The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote 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 financial statements for the year ended December 31, 2016,2019, contained in the Company's annual report on Form 10-K for 2016.2019.
In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.
Homeland Energy Solutions, LLC is organized as an Iowa limited liability company. The members' liability is limited as specified in Homeland Energy Solutions' operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.
Management uses estimates and assumptions in preparing these financial statements in accordance with United States Generally Accepted Accounting Principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
The Company maintains its accounts primarily at one financial institution. At various times, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced losses in such accounts. Also included in cash and cash equivalents are highly liquid investments that are readily convertible into known amounts of cash, which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
Investments bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are measured at fair value using prices obtained from pricing services. Any interest, dividends, and unrealized or realized gains and losses on the trading securities are recorded as part of other income.
The Board of Directors voted to set aside up to $30 million in trading securities that willto be used by the Company for the repurchase of 25,860 membership units per the terms of an agreement with Mr. Retterath entered into on June 13, 2013 with the Company.
Credit sales are made primarily to two customers and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.
The Company has a less than 20% investment interest in Renewable Products Marketing Group, LLC (RPMG)("RPMG"). This investment is being accounted for under the equity method of accounting, as the companyCompany has significant influence, under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. The investment balance is included in other assets and the income recognized as other income. The investment is evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
Shipping costs incurred by the Company in the sale of ethanol and distiller grains are not specifically identifiable and as a result, revenue from the sale of ethanol and distiller grains is recorded based on the net selling price reported to the Company from the marketer. Rail car lease costs incurred by the Company in the sale and shipment of distiller grain products are included in the cost of goods sold.
Inventories are generally valued at the lower of cost (first-in, first-out) or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset group may not be recoverable. If circumstances require an asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset group to the carrying value of the asset group. If the carrying value of the asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting 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 the accounting and reporting requirements of derivative accounting.
The Company enters into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of ethanol for the plant and managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenue in the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presented on the accompanying balance sheet as derivative instruments. All contracts with the same counter party are reported on a net basis.
On June 13, 2013, the Company entered into an agreement with Steve Retterath, the Company's largest member, to repurchase and retire all of the membership units owned by Mr. Retterath. The Company agreed to close on this repurchase on or before August 1, 2013. The Company agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million, to be paid in two2 equal installments payable at closing and on July 1, 2014. The transaction failed to close by the scheduled date due to objections by Mr. Retterath. Due to all conditions of the agreement being met prior to, or on, August 1, 2013, and a court ruling which found the agreement to be binding and enforceable, the Company believes that it has a binding agreement with Mr. Retterath; as such the commitment to repurchase and retire the membership units is reflected in the financial statements as a current liability, due to former member, as of December 31, 2019, as if the transaction had closed on August 1, 2013. In April, 2020, the Company closed the repurchase of the membership units and therefore does not show a liability for the repurchase as of September 30, 2020. See Note 9 for additional information.
Basic and diluted net income per unit is computed by dividing net income by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net income per unit are the same.
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, distiller grains and corn oil to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the nine months ended September 30, 2017,2020, ethanol sales averaged approximately 81%76% of total revenues, while approximately 14%19% of revenues were generated from the
sale of distiller grains. Corn oil sales attributed approximately 5% of revenues during this time period. For the nine months ended September 30, 2017,2020, corn costs averaged approximately 77% of cost of goods sold.
The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
On June 29, 2017, the Company amended and restated the Master Loan Agreement with Home Federal Savings Bank ("Home Federal"), amending the term revolving loan to provide funding to operate the plant and establishing a term loan to help fund the Company's $42 million expansion project. In return, the Company entered into agreements providing Home Federal a security interest in substantially all personal property located on Company property, including the current expansion project.property. The Company currently has two loans1 loan with Home Federal, a term revolving loan and a term loan.
Under the terms of the Fourth Supplement to the Master Loan Agreement, dated June 29, 2017, the Company hashad a $30 million term loan which hashad a maturity date of December 31, 2022. Interest on the term loan iswas at a fixed rate of 4.79%. The Company iswas required to make monthly interest payments beginning July 1, 2017 and bi-annual principal payments of $3 million beginning on June 30, 2018.
|
| | | | |
| 2018 | | $ | 3,000,000 |
|
| 2019 | | 6,000,000 |
|
| 2020 | | 6,000,000 |
|
| 2021 | | 6,000,000 |
|
| 2022 | | 6,000,000 |
|
| Thereafter | | 3,000,000 |
| Total principal payments | | $ | 30,000,000 |
|
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
loan was $0 and $18,000,000, respectively. The long-term portion of the outstanding debt is presented net of unamortized debt issuance costs of $35,176 as of December 31, 2019.
Paycheck Protection Program Debt
The Company entered into a loan agreement with the Small Business Association through Home Federal Savings Bank on April 7, 2020 for approximately $908,000 as part of the Paycheck Protection Program under Division A, Tile I of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The loan matures in April 2022 and has an interest rate of 1%. Proceeds of the loan are restricted for use towards payroll costs and other allowable uses such as covered utilities for a 24 week period following the loan under the Paycheck Protection Program Rules. Provisions of the agreement allow for a portion of the loan to be forgiven if certain qualifications are met. The Company applied for forgiveness of this loan in September 2020.
Covenants
During the term of the loans, the Company is subject to certain financial covenants at various times calculated monthly, quarterly or annually, including restriction of the payment of dividends and capital expenditures and maintenance of certain financial ratios including the minimum working capital and a fixed charge ratio as defined by the Master Loan Agreement. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. The Company is in compliance with all debtfinancial covenants as of September 30, 2017.2020.
4. RELATED PARTY TRANSACTIONS
Due to former member
On June 13, 2013, wethe Company entered into an agreement with Steve Retterath, the Company's largest member, to repurchase and retire all of the units owned by Mr. Retterath. The Company agreed to close on this repurchase on or before August 1, 2013. The Company agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million, to be paid in two2 equal installments payable at closing and on July 1, 2014. The transaction failed to close by the scheduled date due to objections by Mr. Retterath. The Company believes that it has a binding agreement with Mr. Retterath. On August 14, 2013, the Company filed a lawsuit against Mr. Retterath in Iowa state court to enforce the terms of the repurchase agreement. The Company is askingasked the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.
Mr. Retterath contendsRetterath's contention was he is not bound by the agreement. The Company's position is as of the closing date, Mr. Retterath is no longer the equitable owner of any membership units in the Company. As a result, in 2013 the Company recorded a $30 million short-term liability related to the amount the Company agreed to pay Mr. Retterath to repurchase his membership units and correspondingly reduced members' equity on the balance sheet. If the Company is ultimately unsuccessful in its lawsuit againstIn April 2020, Mr. Retterath agreed to complete the Company will reevaluaterepurchase and the accounting considerations made during the period of time that the lawsuit is pending.units were repurchased and retired.
Other matters
The Company has purchased corn and materials from members of its Board of Directors who own or manage elevators or are local producers of corn. Purchases during the three and nine months ended September 30, 20172020 totaled approximately $1,019,000$644,000 and $10,178,000,$1,815,000, respectively, and during the three and nine months ended September 30, 20162019 totaled approximately $3,480,000$1,016,000 and $7,861,000,$2,995,000, respectively. There were nois 0 amounts due to these members at September 30, 20172020 and December 31, 2016.2019, respectively.
5. COMMITMENTS, CONTINGENCIES, AND AGREEMENTS
Ethanol, corn oil, and distiller grains marketing agreements and major customers
The Company has entered into a marketing agreement with RPMG to sell all denatured fuel ethanol produced at the plant at a mutually agreed on price, less commission and transportation charges. As of September 30, 2017,2020, the Company had no commitments to sell any of its produced gallons of ethanol at fixed prices and 3539 million of its produced gallons of ethanol at basis price levels indexed against exchanges for delivery through December 31, 2017.2020.
The Company has entered into a marketing agreement with RPMG to sell all corn oil produced at the plant at a mutually agreed on price, less marketing fees and transportation charges. As of September 30, 2017,2020, the Company had commitments to sell
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
approximately 7.210 million pounds of corn oil at various fixed and basis price levels indexed against exchanges for delivery through December 31, 2017.2020.
The Company also has an investment in RPMG, included in other assets, totaling approximately $2,345,000$2,522,000 and $2,422,000 as of September 30, 2017.2020 and December 31, 2019, respectively.
The Company has entered into a marketing agreement to sell all distiller grains produced at the plant to CHS, an unrelated party, at a mutually agreed on price, less commission and transportation charges. The agreement was renewed for another one year term on April 1, 2017.2020. The agreement calls for automatic renewal for successive one-yearone-year terms unless 90-day prior written notice is given before the current term expires. As of September 30, 2017,2020, the Company had approximately 54,00059,000 tons of distiller grains sales commitments for delivery through December 20172020 at various fixed prices.
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
Sales and marketing fees related to the agreements in place for the three and nine months ended September 30, 20172020 and 20162019 were approximately as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2020 | | September 30, 2019 | | September 30, 2019 |
| Sales ethanol | $ | 58,012,000 | | | $ | 154,159,000 | | | $ | 59,737,000 | | | $ | 189,683,000 | |
| Sales distiller grains | 12,079,000 | | | 38,885,000 | | | 13,689,000 | | | 43,944,000 | |
| Sales corn oil | 3,304,000 | | | 10,426,000 | | | 3,471,000 | | | 10,205,000 | |
| | | | | | | |
| Marketing fees ethanol | $ | 60,000 | | | $ | 143,000 | | | $ | 61,000 | | | $ | 183,000 | |
| Marketing fees distiller grains | 214,000 | | | 610,000 | | | 89,000 | | | 491,000 | |
| Marketing fees corn oil | 29,000 | | | 69,000 | | | 27,000 | | | 78,000 | |
| | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 | | | | |
| Amount due from RPMG | $ | 4,586,000 | | | $ | 4,712,000 | | | | | |
| Amount due from CHS | 750,000 | | | 2,388,000 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2017 | | September 30, 2016 | | September 30, 2016 |
| Sales ethanol | $ | 48,783,000 |
| | $ | 158,311,000 |
| | $ | 49,454,000 |
| | $ | 151,689,000 |
|
| Sales distiller grains | 7,869,000 |
| | 26,253,000 |
| | 12,229,000 |
| | 36,262,000 |
|
| Sales corn oil | 3,028,000 |
| | 9,779,000 |
| | 2,994,000 |
| | 8,182,000 |
|
| | | | | | | | |
| Marketing fees ethanol | $ | 61,000 |
| | $ | 184,000 |
| | $ | 42,000 |
| | $ | 126,000 |
|
| Marketing fees distiller grains | 124,000 |
| | 490,000 |
| | 200,000 |
| | 595,000 |
|
| Marketing fees corn oil | 22,000 |
| | 74,000 |
| | 28,000 |
| | 78,000 |
|
| | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 | | | | |
| Amount due from RPMG | $ | 267,000 |
| | $ | 4,717,000 |
| | | |
|
| Amount due from CHS | 255,000 |
| | 1,329,000 |
| | | |
|
At September 30, 2017,2020, the Company had approximately $9 million$8,429,000 in outstanding priced corn purchase commitments for bushels at various prices and approximately 5,188,0003,023,000 bushels of basis contracts through December 2018September 2022 accounted for under the normal purchase exclusion.
The Company has commitments for minimum purchases of various utilities such as natural gas and electricity over the next 2 years,12 months totaling approximately $3,527,000 accounted for under the normal purchase exclusion, which are anticipated to approximateexclusion.
As of September 30, 2020, the followingCompany had locked in place approximately 966,000 decatherms of natural gas at fixed prices through December 31, 2020 accounted for under the twelve month periods endingnormal purchase exclusion. As of September 30:30, 2019, approximately 5,069,500 decatherms of natural gas was locked into place at fixed prices through December 31, 2020.
|
| | | | |
| 2018 | | $ | 3,787,000 |
|
| 2019 | | 1,894,000 |
|
| Total anticipated commitments | | $ | 5,681,000 |
|
During 2016 and 2017, theThe Company entered into multiple construction agreements as part of an expansion project.plans to build additional grain storage and add distillation in order to produce United States Pharmacopeia (USP) ethanol. The total commitment underCompany has entered into contracts related to these agreements is $35projects totaling approximately $14 million. The Company has incurred costs related to the expansion projectprojects totaling approximately $30.4 million and expects the total expansion project to cost approximately $42 million, however no$10.7 million. No other commitmentscontracts have been executed.
6. LEASE OBLIGATIONS
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The Company elected the option to apply the transition provisions at the adoption date instead of the earliest comparative period presented in the financial statements. By making this election, the Company has not applied retrospective reporting for 2018. The Company elected the short-term lease
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
exception provided for in the standard and therefore only recognized right-of-use assets and lease liabilities for leases with a term greater than one year. The Company elected the package of practical expedients to not re-evaluate existing contracts as containing a lease or the lease classification unless it was not previously assessed against the lease criteria. In addition, the Company did not reassess initial direct costs for any existing leases.
A lease exists when a contract conveys to a party the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company recognized a lease liability at the lease commencement date, as the present value of future lease payments, using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis. A lease asset is recognized based on the lease liability value and adjusted for any prepaid lease payments, initial direct costs, or lease incentive amounts. The lease term at the commencement date includes any renewal options or termination options when it is reasonably certain that the Company will exercise or not exercise those options, respectively.
The Company leases rail cars and rail moving equipment with original terms up to 57 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. These costs are in addition to regular lease payments and are not included in lease expense. Rent expense incurred for the operating leases during the three and nine months ended September 30, 20172020 was approximately $369,000$442,000 and $1,150,000,$1,330,000, respectively, and for the same period in 20162019 was approximately $418,000$460,000 and $1,249,000,$1,314,000, respectively.
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
At the lease term for these leases was 2.14 years as of September 30, 2017,2020.
The discount rate used in determining the lease liability for each individual lease was the Company's estimated incremental borrowing rate of 4.79%. The right-of-use asset operating lease, included in other assets, and operating lease liability, included in current and long term liabilities was $3,514,323 and $4,678,365 as of September 30, 2020 and December 31, 2019, respectively.
At September 30, 2020, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month periodsperiod ended September 30:
| | | | | | | | |
| 2021 | | $ | 1,752,000 | |
| 2022 | | 1,328,000 | |
| 2023 | | 411,000 | |
| 2024 | | 128,000 | |
| 2025 | | 109,000 |
| Thereafter | | 9,000 | |
| Total lease commitments | | $ | 3,737,000 | |
|
| | | | |
| 2018 | | $ | 1,250,000 |
|
| 2019 | | 966,000 |
|
| 2020 | | 966,000 |
|
| 2021 | | 966,000 |
|
| 2022 | | 533,000 |
|
| Total lease commitments | | $ | 4,681,000 |
|
A reconciliation of the undiscounted future payments in the schedule above and the lease liability recognized in the consolidated balance sheet as of September 30, 2020, is shown below.
| | | | | | | | |
| Undiscounted future payments | | $ | 3,737,000 | |
| Discount effect | | (222,677) | |
| | $ | 3,514,323 | |
7. DERIVATIVE INSTRUMENTS
The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures and options contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures and options contracts to reduce price risk. Exchange-traded
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
futures contracts are valued at market price. Changes in market price of exchange traded futures and options contracts related to corn and natural gas are recorded in costs of goods sold and changes in market prices of contracts related to the sale of ethanol, if applicable, are recorded in revenues.
The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The Company's plant will grind approximately 6365 million bushels of corn per year. Over the next 12twelve months, the Company has hedged and anticipates hedging between 6%5% and 30%25% of its anticipated annual grind. At September 30, 2017,2020, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 8%10% of its anticipated monthly grind over the next twelve months.
The following table represents the approximate amount of realized/unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the three and nine months ending September 30, 20172020 and 20162019 and the fair value of derivatives as of September 30, 20172020 and December 31, 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Income Statement Classification | | Realized Gain (Loss) | | Change In Unrealized Gain (Loss) | | Total Gain (Loss) |
| Derivatives not designated as hedging instruments: | | | | | | | |
| Commodity contracts for the | | | | | | | |
| three months ended September 30, 2020 | Revenue | | $ | (1,177,000) | | | $ | 1,176,000 | | | $ | (1,000) | |
| | | | | | | |
| Cost of Goods Sold | | 608,000 | | | (1,348,000) | | | (740,000) | |
| Total | | $ | (569,000) | | | $ | (172,000) | | | $ | (741,000) | |
| Commodity contracts for the | | | | | | | |
| three months ended September 30, 2019 | Cost of Goods Sold | | $ | 2,431,000 | | | $ | 2,102,000 | | | $ | 4,533,000 | |
| | | | | | | |
| Commodity contracts for the | | | | | | | |
| nine months ended September 30, 2020 | Revenue | | $ | (1,177,000) | | | $ | 0 | | | $ | (1,177,000) | |
| Cost of Goods Sold | | 4,791,000 | | | (2,584,000) | | | 2,207,000 | |
| Total | | $ | 3,614,000 | | | $ | (2,584,000) | | | $ | 1,030,000 | |
| | | | | | | |
| Commodity contracts for the | | | | | | | |
| nine months ended September 30, 2019 | Cost of Goods Sold | | $ | 1,113,000 | | | $ | 2,102,000 | | | $ | 3,215,000 | |
|
| | | | | | | | | | | | | |
| | Income Statement Classification | | Realized Gain | | Change In Unrealized Gain (Loss) | | Total Gain |
| Derivatives not designated as hedging instruments: | | | | | | | |
| Commodity contracts for the | | |
|
| |
|
| |
|
|
| three months ended September 30, 2017 | Cost of Goods Sold | | $ | 2,278,000 |
| | $ | 318,000 |
| | $ | 2,596,000 |
|
| | | |
|
| |
|
| |
|
|
| Commodity contracts for the | | |
|
| |
|
| |
|
|
| three months ended September 30, 2016 | Cost of Goods Sold | | $ | 4,712,000 |
| | $ | (2,626,000 | ) | | $ | 2,086,000 |
|
| | | |
|
| |
|
| |
|
|
| Commodity contracts for the | | |
|
| |
|
| |
|
|
| nine months ended September 30, 2017 | Cost of Goods Sold | | $ | 2,534,000 |
| | $ | 236,000 |
| | $ | 2,770,000 |
|
| | | | | | | | |
| Commodity contracts for the | | |
|
| |
|
| |
|
|
| nine months ended September 30, 2016 | Cost of Goods Sold | | $ | 4,682,000 |
| | $ | (269,000 | ) | | $ | 4,413,000 |
|
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | September 30, 2020 | | December 31, 2019 |
| Futures contracts | | | | | |
| In gain position | | | $ | 39,000 | | | $ | 1,126,000 | |
| In loss position | | | (1,532,000) | | | (37,000) | |
| Cash (owed to) held by broker | | | 1,699,000 | | | (290,000) | |
| Current Asset | | $ | 206,000 | | | $ | 799,000 | |
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
|
| | | | | | | | | |
| | Balance Sheet Classification | | September 30, 2017 | | December 31, 2016 |
| Futures contracts through March 2018 | | | | | |
| In gain position | | | $ | 280,000 |
| | $ | 78,000 |
|
| In loss position | | | (26,000 | ) | | (59,000 | ) |
| Cash held by broker | | | 282,000 |
| | 510,000 |
|
| | Current Asset | | $ | 536,000 |
| | $ | 529,000 |
|
8. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below:
Trading securities: Trading securities consisting of corporate bonds and short term bond mutual funds are reported at fair value utilizing Level 1 inputs. Trading securities are measured at fair value using prices obtained from pricing services.
Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets.
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 20172020 and December 31, 2016,2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| As of September 30, 2020 | | | | | | | |
| | | | | | | |
| Trading securities, assets | $ | 10,446,000 | | | $ | 10,446,000 | | | $ | 0 | | | $ | 0 | |
| | | | | | | |
| | | | | | | |
| Derivative financial instruments | | | | | | | |
| Assets | $ | 39,000 | | | $ | 39,000 | | | $ | 0 | | | $ | 0 | |
| Liabilities | (1,532,000) | | | (1,532,000) | | | 0 | | | 0 | |
| | | | | | | |
| As of December 31, 2019 | | | | | | | |
| | | | | | | |
| Trading securities, assets | $ | 42,508,000 | | | $ | 42,508,000 | | | $ | 0 | | | $ | 0 | |
| | | | | | | |
| | | | | | | |
| Derivative financial instruments | | | | | | | |
| Assets | $ | 1,126,000 | | | $ | 1,126,000 | | | 0 | | | 0 | |
| Liabilities | (37,000) | | | (37,000) | | | 0 | | | 0 | |
The Company's financial assets and liabilities not recorded at fair value, for which carrying value approximates fair value, consists of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and term revolver debt. As of December 31, 2019, carrying value of long term debt carried at book value of $18,000,000 at December 31, 2019, had an estimated fair value of approximately $17,965,000.
|
| | | | | | | | | | | | | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| As of September 30, 2017 | | | | | | | |
| Trading securities, assets | $ | 34,879,000 |
| | $ | 34,879,000 |
| | $ | — |
| | $ | — |
|
| Derivative financial instruments |
|
| |
|
| |
|
| |
|
|
| Assets | $ | 280,000 |
| | $ | 280,000 |
| | $ | — |
| | $ | — |
|
| Liabilities | (26,000 | ) | | (26,000 | ) | | — |
| | — |
|
| | | | | | | | |
| As of December 31, 2016 | | | | | | | |
| Trading securities, assets | $ | 41,551,000 |
| | $ | 41,551,000 |
| | $ | — |
| | $ | — |
|
| Derivative financial instruments |
|
| |
|
| |
|
| |
|
|
| Assets | $ | 78,000 |
| | $ | 78,000 |
| | — |
| | — |
|
| Liabilities | (59,000 | ) | | (59,000 | ) | | — |
| | — |
|
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements 9. LITIGATION MATTERS
Retterath
In relation to the repurchase agreement discussed in Note 4, on August 1, 2013 Mr. Retterath filed a lawsuit against the Company along with several directors, the Company's former CEO, former CFO, COO, a former director and the Company's outside legal counsel in Florida state court. In August 2016, this lawsuit was voluntarily dismissed without prejudice by the Retteraths. On August 14, 2013, the Company filed a lawsuit in Iowa state court to enforce the repurchase agreement the Company entered into with Mr. Retterath. No distributions have been paid to Mr. Retterath since the time of the original expected closing date of August 1, 2013. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed various motions with the Iowa Court and was granted a stay regarding his obligation to perform the repurchase agreement while the court considered his post trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling. In February 2020, the Iowa Supreme Court ruled in favor of the Company that the repurchase agreement was valid. In April 2020, the Company closed the repurchase of the membership units held by Mr. Retterath.
GS Cleantech Corporation
On August 9, 2013, GS Cleantech Corporation (GS Cleantech), a subsidiary of Greenshift Corporation, filed a complaint against the Company alleging that the Company's operation of a corn oil extraction process licensed by the Company infringes patent rights claimed by GS Cleantech. GS Cleantech seeks royalties, damages and potentially triple damages associated with the alleged infringement, as well as attorney's fees from the Company. The Company has filed an answer and counterclaims claiming invalidity of the patents, noninfringement, and inequitable conduct. Recently the federal appeals court rejected GS Cleantech's appeal and the deadline to file additional appeals has passed.
10. SUBSEQUENT EVENTS
On November 6, 2020, the Company completed an amendment to the Revolving Loan with Home Federal, increasing the amount available on the Revolving Loan to $50 million and extending the term until November 2025. Debt covenants under the Revolving Loan were amended to allow unlimited capital expenditures and member distributions if working capital remains above a motion for summary judgment whichcertain level.
In November, 2020 the Company received notification that the Paycheck Protection Program loan of approximately $908,000 from the Small Business Association was granted by the Court. The Company expects GS Cleantechforgiven and will appeal this decision.not have to be paid back.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report or in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Homeland Energy Solutions, LLC (referred to herein as "we," "us," the "Company," or "Homeland") is an Iowa limited liability company. Homeland was formed on December 7, 2005 for the purpose of pooling investors for the development, construction and operation of a 100 million gallon per year ethanol plant located near Lawler, Iowa. We began producing ethanol and distiller grains at the plant in April 2009. We completed installation of corn oil extraction equipment and commenced selling corn oil during our fourth quarter of 2011. During our fourth quarter of 2017, we completed a plant expansion project. The ethanol plant is now capable of operating at a rate in excess of 160190 million gallons of ethanol per year.
On June 13, 2013,November 6, 2020, we entered into an agreement with Steve Retterath,amendment to our largest member, to repurchase and retire all of the units owned by Mr. Retterath. We agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million, to be paid in two equal installments, payable at closing and on July 1, 2014. The transaction failed to close by August 1, 2013 due to objections by Mr. Retterath. The Company believes that it has a binding agreement with Mr. Retterath. On August 14, 2013, the Company filed a lawsuit against Mr. Retterath in Iowa state court to enforce the terms of the repurchase agreement. The Company asked the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.
In January 2017, we went to trial with Mr. Retterath on the first part of the Iowa state court case regarding whether the repurchase agreement is valid and enforceable. On June 15, 2017, the Iowa state court issued its ruling finding the repurchase agreement valid and enforceable and ordering Mr. Retterath to perform his obligations under the repurchase agreement. Following the Iowa state court's decision, Mr. Retterath filed post-trial motions that he was asking the court to reconsider its decision and grant a new trial and requested the court stay its order until these motions are considered. The Iowa state court granted the stay pending resolution of the post-trial motions.
Details of the Company's lawsuit against Mr. Retterath are provided below in the section entitled "PART II - Item 1. Legal Proceedings."
On December 21, 2016, our board of directors approved a plan to expand our ethanol production facility. We plan to increase our capacity by approximately 35 million gallons of ethanol per year and add additional grain storage capacity. The total capital cost of this project is expected to be approximately $42 million. We plan to finance the expansion using a combination of additional debt financing and cash from operations. We expect that the expansion will be fully operational during the fourth quarter of our 2017 fiscal year. All expectations for the next twelve months include the expected increased annual capacity of 35 million gallons for the nine months January 2018 through September 2018, as the projected completion of the plant expansion is late fourth quarter 2017.
On June 29, 2017, we entered into a new $30 million term loan (the "Term Loan") and increased and extended our existing revolving loan (the "Revolving Loan")agreements with Home Federal Savings Bank ("Home Federal"HFSB").
In recent years,The purpose of this amendment was to increase our Revolving Term Loan to $50,000,000 and extend the ethanol industry in the United States has increased exports of ethanol and distiller grains. In January 2017, the Chinese issued final tariffs on U.S. distiller grains. The Chinese distiller grains anti-dumping tariffs range from 42.2%maturity date to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%.November 6, 2025. In addition, we adjusted our financial covenants to allow for up to $17,500,000 in capital expenditures each year provided we are meeting our financial covenants. Following the Chinese government increased its ethanol import tariff from 5%amendment, we are allowed an unlimited amount of capital expenditures and an unlimited amount of distributions to 30% asour members provided we maintain working capital of January 1, 2017. These tariffs have had a negative impact on market ethanolat least $40,000,000 following the capital expenditures and distiller grains prices in the United States.distributions.
In addition, on August 23, 2017, Brazil imposed a twenty percent import tariff on ethanol imported from the United States. Since, Brazil is a major source of ethanol demand, this tariff could negatively impact market ethanol prices in the United States.
On June 16, 2017,April 13, 2020, we declared a distribution of $8,977,315 to be paid to 64,585Steve Retterath $30,000,000 and Mr. Retterath transferred his 25,860 membership units which equals $139.00 perto complete the membership unit. Paymentunit repurchase agreement we executed with Mr. Retterath in 2013. The current status of the distribution was contingent on the Home Federal loan closing. The distribution was paid on July 3, 2017.litigation with Mr. Retterath is described further in Part II, Item 1. Legal Proceedings.
Results of Operations
Comparison of Fiscal Quarters Ended September 30, 20172020 and 20162019
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Income Statement Data | | Amount | | % | | Amount | | % |
| Revenue | | $ | 73,396,939 | | | 100.0 | | | $ | 76,896,475 | | | 100.0 | |
| | | | | | | | |
| Costs of goods sold | | 65,268,684 | | | 88.9 | | | 72,369,032 | | | 94.1 | |
| | | | | | | | |
| Gross profit | | 8,128,255 | | | 11.1 | | | 4,527,443 | | | 5.9 | |
| | | | | | | | |
| Selling, general and administrative expenses | | 977,740 | | | 1.3 | | | 726,263 | | | 0.9 | |
| | | | | | | | |
| Operating income | | 7,150,515 | | | 9.7 | | | 3,801,180 | | | 4.9 | |
| | | | | | | | |
| Other income (expense) | | 105,499 | | | 0.1 | | | 189,412 | | | 0.2 | |
| | | | | | | | |
| Net income | | $ | 7,256,014 | | | 9.9 | | | $ | 3,990,592 | | | 5.2 | |
|
| | | | | | | | | | | | | | |
| | | 2017 | | 2016 |
| Income Statement Data | | Amount | | % | | Amount | | % |
| Revenue | | $ | 59,680,650 |
| | 100.0 |
| | $ | 64,675,851 |
| | 100.0 |
|
| | | | | | | | | |
| Costs of goods sold | | 52,152,539 |
| | 87.4 |
| | 55,045,329 |
| | 85.1 |
|
| | | | | | | | | |
| Gross profit | | 7,528,111 |
| | 12.6 |
| | 9,630,522 |
| | 14.9 |
|
| | | | | | | | | |
| Selling, general and administrative expenses | | 806,772 |
| | 1.4 |
| | 1,126,987 |
| | 1.7 |
|
| | | | | | | | | |
| Operating income | | 6,721,339 |
| | 11.3 |
| | 8,503,535 |
| | 13.1 |
|
| | | | | | | | | |
| Other income (expense) | | 76,001 |
| | 0.1 |
| | 167,829 |
| | 0.3 |
|
| | | | | | | | | |
| Net income | | $ | 6,797,340 |
| | 11.4 |
| | $ | 8,671,364 |
| | 13.4 |
|
Revenue
Our total revenue for our third quarter of 20172020 was approximately 8%5% less than our total revenue for our third quarter of 2016. Management attributes this decrease in revenue with2019 due primarily to decreased ethanol and decreased distiller grains revenue during the 2017 period.average prices for our products.
For our third quarter of 2017,2020, our total ethanol revenue was approximately 1%3% less than our third quarter of 20162019 due to decreasedlower average prices we received for our ethanol productionduring the 2020 period, partially offset by an increasemore gallons sold in the2020.
The average price per gallon we received per gallonfor our ethanol during our third quarter of ethanol sold during2020 was approximately 6% less than the 2017 period. The average price we received for our ethanol during our third quarter of 2017 was approximately 3% greater than2019. Management attributes this decrease in the average price we received for our ethanol with lower market corn prices and lower market gasoline prices, both of which impact ethanol prices, during our third quarter of 2016. Management attributes this increase in ethanol prices with higher corn prices and increased ethanol demand. Management anticipates ethanol prices will be lower during our fourth quarter of 2017 due to lower corn prices and increased ethanol supply.
We sold approximately 4% fewer gallons of ethanol during our third quarter of 20172020 compared to the same period of 2016.2019. Management attributes this decreasebelieves that the COVID-19 pandemic impacted gasoline demand during the 2020 period during the summer driving season. Management anticipates that the impact of the COVID-19 pandemic will continue for the rest of our 2020 fiscal year and potentially beyond, especially if additional travel restrictions are implemented later in our 2020 fiscal year.
We sold approximately 3% more gallons of ethanol sales during our third quarter of 2017 with increased plant downtime related to our fall shutdown and work we performed to tie in parts of our expansion project. Management anticipates future ethanol production to be higher2020 compared to prior years duethe same period of 2019 despite market conditions which have impacted demand for ethanol. During times when ethanol prices are low, we are focusing on operating the ethanol plant as efficiently as possible in order to plant expansion project.maximize the amount of ethanol we can produce per bushel of corn ground.
Our total distiller grains revenue was approximately 36%12% less during our third quarter of 20172020 compared to the same period of 2016,2019, primarily due primarily to decreased marketdistiller grains sold as well as lower average dried distiller grains prices. We sold approximately 10% fewer tons of distiller grains during our third quarter of 2020 compared to the same period of 2019 due to reduced production at the ethanol plant, overall, along with increased production of corn oil. When we produce more pounds of corn oil, it reduces the volume of distiller grains we have available to sell. We primarily sell our distillers grains in the dried form. The average price we received for our dried distiller grains was approximately 22% less3% lower during our third quarter of 20172020 compared to the same period of 2016. We sell nearly all of our distiller grains in the dried form.2019. Management attributes these loweranticipates that distiller grains prices to decreased export demand from China due towill remain steady during the anti-dumping and countervailing duty tariffs imposed by the Chinese. Historically, China was the largest export market for distillers grains which has had a significant impact on distiller grains demand and prices. Distiller grains are typically used as a feed substitute for corn. Recently, distiller grains have been trading at a greater discount compared to a comparable
amountrest of corn which management believes is indicative of decreased distiller grains demand. Management anticipates distiller grains will continue to trade at a discount to cornour 2020 fiscal year due to anticipated strong corn supplies and lower demand due to the loss of the Chinese market. We sold approximately 18% fewer total tons ofstable distiller grains during our third quarter of 2017 compared to the same period of 2016 due to improved corn to ethanol conversion efficiency along with increased plant downtime. As we extract more corn oil from our distiller grains, it reduces the volume of distiller grains we sell. In addition, as our production process becomes more efficient, we use less corn to produce our ethanol which correspondingly decreases our distiller grains production. Management anticipates distiller grains production will increase once our plant expansion project becomes fully operational.demand.
Our total corn oil revenue was approximately 1% greater5% lower for our third quarter of 20172020 compared to the same period of 20162019 due to higherdecreased average selling price per pound of corn oil prices.during the 2020 period, partially offset by a slight increase in corn oil pounds sold. We sold approximately 1% fewermore pounds of corn oil during our third quarter of 20172020 compared to the same period of 20162019 primarily because of less ethanol production offset in part by increased efficiency extracting corn oil at the plant. We added additional corn oil extraction equipment which allows us to increaseefficiency during the amount of corn oil we can produce per bushel of corn.2020 period. The average price we received for our corn oil was approximately 2% greater6% lower during our third quarter of 20172020 compared to the same period of 2016. This increase2019 due to decreased demand in the corn oil market. Management anticipates that corn oil prices occurred, in part, due to increasedwill decrease slightly for the rest of our 2020 fiscal year since biodiesel production is typically lower during the winter months and corn oil demand. Management anticipates lower demand for corn oil fromis frequently used as the biodiesel industry since certain proposed volume obligations infeedstock to produce biodiesel.
During our third quarter of 2020, we experienced combined realized and unrealized losses on our ethanol derivatives of approximately $1,000 which decreased our revenue. By comparison, we held no ethanol derivative instruments during the 2018 RFS, which benefit biodiesel, are at lower levels which management believes will negatively impact biodiesel production.same period of 2019.
Cost of Goods Sold
Our two primary costs of production are corn costs and natural gas costs. Our total cost of goods sold was approximately 5%10% less for our third quarter of 20172020 compared to the same period of 2016.2019. Our cost of goods sold related to corn, without taking into account derivative instruments, was approximately 8%21% less during our third quarter of 20172020 compared to our third quarter of 20162019 due to decreasedusing less bushels of corn consumption.as well as lower average corn costs per bushel. We used approximately 5% fewer bushels of corn during our third quarter of 2020 compared to the same period of 2019 due to reduced overall production at the ethanol plant. Our average cost per bushel of corn was approximately 2% greater17% lower during our third quarter of 20172020 compared to our third quarter of 20162019 due primarily to ample corn supplies in our market along with decreased corn demand. Management anticipates that corn costs will remain lower unless current market conditions persist and corn demand is higher due to anticipated lower cornincreased ethanol production.
We processed approximately 10% fewer bushels of cornexperienced decreased natural gas costs during our third quarter of 2017 compared to our third quarter of 2016 due to our decreased total production at the ethanol plant and improved corn to ethanol conversion efficiency. Management anticipates lower corn prices due to the balance between corn supply and demand. However, we may experience higher corn prices once the expansion is fully operational due to increased corn consumption which may impact prices in our local market.
We experienced increased natural gas prices during our third quarter of 20172020 compared to the same period of 20162019 primarily due to higher energy pricesdecreased usage during the 2017 period.2020 period, as well as slightly lower average costs per MMBtu of natural gas used. During our third quarter of 2017, the2020, our average delivered price we paidcost per MMBtu of natural gas was approximately 9% greater 6% lower
compared to the same period of 2016. We2019. In addition, we used approximately 4%3% fewer MMBtu of natural gas during our third quarter of 20172020 compared to our third quarter of 20162019 due to decreased production. Management anticipates continued higher natural gas prices duringproduction at the rest of our 2017 fiscal year with typical natural gas cost increases during the winter months. If a shortage of natural gas were to occur, it could result in significantly higher natural gas prices which could negatively impact our profitability.ethanol plant.
We engage in risk management activities that are intended to fix the purchase price of the corn and natural gas we require to produce ethanol, distiller grains and corn oil. During our third quarter of 2017,2020, we had aexperienced combined realized gainand unrealized losses of approximately $2,278,000 and an unrealized gain of approximately $318,000$741,000 related to our corn and natural gas derivative instruments.instruments which increased our cost of goods sold. During our third quarter of 2016,2019, we had acombined realized gainand unrealized gains of approximately $4,712,000 and an unrealized loss$4.53 million which decreased our cost of approximately $2,626,000goods sold related to our corn and natural gas derivative instruments. We recognize the gains or losses that result from changes in the value of our corn and natural gas derivative instruments in cost of goods sold as the changes occur. Until the expansion is fully implemented, our plant is expected to use approximately 63 million bushels of corn per year. As of September 30, 2017, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 8% of its anticipated monthly grind for the next twelve months, not including our anticipated increased consumption following completion of the expansion project.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were lessmore during our the third quarter of 20172020 than our third quarter of 2016, due to decreased legal expenses from the Retterath trial during third quarter 2017 and non recurring ethanol promotion expenditures that were incurred during our third quarter of 2016.2019, primarily due to increased insurance and legal expenses in the current quarter, offset by decreases in dues and subscriptions related to national trade organizations.
Other Income (Expense)
We had more interest income during our third quarter of 2017 compared to the same period of 2016 due to having more cash on hand during the 2017 period. We also had moreless interest expense during our third quarter of 20172020 compared to the same period of 20162019 due to increased borrowinghaving less outstanding debt. We had less other income during our third quarter of 2020 compared to the same period of 2019 due to less gains on our new term debt.equity method investments in the 2020 period which are also involved in the ethanol industry and experienced decreased profitability in 2020.
Comparison of Nine Months Ended September 30, 20172020 and 2016 2019
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the nine months ended September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Income Statement Data | | Amount | | % | | Amount | | % |
| Revenue | | $ | 202,296,382 | | | 100.0 | | | $ | 243,831,429 | | | 100.0 | |
| | | | | | | | |
| Costs of goods sold | | 193,517,735 | | | 95.7 | | | 229,136,006 | | | 94.0 | |
| | | | | | | | |
| Gross profit | | 8,778,647 | | | 4.3 | | | 14,695,423 | | | 6.0 | |
| | | | | | | | |
| Selling, general and administrative expenses | | 2,814,009 | | | 1.4 | | | 2,870,660 | | | 1.2 | |
| | | | | | | | |
| Operating income | | 5,964,638 | | | 2.9 | | | 11,824,763 | | | 4.8 | |
| | | | | | | | |
| Other income (expense) | | 4,633 | | | — | | | 1,144,729 | | | 0.5 | |
| | | | | | | | |
| Net income | | $ | 5,969,271 | | | 3.0 | | | $ | 12,969,492 | | | 5.3 | |
|
| | | | | | | | | | | | | | |
| | | 2017 | | 2016 |
| Income Statement Data | | Amount | | % | | Amount | | % |
| Revenue | | $ | 194,342,760 |
| | 100.0 |
| | $ | 196,132,720 |
| | 100.0 |
|
| | | | | | | | | |
| Costs of goods sold | | 174,938,128 |
| | 90.0 |
| | 174,855,824 |
| | 89.2 |
|
| | | | | | | | | |
| Gross profit | | 19,404,632 |
| | 10.0 |
| | 21,276,896 |
| | 10.8 |
|
| | | | | | | | | |
| Selling, general and administrative expenses | | 2,833,927 |
| | 1.5 |
| | 2,697,754 |
| | 1.4 |
|
| | | | | | | | | |
| Operating income | | 16,570,705 |
| | 8.5 |
| | 18,579,142 |
| | 9.5 |
|
| | | | | | | | | |
| Other income (expense) | | 607,827 |
| | 0.3 |
| | 1,306,828 |
| | 0.7 |
|
| | | | | | | | | |
| Net income | | $ | 17,178,532 |
| | 8.8 |
| | $ | 19,885,970 |
| | 10.1 |
|
Revenue
Our total revenue for theour nine months ended September 30, 20172020 was approximately 1%17% less than our total revenue for theour nine months ended September 30, 2016. Management attributes this decrease in revenue with lower2019 due primarily to less ethanol and distiller grains revenue, during the 2017 period, partially offset by increased ethanol and corn oil revenue.
For theour nine months ended September 30, 2017,2020, our total ethanol revenue was approximately 4% greater19% less than theour nine months ended September 30, 20162019 due to increasedless gallons of ethanol we sold along with an increase inlower average prices we received for our ethanol during the 2020 period.
The average price per gallon we received per gallon offor our ethanol sold during our nine months ended September 30, 2020 was approximately 11% less than the 2017 period. The average price we received for our ethanol during theour nine months ended September 30, 20172019. Management attributes this decrease in the average price we received for our ethanol with significantly lower gasoline prices
early in our first quarter of 2020 along with decreased gasoline demand due to the COVID-19 pandemic. Management believes that gasoline demand was reduced significantly in the United States early in the pandemic which has substantially impacted ethanol prices. Ethanol demand increased after our second fiscal quarter of 2020. However, ethanol demand remains lower than previous years.
We sold approximately 2% greater than9% fewer gallons of ethanol during theour nine months ended September 30, 2016. Management attributes this increase in ethanol prices with increased gasoline prices which have impacted ethanol prices along with increased export demand. Management anticipates lower ethanol prices for the remaining quarter of our 2017 fiscal year.
We sold approximately 2% more gallons of ethanol during the nine months ended September 30, 20172020 compared to the same period of 2016,2019 due to increased production duringmarket conditions which have impacted demand for ethanol. During times when ethanol prices are low, we are focusing on operating the 2017 period. Management anticipates ethanol productionplant as efficiently as possible in order to be higher compared to prior years due to our plant expansion project.maximize the amount of ethanol we can produce per bushel of corn ground.
Our total distiller grains revenue was approximately 28%12% less during theour nine months ended September 30, 20172020 compared to the same period of 2016,2019, primarily due primarily to decreased distiller grains sales and prices.production along with slightly lower average prices we received for our dried distiller grains. We sold approximately 12% fewer tons of distiller grains during our nine months ended September 30, 2020 compared to the same period of 2019 due to reduced production at the ethanol plant, overall, along with increased production of corn oil. The average price we received for our dried distiller grains was approximately 21% lessconsistent during theour nine months ended September 30, 20172020 compared to the same period of 2016. We sold approximately 8% fewer total tons of distiller grains during the nine months ended September 30, 2017 compared to the same period of 2016 due to improved corn to ethanol conversion efficiency along with increased corn oil production. As we extract more corn oil from our corn, it reduces the volume of distiller grains we sell. In addition, as our production process becomes more efficient, we use less corn to produce our ethanol which correspondingly decreases our distiller grains production.2019.
Our total corn oil revenue was approximately 20%2% greater for theour nine months ended September 30, 20172020 compared to the same period of 20162019 due to increased pounds of corn oil production and higher marketthat we sold, partially offset by lower corn oil prices per pound during the 20172020 period. We sold approximately 17%5% more pounds of corn oil during theour nine months ended September 30, 20172020 compared to the same period of 20162019 primarily because of increased efficiencies in the extraction process along with increased ethanol production. We added additional corn oil extraction equipment which allows us to increaseefficiency during the amount of corn oil we can produce per bushel of corn.2020 period. The average price we received for our corn oil was approximately 2% greater3% less during theour nine months ended September 30, 20172020 compared to the same period of 2016.2019 due to lower commodity prices generally, including lower energy prices.
During our nine months ended September 30, 2020, we experienced combined realized and unrealized losses on our ethanol derivatives of approximately $1,177,000 which decreased our revenue. By comparison, we experienced no realized or unrealized gains or losses on ethanol derivative instruments during the same period of 2019.
Cost of Goods Sold
Our total cost of goods sold was comparableapproximately 15% less for theour nine months ended September 30, 2017 and2020 compared to the same period of 2016.2019. Our cost of goods sold related to corn, without taking into account derivative instruments, was 4%approximately 18% less for theduring our nine months ended September 30, 20172020 compared to theour third quarter of 2019 due to using less bushels of corn along with lower corn costs per bushel. We used approximately 9% fewer bushels of corn during our nine months ended September 30, 20162020 compared to the same period of 2019 due to a favorable supply and demand balance during our 2017 fiscal year.reduced overall production at the ethanol plant. Our average cost per bushel of corn was approximately 3%10% lower during our nine months ended September 30, 2020 compared to our nine months ended September 30, 2019 due to ample corn supplies in our market and lower corn demand from ethanol production and animal feeding operations which resulted from the COVID-19 pandemic.
We experienced decreased natural gas costs during our nine months ended September 30, 2020 compared to the same period of 2019 primarily due to decreased energy prices, generally, during the 2020 period. During our nine months ended September 30, 2020, our average delivered cost per MMBtu of natural gas was approximately 2% less compared to the same period of 2019. In addition, we used approximately 5% fewer MMBtu of natural gas during nine months ended September 30, 2020 compared to our nine months ended September 30, 2019 due to decreased production at the ethanol plant.
We engage in risk management activities that are intended to fix the purchase price of the corn and natural gas we require to produce ethanol, distiller grains and corn oil. During our nine months ended September 30, 2020, we had combined realized and unrealized gains of approximately $2.21 million related to our corn and natural gas derivative instruments. During our nine months ended September 30, 2019, we had combined realized and unrealized gain of approximately $3.2 million related to our corn and natural gas derivative instruments. We recognize the gains or losses that result from changes in the value of our corn and natural gas derivative instruments in cost of goods sold as the changes occur.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were less during the nine months ended September 30, 2017 compared to the2020 than during our nine months ended September 30, 20162019, primarily due to ample corn suppliesdecreased dues and relatively stable corn demand.subscriptions related to national trade associations.
Other Income (Expense)
We processed approximately 1% fewer bushels of cornhad less interest expense during theour nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to improved corn to ethanol conversion efficiency.
We experienced increased natural gas prices during the nine months ended September 30, 20172020 compared to the same period of 2016 primarily2019 due to higher energy pricesless outstanding debt in 2020. We had less other income during the 2017 period. During theour nine months ended September 30, 2017, the average delivered price we paid per MMBtu of natural gas was approximately 6% greater2020 compared to the same period of 2016. We used 5% more natural gas during the nine months ended September 30, 2017 than the nine months ended September 30, 2016 due to increased production and our electrical energy turbine which runs on steam. The steam turbine has significantly reduced electrical usage, with a year to date savings of $1.3 million compared to what our electrical costs would have been without the steam turbine.
During the nine months ended September 30, 2017, we had a realized gain of approximately $2,534,000 and an unrealized gain of $236,000 related to our corn derivative instruments. During the nine months ended September 30, 2016, we had a realized gain of approximately $4,682,000 and an unrealized loss of approximately $269,000 related to our corn derivative instruments.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were greater during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to increased legal expenses related to the Retterath lawsuit.
Other Income
Our other income was less during the nine months ended September 30, 2017 compared to the same period of 20162019 due to less income fromgains in our equity method investments duringin the 20172020 period, and increased interest expense$30 million of which were liquidated in 2017 related to the term debt.April, 2020.
Changes in Financial Condition for the Nine Months Ended September 30, 2017.2020
| | | | | | | | | | | | | | |
| Balance Sheet Data | | September 30, 2020 | | December 31, 2019 |
| Total current assets | | $ | 49,855,132 | | | $ | 87,173,152 | |
| Total property and equipment | | 126,736,438 | | | 126,554,986 | |
| Total other assets | | 8,100,158 | | | 9,231,854 | |
| Total Assets | | $ | 184,691,728 | | | $ | 222,959,992 | |
| | | | |
| Total current liabilities | | $ | 13,018,272 | | | $ | 53,902,670 | |
| Total long-term liabilities | | 11,728,630 | | | 15,081,767 | |
| Total members' equity | | 159,944,826 | | | 153,975,555 | |
| Total Liabilities and Members' Equity | | $ | 184,691,728 | | | $ | 222,959,992 | |
|
| | | | | | | | |
| Balance Sheet Data | | September 30, 2017 | | December 31, 2016 |
| Total current assets | | $ | 89,142,411 |
| | $ | 76,835,075 |
|
| Total property and equipment | | 131,870,267 |
| | 117,806,502 |
|
| Total other assets | | 6,520,977 |
| | 4,143,322 |
|
| Total Assets | | $ | 227,533,655 |
| | $ | 198,784,899 |
|
| | | | | |
| Total current liabilities | | $ | 41,095,066 |
| | $ | 47,424,337 |
|
| Total long-term liabilities | | 27,000,000 |
| | 123,190 |
|
| Total members' equity | | 159,438,589 |
| | 151,237,372 |
|
| Total Liabilities and Members' Equity | | $ | 227,533,655 |
| | $ | 198,784,899 |
|
We had moreless cash and cash equivalents and restricted cash as ofat September 30, 20172020 compared to December 31, 20162019 due to cash generated from our operationspayments on long term debt and capital projects along with $30 million in loan proceeds we receiveddecreased net income during the 20172020 period. We had approximately $2.5 million in restricted cash related to payments we will make in the future for our plant expansion project. As of less trading securities at September 30, 2017, the value of our trading securities was lower2020 compared to theDecember 31, 2019 due to redemption of trading securities we used to complete the Retterath unit repurchase in April 2020. We had less accounts receivable at September 30, 2020 compared to December 31, 2016 due to bonds which matured and other investments we liquidated during the 2017 period. In order to fund our purchase obligation related to the Retterath repurchase agreement, we have allocated $30 million of our trading securities to the Retterath repurchase. Our accounts receivable was lower at September 30, 2017 compared to December 31, 20162019 due to the timing of our quarter end with respectcompared to shipments of our ethanol and payments we received from our marketer. We had more inventory on hand at marketers along with decreased ethanol sales. As of September 30, 2017 compared to December 31, 2016 due primarily to having more finished goods inventory on hand at
September 30, 2017 as a result of the timing of our quarter end. We2020 we had less prepaid expenses at September 30, 2017inventory compared to December 31, 20162019 due to a decreaseless raw materials on hand on the last day of the month. We had fewer prepaid assets at September 30, 2020 compared to December 31, 2019 due to less prepaid insurance at September 30, 2020. As of September 30, 2020, the value of our derivative instruments was lower compared to December 31, 2019 due to changes in prepaid natural gas transportation fees and other prepaid items.the value of our derivative instruments.
Our net property and equipment was greaterhigher at September 30, 20172020 compared to December 31, 20162019 due to the net effect ofincreased spending toward capital expenditures we have been making at the ethanol plantprojects, partially offset by depreciation. OurThe value of our other assets were greaterwas higher at September 30, 2017 than at 2020 compared to December 31, 2016 as a result2019 due to increases from investments at September 30, 2020 compared to December 31, 2019, partially offset by amortization of restricted cash from the loan proceeds for the expansion project.our right of use asset.
Our current liabilities wereaccounts payable was less at September 30, 20172020 compared to December 31, 2016,2019 due primarily due to the decreased accounts payable ashaving less deferred corn payments at September 30, 2020 and lower average corn costs per bushel. As of September 30, 2017 partially offset by the $32020, we no longer had $30 million increase in the current portion of our term loanowed to Mr. Retterath related to the expansion.unit repurchase which was closed in April 2020. Our accounts payableaccrued expenses were less at September 30, 20172020 compared to December 31, 20162019 due primarily to a large outstanding invoicedecreased employee bonuses pursuant to employee compensation plans accrued at December 31, 2016 related to the plant expansion project and having2019. The current portion of our long-term debt was less deferred corn payments as ofat September 30, 20172020 compared to December 31, 2016. 2019 due to payments we made on our long-term debt during our second and third quarters of 2020.
Our accrued expenseslong-term liabilities were lowerless at September 30, 20172020 compared to December 31, 20162019 due to paymentamortization of wagesour operating lease liability and performance bonuses accrueda decrease in long term debt at December 31, 2016.
Our long-term liabilities were greater at September 30, 2017 compared to December 31, 2016 primarily due to our new $30 million term loan less the principal payments due within one year which are included in current liabilities.2020.
Liquidity and Capital Resources
Our primary sources of liquidity as of September 30, 20172020 were cash from our operations and our $30 million long-term revolving loan. Our credit facilities are described in greater detail below under "Short-Term and Long-Term Debt Sources." As of September 30, 2017,2020, we had $30.0$21 million available pursuant to our revolving loan and approximately $36.8$15.95 million in cash and cash equivalents, as well as approximately $2.5 million of restricted cash that is restricted for future expansion costs.equivalents. We also had $30$10.4 million at September 30, 20172020 of trading securities for the Retterath repurchase agreement along with an additional approximately $4.9 million in trading securities which are not set aside for the Retterath repurchase.securities. Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our revolving loan and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity financing for working capital or other purposes.
The following table shows cash flows for the nine months months ended September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Net cash provided by operating activities | | $ | 15,451,999 | | | $ | 24,848,477 | |
| Net cash provided by (used in) investing activities | | 21,319,693 | | | (26,562,534) | |
| Net cash (used for) financing activities | | (38,092,325) | | | (7,842,000) | |
| Cash at beginning of period | | 17,274,703 | | | 28,751,994 | |
| Cash and cash equivalents at end of period | | $ | 15,954,070 | | | $ | 19,195,937 | |
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Net cash provided by operating activities | | $ | 26,164,568 |
| | $ | 24,829,371 |
|
| Net cash (used in) investing activities | | (22,107,145 | ) | | (11,656,462 | ) |
| Net cash provided by (used in) financing activities | | 21,022,685 |
| | (3,875,100 | ) |
| Cash at beginning of period | | 14,168,643 |
| | 20,256,678 |
|
| Cash and restricted cash at end of period | | $ | 39,248,751 |
| | $ | 29,554,487 |
|
Cash Flow From Operations
Our operations provided moreless cash during our first nine months of 20172020 compared to the same period of 20162019 due primarily due to less net income and decreased cash flow from changes in working capital components, including accounts receivable, accounts payable and accrued expenses which increased our cash during the 2017 period, offset by a lower net income in 2017.2020 period.
Cash Flow From Investing Activities
We used Our investing activities provided more cash during the 2020 period because we redeemed $32 million in trading securities during that time, offset by more payments for investing activitiesconstruction in progress during our first nine months of 2017the 2020 period compared to the first nine months of 2016 due to capital expenditures related to our plant expansion during the 2017 period partially offset by cash we realized on the redemption of trading securities.2019 period.
Cash Flow From Financing Activities
Our financing activities providedused more cash during our 2017 fiscal year due to the proceeds2020 period because we received on our term loan.completed the Retterath unit repurchase during the 2020 period. We did not use or receive any cash from financing activitiesalso made $9 million in loan payments during ourthe 2020 period. During the first nine months of 2016.2019 we paid approximately $4.8 million in distributions.
Short-Term and Long-Term Debt Sources
Master Loan Agreement with Home Federal Savings Bank
On June 29, 2017, we entered into a new $30 million term loan (the "Term Loan") and increased and extended our existing revolving loan (the "Revolving Loan") with Home Federal Savings Bank ("Home Federal"). Each loan is described below. On November 6, 2020, we entered into an amendment of our credit facilities.
Term Loan
We have As of September 30, 2020, we had a $30 million term loan with a fixed interest rate of 4.79%. We will paypaid interest on the Term Loan monthly with semi-annual principal payments of $3 million commencing on June 30, 2018. The maturity date of the Term Loan is December 31, 2022. We have the ability to prepay principal on the Term Loan without penalty or premium by giving Home Federal thirty days advance notice. If we choose to refinance the Term Loan within the first thirty-six months following the closing, we will be required to pay Home Federal a prepayment fee. In the event we default on the Term Loan, Home Federal can charge a default interest rate 2%term loan was paid in excess of the current interest rate. Asfull during third quarter, 2020 and therefore has no amount outstanding as of September 30, 2017, we had $30 million outstanding on the Term Loan. 2020.
Revolving Loan
We have a $30 million term revolving loan which has a maturity date of December 31, 2022. Interest on the Revolving Loan accrues at 310Prime Rate less 60 basis points in excess of the 30-day London Interbank Offered Rate (LIBOR).points. We are required to make monthly payments of interest until the maturity date on December 31, 2022, on which date the unpaid principal balance of the Revolving Loan becomes due. We agreed to pay a fee of 30 basis points on a per annum basis on the unused portion of the Revolving Loan payable on a quarterly basis. As of September 30, 2017,2020, we had $0$9 million outstanding on the Revolving Loan and $30$21 million available to be drawn. Interest accrued on the Revolving Loan as of September 30, 20172020 at a rate of 4.33%2.65% per year.
Covenants
In connection with the Master Loan Agreement, we are required to comply with certain debt covenants and financial ratios. We agreed to a debt service coverage ratio of 1:15 to 1:00 and agreed to increase oura minimum working capital covenant from $27.5 million toof $30 million once our expansion is complete.million. We are permitted to pay distributions to our members up to 100% of our 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 we are in
compliance with all of our loan covenants, including compliance with the financial covenants. Further, ourThe maximum capital expenditure covenant was increased to $15 million in 2019. In 2020, we received a waiver from $5Home Federal to increase capital spending to $17.5 million to $10 million per year. in 2020.
As of September 30, 2017,2020, we were in compliance with all of our debt covenants and financial ratios. Management anticipates that we will be in compliance with all of our debt covenants and financial ratios for at least the next 12 months.
Failure to comply with the loan covenants or to maintain the required financial ratios may cause acceleration of any future outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. Any acceleration of the debt financing or imposition of the fees, charges or penalties may restrict or limit our access to the capital resources necessary to continue plant operations.
Should we default on any of our obligations pursuant to the Home Federal loans, Home Federal may terminate its commitment to provide us funds and declare any future unpaid principal balance of the loans, plus accrued interest, immediately due and payable. Events of default include the failure to make payments when due, our insolvency, any material adverse change in our financial condition or the breach of any of the covenants, representations or warranties we have made in the loan agreements.
Application of Critical Accounting 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. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Derivative Instruments
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative mymay be exempted from derivative accounting 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 the accounting and reporting requirements of derivative accounting.
The Company enters into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of ethanol for the plant and managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of all contracts with the same counter partycounter-party are presented net on the accompanying balance sheet as derivative instruments net of cash due from/to broker.
Revenue recognitionRecognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownershipcontrol transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Interest income is recognized as earned. Shipping costs incurred by the Company in the sale of ethanol and distiller grains are not specifically identifiable and as a result, revenue from the sale of ethanol and distiller grains is recorded based on the net selling price reported to the Company from the marketer.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars and we have no amounts outstanding on variable interest rate debt.Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding loans which bear variable interest rates. As of September 30, 2020, we had $9 million outstanding on our variable interest rate loans with interest accruing at a rate of 2.65%. Our variable interest rates are calculated by subtracting a set basis to the prime rate. If we were to experience a 10% increase in the prime rate, the annual effect such change would have on our income statement, based on the amount we had outstanding on our variable interest rate loans as of September 30, 2020, would be approximately $900,000.
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 distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of September 30, 2017,2020, we had price protection in place for approximately 8%10% of our anticipated corn needs, (based on current usage prior to completion of the expansion), 0%19% of our natural gas needs and 0%none of our ethanol sales for the next 12 months. A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk
related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of September 30, 2017,2020, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from September 30, 2017.2020. The results of this analysis, which may differ from actual results, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | | Unit of Measure | | Hypothetical Adverse Change in Price | | Approximate Adverse Change to income |
| Natural Gas | | 4,084,000 | | | MMBTU | | 10% | | $ | (918,900) | |
| Ethanol | | 195,000,000 | | | Gallons | | 10% | | (27,300,000) | |
| Corn | | 60,409,000 | | | Bushels | | 10% | | (23,559,510) | |
|
| | | | | | | | | | | |
| | | Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)* | | Unit of Measure | | Hypothetical Adverse Change in Price | | Approximate Adverse Change to income |
| Natural Gas | | 5,300,000 |
| | MMBTU | | 10% | | $ | (1,653,600 | ) |
| Ethanol | | 188,000,000 |
| | Gallons | | 10% | | (25,004,000 | ) |
| Corn | | 58,000,000 |
| | Bushels | | 10% | | (19,894,000 | ) |
For comparison purposes, our sensitivity analysis for our third quarter of 20162019 is set forth below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | | Unit of Measure | | Hypothetical Adverse Change in Price | | Approximate Adverse Change to income |
| Natural Gas | | 720,000 | | | MMBTU | | 10% | | $ | (216,000) | |
| Ethanol | | 200,000,000 | | | Gallons | | 10% | | (28,000,000) | |
| Corn | | 60,000,000 | | | Bushels | | 10% | | (22,800,000) | |
|
| | | | | | | | | | | |
| | | Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | | Unit of Measure | | Hypothetical Adverse Change in Price | | Approximate Adverse Change to income |
| Natural Gas | | 3,705,000 |
| | MMBTU | | 10% | | $ | (1,100,385 | ) |
| Ethanol | | 143,550,000 |
| | Gallons | | 10% | | (19,092,150 | ) |
| Corn | | 42,140,000 |
| | Bushels | | 10% | | (12,810,560 | ) |
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.
Our management, including our President and Chief Executive Officer (the principal executive officer), James Broghammer, along with our Chief Financial Officer, (the principal financial officer), Beth Eiler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2020. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
For the fiscal quarter ended September 30, 2017,2020, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART IIII.
ITEM 1. LEGAL PROCEEDINGS.
Retterath Lawsuit
On August 14, 2013, the Company filed a lawsuit against Steve Retterath in the Iowa state court located in Polk County, Iowa. The purpose of the lawsuit is to enforce the terms of the repurchase agreement the Company executed with Mr. Retterath on June 13, 2013. The Company asked the Iowa state court to require Mr. Retterath to perform his obligations under the repurchase agreement pursuant to its terms. Mr. Retterath removed the case to federal court in the Federal District Court for the Southern District of Iowa in December 2013. The Company believed that this removal was improper and as a result the Company moved to remand the case back to the Iowa state court in Polk County which was granted. Mr. Retterath answered the lawsuit in August 2014, denying the validity of the repurchase agreement. In addition, the Iowa state court permitted Jason Retterath and Annie Retterath, the son and daughter-in-law of Steve Retterath, to be added as parties to the Iowa state lawsuit. In February 2015, the
Company filed a motion for summary judgment asking the Iowa state court to enforce the repurchase agreement. The Retteraths also filed motions for summary judgment asking the Iowa state court to find the repurchase agreement invalid. On October 16, 2015, the Iowa state court entered a ruling granting Homeland's motion for summary judgment and determined no membership vote was required as Mr. Retterath has contended. The Iowa state court also denied the summary judgment motions filed by Mr. Retterath and his son and daughter-in-law.
Mr. Retterath and his son and daughter-in-law filed a motion to add a significant number of additional parties to the Iowa lawsuit along with additional claims against the Company. We filed a resistance to Mr. Retterath's attempts to expand the scope of the Iowa lawsuit. In November 2016, the Iowa Court ruled that our original claims against Mr. Retterath would proceed to trial in January 2017 as scheduled and that any other issues that remain following that trial would be litigated after a ruling is issued in the January 2017 trial. The trial was held in January 2017. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed motions with the Iowa Court to reconsider its ruling or alternatively award Mr. Retterath a new trial. Mr. Retterath also asked the Iowa Court to stay his obligation to perform the repurchase agreement until these motion are ruled on by the Iowa Court. The Iowa Court granted Mr. Retterath's stay while the court considered his post-trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling. Mr. Retterath filed an appeal of the Iowa Court's decision. In February 2020, the Iowa Supreme Court ruled that the repurchase agreement is valid and enforceable. In April 2020, we closed the repurchase transaction. Now that the first part of the case is resolved, the additional matters Mr. Retterath added to the case in 2016 will be resolved by the court.
GS Cleantech Patent Litigation
On August 9, 2013, GS Cleantech Corporation ("GS Cleantech"), a subsidiary of Greenshift Corporation, filed a complaint in the United States District for the Northern District of Iowa against the Company. The Company is one of more than twenty ethanol manufacturers that were sued by GS Cleantech. The complaint alleges that the Company's operation of a corn oil extraction process infringes patent rights claimed by GS Cleantech. GS Cleantech seeks royalties, damages and
potentially triple damages associated with the alleged infringement, as well as attorney's fees. The complaint was transferred to the United States District Court for the Southern District of Indiana due to a finding that the action involves questions of fact common to several other lawsuits which were joined in a multi-district litigation ("MDL"). The MDL Court developed two tracks of defendants in this litigation. The first track includes defendants which were originally sued by GS Cleantech in 2010 and a second track of defendants sued in 2013 which includes the Company. On October 23, 2014, the MDL Court granted summary judgment in favor of the first track defendants and found that the GS Cleantech patents which the Company is alleged to have infringed are invalid. Further, in a January 16, 2015 decision, the MDL ruled in favor of a stipulated motion for partial summary judgment finding that all of the GS Cleantech patents in the suit were invalid and, therefore, not infringed. GS Cleantech appealed these decisions. The federal appeals court recently rejected GS Cleantech's appeal and the deadline to file additional appeals has said it will appeal this decision when the remaining claim in the suit has been decided. If GS Cleantech successfully appeals the District Court’s findings of invalidity, damages awarded GS Cleantech may be $1 million or more.passed.
The only remaining claim in the lawsuit alleges that GS Cleantech inequitably conducted itself before the United States Patent Office when obtaining the patents at issue. A trial in the District Court for the Southern District of Indiana on the single issue of inequitable conduct was held in October 2015. The MDL Court ruled that GS Cleantech engaged in inequitable conduct. GS Cleantech has asked the court to amend its ruling. The defendants are seeking damages against GS Cleantech and its attorneys as a result of this finding of inequitable conduct. We anticipate that if the determination of inequitable conduct is not amended, GS Cleantech will appeal this decision along with the summary judgment decision issued earlier.
ITEM 1A. RISK FACTORS.
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section10-K for the fiscal year ended December 31, 2016, included2019.
We are subject to global and regional economic downturns and related risks. The level of demand for our products is affected by global and regional demographic and macroeconomic conditions. A significant downturn in global economic growth, or recessionary conditions in major geographic regions for prolonged periods, may lead to reduced demand for our annual reportproducts, which could have a negative effect on Form 10-K.
The Brazilian tariff on U.S. produced ethanol could negatively impactthe market ethanol prices. Brazil is currently the largest importerprice of ethanol producedour products in the United States. However, recentlyIn December 2019, a novel strain of coronavirus surfaced in Wuhan, China (“COVID-19”). In just a few months, the Brazilian government implemented a tariff on ethanol producedspread of COVID-19 has resulted in businesses suspending or terminating global operations and travel, self-imposed or government-mandated quarantines, and an overall slowdown of economic activity in some areas. Cases have been confirmed worldwide, including in Japan, Italy, Brazil, Canada and the United StatesStates. To the extent that such economic conditions negatively impact consumer and exportedbusiness confidence, travel and consumption patterns or volumes for our products, our business and results of operations could be significantly and adversely affected.
COVID-19 may negatively impact our ability to Brazil. Due to current ethanol production levels in the United States, the market price of ethanol has been supported by exports of ethanol. Further, additional ethanol capacity is being constructed which may further increase the domestic supply of ethanol. The Brazilian tariff on U.S. ethanol could lead to an oversupply of ethanol in the United Statesoperate our business which could decrease or eliminate the value of our units. COVID-19 has resulted in significant uncertainty in many areas of our business. We do not know how long these conditions will last. This uncertainty is expected to negatively impact domestic ethanol prices. Ethanol pricesour operations. We may decreaseexperience labor shortages if our employees are unable or unwilling to come to work. In addition, if our suppliers cannot deliver the supplies we need to operate our business, including corn and chemicals for our operations, we may be forced to shutdown operations or reduce production. In addition, if we are unable to ship our products because of trucking or rail shipping disruptions, it could also result in a level which does not allow usforced shutdown or reduction of production. If we are unable to operate the ethanol plant profitably.
Many ethanol producers are expanding their productionat capacity, which could lead to an oversupply of ethanol in the United States. Recently, many ethanol producers have commenced projects to expand their ethanol production capacities. These expansions couldit may result in a significant increase inunfavorable operating results, especially since we will continue to pay our fixed costs of maintaining the supplyfacility. Any shutdown or reduction of ethanol inproduction, especially for an extended period of time, could reduce or eliminate the United States. Currently, ethanol prices are supportedvalue of our units.
by ethanol exports which may not continue at their current levels. While many in the ethanol industry are working to increase the amount of ethanol that is used domestically, specifically in the form of E15, which contains 15% ethanol as compared to the 10% ethanol which is used in most current blends, adoption of E15 has not been as rapid as most ethanol producers would like. Also, the additional ethanol capacity which is being constructed may exceed current domestic and export demand. If an oversupply of ethanol were to occur, it could negatively impact domestic ethanol prices which could negatively impact our ability to profitably operate the ethanol plant.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this report.
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| Exhibit No. | Exhibit |
| 10.1 | |
| 10.2 | |
| 10.3 | |
| 10.4 | |
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| 101 | The following financial information from Homeland Energy Solutions, LLC's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of September 30, 20172020 and December 31, 2016,2019, (ii) Statements of Operations for the three and nine months ended September 30, 20172020 and 2016,2019, (iii) Statements of Cash Flows for the three and nine months ended September 30, 20172020 and 2016,2019, and (iv) the Notes to Unaudited Financial Statements.** |
(*) Filed herewith.
(**) Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| HOMELAND ENERGY SOLUTIONS, LLC |
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| Date: | November 14, 201713, 2020 | | /s/ James Broghammer |
| James Broghammer |
| President and Chief Executive Officer
(Principal Executive Officer)
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| Date: | November 14, 201713, 2020 | | /s/ Beth Eiler |
| Beth Eiler |
| Chief Financial Officer
(Principal Financial Officer)
|