volatility in prices, and impact global margins due to increased commodity, energy, and input costs. The Company currently does not purchase products directly from this region, however, the impact to the global supply could put the Company’s ability to secure product at risk over time.

To the extent the conflict between Russia and Ukraine adversely affects our business, it may also have the effect of heightening other risks disclosed in Part I, “Item 1A. Risk Factors” in the Company's 2021 Annual Report on Form 10-K, any of which could materially and adversely affect the Company's financial condition and results of operations. However, due to the continually evolving nature of the conflict, the potential impact that the conflict could have on such risk factors, and others that cannot yet be identified, remains uncertain. The Company continues to monitor the conflict and assess alternatives to mitigate these risks.

Inflation, including as a result of commodity price inflation or supply chain constraints due to the war in Ukraine, may adversely impact our results of operations.

We have experienced inflationary impacts on business expenses. Commodity prices in particular have risen significantly over the past year. Inflation and its negative impacts could escalate in future periods.

Ukraine is the third largest exporter of grain in the world. Russia is one of the largest producers of natural gas and oil and is the largest exporter of fertilizers. The commodity price impact of the war in Ukraine has been a sharp and sustained rise in grain and energy prices, including corn and natural gas. In addition, the war in Ukraine has adversely affected and may continue to adversely affect global supply chains resulting in further commodity price inflation for our production inputs. Lower fertilizer supplies may also impact future growing seasons, further impacting grain supplies and prices. Also, given high global grain prices, U.S. farmers may prefer to lock in prices and export additional volumes, reducing domestic grain supplies and resulting in further inflationary pressures.

We may not be able to include these additional costs in the prices of the products we sell. As a result, inflation may have a material adverse effect on our results of operations and financial condition.

The ability or willingness of OPEC and other oil exporting nations to set and maintain production levels and/or the impact of sanctions on Russia related to the war in Ukraine may have a significant impact on natural gas commodity prices.

The Organization of Petroleum Exporting Countries and their allies (collectively, OPEC+), is an intergovernmental organization that seeks to manage the price and supply of oil on the global energy market. Actions taken by OPEC+ members, including those taken alongside other oil exporting nations, have a significant impact on global oil supply and pricing. For example, OPEC+ and certain other oil exporting nations have previously agreed to take measures, including production cuts, to support crude oil prices. In March 2020, members of OPEC+ considered extending and potentially increasing these oil production cuts, however these negotiations were unsuccessful. As a result, Saudi Arabia announced an immediate reduction in export prices and Russia announced that all previously agreed oil production cuts expired on April 1, 2020. These actions led to an immediate and steep decrease in oil prices. Conversely, sanctions imposed on Russia in the last few months have increased prices. There can be no assurance that OPEC+ members and other oil exporting nations will agree to future production cuts or other actions to support and stabilize oil prices, nor can there be any assurance that sanctions or other global conflicts will not further impact oil prices. Uncertainty regarding future sanctions or actions to be taken by OPEC+ members or other oil exporting countries could lead to increased volatility in the price of oil and natural gas, which could adversely affect our business, future financial condition and results of operations.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

    None.
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ITEM 4.     MINE SAFETY DISCLOSURES

    None.

ITEM 5.     OTHER INFORMATION

    None.

ITEM 6.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES

    The following exhibits are filed as part of this report.
Exhibit No.Exhibit
Certificate Pursuant to 17 CFR 240.13a-14(a)*
Certificate Pursuant to 17 CFR 240.13a-14(a)*
Certificate Pursuant to 18 U.S.C. Section 1350*
Certificate Pursuant to 18 U.S.C. Section 1350*
101.INS*XBRL Instance Document
101.SCH*XBRL Schema Document
101.CAL*XBRL Calculation Document
101.LAB*XBRL Labels Linkbase Document
101.PRE*XBRL Presentation Linkbase Document
101.DEF*XBRL Definition Linkbase Document
* Filed herewith.
** Furnished herewith.
35


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 LAKE AREA CORN PROCESSORS, LLC
  
Date:November 14, 2022 /s/ Scott Mundt
 Scott Mundt
 President and Chief Executive Officer
(Principal Executive Officer)
  
Date:November 14, 2022 /s/ Robbi Buchholtz
 Robbi Buchholtz
 Chief Financial Officer
(Principal Financial and Accounting Officer)


36
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