Lake Area Corn Proorationcessors LLC

08/13/2024 | Press release | Distributed by Public on 08/13/2024 13:45

Quarterly Report for Quarter Ending June 30, 2024 (Form 10-Q)

lacp-20240630
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
June 30, 2024
or
☐ 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 34 Wentworth, SD
P.O. Box 100 57075
(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 class Trading 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 YesoNo
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 YesoNo
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 Exchange Act). o Yes xNo
As of August 13, 2024, there are 29,620,000 membership units of the registrant outstanding.
Table of Contents
INDEX
Page No.
Part I FINANCIAL INFORMATION
3
Item 1. Financial Statements (Unaudited)
3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
29
Item 4. Controls and Procedures
31
Part II OTHER INFORMATION
31
Item 1. Legal Proceedings
31
Item 1A. Risk Factors
31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
33
Item 3. Defaults Upon Senior Securities
33
Item 4. Mine Safety Disclosures
33
Item 5. Other Information
33
Item 6. Exhibits
33
Signatures
35
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
June 30, 2024 December 31, 2023*
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,619,884 $ 36,773,989
Accounts receivable 3,305,017 6,142,700
Inventory 15,303,167 14,673,710
Derivative financial instruments 1,428,164 1,155,157
Prepaid and other expenses 2,341,351 2,741,191
Total current assets 26,997,583 61,486,747
PROPERTY AND EQUIPMENT
Land 874,473 874,473
Land improvements 8,763,023 8,763,023
Buildings 9,316,576 9,316,576
Equipment 108,207,390 108,135,828
Construction in progress 6,963,574 890,881
134,125,036 127,980,781
Less accumulated depreciation (71,803,493) (69,149,798)
Net property and equipment 62,321,543 58,830,983
OTHER ASSETS
Goodwill 10,395,766 10,395,766
Investments 55,901,020 55,233,080
Other 6,558,302 7,437,578
Total other assets 72,855,088 73,066,424
TOTAL ASSETS $ 162,174,214 $ 193,384,154
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
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LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets
June 30, 2024 December 31, 2023*
LIABILITIES AND MEMBERS' EQUITY (unaudited)
CURRENT LIABILITIES
Outstanding checks in excess of bank balance $ 4,031,532 $ 2,670,403
Accounts payable 10,978,974 33,370,759
Accrued liabilities 851,970 833,973
Derivative financial instruments 1,202,156 1,114,590
Total current liabilities 17,064,632 37,989,725
LONG-TERM LIABILITIES
Notes payable 4,001,000 20,001,000
Total long-term liabilities 4,001,000 20,001,000
MEMBERS' EQUITY (29,620,000 units issued and outstanding)
141,108,582 135,393,429
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 162,174,214 $ 193,384,154
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
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LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 2024 Three Months Ended June 30, 2023 Six Months Ended June 30, 2024 Six Months Ended June 30, 2023
REVENUES $ 49,439,857 $ 74,179,247 $ 96,087,538 $ 152,020,353
COSTS OF REVENUES 41,547,581 68,348,239 85,609,240 142,290,751
GROSS PROFIT 7,892,276 5,831,008 10,478,298 9,729,602
OPERATING EXPENSES 1,359,416 1,303,144 2,631,669 2,754,646
INCOME FROM OPERATIONS 6,532,860 4,527,864 7,846,629 6,974,956
OTHER INCOME (EXPENSE)
Interest and other income 34,421 2,578,911 177,809 2,775,376
Equity in net income of investments 6,094,749 1,593,161 7,081,015 2,456,956
Interest expense (247,331) (71,150) (333,100) (161,442)
Total other income 5,881,839 4,100,922 6,925,724 5,070,890
NET INCOME $ 12,414,699 $ 8,628,786 $ 14,772,353 $ 12,045,846
BASIC AND DILUTED EARNINGS PER UNIT $ 0.42 $ 0.29 $ 0.50 $ 0.41
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 29,620,000 29,620,000 29,620,000 29,620,000
DISTRIBUTIONS DECLARED PER UNIT $ - $ 0.10 $ 0.30 $ 0.10
See Notes to Unaudited Consolidated Financial Statements.
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LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Changes in Members' Equity (Unaudited)
Members' Equity
Balance - December 31, 2022 $ 107,948,006
Net income for the three-month period ended March 31, 2023 3,417,060
Member distributions (125,970)
Balance - March 31, 2023 111,239,096
Net income for the three-month period ended June 30, 2023 8,628,786
Member distributions (2,962,000)
Balance - June 30, 2023 $ 116,905,882
Members' Equity
Balance - December 31, 2023 $ 135,393,429
Net income for the three-month period ended March 31, 2024 2,357,654
Member distributions (9,057,200)
Balance - March 31, 2024 128,693,883
Net income for the three-month period ended June 30, 2024 12,414,699
Balance - June 30, 2024 $ 141,108,582
See Notes to Unaudited Consolidated Financial Statements.
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LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2024 Six Months Ended June 30, 2023
OPERATING ACTIVITIES
Net income $ 14,772,353 $ 12,045,846
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization 5,453,606 2,786,995
Distributions in excess of earnings (earnings in excess of distributions) from investments (2,506,610) (626,956)
(Increase) decrease in
Accounts receivable 2,837,684 (7,515,014)
Inventory (629,457) 6,082,595
Prepaid and other expenses 399,839 (819,465)
Derivative financial instruments (185,441) 5,105,839
Increase (decrease) in
Accounts payable (22,391,786) (24,171,832)
Accrued liabilities 17,998 (112,459)
NET CASH USED IN OPERATING ACTIVITIES (2,231,814) (7,224,451)
INVESTING ACTIVITIES
Natural Gas Transportation Prepayment - (2,370,667)
Purchase of property and equipment (6,211,605) (1,013,203)
NET CASH USED IN INVESTING ACTIVITIES (6,211,605) (3,383,870)
FINANCING ACTIVITIES
Increase in outstanding checks in excess of bank balance 1,361,129 1,693,921
Borrowings on notes payable 13,000,000 5,949,000
Payments on notes payable (29,000,000) (6,949,000)
Distributions paid to members (9,057,200) (3,087,970)
NET CASH USED IN FINANCING ACTIVITIES (23,696,071) (2,394,049)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (32,139,490) (13,002,370)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD 37,329,032 27,004,205
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $ 5,189,542 $ 14,001,835
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest of $196,472 and $2,480 in 2024 and 2023, respectively.
$ 118,269 $ 169,199
Capital expenditures in accounts payable 557,400 -
See Notes to Unaudited Consolidated Financial Statements
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC, (the "Company") is a South Dakota limited liability company.
The Company owns and manages Dakota Ethanol, LLC, a South Dakota limited liability company ("Dakota Ethanol"), a 100 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 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 six months ended June 30, 2024 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, 2023, contained in the Company's annual report on Form 10-K/A for 2023 filed with the SEC on March 12, 2024.
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 Customersrequires 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'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. Revenues from contracts with customers are recognized when control of the promised goods or services 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 FOB shipping point and control of the goods transfers to customers when the goods are loaded into trucks or when rail cars are shipped. Consideration is based on predetermined contractual prices or on current market prices.
•sales of ethanol
•sales of distillers grains
•sales of distillers corn oil
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
Disaggregation of revenue:
All revenue recognized in the statement of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line:
Three Months Ended June 30 Six Months Ended June 30,
2024 2023 2024 2023
Revenues ethanol $ 37,421,728 $ 57,424,180 $ 70,034,007 $ 115,828,049
Revenues distillers grains 9,000,391 13,033,674 19,861,413 27,643,003
Revenues distillers corn oil 3,017,738 3,721,393 6,192,118 8,549,301
$ 49,439,857 $ 74,179,247 $ 96,087,538 $ 152,020,353
Contract assets and contract liabilities:
The Company receives payments from customers based upon contractual billing schedules; 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 had no significant contract assets or contract liabilities from contracts with customers at June 30, 2024 or December 31, 2023.
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 as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.
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 distillers grains are included in cost of revenues.
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.
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, net realizable value is based on estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents consist of demand accounts and other accounts with original maturities of three months or less that provide withdrawal privileges. Restricted cash is subject to a contractual restriction and not readily available in accordance with the terms of the West Leg agreement. See Note 9 for further details.
June 30, 2024 December 31, 2023
Cash and Cash Equivalents $ 4,619,884 $ 36,773,989
Restricted Cash (included in other assets) 569,658 555,043
Total Cash, Cash Equivalents, and Restricted Cash $ 5,189,542 $ 37,329,032
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 and adjusted if payment is thirty (30) days past due. 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 a valuation allowance 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 valuation allowance was determined to be immaterial as of June 30, 2024 and December 31, 2023.
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, future and option derivative instruments.
The Company is subject to market risk with respect to the price and availability of corn since corn is the principal raw material the Company uses to produce ethanol and ethanol by-products. In general, unfavorable market conditions for the Company 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, international trade and global demand and supply. Additionally, the 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 June 30, 2024, the Company was committed to purchasing approximately 2.9 million bushels of corn on a forward contract basis with an average price of $4.22 per bushel. These corn purchases represent approximately 9% of our projected plant corn usage for the next 12 months.
The Company has 755,000 bushels of corn inventory delivered under delayed-pricing contracts. These contracts have various pricing deadlines through August 30, 2024. The Company is subject to risk of changes in the corn market because the price of these bushels of corn will not be set until they are priced.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
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 June 30, 2024, the Company is committed to purchasing approximately 843,500 MMBtus of natural gas with an average price of $3.36 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 40% 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 June 30, 2024, the Company was committed to selling approximately 30,000 dry equivalent tons of distillers grains with an average price of $149 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 13% 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 June 30, 2024, the Company was committed to selling approximately 3.3 million pounds of distillers corn oil with an average price of $0.47 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 10% of the projected annual plant production.
The Company does not have any firm-priced sales commitments for ethanol as of June 30, 2024.
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, or a normal purchase, normal sale exemption is elected. 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 June 30, 2024 and December 31, 2023 were as follows:
Balance Sheet Classification June 30, 2024 December 31, 2023*
Corn forward contracts in gain position $ 1,200 $ 16,878
Futures and Options contracts in gain position
1,113,275 289,681
Futures and Options contracts in loss position
(3,300) (200)
Total forward, futures and options contracts 1,111,175 306,359
Cash held by broker 316,989 848,798
Current Assets $ 1,428,164 $ 1,155,157
Corn forward contracts in loss position Current Liabilities $ (1,202,156) $ (1,114,590)
*Derived from audited financial statements
Futures and options 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.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
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.
Gains and losses related to derivative contracts related to corn and natural gas are included as a component of costs of revenues.
Statement of Operations Three Months Ended June 30,
Classification 2024 2023
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contracts Cost of Revenues $ 1,543,104 $ 3,912,630
Forward contracts Cost of Revenues (1,279,030) (9,001,801)
Statement of Operations Six Months Ended June 30,
Classification 2024 2023
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contracts Cost of Revenues $ 3,089,153 $ 5,230,285
Forward contracts Cost of Revenues (3,582,123) (11,097,676)
Investments
The Company has investment interests in five companies in related industries. Four of these interests are at ownership shares of less than 20%. One of the investments exceeds a 20% ownership interest. 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 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. See Note 5 - Investments for additional details.
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 on December 31 of each fiscal year. The Company determined that there was no impairment of goodwill at December 31, 2023 or through June 30, 2024 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 and fixed asset impairment evaluation.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
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 June 30, 2024, ethanol sales averaged approximately 76% of total revenues, while approximately 18% of revenues were generated from the sale of distillers grains and 6% of revenues were generated from the sale of corn oil. For the six months ended June 30, 2024, ethanol sales averaged approximately 73% of the revenues, while approximately 21% 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.
NOTE 3. SEGMENTS
The Company reports its financial and operating performance in two segments: (1) production, which includes the manufacture 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, a Delaware limited liability company and Ring-neck Energy & Feed, LLC, a South Dakota limited liability company. The Company discloses its other identified operating segments in an all other category, which consists of the Company's investments in Renewable Products Marketing Group, LLC, a Minnesota limited liability company, Lawrenceville Tank, LLC, a Delaware limited liability company, and Guardian Energy Management, LLC, a Delaware limited liability company.
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 are 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 category 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 category 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.
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.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
The following tables set forth certain financial data for the Company's reportable segments:
Three Months Ended Six Months Ended
June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023
unaudited unaudited unaudited unaudited
Net Sales
Production $ 49,439,857 $ 74,179,247 $ 96,087,538 $ 152,020,353
Ethanol Producing Equity Method Investments 137,681,269 181,961,028 257,602,889 344,582,483
All Other 2,869,268 4,595,086 6,405,911 8,933,102
Total 189,990,394 260,735,361 360,096,338 505,535,938
Reconciliation (140,550,537) (186,556,114) (264,008,800) (353,515,585)
Consolidated $ 49,439,857 $ 74,179,247 $ 96,087,538 $ 152,020,353
Gross Profit
Production $ 7,892,276 $ 5,831,008 $ 10,478,298 $ 9,729,602
Ethanol Producing Equity Method Investments 30,554,971 20,245,533 47,909,171 32,783,603
All Other 2,296,849 3,024,743 4,577,726 5,928,503
Total 40,744,096 29,101,284 62,965,195 48,441,708
Reconciliation (32,851,820) (23,270,276) (52,486,897) (38,712,106)
Consolidated $ 7,892,276 $ 5,831,008 $ 10,478,298 $ 9,729,602
Net Income:
Production $ 12,414,699 $ 8,628,786 $ 14,772,353 $ 12,045,846
Ethanol Producing Equity Method Investments 38,456,633 13,761,472 44,708,888 20,030,016
All Other 245,396 1,870,416 1,313,104 3,077,063
Total 51,116,728 24,260,674 60,794,345 35,152,925
Reconciliation (38,702,029) (15,631,888) (46,021,992) (23,107,079)
Consolidated $ 12,414,699 $ 8,628,786 $ 14,772,353 $ 12,045,846
June 30, 2024 December 31, 2023
unaudited audited
Total Assets
Production $ 162,174,214 $ 193,384,154
Ethanol Producing Equity Method Investments 216,830,967 228,609,037
All Other 382,875,486 299,041,128
Total 761,880,667 721,034,319
Reconciliation (599,706,453) (527,650,165)
Consolidated $ 162,174,214 $ 193,384,154
NOTE 4. INVENTORY
Inventory consisted of the following as of June 30, 2024 and December 31, 2023:
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
June 30, 2024 December 31, 2023*
Raw materials $ 8,351,686 $ 8,558,268
Finished goods 3,582,842 2,853,609
Work in process 1,223,839 1,337,989
Parts inventory 2,144,800 1,923,844
$ 15,303,167 $ 14,673,710
*Derived from audited financial statements.
As of June 30, 2024 and December 31, 2023, the Company recorded a lower of cost or net realizable value write-down on inventory of approximately $90,000 and $29,000, respectively.
NOTE 5. INVESTMENTS
Dakota Ethanol has a 5% investment interest in the Company's ethanol marketer, Renewable Products Marketing Group, LLC, a Minnesota limited liability company ("RPMG"). The net income, which is reported in the Company's statement of operations for RPMG is based on RPMG's June 30, 2024 unaudited interim results. The carrying amount of the Company's investment was approximately $2,362,000 and $2,317,000 as of June 30, 2024 and December 31, 2023, respectively.
Dakota Ethanol has a 10% investment interest in Lawrenceville Tanks, LLC ("LT"), a Delaware limited liability company which has a purpose to construct and operate an ethanol storage terminal in Georgia. The net income, which is reported in the Company's statement of operations for LT, is based on LT's June 30, 2024 unaudited interim results. The carrying amount of the Company's investment was approximately $320,000 and $209,000 as of June 30, 2024 and December 31, 2023, respectively.
Lake Area Corn Processors had a 10% investment interest in Guardian Hankinson, LLC (GH), a Delaware limited liability company which operates an ethanol plant in North Dakota. On September 29, 2023 the Company purchased additional units of GH increasing our ownership percentage of GH to 27%. The net income, which is reported in the Company's statement of operations for GH, is based on GH's June 30, 2024 unaudited interim results. The carrying amount of the Company's investment was approximately $36,446,000 and $37,424,000 as of June 30, 2024 and December 31, 2023, respectively. The carrying amount of investment exceeds the underlying equity in net assets by approximately $34,015,000. The excess is comprised of basis adjustment. The Company determined the excess would be amortized over 10 years. The amortization is recorded in equity in net income of investments.
Lake Area Corn Processors has a 20% investment interest in Guardian Energy Management, LLC (GEM), a Delaware limited liability company which provides management services to ethanol plants. The net income which is reported in the Company's statement of operations for GEM, is based on GEM's June 30, 2024 unaudited interim results. The carrying amount of the Company's investment was approximately $93,000 as of both June 30, 2024 and December 31, 2023.
Lake Area Corn Processors has a 12% investment interest in Ring-neck Energy and Feed, LLC (REF), a South Dakota limited liability company which operates an ethanol plant in South Dakota. The net income, which is reported in the Company's statement of operations for REF, is based on REF's June 30, 2024 unaudited interim results. The carrying amount of the Company's investment was approximately $16,680,000 and $15,192,000 as of June 30, 2024 and December 31, 2023, respectively. The carrying amount of the investment exceeds the underlying equity in net assets by approximately $855,000. The excess is comprised of a basis adjustment of approximately $351,000 and capitalized interest of $504,000. The excess is amortized over 20 years. The amortization is recorded in equity in net income of investments.
Condensed, combined unaudited financial information of the Company's investments in RPMG, LT, GH, GEM and REF are as follows:
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
Balance Sheet June 30, 2024 December 31, 2023
Current Assets $ 344,377,614 $ 375,173,028
Other Assets 255,328,838 152,477,137
Current Liabilities 221,385,798 316,288,459
Long-term Liabilities 178,209,447 22,658,176
Members' Equity 200,111,207 188,703,530
Three Months Ended
Income Statement June 30, 2024 June 30, 2023
Revenue $ 141,362,164 $ 186,556,116
Gross Profit 32,859,355 23,270,276
Net Income 36,668,209 15,648,305
Six Months Ended
Income Statement June 30, 2024 June 30, 2023
Revenue $ 267,256,612 $ 353,515,585
Gross Profit 52,511,599 38,712,106
Net Income 46,021,992 23,107,079
The following table shows the condensed financial information of Guardian Hankinson, LLC, a Delaware limited liability company; an investment which represents greater than 10% of the Company's assets and income as of June 30, 2024.
Balance Sheet June 30, 2024 December 31, 2023
Current Assets $ 31,524,733 $ 34,890,139
Other Assets 32,968,588 32,056,021
Current Liabilities 47,687,386 52,166,375
Long-term Liabilities 7,789,417 8,957,906
Members' Equity 9,016,518 5,821,879
Three Months Ended
Income Statement June 30, 2024 June 30, 2023
Revenue $ 89,271,942 $ 115,885,199
Gross Profit 17,501,680 10,271,094
Net Income
15,925,475 8,473,381
Six Months Ended
Income Statement June 30, 2024 June 30, 2023
Revenue $ 162,710,924 $ 228,821,997
Gross Profit 26,232,633 15,610,468
Net Income 23,194,640 12,480,750
The following table shows the condensed financial information of Ring-neck Energy & Feed, LLC, a South Dakota limited liability company; an investment which represents greater than 10% of the Company's assets as of June 30, 2024.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
Balance Sheet June 30, 2024 December 31, 2023
Current Assets $ 35,753,552 $ 42,843,145
Other Assets 116,584,093 118,819,732
Current Liabilities 17,068,510 27,230,565
Long-term Liabilities 1,770,915 13,700,270
Members' Equity 133,498,220 120,732,042
Three Months Ended
Income Statement June 30, 2024 June 30, 2023
Revenue $ 48,409,327 $ 66,075,829
Gross Profit 13,053,291 9,974,439
Net Income (loss) 20,497,338 5,288,091
Six Months Ended
Income Statement June 30, 2024 June 30, 2023
Revenue $ 94,891,965 $ 115,760,486
Gross Profit 21,676,538 17,173,135
Net Income 21,514,248 7,549,266
The Company recorded equity in net income at approximately $7,081,000 and $2,457,000 from our investments for the six months ended June 30, 2024, and 2023, respectively. The Company recorded equity in net income of approximately $6,095,000 and $1,593,000 from our investments for the three months ended June 30, 2024 and 2023, respectively.
NOTE 6. REVOLVING PROMISSORY NOTE
Dakota Ethanol has a revolving promissory note with Farm Credit Services of America (FCSA) in an amount up to $20,000,000. There is a non-use fee of 0.25% per annum on the unused portion of the note. The note is collateralized by substantially all assets of the Company. The note expires on November 1, 2025. Interest on the outstanding principal balance accrues at 300 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 8.33% at June 30, 2024. On June 30, 2024 Dakota Ethanol had $0 outstanding and $20,000,000 available to be drawn on the revolving promissory note.
NOTE 7. LONG-TERM NOTES PAYABLE
Dakota Ethanol had a term note from FCSA in the amount of $8,000,000. Dakota Ethanol made monthly interest payments and annual principal payments of $1,000,000. The note was set to mature on August 1, 2025. Interest on the outstanding principal balance accrued at 325 basis points above the SOFR 30. The interest rate was not subject to a floor. The balance of the term note was paid off in its entirety in July 2023.
Dakota Ethanol has a reducing revolving promissory note from FCSA in the amount up to $60,000,000 or the amount available in accordance with the borrowing availability under the credit agreement. The amount Dakota Ethanol can borrow on the note decreases by $2,500,000 semi-annually starting on January 1, 2024 until the maximum balance reaches $40,000,000 on July 1, 2027. The note matures on January 1, 2030. Interest on the outstanding principal balance will accrue at 325 basis points above the SOFR 30. The interest rate is not subject to a floor. The rate was 8.58% at June 30, 2024. The note contains a non-use fee of 0.50% on the unused portion of the note. On June 30, 2024 Dakota Ethanol had $4,001,000 outstanding and $53,499,000 available to be drawn on the note.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
As part of the notes, 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 2023 with modifications to the requirements. The minimum working capital covenant was increased to $15,000,000 and the minimum net worth covenant was increased to $30,000,000. Dakota Ethanol may make distributions so long as the Company's working capital stays above $20,000,000 post distribution. We are required to maintain a debt service coverage ratio of at least 1.25:1.00.
The balances of the notes payable are as follows. The balances reflect the updated agreement:
June 30, 2024 December 31, 2023
Revolving Note Payable $ - $ -
Reducing Revolving Note Payable 4,001,000 20,001,000
4,001,000 20,001,000
Less current portion -
$ 4,001,000 $ 20,001,000
*Derived from audited financial statements
Principal maturities for the next five years are estimated as follows:
Periods Ending June 30, Principal
2025 $ -
2026 -
2027
-
2028
-
2029
-
thereafter 4,001,000
$ 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.
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 and options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
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 June 30, 2024 and December 31, 2023 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
June 30, 2024
Assets:
Derivative financial instruments, futures and options contracts $ 1,113,275 $ 1,113,275 $ - $ -
Forward contracts $ 1,200 $ - $ 1,200 $ -
Liabilities:
Derivative financial instruments, futures and options contracts $ 3,300 $ 3,300 $ - $ -
Forward contracts $ 1,202,156 $ - $ 1,202,156 $ -
December 31, 2023*
Assets:
Derivative financial instruments, futures and options contracts $ 289,681 $ 289,681 $ - $ -
Forward contracts $ 16,878 $ - $ 16,878 $ -
Liabilities:
Derivative financial instruments, futures and options contracts $ 200 $ 200 $ - $ -
Forward contracts $ 1,114,590 $ - $ 1,114,590 $ -
*Derived from audited financial statements.
During the six months ended June 30, 2024, the Company did not make any changes between Level 1 and Level 2 assets and liabilities. As of June 30, 2024 and December 31, 2023, 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, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2024 and December 31, 2023.
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
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2024 AND 2023
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 2) approximates fair value.
The carrying amount of long-term obligations (level 3) at June 30, 2024 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, 2023 of $20,001,000 had an estimated fair value of approximately $20,001,000.
NOTE 9 - COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Capital Expenditures- Dakota Ethanol has committed to a contract for the construction of distillers corn oil extraction equipment. The value of the construction is approximately $9.5 million, of which approximately $5.0 million is outstanding as of June 30, 2024. The Company has also committed to a contract for the replacement of distillation equipment. The value of the construction is approximately $2.3 million, of which approximately $1.6 million is outstanding as of June 30, 2024. The projects are expected to be completed during the fourth quarter of 2024. Dakota Ethanol has committed to an agreement for the resurfacing on all gravel roadways to concrete around the plant. The value of the agreement is approximately $1.5 million, of which approximately $970,000 is outstanding as of June 30, 2024. The project is expected to be completed during the third quarter of 2024.
Agreements
On June 24, 2022, Dakota Ethanol entered into the Precedent Agreement West Leg 2023 Expansion with Northern Natural Gas Company (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 agreed 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 which was paid in its entirety as of September 30, 2023. 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 a firm commitment of 4,340 decatherms per day during the summer months. The payments to Northern Natural Gas are included in "other assets" on the consolidated balance sheet. The agreement is being amortized over a five year period to our cost of revenues.
From time to time in the normal course of business, the Company can be subject to litigation based on its operations. There is no current litigation nor any litigation that the Company considers probable at this time.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company purchased corn and services from members of its Board of Directors that farm and operate local businesses. Corn purchases from these related parties during the quarters ended June 30, 2024, and 2023 totaled approximately $129,300 and $0, respectively. As of June 30, 2024 and 2023, the Company had no outstanding obligations to these related parties.
NOTE 11 - SUBSEQUENT EVENTS
During August 2024, the Company declared a distribution to its members of $8,886,000 or $0.30 per capital unit, to unit holders of record as of July 1, 2024.
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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 six month period ended June 30, 2024, 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, 2023, included in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2023 which was filed with the SEC on March 12, 2024.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking statements that involve known and unknown risks, including the crisis in Ukraine, risks related to the corn market, 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/A for the fiscal year ended December 31, 2023 which was filed with the SEC on March 12, 2024.
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, a South Dakota limited liability company. Dakota Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 100 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, a Minnesota corporation ("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.
The Company also derives some revenue from its minority investments in five (5) other companies, as described above, Renewable Products Marketing Group, LLC, a Minnesota limited liability company, Lawrenceville Tanks, LLC, a Delaware limited liability company, Guardian Hankinson, LLC, a Delaware limited liability company, Guardian Energy Management, LLC, a Delaware limited liability company and Ring-Neck Energy and Feed, LLC, a South Dakota limited liability company.
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Results of Operations
Comparison of the Three Months Ended June 30, 2024 and 2023
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 June 30, 2024 and 2023:
2024 2023
Income Statement Data Amount % Amount %
Revenues $ 49,439,857 100.0 $ 74,179,247 100.0
Cost of Revenues 41,547,581 84.0 68,348,239 92.1
Gross Profit 7,892,276 16.0 5,831,008 7.9
Operating Expense 1,359,416 2.7 1,303,144 1.8
Income from Operations 6,532,860 13.3 4,527,864 6.1
Other Income 5,881,839 11.9 4,100,922 5.6
Net Income $ 12,414,699 25.2 $ 8,628,786 11.7
Revenues
Revenue from sales decreased by approximately 33.4% during the three months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices per gallon of ethanol sold. As stated in the table under the subheading "disaggregation of revenue" under Note 2 to the financial statements, revenue from distillers grains sales decreased by approximately 30.9% during the three months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices that we received for our modified and wet distillers grains. Revenue from corn oil sales decreased by approximately 18.9% during the three months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices that we received for corn oil sold.
Ethanol
Our ethanol revenue was approximately $20.0 million lower during our three months ended June 30, 2024 compared to the three months ended June 30, 2023, a decrease of approximately 34.8%. This decrease in ethanol revenue was due primarily to a decrease in the price of ethanol along with less gallons sold during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The average price we received for our ethanol was approximately $0.64 lower per gallon during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, a decrease of approximately 28.0%. Management attributes this decrease in ethanol prices during the three months ended June 30, 2024 to high domestic production and inventories which decreases the price of ethanol.
We sold approximately 9.5% less gallons of ethanol during the three months ended June 30, 2024 compared to the same period of 2023, a decrease of approximately 2,372,000 gallons. The decrease is due primarily to decreased ethanol production and timing of ethanol shipments during the three months ended June 30, 2024.
Distillers Grains
Our total distillers grains revenue was approximately 30.9% lower during the three months ended June 30, 2024 compared to the same period of 2023 due primarily to a decrease in the average price received per ton of distiller's grains. The average price we received for our dried distillers grains was approximately 31.3% lower during the three months ended June 30, 2024 compared to the same period of 2023, a decrease of approximately $70.45 per ton. Management attributes the decrease in
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dried distillers grains prices during the three months ended June 30, 2024 to decreases in the price of corn. The average price we received for our modified/wet distillers grains was approximately 32.0% lower for the three months ended June 30, 2024 compared to the same period of 2023, a decrease of approximately $83.52 per ton. Management attributes this decrease in modified/wet distillers grains prices to lower corn prices.
Despite receiving a lower price per pound of corn oil, we sold approximately 2.0% more total tons of distillers grains during the three months ended June 30, 2024 compared to the same period of 2023 due primarily to timing of shipments.
Corn Oil
Our total corn oil revenue was approximately 18.9% lower during the three months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices received for our corn oil during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The average price per pound we received for our corn oil was lower by approximately 24.7% for the three months ended June 30, 2024 compared to the same period of 2023 due primarily to the increase in competing feedstocks. During 2022, the biodiesel blenders' tax credit was reinstated through 2024 so we expect that corn oil demand will remain steady through 2024.
Our total pounds of corn oil sold increased by approximately 7.7% during the three months ended June 30, 2024 compared to the same period of 2023 due primarily to better production efficiency.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 42.2% lower for the three months ended June 30, 2024 compared to the same period of 2023 due to decreased corn prices during the period.
Our average cost per bushel of corn decreased by approximately 43.4% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. We consumed approximately 2.0% more bushels of corn during the three months ended June 30, 2024 compared to the same period of 2023 due to lower ethanol yield. Management anticipates corn prices to remain stable during our 2024 fiscal year due to improved drought conditions.
We experienced approximately $264,000 of combined realized and unrealized gain for the three months ended June 30, 2024 to our corn derivative instruments which decreased our cost of revenues. By comparison, we experienced approximately $5,089,000 of combined realized and unrealized loss for the three months ended June 30, 2023 related to our corn derivative instruments which increased our cost of revenues. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of revenues as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Natural Gas
Our cost of revenues related to natural gas decreased by approximately $40,000, a decrease of approximately 2.2%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This decrease was due to lower natural gas costs per MMBtu during the three months ended June 30, 2024 compared to the same period of 2023.
Our average cost per MMBtu of natural gas during the three months ended June 30, 2024 was approximately 2.6% less compared to the cost per MMbtu for the three months ended June 30, 2023. Management attributes this decrease in our average natural gas costs to lower market natural gas prices.
The volume of natural gas we used decreased by approximately 0.3% during the three months ended June 30, 2024 compared to the same period of 2023, which is comparable year over year.
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Operating Expenses
Our operating expenses were higher for the three months ended June 30, 2024 compared to the same period of 2023 due primarily to a increase in wages, benefits and insurance expense.
Other Income and Expense
Our other income increased during the three months ended June 30, 2024 compared to the same period of 2023 due to increased income from our investments. We had more income from our equity method investments during the three months ended June 30, 2024 compared to the same period of 2023 due to increased investment in Guardian Hankinson, LLC (GH). We had more interest expense during 2024 compared to the same period of 2023 due to increased loan balance outstanding.
Comparison of the Six Months Ended June 30, 2024 and 2023
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 operations for the six months ended June 30, 2024 and 2023:
2024 2023
Income Statement Data Amount % Amount %
Revenues $ 96,087,538 100.0 $ 152,020,353 100.0
Cost of Revenues 85,609,240 89.1 142,290,751 93.6
Gross Profit 10,478,298 10.9 9,729,602 6.4
Operating Expense 2,631,669 2.7 2,754,646 1.8
Income from Operations 7,846,629 8.2 6,974,956 4.6
Other Income 6,925,724 7.2 5,070,890 3.3
Net Income $ 14,772,353 15.4 $ 12,045,846 8.8
Revenues
Revenue from sales decreased by approximately 36.8% during the six months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices per gallon of ethanol sold. Revenue from distillers grains sales decreased by approximately 28.2% during the six months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices that we received for our modified and wet distillers grains. Revenue from corn oil sales decreased by approximately 27.6% during the six months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices that we received for corn oil sold.
Ethanol
Our ethanol revenue was approximately $46 million lower during our six months ended June 30, 2024 compared to the six months ended June 30, 2023, a decrease of approximately 39.5%. This decrease in ethanol revenue was due primarily to a decrease in the price of ethanol along with less gallons sold during the six months ended June 30, 2024 compared to 2023. The average price we received for our ethanol was approximately $0.68 lower per gallon during the six months ended June 30, 2024 compared to 2023, a decrease of approximately 31.1%. Management attributes this decrease in ethanol prices during the six months ended June 30, 2024 to high domestic production and inventories which decreases the price of ethanol.
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We sold approximately 12.4% less gallons of ethanol during the six months ended June 30, 2024 compared to the same period of 2023, a decrease of approximately 6,585,000 gallons. The decrease is due primarily to decreased ethanol yield and timing of ethanol shipments during the six months ended June 30, 2024.
Distillers Grains
Our total distillers grains revenue was approximately 28.2% lower during the six months ended June 30, 2024 compared to the same period of 2023 due primarily to a decrease in the average price received per ton. The average price we received for our dried distillers grains was approximately 28.6% lower during the six months ended June 30, 2024 compared to the same period of 2023, a decrease of approximately $68.11 per ton. Management attributes the decrease in dried distillers grains prices during the six months ended June 30, 2024 to decreases in the price of corn. The average price we received for our modified/wet distillers grains was approximately 29.5% lower for the six months ended June 30, 2024 compared to the same period of 2023, a decrease of approximately $79.81 per ton. Management attributes this decrease in modified/wet distillers grains prices with lower corn prices.
Despite receiving a lower price per ton of distillers grains, we sold approximately 2.2% more total tons of distillers grains during the six months ended June 30, 2024 compared to the same period of 2023 due primarily to increased production yield of distillers.
Corn Oil
Our total corn oil revenue was approximately 27.6% lower during the six months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased prices received for our corn oil during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The average price per pound we received for our corn oil was lower by approximately 26.9% for the six months ended June 30, 2024 compared to the same period of 2023 due primarily to the increase in competing feedstocks. During 2022, the biodiesel blenders' tax credit was reinstated through 2024 so we expect that corn oil demand will remain steady through 2024.
Our total pounds of corn oil sold decreased by approximately 0.7% during the six months ended June 30, 2024 compared to the same period of 2023 due primarily to decreased production.
Cost of Revenues
Corn
Our cost of revenues relating to corn was approximately 40.3% lower for the six months ended June 30, 2024 compared to the same period of 2023 due to decreased corn prices during the period.
Our average cost per bushel of corn decreased by approximately 40.4% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. We consumed approximately 0.2% more bushels of corn during the six months ended June 30, 2024 compared to the same period of 2023 which was similar year over year. Management anticipates corn prices to remain stable during the remaining quarters of our 2024 fiscal year.
We experienced approximately $493,000 of combined realized and unrealized loss for the six months ended June 30, 2024 to our corn derivative instruments which decreased our cost of revenues. By comparison, we experienced approximately $5,663,000 of combined realized and unrealized loss for the six months ended June 30, 2023 related to our corn derivative instruments which increased our cost of revenues. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of revenues as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Natural Gas
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Our cost of revenues related to natural gas decreased by approximately $2,001,000, a decrease of approximately 33.3%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This decrease was due to lower natural gas costs per MMBtu during the six months ended June 30, 2024 compared to the same period of 2023.
Our average cost per MMBtu of natural gas during the six months ended June 30, 2024 was approximately 32.9% less compared to the cost per MMbtu for the six months ended June 30, 2023. Management attributes this decrease in our average natural gas costs to lower market natural gas prices.
The volume of natural gas we used decreased by approximately 0.6% during the six months ended June 30, 2024 compared to the same period of 2023, which is comparable year over year.
Operating Expenses
Our operating expenses were lower for the six months ended June 30, 2024 compared to the same period of 2023 due primarily to a decrease in professional fees.
Other Income and Expense
Our other income increased during the six months ended June 30, 2024 compared to the same period of 2023 due to increased income from our investments. We had more income from our equity method investments during the six months ended June 30, 2024 compared to the same period of 2023 due to increased investment in Guardian Hankinson, LLC (GH).
Changes in Financial Condition for the Six Months Ended June 30, 2024
Current Assets
Our cash on hand at June 30, 2024 was less compared to December 31, 2023 due to our deferred corn payments. We had less accounts receivable at June 30, 2024 compared to December 31, 2023 due to lower ethanol prices at quarter end and the payments received related to the shipments of our products. The value of our inventory was more at June 30, 2024 compared to December 31, 2023 due to increased quantities of finished goods inventory. The asset value of our derivative instruments was comparable at June 30, 2024 compared to December 31, 2023. Our prepaid and other expenses decreased at June 30, 2024 compared to December 31, 2023 due to the decrease in prepaid insurance.
Property and Equipment
The value of our property and equipment was higher at June 30, 2024 compared to December 31, 2023 due to an increase in capital projects.
Other Assets
The value of our investments was higher at June 30, 2024 compared to December 31, 2023 due to increase in earnings of excess of distribution for the six months ended June 30, 2024. We had less other assets at June 30, 2024 compared to December 31, 2023 due primarily to the amortization of prepayment for the firm commitment on natural gas transportation with Northern Natural Gas.
Current Liabilities
We had less outstanding checks in excess of bank balances at June 30, 2024 compared to December 31, 2023 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 June 30, 2024 compared to December 31, 2023 due primarily to deferred corn payables that were paid during the first quarter of 2024. Our derivative instrument liability was higher at June 30, 2024 compared to December 31, 2023 due to recent corn price changes which impacted our derivative instruments.
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Long-Term Liabilities
Our long-term liabilities were less at June 30, 2024 compared to December 31, 2023 due to profits offset by increased capital improvement projects at our facility.
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.
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 "Indebtedness." As of June 30, 2024, we had $4,001,000 of debt outstanding under these loans and $73,499,000 available to be drawn on our revolving loans. 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 six months ended June 30, 2024 and 2023:
Six Months Ended June 30,
2024 2023
Net cash used in operating activities
$ (2,231,814) $ (7,224,451)
Net cash used in investing activities
(6,211,605) (3,383,870)
Net cash used for financing activities
(23,696,071) (2,394,049)
Cash Flow From Operations. Our operating activities used less cash during the six months ended June 30, 2024 compared to the same period of 2023, due primarily to increased net income.
Cash Flow From Investing Activities. Our investing activities used more cash during the six months ended June 30, 2024 compared to the same period of 2023, due to more purchases of property and equipment during the 2024 period.
Cash Flow From Financing Activities. Our financing activities used more cash during the six months ended June 30, 2024 compared to the same period of 2023, due primarily to more payments on notes payable, including our indebtedness with Farm Credit Services of America (FCSA) during the 2024 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 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 September 27, 2023, we entered into a Fifth Amendment to the credit agreement (the "Fifth Amendment"). Under the Fifth Amendment, the operating lines' available credit increased to $20,000,000 and the maturity date was extended to
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November 1, 2025. Interest on the outstanding principal balance of the operating line will accrue at the SOFR 30 plus 300 basis points. The available credit on the reducing revolving note increased to $60,000,000 and the maturity was extended to November 1, 2030. Interest on the outstanding principal balance of the revolving loan and term loan will accrue at the SOFR 30 plus 325 basis points. The minimum working capital covenant was increased to $15,000,000, and the minimum net worth covenant was increased to $30,000,0000. Dakota Ethanol may make distributions so long as the Company's working capital stays above $20,000,000 post distribution.
Operating Line
Dakota Ethanol has a revolving promissory note from FCSA in an amount up to $20,000,000. Interest on the outstanding principal balance will accrue at 300 basis points above the SOFR 30 and is not subject to a floor. The rate was 8.33% at June 30, 2024. There is a non-use fee of 0.25% per annum on the unused portion of the availability. The note is collateralized by substantially all assets of the Company. The note expires on November 1, 2025. On June 30, 2024, Dakota Ethanol had $0 outstanding and $20,000,000 available to be drawn on the revolving promissory note.
Reducing Revolving Loan
Dakota Ethanol has a reducing revolving promissory note from FCSA in the amount up to $60,000,000 or the amount available in accordance with the borrowing availability under the credit agreement. The amount Dakota Ethanol can borrow on the note decreases by $2,500,000 semi-annually starting on January 1, 2024 until the maximum balance reaches $40,000,000 on July 1, 2027. The note matures on November 1, 2030. Interest on the outstanding principal balance will accrue at the SOFR 30 plus 325 basis points. The interest rate is not subject to a floor. The rate was 8.58% at June 30, 2024. The note contains a non-use fee of 0.5% per annum on the unused portion of the note. On June 30, 2024, Dakota Ethanol had $4,001,000 outstanding and $53,499,000 available to be drawn 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 $15 million. We are required to maintain local net worth (total assets minus total liabilities minus the value of certain investments) of at least $30 million. We are required to maintain a debt service coverage ratio of at least 1.25:1.00. Dakota Ethanol may make distributions so long as the Company's working capital stays above $20,000,000 post distribution.
As of June 30, 2024, 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:
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,
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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
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 June 30, 2024, we had $4,001,000 outstanding on our variable interest rate loans with interest accruing at an approximate average rate of 8.58%. 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 average effect such change would have on our statement of operations, based on the amount we had outstanding on our variable interest rate loans as of June 30, 2024, based on the average variable interest rate would be approximately $21,325.
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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 $492,000 related to derivative instruments for the quarter ended June 30, 2024. We recorded a combined increase to our cost of revenues of approximately $5,867,000 related to derivative instruments for the quarter ended June 30, 2023. 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 June 30, 2024, we were committed to purchasing approximately 3.0 million bushels of corn with an average price of $4.22 per bushel. These corn purchases represent approximately 9% of our projected plant corn usage for the next 12 months.
As of June 30, 2024, we were committed to purchasing approximately 843,500 MMBtus of natural gas with an average price of $3.36 per MMBtu. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time the price is fixed and the time the natural gas is delivered. The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market. The natural gas purchases represent approximately 40% of the projected annual plant requirements.
As of June 30, 2024, we were committed to selling approximately 30,000 dry equivalent tons of distillers grains with an average price of $149 per ton. The distillers grains sales represent approximately 13% of the projected annual plant production.
As of June 30, 2024, we were committed to selling approximately 3.3 million pounds of distillers corn oil with an average price of $0.47 per pound. The distillers corn oil sales represent approximately 10% of the projected annual plant production.
We did not have any firm-priced sales commitments for ethanol as of June 30, 2024.
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 June 30, 2024, 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 June 30, 2024. 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 Measure Hypothetical Adverse Change in Price Approximate Adverse Change to Income
Ethanol 100,000,000 Gallons 10 % $ 18,100,000
Corn 30,920,846 Bushels 10 % $ 11,667,115
Natural Gas 1,406,500 MMBTU 10 % $ 383,975
For comparison purposes, our sensitivity analysis for our quarter ended June 30, 2023 is set forth below.
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) Unit of Measure Hypothetical Adverse Change in Price Approximate Adverse Change to Income
Ethanol 100,000,000 Gallons 10 % $ 23,261,207
Corn 30,518,187 Bushels 10 % $ 16,125,810
Natural Gas 946,400 MMBTU 10 % $ 251,742
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 June 30, 2024. 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 June 30, 2024, 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/A for the fiscal year ended December 31, 2023. 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/A for the fiscal year ended December 31, 2023 filed with the Securities Exchange Commission on March 12, 2024.
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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 2023 Annual Report on Form 10-K/A, 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.

IT outages, data loss, data breaches and cyber-attacks could compromise our intellectual property or other sensitive information, be costly to remediate or cause significant damage to our business, reputation and operations.
As AI capabilities improve and are increasingly adopted, we may see cyberattacks created through AI. These attacks could be crafted with an AI tool to directly attack information systems with increased speed and/or efficiency than a human threat actor or create more effective phishing emails. The threat could be introduced from the result of our or our customers and business
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partners incorporating the output of an AI tool that includes a threat, such as introducing malicious code by incorporating AI generated source code.
We have not actively worked to integrate any artificial intelligence into our operations. This may cause us to fall behind competitors in terms of efficiency, innovation, and competitiveness.
In today's fast-paced business environment, AI can provide companies with the ability to analyze vast amounts of data quickly, identify patterns, and make data-driven decisions in real-time. Failure to integrate AI means missing out on these capabilities, potentially leading to inefficiencies and slower decision-making processes compared to competitors who leverage AI effectively. Without AI, we rely somewhat on manual processes for tasks such as data analysis, customer service, or production optimization which may increase our risk of error vs using AI for these processes. This may result in suboptimal resource allocation, increased operational costs, and missed opportunities for growth and expansion as compared to companies who utilize AI.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
Insider Trading Arrangements.
On April 1, 2024, Randall Loyd Hansen, one of our managers, sold seven thousand five hundred (7,500) of our membership units for a purchase price of $6 per unit. This sale was intended to satisfy the affirmative defense conditions of a non-rule 10b5-1 trading arrangement.
On April 1, 2024, Paul Garaets, one of our managers, sold six thousand (6,000) of our membership units for a purchase price of $6 per unit. This sale was intended to satisfy the affirmative defense conditions of a non-rule 10b5-1 trading arrangement.
On June 1, 2024, Randall Loyd Hansen, one of our managers, entered into a contract to purchase 20,000 of our membership units for a purchase price of $6/unit. This purchase did not become effective until June 17, 2024. This sale was intended to satisfy the affirmative defense conditions of a non-rule 10b5-1 trading arrangement.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this report.
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Exhibit No. Exhibit
31.1
Certificate Pursuant to 17 CFR 240.13a-14(a)*
31.2
Certificate Pursuant to 17 CFR 240.13a-14(a)*
32.1
Certificate Pursuant to 18 U.S.C. Section 1350*
32.2
Certificate Pursuant to 18 U.S.C. Section 1350*
101.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.
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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: August 13, 2024 /s/ Scott Mundt
Scott Mundt
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2024 /s/ Robbi Buchholtz
Robbi Buchholtz
Chief Financial Officer
(Principal Financial and Accounting Officer)
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