Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2023

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. All adjustments are of a normal and recurring nature. The results of operations for the nine months ended September 30, 2023 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, 2022, contained in the Company's annual report on Form 10-K for 2022 filed with the SEC on March 9, 2023.

Principles of Consolidation

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

Revenue Recognition

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

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

Disaggregation of revenue:

All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line:


	Three Months Ended September 30				Nine Months Ended September 30,
	2023		2022		2023		2022

Revenues ethanol	$	51,342,538	$	56,385,702	$	167,170,587	$	162,164,019
Revenues distillers grains	11,104,926		12,922,675		38,747,929		37,962,783
Revenues distillers corn oil	4,468,550		4,902,122		13,017,851		13,971,890
	$	66,916,014	$	74,210,499	$	218,936,367	$	214,098,692

Contract assets and contract liabilities:

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

The Company has no significant contract assets or contract liabilities from contracts with customers at September 30, 2023 and December 31, 2022.

Shipping costs

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

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

Reporting Segment

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

Costs of Revenues

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

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

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.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand accounts and other accounts with original maturities of three months or less that provide withdrawal privileges.

Receivables and Credit Policies

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

The carrying amount of trade receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. Management regularly reviews trade receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The allowance was $0 as of September 30, 2023 and December 31, 2022.

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 options derivative instruments.

The Company is subject to market risk with respect to the price and availability of corn, the principal raw material the Company uses to produce ethanol and ethanol by-products. In general, unfavorable market conditions result from rising corn prices. This is especially true when market conditions do not allow us to pass along increased corn costs to our customers. The availability and price of corn are subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply. Additionally, the crisis in Ukraine may effect the price of corn, and by extension, our business.

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

The Company does not apply the normal purchase and sales exemption for forward corn purchase contracts. As of September 30, 2023, the Company was committed to purchasing approximately 4.0 million bushels of corn on a forward contract basis with an average price of $5.04 per bushel. These corn purchases represent approximately 12% of our projected plant corn usage for the next 12 months.

The Company enters into firm-price purchase commitments with natural gas suppliers under which the Company agrees to buy natural gas at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time the price is fixed and the time the natural gas is delivered. At September 30, 2023, the Company is committed to purchasing approximately 1,192,000 MMBtus of natural gas with an average price of $3.68 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 57% of the annual plant requirements.

The Company enters into firm-price sales commitments with distillers grains customers under which the Company agrees to sell distillers grains at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers grain between the time the price is fixed and the time the distillers grains are delivered. At September 30, 2023, the Company was committed to selling approximately 57,000 dry equivalent tons of

distillers grains with an average price of $192 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 25% of the projected annual plant production.

The Company enters into firm-price sales commitments with distillers corn oil customers under which the Company agrees to sell distillers corn oil at a price set in advance of the actual delivery. Under these arrangements, the Company assumes the risk of a price increase in the market price of distillers corn oil between the time the price is fixed and the time the distillers corn oil is delivered. At September 30, 2023, the Company was committed to selling approximately 3.2 million pounds of distillers corn oil with an average price of $0.72 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 9% of the projected annual plant production.

The Company did not have any firm-priced sales commitments for ethanol as of September 30, 2023.

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 September 30, 2023 and December 31, 2022 were as follows:


	Balance Sheet Classification	September 30, 2023		December 31, 2022*

Corn forward contracts in gain position		$	35	$	922,181
Futures contracts in gain position		265,388		252,450
Futures contracts in loss position		(3,388)		(395,300)
Total forward, futures and options contracts		262,035		779,331
Cash held by broker		678,216		2,077,108
	Current Assets	$	940,251	$	2,856,439






Corn forward contracts in loss position	Current Liabilities	$	(2,126,641)	$	(435,053)

*Derived from audited financial statements

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

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

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 September 30,
	Classification	2023		2022
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contracts	Cost of Revenues	$	426,196	$	(1,940,249)
Forward contracts	Cost of Revenues	(1,527,713)		1,405,821

	Statement of Operations	Nine Months Ended September 30,
	Classification	2023		2022
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contracts	Cost of Revenues	$	5,656,481	$	(7,342,878)
Forward contracts	Cost of Revenues	(12,625,389)		2,796,694

Investments

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

Goodwill

Annually, as well as when an event triggering impairment may have occurred, the Company performs an impairment test on goodwill, which compares the fair value of the reporting unit with its carrying amount. An impairment charge is recognized, if necessary, for the amount by which the carrying value exceeds the fair value up to the amount of the goodwill attributed to the reporting unit. The Company performs the annual analysis as of December 31 of each fiscal year. The Company determined that there was no impairment of goodwill at December 31, 2022 or through September 30, 2023 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.

Risks and Uncertainties

The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three months ended September 30, 2023, ethanol sales averaged approximately 77% of total revenues, while approximately 17% of revenues were generated from the sale of distillers grains and 6% of revenues were generated from the sale of corn oil. For the nine months ended September 30, 2023, ethanol

sales averaged approximately 76% of total revenues, while approximately 18% of revenues were generated from the sale of distiller grains and 6% of revenues were generated from the sale of corn oil.

The Company's operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, unleaded gasoline and the petroleum markets, government programs, global political or economic issues, including but not limited to, the war in Ukraine including sanctions associated therewith, shortages, export prices, crude oil prices, currency valuations and government policies in the United States and around the world, over which we have no control. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol.

The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government programs, global political or economic issues, including but not limited to the war in Ukraine including sanctions associated therewith, or global damaging growing conditions, such as plant disease or adverse weather, including drought, increased fertilizer costs as well as global conflicts. The Company's risk management program is used to protect against the price volatility of these commodities.

Goodwill and Intangible Assets Disclosure [Text Block]

Goodwill

LAKE AREA CORN PROCESSORS LLC 10-Q