UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the fiscal year ended | October 31, 2018 | |
OR | ||
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the transition period from to . | ||
COMMISSION FILE NUMBER 000-51177 | ||
GOLDEN GRAIN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa | 02-0575361 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
1822 43rd Street SW, Mason City, Iowa 50401 | ||||
(Address of principal executive offices) | ||||
(641) 423-8525 | ||||
(Registrant's telephone number, including area code) | ||||
Securities registered pursuant to Section 12(b) of the Act: | ||||
None | ||||
Securities registered pursuant to Section 12(g) of the Act: | ||||
Class A Membership Units | ||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer o |
Non-Accelerated Filer x | Smaller Reporting Company o |
Emerging Growth Company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
As of April 30, 2018, the aggregate market value of the Class A membership units held by non-affiliates (computed by reference to the most recent offering price of Class A membership units) was $14,802,167. As of April 30, 2018, the aggregate market value of the Class B membership units held by non-affiliates (computed by reference to the most recent offering price of the Class B membership units) was $345,500.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of December 21, 2018, there were 18,953,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report.
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INDEX
Page Number | |
Item 16. Form 10-K Summary | |
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Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.
• | Ethanol, distiller grains and corn oil supply exceeding demand and corresponding price reductions; |
• | The small refiner exemptions which have been granted by the Trump administration which are decreasing demand for ethanol; |
• | The impact of the Chinese anti-dumping and countervailing duty on U.S. distiller grains; |
• | The Brazilian ethanol import duty and its impact on world ethanol demand and prices; |
• | Any delays in shipping our products by rail and corresponding decreases in our sales as a result of these shipping delays; |
• | Changes in the availability and price of corn and natural gas; |
• | Our ability to profitably operate the ethanol plant, including the sale of distiller grains and corn oil, and maintain a positive spread between the selling price of our products and our raw material costs; |
• | The effect our hedging activities has on our financial performance and cash flows; |
• | Our ability to generate free cash flow to invest in our business, service our debt and satisfy the financial covenants contained in our credit agreement with our lender; |
• | Changes in our business strategy, capital improvements or development plans; |
• | Changes in plant production capacity or technical difficulties in operating the plant; |
• | Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries; |
• | Changes in corn availability due to growing conditions, including unfavorable weather patterns; |
• | Lack of transport, storage and blending infrastructure preventing our products from reaching high demand markets; |
• | Changes in federal and/or state laws and environmental regulations (including the elimination or waiver of the Renewable Fuel Standard); |
• | Changes and advances in ethanol production technology; |
• | Competition from alternative fuel additives; |
• | Changes in interest rates or the lack of credit availability; and |
• | Our ability to retain key employees and maintain labor relations. |
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. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements with these cautionary statements. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.
PART I
ITEM 1. BUSINESS
Business Development
Golden Grain Energy, LLC was formed as an Iowa limited liability company on March 18, 2002, for the purpose of constructing, owning and operating a fuel-grade ethanol plant in Mason City in north central Iowa. References to "we," "us," "our" and the "Company" refer to Golden Grain Energy, LLC. Since December 2004, we have been engaged in the production of ethanol and distiller grains at the plant. We started producing corn oil at the plant in 2009.
On July 17, 2017, our board approved moving forward with an approximately 30 million gallon per year expansion project. This expansion is expected to increase total plant capacity to 150 million gallons of ethanol per year. The expansion is anticipated to cost approximately $34 million and is expected to be completed during our first fiscal quarter of 2020. We anticipate
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financing this expansion through a combination of cash generated by our operations and additional debt financing. We have not yet entered into any agreements regarding any additional debt financing.
On November 21, 2016, our board of directors declared a distribution of $0.75 per membership unit for members of record as of November 21, 2016. The total amount of the distribution was $14,904,750. We paid the distribution in December 2016. On May 15, 2017, our board of directors declared a distribution of $0.50 per membership unit for members of record as of that date. The total amount of the distribution was $9,936,500 which was paid in May 2017. On November 20, 2017, our board of directors declared a distribution of $0.75 per membership unit for members of record as of that date. The total amount distributed was $14,904,750 which was paid on December 13, 2017. On November 19, 2018, our board of directors declared a distribution of $0.25 per membership unit for members of record as of that date. The total amount distributed was $4,968,250 which was paid on December 14, 2018.
Principal Products
The principal products that we produce are ethanol, distiller grains and corn oil. The table below shows the approximate percentage of our total revenue which is attributed to each of our principal products for each of our last three fiscal years.
Product | Fiscal Year 2018 | Fiscal Year 2017 | Fiscal Year 2016 | |||
Ethanol | 79% | 84% | 81% | |||
Distiller Grains | 17% | 12% | 15% | |||
Corn Oil | 4% | 4% | 4% | |||
Ethanol
Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. Ethanol produced in the United States is primarily used for blending with unleaded gasoline and other fuel products. Ethanol blended fuel is typically designated in the marketplace according to the
percentage of the fuel that is ethanol, with the most common fuel blend being E10, which includes 10% ethanol. The United States Environmental Protection Agency ("EPA") has approved the use of gasoline blends that contain 15% ethanol, or E15, for use in all vehicles manufactured in model year 2001 and later. In addition, flexible fuel vehicles can use gasoline blends that contain up to 85% ethanol called E85.
Distiller Grains
The principal co-product of the ethanol production process is distiller grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry. We produce two forms of distiller grains: Modified/Wet Distillers Grains ("MWDG") and Distillers Dried Grains with Solubles ("DDGS"). MWDG is processed corn mash that has been dried to approximately 50% moisture. MWDG has a shelf life of approximately seven days and is often sold to nearby markets. DDGS is processed corn mash that has been dried to approximately 10% moisture. It has a longer shelf life and may be sold and shipped to any market regardless of its vicinity to our ethanol plant.
Corn Oil
We separate a portion of the corn oil contained in our distiller grains which we market separately from our distiller grains. The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. The primary uses of the corn oil that we produce are for animal feed, industrial uses and biodiesel production.
Principal Product Markets
As described below in "Distribution Methods," we market and distribute all of our ethanol, distiller grains and corn oil through RPMG, Inc. ("RPMG") a professional third party marketer. We have very limited control over the decisions RPMG makes regarding where our products are marketed. Our products are primarily sold in the domestic market, however, as domestic production of ethanol, distiller grains and corn oil continue to expand, we anticipate increased international sales of our products. The principal purchasers of ethanol are generally wholesale gasoline marketers or blenders. The principal markets for our ethanol are petroleum terminals in the continental United States.
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Currently, the United States ethanol industry exports a significant amount of distiller grains. During our 2018 fiscal year, the largest importers of United States distiller grains were Mexico, Turkey, South Korea, Thailand, China and Canada. In addition, the United States exported significant amounts of ethanol to Canada, Brazil, India, China, South Korea, the Philippines and Peru.
Both Brazil and China, each a major source of export demand in the past, have instituted tariffs on ethanol produced in the United States during 2018. The imposition of these duties are expected to result in a further decline in demand from these top importers requiring United States producers to seek out alternative markets.
Ethanol export demand is more unpredictable than domestic demand and tends to fluctuate throughout the year as it is subject to monetary and political forces in other nations. An example of this, the recent imposition of a tax on imported ethanol by Brazil has created uncertainty as to the viability of that market for ethanol produced in the United States and may require United States producers to seek out other markets for their products.
We expect our ethanol, distiller grains and corn oil marketer to explore all markets for our products, including export markets. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.
Distribution Methods
On October 1, 2012, we entered into an ethanol marketing agreement with RPMG. Because we are an owner of Renewable Products Marketing Group, LLC ("RPMG, LLC"), the parent company of RPMG, we receive favorable marketing fees from RPMG. Our ethanol marketing agreement allows us to elect to sell our ethanol through an index arrangement or at a fixed price agreed to between us and RPMG. Pursuant to the ethanol marketing agreement, RPMG is our exclusive marketer. The term of our ethanol marketing agreement is perpetual, until it is terminated by either party. The primary reasons our ethanol marketing agreement would terminate are if we cease to be an owner of RPMG, LLC, if there is a breach of the ethanol marketing agreement which is not cured, or if we give advance notice to RPMG that we wish to terminate the ethanol marketing agreement. Notwithstanding our right to terminate the ethanol marketing agreement, we may be obligated to continue to market our ethanol through RPMG for a period of time after the termination. Further, following the termination, we agreed to accept an assignment of certain railcar leases which RPMG has secured to service our ethanol sales. If our ethanol marketing agreement is terminated, it would trigger a redemption of our ownership interest in RPMG, LLC at our contributed capital balance at the time of termination.
On December 15, 2010, we entered into a distiller grains marketing agreement with RPMG. Pursuant to the agreement, RPMG agreed to market all of the distiller grains we produce. We agreed to pay RPMG a fee to market our distiller grains equal to the actual cost of marketing the distiller grains due to the fact that we are an owner of RPMG, LLC. We have the right to terminate the contract by giving RPMG ninety days written notice.
On February 2, 2009, we executed a corn oil marketing agreement with RPMG. Pursuant to the agreement, RPMG agreed to market all of the corn oil we produce, except for certain corn oil we may sell to corn oil customers we identified before we executed the agreement. Currently, all of our corn oil is being sold through RPMG. The agreement automatically renews for one year terms unless either party gives 180 days notice that the agreement will not be renewed. We agreed to pay RPMG a commission based on each pound of our corn oil that is sold by RPMG.
Sources and Availability of Raw Materials
Corn
Our plant currently uses approximately 42 million bushels of corn per year. In October 2008, we received our Iowa grain dealer license which allows us to purchase corn directly from local producers in addition to local grain elevators as intermediaries. Our commodity manager is responsible for purchasing corn for our operations, scheduling corn deliveries and establishing hedging positions to protect the price we pay for corn.
Corn prices were similar during our 2018 fiscal year as a result of consecutive years of favorable corn crops which has increased the amount of corn available to us. As a result of these favorable corn crops, we have not had difficulty securing the corn we need to operate the ethanol plant at prices that have allowed us to operate profitably. However, the general area around our facility experienced less than average corn yields during the 2018 harvest which may impact our ability to secure corn or the price we have to pay for corn in our 2019 fiscal year. In addition, we could experience a drought or other unfavorable weather condition during our 2019 fiscal year which could impact the price we pay for corn and could negatively impact the availability of corn near our plant. If we experience a localized shortage of corn, specifically during our 2019 fiscal year, we may be forced to purchase corn from producers who are farther away from our ethanol plant which can increase our transportation costs. In
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addition, if new corn customers enter the market, it can increase demand for corn which could result in higher corn costs. Since corn is the primary raw material we use to produce our products, the availability and cost of corn can have a significant impact on the profitability of our operations.
Natural Gas
Natural gas is an important input to our manufacturing process. We use natural gas to dry our distiller grains products to moisture contents at which they can be stored for longer periods of time. This allows the distiller grains we produce to be transported greater distances to serve broader livestock markets. We entered into an agreement with Interstate Power and Light Company to deliver all of the natural gas required by the plant. The agreement commenced in December 2004 and continued for a period of 10 years with an option for a 5 year renewal. During our 2014 fiscal year, we provided notice to Interstate Power and Light Company of our election to renew our natural gas transportation agreement and we entered into a renewal of our natural gas transportation agreement until December 31, 2016. Effective January 1, 2017, we entered into a new natural gas transportation agreement with Interstate Power and Light Company. The agreement will continue for a period of 2 years ending on December 31, 2018, with the option for the parties to agree to 1-year extensions thereafter. We do not anticipate any problems securing the natural gas we require to continue to operate the ethanol plant at capacity during our 2019 fiscal year or beyond.
Electricity
We have an agreement with Interstate Power and Light Company to supply all electricity required by the plant. The agreement is month-to-month and may be terminated by either party by giving 60 days prior written notice. We have elected to continue this contract on a month-to-month basis and have not given or received notice of termination of this agreement. We do not anticipate any problems securing the electricity that we require to continue to operate the ethanol plant at capacity during our 2019 fiscal year or beyond.
Water
The primary water supply for our plant is generated by one 800 gallon-per-minute pump at the well drilled at the plant site. We have a second high capacity well that has capacity to produce 600 gallons of water per minute. These two wells provide adequate water capacity to operate the plant under normal circumstances. In addition, we are connected to the City of Mason City's water supply for fire protection and in the event the water supplied by our wells is not sufficient. We have installed an underground distribution system for potable water, process water, fire protection and sanitary sewer lines. In addition, we pay Mason City for any potable water usage at the plant based on our actual usage times the current rate ordinance. We rely more on the City of Mason City to supply us with process water and to handle our wastewater discharge. In November 2018, we commissioned a third water well that has the capacity of producing an additional 500 gallons of water per minute. With these three wells, we can produce over 1,500 gallons of water per minute on site and will likely be less dependent on the City of Mason City for our water supply.
We do not anticipate any problems securing the water that we require to continue to operate the ethanol plant at capacity during our 2019 fiscal year or beyond.
Patents, Trademarks, Licenses, Franchises and Concessions
We do not currently hold any patents, trademarks, franchises or concessions. We were granted a perpetual and royalty free license by ICM, Inc. to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM, Inc. was included in the amount we paid to Fagen, Inc. to design and build our ethanol plant and expansion.
Seasonality Sales
We experience some seasonality of demand for our ethanol, distiller grains and corn oil. Since ethanol is predominantly blended with gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving and, as a result, increased gasoline demand. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand. We also experience decreased distiller grains demand during the summer months due to natural depletion in the size of herds at cattle feed lots and when the animals are turned out to pasture or are slaughtered. Further, we expect some seasonality of demand for our corn oil since a major corn oil user is biodiesel plants which typically reduce production during the winter months.
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Working Capital
We primarily use our working capital for purchases of raw materials necessary to operate the ethanol plant and for capital expenditures to maintain and upgrade the ethanol plant. Our primary sources of working capital are income from our operations as well as our revolving term loan with our primary lender, Farm Credit Services of America ("Farm Credit"). For our 2019 fiscal year, we anticipate that our expansion project will use a significant amount of capital. We anticipate using cash from operations along with additional borrowing to complete the expansion project. In addition, we anticipate using cash from our operations to maintain our current plant infrastructure. Management believes that we will be able to secure sufficient working capital to complete our expansion projects and continue to operate the plant at capacity.
Dependence on a Major Customer
As discussed above, we rely on RPMG for the sale and distribution of all of our products and are highly dependent on RPMG for the successful marketing of our products. We do not currently have the ability to market our ethanol, distiller grains and corn oil internally should RPMG be unable to market these products for us at acceptable prices. We anticipate that we would be able to secure alternate marketers should RPMG fail, however, a loss of our marketer could significantly harm our financial performance.
Competition
We are in direct competition with numerous ethanol producers, many of which have greater resources than we do. As of October 31, 2018, the Renewable Fuels Association ("RFA") estimates that there are 213 ethanol production facilities in the United States with capacity to produce approximately 16.1 billion gallons of ethanol per year. The RFA estimates that approximately 3% of the ethanol production capacity in the United States was not operating as of October 31, 2018. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, Pacific Ethanol, POET Biorefining, and Valero Renewable Fuels, each of which are capable of producing significantly more ethanol than we produce.
The following table identifies the largest ethanol producers in the United States along with their production capacities.
U.S. FUEL ETHANOL PRODUCTION CAPACITY
BY TOP PRODUCERS
Producers of Approximately 500
million gallons per year (MMgy) or more
Company | Current Capacity (MMgy) | Percent of Market | ||||
Archer Daniels Midland | 1,616 | 10 | % | |||
Poet Biorefining | 1,662 | 10 | % | |||
Valero Renewable Fuels | 1,400 | 9 | % | |||
Green Plains Renewable Energy | 1,461 | 9 | % | |||
Flint Hills Resources | 820 | 5 | % | |||
Pacific Ethanol | 553 | 3 | % | |||
TOTAL | 7,512 | 46 | % | |||
Updated: October 31, 2018
Ethanol Competition
Ethanol is a commodity product where competition in the industry is predominantly based on price and consistent fuel quality. Larger ethanol producers may be able to realize economies of scale in their operations that we are unable to realize. Further, we have experienced increased competition from oil companies which have purchased ethanol production facilities, including Valero Renewable Fuels and Flint Hills Resources, which are subsidiaries of larger oil companies. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate our ethanol plant. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. This added flexibility may allow these ethanol producers to compete more effectively, especially during periods when operating margins are unfavorable in the ethanol industry. Finally some ethanol producers who own ethanol plants in geographically diverse areas of the United States may spread the risk they encounter related to feedstock prices.
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We anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock that is being explored is cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn-based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn-based ethanol which could decrease demand for our product or result in competitive disadvantages for our ethanol production process.
A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has recently grown in popularity, especially in urban areas. While there are currently a limited number of vehicle recharging stations, making electric cars not feasible for all consumers, there has been increased development of these recharging stations, making electric car technology more widely available. Additional competition from these other sources of alternative energy, particularly in the automobile market, could reduce the demand for ethanol, which would negatively impact our profitability.
In addition to domestic producers of ethanol, we face competition from ethanol produced in foreign countries, particularly Brazil. Ethanol imports have been lower in recent years and ethanol exports have been higher which was one of the reasons for improved operating margins in the ethanol industry. As of May 1, 2013, Brazil increased its domestic ethanol use requirement from 20% to 25% which decreased the amount of ethanol available in Brazil for export. Further, in August 2017, Brazil instituted a quota and tariff on ethanol produced in the United States and exported to Brazil which also is likely to decrease the amount of ethanol Brazil has available for export. However, in the future we may experience increased ethanol imports from Brazil which could put negative pressure on domestic ethanol prices and result in excess ethanol supply in the United States.
Competition among ethanol producers may continue to increase as gasoline demand decreases due to more fuel efficient vehicles being produced. If the concentration of ethanol used in most gasoline does not increase and gasoline demand is lower due to increased fuel efficiency by the vehicles operated in the United States, competition may increase among ethanol producers to supply the ethanol market.
Distiller Grains Competition
Our ethanol plant competes with other ethanol producers in the production and sale of distiller grains. Distiller grains are primarily used as an animal feed which replaces corn and soybean meal. As a result, we believe that distiller grains prices are positively impacted by increases in corn and soybean prices. In addition, in recent years the United States ethanol industry has increased exports of distiller grains which management believes has positively impacted demand and prices for distiller grains in the United States. However, Chinese tariffs have negatively impacted exports to China which was previously a top destination for distiller grains which has negatively impacted demand a prices. In the event these distiller grains exports continue to decrease, it could result in increased competition among ethanol producers for sales of distiller grains and could negatively impact distiller grains prices in the United States.
Corn Oil Competition
We compete with many ethanol producers for the sale of corn oil. Many ethanol producers have installed the equipment necessary to separate corn oil from the distiller grains they produce which has increased competition for corn oil sales and has resulted in lower market corn oil prices. Many ethanol producers have increased corn oil production due to the relatively low value of distiller grains which has increased corn oil competition.
Governmental Regulation and Federal Ethanol Supports
Federal Ethanol Supports
The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the Federal Renewable Fuels Standard (the "RFS"). 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 RFS statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. 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
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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.
The EPA has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Annually, the EPA is required to pass a rule that establishes the number of gallons of conventional and advanced renewable fuels that must be used in the United States which is called the renewable volume obligations (RVO). Recently, the EPA has been granting small refinery exemptions from the RFS while not using its authority to waive the RFS statutory volume requirements. These small refinery exemptions created unallocated gallons reducing the corn-based conventional biofuel RFS requirements by 2.25 billion gallons in 2018. These small refinery exemptions have had a significant negative impact on domestic demand for ethanol and have resulted in negative operating margins in the ethanol industry.
On November 30, 2018, the final RVO for 2019 was set at 19.29 billion gallons and the corn-based ethanol RVO was set at 15 billion gallons. However, the EPA did not address small refinery exemptions in its 2019 RVO release. In addition, the EPA did not address the reallocation of 500 million gallons from the 2016 RVO which was ordered by a federal court in a recent lawsuit.
In February 2010, the EPA issued new regulations governing the RFS. These new regulations are called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of greenhouse gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these greenhouse gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and is not required to prove compliance with the lifecycle greenhouse gas reductions. Many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane which could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.
Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the United States is approximately 143 billion gallons per year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 14.3 billion gallons per year. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the use of higher percentage blends such as E15 or E85. These higher percentage blends may lead to additional ethanol demand if they become more widely available and accepted by the market.
Many in the ethanol industry believe that it will be impossible to meet the RFS requirement in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. The EPA has approved the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. However, there are still state hurdles that need to be addressed in some states before E15 will become more widely available. Sales of E15 may be limited because it is not approved for use in all vehicles, the EPA requires a label that management believes may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may be required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions which may limit E15 sales in these markets. As a result, the approval of E15 by the EPA has not had an immediate impact on ethanol demand in the United States.
Effect of Governmental Regulation
The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the ethanol plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be
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adopted that could have an adverse effect on the use of ethanol. Plant operations are governed by the Occupational Safety and Health Administration ("OSHA"). OSHA regulations may change such that the costs of operating the ethanol plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.
We have obtained all of the necessary permits to operate the ethanol plant. During our 2018 fiscal year, we incurred costs and expenses of approximately $185,000 complying with environmental laws, including the cost of obtaining permits. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.
In late 2009, California passed a Low Carbon Fuels Standard ("LCFS"). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to the RFS. On December 29, 2011, a federal district court in California ruled that the California LCFS was unconstitutional which halted implementation of the California LCFS. However, the California Air Resources Board ("CARB") appealed this court ruling and on September 18, 2013, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling and CARB re-adopted the LCFS with some slight modifications. The LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices affecting our ability to operate profitably.
The European Union concluded an anti-dumping investigation related to ethanol produced in the United States and exported to Europe. As a result of this investigation, the European Union imposed a tariff on ethanol which is produced in the United States and exported to Europe. This tariff has decreased exports of ethanol to Europe which has negatively impacted the market price of ethanol in the United States. The anti-dumping tariff was scheduled to expire in 2018, however an extension is currently under review. We believe this tariff will continue to negatively impact domestic ethanol prices during our 2019 fiscal year.
In addition, during 2018 China continued to increase its tariff on ethanol produced in the United States which has continued to reduce ethanol exports to China. Due to recent trade disputes between the United States and China, we do not anticipate exports to China will resume in the near future.
In August 2017, Brazil instituted an import quota for ethanol produced in the United States and exported to Brazil, along with a 20% tariff on ethanol imports in excess of the quota. This tariff and quota have reduced exports of ethanol to Brazil and may continue to negatively impact ethanol exports from the United States. Any reduction in ethanol exports could continue to negatively impact market ethanol prices in the United States.
Employees
As of October 31, 2018, we had 51 full-time employees and no part-time employees.
ITEM 1A. RISK FACTORS.
You should carefully read and consider the risks and uncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.
Risks Relating to Our Business
Our profitability is dependent on a positive spread between the price we receive for our products and the raw material costs required to produce our products. Practically all of our revenue is derived from the sale of our ethanol, distiller grains and corn oil. Our primary raw material costs are related to corn costs and energy costs. Our profitability depends on a positive spread between the market price of the ethanol, distiller grains and corn oil we produce and the raw material costs related to these products. While ethanol, distiller grains and corn oil prices typically change in relation to corn prices, this correlation may not always exist. In the event the prices of our products decrease at a time when our raw material costs are increasing, we may not be able to profitably operate the ethanol plant. Further, if the spread between the price we receive for our products and the raw material
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costs associated with producing those products is negative for an extended period of time, we may fail which could negatively impact the value of our units.
Declines in the price of ethanol or distiller grains would significantly reduce our revenues. The sales prices of ethanol and distiller grains can be volatile as a result of a number of factors such as overall supply and demand, the price of gasoline and corn, levels of government support, and the availability and price of competing products. We are dependent on a favorable spread between the price we receive for our ethanol and distiller grains and the price we pay for corn and natural gas. Any lowering of ethanol and distiller grains prices, especially if it is associated with increases in corn and natural gas prices, may affect our ability to operate profitably. We anticipate the price of ethanol and distiller grains to continue to be volatile in our 2019 fiscal year as a result of the net effect of changes in the price of gasoline and corn and increased ethanol supply offset by changes in ethanol demand. Declines in the prices we receive for our ethanol and distiller grains could lead to decreased revenues and may result in our inability to operate the ethanol plant profitably for an extended period of time which could decrease the value of our units.
Decreasing gasoline prices may lower ethanol prices which could negatively impact our ability to operate profitably. Discretionary blending is an important secondary market which is often determined by the price of ethanol versus the price of gasoline. In periods when discretionary blending is financially unattractive, demand for ethanol may be reduced. In recent years, the price of ethanol was less than the price of gasoline which increased demand for ethanol from fuel blenders. Then, gasoline prices were lower which reduced the spread between the price of gasoline and the price of ethanol and led to decreased ethanol demand. If gasoline prices decrease again during our 2019 fiscal year, it could result in lower ethanol prices which could decrease the value of our units.
We may be forced to reduce production or cease production altogether if we are unable to secure the corn we require to operate the ethanol plant. We require a significant amount of corn to operate the ethanol plant at capacity. In recent years, the supply of corn in the market has been higher and we have not had difficulty securing the corn we require at prices that allow us to operate profitably. Despite recent trends, the corn crop harvested in the fall of 2018 in the immediate area around our facility was less than in previous years which could negatively impact corn availability and prices during our 2019 fiscal year. Further, poor weather conditions can have a significant impact on corn production. If the corn crop harvested in future years is smaller than we have recently experienced, it is possible that we could experience corn shortages which could negatively impact our ability to operate the ethanol plant. We may also experience a shortage of corn in our local market which may not increase national corn prices but may require us to increase our corn basis in order to attract corn which can impact our overall corn costs. If we are unable to secure the corn we require to continue to operate the ethanol plant, or we are unable to secure corn at prices that allow us to operate profitably, we may have to reduce production or cease operating altogether which may negatively impact the value of our units.
We engage in hedging transactions which involve risks that could harm our business. We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process, along with sales of ethanol. We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments. The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts. Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices or relatively lower ethanol prices. Alternatively, we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn and/or natural gas prices increase or ethanol prices decrease. Further, we may be required to use a significant amount of cash to make margin calls required by our commodities broker as a result of decreases in corn prices and the resulting unrealized and realized losses we may experience on our hedging activities. Utilizing cash for margin calls has an impact on the cash we have available for our operations which could result in liquidity problems during times when corn prices change significantly which can harm our profitability.
Our business is not diversified. Our success depends almost entirely on our ability to profitably operate our ethanol plant. We do not have any other lines of business if we are unable to operate our ethanol plant and manufacture ethanol, distiller grains and corn oil. Further, all of our investments are in companies involved in the ethanol industry. If economic or political factors adversely affect the market for ethanol, distiller grains or corn oil, we have no other line of business to fall back on. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.
If RPMG fails, it may negatively impact our ability to profitably operate the ethanol plant. All of our ethanol, distiller grains and corn oil is marketed by RPMG. Therefore, nearly all of our revenue is derived from sales that are secured by RPMG. If RPMG is unable to market all of our products, it may negatively impact our ability to profitably operate the ethanol plant. While management believes that we could secure an alternative marketer if RPMG were to fail, switching marketers may negatively
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impact our cash flow and our ability to continue to operate the ethanol plant. If we are unable to sell all of our ethanol, distiller grains and corn oil at prices that allow us to operate profitably, it may decrease the value of our units.
We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their employment with us, they may choose to seek other employment. Any loss of these executive officers and key employees may prevent us from operating the ethanol plant profitably which could decrease the value of our units.
We may violate the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans. We have a credit facility with Farm Credit Services of America ("Farm Credit"). Our credit agreements with Farm Credit include various financial loan covenants. We are currently in compliance with all of our financial loan covenants. Current management projections indicate that we will be in compliance with our loan covenants for at least the next 12 months. However, unforeseen circumstances may develop which could result in us violating our loan covenants. If we violate the terms of our credit agreements, including our financial loan covenants, Farm Credit could deem us to be in default of our loans and require us to immediately repay any outstanding balance of our loans. If we do not have the funds available to repay the loans or we cannot find another source of financing, we may fail which could decrease or eliminate the value of our units.
Our operations may be negatively impacted by natural disasters, severe weather conditions, and other unforeseen plant shutdowns which can negatively impact our operations. Our operations may be negatively impacted by events outside of our control such as natural disasters, severe weather, strikes, train derailments and other unforeseen events which may negatively impact our operations. If we experience any of these unforeseen circumstances which negatively impact our operations, it may affect our cash flow and negatively impact the value of our business.
We may incur casualty losses that are not covered by insurance which could negatively impact the value of our units. We have purchased insurance which we believe adequately covers our losses from foreseeable risks. However, there are risks that we may encounter for which there is no insurance or for which insurance is not available on terms that are acceptable to us. If we experience a loss which materially impairs our ability to operate the ethanol plant which is not covered by insurance, the value of our units could be reduced or eliminated.
Risks Related to Ethanol Industry
The ethanol industry is an industry that is changing rapidly which can result in unexpected developments that could negatively impact our operations and the value of our units. The ethanol industry has grown significantly in the last decade. This rapid growth has resulted in significant shifts in supply and demand of ethanol over a very short period of time. As a result, past performance by the ethanol plant or the ethanol industry generally might not be indicative of future performance. Recently, a significant number of ethanol plants have been expanding their production capacity which could impact the supply and demand balance in the industry. We may experience a rapid shift in the economic conditions in the ethanol industry which may make it difficult to operate the ethanol plant profitably. If changes occur in the ethanol industry that make it difficult for us to operate the ethanol plant profitably, it could result in a reduction in the value of our units.
Excess ethanol supply in the market could put negative pressure on the price of ethanol which could lead to tight operating margins and may impact our ability to operate profitably. In the past, the ethanol industry has confronted market conditions where ethanol supply exceeded demand which led to unfavorable operating conditions. A disconnect between ethanol supply and demand can result in lower ethanol prices which can result in unfavorable operating conditions. The United States benefited from additional exports of ethanol in recent years which may not continue to occur during our 2019 fiscal year. We may experience periods of ethanol supply and demand imbalance during our 2019 fiscal year. If we experience excess ethanol supply, either due to increased ethanol production or lower gasoline demand, it could negatively impact the price of ethanol which could hurt our ability to profitably operate the ethanol plant.
Distiller grains demand and prices may be negatively impacted by the Chinese anti-dumping duty. China was recently the world's largest importer of distiller grains produced in the United States. On January 12, 2016, the Chinese government announced that it would commence an anti-dumping and countervailing duty investigation related to distiller grains imported from the United States. On January 10, 2017, China announced a final ruling related to its anti-dumping and countervailing duty investigation imposing anti-dumping duties from a range of 42.2% to 53.7% and anti-subsidy duties from 11.2% to 12.0%. The imposition of these duties has resulted in a significant decline in demand from this top importer and negatively impacted prices for distiller grains produced in the United States. This reduction in demand could negatively impact our ability to profitably operate the ethanol plant.
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A reduction in ethanol exports to Brazil due to the imposition by the Brazilian government of a tariff on U.S. ethanol could have a negative impact on ethanol prices. Brazil has historically been a top destination for ethanol produced in the United States. However, in 2017, Brazil imposed a 20% tariff on ethanol which is produced in the United States and exported to Brazil after a small quota is reached. This tariff has resulted in a decline in demand for ethanol from Brazil and could negatively impact the market price of ethanol in the United States and our ability to profitably operate the ethanol plant.
Many ethanol producers are expanding their production capacity which could lead to an oversupply of ethanol in the United States. Recently, many ethanol producers have commenced projects to expand their ethanol production capacities. These expansions could result in a significant increase in the supply of ethanol in the United States. Currently, ethanol prices are supported by ethanol exports which may not continue at their current levels. While many in the ethanol industry are working to increase the amount of ethanol that is used domestically, specifically in the form of E15, which contains 15% ethanol as compared to the 10% ethanol which is used in most current blends, adoption of E15 has not been as rapid as most ethanol producers would like. Also, the additional ethanol capacity which is being constructed may exceed current domestic and export demand. If an oversupply of ethanol were to occur, it could negatively impact domestic ethanol prices which could negatively impact our ability to profitably operate the ethanol plant.
Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for standard vehicles. Currently, ethanol is primarily blended with gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 143 billion gallons of gasoline are sold in the United States each year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 14.3 billion gallons. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. Many in the ethanol industry believe that the ethanol industry has reached this blend wall. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in standard vehicles. Such higher percentage blends of ethanol are a contentious issue. Automobile manufacturers and environmental groups have fought against higher percentage ethanol blends. The EPA approved the use of E15 for standard (non-flex fuel) vehicles produced in the model year 2001 and later. The fact that E15 has not been approved for use in all vehicles and the labeling requirements associated with E15 may lead to gasoline retailers refusing to carry E15. In addition, restrictions on the evaporative emissions of E15 during the summer months can limit the availability of E15 in some markets. Without an increase in the allowable percentage blends of ethanol that can be used in all vehicles, demand for ethanol may not continue to increase which could decrease the selling price of ethanol and could result in our inability to operate the ethanol plant profitably, which could reduce or eliminate the value of our units.
Technology advances in the commercialization of cellulosic ethanol may decrease demand for corn-based ethanol which may negatively affect our profitability. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas of the country which are unable to grow corn. The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer strong incentives to develop commercial scale cellulosic ethanol. The RFS requires that 16 billion gallons per year of advanced bio-fuels must be consumed in the United States by 2022. Additionally, state and federal grants have been awarded to several companies which are seeking to develop commercial-scale cellulosic ethanol plants. This has encouraged innovation and has led to several companies which are either in the process or have completed construction of commercial scale cellulosic ethanol plants. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and our financial condition will be negatively impacted.
Changes and advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably. Advances and changes in the technology of ethanol production are expected to occur. Such advances and changes may make the ethanol production technology installed in our ethanol plant less desirable or obsolete. These advances could allow our competitors to produce ethanol at a lower cost than us. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause the ethanol plant to become uncompetitive or completely obsolete. If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income which could decrease the value of our units.
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We operate in an intensely competitive industry and compete with larger, better financed companies which could impact our ability to operate profitably. There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants operating throughout the Midwest and elsewhere in the United States. We also face competition from ethanol producers located outside of the United States. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, Pacific Ethanol, POET, and Valero Renewable Fuels, each of which is capable of producing significantly more ethanol than we produce. Further, many believe that there will be further consolidation occurring in the ethanol industry which will likely lead to a few companies which control a significant portion of the United States ethanol production market. We may not be able to compete with these larger producers. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could negatively impact our financial performance and the value of our units.
Competition from the advancement of alternative fuels and electric vehicles may lessen demand for ethanol. Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, and electric cars or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.
If exports of ethanol are reduced, ethanol prices may be negatively impacted. The United States ethanol industry was supported during our 2018 fiscal year with exports of ethanol. Management believes these additional exports of ethanol were due to lower market ethanol prices in the United States and increased global demand for ethanol. However, these ethanol exports may not continue. In 2017, China and Brazil both implemented import tariffs on United States ethanol and the European Union has maintained a tariff since 2012. As a result of small refinery exemptions in 2018, we are experiencing the impact of excess ethanol supplies in the market. Without exports of ethanol, excess ethanol supplies in the United States will continue which could continue to negatively impact prices. Any decrease in ethanol prices or demand may negatively impact our ability to profitably operate the ethanol plant.
Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines and/or takes more energy to produce than it contributes or based on perceived issues related to the use of corn as the feedstock to produce ethanol may affect demand for ethanol. Certain individuals believe that the use of ethanol will have a negative impact on gasoline prices at the pump. Some also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. Further, some consumers object to the fact that ethanol is produced using corn as the feedstock which these consumers perceive as negatively impacting food prices. These consumer beliefs could potentially be wide-spread and may be increasing as a result of efforts to increase the allowable percentage of ethanol that may be blended for use in vehicles. If consumers choose not to buy ethanol based on these beliefs, it would affect demand for the ethanol we produce which could negatively affect our profitability and financial condition.
Failures of our information technology infrastructure could have a material adverse effect on operations. We utilize various software applications and other information technology that are critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, including production, manufacturing, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses and ransomware attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected.
A cyber attack or other information security breach could have a material adverse effect on our operations and result in financial losses. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and ransomware as well as other events that could have a security impact. If we are unable to prevent cyber attacks and other information security breaches, we may encounter significant disruptions in our operations which
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could adversely impact our business, financial condition and results of operations or result in the unauthorized disclosure of confidential information. Such breaches may also harm our reputation, result in financial losses or subject us to litigation or other costs or penalties.
Risks Related to Regulation and Governmental Action
Government incentives for ethanol production may be reduced or eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal and state ethanol incentives, the most important of which is the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive. The EPA has the authority to waive the RFS statutory volume requirement, in whole or in part, provided certain conditions have been met. Annually, the EPA is supposed 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 obligations. In the past, the EPA has set the renewable volume obligations below the statutory volume requirements. On November 30, 2018, the EPA released its final rule and set the 2019 total volume obligation at 19.92 billion gallons of which 15.0 billion gallons could be met by corn-based ethanol. If the EPA were to significantly reduce the volume requirements under the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress in the future, the market price and demand for ethanol could decrease which will negatively impact our financial performance.
The EPA's small refinery exemptions significantly reduced ethanol demand in 2018 which may continue. In 2018, the EPA issued exemptions from the RFS to certain small refiners which may have reduced the corn-based RFS requirement for 2018 by more than 2 billion gallons. These reductions in the corn-based ethanol use requirements have resulted in significant decreases in ethanol demand and have severely impacted ethanol prices during our 2018 fiscal year and we expect this impact to continue. If the EPA continues to exempt small refiners from the RFS it will further erode demand for ethanol domestically which will decrease prices and may prevent us from profitably operating the ethanol plant.
The California Low Carbon Fuel Standard may decrease demand for corn-based ethanol which could negatively impact our profitability. California passed a Low Carbon Fuels Standard ("LCFS") which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations restrict corn-based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn-based ethanol to California, it could significantly reduce demand for the ethanol we produce. This could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.
Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability. We are subject to extensive air, water and other environmental laws and regulations. In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns. In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.
Carbon dioxide may be regulated in the future by the EPA as an air pollutant requiring us to obtain additional permits and install additional environmental mitigation equipment, which could adversely affect our financial performance. In 2007, the Supreme Court decided a case in which it ruled that carbon dioxide is an air pollutant under the Clean Air Act for motor vehicle emissions. In 2011 the EPA issued a tailoring rule that deferred greenhouse gas regulations for ethanol plants until July of 2014. However, in July of 2013 the D.C. Circuit issued an opinion vacating the EPA's deferral of those regulations for biogenic sources, including ethanol plants. On June 23, 2014 the U.S. Supreme Court affirmed in part and reversed in part the D.C. Circuit’s decision. For plants that already hold PSD permits the court generally affirmed the EPA's ability to regulate greenhouse gas emissions. Our plant produces a significant amount of carbon dioxide. While there are currently no regulations restricting carbon dioxide emissions, if the EPA or the State of Iowa were to regulate carbon dioxide emissions by plants such as ours, we may have to apply for additional permits or we may be required to install carbon dioxide mitigation equipment or take other as yet unknown steps to comply with these potential regulations. Compliance with any future regulation of carbon dioxide, if it occurs, could be costly and may prevent us from operating the ethanol plant profitably which could decrease or eliminate the value of our units.
Government policies and regulations, particularly those affecting the agricultural sector and related industries, could adversely affect our operations and profitability. Agricultural commodity production and trade flows are significantly affected
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by government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, trade tariffs, duties, subsidies, import and export restrictions on commodities and commodity products, can influence industry profitability, the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, and the volume and types of imports and exports. In addition, international trade disputes can adversely affect trade flows by limiting or disrupting trade between countries or regions. Future governmental policies, regulations or actions affecting our industry may adversely affect the supply of, demand for and prices of our products, restrict our ability to do business and cause our financial results to suffer. We may experience negative impacts of higher ethanol tariffs and other disruptions to international agricultural trade related to current trade actions announced by the Trump administration and responsive actions announced by trading partners, including by China. In April of 2018, the Chinese government increased the tariff on United States ethanol imports into China from 30% to 45%. We cannot estimate the exact effect this tariff increase will have on the overall domestic ethanol market. However, the increased tariff is expected to reduce overall United States ethanol export demand, which could have a negative effect on domestic ethanol prices.
ITEM 2. PROPERTIES
Our ethanol plant is located on an approximately 154-acre site in north-central Iowa. The plant's address is 1822 43rd Street SW, Mason City, Iowa. We produce all of our ethanol, distiller grains and corn oil at this site. The ethanol plant has capacity to produce more than 120 million gallons of ethanol per year. At the beginning of our 2015 fiscal year, we purchased an additional approximately 30 acres of land adjacent to our ethanol plant which is used for the water treatment facility and natural gas co-generation project as well as other plant upgrade projects we may undertake in the future.
All of our tangible and intangible property serves as collateral for our senior credit facility with Farm Credit. Our senior credit facility is discussed in greater detail under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Short-Term and Long-Term Debt Sources."
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of 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 disputes. We are not currently involved in any material legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
There is no public trading market for our Class A or Class B membership units. We have created a qualified online matching service ("QMS") in order to facilitate trading of our units. The QMS consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units. We do not receive any compensation for creating or maintaining the QMS. We do not become involved in any purchase or sale negotiations arising from the QMS. In advertising the QMS, we do not characterize the Company as being a broker or dealer or an exchange. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the QMS. We do not use the QMS to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements. We have no role in effecting the transactions beyond approval, as required under our operating agreement, and the issuance of new certificates.
As of December 21, 2018, there were approximately 825 holders of record of our Class A and Class B units.
The following table contains historical information by quarter for the past two years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe this most accurately represents the current trading value of our units. The information was compiled by reviewing the completed unit transfers that occurred on the QMS bulletin board or through private transfers during the quarters indicated.
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Quarter | Low Price | High Price | Average Price | Number of Units Traded | ||||||||
2017 1st | — | — | — | None | ||||||||
2017 2nd | — | — | — | None | ||||||||
2017 3rd | $7.00 | $7.00 | $7.00 | 10,000 | ||||||||
2017 4th | — | — | — | None | ||||||||
2018 1st | — | — | — | None | ||||||||
2018 2nd | $7.25 | $8.00 | $7.38 | 24,000 | ||||||||
2018 3rd | $7.00 | $7.75 | $7.41 | 116,000 | ||||||||
2018 4th | $7.50 | $7.75 | $7.63 | 20,000 | ||||||||
The following tables contain the bid and asked prices that were posted on the QMS bulletin board and includes some transactions that were not completed. We believe the table above more accurately describes the trading value of our units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the QMS bulletin board.
Seller's Quarter | Low Price | High Price | Average Price | Number of Units Traded | ||||||||
2017 1st | — | — | — | None | ||||||||
2017 2nd | — | — | — | None | ||||||||
2017 3rd | — | — | — | None | ||||||||
2017 4th | — | — | — | None | ||||||||
2018 1st | — | — | — | None | ||||||||
2018 2nd | — | — | — | None | ||||||||
2018 3rd | — | — | — | None | ||||||||
2018 4th | $8.00 | $8.00 | $8.00 | 10,000 | ||||||||
Buyer's Quarter | Low Price | High Price | Average Price | Number of Units Traded | ||||||||
2017 1st | $6.25 | $6.50 | $6.42 | 15,000 | ||||||||
2017 2nd | $6.25 | $6.50 | $6.42 | 15,000 | ||||||||
2017 3rd | $6.50 | $7.00 | $6.75 | 30,000 | ||||||||
2017 4th | $8.00 | $8.00 | $8.00 | 20,000 | ||||||||
2018 1st | — | — | — | — | ||||||||
2018 2nd | $7.00 | $7.25 | $7.17 | 45,000 | ||||||||
2018 3rd | $7.50 | $7.50 | $7.50 | 22,000 | ||||||||
2018 4th | $7.50 | $7.50 | $7.50 | 25,000 | ||||||||
As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause us to be deemed a publicly traded partnership.
DISTRIBUTIONS
Distributions are paid to our unit holders in proportion to the number of units held by each unit holder, regardless of class. A unit holder's distribution is determined by dividing the number of units owned by the unit holder by the total number of units outstanding, regardless of class. Our board of directors has complete discretion over the timing and amount of distributions to our unit holders subject to certain restrictions in our credit agreements and our operating agreement. Our operating agreement requires the board of directors to try to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability related to owning our units in a timely fashion. Our expectations with respect to our ability to make future distributions are discussed further in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Distributions are restricted by certain loan covenants in our credit agreements with Farm Credit. During our 2018 fiscal year, our loan covenants with Farm Credit were amended allowing us to make distributions to our members up to 100% of our prior year's net income if following the distribution we have at least $15 million in working capital. Also, in the event our working capital will exceed $20 million following the distribution, our ability to make distributions to our members is not limited
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by our loan covenants. During our 2017 fiscal year, we made two distributions to our members for a total of $1.25 per membership unit for a total distribution of $24,841,250. During our 2018 fiscal year, we made one distribution to our members for a total of $0.75 per membership unit for a total distribution of $14,904,750. Subsequent to the end of our 2018 fiscal year, on November 19, 2018, our board of directors declared a distribution of $0.25 per membership unit for a total of $4,968,250 to be paid to members of record as of November 19, 2018. The distribution was paid in December 2018.
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total member return since November 1, 2013, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the "NASDAQ Market Index") and an index of other companies that have the same SIC code as the Company (the "SIC Code Index"). The graph assumes $100 was invested in each of our units, the NASDAQ Market Index, and the SIC Code Index on November 1, 2013. Data points on the graph are annual. Note that historic unit price performance is not necessarily indicative of future unit price performance.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data as of October 31, 2016, 2015 and 2014 and the selected statement of operations data and other financial data for the years ended October 31, 2015 and 2014 have been derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected balance sheet financial data as of October 31, 2018 and 2017 and the selected statement of operations data and other financial data for each of the years in the three year period ended October 31, 2018 have been derived from the audited Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following consolidated financial data.
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Statement of Operations Data: | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Revenues | $ | 179,501,244 | $ | 213,455,567 | $ | 200,697,852 | $ | 221,149,134 | $ | 289,152,549 | ||||||||||
Cost of Goods Sold | 175,745,659 | 188,326,404 | 185,345,104 | 194,216,462 | 225,335,539 | |||||||||||||||
Insurance Claim Recoveries, net | 1,600,000 | — | — | — | — | |||||||||||||||
Gross Profit | 5,355,585 | 25,129,163 | 15,352,748 | 26,932,672 | 63,817,010 | |||||||||||||||
Operating Expenses | 3,623,272 | 3,844,410 | 3,646,121 | 3,407,954 | 3,569,152 | |||||||||||||||
Operating Income | 1,732,313 | 21,284,753 | 11,706,627 | 23,524,718 | 60,247,858 | |||||||||||||||
Other Income (Expense), net | 4,638,986 | 8,114,071 | 8,686,615 | 8,421,801 | 19,031,679 | |||||||||||||||
Net Income | $ | 6,371,299 | $ | 29,398,824 | $ | 20,393,242 | $ | 31,946,519 | $ | 79,279,537 | ||||||||||
Weighted Average Units Outstanding | 19,873,000 | 19,873,000 | 19,873,000 | 19,873,000 | 19,881,333 | |||||||||||||||
Net Income Per Unit | $ | 0.32 | $ | 1.48 | $ | 1.03 | $ | 1.61 | $ | 3.99 | ||||||||||
Cash Distributions per Unit | $ | 0.75 | $ | 1.25 | $ | 0.95 | $ | 3.10 | $ | 0.90 | ||||||||||
Balance Sheet Data: | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Current Assets | $ | 35,164,094 | $ | 53,988,590 | $ | 48,098,413 | $ | 47,036,908 | $ | 70,279,557 | ||||||||||
Net Property and Equipment | 73,878,806 | 63,477,489 | 66,686,967 | 62,130,548 | 59,644,340 | |||||||||||||||
Other Assets | 26,229,379 | 26,363,336 | 25,978,526 | 28,987,864 | 37,633,918 | |||||||||||||||
Total Assets | 135,272,279 | 143,829,415 | 140,763,906 | 138,155,320 | 167,557,815 | |||||||||||||||
Current Liabilities | 7,634,070 | 7,716,286 | 9,237,168 | 8,114,578 | 7,791,972 | |||||||||||||||
Long-Term Liabilities | 536,414 | 477,883 | 449,066 | 476,962 | 542,282 | |||||||||||||||
Members' Equity | 127,101,795 | 135,635,246 | 131,077,672 | 129,563,780 | 159,223,561 | |||||||||||||||
Book Value Per Unit | $ | 6.40 | $ | 6.83 | $ | 6.60 | $ | 6.52 | $ | 8.01 | ||||||||||
* See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of our financial results.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Comparison of the Fiscal Years Ended October 31, 2018 and 2017
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended October 31, 2018 and 2017:
2018 | 2017 | ||||||||||
Statement of Operations Data | Amount | % | Amount | % | |||||||
Revenues | $ | 179,501,244 | 100.0 | $ | 213,455,567 | 100.0 | |||||
Cost of Goods Sold | 175,745,659 | 97.9 | 188,326,404 | 88.2 | |||||||
Insurance Claim Recoveries, net | 1,600,000 | 0.9 | — | — | |||||||
Gross Profit | 5,355,585 | 3.0 | 25,129,163 | 11.8 | |||||||
Operating Expenses | 3,623,272 | 2.0 | 3,844,410 | 1.8 | |||||||
Operating Income | 1,732,313 | 1.0 | 21,284,753 | 10.0 | |||||||
Other Income (Expense), net | 4,638,986 | 2.6 | 8,114,071 | 3.8 | |||||||
Net Income | $ | 6,371,299 | 3.5 | $ | 29,398,824 | 13.8 | |||||
Revenues. Our total revenue was lower for our 2018 fiscal year compared to the same period of 2017, primarily due to decreases in the average price we received for ethanol and corn oil sales. We produced less ethanol, dried distiller grains and corn oil during our 2018 fiscal year compared to the same period of 2017. For our 2018 fiscal year, ethanol sales accounted for
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approximately 79% of our total revenue, distiller grains sales accounted for approximately 17% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our 2017 fiscal year, ethanol sales accounted for approximately 84% of our total revenue, distiller grains sales accounted for approximately 12% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue.
The average price we received per gallon of ethanol we sold was approximately 11% lower for our 2018 fiscal year compared to the same period of 2017. Management attributes this decrease in the average price we received for our ethanol to higher ethanol supplies and lower demand. Uncertainty existed throughout our 2018 fiscal year related to whether the EPA would grant additional Small Refiner Exemption Waivers (SRE) as part of the Renewable Fuels Standard (RFS) for 2018.
We produced approximately 8% less gallons and sold approximately 10% less gallons of ethanol during our 2018 fiscal year compared to the same period of 2017 due to decreased ethanol production stemming from reduced crush margins and plant production issues experienced during our third fiscal quarter of 2018. Our corn to ethanol conversion rate was similar in 2018 and 2017. Management anticipates that ethanol production will be more steady during our 2019 fiscal year compared to our 2018 fiscal year, but due to negative margins, we will likely have similar overall production rates in 2019 compared to production rates of 2018. In May 2018, our production was impacted by damage we experienced to our distillation columns following our spring shutdown. As a result of this loss, we filed a claim for business interruption insurance due to the fact that our operations were interrupted for approximately four weeks. In October 2018 we settled this insurance claim for approximately $3 million, of which approximately $1.6 million was related to our business interruption claim. We received the settlement funds in November 2018.
If ethanol exports are reduced in the future or if additional SREs are issued, it may lead to excess ethanol supply in the United States which could negatively impact ethanol prices. Management anticipates that ethanol prices will decrease during our 2019 fiscal year as a result of the 2018 ethanol blending rate being lower than the RFS as a result of the SRE waivers that have been issued during prior years and may be issued in 2019.
During our 2018 fiscal year, we experienced combined realized and unrealized gains on our ethanol derivatives of approximately $2,000 which increased our revenue. By comparison, we experienced combined realized and unrealized gains on our ethanol derivative instruments of approximately $32,000 during our 2017 fiscal year which increased our revenue.
The average price per ton we received for our dried distiller grains was approximately 25% more for our 2018 fiscal year compared to the same period of 2017, and the average price per ton we received for our modified/wet distiller grains was approximately 25% more for our 2018 fiscal year compared to the same period of 2017. Management attributes these price increases with strong global protein markets, specifically in soybean meal, and increasing domestic livestock production during the 2018 period. Since distiller grains are primarily used as a feed substitute for corn and soybean meal, when soybean or corn prices increase and the supply of these competing products decrease, it positively impacts distiller grains demand and prices. Management anticipates that global corn and soybean prices and demand will remain relatively stable during our 2019 fiscal year due to the size of the 2018 corn harvest and relatively stable corn demand. However, the area directly around the production facility experienced less than average yields during the 2018 harvest which may increase local demand and price. As a result, management anticipates global distiller grains prices will remain steady during our 2019 fiscal year but local prices may be higher.
Distiller grains prices have been impacted during our recent fiscal years as a result of Chinese trade policies which impacted distiller grains. In 2017, China implemented final tariffs on United States distiller grains which essentially closed the Chinese markets for United States producers. Management believes that this trade dispute has negatively impacted our profitability which could continue during our 2019 fiscal year. In addition, trade negotiations and tariffs continue to affect global supply and demand of both corn and distiller grains. If there are significant changes in the policies, it could have a material impact on both demand and commodity pricing.
We sold approximately 10% less total tons of distiller grains during our 2018 fiscal year compared to the same period of 2017 due to decreased ethanol production. We also increased the amount of corn oil we were extracting from our distiller grains during our 2018 fiscal year which somewhat attributed to reducing the total tons of distiller grains we had available for sale. Management anticipates relatively stable distiller grains production during our 2019 fiscal year as we anticipate a similar amount of ethanol production during our 2019 fiscal year and continued plant efficiencies.
The average price we received for our corn oil was approximately 13% less during our 2018 fiscal year compared to the same period of 2017. This decrease in corn oil prices occurred due to an increase in corn oil supply. Management believes that an increase in total corn oil supply outpaced corn oil demand. Corn oil is used primarily as animal feed, for certain industrial uses and for biodiesel production.
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We sold approximately 6% fewer pounds of corn oil during our 2018 fiscal year compared to the same period of 2017 due to a decrease in ethanol production, partially offset by a 1% increase in the amount of corn oil we extracted from a bushel of corn for the 2018 period. Management anticipates a similar amount of corn oil sales during our 2019 fiscal year.
Cost of Goods Sold. Our cost of goods sold was lower for our 2018 fiscal year compared to the same period of 2017 due to lower corn and natural gas consumption driven by decreased ethanol production. Our average cost per bushel of corn before derivative activities was similar during our 2018 fiscal year compared to the same period of 2017. Corn prices have remained steady following the end of our 2018 fiscal year due to a large national corn crop which was harvested in the fall of 2018; however, the local harvest produced corn yields less than historical averages which may put additional pressure on the price we have to pay for corn. Management anticipates that global corn supplies will remain favorable during our 2019 fiscal year with tighter local supplies. These prices could be impacted by the amount of corn which is planted during 2019 which could result in higher corn prices later in our 2019 fiscal year. In addition, continued trade policy and tariffs have impacted the corn market in 2018 and changes in those policies may have a significant impact on the price of corn.
We consumed approximately 8% fewer bushels of corn during our 2018 fiscal year compared to 2017 due primarily to decreased ethanol production. We were able to maintain our corn conversion efficiency during our 2018 fiscal year compared to 2017 which allowed us to produce similar gallons of ethanol per bushel of corn in each year. Management anticipates consistent corn consumption during our 2019 fiscal year compared to our 2018 fiscal year provided that we can maintain positive operating margins that allow us to continue to operate the ethanol plant at capacity.
Despite reduced ethanol production, our natural gas costs increased by approximately 8% during our 2018 fiscal year compared to the same period of 2017 primarily due to significantly higher natural gas costs during the first quarter of our 2018 fiscal year as compared to the same period of 2017. The average price we paid per MMBtu of natural gas was approximately 13% higher during our 2018 fiscal year compared to the same period of 2017. Management attributes this increase in natural gas prices with a colder than average winter in 2018 that included long periods of extremely cold temperatures. Management anticipates that 2019 natural gas prices will be lower than our 2018 fiscal year due to derivative positions that we anticipate will help protect from market and weather volatility during 2019. However, if we experience an exceptionally cold and long winter during our 2019 fiscal year or a significant change in supply, we could see a slight increase in natural gas prices.
Our natural gas consumption during our 2018 fiscal year decreased by approximately 5% compared to our 2017 fiscal year. Management attributes this decrease to less ethanol gallons produced offset by an increase in natural gas usage per gallon of ethanol. We used more natural gas per gallon of ethanol production during our 2018 fiscal year which decreased our gas efficiency by approximately 3% per gallon.
We experienced approximately $2,767,000 of combined realized and unrealized gains for our 2018 fiscal year related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $2,001,000 of combined realized and unrealized gains for our 2017 fiscal year related to our corn and natural gas derivative instruments which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Operating Expenses. Our operating expenses were lower during our 2018 fiscal year compared to the same period of 2017 primarily due to less employee bonuses, which are partially based off of net income. Management anticipates that our operating expenses will be comparable during our 2019 fiscal year to our 2018 fiscal year.
Other Income (Expense). Other income (expense) items, including equity in net income of investments, interest and other, were lower for our 2018 fiscal year compared to the same period of 2017 due primarily to a decrease in our portion of the net income generated by our investments. Our investments are in companies in the ethanol industry. One of our investments continued to make distributions in excess of the equity balance recorded by the Company and therefore that excess is recorded as income for our 2018 fiscal year; however, they made less distributions in 2018 than in 2017. We had other expenses during our 2018 fiscal year compared to other income in 2017 due to a decrease in income from marketable securities and investments not recorded on the equity method of accounting. In addition, we wrote off the value of our note receivable due from Golden Renewable Energy, LLC which equaled approximately $599,000 during our 2018 fiscal year. Management anticipates decreased income from our investments during our 2019 fiscal year compared to our 2018 fiscal year due to current market factors.
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Results of Operations
Comparison of the Fiscal Years Ended October 31, 2017 and 2016
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended October 31, 2017 and 2016:
2017 | 2016 | ||||||||||
Statement of Operations Data | Amount | % | Amount | % | |||||||
Revenues | $ | 213,455,567 | 100.0 | $ | 200,697,852 | 100.0 | |||||
Cost of Goods Sold | 188,326,404 | 88.2 | 185,345,104 | 92.4 | |||||||
Gross Profit | 25,129,163 | 11.8 | 15,352,748 | 7.6 | |||||||
Operating Expenses | 3,844,410 | 1.8 | 3,646,121 | 1.8 | |||||||
Operating Income | 21,284,753 | 10.0 | 11,706,627 | 5.8 | |||||||
Other Income (Expense), net | 8,114,071 | 3.8 | 8,686,615 | 4.3 | |||||||
Net Income | $ | 29,398,824 | 13.8 | $ | 20,393,242 | 10.2 | |||||
Revenues. Our total revenue was higher for our 2017 fiscal year compared to the same period of 2016, primarily due to increases in the average price we received for ethanol and corn oil sales. We produced more ethanol and corn oil during our 2017 fiscal year compared to the same period of 2016. For our 2017 fiscal year, ethanol sales accounted for approximately 84% of our total revenue, distiller grains sales accounted for approximately 12% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our 2016 fiscal year, ethanol sales accounted for approximately 81% of our total revenue, distiller grains sales accounted for approximately 15% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue.
The average price we received per gallon of ethanol we sold was approximately 6% higher for our 2017 fiscal year compared to the same period of 2016. Management attributes this increase in the average price we received for our ethanol to higher gasoline and higher export demand. In addition, uncertainty existed throughout our 2016 fiscal year related to whether the EPA would reduce the ethanol use requirement in the RFS for 2017. This negative impact was especially pronounced due to low gasoline prices in the first half of our 2016 fiscal year until the EPA announced the ethanol use requirement for 2017 in the fall of 2016.
We produced approximately 3% more gallons and sold approximately 4% more gallons of ethanol during our 2017 fiscal year compared to the same period of 2016 due to increased ethanol production stemming from plant improvement projects implemented during the 2017 fiscal year that targeted plant efficiency improvements. In addition, we had a 1% increase in our corn to ethanol conversion rate which allowed us to produce more gallons of ethanol with the same amount of corn.
During our 2017 fiscal year, we experienced combined realized and unrealized gain on our ethanol derivatives of approximately $32,000 which increased our revenue. By comparison, we experienced combined realized and unrealized loss on our ethanol derivative instruments of approximately $83,000 during our 2016 fiscal year which decreased our revenue.
The average price per ton we received for our dried distiller grains was approximately 15% less for our 2017 fiscal year compared to the same period of 2016, and the average price per ton we received for our modified/wet distiller grains was approximately 36% less for our 2017 fiscal year compared to the same period of 2016. Management attributes these price decreases with lower corn and soybean prices and increased corn and soybean supplies during the 2017 period.
Distiller grains prices were negatively impacted during our recent fiscal years as a result of Chinese trade policies which impacted distiller grains. In 2017, China implemented final tariffs on U.S. distiller grains which essentially closed the Chinese markets for U.S. producers. Management believes that this trade dispute negatively impacted our profitability.
We sold approximately 1% more total tons of distiller grains during our 2017 fiscal year compared to the same period of 2016 due to increased ethanol production offset by efficiencies of converting corn into ethanol which leads to less co-products such as distiller grains. We also increased the amount of corn oil we were extracting from our distiller grains during our 2017 fiscal year which somewhat attributed to reducing the total tons of distiller grains we had available for sale.
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The average price we received for our corn oil was approximately 6% more during our 2017 fiscal year compared to the same period of 2016. This increase in corn oil prices occurred despite an increase in corn oil supply. Management believes that an increase in total corn oil demand, from increased biodiesel production, offset the increase in the market corn oil supply.
We sold approximately 5% more pounds of corn oil during our 2017 fiscal year compared to the same period of 2016 primarily due to increased total production at the ethanol plant along with an increase in the amount of corn oil we separated from each pound of distiller grains during the 2017 period. The production process used during our 2017 fiscal year was able to extract more corn oil from the corn than during our 2016 fiscal year.
Cost of Goods Sold. Our cost of goods sold was higher for our 2017 fiscal year compared to the same period of 2016 due to more corn and natural gas costs driven by increased ethanol production. Our average cost per bushel of corn was approximately 3% less during our 2017 fiscal year compared to the same period of 2016. This decrease in our cost per bushel of corn was primarily related to lower market corn prices due to increased market corn supplies and relatively similar corn demand.
We consumed approximately 1% more bushels of corn during our 2017 fiscal year compared to 2016 due primarily to increased ethanol production. We were able to improve our corn conversion efficiency slightly during our 2017 fiscal year compared to 2016 which allowed us to produce more ethanol per bushel of corn.
Our natural gas costs increased by approximately 20% during our 2017 fiscal year compared to the same period of 2016 primarily due to significantly higher natural gas costs during our 2017 fiscal year as compared to the same period of 2016. The average price we paid per MMBtu of natural gas was approximately 20% higher during our 2017 fiscal year compared to the same period of 2016. Management attributes this increase in natural gas prices with higher commodity and energy prices during the 2017 period as well as growing demand for natural gas.
Our natural gas consumption during our 2017 fiscal year was comparable to our 2016 fiscal year. Management attributes this consistency, despite the increase in production, to improvement in plant efficiencies when it comes to natural gas consumption. Our natural gas efficiency during our 2017 fiscal year increased by 3% per gallon of ethanol production.
We experienced approximately $2,001,000 of combined realized and unrealized gains for our 2017 fiscal year related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $4,128,000 of combined realized and unrealized gains for our 2016 fiscal year related to our corn and natural gas derivative instruments which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Operating Expenses. Our operating expenses were higher during our 2017 fiscal year compared to the same period of 2016 primarily due to more property tax and employee bonuses, which are partially based off of net income. The increase in our property taxes was due to a reduction in the property tax rebate we received from Cerro Gordo County. We received a tax reduction as part of an incentive package we received when the plant was being constructed. Partially offsetting these increases, legal expenses were lower during our 2017 fiscal year compared to the same period of 2016. This was due to the antidumping and countervailing duties claims that we were defending during our 2016 period. In addition, accounting expenses were also lower during our 2017 fiscal year due to a significant tax project that took place during our 2016 fiscal year.
Other Income (Expense). Other income (expense) items, including equity in net income of investments, interest and other, were slightly lower for our 2017 fiscal year compared to the same period of 2016 due to a decrease in our portion of the net income generated by our investments. Our investments are in companies in the ethanol industry. One of our investments continued to make distributions in excess of the equity balance recorded by the Company and therefore that excess is recorded as income for our 2017 fiscal year; however, they made less distributions in 2017 than in 2016. We had more other income during our 2017 fiscal year compared to 2016 due to an increase in income from marketable securities and investments not recorded on the equity method of accounting.
Changes in Financial Condition for the Fiscal Years Ended October 31, 2018 and 2017
Current Assets. We had approximately $9.3 million in cash and equivalents at October 31, 2018 compared to $17.5 million in cash and equivalents at October 31, 2017. In addition, at October 31, 2018 we had approximately $10.6 million in marketable securities associated with short-term investments we purchased during our recent fiscal years. This compares to approximately $22.3 million of marketable securities at October 31, 2017. We had less accounts receivable at October 31, 2018 compared to October 31, 2017 which correlates to more gallons of ethanol in ending inventory on October 31, 2018 compared to
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October 31, 2017. The increase in other receivables as of October 31, 2018 was from a receivable on an insurance claim recovery of approximately $3.0 million.
Property and Equipment. The net value of our property and equipment was higher at October 31, 2018 compared to October 31, 2017 due to regular depreciation offset by approximately $18.5 million of capital expenditures. Plant improvements during our 2018 fiscal year primarily included activities in connection with our plant expansion including a new slurry system, warehouse, process wells and fermentors.
Other Assets. Our investments and other assets were slightly higher at October 31, 2018 compared to October 31, 2017 due mainly to fewer distributions received from investments compared to net income generated by investments during the 2018 fiscal year which increases the asset balance.
Current Liabilities. Our accounts payable balance was slightly higher at October 31, 2018 compared to October 31, 2017 due primarily to an increase in our payables for construction in process at October 31, 2018. Our accrued expenses were lower at October 31, 2018 compared to October 31, 2017 due to a decrease in accrued bonuses for employees and management which are partially based on net income of the Company.
Long-term Liabilities. Our deferred compensation was higher at October 31, 2018 compared to October 31, 2017 due to higher amounts of deferral of the management bonus that was awarded during our 2017 fiscal year, but paid in our 2018 fiscal year.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months. However, additional funds may be necessary to fund our plant expansion project or if the current negative margin environment continues for an extended period of time. As of October 31, 2018, we had $10 million available pursuant to our revolving term loan. In addition, we had approximately $9.3 million in cash and equivalents and approximately $10.6 million in short-term marketable securities at October 31, 2018. Following the end of our 2018 fiscal year, we issued a distribution to our members in the amount of $4,968,250 which used cash after the end of our 2018 fiscal year.
We are in the process of expanding the ethanol plant by approximately 30 million gallons per year. We have entered into material agreements related to the expansion, totaling approximately $18 million, and we anticipate the project will cost approximately $34 million, some of which we expect to pay through operating income. However, we may secure additional debt financing in the future to pay a portion of the costs associated with the project especially if the current market environment continues to be at negative levels. Also, management continually evaluates conditions in the ethanol industry and explores opportunities to improve the efficiency and profitability of our operations which may require additional capital expenditures.
Other than the debt we anticipate incurring for our plant expansion project, we do not anticipate securing any additional equity or debt financing for working capital in the next 12 months. However, we are currently experiencing unfavorable operating conditions and should these conditions last for an extended period of time, we may have to secure additional sources of capital.
The following table shows our cash flows for the fiscal years ended October 31, 2018 and 2017:
Fiscal Year Ended October 31 | |||||||
2018 | 2017 | ||||||
Net cash provided by operating activities | $ | 13,424,754 | $ | 37,544,066 | |||
Net cash (used in) investing activities | (6,886,716 | ) | (11,831,745 | ) | |||
Net cash (used in) financing activities | (14,733,420 | ) | (24,726,324 | ) | |||
Cash Flow From Operations
Our cash flows from operations for our 2018 fiscal year were lower compared to our 2017 fiscal year due primarily to decreased net income during the 2018 period. We also received more cash from our change in accounts receivable and less cash from our change in inventory during our 2018 fiscal year compared to our 2017 fiscal year.
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Cash Flow From Investing Activities
We used less cash for investing activities during our 2018 fiscal year compared to the same period of 2017 primarily due to an increase in capital expenditures offset by an increase in net proceeds from purchases and sales of marketable securities. Our capital expenditures during our 2018 fiscal year were primarily for plant improvements associated with a new slurry system, warehouse, process wells and fermentors. During our 2017 fiscal year, we used cash primarily for plant improvements associated with new cooling towers and co-gen facility. In addition, during our 2017 fiscal year, we received insurance proceeds from an involuntary asset conversion.
Cash Flow From Financing Activities.
We used less cash for financing activities during our 2018 fiscal year as compared to our 2017 fiscal year primarily due to smaller distributions paid to our members during our 2018 fiscal year.
The following table shows our cash flows for the fiscal years ended October 31, 2017 and 2016:
Fiscal Year Ended October 31 | |||||||
2017 | 2016 | ||||||
Net cash provided by operating activities | $ | 37,544,066 | $ | 29,397,743 | |||
Net cash (used in) investing activities | (11,831,745 | ) | (15,399,730 | ) | |||
Net cash (used in) financing activities | (24,726,324 | ) | (18,549,852 | ) | |||
Cash Flow From Operations
Our cash flows from operations for our 2017 fiscal year were higher compared to our 2016 fiscal year due primarily to increased net income during the 2017 period. We also received significantly less cash from our investments during our 2017 fiscal year compared to 2016 and had changes in working capital components.
Cash Flow From Investing Activities
We used less cash for investing activities during our 2017 fiscal year compared to the same period of 2016 primarily due to a decrease in capital expenditures offset by an increase in net purchases of marketable securities. Our capital expenditures during our 2017 fiscal year were primarily for plant improvements associated with new cooling towers and the co-generation system. During our 2016 fiscal year, we used cash primarily for plant improvements associated with new cooling towers and the water treatment building. In addition, during our 2017 fiscal year, we received insurance proceeds from an involuntary asset conversion.
Cash Flow From Financing Activities.
We used more cash for financing activities during our 2017 fiscal year as compared to our 2016 fiscal year primarily due to larger distributions paid to our members during our 2017 fiscal year.
Short-Term and Long-Term Debt Sources
We have a credit facility with Farm Credit with an initial availability of $35 million, which currently has availability of $10 million. In exchange for this credit facility, we executed a mortgage in favor of Farm Credit covering all of our real property and granted Farm Credit a security interest in all of our equipment and other assets. In the event we default on our loans with Farm Credit, Farm Credit may foreclose on our assets, including both our real property and our machinery and equipment. During our 2016 fiscal year, we reduced the amount available to us pursuant to our line of credit in order to reduce the fees associated with the line of credit. In addition, during our 2016 fiscal year we executed an amendment to our credit agreements which allows us to distribute up to 100% of our prior year's net income provided we remain in compliance with our loan covenants and we maintain working capital of at least $15 million following the distribution. Pursuant to the amendment, our distributions are not limited by our prior year's net income if we are in compliance with our loan covenants and we maintain working capital of at least $20 million following any distribution we make.
25
Variable Line of Credit
We have a long-term revolving line of credit. During our 2018 fiscal year, interest on this loan accrued at 3.15% above the One-Month London Interbank Offered Rate (LIBOR). The interest rate is subject to weekly adjustment. We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. We have $10 million available pursuant to this long-term revolving line of credit until it matures on February 1, 2020. We agreed to pay an annual fee of 0.5% of the unused portion of this loan. As of October 31, 2018, we had no outstanding balance on this loan with an accrued interest rate of 5.46% per year. As of October 31, 2018, we had $10 million available to be drawn on this loan.
Administrative Agency Agreement
As part of the Farm Credit loan closing, we entered into an Administrative Agency Agreement with CoBank, ACP ("CoBank"). CoBank purchased a participation interest in the Farm Credit loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for Farm Credit with respect to our loans. We agreed to pay CoBank an annual fee of $5,000 as the agent for Farm Credit.
Covenants
Our credit agreements with Farm Credit are subject to numerous covenants including requiring us to maintain various financial ratios. As of October 31, 2018, we were in compliance with all of our loan covenants with Farm Credit. Based on current management projections, we anticipate that we will be in compliance with our loan covenants for the next 12 months and beyond.
Grants and Government Programs
In December 2006, we received the first payment from our semi-annual economic development grants equal to the amount of the tax assessments imposed on our ethanol plant by Cerro Gordo County, the county in which our ethanol plant is located. Based on our 2009 assessment, the total amount of these grants is expected to be approximately $9 million, which will be paid semi-annually over a 10-year period with the final payment being made in 2019.
Contractual Cash Obligations
In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following table provides information regarding our consolidated contractual obligations and approximate commitments as of October 31, 2018:
Payment Due By Period | ||||||||||||||||||||
Contractual Cash Obligations | Total | Less than One Year | One to Three Years | Three to Five Years | After Five Years | |||||||||||||||
Operating Lease Obligations | $ | 3,418,000 | $ | 1,217,000 | $ | 1,687,000 | $ | 514,000 | $ | — | ||||||||||
Purchase Obligations | 13,738,000 | 13,738,000 | — | — | — | |||||||||||||||
Total Contractual Cash Obligations | $ | 17,156,000 | $ | 14,955,000 | $ | 1,687,000 | $ | 514,000 | $ | — | ||||||||||
Critical Accounting Policies
Management uses estimates and assumptions in preparing our financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Revenue Recognition
Revenue from the sale of our products is recognized at the time title to the goods and all risks of ownership transfer to the customers. The time of transfer is defined in the specific sales agreement; however, it generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between us and our customers. Interest income is recognized as earned.
26
Shipping costs incurred by us in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to us from our marketer. Shipping costs incurred by us in the sale of distiller grain products are included in cost of goods sold.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
We evaluate contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.
We enter into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We occasionally also enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. As part of our risk management process, we use futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage our risk related to pricing of inventories. All of our derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments.
Investments
We have less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which our share of net income is recognized as income in our statement of operations and added to the investment account. Distributions or dividends received in excess of the carrying value are recognized as income in our statement of operations. The investments are evaluated for indications of impairment on a regular basis, a loss would be recognized when the fair value is determined to be less than the carrying value.
Off-Balance Sheet Arrangements.
We currently have no off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to interest rate risk as we had no amount outstanding on our variable interest loan at the end of our 2018 fiscal year and we have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
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As of October 31, 2018, we had price protection in place for approximately 13% of our anticipated corn needs, approximately 23% of our natural gas needs and 1% of our ethanol sales for the next 12 months. We also had price protection in place for approximately 19% of our anticipated natural gas needs for a period from 13-24 months from October 31, 2018.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of October 31, 2018, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from October 31, 2018. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Natural Gas | 754,000 | MMBTU | 10% | $ | 224,000 | ||||||
Ethanol | 119,160,000 | Gallons | 10% | 13,846,000 | |||||||
Corn | 34,640,000 | Bushels | 10% | 11,584,000 | |||||||
For comparison purposes, our sensitivity analysis for our 2017 fiscal year is set forth below.
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Natural Gas | 2,892,000 | MMBTU | 10% | $ | 839,000 | ||||||
Ethanol | 120,000,000 | Gallons | 10% | 16,500,000 | |||||||
Corn | 34,215,420 | Bushels | 10% | 11,226,000 | |||||||
Liability Risk
We participate, along with other plants in the industry, in a group captive insurance company (Captive). The Captive insures losses related to workman's compensation, commercial property and general liability. The Captive reinsures catastrophic losses for all participants, including the Company, in excess of predetermined amounts. Our premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. These premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed over the amount in the collateral fund.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Members and the Board of Directors of Golden Grain Energy, LLC.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Golden Grain Energy, LLC (the Company) as of October 31, 2018 and 2017, the related statements of operations, changes in members’ equity and cash
flows for each of the three years in the period ended October 31, 2018, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2006.
Des Moines, Iowa
December 21, 2018
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GOLDEN GRAIN ENERGY, LLC
Balance Sheets
ASSETS | October 31, 2018 | October 31, 2017 | ||||||
Current Assets | ||||||||
Cash and equivalents | $ | 9,322,805 | $ | 17,518,187 | ||||
Marketable securities | 10,559,242 | 22,311,983 | ||||||
Accounts receivable | 1,085,581 | 5,940,197 | ||||||
Other receivables | 3,784,114 | 674,150 | ||||||
Derivative instruments | 804,952 | 764,713 | ||||||
Inventory | 6,876,956 | 4,304,796 | ||||||
Prepaid expenses and other | 2,730,444 | 2,474,564 | ||||||
Total current assets | 35,164,094 | 53,988,590 | ||||||
Property and Equipment | ||||||||
Land and land improvements | 12,961,713 | 12,961,713 | ||||||
Building and grounds | 31,319,540 | 28,617,796 | ||||||
Grain handling equipment | 16,046,157 | 15,833,823 | ||||||
Office equipment | 275,086 | 213,207 | ||||||
Plant and process equipment | 108,786,485 | 104,222,168 | ||||||
Construction in progress | 12,887,773 | 1,562,807 | ||||||
182,276,754 | 163,411,514 | |||||||
Less accumulated depreciation | 108,397,948 | 99,934,025 | ||||||
Net property and equipment | 73,878,806 | 63,477,489 | ||||||
Other Assets | ||||||||
Investments | 25,719,513 | 25,009,140 | ||||||
Other assets | 509,866 | 1,354,196 | ||||||
Total other assets | 26,229,379 | 26,363,336 | ||||||
Total Assets | $ | 135,272,279 | $ | 143,829,415 | ||||
Notes to Financial Statements are an integral part of this Statement.
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GOLDEN GRAIN ENERGY, LLC
Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | October 31, 2018 | October 31, 2017 | ||||||
Current Liabilities | ||||||||
Accounts payable | $ | 4,465,376 | $ | 4,192,944 | ||||
Accrued expenses | 2,801,329 | 3,429,899 | ||||||
Other current liabilities | 367,365 | 93,443 | ||||||
Total current liabilities | 7,634,070 | 7,716,286 | ||||||
Long-term Liabilities-Deferred compensation | 536,414 | 477,883 | ||||||
Commitments and Contingencies | ||||||||
Members' Equity (19,873,000 units issued and outstanding) | 127,101,795 | 135,635,246 | ||||||
Total Liabilities and Members’ Equity | $ | 135,272,279 | $ | 143,829,415 | ||||
Notes to Financial Statements are an integral part of this Statement.
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GOLDEN GRAIN ENERGY, LLC
Statements of Operations
Year Ended | Year Ended | Year Ended | |||||||||
October 31, 2018 | October 31, 2017 | October 31, 2016 | |||||||||
Revenues | $ | 179,501,244 | $ | 213,455,567 | $ | 200,697,852 | |||||
Cost of Goods Sold | 175,745,659 | 188,326,404 | 185,345,104 | ||||||||
Insurance claim recoveries, net (see note 14) | 1,600,000 | — | — | ||||||||
Gross Profit | 5,355,585 | 25,129,163 | 15,352,748 | ||||||||
Operating Expenses | 3,623,272 | 3,844,410 | 3,646,121 | ||||||||
Operating Income | 1,732,313 | 21,284,753 | 11,706,627 | ||||||||
Other Income (Expense) | |||||||||||
Other income (expense) | (643,461 | ) | 655,000 | 426,380 | |||||||
Interest income (expense) | 18,672 | (18,638 | ) | (5,192 | ) | ||||||
Equity in net income of investments | 5,263,775 | 7,477,709 | 8,265,427 | ||||||||
Total Other Income | 4,638,986 | 8,114,071 | 8,686,615 | ||||||||
Net Income | $ | 6,371,299 | $ | 29,398,824 | $ | 20,393,242 | |||||
Basic & diluted net income per unit | $ | 0.32 | $ | 1.48 | $ | 1.03 | |||||
Weighted average units outstanding for the calculation of basic & diluted net income per unit | 19,873,000 | 19,873,000 | 19,873,000 | ||||||||
Distributions Per Unit | $ | 0.75 | $ | 1.25 | $ | 0.95 | |||||
Notes to Financial Statements are an integral part of this Statement.
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GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows
Year Ended | Year Ended | Year Ended | |||||||||
October 31, 2018 | October 31, 2017 | October 31, 2016 | |||||||||
Cash Flows from Operating Activities | |||||||||||
Net income | $ | 6,371,299 | $ | 29,398,824 | $ | 20,393,242 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 9,092,277 | 9,119,688 | 8,843,533 | ||||||||
Unrealized (gain) loss on risk management & marketable securities | 71,059 | (465,112 | ) | 64,851 | |||||||
Loss on disposal of assets | 3,140 | — | — | ||||||||
Amortization of deferred revenue | (93,443 | ) | (163,884 | ) | (51,229 | ) | |||||
Cancelation of note receivable | 599,421 | — | — | ||||||||
Change in accretion of interest on grant & note receivable | (188,138 | ) | 18,979 | (194,156 | ) | ||||||
Distributions (earnings) in excess of earnings (distributions) from investments | (710,373 | ) | (549,280 | ) | 2,859,583 | ||||||
Gain on insurance proceeds from involuntary conversion & business interruption | (3,000,000 | ) | (489,852 | ) | — | ||||||
Deferred compensation expense | 58,531 | 122,260 | 76,825 | ||||||||
Change in assets and liabilities | |||||||||||
Accounts receivable | 4,854,616 | 261,907 | (3,484,512 | ) | |||||||
Inventory | (2,572,160 | ) | 2,600,888 | (39,179 | ) | ||||||
Prepaid expenses and other | (189,669 | ) | (990,699 | ) | 16,178 | ||||||
Accounts payable | (243,236 | ) | (1,777,738 | ) | 848,661 | ||||||
Accrued expenses | (628,570 | ) | 458,085 | 63,946 | |||||||
Net cash provided by operating activities | 13,424,754 | 37,544,066 | 29,397,743 | ||||||||
Cash Flows from Investing Activities | |||||||||||
Capital expenditures | (18,538,159 | ) | (6,154,333 | ) | (13,154,853 | ) | |||||
Proceeds from sale of equipment | 10,000 | — | — | ||||||||
Insurance proceeds from involuntary conversion | — | 648,752 | — | ||||||||
Purchase of marketable securities | (34,645 | ) | (9,061,164 | ) | (13,750,000 | ) | |||||
Proceeds from sale of marketable securities | 11,676,088 | 2,750,000 | 11,505,123 | ||||||||
Purchase of investments | — | (15,000 | ) | — | |||||||
Net cash (used in) investing activities | (6,886,716 | ) | (11,831,745 | ) | (15,399,730 | ) | |||||
Cash Flows from Financing Activities | |||||||||||
Distributions to members | (14,904,750 | ) | (24,841,250 | ) | (18,879,350 | ) | |||||
Refund on utility right costs | — | 30,668 | — | ||||||||
Payments received on grant receivable | 171,330 | 84,258 | 329,498 | ||||||||
Net cash (used in) financing activities | (14,733,420 | ) | (24,726,324 | ) | (18,549,852 | ) | |||||
Net Increase (Decrease) in Cash and Equivalents | (8,195,382 | ) | 985,997 | (4,551,839 | ) | ||||||
Cash and Equivalents – Beginning of Period | 17,518,187 | 16,532,190 | 21,084,029 | ||||||||
Cash and Equivalents – End of Period | $ | 9,322,805 | $ | 17,518,187 | $ | 16,532,190 | |||||
Supplemental Cash Flow Information | |||||||||||
Interest paid | $ | 56,609 | $ | 51,157 | $ | 54,787 | |||||
Supplemental Disclosure of Noncash Operating & Investing Activities | |||||||||||
Accounts Payable related to construction in process | $ | 1,304,936 | $ | 421,903 | $ | 552,691 | |||||
Notes to Financial Statements are an integral part of this Statement.
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GOLDEN GRAIN ENERGY, LLC
Statements of Changes in Members' Equity
For the years ended October 31, 2018, 2017 and 2016
Balance - October 31, 2015 | $ | 129,563,780 | |
Distribution for 19,873,000 Class A and Class B units, Dec 2015 & May 2016, $0.95 per unit | (18,879,350 | ) | |
Net Income | 20,393,242 | ||
Balance - October 31, 2016 | 131,077,672 | ||
Distribution for 19,873,000 Class A and Class B units, November 2016 & May 2017, $1.25 per unit | (24,841,250 | ) | |
Net Income | 29,398,824 | ||
Balance - October 31, 2017 | 135,635,246 | ||
Distribution for 19,873,000 Class A and Class B units, November 2017 $0.75 per unit | (14,904,750 | ) | |
Net Income | 6,371,299 | ||
Balance - October 31, 2018 | $ | 127,101,795 | |
Notes to Financial Statements are an integral part of this Statement.
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Golden Grain Energy, LLC ("Golden Grain Energy" and the "Company") is an approximately 120 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol, distiller grains with solubles and corn oil primarily in the continental United States. The Company also holds several investments in various companies that focus on ethanol production, marketing and/or logistics.
Organization
Golden Grain Energy is organized as an Iowa limited liability company. The members' liability is limited as specified in Golden Grain Energy's operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Cash and Equivalents
The Company's cash balances are maintained in bank depositories and regularly exceed federally insured limits. The Company has not experienced any losses in connection with these balances. Also included in cash and equivalents are highly liquid investments, that are readily convertible into known amounts of cash, which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
Marketable Securities
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short term or long term on the Balance Sheet, based on contractual maturity date and are stated at cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings.
Marketable securities consisted of certificates of deposits with original maturities of greater than three months and mutual funds. Certificates of deposit are considered held-to-maturity securities, which are measured at cost. Mutual funds are considered trading securities which are measured at fair value using prices obtained from pricing services. Any unrealized or realized gains and losses on the trading securities are recorded as part of other income.
Marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds and certificates of deposit all with maturities of less than one year. For the periods ended October 31, 2018 and 2017, there was no other-than-temporary impairment recognized. The Company recorded interest, dividends and net realized and unrealized gains (losses) from these investments as part of other income as follows:
Year Ended October 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Net earnings (loss) on marketable securities | $ | (135,000 | ) | $ | 183,000 | $ | 298,000 | |||||
Marketable Securities | ||||||||||||
As of | Cost | Fair Market Value | Certificates of Deposit | |||||||||
October 31, 2018 | $ | 10,857,000 | $ | 10,559,000 | $ | — | ||||||
October 31, 2017 | 22,411,000 | 22,312,000 | 1,250,000 | |||||||||
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Accounts Receivable
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.
Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. Distributions or dividends received in excess of the carrying value are recognized as income in the statement of operations. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
The fiscal years of Renewable Products Marketing Group, LLC (RPMG) and Guardian Energy Janesville, LLC end on September 30 and the fiscal years of Absolute Energy, LLC, Homeland Energy Solutions, LLC and Lawrenceville Tank, LLC, end on December 31. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company's statement of operations for the period ended October 31, 2018, for all companies, is based on the investee's results for the twelve month period ended September 30 of each year.
Note Receivable
The Company carried a note receivable from an unrelated party with a balance of approximately $599,000 as of October 31, 2017, included in other assets. This balance included the original face value plus accrued interest. During 2018, the Company deemed the likelihood of collecting on the note receivable remote and wrote-off the entire balance, which is included in other expense on the statement of operations for the period ended October 31, 2018.
Revenue and Cost Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol, distiller grains and corn oil are recorded based on the net selling price reported to the Company from its marketer. Railcar lease costs incurred by the Company in the sale and shipment of distiller grain products are included in cost of goods sold.
Inventory
Inventories are generally valued at the lower of weighted average cost or net realizable value. 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.
Property & Equipment
Property and equipment are stated at historical cost. Significant additions and betterments are capitalized, while expenditures for maintenance and repairs are charged to operations when incurred. The Company uses the straight-line method of computing depreciation over the estimated useful lives between 3 and 40 years.
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset group may not be recoverable. If circumstances require a long-lived asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset group to the carrying value of the asset group. If the carrying value of the asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Income Taxes
The Company was formed under sections of the federal and state income tax laws which provide that, in lieu of corporate income taxes, the members separately account for their pro rata share of the Company’s items of income, deductions, losses and credits. As a result of this election, no income taxes have been recognized in the accompanying financial statements.
36
Investment in commodities contracts, derivative instruments and hedging activities
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.
The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company occasionally also enters into derivative contracts to hedge its exposure to price risk as it relates to ethanol sales. As part of its risk management process, the Company uses futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage its risk related to pricing of inventories. All of the Company's derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments net of cash due from/to broker.
Net income per unit
Basic and diluted earnings per unit are computed using the weighted-average number of Class A and B units outstanding during the period.
Environmental liabilities
The Company's operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when the Company's liability is probable and the costs can be reasonably estimated. No expense or liability has been recorded as of October 31, 2018, 2017 or 2016 for environmental liabilities.
Incentive Compensation Plan
The Company has an incentive compensation plan for certain employees equal to 1% of net income. Awards pursuant to the incentive compensation plan are paid in cash after the Company's net income is determined for each fiscal year. Awards made pursuant to the plan are immediately vested and paid.
Fair Value
Financial instruments include cash and equivalents, marketable securities, receivables, accounts payable, accrued expenses and derivative instruments. The fair value of marketable securities and derivative financial instruments is based on quoted market prices, as disclosed in Note 8. The fair value, determined using level 3 inputs, of all other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the 2018 fiscal year, ethanol sales accounted for approximately 79% of total revenue, distiller grains sales accounted for approximately 17% of total revenue and corn oil sales accounted for approximately 4% of total revenue while corn costs averaged approximately 76% of cost of goods sold.
The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs,
37
and unleaded gasoline and the petroleum markets with ethanol selling, in general, for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
Recent Accounting Pronouncements
In February 2016, FASB issued ASU No. 2016-02 "Leases" ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted cash flow basis; and (2) a "right of use" asset, which is an asset that represents the lessee's right to use the specified asset for the lease term. The Company is currently evaluating the impact of its pending adoption of the new standard on the financial statements but expects that upon adoption of this accounting standard, right of use assets and lease obligations recognized on the balance sheet will be material.
In August 2018, FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). ASU 2018-13 changes some of the disclosure requirements related to fair value measurements related to the Level 1, 2 and 3 investments. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and for interim periods within that fiscal year. The Company is currently evaluating the impact of its pending adoption of the new standard on the financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the revenue recognition requirements in "Accounting Standard Codification 605 - Revenue Recognition" and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within that fiscal year. Although early application as of the original date is permitted, the Company will adopt ASU No. 2014-09 and the related ASUs on November 1, 2018. The Company has evaluated the effect of this standard as well as its existing contracts with customers and it plans to use the modified retrospective method, if material. Under the modified retrospective method, the Company will present revenue under the new method required by ASU No. 2014-09 beginning in our 2019 fiscal year. The Company expects to have enhanced disclosures, but does not expect this standard to have a material financial impact on the Company's financial statements.
Reclassification
Certain items in the balance sheet as of October 31, 2017 and statements of cash flows for the years ended October 31, 2017 and 2016 have been reclassified to conform to the presentation as of and for the year ended October 31, 2018. The changes do not affect net liabilities or net cash flow but were changed to agree with the classifications used in the October 31, 2018 financial statements.
2. INVENTORY
Inventory consisted of the following as of October 31, 2018 and October 31, 2017:
October 31, 2018 | October 31, 2017 | |||||||
Raw Materials | $ | 2,859,081 | $ | 2,657,993 | ||||
Work in Process | 1,232,248 | 1,126,913 | ||||||
Finished Goods | 2,785,627 | 519,890 | ||||||
Totals | $ | 6,876,956 | $ | 4,304,796 | ||||
3. BANK FINANCING
The Company has entered into a master loan agreement with Farm Credit Services of America (FLCA) which includes revolving term loans with original maximum borrowings of $35 million and which currently has availability of $10 million and matures
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on February 1, 2020. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (5.46% as of October 31, 2018). The borrowings are secured by substantially all the assets of the Company. The credit agreements are subject to covenants, including requiring the Company to maintain various financial ratios, as well as certain distribution limitations. As of October 31, 2018, the Company was in compliance with all of the loan covenants. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of any outstanding principal balances on the loans and/or imposition of fees and penalties. As of October 31, 2018 and 2017, the Company had no outstanding borrowings.
4. RELATED PARTY TRANSACTIONS
The Company purchased corn and materials from employees, members of its Board of Directors or Risk Management Committee that own or manage elevators and construction companies (See Note 6). The Company also purchased ingredients from RPMG. Purchases during the fiscal years ended October 31, 2018, 2017 and 2016 totaled approximately $41,478,000, $33,317,000 and $64,318,000, respectively. As of October 31, 2018 and 2017, the amounts owed to related parties was approximately $420,000 and $205,000, respectively (See Note 6).
5. EMPLOYEE BENEFIT PLANS
The Company had a deferred phantom unit compensation plan for certain employees equal to 1% of net income for its fiscal year ended October 31, 2014. Currently, the Company has a cash bonus compensation plan which is paid shortly after the fiscal year in which the cash bonus is earned. During the fiscal years ended October 31, 2018, 2017 and 2016, the Company recorded compensation expense related to the prior deferred phantom unit compensation plan of approximately $59,000, $122,000 and $77,000, respectively. As of October 31, 2018 and 2017, the Company had a liability of approximately $536,000 and $478,000 outstanding as deferred compensation, respectively, and had no additional expense to be recognized as future compensation expense as all units are fully vested as of October 31, 2018.
The Company has a retirement plan which provides retirement savings options for all eligible employees. Employees meeting certain eligibility requirements can participate in the plan. The Company makes a matching contribution based on the participants' eligible wages. The Company made matching contributions of approximately $154,000, $118,000 and $100,000 during the years ended October 31, 2018, 2017 and 2016, respectively.
6. COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Ethanol, Distiller Grains and Corn Oil marketing agreements and major customers
The Company has entered into marketing agreements with RPMG, a marketing company, for the exclusive rights to market, sell and distribute the entire ethanol, distiller grains and corn oil inventory produced by the Company. The marketing fees are presented net in revenues.
Approximate sales and marketing fees related to the agreements in place are as follows:
2018 | 2017 | 2016 | |||||||||
Sales ethanol, distiller grains & corn oil | $ | 180,056,000 | $ | 213,923,000 | $ | 201,243,000 | |||||
Marketing fees | 556,000 | 500,000 | 462,000 | ||||||||
As of | October 31, 2018 | October 31, 2017 | |||||||||
Amount due from RPMG | $ | 1,080,000 | $ | 5,940,000 | |||||||
During 2018 and 2017, the Company entered into multiple construction agreements as part of plans to expand plant capacity. Total commitment under these agreements total approximately $18 million of which approximately $7.3 million is to a related party. The Company has incurred costs related to the expansion project totaling approximately $15 million of which approximately $6.1 million is to a related party. The total expansion project costs are estimated at approximately $34 million. The project is expected to be completed in the winter of 2020 and no other commitments have been executed.
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7. RISK MANAGEMENT
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 financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of contracts related to corn and natural gas are recorded in cost of goods sold and changes in market prices of contracts related to sale of ethanol are recorded in revenues.
The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for periods ended October 31, 2018, 2017 and 2016 and the fair value of derivatives as of October 31, 2018 and 2017:
Statement of Operations Classification | Realized Gain (Loss) | Change in Unrealized Gain (Loss) | Total Gain (Loss) | |||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||
Commodity Contracts for the | Revenue | $ | — | $ | 2,000 | $ | 2,000 | |||||||
fiscal year 2018 | Cost of Goods Sold | 2,659,000 | 108,000 | 2,767,000 | ||||||||||
Total | $ | 2,659,000 | $ | 110,000 | $ | 2,769,000 | ||||||||
Commodity Contracts for the | Revenue | $ | — | $ | 32,000 | $ | 32,000 | |||||||
fiscal year 2017 | Cost of Goods Sold | 1,618,000 | 383,000 | 2,001,000 | ||||||||||
Total | $ | 1,618,000 | $ | 415,000 | $ | 2,033,000 | ||||||||
Commodity Contracts for the | Revenue | $ | (51,000 | ) | $ | (32,000 | ) | $ | (83,000 | ) | ||||
fiscal year 2016 | Cost of Goods Sold | 3,981,000 | 147,000 | 4,128,000 | ||||||||||
Total | $ | 3,930,000 | $ | 115,000 | $ | 4,045,000 | ||||||||
Balance Sheet Classification | October 31, 2018 | October 31, 2017 | ||||||||
Futures and option contracts | ||||||||||
In gain position | $ | 801,000 | $ | 371,000 | ||||||
In loss position | (340,000 | ) | (21,000 | ) | ||||||
Cash held by broker | 344,000 | 415,000 | ||||||||
Current Asset | $ | 805,000 | $ | 765,000 | ||||||
As of October 31, 2018, the Company had the following approximate outstanding purchase and sale commitments, of which approximately $411,000 of the purchase commitments and all of the sale commitments were with related parties. As of October 31, 2018 the Company recognized an impairment on our forward purchase contracts of approximately $394,000. This reduced inventory on the balance sheet and increased cost of good sold on the statement of operations.
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Commitments Through | Amount | |||||
Sale commitments | ||||||
Distiller grains - fixed price | November 2018 | $ | 3,057,000 | |||
Corn Oil - fixed price | December 2018 | 1,410,000 | ||||
Purchase commitments | ||||||
Corn - fixed price | July 2019 | $ | 7,396,000 | |||
Corn - basis contract | December 2018 | 1,734,000 | ||||
Natural gas - fixed price | June 2020 | 3,379,000 | ||||
As of October 31, 2018, the Company has fixed price futures and forward contracts in place for approximately 13% of anticipated corn needs and 1% of ethanol sales with no open positions beyond that point. As of October 31, 2018, the Company has fixed priced futures and forward contracts in place for approximately 23% of its natural gas needs for the next 12 months and approximately 19% of its natural gas needs for the next 24 months with no open positions beyond that point.
As of October 31, 2018, the Company had approximately 108,000 bushels with approximate market value of $360,000 of credit sale corn contracts. As of October 31, 2017, the Company had approximately 295,200 bushels with approximate market value of $915,000 of priced later and deferred payment corn contracts.
8. FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
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.
Marketable Securities: The Company's investments in short-term liquid investments (e.g. mutual funds), are classified within Level 1, carried at fair value based on the quoted market prices.
Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from markets such as the CME and NYMEX. Crush swaps are bundled contracts or combined contracts that include a portion of corn, ethanol and natural gas rolled into a single trading instrument. These contracts are reported at fair value utilizing Level 2 inputs and are based on the various trading activity of the components of each segment of the bundled contract.
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The following table summarizes financial assets and financial liabilities measured at the approximate fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Marketable securities | ||||||||||||||||
Assets, October 31, 2018 | $ | 10,559,000 | $ | 10,559,000 | $ | — | $ | — | ||||||||
Assets, October 31, 2017 | 22,312,000 | 22,312,000 | — | — | ||||||||||||
Derivative financial instruments | ||||||||||||||||
October 31, 2018 | ||||||||||||||||
Assets | $ | 801,000 | $ | 195,000 | $ | 606,000 | $ | — | ||||||||
Liabilities | (340,000 | ) | (22,000 | ) | (318,000 | ) | — | |||||||||
October 31, 2017 | ||||||||||||||||
Assets | $ | 371,000 | $ | 360,000 | $ | 11,000 | $ | — | ||||||||
Liabilities | (21,000 | ) | (1,000 | ) | (20,000 | ) | — | |||||||||
9. INVESTMENTS
Condensed, combined financial information of the Company’s investments in Absolute Energy, Homeland Energy Solutions, Guardian Energy, Lawrenceville Tank and RPMG is as follows (in 000’s).
Balance Sheet | 9/30/2018 | 9/30/2017 | 9/30/2016 | |||||||||
Current Assets | $ | 309,869 | $ | 294,535 | $ | 313,541 | ||||||
Other Assets | 268,900 | 265,004 | 246,702 | |||||||||
Current Liabilities | 199,683 | 170,289 | 175,588 | |||||||||
Long-term Debt | 63,535 | 78,122 | 55,726 | |||||||||
Members’ Equity | 315,550 | 311,128 | 328,928 | |||||||||
Twelve Months Ended | ||||||||||||
Income Statement | 9/30/2018 | 9/30/2017 | 9/30/2016 | |||||||||
Revenue | $ | 771,762 | $ | 746,736 | $ | 731,251 | ||||||
Gross Profit | 78,167 | 98,659 | 83,056 | |||||||||
Net Income | 67,128 | 89,442 | 75,533 | |||||||||
The following table (in 000's) shows the condensed financial information of Guardian Energy, which represents greater than 10% of the Company's net income for the year ended October 31, 2016.
Guardian Energy Condensed Financial Information | ||||||||||||
Balance Sheet | 9/30/2018 | 9/30/2017 | 9/30/2016 | |||||||||
Current Assets | $ | 19,687 | $ | 22,476 | $ | 26,350 | ||||||
Other Assets | 34,259 | 38,095 | 42,264 | |||||||||
Current Liabilities | 21,011 | 15,389 | 17,812 | |||||||||
Long-term Debt | 42,588 | 50,951 | 55,500 | |||||||||
Members’ (Deficit) | (9,653) | (5,769) | (4,698) | |||||||||
Twelve Months Ended | ||||||||||||
Income Statement | 9/30/2018 | 9/30/2017 | 9/30/2016 | |||||||||
Revenue | $ | 234,556 | $ | 236,033 | $ | 229,123 | ||||||
Gross Profit | 26,103 | 32,971 | 30,887 | |||||||||
Net Income | 19,615 | 26,429 | 25,764 | |||||||||
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The following table (in 000's) shows the condensed financial information of Homeland Energy Solutions. The Company's equitable portion of assets of Homeland Energy Solutions is greater than 10% of the Company total assets as of the year ended October 31, 2018.
Homeland Energy Solutions Condensed Financial Information | ||||||||||||
Balance Sheet | 9/30/2018 | 9/30/2017 | 9/30/2016 | |||||||||
Current Assets | $ | 89,707 | $ | 89,142 | $ | 51,430 | ||||||
Other Assets | 139,631 | 138,391 | 85,272 | |||||||||
Current Liabilities | 44,366 | 41,095 | 3,932 | |||||||||
Long-term Debt | 20,947 | 27,000 | 0 | |||||||||
Members’ Equity | 164,025 | 159,438 | 132,770 | |||||||||
Twelve Months Ended | ||||||||||||
Income Statement | 9/30/2018 | 9/30/2017 | 9/30/2016 | |||||||||
Revenue | $ | 300,385 | $ | 271,148 | $ | 264,378 | ||||||
Gross Profit | 25,740 | 35,279 | 27,264 | |||||||||
Net Income | 21,831 | 31,777 | 24,847 | |||||||||
The Company recorded equity in net income of investments of approximately $1,711,000 from Absolute Energy, $1,652,000 from Guardian Energy, $1,772,000 from Homeland Energy Solutions and $129,000 from our other investments for a total of approximately $5,264,000 for the fiscal year ended October 31, 2018. Income for the fiscal years ended October 31, 2017 and 2016 totaled approximately $7,478,000 and $8,265,000, respectively. The Company has undistributed net earnings of investees of approximately $12,361,000 and $11,667,000 as of October 31, 2018 and 2017, respectively.
10. MEMBERS’ EQUITY
The total number of Class A and B units outstanding as of October 31, 2018 and 2017 was 19,873,000. Allocations of profits, losses and distributions as well as voting rights are identical for both Class A and B units except for in the case of disposition of properties in dissolution. In such case, Class B units have preferential treatment in the allocation of any remaining gain.
11. LEASE OBLIGATIONS
The Company has eight leases for equipment with original terms of 2 to 5 years which extend through September 2023. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the lease. Rent expense for operating leases for the years ending October 31, 2018, 2017 and 2016 was approximately $1,407,000, $1,625,000 and $1,945,000, respectively.
At October 31, 2018, the Company had the following approximate minimum rental commitments under non-cancelable operating leases.
2019 | $ | 1,217,000 | |
2020 | 1,012,000 | ||
2021 | 675,000 | ||
2022 | 385,000 | ||
2023 | 129,000 | ||
Total | $ | 3,418,000 | |
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12. GROUP INSURANCE
The Company participates, along with other plants in the industry, in a group captive insurance company (Captive). The Captive insures losses related to workman's compensation, commercial property and general liability. The Captive reinsures catastrophic losses for all participants, including the Company, in excess of predetermined amounts. The Company's premiums are accrued by a charge to income for the period to which the premium relates and is remitted by the Company's insurer to the captive reinsurer. These premiums are structured such that the Company has made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. The Company cannot be assessed over the amount in the collateral fund.
13. QUARTERLY FINANCIAL REPORTING (UNAUDITED)
Summary quarterly results are as follows:
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
Year ended October 31, 2018 | ||||||||||||||||
Total revenues | $ | 47,479,043 | $ | 45,886,524 | $ | 41,465,388 | $ | 44,670,289 | ||||||||
Gross profit | 60,857 | 2,341,798 | 833,081 | 2,119,849 | ||||||||||||
Operating income (loss) | (987,179 | ) | 1,259,684 | 100,698 | 1,359,110 | |||||||||||
Net income (loss) | (1,317,498 | ) | 3,321,205 | 1,440,371 | 2,927,221 | |||||||||||
Basic & diluted income (loss) per unit | $ | (0.07 | ) | $ | 0.17 | $ | 0.07 | $ | 0.15 | |||||||
Year ended October 31, 2017 | ||||||||||||||||
Total revenues | $ | 56,063,549 | $ | 50,960,556 | $ | 49,760,291 | $ | 56,671,171 | ||||||||
Gross profit | 8,913,597 | 3,930,146 | 3,725,862 | 8,559,558 | ||||||||||||
Operating income | 7,961,450 | 3,039,717 | 2,683,514 | 7,600,072 | ||||||||||||
Net income | 10,959,532 | 4,742,720 | 3,840,574 | 9,855,998 | ||||||||||||
Basic & diluted income per unit | $ | 0.55 | $ | 0.24 | $ | 0.19 | $ | 0.50 | ||||||||
Year ended October 31, 2016 | ||||||||||||||||
Total revenues | $ | 48,773,123 | $ | 51,518,991 | $ | 48,641,969 | $ | 51,763,769 | ||||||||
Gross profit | 1,953,759 | 1,621,069 | 6,983,670 | 4,794,250 | ||||||||||||
Operating income | 954,791 | 724,310 | 6,335,287 | 3,692,239 | ||||||||||||
Net income | 3,417,335 | 2,404,294 | 8,346,905 | 6,224,708 | ||||||||||||
Basic & diluted income per unit | $ | 0.17 | $ | 0.12 | $ | 0.42 | $ | 0.32 | ||||||||
14. BUSINESS INTERUPTION
In May 2018 the Company experienced damage to their distillation columns which impacted ethanol production at its facility causing a business interruption for approximately four weeks. As a result, the Company incurred expenses of approximately $4.0 million in the year ended October 31, 2018 consisting primarily of equipment repair costs, professional fees and loss of business income. The Company filed property and business interruption insurance claims in July 2018.
The claims were predominately settled in October 2018 for a net recovery of approximately $3.0 million, consisting of approximately $1.4 million from the property insurance claim and $1.6 million from the business interruption claim. The net recovery of approximately $3.0 million is included in other receivables on the balance sheet as of October 31, 2018. On the statement of operations for the period ending October 31, 2018, approximately $1.0 million increased revenues, approximately $400,000 decreased cost of sales and $1.6 million was classified as insurance claim recoveries, net. The funds were received by the Company in November 2018.
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15. SUBSEQUENT EVENTS
On November 19, 2018, the board of directors declared a cash distribution of $0.25 per membership unit to the holders of Class A and Class B units of record at the close of business on November 19, 2018, for a total distribution of $4,968,250. The distribution will be recorded in the Company's first quarter financial statements for the 2019 fiscal year and was paid on December 14, 2018.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, including our Executive Vice President (the principal executive officer), Curtis Strong, along with our Chief Financial Officer (the principal financial officer), Christine Marchand, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of October 31, 2018. Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Inherent Limitations Over Internal Controls
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Management, including our Executive Vice President and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management's Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in the 2013 Internal Control-Integrated
45
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of October 31, 2018.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As we are a non-accelerated filer, management's report is not subject to attestation by our registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act of 2002 that permits us to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting during the fourth quarter of our 2018 fiscal year which were identified in connection with management's evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference in the definitive proxy statement from our 2019 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days of our 2018 fiscal year end. This proxy statement is referred to in this report as the 2019 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the 2019 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item is incorporated by reference to the 2019 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to the 2019 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to the 2019 Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits Filed as Part of this Report and Exhibits Incorporated by Reference.
The following exhibits and financial statements are filed as part of, or are incorporated by reference into, this report:
(1) | Financial Statements |
The financial statements appear beginning at page 31 of this report.
(2) | Financial Statement Schedules |
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All supplemental schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
(3) | Exhibits |
Exhibit No. | Exhibit | Filed Herewith | Incorporated by Reference | ||
3.1 | Exhibit 3.1 to the registrant's registration statement on Form SB-2 (Commission File 333-101441). | ||||
3.2 | Exhibit 3.2 to the registrant Form 10-K filed with the Commission on January 17, 2008. | ||||
3.3 | Exhibit 3.1 to the registrants Form 10-Q filed with the Commission on March 15, 2012. | ||||
3.4 | Exhibit 3.1 to the registrant's Form 10-Q filed with the Commission on March 15, 2013 | ||||
4.1 | Exhibit 4.2 to the registrant's registration statement on Form SB-2 (Commission File 333-101441). | ||||
10.1 | Exhibit 10.1 to the registrant's Form 10-QSB filed with the Commission on June 14, 2006. | ||||
10.2 | Exhibit 10.11 to the registrant's Form 10-K filed with the Commission on January 29, 2009. | ||||
10.3 | Exhibit 10.12 to the registrant's Form 10-K filed with the Commission on January 29, 2009. | ||||
10.4 | Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on March 17, 2009. | ||||
10.5 | Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on September 14, 2010. | ||||
10.6 | Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on September 14, 2010. | ||||
10.7 | Exhibit 10.3 to the registrant's Form 10-Q filed with the Commission on September 14, 2010. | ||||
10.8 | Exhibit 10.4 to the registrant's Form 10-Q filed with the Commission on September 14, 2010. | ||||
10.9 | Exhibit 10.5 to the registrant's Form 10-Q filed with the Commission on September 14, 2010. | ||||
10.10 | Exhibit 10.21 to the registrant's Form 10-K filed with the Commission on December 23, 2010. | ||||
10.11 | Exhibit 10.22 to the registrant's Form 10-K filed with the Commission on December 23, 2010. | ||||
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10.12 | Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on September 14, 2011. | ||||
10.13 | Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on September 14, 2011. | ||||
10.14 | Exhibit 10.3 to the registrant's Form 10-Q filed with the Commission on September 14, 2011. | ||||
10.15 | Exhibit 10.15 to the registrant's Form 10-K filed with the Commission on December 23, 2011. | ||||
10.16 | Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on September 13, 2012. | ||||
10.17 | Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on March 15, 2013. | ||||
10.18 | Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on March 15, 2013. | ||||
10.19 | Exhibit 10.3 to the registrant's Form 10-Q filed with the Commission on March 15, 2013. | ||||
10.20 | Exhibit 10.4 to the registrant's Form 10-Q filed with the Commission on March 15, 2013. | ||||
10.21 | Exhibit 99.1 to the registrant's Form 8-K filed with the Commission on May 16, 2014. | ||||
10.22 | Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on June 11, 2015. | ||||
14.1 | Exhibit 14.1 to the registrant's Form 10-KSB filed with the Commission on January 29, 2004. | ||||
31.1 | X | ||||
31.2 | X | ||||
32.1 | X | ||||
32.2 | X | ||||
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101 | The following financial information from Golden Grain Energy, LLC's Annual Report on Form 10-K for the fiscal year ended October 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of October 31, 2018 and October 31, 2017, (ii) Statements of Operations for the fiscal years ended October 31, 2018, 2017 and 2016, (iii) Statements of Cash Flows for the fiscal years ended October 31, 2018, 2017 and 2016, (iv) Statements of Members' Equity for the fiscal years ended October 31, 2018, 2017 and 2016, and (v) the Notes to Consolidated Financial Statements.* | ||||
(+) Confidential treatment requested.
(*) Furnished herewith.
ITEM 16. FORM 10-K SUMMARY.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GOLDEN GRAIN ENERGY, LLC | |||
Date: | December 21, 2018 | /s/ Curtis Strong | |
Curtis Strong | |||
Executive Vice-President | |||
(Principal Executive Officer) | |||
Date: | December 21, 2018 | /s/ Christine Marchand | |
Christine Marchand | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: | December 21, 2018 | /s/ Dave Sovereign | |
Dave Sovereign, Chairman and Director | |||
Date: | December 21, 2018 | /s/ Jim Boeding | |
Jim Boeding, Director | |||
Date: | December 21, 2018 | /s/ Stan Laures | |
Stan Laures, Director | |||
Date: | December 21, 2018 | /s/ Jerry Calease | |
Jerry Calease, Director | |||
Date: | December 21, 2018 | /s/ Marion Cagley | |
Marion Cagley, Director | |||
Date: | December 21, 2018 | /s/ Dave Reinhart | |
Dave Reinhart, Director | |||
Date: | December 21, 2018 | /s/ Leslie Hansen | |
Leslie Hansen, Director | |||
Date: | December 21, 2018 | /s/ Duane Lynch | |
Duane Lynch, Director | |||
Date: | December 21, 2018 | /s/ Steve Sukup | |
Steve Sukup, Vice Chairman and Director | |||
Date: | December 21, 2018 | /s/ Roger Shaffer | |
Roger Shaffer, Director | |||
50