Document

10-Q 1 sdsp2019-09x30doc.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NO. 000-50253

South Dakota Soybean Processors, LLC

(Exact name of registrant as specified in its charter)



South Dakota		46-0462968
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

100 Caspian Avenue; PO Box 500 Volga, South Dakota		57071
(Address of Principal Executive Offices		(Zip Code)

(605) 627-9240

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



¨ Large Accelerated Filer	¨ Accelerated Filer	x Non-Accelerated Filer	¨ Smaller Reporting Company
		(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

¨ Yes x No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: On November 7, 2019, the registrant had 30,419,000 capital units outstanding.

Table of Contents



			Page

Part I.	FINANCIAL INFORMATION		3

	Item I.	Financial Statements (Unaudited)	3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24

	Item 4.	Controls and Procedures	24

Part II.	OTHER INFORMATION		25

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

	Item 3.	Defaults among Senior Securities	25

	Item 4.	Mine Safety Disclosures	25

	Item 5.	Other Information	25

	Item 6.	Exhibits	25

Signatures			26

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

South Dakota Soybean Processors, LLC

Condensed Financial Statements

September 30, 2019 and 2018

South Dakota Soybean Processors, LLC

Condensed Balance Sheets



	September 30, 2019			December 31, 2018
	(Unaudited)			December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	239,121		$	7,197,082
Trade accounts receivable	17,959,870			20,550,438
Inventories	52,577,554			36,716,014
Margin deposits	2,764,721			2,350,852
Prepaid expenses	719,047			1,492,163
Total current assets	74,260,313			68,306,549

Property and equipment	115,116,127			110,314,779
Less accumulated depreciation	(54,325,980		)	(51,246,765		)
Total property and equipment, net	60,790,147			59,068,014

Other assets
Investments in related parties	7,873,727			8,009,315
Investments in cooperatives	1,562,098			1,552,022
Right-of-use lease asset, net	6,735,845			7,918,283
Total other assets	16,171,670			17,479,620

Total assets	$	151,222,130		$	144,854,183

(continued on following page)

South Dakota Soybean Processors, LLC

Condensed Balance Sheets (continued)



	September 30, 2019		December 31, 2018
	(Unaudited)
Liabilities and Members' Equity
Current liabilities
Excess of outstanding checks over bank balance	$	5,192,413	$	3,893,179
Current maturities of long-term debt	4,603,342		61,964
Note payable - seasonal loan	3,738,236		—
Current operating lease liabilities	2,818,321		2,714,928
Accounts payable	2,148,992		2,325,404
Accrued commodity purchases	26,093,911		35,384,390
Accrued expenses	3,182,372		3,697,631
Accrued interest	62,675		10,673
Deferred liabilities - current	319,007		792,384
Total current liabilities	48,159,269		48,880,553

Long-term liabilities
Long-term debt, net of current maturities and unamortized debt issuance costs	11,991,385		593,027
Long-term operating lease liabilities	3,917,524		5,203,355
Total long-term liabilities	15,908,909		5,796,382

Commitments and contingencies (Notes 6, 7, 8, and 13)

Members' equity
Class A Units, no par value, 30,419,000 units issued and outstanding at September 30, 2019 and December 31, 2018	87,153,952		90,177,248

Total liabilities and members' equity	$	151,222,130	$	144,854,183

The accompanying notes are an integral part of these condensed financial statements.

South Dakota Soybean Processors, LLC

Condensed Statements of Operations (Unaudited)

For the Three and Nine-Month Periods Ended September 30, 2019 and 2018



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Net revenues	$	85,001,379		$	100,386,226		$	277,299,775		$	292,173,855

Cost of revenues:
Cost of product sold	65,035,124			70,997,345			212,714,179			227,452,292
Production	8,889,751			6,691,112			22,583,763			19,664,019
Freight and rail	8,212,636			9,879,915			26,472,517			26,954,523
Brokerage fees	146,960			155,753			476,047			466,707
Total cost of revenues	82,284,471			87,724,125			262,246,506			274,537,541

Gross profit (loss)	2,716,908			12,662,101			15,053,269			17,636,314

Operating expenses:
Administration	848,890			1,009,383			2,781,405			2,791,039

Operating income (loss)	1,868,018			11,652,718			12,271,864			14,845,275

Other income (expense):
Interest expense	(196,440		)	(257,772		)	(656,729		)	(841,503		)
Other non-operating income (expense)	(17,253		)	162,989			402,213			557,865
Patronage dividend income	—			49,735			169,456			146,258
Total other income (expense)	(213,693		)	(45,048		)	(85,060		)	(137,380		)

Income (loss) before income taxes	1,654,325			11,607,670			12,186,804			14,707,895

Income tax benefit (expense)	—			—			(600		)	(1,960		)

Net income (loss)	$	1,654,325		$	11,607,670		$	12,186,204		$	14,705,935


Basic and diluted earnings (loss) per capital unit	$	0.05		$	0.38		$	0.40		$	0.48

Weighted average number of capital units outstanding for calculation of basic and diluted earnings (loss) per capital unit	30,419,000			30,419,000			30,419,000			30,419,000

The accompanying notes are an integral part of these condensed financial statements.

South Dakota Soybean Processors, LLC

Condensed Statements of Changes in Members' Equity (Unaudited)

For the Nine Months Ended September 30, 2019 and 2018



	Class A Units
	Units	Amount

Balances, December 31, 2017	30,419,000	$	69,375,206
Net income	—	14,705,935
Distribution to members	—	(5,075,303		)
Balances, September 30, 2018	30,419,000	$	79,005,838

Balances, December 31, 2018	30,419,000	$	90,177,248
Net income	—	12,186,204
Distribution to members	—	(15,209,500		)
Balances, September 30, 2019	30,419,000	$	87,153,952

The accompanying notes are an integral part of these condensed financial statements.

South Dakota Soybean Processors, LLC

Condensed Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2019 and 2018



	2019			2018
Operating activities
Net income (loss)	$	12,186,204		$	14,705,935
Charges and credits to net income not affecting cash:
Depreciation and amortization	3,199,108			3,097,587
Net (gain) loss recognized on derivative activities	(2,983,943		)	(3,059,988		)
Gain on sales of property and equipment	(6,687		)	(271,933		)
Loss on equity method investment	135,588			61,996
Non-cash patronage dividends	(42,364		)	(24,131		)
Change in current assets and liabilities	(20,331,307		)	202,992
Net cash provided by (used for) operating activities	(7,843,401		)	14,712,458

Investing activities
Purchase of investments	—			(5,000,000		)
Retirement of patronage dividends	32,288			—
Proceeds from sales of property and equipment	64,800			309,870
Purchase of property and equipment	(4,977,738		)	(5,874,304		)
Net cash provided by (used for) investing activities	(4,880,650		)	(10,564,434		)

Financing activities
Change in excess of outstanding checks over bank balances	1,299,234			(285,932		)
Net proceeds (payments) from seasonal borrowings	3,738,236			—
Distributions to members	(15,209,500		)	(5,075,303		)
Payments for debt issue costs	—			(10,500		)
Proceeds from long-term debt	71,476,467			47,306,495
Principal payments on long-term debt	(55,538,347		)	(46,074,101		)
Net cash provided by (used for) financing activities	5,766,090			(4,139,341		)

Net change in cash and cash equivalents	(6,957,961		)	8,683

Cash and cash equivalents, beginning of period	7,197,082			683,523

Cash and cash equivalents, end of period	$	239,121		$	692,206

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	604,727		$	801,815

Income taxes	$	—		$	—

The accompanying notes are an integral part of these condensed financial statements.

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements

Note 1 - Principal Activity and Significant Accounting Policies

The unaudited condensed financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although South Dakota Soybean Processors, LLC (the “Company”, “LLC”, “we”, “our”, or “us”) believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in the accompanying condensed financial statements. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year due in part to the seasonal nature of some of the Company’s businesses. The balance sheet data as of December 31, 2018 has been derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2018, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2019.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue

The Company accounts for all of its revenues from contracts with customers under ASC 606, Revenue from Contracts with Customers.

The Company principally generates revenue from merchandising and transporting manufactured agricultural products used as ingredients in food, feed, energy and industrial products. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any amounts collected on behalf of third parties (e.g. - taxes). The Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product to a customer. Control transfer typically occurs when goods are shipped from our facilities or at other predetermined control transfer points (for instance, destination terms). Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of revenues. Accordingly, amounts billed to customers for such costs are included as a component of revenues.

Payments received in advance to the transfer of goods, or "contract liabilities", are included in "Deferred liabilities - current" on the Company's condensed balance sheets. These customer prepayments totaled $140,396 and $15,042 as of September 30, 2019 and December 31, 2018, respectively. Of the $15,042 balance as of December 31, 2018, contract liabilities recognized as revenues were $0 and $15,042 for the three and nine month periods ended September 30, 2019, respectively.

The following table presents a disaggregation of revenue from contracts with customers for the three and nine month periods ended September 30, 2019 and 2018, by product type:

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Soybean meal and hulls	$	57,332,025	$	70,011,833	$	181,532,951	$	195,009,313
Soybean oil and oil byproducts	27,669,354		30,374,393		95,766,824		97,164,542

Totals	$	85,001,379	$	100,386,226	$	277,299,775	$	292,173,855

Recent accounting pronouncements

Effective January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02 (Leases). The standard requires companies to recognize operating lease assets and liabilities on the balance sheet and disclose key information regarding leasing arrangements. The Company has elected the package of practical expedients permitted in ASC Topic 842. Accordingly, the Company accounted for all its leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain leases under Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments, if any, would have met the definition of initial direct costs in ASC Topic 842 at lease commencement. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2018 (the beginning of the earliest period presented): (a) a lease liability of $10.3 million, which represents the present value of the remaining lease payments of $11,000,000, discounted using the Company's incremental borrowing rate at the time of adoption of the respective leases, and (b) a right-to-use asset of $10.3 million, which represents the total lease liability adjusted for any unamortized initial direct costs. The Company also elected not to recognize and measure any short-term lease, which is a lease that, at the commencement date, has a term of 12 months or less and does not contain an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

Note 2 - Accounts Receivable

Accounts receivable are considered past due when payments are not received on a timely basis in accordance with the Company’s credit terms, which is generally 30 days from invoice date. Accounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any.

The following table presents the aging analysis of trade receivables as of September 30, 2019 and December 31, 2018:



	September 30, 2019		December 31, 2018
Past due:
Less than 30 days past due	$	3,674,172	$	5,362,970
30-60 days past due	312,339		387,670
60-90 days past due	14,279		101,687
Greater than 90 days past due	15,782		84
Total past due	4,016,572		5,852,411
Current	13,943,298		14,698,027

Totals	$	17,959,870	$	20,550,438

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements

The following table provides information regarding the Company’s allowance for doubtful accounts receivable as of September 30, 2019 and December 31, 2018:



	September 30, 2019		December 31, 2018

Balances, beginning of period	$	—	$	—
Amounts charged (credited) to costs and expenses	—		—
Additions (deductions)	—		—

Balances, end of period	$	—	$	—

In general, cash is applied to the oldest outstanding invoice first, unless payment is for a specified invoice. The Company, on a case by case basis, may charge a late fee of 1.5% per month on past due receivables.

Note 3 - Inventories

The Company’s inventories consist of the following at September 30, 2019 and December 31, 2018:



	September 30, 2019		December 31, 2018
Finished goods	$	26,736,079	$	21,283,354
Raw materials	25,531,163		15,206,526
Supplies & miscellaneous	310,312		226,134

Totals	$	52,577,554	$	36,716,014

Finished goods and raw materials are valued at estimated market value, which approximates net realizable value. In addition, futures and option contracts are marked to market through cost of revenues, with unrealized gains and losses recorded in the above inventory amounts. Supplies and other inventories are stated at net realizable value.

Note 4 - Investments in Related Parties

The Company accounts for its investment in Prairie AquaTech, LLC using the equity method due to the Company's ability to exercise significant influence based on its position on the board of managers. The Company recognized gains (losses) of $(36,099) and $91,781 during the three months ended September 30, 2019 and 2018, respectively, and $(135,588) and $(61,996) during the nine months ended September 30, 2019 and 2018, respectively, which is included in other non-operating income (expense).

The Company accounts for the investments in Prairie AquaTech Investments, LLC and Prairie AquaTech Manufacturing, LLC using the cost method. In the construction phase of the facility, the Company is acting as the Owner’s representative and providing various construction and management services. However, once the facility is operational in fiscal year 2019, the Company will not be able to exercise significant influence or control over any aspect of operations. Under the cost method, the investments are recorded at cost and the Company will record any dividends as income when received.

The results of operations and financial position of the Company's equity method investment in Prairie AquaTech, LLC as of September 30, 2019 and December 31, 2018 and for the three and nine-month periods ended September 30, 2019 and 2018 are summarized below.

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Condensed income statement:
Revenues	$	315,130		$	476,250	$	598,223		$	762,359
Expenses	(733,092		)	136,606		(2,159,700		)	(1,145,481		)
Other income (expense)	10,268			48,067		30,183			(172,071		)
Net income (loss)	$	(407,694	)	$	660,923	$	(1,531,294	)	$	(555,193	)



	September 30, 2019		December 31, 2018
Condensed balance sheet information:
Assets	$	5,472,206	$	7,264,092
Liabilities	362,044		610,789
Equity	5,110,162		6,653,303

Note 5 - Property and Equipment

The following is a summary of the Company's property and equipment at September 30, 2019 and December 31, 2018:



	2019							2018
	Cost		Accumulated Depreciation			Net		Net
Land	$	516,326	$	—		$	516,326	$	516,326
Land improvements	2,043,236		(581,255		)	1,461,981		1,556,183
Buildings and improvements	21,602,738		(9,346,014		)	12,256,724		12,588,664
Machinery and equipment	79,613,657		(43,219,649		)	36,394,008		38,513,796
Railroad cars	1,238,508		(24,770		)	1,213,738		1,232,315
Company vehicles	146,754		(106,417		)	40,337		16,307
Furniture and fixtures	1,526,779		(1,047,875		)	478,904		543,801
Construction in progress	8,428,129		—			8,428,129		4,100,622

Totals	$	115,116,127	$	(54,325,980	)	$	60,790,147	$	59,068,014

Depreciation of property and equipment was $1,067,076 and $1,087,935 for the three months ended September 30, 2019 and 2018, respectively, and $3,197,493 and $3,085,472 for the nine months ended September 30, 2019 and 2018, respectively.

Note 6 - Note Payable – Seasonal Loan

The Company has entered into a revolving credit agreement with CoBank which expires December 1, 2019. The purpose of the credit agreement is to finance the operating needs of the Company. Under this agreement, the Company may borrow up to $20 million, and advances on the revolving credit agreement are secured. Interest accrues at a variable rate (4.22% at September 30, 2019). The Company pays a 0.20% annual commitment fee on any funds not borrowed. There were advances outstanding of $3,738,236 and $0 at September 30, 2019 and December 31, 2018, respectively. The remaining available funds to borrow under the terms of the revolving credit agreement were $16.3 million as of September 30, 2019.

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements

Note 7 - Long-Term Debt

The following is a summary of the Company's long-term debt at September 30, 2019 and December 31, 2018:



	September 30, 2019			December 31, 2018
Revolving term loan from CoBank, interest at variable rates (4.47% and 4.96% at September 30, 2019 and December 31, 2018, respectively), secured by substantially all property and equipment. Loan matures September 20, 2023.	$	16,000,000		$	—
Note payable to Brookings Regional Railroad Authority, due in annual principal and interest installments of $75,500, interest rate at 2.00%, secured by railroad track assets. Note matures June 1, 2020.	603,342			665,222
Total debt before debt issuance costs	16,603,342			665,222
Less current maturities	(4,603,342		)	(61,964		)
Less debt issuance costs, net of amortization of $5,385 and $3,769 as of September 30, 2019 and December 31, 2018, respectively	(8,615		)	(10,231		)

Total long-term debt	$	11,991,385		$	593,027

The Company entered into an agreement as of March 28, 2017 with CoBank to amend and restate its Credit Agreement, which includes both the revolving term and seasonal loans. Under the terms and conditions of the Credit Agreement, CoBank agreed to make advances to the Company for up to $24,000,000 on the revolving term loan with a variable effective interest rate of 4.47%. The available commitment decreases in scheduled periodic increments of $2,000,000 every six months starting March 20, 2018 until maturity on September 20, 2023. The Company pays a 0.40% annual commitment fee on any funds not borrowed. The debt issuance costs of $14,000 paid by the Company on this amendment will be amortized over the term of loan. The principal balance outstanding on the revolving term loan was $16,000,000 and $0 as of September 30, 2019 and December 31, 2018, respectively. There were no remaining commitments available to borrow on the revolving term loan as of September 30, 2019.

Under this agreement, the Company is subject to compliance with standard financial covenants and the maintenance of certain financial ratios. The Company was in compliance with all covenants and conditions with CoBank as of September 30, 2019.

Effective March 1, 2013, the State of South Dakota Department of Transportation agreed to loan the Brookings County Regional Railway Authority $964,070 for purposes of making improvements to the railway infrastructure near the Company’s soybean processing facility in Volga, South Dakota. In consideration of this secured loan, the Company agreed to provide a guarantee to the State of South Dakota Department of Transportation for the full amount of the loan, plus interest. This guaranty was converted into a direct obligation of the Company’s on October 16, 2013, when the Company received the entire loan proceeds and assumed responsibility for paying the annual principal and interest payments.

The following are minimum principal payments on long-term debt obligations for the twelve-month periods ended September 30:



2020	$	4,603,342
2021	4,000,000
2022	4,000,000
2023	4,000,000

Total	$	16,603,342

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements

Note 8 - Operating Leases

The Company has several operating leases for railcars. These leases have terms ranging from 3-18 years and do not have renewal terms provided. The leases require the Company to maintain the condition of the railcars, restrict the use of the railcars to specified products, such as soybean meal, hulls or oil, limit usage to the continental United States, Canada or Mexico, require approval to sublease to other entities, and require the Company's submission of its financial statements. Lease expense for all railcars was $766,022 and $787,306 for the three months ended September 30, 2019 and 2018, respectively, and $2,302,012 and $2,369,318 for the nine months ended September 30, 2019 and 2018, respectively.

The following is a schedule of the Company's operating leases for railcars as of September 30, 2019:



Lessor	Quantity of Railcars	Commencement Date	Maturity Date	Monthly Payment

Wells Fargo Rail	112	8/1/2017	7/31/2022	$	52,557
Wells Fargo Rail	107	1/1/2018	12/31/2022	35,845
Wells Fargo Rail	7	1/1/2004	12/31/2021	2,926
Wells Fargo Rail	15	1/1/2004	12/31/2021	5,850
Wells Fargo Rail	8	1/1/2015	12/31/2021	3,600
Trinity Capital	88	8/1/2002	7/31/2020	33,704
Trinity Capital	29	12/1/2015	11/30/2020	28,536
Trinity Capital	20	10/1/2015	9/30/2020	13,600
Midwest Railcar Corporation	64	1/1/2015	12/31/2021	27,200
American Railcar Leasing	30	7/1/2015	6/30/2021	30,780
Andersons Railcar Leasing Co.	10	7/1/2018	6/30/2023	5,000
Andersons Railcar Leasing Co.	20	7/1/2019	6/30/2026	11,300
GATX Corporation	15	7/1/2017	6/30/2020	4,500

	525			$	255,398

The Company also has a number of other operating leases for machinery and equipment. These leases have terms ranging from 3-7 years; however, most of these leases have automatic renewal terms. These leases require monthly payments of $3,912. Rental expense under these other operating leases was $21,081 and $9,540 for the three months ended September 30, 2019 and 2018, respectively, and $41,723 and $34,118 for the nine-month periods ended September 30, 2019 and 2018, respectively.

Operating leases are included in right-to-use lease assets, current operating lease liabilities, and long-term lease liabilities on the condensed balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company's secured incremental borrowing rates or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.

Lease expense for these operating leases is recognized on a straight-line basis over the lease terms. The components of lease costs recognized within our condensed statements of operations for the nine-month periods ended September 30, 2019 and 2018 were as follows:

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018

Cost of revenues - Freight and rail	$	766,022	$	787,306	$	2,302,012	$	2,369,318
Cost of revenues - Production	17,973		6,306		32,606		25,665
Administration expenses	3,108		3,234		9,117		8,453
Total operating lease costs	$	787,103	$	796,846	$	2,343,735	$	2,403,436

The following is a maturity analysis of the undiscounted cash flows of the operating lease liabilities as of September 30, 2019:



	Railcars			Other			Total
Twelve-month periods ended September 30:
2020	$	2,931,312		$	41,377		$	2,972,689
2021	2,065,429			38,263			2,103,692
2022	1,322,596			37,640			1,360,236
2023	288,135			36,696			324,831
2024	135,600			20,818			156,418
Thereafter	237,300			4,943			242,243
Total lease payments	6,980,372			179,737			7,160,109
Less amount of lease payments representing interest	(404,268		)	(19,996		)	(424,264		)
Total present value of lease payments	$	6,576,104		$	159,741		$	6,735,845

Note 9 - Member Distribution

On February 5, 2019, the Company’s Board of Managers approved a cash distribution of approximately $15.2 million, or 50.0¢ per capital unit. The distribution was paid in accordance with the Company’s operating agreement and distribution policy on February 7, 2019.

Note 10 - Derivative Instruments and Hedging Activities

In the ordinary course of business, the Company enters into contractual arrangements as a means of managing exposure to changes in commodity prices and, occasionally, foreign exchange and interest rates. The Company’s derivative instruments primarily consist of commodity futures, options and forward contracts, and interest rate swaps, caps and floors. Although these contracts may be effective economic hedges of specified risks, they are not designated as, nor accounted for, as hedging instruments. These contracts are recorded on the Company’s condensed balance sheets at fair value as discussed in Note 11, Fair Value.

As of September 30, 2019 and December 31, 2018, the value of the Company’s open futures, options and forward contracts was approximately $484,832 and $802,770, respectively.



		As of September 30, 2019
	Balance Sheet Classification	Asset Derivatives		Liability Derivatives
Derivatives not designated as hedging instruments:
Commodity contracts	Current Assets	$	3,633,222	$	2,707,719
Foreign exchange contracts	Current Assets	16,457		8,509
Interest rate caps and floors	Current Liabilities	—		448,619

Totals		$	3,649,679	$	3,164,847

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements



		As of December 31, 2018
	Balance Sheet Classification	Asset Derivatives		Liability Derivatives
Derivatives not designated as hedging instruments:
Commodity contracts	Current Assets	$	3,696,540	$	2,722,830
Foreign exchange contracts	Current Assets	129,258		100,730
Interest rate caps and floors	Current Liabilities	—		199,468

Totals		$	3,825,798	$	3,023,028

During the three and nine-month periods ended September 30, 2019 and 2018, net realized and unrealized gains (losses) on derivative transactions were recognized in the condensed statements of operations as follows:



	Net Gain (Loss) Recognized on Derivative Activities for the					Net Gain (Loss) Recognized on Derivative Activities for the
	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Derivatives not designated as hedging instruments:
Commodity contracts	$	2,188,931		$	4,607,791	$	3,197,752		$	2,801,898
Foreign exchange contracts	(10,091		)	46,342		34,738			6,158
Interest rate swaps, caps and floors	(92,998		)	40,008		(248,547		)	251,932

Totals	$	2,085,842		$	4,694,141	$	2,983,943		$	3,059,988

Note 11 - Fair Value

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, this guidance establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. The three levels of hierarchy and examples are as follows:


•	Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange and commodity derivative contracts listed on the Chicago Board of Trade (“CBOT”).


•	Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs, such as commodity prices using forward future prices.


•	Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.

The following tables set forth financial assets and liabilities measured at fair value in the condensed balance sheets and the respective levels to which fair value measurements are classified within the fair value hierarchy as of September 30, 2019 and December 31, 2018:

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements



	Fair Value as of September 30, 2019
	Level 1		Level 2		Level 3		Total
Financial assets:
Inventory	$	925,503	$	51,258,118	$	—	$	52,183,621
Margin deposits (deficits)	$	2,764,721	$	—	$	—	$	2,764,721



	Fair Value as of December 31, 2018
	Level 1		Level 2		Level 3		Total
Financial assets:
Inventory	$	973,710	$	35,338,531	$	—	$	36,312,241
Margin deposits	$	2,350,852	$	—	$	—	$	2,350,852

In accordance with ASC 825, Financial Instruments, the Company enters into various commodity derivative instruments, including futures, options, swaps and other agreements. The fair value of the Company’s commodity derivatives is determined using unadjusted quoted prices for identical instruments on the CBOT. The Company estimates the fair market value of their finished goods and raw materials inventories using the market price quotations of similar forward future contracts listed on the CBOT and adjusts for the local market adjustments derived from other grain terminals in our area.

The Company considers the carrying amount of significant classes of financial instruments on the balance sheets, including cash, accounts receivable, and accounts payable, to be reasonable estimates of fair value due to their length or maturity. The fair value of the Company’s long-term debt approximates the carrying value. The interest rates on the long-term debt are similar to rates the Company would be able to obtain currently in the market.

The Company has patronage investments in other cooperatives and common and preferred stock holdings in privately held entities. There is no market for their patronage credits or the entity’s common and preferred holdings, and it is impracticable to estimate fair value of the Company’s investments. These investments are carried on the balance sheet at original cost plus the amount of patronage earnings allocated to the Company, less any cash distributions received.

Note 12 - Related Party Transactions

The Company sold soybean products to Prairie AquaTech, LLC and Prairie AquaTech Manufacturing, LLC totaling $648,215 and $152,838 during the three months ended September 30, 2019 and 2018, respectively, and $942,195 and $233,233 during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 and December 31, 2018, Prairie AquaTech, LLC and Prairie AquaTech Manufacturing, LLC owed the Company $90,414 and $18,540, respectively.

The Company has entered into agreements with Prairie AquaTech Manufacturing, LLC to perform various management services and to serve as the owner's representative during the construction of its new manufacturing facility adjacent to the Company's plant in Volga, South Dakota. The Company received a total of $1.72 million in compensation for those services, which was recorded in deferred liabilities on the Company's balance sheet. As of September 30, 2019 and December 31, 2018, the balance remaining in deferred liabilities was $178,611 and $777,342, respectively. The Company recognized revenues from management services of $100,834 and $27,693 during the three-month periods ended September 30, 2019 and 2018, respectively, and $666,431 and $55,385 during the nine months ended September 30, 2019 and 2018, respectively.

Note 13 - Commitments and Contingencies

As of September 30, 2019, the Company had unpaid commitments of approximately $87,000 for construction and acquisition of property and equipment, all of which is expected to be incurred by December 2019.

From time to time in the ordinary course of our business, the Company may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual dispute. The Company carries insurance that provides protection against general commercial liability claims, claims against

South Dakota Soybean Processors, LLC

Notes to Condensed Financial Statements

our directors, officer and employees, business interruption, automobile liability, and workers' compensation. The Company is not currently involved in any material legal proceedings and are not aware of any potential claims.

Note 14 - Subsequent Event

The Company evaluated all of its activities and concluded that no subsequent events have occurred that would require recognition in its financial statements or disclosed in the notes to its financial statements.

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

Forward-Looking Statements

The information in this quarterly report on Form 10-Q for the nine-month period ended September 30, 2019, (including reports filed with the Securities and Exchange Commission (the “SEC” or “Commission”), contains “forward-looking statements” that deal with future results, expectations, plans and performance, and should be read in conjunction with the financial statements and Annual Report on Form 10-K for the year ended December 31, 2018. Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions. Forward-looking statements involve numerous assumptions, risks and uncertainties. Actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements are identified in our Form 10-K for the year ended December 31, 2018.

We are not under any duty to update the forward-looking statements contained in this report, nor do we guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

Executive Overview and Summary

During the nine months ended September 30, 2019, we reported a net income of $12.2 million, compared to $14.7 million during the same period in 2018. The decrease in profitability is largely driven by adverse weather conditions in our soybean procurement area, increased soybean processing in the U.S., and higher maintenance costs.

Poor weather conditions, including heavy snow and rainfall, during the spring of 2019 adversely affected our profitability. Severe flooding in our area contributed to a very late planting season and left a significant number of unplanted fields, causing uncertainty about the quantity and quality of this fall's soybean crop. As a result, farmers became reluctant sellers, leading to increases in soybean prices and deteriorating soybean crush margins.

China's implementation of a 25% tariff on U.S. soybeans in May 2018 effectively halted soybean exports to China, in turn shifting soybean demand to other countries such as Brazil and Argentina. Since China does not typically buy or import soybean meal or oil, soybean meal and oil prices did not decrease at the same rate as soybeans which helped generate unprecedented board crush levels. By 2019, however, U.S. soybean processing facilities, in efforts to capitalize on the high crushing margins, increased their production capacity, decreasing margins back to historically average amounts.

Lastly, our Volga facility completed its regularly scheduled annual shutdown for maintenance. Unfortunately, this year's shutdown was approximately twice as long in duration than in previous years due to extensive repairs and replacements of process equipment. As a result, maintenance expenses, which are part of production costs, increased by approximately $2.1 million during the nine months ended September 30, 2019, compared to the same period in 2018.

We believe the fourth quarter of 2019 will be subject to continued uncertainty. We are unsure about the quantity and quality of the soybeans to be procured at harvest given the effect of poor weather conditions. The prolonged trade disputes with China and other countries are also likely to continue to have a destabilizing effect, adversely impacting soybean prices and crush margins.

RESULTS OF OPERATIONS

Comparison of the three months ended September 30, 2019 and 2018



	Three Months Ended September 30, 2019					Three Months Ended September 30, 2018
	$			% of Revenue		$			% of Revenue
Revenue	$	85,001,379		100.0		$	100,386,226		100.0
Cost of revenues	(82,284,471		)	(96.8	)	(87,724,125		)	(87.4	)
Operating expenses	(848,890		)	(1.0	)	(1,009,383		)	(1.0	)
Other income (expense)	(213,693		)	(0.3	)	(45,048		)	—

Net income	$	1,654,325		1.9		$	11,607,670		11.6

Revenue – Revenue decreased $15.4 million, or 15.3%, for the three months ended September 30, 2019, compared to the same period in 2018. The decrease in revenues is due to a reduction in the quantity of soybeans processed, which decreased the volume of our soybean products available for sale to customers. Our processing volume decreased due to an extended shutdown at our Volga facility in August 2019 for annual maintenance.

Gross Profit/Loss – Gross profit decreased $9.9 million, or 78.5%, for the three-month period ended September 30, 2019, compared to the same period in 2018. The decrease in gross profit is primarily driven by the effect of the current trade dispute between the U.S. and China on the soybean export market and an increase in production expenses. The threat and imposition of tariffs by China on U.S. soybeans in 2018 resulted in a decrease in U.S. soybean prices which improved processing margins for our products in 2018 and early 2019. By 2019, however, U.S. soybean processing facilities, in efforts to capitalize on the high crushing margins, increased their production capacity, decreasing margins back to historically average amounts. In addition, gross profit decreased due to an increase in production expenses of $2.2 million, or 32.9%, for the three-month period ended September 30, 2019, compared to the same period in 2018. Production expenses increased between periods because of an extended shutdown of our Volga facility in August 2019, where we were required to make extensive repairs and replace certain processing equipment.

Operating Expenses – Administrative expenses, including all selling, general and administrative expenses, decreased $160,000, or 15.9%, for the three months ended September 30, 2019, compared to the same period in 2018. The decrease is primarily due to a decrease in personnel costs.

Interest Expense – Interest expense decreased $61,000, or 23.8%, during the three-month period ended September 30, 2019, compared to the same period in 2018. The decrease in interest expense is due primarily to a decrease in borrowings from our lines of credit, as we had less need to borrow due to an increase in working capital and a decrease in commodity prices. The average debt level during the three months ended September 30, 2019 was approximately $16.2 million, compared to $20.5 million for the same period in 2018.

Other Non-Operating Income – Other non-operating income, including patronage dividend income, decreased $230,000 during the three months ended September 30, 2019, compared to the same period in 2018. The decrease in other non-operating income is primarily due to decreases in our equity method investment in Prairie AquaTech, LLC and in patronage dividend income. During the three-month period ended September 30, 2019, losses on our equity method investment totaled $36,099, compared to a gain of $92,000 during the same period in 2018. In addition, CoBank issued to us a dividend in the amount of $50,000 during the quarter ended September 30, 2018, compared to $0 during the same period in 2019.

Net Income/Loss – During the three months ended September 30, 2019, we generated a net income of $1.7 million, compared to $11.6 million for the same period in 2018. The $9.9 million decrease is primarily attributable to a decrease in processing margins and an increase in production costs.

Comparison of the nine months ended September 30, 2019 and 2018



	Nine Months Ended September 30, 2019					Nine Months Ended September 30, 2018
	$			% of Revenue		$			% of Revenue
Revenue	$	277,299,775		100.0		$	292,173,855		100.0
Cost of revenues	(262,246,506		)	(94.6	)	(274,537,541		)	(94.0	)
Operating expenses	(2,781,405		)	(1.0	)	(2,791,039		)	(1.0	)
Other income (expense)	(85,060		)	—		(137,380		)	—
Income tax benefit (expense)	(600		)	—		(1,960		)	—

Net income	$	12,186,204		4.4		$	14,705,935		5.0

Revenue – Revenue decreased $14.9 million, or 5.1%, for the nine-month period ended September 30, 2019, compared to the same period in 2018. The decrease in revenues is primarily due to a 6.5% decrease in the average sales price of soybean meal. Soybean meal prices were affected by increased production of U.S. soybeans during the nine months ended September 30, 2019, compared to the same period in 2018. With good margins, a record sized soybean crop in the fall of 2018, and the trade dispute with China, the primary importer of U.S. soybeans, soybean processors in the U.S. operated at full capacity, and in some cases increased capacity, in efforts to maximize margins.

Gross Profit/Loss – Gross profit decreased $2.6 million for the nine months ended September 30, 2019, compared to the same period in 2018. The decrease in gross profit is primarily due to a $2.9 million increase in production costs following the extended shutdown at our Volga facility in August 2019.

Operating Expenses – Administrative expenses, including all selling, general and administrative expenses, remained relatively constant for the nine-month period ended September 30, 2019, compared to the same period in 2018.

Interest Expense – Interest expense decreased $185,000, or 22.0%, during the nine months ended September 30, 2019, compared to the same period in 2018. The decrease in interest expense is due primarily to a decrease in borrowings from our lines of credit, as we had less need to borrow due to an increase in working capital and a decrease in commodity prices. The average debt level during the nine-month period ended September 30, 2019 was approximately $17.4 million, compared to $24.0 million for the same period in 2018.

Other Non-Operating Income – Other non-operating income, including patronage dividend income, decreased $132,000 during the nine-month period ended September 30, 2019, compared to the same period in 2018. The decrease in other non-operating income is due to a $265,000 decrease in gains on sales of property and equipment. During the nine-month period ended September 30, 2019, gains on sales of property and equipment totaled $7,000, compared to $272,000 during the same period in 2018.

Net Income/Loss – During the nine-month period ended September 30, 2019, we generated a net income of $12.2 million, compared to $14.7 million for the same period in 2018. The $2.5 million decrease is primarily attributable to an increase in production costs.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash provided by operations and borrowings under our two lines of credit which are discussed below under “Indebtedness.” On September 30, 2019, we had working capital, defined as current assets less current liabilities, of approximately $26.1 million, compared to $18.8 million on September 30, 2018. Working capital increased $7.3 million between periods primarily due to an increase in net income since September 30, 2018. Based on our current plans, we believe that we will continue funding our operating and capital needs from operations and revolving lines of credit.

Comparison of the Nine Months Ended September 30, 2019 and 2018



	2019			2018
Net cash provided by (used for) operating activities	$	(7,843,401	)	$	14,712,458
Net cash used for investing activities	(4,880,650		)	(10,564,434		)
Net cash provided by (used for) financing activities	5,766,090			(4,139,341		)

Cash Flows Used For Operations

The $22.6 million change in cash flows provided by (used for) operating activities is attributed to a delayed soybean harvest in 2019, compared to the same period in 2018. Typically, we expect that a substantial amount of soybeans harvested in the fall will be delivered to our facilities by early October. However, a long winter and extremely wet spring in 2019 delayed planting and, ultimately, the fall harvest. Consequently, we were required to purchase a significant quantity of soybeans from 2018 to enable us to continue processing until the unexpected peak of harvest in late October. These purchases led to a $15.9 million increase in inventory during the nine-month period ended September 30, 2019, compared to $8.2 million reduction during the same period in 2018.

Cash Flows Used For Investing Activities

The $5.7 million decrease in cash flows used for investing activities during the nine-month period ended September 30, 2019, compared to the same period in 2018, is due to a decrease in investment purchases. During the nine months ended September 30, 2018, we invested an additional $5.0 million in Prairie AquaTech, LLC and its affiliates, compared to $0 during the same period in 2019.

Cash Flows Provided By (Used For) Financing Activities

The $9.9 million change in cash flows provided by (used for) financing activities is principally due to an $18.4 million increase in net proceeds on borrowings. During the nine months ended September 30, 2019, net proceeds on borrowings increased $19.6 million , compared to $1.2 million during the same period in 2018. Partially offsetting the increase in borrowings was a $10.1 million increase in cash distributions to our members. Cash distributions to our members totaled approximately $15.2 million during the nine-month period ended September 30, 2019, compared to $5.1 million during the same period in 2018.

Indebtedness

We have two lines of credit with CoBank, our primary lender, to meet the short and long-term needs of our operations. The first credit line is a revolving long-term loan. Under the terms of this loan, we may borrow funds as needed up to the credit line maximum, or $24.0 million, and then pay down the principal whenever excess cash is available. Repaid amounts may be borrowed up to the available credit line. On March 20, 2018, the available credit line decreased by $2.0 million, and decreases continually by the same amount every six months until the credit line’s maturity on September 20, 2023. We pay a 0.40% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan is $16.0 million and $0 as of September 30, 2019 and December 31, 2018. Under this loan, there were no additional funds available to be borrowed as of September 30, 2019.

The second credit line is a revolving working capital (seasonal) loan that matures on December 1, 2019. The primary purpose of this loan is to finance our operating needs. The maximum we may borrow under this credit line is $20 million. We pay a 0.20% annual commitment fee on any funds not borrowed; however, we have the option to reduce the credit line during any given commitment period listed in the credit agreement to avoid the commitment fee. As of September 30, 2019 and December 31, 2018, there were advances outstanding on the seasonal loan of $3.7 million and $0, respectively. There was $16.3 million available to borrow under this loan as of September 30, 2019.

Both loans with CoBank are set up with a variable rate option. The variable rate is set by CoBank and changes weekly on the first business day of each week. We also have a fixed rate option on both loans allowing us to fix rates for any period between one day and the entire commitment period. The annual interest rate on the revolving term loan is 4.47% and 4.96% as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018, the interest rate on the seasonal loan is 4.22% and 4.71%, respectively. We were in compliance with all covenants and conditions under the loans as of September 30, 2019 and the date of this filing.

We also have a loan with the State of South Dakota Department of Transportation in connection with previous improvements made to the railway infrastructure near our soybean processing facility in Volga, South Dakota. Under this loan, which matures on June 1, 2020, we make annual principal and interest payments of $75,500. The principal balance outstanding on this loan was $603,342 and $665,222 as of September 30, 2019 and December 31, 2018, respectively.

OFF BALANCE SHEET FINANCING ARRANGEMENTS

We do not utilize variable interest entities or other off-balance sheet financial arrangements.

Lease Commitments

We have commitments under various operating leases for rail cars, various types of vehicles, and lab and office equipment. Our most significant lease commitments are for rail cars used in the transportation of our products. We have several long-term leases for hopper rail cars and oil tank cars with American Railcar Leasing, Andersons Railcar Leasing Co., GATX Corporation, Midwest Railcar Corporation, Trinity Capital and Wells Fargo Rail. Total lease expense under these arrangements is approximately $766,000 and $787,000 for the three month periods ended September 30, 2019 and 2018, respectively, and $2.3 million and $2.4 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

In addition to rail car leases, we have a few operating leases for various machinery, equipment and storage facilities. Total lease expense under these arrangements is $21,000 and $10,000 for the three month periods ended September 30, 2019 and 2018, respectively, and $41,000 and $34,000 for the nine months ended September 30, 2019 and 2018, respectively. Some of our leases include purchase options, none of which, however, are for a value less than fair market value at the end of the lease.

Contractual Obligations

The following table shows our contractual obligations for the periods presented:



	Payment due by period
CONTRACTUAL OBLIGATIONS	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations (1)	$	18,227,000	$	5,327,000	$	8,800,000	$	4,100,000	$	—

Operating Lease Obligations	7,160,000		2,973,000		3,464,000		481,000		242,000

Totals	$	25,387,000	$	8,300,000	$	12,264,000	$	4,581,000	$	242,000


(1)	Represents principal and interest payments on our notes payable, which are included on our Balance Sheet.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 of our Financial Statements under Part I, Item 1, for a discussion on the impact, if any, of the recently pronounced accounting standards.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Except for the adoption of Accounting Standards Update No. 2016-02 (Leases) noted below, there have been no material changes to our critical accounting policies and estimates from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2018.

We adopted ASU 2016-02 (Leases) as of January 1, 2019. As a result of the adoption of the new lease accounting guidance, we recognized on January 1, 2018 (the beginning of the earliest period presented): (a) a lease liability of $10.3 million, which represents the present value of the remaining lease payments of $11,000,000, discounted using

our incremental borrowing rate at the time of adoption of the respective leases, and (b) a right-to-use asset of $10.3 million, which represents the total lease liability adjusted for any unamortized initial direct costs.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Commodities Risk & Risk Management. To reduce the price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight or options futures contract) on a regulated commodity futures exchange, the Chicago Board of Trade. While hedging activities reduce the risk of loss from changing market prices, such activities also limit the gain potential which otherwise could result from these significant fluctuations in market prices. Our policy is generally to maintain a hedged position within limits, but we can be long or short at any time. Our profitability is primarily derived from margins on soybeans processed, not from hedging transactions. Our management does not anticipate that hedging activities will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a cash contract.

At any one time, our inventory and purchase contracts for delivery to our facility may be substantial. We have risk management policies and procedures that include net position limits. They are defined by commodity, and include both trader and management limits. This policy and procedure triggers a review by management when any trader is outside of position limits. The position limits are reviewed at least annually with the board of managers. We monitor current market conditions and may expand or reduce the limits in response to changes in those conditions.

An adverse change in market prices would not materially affect our profitability since we generally take opposite and offsetting positions by entering into commodity futures and forward contracts as economic hedges of price risk.

Foreign Currency Risk. We conduct essentially all of our business in U.S. dollars and have minimal direct risk regarding foreign currency fluctuations. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of and demand for U.S. agricultural products compared to the same products offered by foreign suppliers.

Interest Rate Risk. We manage exposure to interest rate changes by using variable rate loan agreements with fixed rate options. Long-term loan agreements can utilize the fixed option through maturity; however, the revolving ability to pay down and borrow back would be eliminated once the funds were fixed.

As of September 30, 2019, we had $603,342 in fixed rate debt outstanding and $36 million of variable rate lines of credit. Interest rate changes impact the amount of our interest payments and, therefore, our future earnings and cash flows. Assuming other variables remain constant, a 1.0% increase in interest rates on our variable rate debt could have an estimated impact on profitability of approximately $360,000 per year.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting. There were no changes to our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting during the quarter ended September 30, 2019.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time in the ordinary course of our business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual dispute. We carry insurance that provides protection against general commercial liability claims, claims against our directors, officer and employees, business interruption, automobile liability, and workers' compensation. We are not currently involved in any material legal proceedings and are not aware of any potential claims.

Item 1A. Risk Factors.

During the quarter ended September 30, 2019, there were no material changes to the Risk Factors disclosed in Item 1A (Part I) of our 2018 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.



Exhibit Number		Description
3.1(i)		Articles of Organization (1)
3.1(ii)		Operating Agreement, as amended (2)
3.1(iii)		Articles of Amendment to Articles of Organization (3)
4.1		Form of Class A Unit Certificate (4)
31.1		Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1		Section 1350 Certification by Chief Executive Officer
32.2		Section 1350 Certification by Chief Financial Officer

____________________________________________________________________________

(1) Incorporated by reference from Appendix B to the information statement/prospectus filed as a part of the issuer’s Registration Statement on Form S-4 (File No. 333-75804).

(2) Incorporated by reference from the same numbered exhibit to the issuer’s Form 8-K filed on June 22, 2017.

(3) Incorporated by reference from the same numbered exhibit to the issuer’s Form 10-Q filed on August 14, 2002.

(4) Incorporated by reference from the same numbered exhibit to the issuer’s Registration Statement on Form S-4 (File No. 333-75804).

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



			SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

Dated:	November 7, 2019	By	/s/ Thomas Kersting
			Thomas Kersting, Chief Executive Officer
			(Principal Executive Officer)

Dated:	November 7, 2019	By	/s/ Mark Hyde
			Mark Hyde, Chief Financial Officer
			(Principal Financial Officer)