to a lower of cost or marketnet realizable value assessment. The Company recognized a reserve and resulting accrued loss on purchase commitments of approximately $547,000 and $366,000 as of June 30, 2019 and September 30, 2018, respectively.

Shipping and handling costs incurred by the Company forin the sale of distillers grainethanol, distiller grains and corn oil are not specifically identifiable and as a result, are recorded based on the net selling price. Railcar lease costs incurred by the Company in the sale of its products are included in coststhe cost of goods sold. Ethanol revenue is reported free on board (FOB) and all shipping and handling costs are incurred by the ethanol marketer. Commissions for the marketing and sale of ethanol and distiller grains are included in costs of goods sold.

The Company has a revolving term loan, with a bank, available for up to $21,000,000.$25,000,000. Borrowings will be reduced by $3,600,000$5,000,000 every year starting July 1, 2019October 20, 2020 until JulyOctober 1, 2024 when the loan expires. The Company will pay interest on the unpaid balance at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate (2.40% as of June 30, 2019) plus 3.15%3.75%. The Company also pays a commitment fee on the average daily unused portion of the loan at the rate of .50% annum, payable monthly. The loan is secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master agreement. There were outstanding borrowings of $13,900,000$22,600,000 and $3,000,000,$15,200,000, respectively, on the revolving term loan at June 30, 20182019 and September 30, 2017.

The Company had the following related-party activity with members during the three and nine months ended June 30, 20182019 and 2017:2018:

The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the distillers grains produced by the Company. Revenues from this entity including both distillers grains and corn oil were $3,761,379 and $11,253,448, respectively, for the three and nine months ended June 30, 2019. Revenues with this entity were $4,479,177 and $12,971,145, respectively, for the three and nine months ended June 30, 2018. Revenues with this entity were $3,769,434 and $10,918,329, respectively, for the three and nine months ended June 30, 2017. The Company sells corn oil to this entity as a third party broker independent of its agreement with the entity relating to distillers grain sales. Trade accounts receivable of $627,695$212,976 were due from this entity as of June 30, 2018.2019. The Company had distillers grain sales commitments with this entity of approximately 3,6754,600 tons, for a total sales commitment of approximately $463,000.$583,250.

As of June 30, 2018,2019, the Company had purchase commitments for corn forward contracts with various unrelated parties, totaling approximately $5.8$6.5 million. These contracts mature at various dates through July 2019.June 2020. The Company also had basis contract commitments with unrelated parties to purchase 121,700142,500 bushels of corn. These contracts mature at various dates through December 2018.July 2019.

The Company has an agreement with an unrelated party for the transportation of natural gas to the Company's ethanol plant. Under the agreement, the Company is committed to future monthly usage fees totaling approximately $3.6 million over the 10 year term which commenced in November 2014. The Company assigned an irrevocable standby letter of credit to the counter-party to stand as security for the Company's obligation under the agreement maturing May 2021. The letter of credit will be reduced over time as the Company makes payments under the agreement. At June 30, 2018,2019, the remaining commitment was approximately $1.9$1.5 million.

As of June 30, 2018,2019, the Company had purchase commitments for natural gas basis contracts with an unrelated party totaling 209,110312,800 MMBtu's maturing at various dates through October 2018.

The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices.  These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program.  The Company's risk management program focuses on the unpredictability of commodity markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations.  The Company's specific goal is to protect the Company from large moves in the commodity costs.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures and options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward purchase and sale contracts.  Exchange traded futures and options contracts are designated as non-hedge derivatives and are valued at market price with changes in market price recorded in operating income through cost of goods sold for corn derivatives and through revenue for ethanol derivatives. The Company treats all contracts with the same counterparty on a net basis on the balance sheet.

Derivatives not designated as hedging instruments are as follows:

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company's financial statements but are subject to a lower of cost or market assessment.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according

to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.

 

Various discussions and statements in this quarterly report are or contain forward-looking statements that express our current beliefs, forecasts, projections and predictions about future events.  All statements other than statements of historical fact are

forward-looking statements, and include statements with respect to financial results and condition; anticipated trends in business, revenues, net income, net profits or net losses; projections concerning ethanol prices, distillers grain prices, corn prices, gas prices, operations, capital needs and cash flow; investment, business, growth, joint venture, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections, predictions and statements of expectation.  Words such as "expects," "anticipates," "estimates," "plans," "may," "will," "contemplates," "forecasts," "strategy," "future," "potential," "predicts," "projects," "prospects," "possible," "continue," "hopes," "intends," "believes," "seeks," "should," "could," "thinks," "objectives" and other similar expressions or variations of those words or those types of words help identify forward-looking statements.

These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report.   Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 20172018 and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.  We undertake no obligation to revise or update any forward-looking statements.  The forward-looking statements contained in this report are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Lincolnway Energy is an Iowa limited liability company that operates a dry mill, natural gas fired ethanol plant located in Nevada, Iowa.  We have been processing corn into fuel grade ethanol and distillers grains at the ethanol plant since May 22, 2006.  Our ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year.

All of the ethanol we produce is marketed by Eco-Energy, LLC (“Eco-Energy”) and all of our distillers grains are marketed by Gavilon Ingredients, LLC (“Gavilon”). Our revenues are derived primarily from the sale of our ethanol and distillers grains.

We also extract corn oil from the syrup generated in the production of ethanol. We market and distribute all of our corn oil directly to end users and third party brokers within the domestic market.

Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. (“Air Products”), has a plant located on the Company’s site that collectspurchases the Company's carbon dioxide gas that is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. Air Products also markets and sells the liquid carbon dioxide.

We expect to fund our operations during the next 12twelve months using cash flowflows from continuing operations and the revolving term loan that is availableavailable. If the current ethanol economics continue, the Company may seek capital in form of equity or debt to us.meet our operating requirements.

On December 22, 2017,The ethanol industry is experiencing the H.R. 1, originally known aslowest margin environment seen in the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), was signed into law. The 2017 Tax Reform Act includes significant changespast decade primarily due to the taxationfact that the substantial oversupply of business entities, includingethanol which is exceeding demand and markets are reacting accordingly by disincentivizing production. Although our current plant operational efficiencies are strong, in order to drive positive results in a permanent reductionnegative margin environment, we need to continue to enhance our operational efficiencies. As a result, our management team and Board of Directors continue to explore opportunities to improve our plant's operational efficiencies. We are evaluating various opportunities to add value to our production process by diversifying into high protein feed along with measures to reduce the energy we use as part of the production process and to reduce the carbon index of the ethanol we produce.

As stated in Note 1, the Company wrote off the Dyer note receivable for approximately $4.4 million. We remain committed to the development of a new high quality species specific animal feed which we have branded as PureStream™ protein as we seek alternatives for drying this high quality feed product.  We currently intend to market this new product to the growing swine and poultry markets in Iowa.  When compared to traditional distillers grains, our new PureStream™ protein animal feed products are expected to be higher in crude protein and richer in the federal corporate income tax rate from 35% to 21%, effectiveessential amino acids that drive growth in 2018swine and changes inpoultry. We entered into agreements with third parties for the deductibilityinstallation of interest on debt obligations. The Companya grains drying and cooling system as part of the development of the PureStream™ protein production process; however, as is common when installing new production equipment, we have faced multiple challenges with the installation and implementation of such systems.  We are currently evaluating our options with respect to these agreements and potential alternatives in order to complete the impactdevelopment of the 2017 Tax Reform Act, as well as potential future regulations implementingnecessary enhancements required to produce the new tax law and interpretationsPureStream™ protein animal feed.

Part of the new tax law with its professional advisers. The full impactevaluation process for any of these opportunities and efficiency improvements includes a review of the Tax Actrelative costs and benefits of any proposed process enhancements, including any necessary capital investments in technology or equipment and the potential return on such investment. These process enhancements require significant financial investments but the Company in future periods cannot be predicted at this time.goal is to

The ethanol industry is dependent on the Federal Renewable Fuels Standard (the “RFS”), a federal ethanol support and economic incentive which mandates ethanol use, and the RFS continues to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective.  The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

The RFS usage requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels.  Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

Annually, the EPA is supposedrequired to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. On July 5, 2017, the EPA released a proposed rule to set the 2018 renewable volume requirements which proposed setting the annual volume requirements for renewable fuel at 19.24 billion gallons of renewable fuels per year (the “Proposed 2018 Rule”). On November 30, 2017,2018, the EPA issued the final rule for 20182019 which varied only slightly from the Proposed 2018 Rule withset the annual volume requirement for renewable fuel set at 19.2919.92 billion gallons of renewable fuels per year (the "Final 20182019 Rule"). On July 5, 2019, the EPA issued the proposed rule that sets the 2020 annual volume requirements for renewable fuel at 20.04 billion gallons per year and maintained the number of gallons that may be met by conventional renewable fuels such as corn based ethanol at 15.0 billion gallons (the "Proposed 2020 Rule"). Although the volume requirements set forth in the Final 20182019 Rule are slightly higher than the 19.28 billion gallons required under2018 requirements and the final 2017 renewable fuelproposed 2019 Rule is slightly higher than the Final 2019 Rule, the volume requirements under both the 2018 volume requirementsFinal 2019 Rule and the proposed 2020 Rule are still significantly below the 26 billion gallons and 28 billion gallons statutory mandatemandates for 20182019 and 2020, respectively, with significant reductions in the volume requirements for advanced biofuels.biofuels as well. However, the Final 20182019 Rule does maintainmaintains the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.

Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. SinceThe Final 2018 isRule represented the first year the total proposed volume requirements arewere more than 20% below statutory levels,levels. In response, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The ProposedFinal 2019 Rule is approximately 29% below the statutory levels; therefore, iflevels representing the Proposed 2019 Rule is finalized as proposed,second consecutive year of reductions of more than 20% below the statutory mandates triggering the mandatory reset will be triggered under the RFS andRFS. Therefore, the EPA will beis now statutorily required to modify the statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022. These factors include environmental impact, domestic energy security, expected production, infrastructure impact, consumer costs, job creation, price of agricultural commodities, food prices, and rural economic development.

On October 19, 2017, EPA Administrator Pruitt issued a letter (the "Pruitt Letter") to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS, among other topics, he stated the EPA is actively exploring its authority to remove arbitrary barriers to the year-rounds use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption and that the EPA will not pursue regulations to allow ethanol exports to generate renewable identification numbers (“RINs”). In addition, on April 12, 2018, as part of a series of meetings focused on RIN prices and E15 year-round sales involving President Trump, Senators, key federal agency and industry leaders, President Trump indicated that EPA would be moving forward to authorize year-round sales of E15 by rulemaking designed to addressremove arbitrary barriers to the waiveryear-round use of E15 that currently inhibits inhibit

sales of E15 in certain markets during summer driving months. The lettermonths and these statements represent actionsextend the One-Pound Waiver to E15 so that would likely have a positive impact onE15 may be sold throughout the ethanol industry either directly or indirectly.year without disruption.

The letter also stated thatDespite the EPA would soon finalizerecent actions by the Trump administration relating to E15, there continues to be uncertainty regarding the future of the RFS as a decision to denyresult of the request to changesignificant number of small refiner waivers granted.  Under the point of obligation for renewable identification numbers, or RINs, from refiners and importers to blenders. TheRFS, the EPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by ethanol producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. Consistent

The EPA can, in consultation with the positionDepartment of Energy, waive the obligation for individual smaller refineries that are suffering “disproportionate economic hardship” due to compliance with the RFS. To qualify, for this “small refinery waiver,” the refineries must be under total throughput of 75,000 barrels per day and state their case for an exemption in his letter, on November 22, 2017,an application to the EPA issued a Noticeeach year. As of DenialMarch 2019, the EPA reported waiving the obligation for 19 of Petitions20 applicants for rulemaking to changecompliance year 2016, totaling 790 million gallons, and 35 of 37 for compliance year 2017 totaling 1.82 billion gallons. This effectively reduces the annual renewable volume obligation for each year by that amount as the waivers exempt the obligating parties from meeting the RFS pointblending targets and the waived gallons are not reallocated to other obligated parties at this time. The resulting surplus of obligation which resultedRINs in the EPA confirmingmarket has brought values down significantly, from the pointmid $0.80 range early in the year to under $0.20. Since the RIN value helps to make higher blends of obligation will not change.ethanol more cost effective, lower RIN values could negatively impact retailer and consumer adoption of E15 and higher blends. As of June 30, 2019, there are approximately 40 waiver applications pending for compliance year 2018.

Legal challenges are underway to the EPA's recent reductionsBiofuels groups have filed a lawsuit in the U.S. Federal District Court for the D.C. Circuit, challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. This is the first RFS rulemaking since the expanded use of the exemptions came to light, however the EPA has refused to cap the number of waivers it grants or how it accounts for the retroactive waivers in its percentage standard calculations. The EPA has a statutory mandate to ensure the volume requirements includingare met, which are achieved by setting the Final 2018 Rulepercentage standards for obligated parties. The current approach accomplishes the opposite. Even if all the obligated parties comply with their respective percentage obligations for 2019, the nation’s overall supply of renewable fuel will not meet the total volume requirements set by the EPA. This undermines Congressional intent of demand pressure creation and an increased consumption of renewable fuels. Biofuels groups argue the Proposed 2019 Rule as well asEPA must therefore adjust its percentage standard calculations to make up for past retroactive waivers and adjust the denial of petitionsstandards to changeaccount for any waivers it reasonably expects to grant in the RFS point of obligation and the recent small refiner waivers. future.

If the EPA's decisionEPA’s decisions to reduce the volume requirements under the RFS isstatutory mandates are allowed to stand, if the volume requirements are further reduced if the RFS point of obligation were changed or if the EPA continues to grant waivers to small refiners, the market price and demand for ethanol would be adversely effective which would negatively impact our financial performance.

On May 18, 2018, the Advanced Biofuel Association initiated a legal challenge to the EPA’s process for granting exemptions from compliance under the RFS to small refineries. In its petition, the Advanced Biofuel Association seeks judicial review of the EPA’s decision to modify criteria to lower the threshold by which the agency determines whether to grant small refineries an exemption for the RFS for reasons of disproportionate economic hardship.

Additionally, on May 29, 2018, the National Corn Growers Association, National Farmers Union and the Renewable Fuels Association filed a petition challenging the EPA’s grant of waivers to three specific refineries seeking that the court reject the waivers granted to the three as an abuse of EPA authority.  These waived gallons are not redistributed to obligated parties, and in effect, reduce the aggregate RVOsrenewable volume obligations (“RVOs”) under the RFS. If the specific waivers granted by the EPA and/or its lower criteria for granting small refinery waivers under the RFS are allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Related to the recent lawsuits, the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy, National Biodiesel Board, National Corn Growers Association, Biotechnology Industry Organization, and National Farmers Union petitioned the EPA on June 4, 2018 to change its regulations to account for lost volumes of renewable fuel resulting from the retroactive small refinery exemptions. This petition to the EPA seeks a broader, forward-looking remedy to account for the collective

lost volumes caused by the recent increase in retroactive small refinery RVO exemptions. It is unclear what regulatory changes, if any, will emerge from the petition to the EPA.

Although the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol in the Final 2018 Rule and the ProposedFinal 2019 Rule together with the Pruitt Letter and the resultingrecent actions taken by the EPA consistent with Pruitt LetterTrump administration relating to permitting the year round sale of E15 signals support from the EPA and the Trump administration for domestic ethanol production, there is still significant uncertainty about the level of support for the RFS within the Trump administration. The Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of any such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company'sCompany’s profitability.

compared to the three months ended June 30, 2017.2018. The change in ethanol revenue was a result of a 4.3%1.5% decrease in the price per gallon received which was partially offset bycombined with a 2.4%2.7% increase in sales volume for the three months ended June 30, 2018,2019, when compared to the three months ended June 30, 2017.2018. Ethanol prices decreased due to relatively high inventories in the domestic market coupled with ongoing record domestic production of ethanol.  OurIn addition, ethanol prices have been negatively impacted by international trade disputes with foreign countries, including, China, Mexico, and the European Union, and the institution of tariffs have had an adverse effect on export demand from certain countries.  Ethanol sales volume increased duedecreased as flooding issues caused bottlenecks with railcar returns, forcing the Company to better production rates with the implementationbuild inventories instead of new process improvements.shipping product.  Ethanol revenue for the three months ended June 30, 2018 also included a $3,150 net gain for ethanol derivatives, compared to a $11,403 net loss in the same quarter for the prior period.

Sales from co-products decreased by 13.3% for the three months ended June 30, 2019 from the three months ended June 30, 2017.2018. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide.  The change in co-product sales was primarily due to a $1.2$.7 million increasedecrease in distillers grain revenue.  Distillers grain revenue increasedsales volume decreased as market prices increasedproblems with railcar returns forced the company to build inventories.  Improvements in responseethanol yields also decreased distillers grain production as more corn in the process is converted to increased export demand as Argentina, the world's biggest meal exporter, suffers from continued drought.ethanol.

 

Sales from co-products increaseddecreased by 15.6%10.4%, or $2.5$1.9 million, for the nine months ended June 30, 20182019 from the nine months ended June 30, 2017.2018. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide.  Co-product revenue increaseddecreased primarily due to a 25.9% increase12.5% decrease in driedcombined distillers grains revenue for the nine months ended June 30, 20182019 from the nine months ended June 30, 2017.2018.  Distillers grain revenue increased asrevenues decreased due to relatively high inventories in the domestic market prices climbed in response to increased export demand as Argentina, the world's biggest meal exporter, suffers from continued drought.coupled with ongoing record production of ethanol.

Corn costs, including hedging, decreasedincreased by $2.4$2.5 million, or 4.3%4.9%, for the nine months ended June 30, 20182019 from the nine months ended June 30, 2017.2018.  The decreaseincrease was due to a large hedging gain and improved ethanol yields..5% increase in corn bushels priced while the production process decreased corn consumed by 572,541 bushels or 4%.  For the nine months ended June 30, 2018,2019, corn costs included a $1.1$.6 million net gainloss for derivatives relating to future contracts, compared to a $.3$1.1 million gainloss for the nine months ended June 30, 2017.2018.  Corn costs represented 68.7%70.2% of cost of goods sold for the nine months ended June 30, 2018,2019, compared to 69.6% for the nine month June 30, 2017.

Natural gas costs decreasedDepreciation expense increased approximately 8.9%$.9 million, or $.5 million36.0% for the nine months ended June 30, 20182019 from the nine months ended June 30, 2017. The decrease2018.  Depreciation was dueaccelerated on the old regenerative thermal oxidizer (RTO) to lower natural gas prices, runningadjust the plant more efficiently at higher yieldsasset to its revised useful life before it was replaced in December 2018 and lower production levels.thusly resumed to normalized depreciation rate.

RepairsGeneral and maintenanceadministrative costs increased approximately 20.0%,by $308 thousand or $.6 million,12.5% for the nine months ended June, 30, 20182019 from the nine months ended June 30, 2017. The increase was due to higher maintenance and repair costs on the older equipment. A large number of repairs were made to our steam tube dryers. The Company has also increased its focus on preventative maintenance to maximize production days and increase efficiency.

During the three months ended June 30, 2018,2019, the ethanol industry experienced modestly risinghistorically poor ethanol production margins as a result of a combination of factors including the following:

We use futures and options strategies on the Chicago Mercantile Exchange to hedge some of the risk involved with changing corn prices, as well as the purchase and physical delivery of corn contracts from area farmers and commercial suppliers. We also incorporate risk management strategies to cover some of the risk involved with changing ethanol and distillers market prices. We continue to monitor the markets and attempt to provide for an adequate supply of corn and protection against rapid price increases for corn and price decreases for ethanol and distillers grains.

Management currently believes that our margins will remain flat duringcontinue on the defensive for the remainder of the fiscal year ending September 30, 20182019 (“Fiscal 2018”2019”). Continued largeTightening old crop corn supplies, expected large new crop supplies and ethanol production capacity increases couldshould have a negativepositive impact on the market price of corn and a lesser positive impact on the market price of ethanol which could adversely impact our profitability. This negative impact could worsen in the event that domestic ethanol inventories remain historically high or grow, or if U.S. exports of ethanol decline.decline further. The ethanol industry is

Our margins have been, positivelyand could continue to be, negatively impacted in the second calendar quarter of 2018 due to the higherlower prices received for our distillers grains. During the second calendar quarter of our 2018 our distillers grains prices improveddid not improve as a result of relatively firmrising U.S. corn and world soybean meal prices which management believes areis attributable to the Argentinian drought. ArgentinaU.S. planting delays and the resulting declines in acreage and yield expectations. The U.S. is the third largest soybeancorn producer in the world and a leadinglarge exporter of soybean meal. In addition to being an animal feed substitute for corn, distillers grains are increasingly considered a protein feed substitute for soybean meal. In 2018,the second quarter of 2019 strong proteincorn prices and relatively weak soybean meal prices due to a record South American soybean crop have enabledcaused distillers grains prices to rallyfall versus corn, our basic raw material. Management currentlyIn addition, hogs, a major demand sector for distillers grains, have experienced a significant reduction in price due to the tariff war with China. Demand and prices for distillers grains may continue to experience decreases in the near term due to lower demand as a result of these lower margins for hog growers and a lesser share of distillers grains in domestic rations. While management believes that the impact of the Chinese imposition of antidumpinganti-dumping and countervailing duties on distillers grains produced in the U.S. has been fullylargely absorbed into the current market, the softness in U.S. hog and therefore should notsoybean prices relative to corn prices could result in further prices declines. However, domestic feeding marginsongoing stagnation in cattle and hogs in particular could have a negative impact on total distillers grains domestic offtake. While we remain optimistic onprices at low levels. Other countries such as Mexico, Canada and South Korea have increased their imports of distillers grains usage relative to other feed and protein sources, declining feeding marginsmanagement believes that the impact of reduced demand from China has been fully discounted in the red meat sector are an ongoing concern.market. But weaker U.S. feed demand is not positive for prices.

The Final 2019 Rule raised the renewable volume requirements for advanced biofuels from the 2018 level of 4.5 billion gallons to 4.9 billion gallons and left biomass basedbiomass-based diesel unchanged.unchanged at 2.1 billion gallons. This could negativelypositively impact the demand for corn oil asoil. U.S. corn oil supplies are expected to grow by well in excess of 5%approximately 10%. World oilseed supplies are projected to be lower,flat and world soybean suppliesoilseed stocks are expected to contractcontract. This suggests corn oil prices may fluctuate modestly. The most important factor currently is the uncertainty about what the United States Government may doThus far in regard to tariffs on a wide range of imports and the potential impact to international biodiesel flows. Large amounts of biodiesel often flow into the U.S. from Argentina and the Far East. While these flows have moderated,2019 corn oil prices have movedbeen very weak relative to multiyear lows as U.S. production exceedscorn prices and the relative contribution of corn oil to margins has fallen. Much of this price weakness is attributable to increased uncertainty regarding the biodiesel production capacity.tax credit. Biodiesel producers have also experienced shrinking margins as fears grow that the tax credit may be reduced and phased out or eliminated altogether. These fears have curtailed corn oil demand. Management sees little potential for an increaseincreases in corn oil prices given production increases and large trade flow uncertainty.until the status of the tax credit is clarified.

Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities. We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations. The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). Part of our risk management strategy requires that we actively monitor credit and counterparty risk through credit analysis.

Based on the financial projections prepared by management, we anticipate that we will have sufficient cash fromplan to closely monitor existing cash, our current credit facilities, and cash from operations to continue to operate the ethanol plant forplant. The Company may seek capital in form of equity or debt due to the next 12 months.negative results of the ethanol margins to meet our operating requirements. Management believes that an abundantis waiting to see how the corn supply will causecrop develops with the 2019 harvest regarding the future corn supply.   Corn prices may continue to remain near current levels and an anticipated increase in price with the supply of ethanol will cause ethanol prices to stay near current levels.uncertain corn production.  Working capital (deficit) was approximately $5.4$(16.1) million after writing off $4.4 million related to a note receivable and converting $22.6 million of long term liabilities to current liabilities as of June 30, 20182019.  As referenced in Note 1, on March 28, 2019, the Company recorded a note receivable totaling $4,080,000 for a component of the construction in progress (the dryer) that failed to meet required specifications. The vendor issued a promissory note to the Company, which is personally guaranteed by principals of the vendor. The full amount of the note receivable plus interest was wrote off because there is no guarantee that we will be able to collect all, or any, of the amounts due and is projectedpayable under such note receivable.  The long term debt was converted to current liabilities due to the uncertainties of staying in covenant compliance for debt service coverage at year end. However, management currently projects that liquid working capital will be sufficient withbased on current cash balances and credit facilities available for the remainder of the fiscal year. Management continuesyear, but management will continue to monitor our liquidity position on a weekly basis.

Our financial position and liquidity are, and will continue to be, influenced by a variety of factors, including, without limitation:

Cash Flow Provided by(Used in) Operations

For the nine months ended June 30, 2018,2019, net cash provided byused in operating activities decreasedincreased by $2.6$6.6 million when compared to net cash provided by operating activities for the nine months ended June 30, 2017.2018. The decrease in cash provided byused in operating activities is due to net loss and the timing in working capital components.

Cash Flow Used in(Used in) Investing Activities

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant. Net cash used in investing activities increaseddecreased by $4.6$8.8 million for the nine months ended June 30, 20182019 compared to the nine months ended June 30, 2017.2018. The increasedecrease is due to initial progress payments on the installation of a grains drying and cooling system. The project is estimated to be completedsystem in the fourth quarter ofprevious fiscal year 2018.year.

Cash Flow Provided by Financing Activities

Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash provided by financing activities increaseddecreased by $7.0$2.4 million for the nine months ended June 30, 20182019 compared to the nine months ended June 30, 2017.2018. The increasedecrease is due to reduced borrowings on our term revolver offset by distributionsin the nine month ended June 30, 2019 compared to borrowings in the nine months ended June 30, 2018. In addition to the distribution paid to members.members in fiscal year 2018.

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.

Revenue from the sale of our ethanol and distillers grains is recognized at the time title and all risks of ownership transfer to the marketing company. This generally occurs upon the loading of the product. For ethanol, title passes from the Company at the time the product crosses the loading flange into either a railcar or truck. For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that the railcars have been loaded and are available for billing. For distillers grains,

All of our ethanol production is sold to Eco-Energy. The purchase price payable to us under our agreement with Eco-Energy is the purchase price set forth in the applicable purchase order, less a marketing fee payable to Eco-Energy.

We have an agreement with Gavilon to purchase all of the distillers grains produced at our ethanol plant. The purchase price payable to us is the corresponding price being paid to Gavilon for the distillers grains, less certain logistics costs and a service fee.

Inventories are stated at the lower of net realizable value or actual cost using the first-in, first-out method.  In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation. For the nine months ended June 30, 2019 and 2018, the Company had a lower of net realizable value inventory adjustment of approximately $180,000 and $280,000 respectively, for a lower of net realizable value or cost inventory adjustment due to low market prices for ethanol.

In addition to the various risks inherent in the ethanol industry and our operations, we are exposed to various market risks.  The primary market risks arise as a result of possible changes in certain commodity prices and changes in interest rates.

We are exposed to market risk with respect to the price of ethanol, which is our principal product, and the price and availability of corn and natural gas, which are the principal commodities we use to produce ethanol. Our other primary product is distillers grains, and we are also subject to market risk with respect to the price for distillers grains. The prices for ethanol, distillers grains, corn and natural gas are volatile, and we may experience market conditions where the prices we receive for our ethanol and distillers grains are declining, but the price we pay for our corn, natural gas and other inputs is increasing. Our results will therefore vary substantially over time, and include the possibility of losses, which could be substantial.

In general, rising ethanol and distillers grains prices result in higher profit margins, and therefore represent favorable market conditions. We are, however, subject to various material risks related to our production of ethanol and distillers grains and the price for ethanol and distillers grains.  For example, ethanol and distillers grains prices are influenced by various factors beyond the control of our management, including the supply and demand for gasoline, the availability of substitutes, international trade and the effects of domestic and foreign laws, regulations and government policies.

In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions. We will generally not be able to pass along increased corn costs to our ethanol customers. We are subject to various material risks related to the availability and price of corn, many of which are beyond our control. For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture, and local, regional, national and international trade, demand and supply. If our corn costs were to increase $.10 per bushel from one year to the next, the impact on costs of goods sold would be approximately $2.1$2.3 million for the year, assuming corn use of 2123 million bushels during the year.

Falling ethanol prices indicate weak market conditions and will usually negatively impact profit margins. Lincolnway EnergyWe will typically be unable to pass through the impact of decreased ethanol revenues to its corn suppliers. Lincolnway Energy isWe are subject to various material risks related to the demand for and price of ethanol, many of which are beyond the control of the Company.our control. For example, the demand for and price of ethanol is subject to significant fluctuations due to various unpredictable factors which are beyond the control of Lincolnway Energy's management,

including driving habits, consumer vehicle buying decisions, petroleum price movement, plant capacity utilization, and government policies with respect to biofuel use, railroad transportation requirements, national and international trade and supply and demand. If Lincolnway Energy'sour ethanol revenue were to decrease $.05 per gallon from one year to the next, the impact on gross revenues would be approximately $3.1 million for the year.

During the quarter ended June 30, 2018,2019, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $3.43 per bushel for July 2019 delivery to a high of $4.64 per bushel for July 2019 delivery. The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended June 30, 2018 ranged from a low of $3.39 per bushel for July 2018 delivery to a high of $4.12 per bushel for July 2018 delivery.  The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended June 30, 2017 ranged from a low of $3.56 per bushel for July 2017 delivery to a high of $3.92 per bushel for July 2017 delivery.

The average price we received for our ethanol during the three months ended June 30, 20182019 was $1.32$1.30 per gallon, as compared to $1.38$1.32 per gallon during the three months ended June 30, 2017.2018.

During the quarter ended June 30, 2018,2019, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.28 per gallon for July 2019 delivery to a high of $1.65 per gallon for July 2019 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended June 30, 2018 ranged from a low of $1.36 per gallon for July 2018 delivery to a high of $1.54 per gallon for July 2018 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended June 30, 2017 ranged from a low of $1.45 per gallon for July 2017 delivery to a high of $1.62 per gallon for July 2017 delivery.

We may from time to time take various cash, futures, options or other positions in an attempt to minimize or reduce our price risks related to corn and ethanol. The extent to which we enter into such positions may vary substantially from time to time and based on various factors, including seasonal factors and our views as to future market trends. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn and ethanol markets are highly volatile and

We attempt to offset or hedge some of the risk involved with changing corn prices through the trading of futures and options on the Chicago Mercantile Exchange, as well as through purchase and physical delivery contracts from suppliers. We continue to stay at a near neutral corn position due to an uptrend in ethanol sales margins. We continue to monitor and attempt to ensure adequate corn supply and protection against rapid price increases. As noted above those activities are, however, subject to various material risks, including that price movements in the cash corn and corn futures markets are highly volatile and are influenced by many factors and occurrences which are beyond our control.

Another important raw material for our production of ethanol is natural gas. Our cost per MMBTU is subject to various factors that are outside of the control of our management. The factors include changes in weather, increaseincreases in transportation costs and the overall economic activity.  Our natural gas costs will therefore vary, and the variations could be material.  Our natural gas costs for the three months ended June 30, 20182019 represented approximately 4.7%6.8% of our total cost of goods sold for that period.

We have various outstanding loan agreements that expose us to market risk related to changes in the interest rate imposed under the loan agreement and promissory notes.

We have entered into loan agreements, including an irrevocable letter of credit, with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, "Farm Credit"). The interest rate on the Farm Credit revolving term loan and irrevocable letter of credit is a variable interest rate based on the one-month LIBOR index plus 3.15%3.75%. We do not anticipate any significant increase in interest rates during Fiscal 2018.2019.

Our management, under the supervision and with the participation of our President and Chief Executive Officer and our Director of Finance (our principal financial officer),Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report.  Based on that evaluation, our President and Chief Executive Officer and our Director of FinanceChief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures have been effective to provide reasonable assurance that the information required to be disclosed in the reports our files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to management, including our principal executive and principal financial officers or persons performing such functions, as appropriate, to allow timely decisions regarding disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No change in our internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and in Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017 and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018 other than as provided below.2018. Additional risks and uncertainties, including risk and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and results of operations.

None.

None.