UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒⌧Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended January 31, ~~2018~~2021

☐◻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 000-51277

GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)


Minnesota		41-1997390
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

15045 Highway 23 SE, Granite Falls, MN 56241-0216
(Address of principal executive offices)

(320) 564-3100
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
None	N/A	N/A

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

~~☒Yes~~ ⌧☐Yes◻No

Indicate by checkmark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

~~☒Yes~~ ⌧☐Yes◻No

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 an emerging growth company. See the definitions of ~~"large~~“large accelerated filer,~~" "accelerated filer", "smaller~~” “accelerated filer,” “smaller reporting ~~company"~~company,” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange Act:


Large Accelerated Filer	☐	Non-Accelerated Filer	☒
Accelerated Filer	☐	Smaller Reporting Company	☐☒
		Emerging Growth Company	☐

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. ☐◻

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

☐◻Yes ~~☒No~~⌧No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of March ~~19, 2018,~~17, 2021, there were 30,606 membership units outstanding.

Table of Contents

INDEX

~~INDEX~~


	Page Number
PART I. FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16 19

Item 3. Quantitative and Qualitative Disclosures about Market Risk	32 31

Item 4. Controls and Procedures	34 31

PART II. OTHER INFORMATION	34 32

Item 1. Legal Proceedings	34 32

Item 1A. Risk Factors	35 32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35 32

Item 3. Defaults Upon Senior Securities	35 32

Item 4. Mine Safety Disclosures	35 32

Item 5. Other Information	36 32

Item 6. Exhibits	36 33

SIGNATURES	36 34

Table of Contents

PART I FINANCIAL INFORMATION

~~PART IFINANCIAL INFORMATION~~

Item 1. Financial Statements

GRANITE FALLS ENERGY, LLC ~~AND SUBSIDIARIES~~and Subsidiaries

Condensed Consolidated Balance Sheets


	January 31, 2018		October 31, 2017

					January 31, 2021		October 31, 2021
ASSETS	(unaudited)				(unaudited)
Current Assets
Cash	$	6,638,645	$	21,658,422	$	4,782,264	$	11,423,427
Restricted cash		547,132		75,189		2,236,628		2,156,694
Accounts receivable		7,442,899		7,622,601		3,044,869		3,386,068
Inventory		15,736,482		15,241,092		20,095,230		13,791,805
Commodity derivative instruments		36,525		244,294		63,012		56,050
Prepaid expenses and other current assets		702,650		361,340		1,702,672		901,384
Total current assets		31,104,333		45,202,938		31,924,675		31,715,428


Property and Equipment, net		70,414,786		72,271,013		53,867,075		54,965,983

Goodwill		1,372,473		1,372,473

Investment		7,500,000		7,500,000


Investments						9,913,839		9,799,384

Operating lease right of use asset						18,472,852		19,383,654

Other Assets		733,569		743,106		333,254		333,254


Total Assets	$	111,125,161	$	127,089,530	$	114,511,695	$	116,197,703


LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Checks drawn in excess of bank balances					$	2,086,565	$	692,984
Current maturities of long-term debt	$	333,015	$	432,183		14,685,873		12,954,538
Checks drawn in excess of bank balance		1,151,278		—
Accounts payable		4,833,477		7,535,468		8,088,293		12,294,097
Commodity derivative instruments		76,264		40,379		1,246,719		816,478
Accrued expenses		1,198,817		972,043		1,076,607		865,883
Operating lease, current liabilities						3,614,887		3,628,259
Total current liabilities		7,592,851		8,980,073		30,798,944		31,252,239


Long-Term Debt, less current portion		8,453,826		8,465,502		10,820,933		5,876,318


Operating lease, long-term liabilities						14,857,965		15,755,395

Other Long-Term Liabilities						1,433,405		1,421,924

Commitments and Contingencies


Members' Equity
Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized, issued, and outstanding at both January 31, 2018 and October 31, 2017		73,271,176		83,998,672
Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized, issued and outstanding at January 31, 2021 and October 31, 2020						48,860,671		52,111,525
Non-controlling interest		21,807,308		25,645,283		7,739,777		9,780,302
Total members' equity		95,078,484		109,643,955		56,600,448		61,891,827


Total Liabilities and Members' Equity	$	111,125,161	$	127,089,530	$	114,511,695	$	116,197,703

Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC ~~AND SUBSIDIARIES~~and Subsidiaries

Condensed Consolidated Statements of Operations

Three Months Ended January 31,

2018

2017

(unaudited)

(unaudited)

Revenues

$
52,993,499

$
54,576,064

Cost of Goods Sold

49,988,507

47,731,157

Gross Profit

3,004,992

6,844,907

Operating Expenses

1,680,143

1,607,221

Operating Income

1,324,849

5,237,686

Other Income (Expense):

Other income, net

259,256

392,265

Interest income

46,473

454

Interest expense

(105,755)

(41,609)

Total other income, net

199,974

351,110

Net Income

$
1,524,823

$
5,588,796

Less: Net Income Attributable to Non-controlling Interest

(473,217)

(1,429,005)

Net Income Attributable to Granite Falls Energy, LLC

$
1,051,606

$
4,159,791

Weighted Average Units Outstanding - Basic and Diluted

30,606

30,606

Amounts attributable to Granite Falls Energy, LLC:

Net Income Per Unit - Basic and Diluted

$
34.36

$
135.91

Distributions Per Unit

$
385.00

$
365.00


	Three Months Ended
	January 31, 2021		January 31, 2020
	(Unaudited)		(Unaudited)

Revenues	$	49,398,386	$	53,356,326

Cost of Goods Sold		52,788,296		54,298,819

Gross Loss		(3,389,910)		(942,493)

Operating Expenses		1,994,237		1,773,688

Operating Loss		(5,384,147)		(2,716,181)

Other Income (Expense)
Other (expense), net		143,457		(54)
Interest income		1,311		35,478
Interest expense		(166,455)		(103,998)
Investment income		114,455		98,685
Total other income, net		92,768		30,111

Net Loss	$	(5,291,379)	$	(2,686,070)

Less: Net Loss Attributable to Non-controlling Interest	$	2,040,525	$	1,185,371

Net Loss Attributable to Granite Falls Energy, LLC	$	(3,250,854)	$	(1,500,699)

Weighted Average Units Outstanding - Basic and Diluted		30,606		30,606

Amounts attributable to Granite Falls Energy, LLC:

Net Loss Per Unit - Basic and Diluted	$	(106.22)	$	(49.03)

Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Changes in Members' Equity


	Members' Equity
	attributable to		Non-controlling		Total
	Granite Falls Energy, LLC		Interest		Members' Equity
Balance - October 31, 2020	$	52,111,525	$	9,780,302		61,891,827

Distribution		—		—		—
Net loss attributable to non-controlling interest		—		(2,040,525)		(2,040,525)
Net loss attributable to Granite Falls Energy, LLC		(3,250,854)		—		(3,250,854)

Balance - January 31, 2021	$	48,860,671	$	7,739,777		56,600,448


Balance - October 31, 2019	$	65,468,635		19,215,914		84,684,549

Acquitition of non-controlling interest		(78,817)		(2,146,183)		(2,225,000)
Distribution		—		—		—
Net loss attributable to non-controlling interest		—		(1,185,371)		(1,185,371)
Net loss attributable to Granite Falls Energy, LLC		(1,500,699)		—		(1,500,699)

Balance - January 31, 2020	$	63,889,119	$	15,884,360		79,773,475

Notes to Consolidated Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Three Months Ended January 31,

2018

2017

(unaudited)

(unaudited)

Cash Flows from Operating Activities:

Net income

$
1,524,823

$
5,588,796

Adjustments to reconcile net income to net cash provided by operations:

Depreciation and amortization

2,284,340

2,492,791

Change in fair value of commodity derivative instruments

113,233

(383,860)

Gain on sale of assets

(24,815)

(45,000)

Changes in operating assets and liabilities:

Restricted cash

(471,943)

—

Commodity derivative instruments

130,421

842,875

Accounts recievable

179,702

2,302,376

Inventory

(495,390)

(271,086)

Prepaid expenses and other current assets

(341,310)

(71,998)

Accounts payable

(2,550,585)

(7,605,717)

Accrued expenses

226,774

164,537

Net Cash Provided by Operating Activities

575,250

3,013,714

Cash Flows from Investing Activities:

Payment for investment

—

(750,000)

Payments for capital expenditures

(569,982)

(385,554)

Proceeds from disposal of assets

24,815

45,000

Net Cash Used in Investing Activities

(545,167)

(1,090,554)

Cash Flows from Financing Activities:

Payments on long-term debt

(110,844)

(128,887)

Checks drawn in excess of bank balance

1,151,278

(1,230,005)

Distributions to non-controlling interests

(4,311,192)

—

Member distributions paid

(11,779,102)

(11,171,190)

Net Cash Used in Financing Activities

(15,049,860)

(12,530,082)

Net Decrease in Cash

(15,019,777)

(10,606,922)

Cash - Beginning of Period

21,658,422

13,797,857

Cash - End of Period

$
6,638,645

$
3,190,935

Supplemental Cash Flow Information

Cash paid during the period for:

Interest expense

$
105,755

$
41,609

Supplemental Disclosure of Noncash Investing and Financing Activities

Capital expenditures and construction in process included in accounts payable

$
63,829

$
175,891


	Three Months Ended		Three Months Ended
	January 31, 2021		January 31, 2020
	(Unaudited)		(Unaudited)
Cash Flows from Operating Activities
Net loss	$	(5,291,379)	$	(2,686,070)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		1,872,857		2,366,198
Change in fair value of derivative instruments		5,779,920		370,611
Gain on equity method investments		(114,455)		(98,685)
Loss on disposal of assets		21,728		—
Changes in operating assets and liabilities:
Commodity derivative instruments		(5,356,641)		(101,536)
Accounts receivable		341,199		5,466,849
Inventory		(6,303,425)		(4,451,879)
Prepaid expenses and other current assets		(801,288)		(525,691)
Accounts payable		(2,816,836)		(3,985,284)
Accrued expenses		210,724		210,459
Accrued railcar rehabilitation costs		11,481		11,481
Net Cash Used In Operating Activities		(12,446,115)		(3,423,547)

Cash Flows from Investing Activities
Payments for capital expenditures		(2,184,645)		(208,285)
Net Cash Used in Investing Activities		(2,184,645)		(208,285)

Cash Flows from Financing Activities
Checks drawn in excess of bank balance		1,393,581		724,292
Proceeds from long-term debt		7,587,875		7,039,706
Payments on long-term debt		(911,925)		(7,237,592)
Acquisition of non-controlling interest		—		(2,000,000)
Net Cash Provided by (Used in) Financing Activities		8,069,531		(1,473,594)

Net Decrease in Cash and Restricted Cash		(6,561,229)		(5,105,426)

Cash and Restricted Cash - Beginning of Period		13,580,121		13,574,290

Cash and Restricted Cash - End of Period	$	7,018,892	$	8,468,864

Reconcilation of Cash and Restricted Cash
Cash - Balance Sheet	$	4,782,264	$	8,426,643
Restricted Cash - Balance Sheet		2,236,628		42,221
Cash and Restricted Cash	$	7,018,892	$	8,468,864

Supplemental Cash Flow Information
Cash paid during the period for:
Interest expense	$	168,603	$	103,998

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Capital expenditures and construction in process included in accounts payable	$	751,657	$	—

Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

Table of Contents

~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Granite Falls Energy, LLC (“GFE”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains, and crude corn oil near Granite Falls, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States and on the international market. GFE's plant has an approximate annual production capacity of 60 million gallons, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a ~~twelve month~~twelve-month rolling sum basis.

Additionally, GFE owns a majority interest in Heron Lake BioEnergy, LLC (“HLBE”). HLBE is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains, and crude corn oil near Heron Lake, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States. HLBE's plant has an approximate annual production capacity of 60 million gallons, but is permitted to produce approximately 72.3 million gallons of undenatured ethanol on a ~~twelve month~~twelve-month rolling sum basis. Additionally, HLBE, ~~owns~~through a ~~majority interest in~~wholly owned subsidiary, Agrinatural Gas, LLC (“Agrinatural”), ~~which~~ operates a natural gas pipeline that provides natural gas to HLBE's ethanol production facility and other customers.

All references to “we”, “us”, “our”, and the “Company” collectively refer to GFE and its wholly-owned and majority-owned subsidiaries.

Basis of Presentation and Principles of Consolidation

The condensed consolidated unaudited financial statements as of January 31, ~~2018~~2021 consolidate the operating results and financial position of GFE, and its approximately 50.7% owned subsidiary, HLBE (through GFE's 100% ownership of Project Viking, LLC). Given the Company’s control over the operations of HLBE and its majority voting interest, the Company consolidates the condensed consolidated unaudited financial statements of HLBE with GFE's condensed consolidated unaudited financial statements. The remaining 49.3% ownership of HLBE is included in the condensed consolidated unaudited financial statements as a non-controlling interest. HLBE, through its wholly owned subsidiary, HLBE Pipeline Company, LLC, ~~owns~~owned approximately 73% of ~~Agrinatural. Given HLBE’s control over the operations of~~ Agrinatural ~~and its majority voting interest, HLBE consolidates the financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings attributed to~~through December 11, 2019 when the remaining ~~approximately 27% noncontrolling interest.~~non-controlling interest was acquired. All significant intercompany balances and transactions are eliminated in consolidation.

The accompanying condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, ~~2017,~~2020, contained in the Company’s annual report on Form 10-K.

In the opinion of management, the condensed consolidated unaudited financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated unaudited financial statements should not be regarded as necessarily indicative of results that may be expected for any other fiscal period or for the fiscal year.

~~Table of Contents~~

~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

Reportable Operating Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Therefore, in applying the criteria set forth in ASC 280, the Company determined that based on the nature of the products and production process and the expected financial results, the Company’s operations at GFE’s ethanol plant and HLBE’s plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

Table of Contents

Additionally, the Company also realizes relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE’s ~~majority~~ owned subsidiary. Before and after accounting for intercompany eliminations, these revenues from ~~Agrinatural’s~~Agrinatural represent ~~less than less than 1%~~approximately 1-2% of our consolidated revenues and have little to no impact on the overall performance of the Company. Therefore, the Company does not separately review Agrinatural’s revenues, cost of sales or other operating performance information. Rather, the Company reviews Agrinatural’s natural gas pipeline financial data on a consolidated basis with the Company’s ethanol production operating segment. The Company believes that the presentation of separate operating performance information for Agrinatural’s natural gas pipeline operations would not provide meaningful information to a reader of the Company’s consolidated financial statements and would not achieve the basic principles and objectives of ASC 280.

Accounting Estimates

Management uses estimates and assumptions in preparing these condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America. 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. The Company uses estimates and assumptions in accounting for the following significant matters, among others: economic lives of property and equipment, valuation of commodity derivatives, inventory, inventory purchase and sale commitments, evaluation of railcar ~~damages contingency, and~~rehabilitation costs, the assumptions used in the impairment analysis of long-lived assets, ~~which includes goodwill.~~and evaluation of going concern. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated unaudited financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

Revenue Recognition

~~The Company generally sells ethanol~~Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and ~~related products pursuant to marketing agreements. Revenues from~~other customers as described below. Our performance obligations consist of the ~~production~~delivery of ethanol, and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. Ethanol and related products are generally shipped free on board (FOB) shipping point. The Company believes there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue.

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues, as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs paid by the Company to the marketer in the sale of ethanol are not specifically identifiable and, as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distillers' grains, and corn oil ~~are included~~to our customers. Our customers primarily consist of two distinct marketing companies as described below. The consideration we receive for these products reflects an amount the Company expects to be entitled to in ~~cost~~exchange for these products based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of ~~goods sold.~~transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. We sell each of the products via different marketing channels as described below.

●

Ethanol. The Company sells its ethanol via a marketing agreement with Eco-Energy, Inc. Eco-Energy sells one hundred percent of the Company's ethanol production based on agreements with end users at prices agreed upon mutually among the end user, Eco-Energy and the Company. Our performance obligations consist of our obligation to deliver ethanol to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. The marketing agreement calls for control and title to pass to Eco-Energy once a rail car is released to the railroad or a truck is released from the Company's scales. Revenue is recognized then at the price in the agreement with the end user, net of commissions, freight, and fees.

●

Distillers’ grains. The Company engages another third-party marketing company, RPMG, Inc., to sell one hundred percent of the distillers grains it produces at the plant. RPMG takes title and control once a rail car is released to the railroad or a truck is released from the Company's scales. Prices are agreed upon between RPMG and the Company. Our performance obligations consist of our obligation to deliver corn oil to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. Revenue is recognized net of commissions, freight and fees.

●

Distillers’ corn oil (corn oil). The Company sells one hundred percent of its corn oil production to RPMG, Inc. The process for selling corn oil is the same as our distillers’ grains. RPMG takes title and control once a rail car is released to the railroad or a truck is released from the Company's scales. Prices are agreed upon between RPMG and the Company. Our performance obligations consist of our obligation to deliver corn oil to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. Revenue is recognized net of commissions, freight and fees.

Agrinatural recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

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~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost for all inventories is determined using the first in first out ~~method (“FIFO”).~~method. Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Inventory consists of raw materials, work in process, finished goods, and ~~spare parts.~~supplies. Corn is the primary raw material along with other raw materials. Finished goods consist of ethanol, distillers' grains, and corn oil.

Derivative Instruments

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives on the balance sheets at fair value.

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in earnings.

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our condensed consolidated unaudited financial statements.

In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company's ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 4.5.

~~Investment~~Investments

On November 1, 2016, GFE subscribed to purchase 1,500 capital units of Ringneck Energy & Feed, LLC (“Ringneck”) at a price of $5,000 per unit for a total of $7,500,000. Ringneck is a South Dakota limited liability company that is currently constructing an 80 million gallon per year ethanol manufacturing plant in outside of Onida, South Dakota in Sully County. GFE’s investment is sufficient to secure the Company the right to appoint one director to the board of directors of Ringneck. GFE has appointed Steve Christensen, its CEO, to serve as its appointed director.

GFE paid a down payment of $750,000 in connection with the subscription, and signed a promissory note for $6,750,000 for the remaining balance of the subscription. On August 2, 2017, following notice from Ringneck accepting GFE’s subscription and that payment of the balance of GFE’s subscription and promissory note was due, GFE borrowed $7.5 million under its credit facility with Project Hawkeye, LLC (“Project Hawkeye”) and paid $6,750,000 to Ringneck as payment for the remaining balance of GFE’s subscription. Project Hawkeye is an affiliate of Fagen, Inc., which is a member of GFE. See Note 6 below for the terms of GFE’s credit facility with Project Hawkeye.

~~Table of Contents~~

~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

The Company has investment ~~will be~~interests in two companies in related industries. The investments are accounted for by the equity method, under which the Company’s share of the net income of the investee is recognized as income in the Company’s Condensed Consolidated Statements of Operations and added to the investment account, and distributions received from the affiliates are treated as a reduction of the investment.

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2. RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, distillers' grains, corn oil, and natural gas to customers primarily located in the United States. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales typically average 75% - 90% of total revenues and corn costs typically average 65% - 85% of cost of goods sold.

The Company's operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. 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, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have afurther significant adverse ~~effect~~effects on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements. The Company’s risk management program is used to protect against the price volatility of these commodities.

HLBE was out of compliance with certain debt covenants on January 31, 2021, for which a waiver was obtained from the lender. HLBE has forecasted that it is probable that there will be future instances of noncompliance with debt covenants within the next twelve months. These conditions result in the classification of all HLBE debt with the lender as current as of at January 31, 2021. HLBE has insufficient cash on hand and additional borrowing capacity, and current forecasts indicate insufficient cash flows from operations, to repay the debt if it were to come due as a result of covenant noncompliance. While the Company believes the replacement of the HLBE boiler has improved the operating performance of the plant, and led to lower operating costs, market conditions have resulted in losses. HLBE intends to source other capital sources, which may include re-negotiating their debt agreements and terms or seek potential equity solutions. At this time, there are no commitments to do so and we may not be successful in doing so.

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2020 and into 2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. We expect to have sufficient cash on hand and availability on our credit facilities and other loans to fund our operations and commitments for at least the next twelve months from the issuance date of these unaudited consolidated financial statements. However, should unfavorable operating conditions continue in the ethanol industry that prevent us from profitably operating our plant, we may need to seek additional debt or equity funding or further idle ethanol production altogether.

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3. ~~INVENTORY~~REVENUE

Revenue by Source

All revenues from contracts with customers under ASC Topic 606 are recognized at a point in time. The following table disaggregates revenue by major source for the three months ended January 31, 2021 and 2020:


	Three Months Ended January 31, 2021
	(unaudited)
	Total
Ethanol	$	36,138,491
Distillers’ Grains		9,777,090
Corn Oil		2,850,199
Other		225,746
Natural Gas Pipeline		406,860
Total Revenues	$	49,398,386

	Three Months Ended January 31, 2020
	(unaudited)
	Total
Ethanol	$	40,851,988
Distillers’ Grains		9,631,292
Corn Oil		1,887,852
Other		295,917
Natural Gas Pipeline		689,277
Total Revenues	$	53,356,326

Payment Terms

The Company has contractual payment terms with each respective marketer that sells ethanol, distillers’ grains and corn oil. These terms are 10 calendar days after the transfer of control date. The Company has contractual payment terms with natural gas customers of 20 days.

Shipping and Handling Costs

Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of goods sold. Accordingly, amounts billed to customers for such costs are included as a component of revenue.

4. INVENTORY

Inventories consist of the following:


	January 31, 2018		October 31, 2017
	(unaudited)

					January 31,		October 31,
						2021	2020
					(unaudited)
Raw materials	$	4,524,471	$	4,488,923	$	5,945,944	$	4,893,502
Supplies		2,913,151		2,929,385		3,311,594		3,070,458
Work in process		1,318,638		1,281,292		1,627,529		1,480,871
Finished goods		6,980,222		6,541,492		9,210,163		4,346,974
Totals	$	15,736,482	$	15,241,092	$	20,095,230	$	13,791,805

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the net realizable values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, as a component of cost of goods sold, the Company recorded a loss on ethanol inventories of approximately ~~$377,000~~$325,000 and ~~$207,000~~$1,202,000 for the three months ended January 31, ~~2018~~2021 and ~~2017,~~2020, respectively.

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5. DERIVATIVE INSTRUMENTS

As of January 31, ~~2018,~~2021, the total notional amount of GFE’s outstanding corn derivative instruments was approximately ~~7,090,000~~3,305,000 bushels, comprised of long corn futures positions on ~~2,070,000~~800,000 bushels that were entered into to hedge forecasted ethanol sales through ~~March 2018,~~July 2021, and short corn futures positions on ~~5,020,000~~2,505,000 bushels that were entered into to hedge forecasted corn purchases through December 2022. Additionally, there are corn options positions of 4,195,000 bushels through December 2021. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions ~~outstanding as disclosed above.~~outstanding.

~~Table~~As of ~~Contents~~

~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

January 31, ~~2018~~

~~As of~~ ~~January 31, 2018~~,2021, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately ~~5,635,000~~730,000 bushels, comprised of long corn futures positions on ~~1,995,000~~340,000 bushels that were entered into to hedge forecasted ethanol sales through ~~March 2018,~~July 2021, and short corn futures positions on ~~3,640,000~~390,000 bushels that were entered into to hedge forecasted corn purchases through July 2022. Additionally, there are corn options positions of 3,710,000 bushels through December ~~2019.~~2021. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of January 31, ~~2018, HLBE had outstanding natural gas derivative instruments totaling approximately 40,000 MMBTUs entered into to hedge forecasted ethanol sales through February 2018.~~

~~As of January 31, 2018,~~2021, GFE had approximately ~~$386,000~~$1,944,000 of cash collateral (restricted cash) related to derivatives held by a ~~broker~~.broker.

As of January 31, ~~2018,~~2021, HLBE had approximately ~~$161,000~~$242,000 of cash collateral (restricted cash) related to derivatives held by a ~~broker~~.broker.

The following tables provide details regarding the Company's derivative instruments at January 31, ~~2018,~~2021, none of which were designated as hedging instruments:


	Consolidated Balance Sheet location	Assets		Liabilities

						Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts - GFE	Commodity derivative instruments	$	—	$	70,000	Commodity derivative instruments	$	—	$	1,102,819
Corn contracts - HLBE	Commodity derivative instruments		5,025		—	Commodity derivative instruments		—		143,900
Ethanol contracts - GFE						Commodity derivative instruments		40,175		—
Ethanol contracts - HLBE	Commodity derivative instruments		31,500		—	Commodity derivative instruments		22,837		—
Natural gas contracts - HLBE	Commodity derivative instruments		—		6,264
Totals		$	36,525	$	76,264		$	63,012	$	1,246,719

As of October 31, ~~2017,~~2020, the total notional amount of GFE’s outstanding corn derivative instruments was approximately ~~1,495,000~~4,275,000 bushels, comprised of long corn futures positions on ~~200,000~~760,000 bushels that were entered into to hedge forecasted ethanol sales through ~~December 2017,~~March 2021, and short corn futures positions on ~~1,295,000~~3,515,000 bushels that were entered into to hedge forecasted corn purchases through December ~~2018.~~2022 and are directly related to corn forward contracts. Additionally, there are corn options positions of 1,920,000 bushels through March 2021. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of October 31, ~~2017, the total notional amount of GFE’s outstanding ethanol derivative instruments was approximately 420,000 gallons that were entered into to hedge forecasted ethanol sales through November 2017.~~

~~As of October 31, 2017,~~2020, GFE had approximately ~~$75,000~~$1,643,000 of cash collateral (restricted cash) ~~and approximately $12,000 due to broker~~ related to derivatives held by a ~~broker, recorded as a component of accounts payable.~~broker.

As of October 31, ~~2017,~~2020, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately ~~1,120,000~~2,095,000 bushels, comprised of long corn futures positions on ~~215,000~~325,000 bushels that were entered into to hedge forecasted ethanol sales through ~~December 2017,~~March 2021, and short corn futures positions on ~~905,000~~1,770,000 bushels that were entered into to hedge forecasted corn purchases through July ~~2018.~~2022 and are directly related to corn forward contracts. Additionally, there are corn options positions of 1,380,000 bushels through March 2021. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of October 31, ~~2017,~~2020, HLBE had ~~outstanding natural gas derivative instruments totaling 120,000 MMBTU entered into hedge forecasted natural gas purchases through February 2018.~~

~~As of October 31, 2017, the total notional amount of HLBE’s outstanding ethanol derivative instruments was~~ approximately ~~420,000 gallons that were entered into to hedge forecasted ethanol sales through November 2017~~

~~As of October 31, 2017, HLBE did not have any~~$514,000 in cash collateral (restricted cash) ~~and approximately $12,000 due to broker~~ related to derivatives held by a ~~broker, recorded as a component of accounts payable.~~broker.

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~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

The following tables provide details regarding the ~~Company's~~Company’s derivative instruments at October 31, ~~2017,~~2020, none of which were designated as hedging instruments:


	Consolidated Balance Sheet location	Assets		Liabilities

						Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts - GFE	Commodity derivative instruments	$	102,650	$	—	Commodity derivative instruments	$	—	$	642,550
Corn contracts - HLBE	Commodity derivative instruments		141,644		—	Commodity derivative instruments		—		173,928
Ethanol contracts - GFE	Commodity derivative instruments		—		12,749	Commodity derivative instruments		40,900		—
Ethanol contracts - HLBE	Commodity derivative instruments		—		12,249	Commodity derivative instruments		15,150		—
Natural gas contracts - HLBE	Commodity derivative instruments		—		15,381
Totals		$	244,294	$	40,379		$	56,050	$	816,478

The following tables provide details regarding the gains (losses) from Company's derivative instruments in the consolidated statements of operations, none of which are designated as hedging instruments:


	Consolidated Statement	Three Months Ended January 31,
	of Operations Location	2018		2017

						Consolidated Statement	Three Months Ended January 31,
						of Operations Location	2021		2020
Corn contracts	Cost of Goods Sold	$	(265,068)	$	(33,137)	Cost of Goods Sold	$	(5,893,858)	$	(160,218)
Ethanol contracts	Revenues		139,497		416,997	Revenues		113,938		(210,393)
Natural gas contracts	Cost of Goods Sold		12,338		—
Total gain (loss)		$	(113,233)	$	383,860
Total loss							$	(5,779,920)	$	(370,611)

5.6. FAIR VALUE

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at January 31, ~~2018:~~2021:

Fair Value Measurement Using

Quoted Prices

Significant Other

Significant

Carrying Amount in

in Active Markets

Observable Inputs

Unobservable Inputs

Financial Asset:

Consolidated Balance Sheet

Fair Value

(Level 1)

(Level 2)

(Level 3)

Commodity Derivative Instruments - Corn

$
5,025

$
5,025

$
5,025

$
—

$
—

Commodity Derivative Instruments - Ethanol

$
31,500

$
31,500

$
31,500

$
—

$
—

Financial Liabilities:

Commodity Derivative Instruments - Corn

$
70,000

$
70,000

$
70,000

$
—

$
—

Commodity Derivative Instruments - Natural Gas

$
6,264

$
6,264

$
—

$
6,264

$
—


					Fair Value Measurement Using
					Quoted Prices		Significant Other		Significant
	Carrying Amount in				in Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Consolidated Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Ethanol	$	63,012	$	63,012	$	63,012	$	—	$	—

Financial Liabilities:
Commodity Derivative instruments - Corn	$	1,246,719	$	1,246,719	$	1,246,719	$	—	$	—
Accounts Payable (1)	$	66,839	$	66,839	$	—	$	66,839	$	—

The following table ~~sets forth, by level, the Company~~provides information on those derivative assets ~~that were accounted for~~and liabilities measured at fair value on a recurring basis at October 31, ~~2017:~~2020:

Fair Value Measurement Using

Quoted Prices

Significant Other

Significant

Carrying Amount in

in Active Markets

Observable Inputs

Unobservable Inputs

Financial Asset:

Consolidated Balance Sheet

Fair Value

(Level 1)

(Level 2)

(Level 3)

Commodity Derivative Instruments - Corn

$
244,294

$
244,294

$
244,294

$
—

$
—

Financial Liabilities:

Commodity Derivative Instruments - Ethanol

$
24,998

$
24,998

$
36,500

$
(11,502)

$
—

Commodity Derivative Instruments - Natural Gas

$
15,381

$
15,381

$
—

$
15,381

$
—


					Fair Value Measurement Using
					Quoted Prices		Significant Other		Significant
	Carrying Amount in				in Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Consolidated Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative Instruments - Ethanol	$	56,050	$	56,050	$	56,050	$	—	$	—

Financial Liabilities:
Commodity Derivative Instruments - Corn	$	816,478	$	816,478	$	816,478	$	—	$	—
Accounts Payable (1)	$	792,795	$	792,795	$	—	$	792,795	$	—

(1)

Accounts payable is generally stated at historical amounts with the exception of amounts in this table related to certain delivered inventory for which the payable fluctuates based on the changes in commodity prices. These payables are hybrid financial instruments for which the company has elected the fair value option.

~~Table of Contents~~

~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

The Company determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may

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include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value ~~of ethanol and natural gas~~ Level 2 ~~instruments by model-based techniques in which all significant inputs are observable in the markets noted above.~~accounts payable based on nearby futures values, plus or minus nearby basis.

6.7. DEBT FACILITIES

Debt financing consists of the following:


	January 31, 2018		October 31, 2017
	(unaudited)

					January 31, 2021		October 31, 2020
					(unaudited)
GRANITE FALLS ENERGY:
Seasonal loan, see terms below.	$	—	$	—
Revolving term loan, see terms below.					$	5,436,202	$	—
Term note payable to Project Hawkeye, see terms below.		7,500,000		7,500,000		6,071,428		6,339,286

SBA Paycheck Protection Program Loan						703,900		703,900

HERON LAKE BIOENERGY:
Revolving term loan, see terms below.		—		—
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. HLBE made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.		1,241,171		1,241,171
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.		45,670		56,514
Note payable to non-controlling interest member of Agrinatural. Interest is at One Month LIBOR plus 4.0%, which was approximately 5.58% and 5.24% at January 31, 2018 and October 31, 2017, respectively. The note was paid in full in January 2018.		—		100,000
Amended revolving term note payable to lending institution, see terms below.						9,699,032		7,891,426
Single advance term note payable to lending institution, see terms below.						2,700,000		3,000,000
Seasonal line of credit payable to lending institution, see terms above.						—		—
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in October 2021. HLBE made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other current assets that are held on deposit to be applied with the final payments of the assessment.						300,551		300,551
SBA Paycheck Protection Program Loan						595,693		595,693
Totals		8,786,841		8,897,685		25,506,806		18,830,856
Less: amounts due within one year		333,015		432,183		14,685,873		12,954,538
Net long-term debt	$	8,453,826	$	8,465,502	$	10,820,933	$	5,876,318

Granite Falls Energy

~~Seasonal~~ Revolving Term Loan

GFE has a credit facility with a lender in the form of a revolving term loan in the amount of $11,000,000 that ~~includes a seasonal revolving loan, under which GFE may borrow, repay, and re-borrow up to the aggregate principal commitment of $6,000,000 until maturity. The seasonal revolving loan matures~~will expire on October ~~1, 2018 unless a later date is agreed to by the administrative agent for the facility.~~20, 2024. There was noan outstanding balance on ~~the seasonal~~this revolving term loan atof $5,436,202 on January 31, ~~2018 and October 31, 2017.~~2021. Therefore, the aggregate principal amount available for borrowing by GFE under this ~~seasonal~~ revolving term loan at January 31, ~~2018 and October 31, 2017~~2021 was ~~$6,000,000.~~$5,563,798.

~~The interest rate~~Interest on the ~~seasonal~~ revolving ~~loan is based on~~term accrues at a variable weekly rate equal to 3.25% above the ~~bank's~~higher of 0.00% or One Month London Interbank Offered Rate (“LIBOR”) Index Rate, ~~plus 2.75%,~~ which ~~equated to 4.33% and 3.99%~~totaled 3.38% at January 31, ~~2018 and October 31, 2017, respectively.~~2021.

The credit facility also requires GFE to comply with certain financial covenants at various times calculated monthly, quarterly or annually, including a restriction of the payment of dividends and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit ~~facility, as well as a restriction of the payment of distributions.~~facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties.

~~Table~~GFE also agreed to pay an unused commitment fee on the unused available portion of ~~Contents~~the revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

The credit facility is secured by substantially all assets of GFE. There are no savings account balance collateral requirements as part of this credit facility.

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Project Hawkeye Loan

On August 2, 2017, GFE entered into a replacement credit facility with Project ~~Hawkeye to finance its investment in Ringneck. Pursuant to this~~Hawkeye. The terms of the replacement credit facility allow GFE ~~borrowed~~to borrow up to $7.5 million of variable-rate, amortizing non-recourse debt from Project Hawkeye using the GFE’s $7.5 million investment in Ringneck ~~investment~~Energy & Feed, LLC (“Ringneck”), as ~~collateral~~.collateral. The Project Hawkeye loan bears interest from date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of the One Month LIBOR Index Rate plus 3.05% per annum, with an interest rate floor of 3.55%, which equated to ~~4.63% and 4.29% at~~3.55% \at January 31, ~~2018~~2021 and October 31, ~~2017 respectively.~~2020.

The Project Hawkeye loan requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years three through nine based on a ~~seven-year~~seven- year amortization period. The monthly amortized payments will be re-amortized following any change in interest rate. The entire outstanding principal balance of the loan, plus any accrued and unpaid interest thereon, is due and payable in full on August 2, 2026. GFE is permitted to voluntarily prepay all or any portion of the outstanding balance of this loan at any time without premium or penalty.

Pursuant to a pledge agreement entered into in connection with the Project Hawkeye loan,, GFE’s obligations are secured by all of its right, title, and interest in its investment in Ringneck, including the 1,500 units subscribed for by GFE. The loan is non-recourse to all of GFE’s other assets, meaning that in the event of default, the only remedy available to Project Hawkeye will be to foreclose and seize all of GFE’s right, title and interest in its investment in Ringneck.

SBA Paycheck Protection Program Loan

In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 17, 2020, GFE received a loan in the amount of $703,900 through the Paycheck Protection Program. This note was forgiven in February 2021.

Also in February 2021, GFE received a second Paycheck Protection Program loan in the amount of $703,900. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, GFE would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in June 2022 with a final installment in February 2026.

Heron Lake BioEnergy

Revolving Term ~~Loan~~Note

~~HLBE~~ ~~has a revolving term note payable with a lender under which HLBE can borrow, repay~~The 2020 Credit Facility includes an amended and re-borrow in an amount up to the original aggregate principal commitment at any time prior to maturity at March 1, 2022. The original aggregate principal commitment was $28,000,000, which reduced by $3,500,000 annually, starting March 1, 2015 and continuing each anniversary thereafter until maturity. In December 2017, HLBE and its lender orally agreed to reduce the aggregate principal commitment of therestated revolving term loan ~~to $8,000,000. HLBE had no outstanding balance on the revolving term loan at January 1, 2018 and October 31, 2017. Therefore, the aggregate~~with a $13,000,000 principal ~~amount available to HLBE for borrowing at January 31, 2018 and October 31, 2017 was $8,000,000 and $17,500,000, respectively.~~

In connection with the reduction in the aggregate principal commitment, the interest rate on the revolving term loan was reduced from 3.25% above the One-Month LIBOR Index rate to 2.85% above the One-Month LIBOR Index rate. The interest rate on this facility was 4.42% and 4.49% at January 31, 2018, and October 31, 2017, respectively. HLBE 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.

~~HLBE also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum.~~commitment. The loan is secured by substantially all of ~~HLBE's~~HLBE’s assets, including a subsidiary guarantee.

~~During the term of the revolving term loan, HLBE is subject to certain financial~~The 2020 Credit Facility contains customary covenants, including ~~restriction of~~restrictions on the payment of dividends ~~restrictions on~~and loans and advances to Agrinatural, and ~~the~~ maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties. For the period ended January 31, 2021, HLBE had events of non-compliance. HLBE has obtained a waiver from its lender for the non-compliance events.

As part of the ~~credit facility~~2020 Credit Facility closing, HLBE entered into an ~~Administrative Agency Agreement~~amended administrative agency agreement with CoBank, ACP (“CoBank”). ~~CoBank purchased a participation interest in the revolving term loan and was appointed the administrative agent for the purpose of servicing the loan.~~ As a result, CoBank will continue act as the agent for the lender with respect to the ~~credit facility.~~ 2020 Credit Facility. HLBE agreed to pay CoBank an annual fee of $2,500 for its services as administrative agent.

Under the terms of the amended revolving term loan, HLBE may borrow, repay, and reborrow up to the aggregate principal commitment amount of $13,000,000. Final payment of amounts borrowed under the amended revolving term loan is due December 1, 2022. Interest on the amended revolving term loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which totaled 3.48% at January 31, 2021.

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Table of Contents

~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

HLBE also agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

Single Advance Term Note

In June 2020, HLBE entered into a single advance term note with a $3,000,000 principal commitment, with the purpose to finance the construction of a new grain bin and provide principal reduction on the Revolving Term Note. The interest rate is fixed at 3.80%. Principal with interest is to be paid in 10 consecutive, semi-annual installments, with the first installment due on December 20, 2020 and the last installment due on June 20, 2025. The note is secured as provided in the 2020 Credit Facility.

Short Term Revolving Promissory Note

In February 2021, HLBE entered into a revolving promissory note with its lender in order to finance the operating needs of HLBE. The revolving promissory note is subject to the 2020 Credit Facility. Under the terms, HLBE may borrow, repay and reborrow up to the aggregate principal commitment amount of $5,000,000. Final payment of amounts borrowed under the revolving promissory note is June 1, 2021. Interest of the loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate and is payable monthly in arrears. In addition, HLBE agreed to pay an unused commitment fee on the unused available portion of the loan at the rate of 0.50% per annum payable monthly in arrears.

During February 2021, the 2020 Credit Facility was amended to reduce the working capital covenant to $8 million through May 31, 2021 and increasing to $10 million beginning June 30, 2021. Also in February 2021, the 2020 Credit Facility was also amended to decrease the net worth requirement from $32 million to $28 million.

HLBE has forecasted that it is probable that there will be future instances of non-compliance with debt covenants within the next twelve months. As a result, approximately $11,800,000 of long term debt has been reclassified as current maturities

SBA Paycheck Protection Program Loan

In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 18, 2020, HLBE received a loan in the amount of $595,693 through the Paycheck Protection Program. Management expects the loan to be forgiven in March 2021. To the extent it is not forgiven, GFE would be required to repay that portion at an interest rate of 1% over a period of two years, beginning August 2021 with a final installment in April 2022.

Also in February 2021, HLBE received a second Paycheck Protection Program loan in the amount of $595,693. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, HLBE would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in February 2022 with a final installment in February 2026.

Estimated annual maturities of debt at January 31, ~~2018,~~2021, are as follows based on the most recent debt ~~agreements:~~agreements and violation of certain loan covenants:


2019	$	333,015
2020		842,921
2021		1,389,227

2022		1,391,250	$	14,685,873
2023		1,071,428		1,456,160
2024				1,071,429
2025				6,507,630
2026				1,071,429
Thereafter		3,759,000		714,285
Total debt	$	8,786,841	$	25,506,806

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8. LEASES

The Company elected the following practical expedients allowable under the ASC 842: not to reassess whether any expired or existing contracts are or contain leases; not to reassess the lease classification for any expired or existing leases; not to reassess initial direct costs for any existing leases. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to only long-term (greater than one year) leases.

The Company leases rail cars for its facility to transport ethanol and dried distillers’ grains to its end customers. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the three months ended January 31, 2021, the Company’s weighted average discount rate was 4.87%. Operating lease expense is recognized on a straight-line basis over the lease term.

The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining terms of approximately one to seven years. For the three months ended January 31, 2021, the weighted average remaining lease term was four years.

The Company elected to use a portfolio approach for lease classification, which allows for an entity to group together leases with similar characteristics provided that its application does not create a material difference when compared to accounting for the leases at a contract level. For railcar leases, the Company elected to combine the railcars within each rider and account for each rider as an individual lease.

The following table summarizes the remaining annual maturities of the Company’s operating lease liabilities as of January 31, 2021:



2022	$	4,403,800
2023		4,315,800
2024		3,917,400
2025		3,261,000
2026		2,870,100
Thereafter		2,083,000
Totals		20,851,100
Less: Amount representing interest		2,378,248
Lease liabilities	$	18,472,852

For the three months ended January 31, 2021 and 2020, GFE recorded operating lease costs of approximately $834,000 and $778,000 respectivley, in cost of goods sold in the GFE’s statement of operations, which approximates cash paid for the period.

For the three months ended January 31, 2021 and 2020, HLBE recorded operating lease costs of approximately $610,000 and $575,000 respectively in cost of goods sold in HLBE’s statement of operations, which approximates cash paid for the period.

9. MEMBERS' EQUITY

Granite Falls Energy

GFE has one class of membership units. The units have no par value and have identical rights, obligations and privileges. Income and losses are allocated to all members based upon their respective percentage of units held. As of January 31, ~~2018~~2021 and October 31, ~~2017,~~2020, GFE had 30,606 membership units authorized, issued, and outstanding.

~~In December 2017, the Board~~

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10. RELATED PARTY TRANSACTIONS

Corn Purchases - Members

GFE ~~declared a cash distribution of $385 per unit or approximately $11,783,000, for unit holders of record as of December 21, 2017. The distribution was paid in January 2018.~~

In December 2016, the Board of Governors of GFE declared a cash distribution of $365 per unit or approximately $11,171,000, for unit holders of record as of December 22, 2016. The distribution was paid in January 2017.

~~Heron Lake BioEnergy~~

In December 2017, the Board of Governors of HLBE declared a cash distribution of $0.11 per unit, or approximately $8,573,000, for unit holders of record as of December 21, 2017. The distribution was paid in January 2018.

~~At December 21, 2017, GFE owned 24,475,824 Class A membership units and 15,000,000 Class B units of HLBE, and received an aggregate distribution~~purchased corn from ~~HLBE~~board members of approximately ~~$4,342,000. The remaining $4,231,000 was distributed by~~ $977,000 and $314,000 for the three months ended January 31, 2021 and 2020, respectively.

HLBE topurchased corn from board members of approximately $3,742,000 and $5,065,000 for the ~~non-controlling interest.~~three months ended January 31, 2021 and 2020, respectively.

8.11. COMMITMENTS AND CONTINGENCIES

Corn ~~Purchase Commitments~~Forward Contracts

At January 31, ~~2018,~~2021, GFE had cash and basis contracts for forward corn ~~contracts~~ purchase commitments for approximately ~~4,096,000~~4,987,000 bushels for ~~delivery periods~~deliveries through ~~February 2019.~~December 2022.

At January 31, ~~2018,~~2021, HLBE had cash and basis contracts for forward corn purchase commitments for approximately ~~3,392,000~~4,402,000 bushels for ~~delivery periods~~deliveries through ~~January 2019.~~July 2022.

~~Corn Purchases - Members~~

~~GFE purchased~~Given the uncertainty of future ethanol and corn ~~from board members~~prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts and its inventories using the lower of cost or net realizable value evaluation, similar to the method used on its inventory, and has determined that an impairment of loss of approximately ~~$437,000 and $0~~$47,000 existed at October 31, 2020, for the ~~three months ended January 31, 2018 and 2017, respectively.~~HLBE forward corn purchase commitments. No impairment loss existed for GFE forward corn purchase commitments.

~~HLBE purchased corn from board members of approximately $4,455,000 and $3,025,000 for the three months ended January 31, 2018 and 2017, respectively.~~Ethanol Forward Contracts

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~~Granite Falls Energy, LLC and Subsidiaries~~

~~Notes to Condensed Consolidated Unaudited Financial Statements~~

~~January 31, 2018~~

~~Ethanol Contracts~~

At January 31, ~~2018,~~2021, GFE had fixed and basis contracts to sell approximately ~~$11,710,000~~$14,600,000 of ethanol for various delivery periods through March ~~2018.~~ 2021, which approximates 95% of its anticipated ethanol sales for this that period.

At January 31, ~~2018,~~2021, HLBE had fixed and basis contracts to sell approximately ~~$14,003,000~~$14,720,000 of ethanol for various delivery periods through March ~~2018.~~ 2021, which approximates 97% of its anticipated ethanol sales for that period.

Distillers' Grain Forward Contracts

At January 31, ~~2018,~~2021, GFE had forward contracts to sell approximately ~~$993,000~~$3,063,000 of ~~distillers'~~distillers’ grain for ~~various delivery periods~~deliveries through ~~February 2018.~~March 2021, which approximates 55% of its anticipated distillers’ grain sales during that period.

At January 31, ~~2018,~~2021, HLBE had forward contracts to sell approximately ~~$1,640,000~~$5,473,000 of ~~distillers'~~distillers’ grains for delivery ~~periods~~ through ~~March 2018.~~September 2021, which approximates 27% of its anticipated distillers’ grains sales during that period.

Corn Oil Forward Contracts

At January 31, ~~2018,~~2021, GFE had forward contracts to sell approximately ~~$260,000~~$637,000 of corn oil for ~~various~~ delivery ~~periods~~ through February ~~2018.~~2021, which approximates 75% of its anticipated corn oil sales for that period.

At January 31, ~~2018,~~2021, HLBE had forward contracts to sell approximately ~~$466,000~~$435,000 of corn oil for ~~various~~ delivery ~~periods~~ through February ~~2018.~~2021, which approximates 75% of its anticipated corn oil sales for that period.

~~Railcar Damages~~Rail Car Rehabilitation Costs

~~In accordance with certain railcar lease agreements, at expiration,~~GFE leases 75 hopper rail cars under a multi-year agreement which ends in November 2025. Under the ~~Company~~agreement, GFE is required to ~~return the railcars in good condition, less~~pay to rehabilitate each car for “damage” that is considered to be other than normal wear and ~~tear. Primarily due to the ongoing maintenance and repair activities performed on its railcars, the Company has determined that no accrual for leased railcars is necessary and an estimate~~tear upon turn in of the ~~possible range~~car(s) at the termination of ~~loss cannot~~the lease. GFE believes that it is probable that GFE may be ~~made.~~

assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars at January 31, 2021 and October 31, 2020

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to be approximately $825,000. GFE accrues the estimated cost of railcar damages over the term of the lease as the cost of damages are incurred.

HLBE leases 50 hopper rail cars under a multi-year agreement which ends in May 2027. Under the agreement, HLBE is required to pay to rehabilitate each car for “damage” that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease. HLBE believes that it is probable that HLBE may be assessed for damages incurred and management has estimated total costs to rehabilitate the cars at January 31, 2021 and October 31, 2020, to be approximately $608,000 and $597,000, respectively. During the quarter ended January 31, 2021 and 2020, HLBE has recorded an expense in cost of goods of approximately $12,000 and $11,000, respectively.

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

We prepared the following discussion and analysis to help ~~you~~readers better understand our financial condition, changes in our financial condition, and results of operations for the three months ended January 31, ~~2018~~2021 and ~~2017.~~2020. This ~~discussion~~section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in PART I - Item 1 of this report and the information contained in the ~~Company's~~Company’s annual report on Form 10-K for the fiscal year ended October 31, ~~2017.~~2020.

Disclosure Regarding Forward-Looking Statements

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects in this report. All statements that are not historical or current facts are forward-looking statements. InIn some cases, you can identify forward-looking statements by terms such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would”,“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions.

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. W~~hile~~While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us are described more particularly in the “Risk Factors” section of our annual report on Form 10-K for the year ended October 31, ~~2017~~ ~~and this report on Form 10-Q.~~ 2020. These risks and uncertainties include, but are not limited to, the following:

●

Fluctuations in the price of ethanol as a result of a number of factors, including: the price and availability of competing fuels; the overall supply and demand for ethanol and corn; the price of gasoline, crude oil and corn; and government policies;

●

Fluctuations in the price of crude oil and gasoline and the impact of lower oil and gasoline prices on ethanol prices and demand;

●

Fluctuations in the availability and price of corn, resulting from factors such as domestic stocks, demand from corn-consuming industries, such as the ethanol industry, prices for alternative crops, increasing input costs, changes in government policies, shifts in global markets or damaging growing conditions, such as plant disease or adverse weather, including drought;

●

Fluctuations in the availability and price of natural gas, which is may be affected by by factors such as weather, drilling economics, overall economic conditions, and government regulations;

●

Negative operating margins which may result from lower ethanol and/or high corn prices;

●

Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;

●

Overcapacity and oversupply in the ethanol industry;

●

Ethanol ~~may~~ trading at a premium to gasoline at times, ~~resulting in~~which may act as a disincentive for discretionary blending of ethanol beyond ~~the~~RFS requirements ~~of the Renewable Fuels Standard (“RFS”)~~ and consequently negatively impacting ethanol prices and demand;

●

Changes in federal and/or state laws and environmental regulations including elimination, waiver or reduction of ~~the~~ corn-based ethanol ~~use requirement in~~volume obligations under the RFS and legislative acts taken by state governments such as California related to low-carbon fuels, may have an adverse effect on our business;

●

Any impairment of the transportation, storage and blending infrastructure that prevents ethanol from reaching markets;

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●

Any effect on prices and demand for our products resulting from actions in international markets, particularly imposition of ~~tariffs on ethanol imported to Brazil and/or increased tariffs on ethanol exported to China and~~ ~~anti-dumping and countervailing duties on U.S. distillers’ grains exported to China;~~

tariffs;

●

Changes in our business strategy, capital improvements or development plans;

●

Effect of our risk mitigation strategies and hedging activities on our financial performance and cash flows;

●

Competition from alternative fuels and alternative fuel additives;

●

Changes or advances in plant production capacity or technical difficulties in operating the plant; ~~and~~

●

Our reliance on key management ~~personnel.~~

personnel; and

●

A slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from COVID-19.

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We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

Available Information

Our website address is www.granitefallsenergy.com. Our annual report on Form 10-K, periodic reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC ~~Compliance”,~~Compliance,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this report on Form 10-Q.

Industry and Market Data

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the United States (“U.S.”) ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent ~~sources~~.sources. Although we believe our third-party sources are reliable, we have not independently verified the information.

Overview

Granite Falls Energy, LLC (“Granite Falls Energy” or “GFE”) is a Minnesota limited liability company that owns and operates a dry mill ~~cornbased,~~corn-based, natural gas fired ethanol plant in Granite Falls, Minnesota. Additionally, through Project Viking, L.L.C., a wholly owned subsidiary (“Project Viking”), GFE owns an approximately 50.7% controlling interest of Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or “HLBE”). HLBE is a Minnesota limited liability company that owns and operates a dry mill ~~cornbased,~~corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota. Additionally, through its a wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), HLBE ~~owns a 73% controlling interest~~is the sole owner of Agrinatural Gas, LLC (“Agrinatural”), which operates a natural gas pipeline.

When we use the terms “Heron Lake BioEnergy”, “Heron Lake”, or “HLBE” or similar words, unless the context otherwise requires, we are referring to Heron Lake BioEnergy and its wholly owned subsidiary, HLBE Pipeline Company, LLC, and its majority-owned subsidiary Agrinatural. When we use the terms “Granite Falls Energy” or “GFE” or similar words, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our operations at our ethanol production facility located in Granite Falls, Minnesota. When we use the terms the “Company”, “we”, “us”, “our” or similar, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our consolidated wholly- and majority owned subsidiaries.

Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S. Our production operations are carried out at GFE’s ethanol plant located in Granite Falls, Minnesota and at HLBE’s ethanol plant near Heron Lake, Minnesota.

~~The GFE~~GFE’s ethanol plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but has obtained EPA pathway approval and permits from the Minnesota Pollution Control Authority (“MPCA”) to increase ~~our~~its production capacity to approximately 70 million gallons of undenatured ethanol on a ~~twelve month~~twelve-month rolling sum basis. ~~The HLBE~~HLBE’s plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but has obtained EPA pathway approval and permits from the MPCA to increase its production capacity to approximately 72 million gallons of undenatured ethanol on a twelve month rolling sum basis. We intend to continue working toward increasing production at plants to take advantage of the additional production allowed pursuant to their respective permits so long as we believe it is profitable to do so.

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We market and sell the products produced at ~~the GFE and HLBE~~our plants primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, ~~LLC~~Inc. to market all of the ethanol produced at our ethanol plants. WeGFE also independently ~~market~~markets a small portion of the ethanol production at ~~the GFE~~its plant as E-85 to local retailers.

We have contracted with Renewable Products Marketing Group, LLC (“RPMG”) to market the distillers’ grains produced at the GFE plant and with Gavilon Ingredients, LLC to market distillers’ grains produced at the HLBE plant. We have contracted with RPMG to market all of corn oil produced at our ethanol plants. HLBE also occasionally independently markets and sells excess corn syrup from the distillation process at the Heron Lake plant to local livestock feeders.

We do not have any long-term, fixed price exclusive supply contracts for the purchase of corn for either the GFE or HLBE plants. Both GFE and HLBE purchase the corn necessary for operating directly from grain elevators, farmers, and local dealers within approximately 80 miles of their respective plants. Neither GFE’s nor HLBE’s members are obligated to deliver corn to our plants.

AtSteve Christensen serves as our CEO and general manager and intends to retire at or before the ~~GFE plant,~~end of 2021. In February 2021, we ~~pay Center Point Energy/Minnegasco~~executed a per unit fee to move the natural gas through the pipeline, and we have guaranteed to move a minimum of 1,500,000 MMBTUs annually through December 31, 2025, which is the ending date of the agreement. We also have anseparation agreement with ~~U.S. Energy Services, Inc.~~Mr. Christensen, which provides that Christensen will continue to ~~procure contracts with various natural gas vendors on our behalf to supply the natural gas necessary to operate the Granite Falls plant.~~serve in his roles until we hire his replacement and complete a transition period.

HLBE ~~has~~was out of compliance with certain debt covenants on January 31, 2021, for which a ~~facilities agreement with Northern Border Pipeline Company, which allows HLBE to access an existing interstate natural gas pipeline located approximately 16 miles north of its plant.~~waiver was obtained from the lender. HLBE has ~~entered into~~forecasted that it is probable that there will be future instances of noncompliance with debt covenants within the next twelve months. These conditions result in the classification of approximately $11.8 million of debt as current as of at January 31, 2021. HLBE has insufficient cash on hand and additional borrowing capacity, and current forecasts indicate insufficient cash flows from operations, to repay the debt if it were to come due as a ~~firm natural gas transportation agreement with its majority owned subsidiary, Agrinatural.~~result of covenant noncompliance. These factors raise substantial doubt about HLBE’s ability to continue as a going concern. To remain in business, HLBE ~~also has an agreement with Constellation NewEnergy—Gas Division, LLC~~will need to ~~supply the natural gas necessary to operate the Heron Lake plant.~~

We have entered into a management services agreement with HLBE pursuant to which our chief executive officer, chief financial officer, and commodity risk manager also hold those same offices with HLBE. The management services agreement automatically renews for successive one-year terms unless either HLBEobtain additional equity or GFE gives the other party written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

~~HLBE also owns a controlling 73% interest in Agrinatural, which~~debt financings. There is a ~~natural gas distribution~~risk that CoBank, as the administrative agent for our lender Compeer, may seek to enforce its security interests and ~~sales company located in Heron Lake, Minnesota~~take control of HLBE’s assets. If that ~~owns approximately 190 miles of natural gas pipeline and provides natural gas~~were to ~~HLBE’s ethanol plant and other commercial, agricultural and residential customers through a connection~~happen, HLBE may be faced with the ~~natural gas pipeline facilities~~prospect of ~~Northern Border Pipeline Company. Agrinatural's revenues are generated~~either ceasing operations or seeking to reorganize through ~~natural gas distribution fees and sales.~~Chapter 11 bankruptcy proceedings.

On November 1, 2016, we subscribed to purchase 1,500 capital units of Ringneck Energy & Feed, LLC (“Ringneck”) at a price of $5,000 per unit for a total of $7,500,000. By letter dated July 12, 2017, GFE was notified of Ringneck’s acceptance of GFE’s subscription and that payment of the balance of GFE’s subscription due under the promissory note was due not later than August 2, 2017. On August 2, 2017, GFE borrowed $7.5 million under its credit facility with Project Hawkeye, LLC (“Project Hawkeye”), an affiliate of Fagen, Inc., which is a member of GFE, and paid $6,750,000 to Ringneck as payment of the remaining balance of GFE’s subscription and promissory note. Details regarding our investment in Ringneck are provided below in the section below titled “~~Investments.” Details of the Project Hawkeye credit facility are provided below in the section below entitled “Indebtedness - Granite Falls Energy - GFE’s Other Credit Arrangement~~”.

~~Reportable Operating Segments~~

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers' grains and sales of corn oil at GFE's ethanol plant and HLBE's ethanol plant. Therefore, we have determined that based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant and HLBE's plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

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Additionally, we also realize relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE's majority owned subsidiary. The intercompany transactions between HLBE and Agrinatural resulting from the firm natural gas transportation agreement between the two companies are eliminated in consolidation. After intercompany eliminations, revenues from Agrinatural represent less than less than 1% of our consolidated revenues and have little to no impact on the overall performance of the Company. Therefore, our management does not separately review Agrinatural's operating performance information. Rather, management reviews Agrinatural's natural gas pipeline financial data on a consolidated basis with our ethanol production operations segment. Additionally, management believes that the presentation of separate operating performance information for Agrinatural's natural gas pipeline operations would not provide meaningful information to a reader of the Company’s condensed consolidated unaudited financial statements.

We currently do not have or anticipate that we will have any other lines of business or other significant sources of revenue other than the sale of ethanol and its co-products, which include distillers' grains and non-edible corn oil.

Plan of Operations for the Next Twelve Months

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2020 and so far in 2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels, exacerbated by the COVID-19 pandemic. These factors resulted and continue to result in prolonged negative operating margins, lower cash flow from operations and substantial net losses. We expect to have sufficient cash generated by continuing operations, availability on our credit facility, and additional debt with the Company’s current lenders to fund our operations. However, should unfavorable operating conditions continue or worsen in the ethanol industry that prevent us from profitably operating our plant, we may need to seek additional funding or further idle ethanol production altogether.

Over the next twelve months, we will continue our focus on operational improvements at our plants. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plants to take full advantage of our permitted production capacities,, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

We expect to have sufficient cash generated by continuing operations and availability on current credit facilities to fund our operations. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plants, we may need to seek additional funding.

Additionally, we expect to continue to conduct routine maintenance and repair activities at our ethanol plants to maintain current plant infrastructure, as well as small capital projects to improve operating efficiency. We anticipate using cash ~~we generate~~ from ~~our operations and~~ our revolving term ~~loan~~loans to finance these plant upgrade projects.

Trends and Uncertainties Impacting Our Operations

The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains and natural gas,, as well as governmental programs designed to create incentives for the use of corn-based ethanol. Other factors that may affect our future results of operation include those risks discussed below and in “PART II - Item 1A. Risk Factors” of this report, and “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, ~~2017.~~2020.

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and

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foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons.

Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production.

Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our plants may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our plants to minimize our variable costs and optimize cash flow.

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Management ~~currently~~ believes that the ethanol outlook in the fiscal year 2021 will remain relatively consistent with this quarter and our margins will remain ~~modest during~~tight due to higher corn prices and depressed gasoline demand. While the ~~remainder~~distribution of COVID-19 vaccinations and the increase in business re-openings have improved the overall economic outlook , the negative market effects of the ~~fiscal year 2018. However,~~COVID-19 pandemic will likely continue to impact our profitability. Additionally, continued large corn supplies and ethanol production capacity increases could have a negative impact on the market price of ethanol which could adversely impact our profitability. This negative impact could worsen if domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline. ~~The ethanol industry is currently experiencing growth in production capacity principally through plant optimization and some new construction. The EIA has reported that during 2017, increasing~~Further, while ethanol production ~~rates~~briefly and significantly declined during the second fiscal quarter of 2020, ethanol production has mostly rebounded and remained steady in the three months ended January 31, 2021. In addition, management believes that the continued issuance of waivers of small refiner renewable volume obligations (“RVOs”) by the U.S. Environmental Protection Agency (“EPA”), as well as uncertainty regarding the Renewable Fuels Standard (“RFS”) reset, could contribute to the projected negative or low margins.

Additionally, while ethanol continues trading at a significant discount to gasoline, which has improved export demand somewhat, the continued issuances of waivers of small refiner RVOs by the EPA has contributed to management’s expectation regarding margins. Prices for renewable identification numbers (“RINs”) for corn-based ethanol increased slightly in the three months ending January 31, 2021. However, previously issued small refiner waivers and the reductions in Chinese imports continue to have ~~outpaced domestic E10 gasoline demand and export growth, leading to elevated ethanol inventory levels.~~

~~In recent years,~~a negative impact on prices RINs, thereby diminishing a blending incentive from the ethanol ~~industry~~marketplace.

Changes in the ~~U.S. has increased exports of ethanol~~price for crude oil and ~~distillers’ grains. However,~~ export demand for ethanol is less consistent compared to domestic demand which can lead to ethanol price volatility. During 2017, China and Brazil instituted tariffs on ethanol produced in the U.S., which are expected to continue to negatively impact U.S. exports. In September 2017, China’s National Development and Reform Commission, the National Energy Board and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanol by 2020. China, the number three importer of U.S. ethanol in 2016, imported negligible volumes during calendar year 2017 due to a 30% tariff imposed on imports of U.S. and Brazil fuel ethanol, which took effect in January 2017. There is no assurance that the recently issued joint plan will lead to increased imports of U.S. ethanol by China but any increase in exports to Chinaunleaded gasoline could have a ~~positive~~negative impact on the ~~ethanol market.~~

~~While Chinese export~~ demand has fallen off since imposition of its tariffs, Brazilian demand from the U.S. has remained relatively steady. Additionally, given the ethanol supply struggles Brazil is currently facing, the government of Brazil has indicated that it is contemplating reversing the tariff. As a result, management anticipates exports to Brazil will remain steady in the near term despite the tariff because of market conditions in Brazil. Any decrease in U.S. ethanol exports could adverselyfor gasoline and impact the market price of ethanol, ~~unless~~which could adversely impact our profitability. According to the EIA February 2021 Short Term Energy Outlook, EIA estimates that U.S. gasoline consumption will average 8.5 million barrels per day from February to June, compared with an estimated 7.8 million barrels per day in January. U.S. regular gasoline retail prices averaged $2.33 per gallon in January 2021, compared with an average of $2.20 per gallon in December 2020 and $2.55 per gallon in January 2020. EIA forecasts gasoline prices to average $2.44 per gallon in 2021 and $2.46 per gallon in 2022. In addition, EIA forecasts relatively stable prices for crude oil, projecting Brent crude oil prices to average $56 per barrel in the first quarter of 2021 and $52 per barrel for the remainder of the year. EIA expects lower oil prices later in 2021 as a result of rising oil supply. Significant decreases in the price for crude oil have a negative impact on the demand for ethanol.

Continued ethanol production capacity increases could also have a negative impact on the market price of ethanol, which could be further exacerbated if domestic ~~demand increases~~ethanol inventories remain high or ~~foreign markets are developed.~~

~~Our margins have also been, and could continue to be, negatively impacted~~grow, or if U.S. exports of ethanol decline. Throughout 2020, some U.S. ethanol plants temporarily suspended production due to ~~lower market~~negative margins, largely resulting from the COVID-19 pandemic, and stagnant export projections caused by trade barriers and decreased global demand in connection with the COVID-19 pandemic.

Corn oil prices ~~for distillers’ grains due to lower export demand, largely due to Chinese tariffs, and oversupply in the domestic market, along with~~ increased ~~corn and soybean availability. However,~~ during the three months ~~ended~~ending January 31, ~~2018, distillers’ grains prices were somewhat buoyed by improved domestic demand~~2021. One factor in ~~response to the~~ ~~continued rise in soybean meal price and improved export demand from southeast Asia, particularly Vietnam.~~ ~~Exports of U.S. distillers’ grains to Vietnam had halted completely due to Vietnam’s imposition of stricter regulations on fumigation in December 2016. However, i~~n a statement issued September 1, 2017, the U.S. Grains Council announced that Vietnam is lifting its suspension of U.S. distillers’ grains imports and easing fumigation requirements. Since the lifting of Vietnam’s suspension, ~~exports to Vietnam have resumed, although there is no guarantee that they will reach pre-suspension levels.~~

Demand and prices for distillers’ grains have experienced significant decline due to decreased exports to China as a result of the substantial tariffs and duties imposed on imports into China of distillers’ grains produced in the U.S. imposed in January 2017. China had historically been one of the largest importers of domestically produced distillers’ grains. However, in November 2017, the Chinese foreign ministry announced that it would be removing the 11% value-added tax on U.S. produced dried distillers’ grains but no timeline for removal has been established. While the anti-subsidy tariffs may be r~~emoved, the more substantial anti-dumping duties remain~~. As a result, we cannot forecast how much demand from China will come back into the marketplace and distillers’ grains prices could remain low unless additional demand can be created from other foreign markets or domestically.

~~Corn oil prices have been adversely impacted by oversupply of corn oil due to the substantial increase in ethanol production during the last few years. Additionally,~~higher corn oil prices have been impacted by oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil for biodiesel production. The impact of lower soybean oil prices and the current oversupply of corn oil due to the substantial increase in corn oil production during the last few years will likely continue to impact corn oil prices.

~~In February 2018,~~is 2019 legislation ~~was signed retroactively~~ extending the ~~$1.00-per-gallon~~$1.00 per-gallon biodiesel blender tax credit ~~retroactively to January 1, 2017. Any~~through December 31, 2022. However, corn oil prices may decrease if biodiesel producers reduce production and/or demand for corn oil is reduced without extension of the biodiesel blenders tax credit beyond December 31, 2017 could increase demand for corn oil and soybean oil and positively impact the price of corn oil. However, due to the recent uncertainty in Congress, management cannot predict whether additional legislation further extending the biodiesel tax credit will be passed by Congress. credit.

2022

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Given the inherent volatility in ethanol, distillers’ grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers’ grains, non-food grade corn oil, and grain prices in future periods will be consistent compared to historical periods.

Impact of COVID-19 on the Company

Operations

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout 2020, as the COVID-19 pandemic greatly reduced travel and thereby reduced demand for fuel, including the ethanol we produce. Reduced demand and high industry inventory levels resulted in record low ethanol prices in the second and third fiscal quarters of 2020. As a result, we experienced negative operating margins, significantly lower cash flow from operations and substantial net losses. In response to these adverse market conditions, HLBE idled its ethanol production from on or about March 30, 2020 through approximately May 31, 2020 and GFE temporarily idled its operations from on or about April 3, 2020 through approximately May 18, 2020. Fuel prices generally, and ethanol prices specifically, stabilized in the three months ending January 31, 2021, and management believes there is potential for fuel demand to increase as more individuals obtain COVID-19 vaccinations and resume traveling. However, it is possible that ongoing pandemic or other factors will cause fuel demand and ethanol prices to remain flat or decrease, thus negatively affecting our business. The Company continues to monitor COVID-19 developments to determine if adjustments to production are warranted.

Employees

The Company has enacted appropriate safety measures to protect the health and safety of our employees, customers, partners and suppliers, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

Supply and Demand

Although we continue to regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to produce our products, adversely affecting our operations, even when operating at reduced production levels. Additionally, restrictions or disruptions of transportation, such as reduced availability of truck, rail or air transport, port closures and increased border controls or closures, may result in higher costs and delays, both with respect to obtaining raw materials and shipping finished products to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers. Additionally, the COVID-19 pandemic has significantly increased economic and demand uncertainty. The pandemic has caused a global economic slowdown, and it is possible that it could cause a global recession. In the event of a recession, demand for our products would decline further and our business would be further adversely affected.

PPP Loans

On April 17, 2020, GFE received a loan in the amount of $703,900 through the Paycheck Protection Program. GFE’s PPP loan was forgiven in February 2021. Additionally, on April 18, 2020 HLBE received a loan in the amount of $595,693 through the Paycheck Protection Program. Management expects the HLBE PPP loan will be forgiven in March 2021.

GFE received a second Paycheck Protection Program loan in February 2021 the amount of $703,900. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in June 2022 with a final installment in February 2026.

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HLBE received a second Paycheck Protection Program loan in February 2021 in the amount of $595,693. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, HLBE would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in February 2022 with a final installment in February 2026.

Outlook

The adverse conditions created by the COVID-19 pandemic caused the Company to experience negative operating margins, significantly lower cash flow from operations and substantial net losses. Although there is uncertainty related to the ongoing impact of the COVID-19 pandemic on our future results, we believe our current cash reserves, cash generated from our operations, our Paycheck Protection Program loans and the available cash under our revolving loans leave us well-positioned to manage our business through this crisis. However, the impacts of the COVID-19 pandemic are broad-reaching, and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses. As a result, although GFE was in compliance with our financial covenants set forth in GFE’s Term Revolving Loan, the impact the COVID-19 pandemic could have an adverse impact on our operating results which could result in our inability to comply with certain of these financial covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default.

Additionally, due to the negative financial impacts of the COVID-19 pandemic, HLBE experienced instances of noncompliance with certain loan covenants related to its working capital and net worth ratio, and HLBE is projected to experience additional instances of noncompliance with these loan covenants in the next twelve months. These conditions result in the classification of approximately $11.8 million of debt as current as of at January 31, 2021. HLBE has insufficient cash on hand and additional borrowing capacity, and current forecasts indicate insufficient cash flows from operations, to repay the debt if it were to come due as a result of covenant noncompliance. These factors raise substantial doubt about HLBE’s ability to continue as a going concern. To remain in business, HLBE will need to obtain additional equity or debt financings. There is a risk that CoBank, as the administrative agent for our lender Compeer, may seek to enforce its security interests and take control of HLBE’s assets. If that were to happen, HLBE may be faced with the prospect of either ceasing operations or seeking to reorganize through Chapter 11 bankruptcy proceedings.

While the business re-openings and distribution of COVID-19 vaccines have improved the overall economic outlook, the pandemic is ongoing, and its dynamic nature makes it difficult to forecast the long-term effects on our industry as a whole and our Company specifically. New variants of the virus that causes COVID-19 may prolong the pandemic, create additional waves of infections, or impose other unforeseen challenges. It is possible that even after the pandemic has subsided, there will be permanent changes to social and economic patterns, such as increased use of video-teleconferencing technology and remote working, that will limit travel and thereby suppress demand for fuel, including the ethanol we produce.

Despite the economic uncertainty resulting from the COVID-19 pandemic, we intend to continue to focus on strategic initiatives designed to improve on our operational efficiencies, which is critical in order to drive positive results in a low-margin environment.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future.

Government Supports and Regulation

The Renewable Fuels Standard

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”~~(“RFS”). The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage. Opponents of the RFS have sought to restrict or eliminate the standard through various

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litigation and legislative actions. Any adverse ruling on, or legislation affecting, the RFS could have an adverse impact on ~~short-term~~ ethanol prices and our financial performance in the future.

~~Under~~The Biden administration has indicated support for RFS blending rules and energy policies that could be beneficial to the ~~provisions~~ethanol industry and our business. Specifically, the EPA under the Biden administration has announced it supports the interpretation of the RFS’s small-refinery provisions made by U.S. Court of Appeals for the Tenth Circuit in a 2020 decision. In the case, Renewable Fuels Association et al. v. EPA, various agriculture and biofuel groups challenged the EPA’s grant of waivers to three specific refineries. The waived gallons were not redistributed to obligated parties, and thus reduced the aggregate RVOs under the RFS. In January 2020, the court struck down the exemptions as improperly issued by the EPA. The court interpreted the RFS statute to require that any exemption granted to a small refinery after 2010 must take the ~~Environmental Protection Agency (“EPA”) must publish~~form of an ~~annual rule that establishes~~“extension.” The U.S. Supreme Court has agreed to hear the number of gallons of different types of renewable fuels, including corn-based ethanol, that must be blended with gasoline in the U.S. by refineries, blenders, distributors and importers, which affects the domestic market for ethanol.case. In ~~November 2017,~~February 2021, the EPA announced it ~~would maintain~~supported the ~~15 billion gallon mandate for conventional~~10th Circuit’s interpretation of the RFS, reversing the position the EPA took under the previous administration. Nonetheless, it is uncertain whether the 10th Circuit’s interpretation will be upheld or whether the Biden administration will continue to support energy policies that benefit the ethanol ~~in 2018.~~ industry and our business.

~~According~~Additional legal actions related to the RFS ~~if mandatory~~are underway. These include lawsuits challenging fuel volume waivers based on “inadequate domestic supply,” challenging the EPA’s lower threshold for granting small refinery exemptions, seeking broader, forward-looking remedy to account for the collective lost volumes caused by recent small refinery exemptions, alleging that the EPA and U.S. Department of Energy have improperly denied access to public records request by RFA, and challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. If these legal actions, which general seek to require the EPA to enforce the renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Although the EPA maintained the RVO for conventional ethanol at 15 billion gallons, 2018 is the first year the total proposed RVOs are more than 20% below statutory volumes levels. Thus, the EPA Administrator Pruitt directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The reset will be triggered if the 2019 RVOs continue to be more than 20% below the statutory levels. If the reset is triggered, the EPA will be required to modify statutory volumes through 2022 within one yearblending requirements of the ~~trigger event, based~~RFS, are unsuccessful, there may negative impacts on the ~~same factors used to set the RVOs post-2022. Any adverse ruling on, or legislation affecting, the RFS could have an adverse impact on short-term~~ ethanol ~~prices~~industry and our financial ~~performance~~performance.

COVID-19 Legislation

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020 in an attempt to offset some of the ~~future.~~economic damage arising from the COVID-19 pandemic. The CARES Act created and funded multiple programs that have impacted or could impact our industry. The USDA was given additional resources for the Commodity Credit Corporation (CCC), which it is using to provide direct payments to farmers, including corn farmers from whom we purchase most of our feedstock for ethanol production. Similar to the trade aid payments made by the USDA over the past two years, this cash injection for farmers could cause them to delay marketing decisions and increase the price we have to pay to purchase the corn.

The ~~EPA assigns individual refiners, blenders~~CARES Act also provided for the Small Business Administration to assist companies that constitute small business and ~~importers~~keep them from laying off workers. The Paycheck Protection Program (the “PPP”) was created and quickly paid out all of the ~~renewable volume obligations (“RVOs”) they are obligated~~funds appropriated, including some to ~~use based on their percentage~~farmers and to ethanol plants. Although we received our PPP Loan under the CARES Act, as discussed above, the receipt of ~~total fuel sales. However,~~PPP funds by farmers could, like the ~~EPA has the authority~~CCC funds, incentivize them to waive the mandates in whole or in part if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or environment. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affectsdelay marketing corn which could increase the price of ~~ethanol in certain markets and influences~~corn.

On December 27, 2020, the ~~purchasing decisions by obligated parties.~~federal government enacted Consolidated Appropriations Act, 2021, a second COVID-19 relief package. Among other things, the legislation authorized additional PPP loans. In ~~November 2017, the EPA denied~~February 2021, GFE received a ~~petition to change the point of obligation under RFS to the parties that own the gasoline before it is sold.~~

On October 19, 2017, the EPA Administrator Pruitt reiterated his commitment to the text and spirit of the RFS. In a letter to seven senators from the Midwestern states, he stated the EPA is actively exploring its authority to issue an RVP waiver and will not pursue action on RINs involving ethanol exports. Moreover, on November 22, 2017, the EPA issued a Notice of Denial of Petitions for rulemaking to change the RFS point of obligation, confirming the point of obligation will not change. The point of obligation does not directly impact ethanol producers; however, moving the point of obligation could indirectly affect ethanol producers.

Valero Energy and refining trade group American Fuel and Petrochemical Manufacturers (AFPM) have challenged the EPA’s handling of the U.S. biofuel mandate in separate actions on January 26, 2018. AFPM is asking the D.C. U.S. Court of Appeals to review the EPA’s November 2017 decision to reject proposed changes to the structure of the RFS, including moving the point of obligation from refiners and importers of fuel to fuel blenders. Valero filed two petitions with the same court, one seeking review of the annual Renewable Volume Obligation (RVO) rule set by EPA’s for 2018 and 2019, which dictates the volumes of renewable fuels to be blendedsecond Paycheck Protection Program loan in the ~~coming years,~~amount of $703,900 and HLBE received a second ~~arguing against~~Paycheck Protection Program loan in the ~~EPA’s December 2017 assertion~~amount of $595,693. Management expects the entirety of both loans will be used for payroll, utilities and interest; therefore, management anticipates that the ~~agency has fulfilled its duty to periodically review the RFS as directed by statute.~~loan will be substantially forgiven.

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Although the maintenance of the 15 billion gallon RVO for corn-based ethanol, the October 2017 letter issued by EPA Administrator Pruitt, and the resulting actions taken by the EPA consistent with EPA Administrator Pruitt’s letter signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS. At the end of February 2018 and continuing into March, several discussions regarding the RFS were held between the Trump administration and congressional and petroleum and ethanol industry leaders. A variety of proposals to modify obligations under the RFS have surfaced in recent months, including application of the various waiver authorities under the RFS, expanding the number of small refinery exemptions, and a $0.10 per gallon cap on the price of the RIN credits used to comply with the RFS. There has also been discussion of granting an RVP waiver for E15 gasoline blends to ~~remove barriers to the year-rounds use of E15 and other mid-level ethanol blends~~. ~~However, it is unclear what regulatory changes, if any, will emerge from these discussions.Any changes to the RFS which could significantly affect the market price of RINs or reduce RVOs could adversely affect the demand and price for ethanol and the Company's profitability~~.

T~~ax Cuts and Job Act~~

~~On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act includes significant changes to the taxation of partnership entities.~~ ~~Included in those changes were changes~~ ~~U.S. federal tax rates~~, ~~significant limitations on the deductibility of interest, and allowances for the expensing of capital expenditures~~. The Company is currently evaluating the impact of the Tax Reform Act, as well as potential future regulations implementing the new tax law and interpretations of the new tax law with its professional advisors. The full impact of the Tax Reform Act on the Company in future periods cannot be predicted at this time

~~The Tax Reform Act also included an unintended consequence under section 199A benefitting producers of agricultural products that sell their products through cooperatives. Currently, sales t~~o non-cooperative grain buyers, like the Company, do not qualify for the same benefit. This may provide cooperatives with a potential marketplace advantage over us as we compete to purchase corn for our plant due to how sales from farmers to such entities are treated for income tax purposes. Any increase in the price we must pay for the corn to effectively compete with cooperatives would result in lower profit margins and adversely affect our financial performance. According recent industry new reports, draft legislation has been proposed to address the marketplace imbalance created by section 199A retroactive to January 1, 2018 for inclusion in the pending 2018 omnibus spending bill. While we believe that Congress intends to correct these provisions favoring cooperatives, there is no assurance that Congress will act to resolve this issue or that if such changes are approved that they will be retroactively applied.

Results of Operations for the Three Months Ended January 31, ~~2018~~2021 and ~~2017~~2020

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, ~~2018~~2021 and ~~2017~~2020 (amounts in thousands).


	Three Months Ended January 31,
	2021				2020
	(unaudited)				(unaudited)
Statement of Operations Data	Amount		%		Amount		%
Revenues	$	49,398	100.0	%	$	53,356	100.0	%
Cost of Goods Sold		52,788	106.9	%		54,299	101.8	%
Gross Loss		(3,390)	(6.9)	%		(943)	(1.8)	%
Operating Expenses		1,994	4.0	%		1,773	3.3	%
Operating Loss		(5,384)	(10.9)	%		(2,716)	(5.1)	%
Other Income (Expense), net		93	0.2	%		30	0.1	%
Net Loss		5,291	10.7	%		(2,686)	(5.0)	%
Less: Net (Income) Loss Attributable to Non-controlling Interest		2,040	4.1	%		1,185	2.2	%
Net Loss Attributable to Granite Falls Energy, LLC	$	(3,251)	(6.6)	%	$	(1,501)	(2.8)	%

Three Months Ended  January 31,

2018

2017

(unaudited)

(unaudited)

Statement of Operations Data

Amount

%

Amount

%

Revenues

$
52,993

100.0
%

$
54,576

100.0
%

Cost of Goods Sold

49,989

94.3
%

47,731

87.5
%

Gross Profit

3,004

5.7
%

6,845

12.5
%

Operating Expenses

1,680

3.2
%

1,607

2.9
%

Operating Income

1,324

2.5
%

5,238

9.6
%

Other Income, net

200

0.4
%

351

0.6
%

Net Income

1,524

2.9
%

5,589

10.2
%

Less: Net Income Attributable to Non-controlling Interest

(473)

(0.9)
%

(1,429)

(2.6)
%

Net Income Attributable to Granite Falls Energy, LLC

$
1,051

2.0
%

$
4,160

7.6
%

Revenues

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~~Revenues~~

Our consolidated revenue is derived principally from sales of our three primary products: ethanol, distillers’ grains and corn oil. Revenues from these products represented approximately ~~98.4%~~98.8% and ~~98.9%~~98.2% of our total revenues for the three months ended January 31, ~~2018~~2021 and ~~2017,~~2020, respectively. The remaining approximately ~~1.6%~~1.2% and ~~1.1%~~1.8% is attributable to miscellaneous other revenue for the three months ended January 31, ~~2018~~2021 and ~~2017,~~2020, respectively, and is made up of incidental sales of corn syrup at ~~HLBE's~~HLBE’s plant and revenues from natural gas pipeline operations at Agrinatural, net of intercompany eliminations for distribution fees paid by HLBE to Agrinatural for natural gas transportation services.

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2018:

Three Months Ended  January 31, 2018

Sales Revenue

% of Total Revenues
Revenue Sources

(in thousands)

Ethanol sales

$
39,863

75.2
%
Distillers' grains sales

9,927

18.8
%
Corn oil sales

2,347

4.4
%
Miscellaneous other

856

1.6
%
Total Revenues

$
52,993

100.0
%

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our condensed consolidated unaudited statements of operations for the three months ended January 31, ~~2017:~~2021:


	Three Months Ended January 31, 2017
	Sales Revenue		% of Total Revenues

					Three Months Ended January 31, 2021
					Sales Revenue		% of Total Revenues
Revenue Sources	(in thousands)				(in thousands)
Ethanol sales	$	43,921	80.5	%	$	36,138	73.2	%
Distillers' grains sales		7,648	14.0	%		9,777	19.8	%
Corn oil sales		2,419	4.4	%		2,850	5.8	%
Miscellaneous other		588	1.1	%		633	1.2	%
Total Revenues	$	54,576	100.0	%	$	49,398	100.0	%


	Three Months Ended January 31, 2020
	Sales Revenue		% of Total Revenues
Revenue Sources	(in thousands)
Ethanol sales	$	40,852	76.6	%
Distillers' grains sales		9,631	18.1	%
Corn oil sales		1,888	3.5	%
Miscellaneous other		985	1.8	%
Total Revenues	$	53,356	100.0	%

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Our total consolidated revenues decreased by approximately ~~2.9%~~7.4% for the three months ended January 31, ~~2018,~~2021, as compared to the three months ended January 31, ~~2017~~2020. This decrease was primarily due ~~primarily~~ to ~~the~~an 11.5% decrease in the ~~average price received for our~~number of gallons of ethanol ~~and corn oil, which was partially mitigated by the increase in the average price received for our distillers’ grains.~~ sold. The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended January 31, ~~2018~~2021 and ~~2017:~~ 2020:


	Three Months Ended January 31, 2018			Three Months Ended January 31, 2017
	Quantity Sold	Avg. Net Price		Quantity Sold	Avg. Net Price

							Three Months Ended January 31, 2021			Three Months Ended January 31, 2020
							Quantity Sold	Avg. Net Price		Quantity Sold	Avg. Net Price
Product	(in thousands)			(in thousands)			(in thousands)			(in thousands)
Ethanol (gallons)	33,193	$	1.20	30,828	$	1.42	27,436	$	1.32	32,227	$	1.32
Distillers' grains (tons)	82	$	121.22	80	$	95.89	75	$	130.10	75	$	120.41
Corn oil (pounds)	9,204	$	0.25	8,889	$	0.27	9,011	$	0.32	8,337	$	0.25

Ethanol

Total revenues from sales of ethanol decreased by approximately ~~9.2%~~11.5% for the three months ended January 31, ~~2018~~2021 compared to the same period ~~of 2017~~a year earlier due to a decrease of approximately 15.7% in the average price per gallon we received for our ethanol, partially offset by a 7.7% increase in volume sold. This aggregate increase in the number of gallons sold is attributable to an approximately 2.4% and 13.0% increase in the number of gallons sold at the GFE and HLBE plants, respectively, during the three months ended January 31, 2018. We sold more ethanol at our plants as a result of increased ethanol production at the HLBE during the 2018 period and the timing of shipments at the GFE plant. We are currently operating our plants above their nameplate capacities. Management anticipates relatively stable ethanol production and sales during our 2018 fiscal year.

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~~The~~11.5% decrease in ~~average market price for~~ aggregate volume sold caused, in part, by production declines caused in part by the ~~three months ended January 31, 2018 compared to the same period of 2017 is~~ due to lower market corn prices and increased ethanol supply in the market. Management anticipates that ethanol prices may continue lower during our 2018 fiscal year due to a several factors, including anticipated increases in U.S. ethanol production from plant expansions coming online, along with lower export demand from Brazil and China. Domestic production expansion, coupled with the Chinese and Brazilian ethanol tariffs, have increased domestic stocks of ethanol, pushing ethanol prices downward. Management anticipates that this excess ethanol supply may continue unless new export markets for ethanol are developed or domestic demand for ethanol increases. While ethanol exports to Brazil continue, if ethanol prices increase, these exports to Brazil may cease. Further, ethanol exports could potentially be higher without the Chinese and Brazilian tariffs. Additionally, if domestic use increases as a result of the traditional summer driving season, ethanol prices may increase. boiler replacement at HLBE.

From time to time, we engage in hedging activities with respect to our ethanol sales. At January 31, ~~2018,~~2021, GFE had fixed and basis contracts for forward ethanol sales for various delivery periods through March ~~2018~~31, 2021 valued at approximately ~~$11.7~~$14.6 million. At January 31, ~~2018,~~2021 HLBE had ~~fixed and basis contracts for~~ forward ethanol sales contracts valued at approximately $14.7 million for various ~~delivery~~ periods through March ~~2018 valued at approximately $14.0 million.~~2021. Separately, ethanol derivative instruments resulted in ~~gains~~a gain of approximately ~~$139,000 and $417,000 during~~$114,000 for the three months ended January 31, ~~2018, and~~2021; in comparison, they resulted in a loss of approximately $210,000 for the three months ended January 31, ~~2017, respectively.~~ 2020.

Distillers' Grains

Total revenues from sales of distillers’ grains increased by approximately ~~29.8%~~1.5% for the three months ended January 31, ~~2018~~2021, compared to the same period ~~of 2017. This increase was~~a year earlier, due primarily to an ~~approximately 26.4%~~ increase in ~~the average price per ton we received~~tons sold of approximately 5.7%.

At January 31, 2021, GFE had forward contracts to sell approximately $3,063,000 of distillers’ grain for ~~our distillers’ grains, coupled with an~~deliveries through March 2021. At January 31, 2021, HLBE had forward contracts to sell approximately ~~2.7% increase in the volumes sold from period to period.~~ ~~The increase in total tons~~$5,473,000 of distillers’ grains sold during the three months ended January 31, 2018 compared to the same period of 2017 was due to an approximately 11.6% increase in distillers’ grains produced at HLBE’s plant, offset by an approximately 5.2% decrease in distillers’ grain production at the GFE plant. ~~The decrease in tons produced at the GFE plant was due primarily~~ ~~to decreased ethanol production.~~ ~~The increase in tons produced at the HLBE plant was due primarily to~~ ~~an increase in ethanol production~~ ~~from period to period, which resulted in increased distillers’ grains production~~.for delivery through September 2021.

~~Management attributes the increase in the market price of distillers’ grains to increased export demand from southeast Asia, particularly Vietnam, as well as increased prices for soybean meal.~~ ~~Management anticipates distillers’ grains prices will remain steady during our 2018 fiscal year,~~ ~~unless China reduces or eliminates its tariffs~~ or additional domestic demand and/ or other foreign markets develop. Domestic demand for distillers’ grains could decline if corn or soybean meal prices weaken and end-users switch to lower priced alternatives. ~~Domestic demand for distillers’ grains may also decrease due to over-supply resulting from expansion of production capacity in the ethanol industry.~~

At January 31, 2018, GFE had forward distillers’ grains sales contracts valued at approximately $993,000 for various delivery periods through February 2018 and HLBE had forward distillers’ grains sales contracts valued at approximately $1.6 million for various delivery periods through March 2018.

Corn Oil

Total revenues from sales of corn oil ~~decreased~~increased by approximately ~~3.0%~~51.0% for the three months ended January 31, ~~2018~~2021 compared to the same period ~~of 2017~~a year earlier due primarily to an approximately ~~6.3% decrease~~40% increase in the average price per pound we received for our corn oil ~~which was offset by~~from period to period coupled with an approximately ~~3.5%~~7.6% increase in pounds sold from period to period.

~~Management attributes the decrease in corn oil prices~~ ~~to decreased demand from the biodiesel industry and from the feed market. Management expects~~Although management believes that corn oil prices will remain relatively steady, ~~in the near term. However, we~~prices may ~~experierence lower demand for~~decrease if there is an oversupply of corn oil production resulting from increased production rates at ethanol plants or if biodiesel producers begin to utilize lower-priced alternatives such as soybean oil or if the biodiesel ~~industry since the proposed volume obligations in the 2018 RFS for biodiesel are lower than statutory levels unless the biodiesel blenders~~blenders’ tax credit is ~~extended beyond December~~not renewed and biodiesel production declines.

At January 31, ~~2017. Additionally, the production capacity increase that is occurring throughout the ethanol industry may also result in oversupply that may negatively affecting prices unless plants curtail~~2021, GFE had forward contracts to sell approximately $637,000 of corn oil ~~production or additional demand can be created.~~for delivery through February 2021. At January 31, 2021, HLBE had forward contracts to sell approximately $435,000 of corn oil for delivery through February 2021.

Cost of Goods Sold

~~Table~~Our cost of ~~Contents~~

~~The increase in pounds~~goods sold ~~from period to period was attributable to an~~decreased by approximately ~~14.6%~~ ~~increase in the volume sold at the HLBE plant~~2.8% for the three months ended January 31, ~~2018 compared to the same period of 2017, offset by a 6.9% decrease in the volume sold at the GFE plant.~~ ~~The decrease in pounds sold at the GFE plant was due primarily to~~ ~~due to decreased ethanol production and decreased oil extraction rates per bushel of corn during the 2018 period.~~ ~~The increase in pounds sold at the HLBE plant was due primarily to increased ethanol production and~~ ~~improved oil extraction rates per bushel of corn~~ ~~from period to period. Management anticipates that the corn oil production our ethanol plants will be relatively stable going forward.~~

At January 31, 2018, GFE had forward corn oil sales contracts valued at approximately $260,000 for various delivery periods through February 2018. At January 31, 2018, HLBE had forward corn oil sales contracts valued at approximately $466,000 for various delivery periods through February 2018.

~~Cost of Goods Sold~~

~~Our cost of goods sold increased by approximately 4.7% for the three months ended January 31, 2018,~~2021, as compared to the three months ended January 31, ~~2017. As~~2020 However, as a percentage of revenues, our cost of goods sold increased to approximately ~~94.3%~~106.9% for the three months ended January 31, ~~2018~~,2021, as compared to approximately ~~87.5%~~101.8% for the same period ~~in 2017~~ ~~due primarily to the decline in the price of ethanol and corn oil which exceeded the decline in the price of corn from period to period.~~a year earlier. Approximately 90% of our total costs of goods sold is attributable to our ethanol ~~production segment. Therefore, t~~he

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production. The cost of goods sold per gallon of ethanol sold for the three months ended January 31, ~~2018~~ 2021, and 2020 was approximately ~~$1.36~~$1.73 and $1.58 per gallon, ~~of ethanol sold compared to approximately $1.39 per gallon of ethanol sold~~ ~~three months ended January 31, 2017~~.respectively.

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended January 31, ~~2018:~~2021:


	Three Months Ended January 31, 2018
	Cost		% of Cost of Goods Sold
	(in thousands)

					Three Months Ended January 31, 2021
					Cost		% of Cost of Goods Sold
					(in thousands)
Corn costs	$	36,000	72.0	%	$	45,193	85.6	%
Natural gas costs		3,492	7.0	%		3,163	6.0	%
All other components of costs of goods sold		10,497	21.0	%		4,432	8.4	%
Total Cost of Goods Sold	$	49,989	100.0	%	$	52,788	100.0	%

The following table shows the costs of corn, natural gas and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended January 31, ~~2017:~~2020:


	Three Months Ended January 31, 2017
	Cost		% of Cost of Goods Sold
	(in thousands)

					Three Months Ended January 31, 2020
					Cost		% of Cost of Goods Sold
					(in thousands)
Corn costs	$	35,816	75.0	%	$	41,974	77.3	%
Natural gas costs		3,433	7.2	%		3,442	6.3	%
All other components of costs of goods sold		8,482	17.8	%		8,883	16.4	%
Total Cost of Goods Sold	$	47,731	100.0	%	$	54,299	100.0	%

Corn

Our aggregate cost of corn was approximately ~~0.5%~~7.6% more for the three months ended January 31, ~~2018~~2021 compared to the same period of ~~2017,~~ a year earlier due to an approximately ~~a 3.5%~~17.0% increase ~~in the number of bushels of corn processed, partially offset by 2.9% decrease~~ in the average price per bushel paid for corn, partially offset by an approximately 8.0% decrease in the number of bushels processed from period to ~~period~~. period. The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for the three months ended January 31, ~~2018~~2021 was approximately ~~$0.19~~$0.23 lower than the corn-ethanol price spread we experienced for same period of ~~2017~~.ended January 31, 2020.

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The decrease in corn prices was primarily due to lower market prices as a result of the strong 2017 harvest and ample market supplies of corn pushing prices down. Management anticipates that corn prices will remain relatively lower through the first half of 2018 fiscal year. However, we may still experience short term volatility due to weather conditions, domestic and world supply and demand, current and anticipated stocks, agricultural policy, and other factors, and could significantly impact our costs of production. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers’ grains out paces rising corn prices.

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At January 31, ~~2018,~~2021, GFE had ~~approximately 4.1 million bushels of~~ cash and basis contracts for forward corn purchase commitments for ~~delivery periods~~approximately 5.0 million bushels for deliveries through ~~February 2019.~~December 2022. At January 31, ~~2018,~~2021, HLBE had ~~approximately 3.4 million bushels of~~ cash and basis contracts for forward corn purchase commitments for ~~delivery periods~~approximately 4.4 million bushels for deliveries through ~~January 2019.~~ July 2022.

Our corn derivative positions resulted in ~~losses~~a loss of approximately ~~$265,000 and $33,000~~$5.9 million for the three months ended January 31, ~~2018~~2021, and ~~2017, respectively, which increased cost~~a loss of ~~goods.~~approximately $160,000 for the three months ended January 31, 2020. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Natural Gas

Our cost of goods sold related to n~~atural~~natural gas costs ~~increased~~decreased approximately ~~1.7%~~8.1% for the three months ended January 31, ~~2018,~~2021, as compared to the three months ended January 31, ~~2017.~~ 2020. Management attributes this ~~increase~~decrease in cost of natural gas from period to period to ~~the colder weather during November and December 2017, which led~~less ethanol production.

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Other Components of Costs of Goods Sold

Our costs of goods sold related to a spike in natural gas prices along with higher energy prices generally during the three months ended January 31, 2018. We expect continued higher natural gas prices during winter months of our 2018 fiscal year due to continued colder weather. Further, if we experience a supply disruption during our 2018 fiscal year, it may lead to significantly higher natural gas costs.

~~From time to time we enter into forward purchase contracts for our natural gas purchases. Our natural gas derivative positions resulted in a gain of~~all other components decreased approximately ~~$12,000~~50.1% for the three months ended January 31, ~~2018, which decreased cost of goods sold. Comparatively, we had no gain or loss on natural gas derivative instruments for~~ 2021, compared to the ~~three months ended~~same period ending January 31, ~~2017. We recognize the gains or losses that result from the changes~~2020 due primarily to a drecrease in ~~the value of our derivative instruments from natural gas in cost of goods sold as the changes occur~~.production.

Operating Expenses

Operating expenses include wages, salaries, and benefits of administrative employees at the plant, insurance, professional fees, property taxes, and similar costs. Our operating expenses increased by approximately ~~4.5%~~12.4% for the three months ended January 31, ~~2018~~2021, compared to the same period ended ~~2017. This increase is~~2020 due primarily to ~~fixed production~~timing of payments related to administrative expenses, ~~that were higher compared to fiscal year 2018. Our efforts to optimize efficiencies~~including professional fees, trade association dues, and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady throughout the remainder of the 2018 fiscal year.consulting fees.

Operating Income (Loss)

Our ~~income from operations~~operating loss for the three months ended January 31, ~~2018 decreased by~~2021, increased approximately ~~$3.9~~$2.7 million compared to the same period ~~of 2017.~~ended January 31, 2020. This ~~decrease~~increase resulted ~~largely~~ from ~~decreased prices received for our ethanol and corn oil at our plants and~~negative operating margins during the ~~narrowing of our net operating margin.~~ three-month period ending January 31, 2021.

Other Income (Expense), Net

We had net other income of approximately ~~$200,000~~ ~~during~~ $93,000 and net other income of approximately $30,000 for the three months ended January 31, ~~2018~~ ~~compared to~~2021, and 2020, respectively. This increase in net other income ~~of approximately $351,000 for~~resulted primarily from an increase in patronage income in the ~~same~~three-month period ~~of 2017~~. ~~We had less other income during~~ ~~the three months~~ ended January 31, ~~2018~~ ~~compared to~~ ~~the same period of 2017~~ ~~due to~~ ~~increased interest expense and decreased other income from patronage income for the 2018 period.~~2021.

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~~Investment~~

On November 1, 2016, we subscribed to purchase 1,500 capital units of Ringneck at a price of $5,000 per unit for a total of $7.5 million. We paid a down payment of $750,000 in connection with our subscription, and signed a promissory note for the remaining balance of the subscription. On August 2, 2017, following notice from Ringneck accepting GFE’s subscription and that payment of the balance of GFE’s subscription and promissory note was due, GFE borrowed $7.5 million under its credit facility with Project Hawkeye and paid $6.75 million to Ringneck for the remaining balance of GFE’s subscription. Details of the Project Hawkeye credit facility are provided below in the section below entitled “~~Indebtedness - GFE’s Other Credit Arrangement~~”.

Ringneck is a South Dakota limited liability company that is constructing an 80 million gallon per year ethanol manufacturing plant in outside of Onida, South Dakota in Sully County. GFE’s investment is sufficient to the right to appoint one director to the board of directors of Ringneck and GFE has appointed Steve Christensen, its CEO, to fill this seat. The units we acquired in Ringneck are subject to restrictions on transfer, therefore, this should not be considered a liquid investment. It may take a significant amount of time before we realize a return on our investment, if we realize a return on the investment at all.

Because Ringneck is not subject to SEC registration and reporting requirements, we do not expect that information about Ringneck will be available via the SEC’s EDGAR filing system. Therefore, it may be difficult for our investors to obtain information about Ringneck.

Changes in Financial Condition at January 31, ~~2018~~2021 and October 31, ~~2017~~2020

The following table highlights our financial condition at January 31, ~~2018~~2021 and October 31, ~~2017~~2020 (amounts in thousands):


	January 31, 2018		October 31, 2017
	(unaudited)

					January 31, 2021		October 31, 2020
Current Assets	$	31,104	$	45,203	$	31,925	$	31,715
Total Assets	$	111,125	$	127,090	$	114,512	$	116,198
Current Liabilities	$	7,593	$	8,980	$	30,799	$	31,252
Long-Term Debt, less currrent portion	$	8,454	$	8,466
Long-Term Debt, less current portion					$	10,821	$	5,876
Operating lease, long-term liabilities					$	14,858	$	15,755
Other Long-Term Liabilities					$	1,433	$	1,422
Members' Equity attributable to Granite Falls Energy, LLC	$	73,271	$	83,999	$	48,861	$	52,112
Non-controlling Interest	$	21,807	$	25,645	$	7,740	$	9,780

The decrease in total assets iswas due primarily to a decrease in long-term assets related to depreciation expense and a decrease in the operating lease right of use asset. The decrease in cash was due primarily to increased net loss in the three months ending January 31, 2021.

Our current ~~assets which is~~liabilities decreased approximately $453,000 at January 31, 2021 compared to October 31, 2020, due primarily ~~attributable~~ to a decrease in ~~cash on hand~~accounts payable of approximately ~~$15.0~~$4.2 million ~~at January 31, 2018 compared to October 31, 2017, due~~ ~~primarily to payment of distributions of approximately $16.1 million to members and non-controlling interests in January 2018. Also contributing to the decrease in current assets was a decrease in accounts receivable of $180,000 and the value of commodity derivative instruments of approximately $208,000. Offsetting~~ ~~these decreases were~~ increases in restricted cash of approximately $472,000, inventory of approximately $495,000, and prepaid expenses and other current assets of approximately $341,000 at January 31, 2018 compared to October 31, 2017. Property and equipment also decreased by approximately $1.9 million primarily ~~due to depreciation expense during the 2018 period.~~

Total current liabilities decreased by approximately $1.4 million at January 31, 2018 compared to October 31, 2017. This decrease was due to decreases of approximately $2.7 million in accounts payable, and approximately $99,000 in the current portion of our long-term debt at January 31, 2018~~compared to October 31, 2017. These decreases were~~ ~~partially offset by increases of approximately $1.2 million in checks drawn in excess of bank balance and approximately $227,000 in accrued expenses.~~ ~~The decrease in our accounts payable is~~ due to the timing of payments to vendors, offset by an increase in current maturities of long-term debt of approximately $1.7 million and ~~lower corn prices during the three months ended January 31, 2018 which reduced the amount~~increase in checks drawn in excess of ~~corn payable~~bank balances of approximately $1.4 million.

Our long-term debt increased approximately $4.9 million at January 31, ~~2018.~~

~~Our long-term debt decreased approximately $12,000 at January 31, 2018~~2021, compared to October 31, ~~2017. The decrease is mostly~~2020, due primarily to ~~assessments paid under HLBE’s~~ ~~industrial water supply treatment agreement with~~both GFE drawing on its revolving term loans during the ~~City of Heron Lake and Jackson County~~.

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three-month period ended January 31, 2021.

Members’ equity attributable to Granite Falls Energy, LLC at January 31, ~~2018~~2021, compared to October 31, ~~2017~~2020 decreased by approximately ~~$10.7~~$3.3 million. The decrease was related ~~to the distribution~~primarily to our ~~members of~~ approximately ~~$11.8~~$3.3 million ~~during January 2018, offset by our approximately $1.1 million of~~ net ~~income~~loss attributable to GFE during the three months ended January 31, ~~2018.~~ 2021.

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Non-controlling interest totaled approximately ~~$21.8~~$7.4 million and ~~$25.6~~$9.8 million at January 31, ~~2018~~2021, and October 31, ~~2017,~~2020, respectively. This decrease is ~~directly related~~a result of increased net loss attributable to ~~recognition of the 49.3% noncontrolling~~non-controlling interest in ~~HLBE.~~the 2021 period.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash provided by operations, cash, and ~~equivalents on hand, and~~ available borrowings under our credit facilities. ~~Based~~Future instances of noncompliance with loan covenants may cause acceleration of the outstanding principal balances on ~~management’s financial forecasts, we expect to have sufficient cash generated by continuing operations and~~the revolving term loan ~~to fund our operations for~~and/or the ~~next twelve months. However, should~~imposition of fees, charges or penalties. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other ~~purposes.~~purposes, or we may be required to idle ethanol production.

Additionally, due to recurring operating and cash flow losses related to difficult market conditions and operating performance, HLBE has experienced instances of noncompliance with certain debt covenants. HLBE has obtained waivers for these instances of noncompliance. However, it is probable HLBE will incur future instances of noncompliance within the next 12 months and there is no guarantee HLBE’s lender will grant future waivers. As a result, approximately $11.8 million of long-term debt has been reclassified as current maturities. HLBE has insufficient cash on hand and additional borrowing capacity, and current forecasts indicate insufficient cash flows from operations, to repay the debt if it were to come due as a result of covenant noncompliance. These factors raise substantial doubt about HLBE’s ability to continue as a going concern. To remain in business, HLBE will need to obtain additional equity or debt financings. There is a risk that CoBank, as the administrative agent for our lender Compeer, may seek to enforce its security interests and take control of HLBE’s assets. If that were to happen, HLBE may be faced with the prospect of either ceasing operations or seeking to reorganize through Chapter 11 bankruptcy proceedings.

Cash Flows

The following table shows our cash flows for the ~~nine~~three months ended January 31, ~~2018~~2021 and ~~2017~~2020 (amounts in thousands):

2018

2017

(unaudited)

(unaudited)

Net cash provided by operating activities

$
575

$
3,014

Net cash used in investing activities

$
(545)

$
(1,091)

Net cash used in financing activities

$
(15,050)

$
(12,530)

Net decrease in cash

$
(15,020)

$
(10,607)


	2021		2020
Net cash used in operating activities	$	(12,446)	$	(3,423)
Net cash used in investing activities	$	(2,185)	$	(208)
Net cash provided by (used in) financing activities	$	8,070	$	(1,474)
Net decrease in cash and restricted cash	$	(6,561)	$	(5,105)

Operating Cash Flows

D~~uring~~During the three months ended January 31, ~~2018, operations provided less~~2021, we used approximately $9.0 million more cash in operating activities compared to the same period ~~of 2017primarily~~ending January 31, 2020, due in part to ~~lower~~greater net ~~income~~loss in ~~2018 and~~the 2021 period. Additionally, changes in various working capital components, including ~~accounts receivable, restricted~~the value of commodity derivative instruments and inventory, contributed to the additional cash ~~inventory, prepaid expenses, and accounts payable.~~used during the 2021 period.

Investing Cash Flows

Cash used in investing activities was approximately ~~$545,000 less~~$2.0 million more for the three months ended January 31, ~~2018,~~2021, compared to the ~~three months ended January 31, 2017.~~ same period a year earlier, due to an increase in capital expenditures during the 2021 period.

Financing Cash Flows

During the three months ended January 31, ~~2018, we used~~2021, our financing activities provided us with approximately $9.5 million in cash ~~forcapital expenditures for general plant improvements, which was~~ ~~partially offset by proceeds~~more than during the three month period ended January 31, 2020. We borrowed approximately $6.7 million from ~~disposal~~long-term debt, net of ~~property and equipment. Comparatively,~~ repayments during the three months ended January 31, ~~2017~~,2021, while we ~~used approximately $386,000 of cash for capital expenditures and GFE used $750,000 for its initial payment on our subscription for its Ringneck investment.~~

~~Financing Cash Flows~~

~~During~~ ~~the three months ended January 31, 2018, we used cash to make~~made net payments of approximately ~~$111,000~~$198,000 on our long-term debt ~~and make payments~~net of ~~approximately $11.8 million in distributions to our unit holders~~ ~~and approximately $4.3 million to non-controlling interests, offset by approximately $1.2 million from checks in excess of bank balance. Comparatively,~~borrowing during the same period ~~of 2017,~~ we made payments of approximately $11.2 million in distributions to our unit holders, approximately $1.2 million reduction in checks drawn in excess of bank balance, and principal payments of approximately $129,000 on HLBE’s long-term debt.a year earlier.

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Indebtedness

~~Indebtedness~~

~~GFE’sSeasonal Revolving Loan~~

GFE has a credit facility with AgCountry Farm Credit Services, PCA, formerly known as United FCS (“AgCounty”), for which CoBank serves as the administrative agent. The credit facility consists of a seasonal revolving loan. Under the seasonal revolving loan, GFE may borrow, repay, and re-borrow up to the aggregate principal commitment of $6.0 million until its maturity on October 1, 2018, unless a later date is agreed to by CoBank. The outstanding balance on the seasonal revolving loan totaled $0 at January 31, 2018 and October 31, 2017. Therefore, the aggregate principal amount available to GFE for additional borrowing was $6.0 million at January 31, 2018 and October 31, 2017.

~~The~~ ~~seasonal revolving~~ ~~loan~~ ~~bears interest from date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum~~indebtedness consisting of the ~~One Month LIBOR Index Rate~~ ~~plus 2.75% per annum,~~ ~~which equated to~~ ~~4.33%~~following loans and ~~3.99% at January 31, 2018 and October 31, 2017, respectively.~~ GFE pays an unused commitment fee on the unused portion of the seasonal revolving loan commitment at the rate of 0.250% per annum. The credit facility with AgCounty is secured by substantially all of GFE’s assets.

~~Under the United FSC credit facility, GFE~~ ~~is subject to certain financial and non-financial covenants~~ ~~that limit~~ ~~GFE~~ ~~distributions and debt and require minimum working capital, and debt service coverage ratio.~~ ~~GFE agreed to~~agreements: a debt service coverage ratio of 1.5 to 1.0 and to maintain minimum working capital of $10.0 million. GFE are permitted to pay distributions to its members up to 75% of its net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and GFE is in compliance with all of its loan covenants including compliance with the financial covenants. Further, ~~GFE agreed not c~~reate or incur any indebtedness except for debt to AgCounty, accounts payable to trade creditors, subordinated debt owed to Project Hawkeye, or debt to other lenders in an aggregate amount not exceed $750,000 or make loans or advances or invest in any entity, other than its investments in HLBE and Ringneck, without the consent of CoBank or AgCounty.

~~As of~~ ~~January 31, 2018~~, GFE was in compliance with these financial covenants. However, if market conditions deteriorate in the future, circumstances may develop which could result in GFE violating the financial covenants or other terms of its credit facility. If GFE fails to comply with the terms of its credit agreement with AgCounty, and AgCounty refuses to waive the non-compliance, AgCounty could terminate the credit facility and any commitment to loan funds to GFE.

~~GFE’s Other Credit Arrangement~~

~~On August 2, 2017, GFE entered into~~Revolving Term Loan, a ~~credit facility with Project Hawkeye for a~~ ~~variable-rate, amortizing non-recourse loan to finance the balance of its subscription in Ringneck.~~ ~~Pursuant to this credit facility, GFE borrowed~~ ~~$7.5 million from Project Hawkeye using the Ringneck investment as collateral. The~~ ~~Project Hawkeye~~ ~~loan~~ ~~bears interest from date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of the~~ ~~One Month LIBOR Index Rate~~ ~~plus 3.05% per annum, with an interest rate floor of 3.55%.~~

~~The~~ ~~Project Hawkeye~~ ~~loan requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years three through nine based on a seven-year amortization period.~~ ~~The monthly amortized payments will be re-amortized following any change in interest rate.~~ The entire outstanding principal balance of the loan, plus any accrued and unpaid interest thereon, is due and payable in full on August 2, 2026. GFE is permitted to voluntarily prepay all or any portion of the outstanding balance of this loan at any time without premium or penalty.

~~Pursuant to a~~ ~~pledge agreement entered into in connection with~~Single Advance Term Note, the Project Hawkeye ~~loan, GFE’s obligations are secured by all of its right, title,~~Loan, and interest in its investment in Ringneck, including the 1,500 units subscribed for by GFE. The loan is non-recourse to all of GFE’s other assets, meaning that in the event of default, the only remedy available to Project Hawkeye will be to foreclose and seize all of GFE’s right, title and interest in its investment in Ringneck.

~~As of~~ ~~January 31, 2018 and October 31, 2017, there was $7.5 million outstanding under the Project Hawkeye credit facility.~~

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~~HLBE’s~~ ~~Compeer~~ ~~Credit Facility~~

an SBA Paycheck Protection Program Loan. HLBE has ~~a comprehensive credit~~ ~~facility with Compeer Financial, formerly known as AgStar Financial Services, FCLA (“Compeer”), which consists of a revolving term loan with a maturity date of March 1, 2022. As part~~indebtedness consisting of the ~~credit facility closing, HLBE entered into an administrative agency agreement with CoBank, ACP (“CoBank”). CoBank purchased a participation interest in the Compeer~~following loans and ~~was appointed the administrative agent~~agreements a Revolving Term Loan, a Single Advance Term Loan, a Short Term Revolving Promissory Note, an SBA Paycheck Protection Program Loan, and certain water treatment agreements. Please refer to PART I - Item 1 - Financial Statements, Note 7 - Debt Facilities for ~~the purpose of servicing the loans.~~ additional details.

~~Under the Compeer revolving term note,~~ HLBE can borrow, repay and re-borrow in an amount up to the original aggregate principal commitment at any time prior to maturity at March 1, 2022. The original aggregate principal commitment was $28,000,000, which reduced by $3,500,000 annually, starting March 1, 2015 and continuing each anniversary thereafter until maturity. In December 2017, HLBE and its lender agreed to reduce the aggregate principal commitment of the revolving term loan to $8,000,000. HLBE had no outstanding balance on the revolving term loan at January 1, 2018 and October 31, 2017. Therefore, the aggregate principal amount available to HLBE for borrowing at January 31, 2018 and October 31, 2017 was $8,000,000 and $17,500,000, respectively.

In connection with the reduction in the aggregate principal commitment, the interest rate on the revolving term loan was reduced from 3.25% above the One-Month LIBOR Index rate to 2.85% above the One-Month LIBOR Index rate. The interest rate on this facility was 4.42% and 4.49% at January 31, 2018 and October 31, 2017, respectively. HLBE 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.

HLBE also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum. The loan is secured by substantially all of HLBE's assets including a subsidiary guarantee.

~~Under the credit facility, HLBE is subject to certain financial and non-financial covenants~~ ~~that limit~~ ~~the Company’s~~ ~~distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio.~~ HLBE agreed to a debt service coverage ratio of 1.5 to 1.0 and to maintain minimum working capital and net worth of $8.0 million and $32.0 million, respectively. HLBE is permitted to pay distributions to its members up to 65% of its net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and HLBE is in compliance with all of its loan covenants including compliance with the financial covenants. Further, ~~HLBE agreed not to~~ ~~make loans or advances to Agrinatural that exceed an aggregate principal amount of approximately $3.1 million without the consent of Compeer.~~

~~As of~~ ~~January 31, 2018, HLBE was in compliance with these loan covenants. However, if market conditions deteriorate in the future, circumstances may develop which could result in~~ ~~HLBE~~ ~~violating the financial covenants or other terms of its~~ ~~Compeer~~ ~~credit facility. If HLBE fails to comply with the terms of its credit agreement with~~ ~~Compeer, and~~ ~~Compeer~~ ~~refuses to waive the non-compliance,~~ ~~Compeer~~ ~~could terminate the credit facility and any commitment to loan funds to HLBE.~~

~~HLBE’s Other Credit Arrangements~~

~~In addition to HLBE's primary credit arrangement with Compeer, HLBE has other material credit arrangements and debt obligations.~~

In October 2003, HLBE entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, HLBE and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that, prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities.

~~Table of Contents~~

In May 2006, HLBE entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, HLBE pays monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to HLBE if any funds remain after final payment in full on the bonds and assuming HLBE complies with all payment obligations under the agreement.

There was a total of approximately $1.3 million in outstanding water revenue bonds at January 31, 2018 and October 31, 2017. HLBE classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 6.55% to 8.73%.

~~HLBE also had a note payable to the noncontrolling owner of Agrinatural, which accrued interest at a rate equal to the One-Month LIBOR rate plus 4.0%. Payment of the note is due on demand at the discretion of the board of managers of Agrinatural.~~ The interest rate on this note payable was 4.78% and 4.53% at January 31, 2018 and October 31, 2017, respectively. There was a total of $100,000 outstanding on this note at October 31, 2017. In January 2018, HLBE paid this note in full.

~~Agrinatural Credit Facilities~~

On July 29, 2014, HLBE has entered into an intercompany loan agreement, promissory note and related loan documents with Agrinatural, its majority owned subsidiary (collectively, the “Original Agrinatural Credit Facility”). Under the Original Agrinatural Credit Facility, the Company agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural for use by Agrinatural to repay approximately $1.4 million of its outstanding debt and provide approximately $1.6 million of working capital to Agrinatural. The Original Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

Interest on the Original Agrinatural Credit Facility accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Accrued interest is due and payable monthly.

On March 30, 2015, HLBE entered into an allonge to the July 29, 2014 note with Agrinatural. Under the terms of the allonge, HLBE and Agrinatural agreed to increase the principal amount of the Original Agrinatural Credit Facility to approximately $3.06 million, defer commencement of repayment of principal until May 1, 2015, decrease the monthly principal payment to $36,000 per month and shorten maturity of the Original Agrinatural Credit Facility to May 1, 2019. Except as otherwise provided in the allonge, all of the terms and conditions contained in the Original Agrinatural Credit Facility remain in full force and effect.

In exchange for the Original Agrinatural Credit Facility, Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning HLBE all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, Rural Energy Solutions, LLC, the noncontrolling owner of Agrinatural (“RES”), executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to HLBE.

~~The balance of this loan was approximately $1.9 million at January 31, 2018 and $2.0 million at October 31, 2017.~~

On March 30, 2015, HLBE entered into a second intercompany loan agreement, promissory note and related loan documents (collectively, the “Additional Agrinatural Credit Facility”) with Agrinatural. Under the Additional Agrinatural Credit Facility, HLBE agreed to make a four-year term loan in the principal amount of $3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital. The Additional Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size, including a covenant restricting capital expenditures by Agrinatural.

Interest on the additional term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Prior to May 1, 2015, Agrinatural is required to pay only monthly interest on the term loan. Commencing May 1, 2015, Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on May 1, 2019.

~~Table of Contents~~

On May 19, 2016, HLBE and Agrinatural amended the Additional Agrinatural Credit Facility, entering into amendment to the loan agreement dated March 30, 2015 to increase the amount of the capital expenditures allowed by Agrinatural during the term of the facility. HLBE and Agrinatural also executed an allonge to the negotiable promissory note dated March 30, 2015 to defer a portion of the principal payments required for 2016, which such deferred principal payments ~~continue to accrue interest at the rate set forth in the note and become a part of the balloon payment due at maturity~~.

~~As provided in the Amendment, for calendar years~~ ~~2017, 2018 and 2019,~~ ~~Agrinatural may, without consent of HLBE,~~ proceed with and pay for capital expenditures in an amount up to $100,000 plus the amount of contributions in aid of construction received by Agrinatural from customers for capital improvements (“CIAC”), less a reserve for distribution to the Agrinatural members to cover the income or other taxes imposed as a result of receipt of CIAC in an amount equal to 40% of CIAC. Prior to the amendment, Agrinatural’s capital expenditures were restricted to $100,000 per year.

In exchange for the Additional Agrinatural Credit Facility, Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning HLBE all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, RES executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to HLBE under the Additional Agrinatural Credit Facility.

~~The balance of this loan was approximately $2.4 million at January 31, 2018 and $2.5 million at October 31, 2017.~~

Critical Accounting Policies and Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with 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. We believe that of our significant accounting policies summarized in Note 1 to our condensed consolidated unaudited financial statements included with this Form 10-Q.

At January 31, ~~2018,~~2021, our critical accounting estimates continue to include those described in our annual report on Form 10-K for the fiscal year ended October 31, ~~2017.~~2020. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk~~

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. 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, ethanol and natural gas. 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 pursuant to the requirements of U.S. Generally Accepted Accounting Principles.Not Applicable.

~~Interest Rate Risk~~

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our credit facilities with AgCounty, HLBE's credit facilities with Compeer and HLBE’s note payable to the minority owner of Agrinatural. The specifics of these credit facilities are discussed in greater detail in “~~Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness~~.”

~~Table of Contents~~

At January 31, 2018, there were no amounts outstanding under GFE’s credit facility with AgCounty or HLBE’s credit facility with Compeer. Therefore, at January 31, 2018, we had exposure to interest rate risk only from the amounts outstanding under GFE’s credit facility with Project Hawkeye. Below is a sensitivity analysis ~~. Below is a sensitivity analysis we prepared regarding GFE’s income exposure to changes in interest rates.~~

~~The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one-year period.~~

Outstanding Variable

Rate Debt at

Interest Rate at

Interest Rate Following 10%

Approximate Adverse

January 31, 2018

January 31, 2018

Adverse Change

Change to Income

$
7,500,000

4.63
%

5.10
%

$
34,000

~~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 distillers' 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 period to period due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As of January 31, 2018, GFE had price protection in place for approximately 14.0% and 33.0% of its anticipated corn and natural gas needs, respectively, and approximately 22.0%, 5.0%, and 6.0% of its ethanol, distillers’ grains, and corn oil sales, respectively, for the next 12 months. As of January 31, 2018, HLBE had price protection in place for approximately 17.0% and 5.0% of its anticipated corn and natural gas needs, respectively and approximately 25.0%, 6.0%, and 10.0% of its ethanol, distillers’ grains, and corn oil sales, respectively, for the next 12 months. Through these contracts we hope to minimize risk from future market price fluctuations and basis fluctuations. As input prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

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 fair value of our corn and natural gas prices and average ethanol price as of January 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 both of the GFE and HLBE plants for a one year period from January 31, 2018.

~~The results of this sensitivity analysis, which may differ from actual results, are as follows:~~

Estimated Volume Requirements

Hypothetical Adverse

for the next 12 months

Unit of

Change in Price as of

Approximate Adverse

(net of forward and futures contracts)

Measure

January 31, 2018

Change to Income

Ethanol

120,000,000

Gallons

10
%

$
14,685,000

Corn

34,135,000

Bushels

10
%

$
10,939,000

Natural Gas

2,550,000

MMBTU

10
%

$
819,000

~~Table of Contents~~

~~Participation in Captive Reinsurance Company~~

We participate in a captive reinsurance company (“Captive”). The Captive reinsures losses related to workman's compensation, commercial property and general liability. 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. The Captive reinsures losses in excess of a predetermined amount. The Captive insurer has estimated and collected a premium amount in excess of expected losses but less than the aggregate loss limits reinsured by the Captive. We have contributed limited capital surplus to the Captive that is available to fund losses should the actual losses sustained exceed premium funding. So long as the Captive is fully-funded through premiums and capital contributions to the aggregate loss limits reinsured, and the fronting insurers are financially strong, we cannot be assessed over the amount of our current contributions.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

Effectiveness of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and General Manager (the principal executive officer), Steve Christensen, along with our Chief Financial Officer (the principal financial officer), Stacie Schuler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of January 31, ~~2018.~~2021. Based upon 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during our most recently completed reporting period t~~hat~~that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time in the ordinary course of business, Granite Falls Energy, LLC and Heron Lake BioEnergy, LLC may be named as a defendant in legal proceedings related to various issues, including ~~workers'~~workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.

~~Table of Contents~~

Item 1A. Risk Factors

The risk factors below should be read in conjunction with the risk factors previously discussed in Item 1A of our Form 10-K for the fiscal year ended October 31, ~~2017. Additional~~2020. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

~~Tax reform~~Our CEO and General Manager intends to retire before the end of 2021, and as a result our Company may ~~affect the Company and its members.~~

~~Congress recently passed the Tax Reform Act,~~face challenges that arise from a transition in leadership, which makes significant changes to the taxation of business entities. The Tax Reform Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and allows for the expensing of capital expenditures. We continue to assess the impact of the Tax Reform Act, as well as any future regulations implementing the new tax law and any interpretations of the new tax law may ~~have on our business. The impact of this tax reform on the Company and its members is uncertain but the effect of the Tax Reform Act and any implementing regulations and interpretations could~~ adversely affect our ~~business~~business.

Our CEO and ~~financial condition.~~general manager Steve Christensen intends to retire at or before the end of 2021 and has executed a separation agreement with GFE. As a result, GFE will be required to hire a new CEO in 2021. With Christensen’s departure, the Company will lose significant experience and institutional knowledge, which may adversely affect our business.

The ~~price we pay for agricultural commodities~~election of President Joe Biden and the transition to a new presidential administration may ~~increase~~result in new or different regulations and policies that may adversely affect our business.

Joe Biden was elected president in November 2020, defeating President Donald Trump. As of January 31, 2021, Democrats controlled the presidency and held narrow majorities in the U.S. Senate and House of Representatives. The transition to a new presidential administration creates unknowns that may adversely affect the economy as a ~~result~~whole and our industry and business specifically. Single-party control of the ~~Tax Cuts and Jobs Act which gives a benefit to agricultural producers to sell their products through cooperatives.~~

~~Congress recently passed the Tax Reform Act, which includes a provision that gives a benefit to producers of agricultural products to sell their products through cooperatives. Currently sales t~~o ~~non-cooperative grain buyers like the Company do not qualify for the same benefit. This~~federal government may ~~put us at a significant disadvantage when competing with cooperatives to purchase corn for our plant. Any increase in the price we must pay for the corn in order to compete with cooperatives would~~ result in ~~lower profit margins~~new or altered regulations and policies, including those related to agriculture, the environment, energy, transportation, and labor. Under the new administration, the future of policies specifically applicable to our industry and business, including the RFS and small refinery RVOs, also remain unclear. These factors and other political shifts may negatively affect our financial performance. While we believe that Congress intends to correct these provisions, there is no assurance that Congress will enact changes that will resolve this issue or that if such changes are approved that they will be retroactively applied. business.

If the U.S. were to withdraw from or materially modify NAFTA or certain other international trade agreements, our business, financial condition and results of operations could be materially adversely affected.

We expect a majority of our ethanol, distillers’ grains and corn oil to continue to be marketed and sold domestically. However, as domestic production of ethanol and its co-products continues to expand, we anticipate increased international sales, including sales to Canada, Mexico and other countries with trade agreements with the U.S. The Trump administration has expressed aversion towards certain existing international trade agreements, including the North American Free Trade Agreement (“NAFTA”), and made comments suggesting that they support significantly increasing tariffs on goods imported into the U.S., which in turn may lead to retaliatory actions on U.S. exports. As of the date of this report, it remains unclear what the outcomes may be of NAFTA trade regulations, other international trade agreements, and tariffs on various goods imported into the U.S. If the U.S. were to withdraw from or materially modify NAFTA or other international trade agreements to which it is a party, or if tariffs were raised on the foreign-sourced goods that lead to retaliatory actions, it could have material adverse effect on our business, financial condition and results of operations.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

~~Table of Contents~~

Item 5.Other Information

None.

Table of Contents

Item 6. Exhibits.

(a)

The following exhibits are included in this report.


Exhibit No.			Exhibit
~~31.1~~
10.1			Negotiable Promissory Note dated December 1, 2020 between Heron Lake BioEnergy, LLC, as Borrower and Granite Falls Energy, LLC, as Lender.*

31.1			Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)**

31.2			Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)*

32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350*

32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350*
101
~~101~~			The following financial information from Granite Falls Ethanol, LLC's Quarterly Report on Form 10-Q for the three months ended January 31, ~~2018,~~2021, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at January 31, ~~2018~~2021 and October 31, ~~2017;~~2020; (ii) the Condensed Consolidated Statements of Operations forfor the three months ended January 31, ~~2018~~2021 and ~~2017;~~2020; (iii) the Condensed Consolidated Statements of Changes in Members’ Equity for the three months ended January 31, 2021 and 2020; (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended January 31, ~~2018~~2021 and ~~2017~~;2021; and (iv) Notes to Condensed Consolidated Unaudited Financial Statements.*

* Filed herewith.

Table of Contents

SIGNATURES~~SIGNATURES~~

Pursuant to the requirements 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.


		GRANITE FALLS ENERGY, LLC

Date: March ~~19, 2018~~17, 2021		/s/ Steve Christensen
		Steve Christensen
		Chief Executive Officer

		/s/ Stacie Schuler
Date: March ~~19, 2018~~17, 2021		Stacie Schuler
		Chief Financial Officer

3634


					Fair Value Measurement Using
					Quoted Prices		Significant Other		Significant
	Carrying Amount in				in Active Markets		Observable Inputs		Unobservable Inputs
Financial Asset:	Consolidated Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative Instruments - Corn	$	5,025	$	5,025	$	5,025	$	—	$	—
Commodity Derivative Instruments - Ethanol	$	31,500	$	31,500	$	31,500	$	—	$	—

Financial Liabilities:
Commodity Derivative Instruments - Corn	$	70,000	$	70,000	$	70,000	$	—	$	—
Commodity Derivative Instruments - Natural Gas	$	6,264	$	6,264	$	—	$	6,264	$	—


Outstanding Variable
Rate Debt at		Interest Rate at		Interest Rate Following 10%		Approximate Adverse
January 31, 2018		January 31, 2018		Adverse Change		Change to Income
$	7,500,000	4.63	%	5.10	%	$	34,000


	Estimated Volume Requirements		Hypothetical Adverse
	for the next 12 months	Unit of	Change in Price as of		Approximate Adverse
	(net of forward and futures contracts)	Measure	January 31, 2018		Change to Income
Ethanol	120,000,000	Gallons	10	%	$	14,685,000
Corn	34,135,000	Bushels	10	%	$	10,939,000
Natural Gas	2,550,000	MMBTU	10	%	$	819,000