SOUTH DAKOTA SOYBEAN PROCESSORS LLC - Quarter Report: 2012 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2012

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)

100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071

(Address of Principal Executive Offices)

(605) 627-9240

(Registrant’s Telephone Number)

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):

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

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 14, 2012, the registrant had 30,419,000 capital units outstanding.

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

South Dakota Soybean Processors, LLC

Condensed Consolidated Financial Statements

September 30, 2012 and 2011

Report of Independent Registered Public Accounting Firm

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

We have reviewed the condensed consolidated balance sheet of South Dakota Soybean Processors, LLC (the “Company”), as of September 30, 2012, the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of South Dakota Soybean Processors, LLC as of December 31, 2011, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 30, 2012, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Eide Bailly LLP

November 14, 2012

Greenwood Village, Colorado

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

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

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

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

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

Note 1 -         Principal Activity and Significant Accounting Policies

The financial statements as of and for the periods ended September 30, 2012 and 2011 reflect, in the opinion of management of South Dakota Soybean Processors, LLC (the “Company”, “LLC”, “we”, “our”, or “us”), all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods presented. 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 consolidated balance sheet data as of December 31, 2011 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.

The condensed consolidated financial statements include the accounts of the Company and Urethane Soy Systems Company (USSC), which is the Company’s wholly-owned subsidiary. The effects of all intercompany accounts and transactions have been eliminated. During 2011 the Company determined to discontinue operations of its polyurethane segment, including USSC, and put the assets and business up for sale. For all periods presented, amounts associated with the polyurethane segment have been classified as discontinued operations on the accompanying condensed consolidated financial statements.

These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2011, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.

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.

Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a material impact on the Company’s financial condition or results of operations.

Reclassifications

Certain reclassifications have been made to the prior year’s financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or members’ equity.

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Note 2 -         Correction of Prior Period

In 2011 the Company recorded all product sales upon shipment of the product regardless of the contract terms. Those contracts with terms of ‘FOB Destination’ should have been recorded upon the arrival of the product at the agreed-upon location. As a result of the Company’s evaluation of this error under SEC’s Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (SAB 108), the Company determined that this error was material to the condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2011. Consequently, the condensed consolidated financial statements for those periods were adjusted to reflect the correction of this error. In evaluating and determining the appropriateness of applying SAB 108 to this error, the Company considered materiality both quantitatively and qualitatively as prescribed by the SEC’s Staff Accounting Bulletin No. 99. The following table reflects the impact of the above error to the condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2011:

Note 3 -         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.

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 ½% per month on past due receivables.

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The following table provides information regarding the Company’s allowance for doubtful accounts receivable of continued operations as of September 30, 2012 and December 31, 2011:

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Note 4 -         Inventories

The Company’s inventories of continued operations consist of the following at September 30, 2012 and December 31, 2011:

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 the lower of cost, determined by the first-in, first-out method, or market.

Note 5 -         Property and Equipment

Depreciation of property and equipment of continued operations amounts to $1,326,791 and $1,610,564 for the nine months ended September 30, 2012 and 2011, respectively.

Note 6 -         Note Payable – Seasonal Loan

The Company has entered into a revolving credit agreement with CoBank expires August 1, 2013. The Company, which prior to the amendment disclosed in Note 11, could borrow up to $40 million under this agreement to finance inventory and accounts receivable. Interest accrues at a variable rate (4.57% at September 30, 2012). Advances on the revolving credit agreement are secured and limited to qualifying inventory and accounts receivable, net of any accrued commodity purchases. There were advances outstanding of $26,505,978 and $0 at September 30, 2012 and December 31, 2011, respectively. The remaining available funds to borrow under the terms of the revolving credit agreement are approximately $13,500,000 as of September 30, 2012.

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Note 7 - Long-Term Debt

The Company entered into a Master Loan Agreement (MLA), which includes both the revolving term loan and the seasonal loan discussed in Note 6, with CoBank. Under the terms and conditions of the MLA, CoBank agreed to make advances to the Company for up to $15,500,000 on the revolving term loan. The available commitment decreases in scheduled periodic increments of $1,300,000 every six months starting September 20, 2012 until maturity on March 20, 2018. The principal balance outstanding on the revolving term loan was $14,200,000 and $14,805,001 as of September 30, 2012 and December 31, 2011, respectively. There were no remaining commitments available to borrow on the revolving term loan as of September 30, 2012.

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, 2012.

The minimum principal payments on long-term debt obligations are expected to be as follows:

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Note 8 -         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. The Company’s derivative instruments primarily consist of commodity futures, options and forward contracts. 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 in inventory on the Company’s consolidated balance sheets at fair value as discussed in Note 9, Fair Value of Financial Instruments.

As of September 30, 2012 and December 31, 2011, the value of the Company’s open futures, options and forward contracts was approximately $3,922,787 and $(3,235,056), respectively.

During the three-month and nine-month periods ended September 30, 2012 and 2011, net realized and unrealized gains (losses) on derivative transactions were recognized in the consolidated statement of operations as follows:

The Company recorded gains (losses) of $3,005,708 and $(1,006,848) in cost of goods sold related to its commodity derivative instruments for the nine-month periods ended September 30, 2012 and 2011, respectively.

Note 9 -         Fair Value of Financial Instruments

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 adoption of ASC 820 had an immaterial impact on the Company’s financial statements. The three levels of hierarchy and examples are as follows:

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The following tables set forth financial assets and liabilities measured at fair value in the consolidated balance sheets and the respective levels to which fair value measurements are classified within the fair value hierarchy as of September 30, 2012 and December 31, 2011:

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 CME; therefore, the Company has recorded them in Level 1. In certain circumstances, the net value of these commodity derivative instruments could be negative. 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 CME and adjusts for the local market adjustments derived from other grain terminals in our area; thus, the Company considers these assets to be Level 2.

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The assets of discontinued division represents a nonrecurring level 3 fair value measurement. The fair value measurements were based on management’s best estimate of fair market value, which includes comparisons to similar assets within the industry.

The Company has patronage investments in other cooperatives and common stock in a privately held entity. There is no market for their patronage credits or the entity’s common shares, 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.

The carrying amount of accounts receivable approximates fair value due to the short term nature. 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.

Note 10 -         Business Segment Information

The Company organizes its business units into two reportable segments: soybean processing and polyurethane. Separate management of each segment is required because each segment is subject to different marketing, production, and technology strategies. The soybean processing segment purchases soybeans and processes them in primarily three products: soybean meal, oil and hulls. The polyurethane segment manufactures a soy-based polyol, which is called Soyol^®, and its resin system and sells them to the polyurethane industry. The segments’ accounting policies are the same as those described in the summary of significant accounting policies. Market prices are used to report intersegment sales.

Segment information for the three-month and nine-month periods ended September 30, 2012 and 2011 are as follows:

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Due to a history of losses within the polyurethane segment, the Company decided to discontinue operations of its polyurethane segment. As of the date of this filing, the Company has sold most of this segment’s assets, including its intellectual property.

Note 11 -         Subsequent Event

Except for the event listed below, we evaluated all of our activity and concluded that no subsequent events have occurred that would require recognition in our financial statements or disclosed in the notes to our financial statements.

On October 4, 2012, the Company entered into an amendment of the Master Loan Agreement with CoBank. The amendment increased the maximum amount available to borrow under the seasonal loan from $40 million to $50 million until May 1, 2013, at which time it will decrease back to $40 million. In addition, the interest rates on both loans decreased by 0.6%. Prior to the amendment, the interest rates on the seasonal and revolving term loans were subject to LIBOR (One-Month LIBOR Index Rate) plus 4.35% and 4.60%, respectively. Under the amendment, the interest rates on the seasonal and revolving term loans were subject to LIBOR (One-Month LIBOR Index Rate) plus 3.75% and 4.00%, respectively. Lastly, the working capital covenant was amended. Prior to the amendment, our minimum working capital covenant was $8.0 million at the end of each fiscal year and $5.5 million at the end of each other period for which financials are the be furnished. After the amendment, our minimum working capital covenant is increased to $11.0 million at the end of each fiscal year and $9.0 million at the end of each other period. All other material items and conditions under the Master Loan Agreement and subsequent amendments remained the same following this amendment.

As a result of history of significant operating losses from its subsidiary company, the Company’s Board of Managers unanimously approved the dissolution of USSC on October 16, 2012.

Forward-Looking Statements

The information in this quarterly report on Form 10-Q for the three-month and nine-month periods ended September 30, 2012, (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 consolidated financial statements and Annual Report on Form 10-K for the year ended December 31, 2011.  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, 2011.

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

Our core business and primary source of income generation is our soybean processing plant located in Volga, South Dakota. We process approximately 27 million bushels of soybeans annually, producing approximately 600,000 tons of high protein soybean meal and 300 million pounds of crude soybean oil. Our production represents approximately 1.3% of the total soybean processing capacity in the U.S. In addition to our processing plant, we operate a soybean oil refinery in Volga where we refine the crude soybean oil for customers in the food, chemical and industrial sectors. In the second quarter of 2011, we completed construction of a deodorizer to our refinery, which allows us to produce and sell food-grade soybean oil and opens a new customer base for our products. Also, under certain market conditions we may issue warehouse receipts for crude soybean oil according to the terms and conditions of a Chicago Mercantile Exchange Group (CME) soybean oil contract.

Soybean processing is basically a commodity driven business and is cyclical in nature. Our industry is dependent on the annual soybean crop production (supply side) and world economic growth (demand side for food). Soybean processing is a highly consolidated industry with four companies in the U.S. controlling approximately 84% of the soybean processing industry and approximately 75% of the soybean oil refining capacity for food applications. We compete in this industry by producing high quality products and operating a highly efficient operation at the lowest possible cost.

In the nine-month period ended September 30, 2012 we recorded a net income of $9.4 million attributable to a broad set of factors. Overall, all sectors of our plant have been contributing to a strong bottom line. First, we have been well positioned from a marketing perspective in how we buy beans and sell our products. The quality of the local soybean crop has improved over previous years, with beans being very low in moisture, higher in oil and protein content, and producing strong yields for our facility. Demand for soybean meal also has increased in 2012 due to a reduction in the supply of a competing feedstock, distillers grains, as a result of the recent decline in ethanol production. Second, we have experienced an improvement in plant efficiencies, where we have focused on yields and energy savings. Third, we have experienced a steady increase in customers, mostly in the food industry, resulting from the addition of a deodorizer to our soybean oil refinery. The food sector, unlike other sectors of the economy, has withstood the frail economy since 2008, allowing us a perfect opportunity to expand our product line.

While we are very pleased with our results, high soybean prices are a cause for concern; thus, we are guarded about future results. At this time, it is difficult to determine how the all-time high prices for soybeans and commodities in general will impact demand for our products going forward. We know that as prices rise, the function of the market is to cut off demand, resulting in problems for our customers in the livestock industry. While the impact on us has yet to be felt, we expect some livestock herd liquidations in the future as a result of high feed costs, especially in the short term. This could impact the demand for our soybean meal product. Nevertheless, with the high price of corn and the relatively low price for petroleum, we expect distillers grains to continue to be a costly substitute to soybean meal. The price of canola meal, however, may decrease this fall due to a projected record crop, which may cause it to work its way into additional feed rations.

RESULTS OF OPERATIONS

Comparison of the three months ended September 30, 2012 and 2011

Revenue – Consolidated revenue increased $4.9 million, or 4.9%, for the third quarter of 2012, compared to the same period in 2011. The increase in revenues is primarily due to an increase in average sales price of soybean meal and hulls along with an increase in sales volume of soybean meal and hulls. During the third quarter of 2012, we processed approximately 6.2% in additional soybeans than during the same period of 2011, which increased the amount of soybean products available to sell. The average sales price of our soybean products also increased approximately 34% in the three-month period ended September 30, 2012, compared to the same period in 2011. The increase in sale price was primarily due to a poor South American crop and the anticipated poor 2012 crop due to drought, which caused substantial price increases in many commodities including soybean meal and hulls. The increase in revenue is partially offset by a decrease in sales volume of soybean oil due to a weaker demand for oil from the biodiesel market. During the three-month period ended September 30, 2011, we purchased, refined and resold approximately 14 million pounds of soybean oil as a result of the strong demand from biodiesel producers, compared to only 0.6 million pounds during the same period in 2012.

Gross Profit/Loss – For the third quarter of 2012, we generated a consolidated gross profit of $3.5 million, compared to $0.3 million for the same period in 2011. The $3.2 million improvement in gross profit is primarily attributed to improved soybean quality within our region and an improvement in demand for soybean meal. While much of the U.S. soybean processors are dealing with poor soybean quality due to a hard freeze early last fall, the locally-grown beans we received were low in moisture, high in oil and protein content, and produced higher than historical yields. In addition to the improved soybean quality, demand for soybean meal increased in the quarter ended September 30, 2012, compared to the same period in 2011. As a result of a decrease in ethanol production, the supply of distillers grains, a competing feed substitute for soybean meal, decreased, therefore increasing the demand for soybean meal. The increase in gross profit is partially offset by a $0.6 million increase in production costs resulting from increased maintenance costs. During the third quarter of 2012, we performed an annual plant shut-down, halting production as well as inspecting and maintaining equipment, compared to last year when the annual plant shutdown was conducted during the second quarter.

Operating Expenses – Consolidated administrative expenses, including all selling, general and administrative expenses, increased $37,000, or 7.5%, for the three-month period ended September 30, 2012, compared to the same period in 2011. The increase in administrative costs is mainly due to an increase in personnel costs.

Interest Expense – Interest expense increased to $532,000 during the three-month period ended September 30, 2012, compared to $371,000 in the same period in 2011. This increase is due to increased debt levels used for continuing operations, which resulted from increased inventory quantities and commodity prices. The average debt level during the three-month period ended September 30, 2012 is approximately $36.9 million, compared to $33.9 million for the same period in 2011. Similarly, interest rates on our seasonal and long-term loans increased during the third quarter of 2012, compared to the same period in 2011. As of September 30, 2012, the interest rate on our seasonal line of credit was 4.57%, compared to 4.24% as of September 30, 2011.

Other Non-Operating Income – Consolidated other non-operating income decreased $121,000, or 18.2%, for the three-month period ended September 30, 2012, compared to the same period in 2011. The decrease is primarily due to a decrease in oil storage income arising from our issuance of warehouse receipts on CME soybean oil contracts. We stored less oil on CME oil contracts in the three-month period ended September 30, 2012, compared to the same period in 2011, because the biodiesel market increased its demand for soybean oil during the second half of 2011. As a result, entities for which a CME contract was in effect took delivery on approximately half of the oil we had stored for the CME, thus reducing our oil storage income in the third quarter of 2012.

Income (Loss) from Discontinued Operations – In 2011, we decided to discontinue operations of our polyurethane segment, including our wholly-owned subsidiary USSC, and place for sale the segment’s assets and business. We made this decision because of a history of significant operating losses. During the quarter ended September 30, 2012, we generated a loss of $64,000 within this segment, compared to $367,000 during the same period in 2011. On October 16, 2012, we elected to permanently dissolve USSC.

Net Income/Loss – We generated a consolidated net income of $2.9 million during the third quarter of 2012, compared to a consolidated net loss of $0.2 million during the same period in 2011. The $3.1 million improvement in net income is primarily attributable to an increase in gross profit associated with improved soybean quality within our region and an improvement in soybean meal demand.

Comparison of the nine months ended September 30, 2012 and 2011

Revenue – Consolidated revenue decreased $3.1 million, or 1.0%, for the nine-month period ended September 30, 2012, compared to the same period in 2011. The decrease in revenues is primarily due to a decrease in sales volume of soybean oil due to a weaker demand for such oil from the biodiesel market. During the nine-month period ended September 30, 2011, we purchased, refined and resold approximately 48 million pounds of soybean oil as a result of the strong demand at the time from biodiesel producers, compared to only 1.4 million pounds during the same period in 2012.The decrease in revenues is partially offset by an increase in average sales price of soybean meal and hulls along with an increase in sales volume of soybean meal and hulls. During the nine-month period ended September 30, 2012, we processed approximately 8.2% in additional soybeans than during the same period of 2011, which increased the amount of soybean products available to sell. The average sales price of our soybean meal and hulls also increased approximately 9.5% in the nine-month period ended September 30, 2012, compared to the same period in 2011. The increase in sale price was primarily due to a poor South American crop and the anticipation of a poor 2012 crop due to drought, which caused substantial price increases in many commodities including soybean meal and hulls.

Gross Profit/Loss – We generated a consolidated gross profit of $10.7 million during the nine-month period ended September 30, 2012, compared to a $1.2 million gross loss for the same period in 2011. The $11.9 million improvement in gross profit is primarily attributed to improved soybean quality within our region and an improvement in value of our soybean oil following the addition of a deodorizer in the second quarter of 2011. While much of the U.S. soybean processors were dealing with poor soybean quality due to a hard freeze early last fall, the locally-grown beans we received were low in moisture, high in oil and protein content, and produced higher than historical yields. In addition to the improved soybean quality, demand for soybean meal increased in the nine months ended September 30, 2012, compared to the same period in 2011. As a result of a decrease in ethanol production, the supply of distillers grains decreased, therefore increasing the demand for soybean meal.

Operating Expenses – Consolidated administrative expenses, including all selling, general and administrative expenses, decreased $80,000, or 4.4%, for the nine-month period ended September 30, 2012, compared to the same period in 2011. The decrease is largely due to a reduction in personnel costs following the resignation of our former chief executive officer on March 28, 2011. Our chief executive officer, Tom Kersting, who served previously as our commercial manager and had been employed with us since 1996, immediately assumed duties as new chief executive officer but did not enter into any new compensatory plan as a result of his additional responsibilities.

Interest Expense – Interest expense increased by $297,000 during the nine-month period ended September 30, 2012, compared to the same period in 2011. This increase is due to increased interest rates on our senior debt with CoBank. As of September 30, 2012, the interest rate on our seasonal line of credit was 4.57%, compared to 4.24% as of September 30, 2011.

Other Non-Operating Income – Consolidated other non-operating income decreased $247,000, or 11.9% for the nine-month period ended September 30, 2012, compared to the same period in 2011. The decrease is primarily due to a decrease in oil storage income arising from our issuance of warehouse receipts on a CME soybean oil contract. We stored less oil on a CME oil contract in the nine-month period ended September 30, 2012 because the biodiesel market increased its demand for soybean oil during the second half of 2011. As a result, entities for which a CME contract was in effect took delivery on approximately half of the oil we had stored for the CME, in effect decreasing our oil storage income in 2012. The decrease in other non-operating income is partially offset by an increase in patronage allocations received from our associated cooperatives, including CoBank and Minnesota Soybean Processors.

Income (Loss) from Discontinued Operations – In 2011, we decided to discontinue operations of our polyurethane segment, including our wholly-owned subsidiary USSC, and place for sale the segment’s assets and business. This decision was made primarily because of a history of significant operating losses. During the nine-month period ended September 30, 2012, we generated a loss of $107,000 within this segment, compared to a loss of $1,172,000 during the same period in 2011. On October 16, 2012, we elected to permanently dissolve USSC.

Net Income/Loss – We generated a consolidated net income of $9.4 million during the nine-month period ended September 30, 2012, compared to a consolidated net loss of $3.2 million during the same period in 2011. The $12.6 million improvement in net income is primarily attributable to an increase in gross profit associated with improved soybean quality within our region and an improvement in soybean meal demand.

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, 2012, we had working capital, defined as current assets less current liabilities, of approximately $13.3 million, compared to working capital of approximately $5.9 million on September 30, 2011. Working capital increased between periods primarily due to an increase in net income. Based on our current operating plans, we believe that we will be able to fund our needs for the foreseeable future from cash from operations and revolving lines of credit.

A summary of our cash flow from operating, investing and financing activities for each of the nine-month periods ended September 30, 2012 and 2011:

Cash Flows from Operations

Cash flows from operations are generally affected by commodity prices and the seasonality of our business. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions. The $48.2 million change in cash flows used for operating activities is primarily attributed to increases in inventory quantities, commodity prices, and accounts receivable in 2012, compared to 2011. During the nine-month period ended September 30, 2012, our inventory increased by $69.9 million, compared to a $21.4 million decrease during the same period in 2011, largely due to a steep increase in soybean inventory quantity and higher commodity prices. Soybean inventories increased dramatically in September 2012 due to an early harvest; by contrast, in 2011, soybean inventories increased in October because of a later harvest. Commodity prices increased in 2012 because of a poor South American crop and the effect of a drought straining most of the U.S.

In addition to the increases in inventory quantities and commodity prices, accounts receivable increased by $7.9 million during the nine-month period ended September 30, 2012, compared to $4.3 million during the same period in 2011. Accounts receivable increased largely due to the elevated commodity prices.

Partially offsetting the increases inventory quantities, commodity prices, and accounts receivable, is a $12.5 million improvement in net profit (loss) and a large change in accrued commodity purchases. Accrued commodity purchases increased by $21.8 million during the nine months ended September 30, 2012, compared to a decrease of $7.7 million during the same period in 2011. The increase in accrued commodity purchases is the result of an early harvest and a recent drop in soybean prices in September 2012. As soybean producers delivered their soybean crop to us in September 2012, the price of soybeans decreased, causing many producers to place delivered soybeans on our price-later program.

Cash Flows Used For Investing Activities

The $1.2 million decrease in cash flows used for investing activities is principally due to a decrease in the purchase of property and equipment in 2012, compared to 2011. We purchased $1.4 million in property and equipment in the nine months ended September 30, 2012, compared to $2.5 million during the same period in 2011. In 2011, we increased purchases of property and equipment because we were in the process of completing the construction of the deodorizer to our refinery, which we completed in the second quarter of 2011.

Cash Flows Used For Financing Activities

The $47.1 million change in cash flows from (used for) financing activities is principally due to an increase in short-term borrowings as a result of the increase in inventory and accounts receivable, as discussed above, during the nine months ended September 30, 2012.

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 $15.5 million, and then pay down the principal whenever excess cash is available. Repaid amounts may be borrowed up to the available credit line. The available credit line is reduced by $1.3 million every six months from September 20, 2012 to the credit line’s maturity on March 20, 2018. The final payment at maturity is equal to the remaining unpaid principal balance of the loan. We pay a 0.50% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan is $14.2 million and $15.5 million as of September 30, 2012 and 2011, respectively. Under this loan, there are no available funds to borrow as of September 30, 2012.

The second credit line is a revolving working capital (seasonal) loan that matures on August 1, 2013. The primary purpose of this loan is to finance inventory and receivables. Prior to the amendment below, the maximum available under this credit line was $40 million. Borrowing base reports and financial statements are required monthly to justify the balance borrowed on this line. We pay a 0.25% 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 agreement to avoid the commitment fee. The principal balance outstanding on the working capital loan is $26.5 and $9.8 million as of September 30, 2012 and 2011, respectively. Under this loan, there is an additional $13.5 million in available funds to borrow as of September 30, 2012.

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 4.82% and 4.49% as of September 30, 2012 and 2011, respectively. As of September 30, 2012 and 2011, the interest rate on the seasonal loan is 4.57% and 4.24%, respectively. We were in compliance with all covenants and conditions under the loans as of September 30, 2012 and the date of this filing.

On October 4, 2012, we entered into an amendment of the Master Loan Agreement with CoBank, the terms of which affect our revolving term loan and seasonal loan, as well as covenants. Under the revolving term loan, our variable interest rate is decreased by 0.6%. Prior to the amendment, the interest rate was subject to LIBOR (One-Month LIBOR Index Rate) plus 4.60%, adjusted weekly. Under the amendment, the variable rate is LIBOR (One-Month LIBOR Index Rate) plus 4.00%. Under the seasonal loan, the amount that we may borrow is increased from $40 million to $50 million until May 1, 2013, at which time it will decrease back to $40 million. In addition, the interest rate on the seasonal loan is decreased by 0.6%. Prior to the amendment, the variable interest rate was LIBOR (One-Month LIBOR Index Rate) plus 4.35%, adjusted weekly. Under the amendment, the variable rate option is LIBOR (One-Month LIBOR Index Rate) plus 3.75%. Finally, the working capital covenant under our Master Loan Agreement is amended. Prior to the amendment, our minimum working capital requirement was $8.0 million at the end of each fiscal year and $5.5 million at the end of each other period for which financial statements are required to be furnished. After the amendment, our minimum working capital requirement is increased to $11.0 million at the end of each fiscal year and $9.0 million at the end of each other period. All other material items and conditions under the Master Loan Agreement and subsequent amendments remain the same following this amendment.

We also had another note payable totaling $250,000, with an annual interest rate of 5.0%. The principal balance on this note is $0 as of September 30, 2012 and 2011. We made principal payments totaling $0 and $238,000 on this obligation during the nine-month periods ended September 30, 2012 and 2011, respectively.

OFF BALANCE SHEET FINANCING ARRANGEMENTS

Except as described below, 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 the rail car leases we use to distribute our products.  We have a number of long-term leases for hopper rail cars and oil tank cars with GE Capital, Trinity Capital, Flagship Rail Services and GATX Corporation. Total lease expenses under these arrangements are approximately $1.7 million and $1.6 million for the nine-month periods ended September 30, 2012 and 2011, respectively. The hopper rail cars earn mileage credit from the railroad through a sublease program, which totaled $1.2 million and $1.1 million for the nine-month periods ended September 30, 2012 and 2011, respectively.

In addition to rail car leases, we have several operating leases for various equipment and storage facilities. Total lease expense under these arrangements is $121,000 and $181,000 for the nine-month periods ended September 30, 2012 and 2011, 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.

Other Long-Term Commitments

We have a commitment under a Grain Storage and Transportation Agreement with H&I Grain of Hetland, Inc. (H&I). This agreement is for the handling, storage and transportation of soybeans to and from the H&I facilities located in DeSmet, Hetland, and Arlington, South Dakota, at established rates per bushel. The agreement provides for an annual minimum payment of $200,000 and expires on August 31, 2014. Expenses under this agreement were $736,000 and $342,000 for the nine months ended September 30, 2012 and 2011, respectively.

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

Preparation of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We continually evaluate these estimates based on historical experience and other assumptions we believe to be reasonable under the circumstances.

The difficulty in applying these policies arises from the assumptions, estimates, and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.

Of the significant accounting policies described in the notes to the financial statements, we believe that the following may involve a higher degree of estimates, judgments, and complexity:

Commitments and Contingencies

Contingencies, by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred, as well as in estimating the amount of the potential expense.  In conformity with accounting principles generally accepted in the U.S, we accrue an expense when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Inventory Valuation

We account for our inventories at estimated net realizable market value. These inventories are agricultural commodities that are freely traded, have quoted market prices, may be sold without significant further processing, and have predictable and insignificant costs of disposal. We derive our estimates from local market prices determined by grain terminals in our area. Processed product price estimates are determined by the ending sales contract price as of the close of the final day of the period. This price is determined by the closing price on the Chicago Mercantile Exchange (CME), net of the local basis, for the last two business days of the period and the first business day of the subsequent period. Changes in the market values of these inventories are recognized as a component of cost of goods sold.

Long-Lived Assets

Depreciation and amortization of our property, plant and equipment is provided on the straight-lined method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

Long-lived assets, including property, plant and equipment and investments are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Considerable management judgment is necessary to estimate undiscounted future cash flows and may differ from actual.

We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying value may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. We measure the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeded its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

Accounting for Derivative Instruments and Hedging Activities

We minimize the effects of changes in the price of agricultural commodities by using exchange-traded futures and options contracts to minimize our net positions in these inventories and contracts. We account for changes in market value on exchange-traded futures and option contracts, as well as our forward purchase and sales contracts, using quoted exchange prices for identical instruments. Changes in the market value of all these contracts are recognized in earnings as a component of cost of goods sold.

 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 CME. 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. We do not anticipate that our hedging activity 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.

Foreign Currency Risk. We conduct essentially all of our business in U.S. dollars and have no 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.

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 internal control over financial reporting during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

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. Currently, we are not involved in any legal proceeding that we believe is material. In the event we become involved in a legal proceeding, we carry insurance that provides protection against general commercial liability claims, claims against our directors, officers and employees, business interruption, automobile liability, and workers’ compensation claims. We are not currently involved in any material legal proceeding and are not aware of any potential claims.

During the quarter ended September 30, 2012, there were no material changes to the Risk Factors disclosed in Item 1A (Part I) of our 2011 Annual Report on Form 10-K.

None.

None.

None.

None.

See Exhibit Index.

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.

EXHIBIT INDEX

TO

FORM 10-Q

OF

SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

(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 21, 2012.

(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).