Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit321-certification9x.htm |
| EX-32.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit322-certification9x.htm |
| EX-31.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit312-certification9x.htm |
| EX-31.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit311-certification9x.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal quarter ended September 30, 2016 | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
Commission file number 000-53202 | |
HOMELAND ENERGY SOLUTIONS, LLC | |||
(Exact name of registrant as specified in its charter) | |||
Iowa | 20-3919356 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
2779 Highway 24, Lawler, Iowa | 52154 | ||
(Address of principal executive offices) | (Zip Code) | ||
(563) 238-5555 | |||
(Registrant's telephone number, including area code) | |||
Securities registered pursuant to Section 12(b) of the Act: None | |||
Securities registered pursuant to Section 12(g) of the Act: Membership Units | |||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | x | Smaller Reporting Company | o | |
(Do not check if a smaller reporting company) | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
As of November 14, 2016, we had 90,445 membership units outstanding. On June 13, 2013, the Company entered into an agreement with Steve Retterath, the Company's largest equity holder, to repurchase and retire all of the units owned by Mr. Retterath. The Company agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million. The Company believes that it has a binding agreement with Mr. Retterath. Mr. Retterath contends 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, the Company has recorded a $30 million short-term liability related to the amount the Company agreed to pay Mr. Retterath to repurchase his membership units and has correspondingly reduced members' equity on the balance sheet. The 90,445 membership units outstanding include the contested membership units the Company agreed to repurchase from Mr. Retterath.
INDEX
Page No. | |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Homeland Energy Solutions, LLC
Balance Sheets
September 30, 2016 | December 31, 2015 | ||||||
ASSETS | (Unaudited) | (Audited) | |||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 29,554,487 | $ | 20,256,678 | |||
Trading securities | 41,809,308 | 40,730,621 | |||||
Accounts receivable | 2,221,129 | 4,875,102 | |||||
Inventory | 11,345,205 | 7,653,149 | |||||
Prepaid and other | 2,475,693 | 2,382,674 | |||||
Derivative instruments | 894,405 | 705,549 | |||||
Total current assets | 88,300,227 | 76,603,773 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land and improvements | 22,539,771 | 22,539,771 | |||||
Buildings | 5,817,054 | 5,684,546 | |||||
Equipment | 159,726,187 | 149,732,809 | |||||
Construction in progress | 4,479,242 | 2,518,695 | |||||
192,562,254 | 180,475,821 | ||||||
Less accumulated depreciation | 83,061,112 | 74,755,593 | |||||
Total property and equipment | 109,501,142 | 105,720,228 | |||||
OTHER ASSETS | |||||||
Utility rights, net of amortization of $1,285,120 and $1,182,829 | 1,022,909 | 1,125,200 | |||||
Other assets | 3,320,869 | 3,543,028 | |||||
Total other assets | 4,343,778 | 4,668,228 | |||||
TOTAL ASSETS | $ | 202,145,147 | $ | 186,992,229 | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Balance Sheets (continued)
September 30, 2016 | December 31, 2015 | ||||||
LIABILITIES AND MEMBERS' EQUITY | (Unaudited) | (Audited) | |||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 5,971,462 | $ | 6,522,326 | |||
Due to former member | 30,000,000 | 30,000,000 | |||||
Accrued expenses | 1,023,999 | 1,139,020 | |||||
Total current liabilities | 36,995,461 | 37,661,346 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
LONG-TERM LIABILITIES | |||||||
Other liabilities | 157,992 | 350,059 | |||||
Total long-term liabilities | 157,992 | 350,059 | |||||
MEMBERS' EQUITY (64,585 units issued and outstanding) | 164,991,694 | 148,980,824 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 202,145,147 | $ | 186,992,229 | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Statements of Operations
(Unaudited)
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||||
September 30, 2016 | September 30, 2015 | September 30, 2016 | September 30, 2015 | ||||||||||||
Revenue | $ | 64,675,851 | $ | 67,305,574 | $ | 196,132,720 | $ | 201,725,396 | |||||||
Costs of goods sold | 55,045,329 | 58,081,849 | 174,855,824 | 180,370,248 | |||||||||||
Gross profit | 9,630,522 | 9,223,725 | 21,276,896 | 21,355,148 | |||||||||||
Selling, general and administrative expenses | 1,126,987 | 787,789 | 2,697,754 | 2,657,247 | |||||||||||
Operating income | 8,503,535 | 8,435,936 | 18,579,142 | 18,697,901 | |||||||||||
Other income | |||||||||||||||
Interest income | 3,493 | 2,644 | 8,270 | 6,197 | |||||||||||
Other income | 164,336 | 174,087 | 1,298,558 | 846,027 | |||||||||||
Total other income | 167,829 | 176,731 | 1,306,828 | 852,224 | |||||||||||
Net income | $ | 8,671,364 | $ | 8,612,667 | $ | 19,885,970 | $ | 19,550,125 | |||||||
Basic & diluted net income per capital unit | $ | 134.26 | $ | 133.35 | $ | 307.90 | $ | 302.70 | |||||||
Weighted average number of units outstanding for the calculation of basic & diluted net income per capital unit | 64,585 | 64,585 | 64,585 | 64,585 | |||||||||||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Statements of Cash Flows
(Unaudited)
Nine Months Ended | Nine Months Ended | ||||||
September 30, 2016 | September 30, 2015 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income | $ | 19,885,970 | $ | 19,550,125 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 8,407,810 | 7,905,900 | |||||
Unrealized (gain) loss on risk management activities | (188,856 | ) | 337,690 | ||||
Unrealized (gain) on trading securities activities | (1,078,687 | ) | (374,421 | ) | |||
Change in working capital components: | |||||||
Accounts receivable | 2,653,973 | (1,746,251 | ) | ||||
Inventory | (3,692,056 | ) | 411,293 | ||||
Prepaid and other | (93,019 | ) | 8,932 | ||||
Accounts payable and other accrued expenses | (1,065,764 | ) | (4,822,005 | ) | |||
Net cash provided by operating activities | 24,829,371 | 21,271,263 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of trading securities | — | (8,254,031 | ) | ||||
Payments for equipment and construction in progress | (11,878,621 | ) | (7,323,369 | ) | |||
Decrease (Increase) in other assets | 222,159 | (255,053 | ) | ||||
Net cash (used in) investing activities | (11,656,462 | ) | (15,832,453 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Distribution to members | (3,875,100 | ) | (13,692,020 | ) | |||
Net cash (used in) financing activities | (3,875,100 | ) | (13,692,020 | ) | |||
Net increase (decrease) in cash and cash equivalents | 9,297,809 | (8,253,210 | ) | ||||
Cash and Cash Equivalents - Beginning | 20,256,678 | 32,522,840 | |||||
Cash and Cash Equivalents - Ending | $ | 29,554,487 | $ | 24,269,630 | |||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||
Accounts payable related to property and equipment | $ | 300,812 | $ | 523,000 | |||
See Notes to Unaudited Financial Statements.
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1. | Nature of Business and Significant Accounting Policies |
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, 2015, contained in the Company's annual report on Form 10-K for 2015.
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.
Nature of Business
Homeland Energy Solutions, LLC (an Iowa Limited Liability Company) is located near Lawler, Iowa and was organized to pool investors for a 100 million gallon ethanol plant with distribution primarily throughout the United States. The Company has capacity to produce in excess of 145 million gallons annually and sells distillers dried grains and corn oil as byproducts of ethanol production.
Organization
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.
Significant Accounting Policies:
Accounting Estimates
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.
Cash & Cash Equivalents
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.
Trading Securities
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 (expense).
At December 31, 2015, trading securities consisted of short term bond mutual funds with an approximate cost of $41,157,000 and fair value of $40,731,000, respectively. At September 30, 2016, trading securities consisted of short term bond mutual funds with an approximate cost of $41,664,000 and fair value of $41,809,000, respectively. For the three and nine months ended September 30, 2016, the Company recorded interest, dividend and net unrealized gains and losses from these investments of approximately $159,000 and $1,079,000, respectively. During the same time periods of 2015, the Company recorded interest, dividends and net unrealized gains and losses from these investments of approximately $114,000 and $374,000, respectively.
The Board of Directors voted to set aside up to $30 million in trading securities that will be used by the Company for the repurchase of 25,860 membership units held by Steve Retterath per the terms of an agreement with Mr. Retterath entered into on June 13, 2013 with the Company.
Receivables
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.
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Investments
The Company has a less than 20% investment interest in Renewable Products Marketing Group, LLC (RPMG). This investment is being accounted for under the equity method of accounting under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. 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.
Revenue and Cost Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. 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. 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
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.
Property & Equipment
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.
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 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.
Committed Shares to be Redeemed
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
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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 two 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, 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 if the transaction had closed on August 1, 2013. See Note 9 for additional information.
Net Income per Unit
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.
Prior to, or on, August 1, 2013, the Company believes it has a binding agreement with Steve Retterath to repurchase and retire all 25,860 membership units owned by Mr. Retterath. These membership units have thus been excluded in the determination of net income per capital unit as presented in the Statement of Operations. The Company is currently involved in litigation with Mr. Retterath. There is potential that Mr. Retterath will continue as a unit holder upon conclusion of the litigation and said membership units would not be redeemed under the repurchase agreement. If the units are not redeemed, basic and diluted net income per unit, including the 25,860 units, for the three and nine months ended September 30, 2016 would be $95.87 and $219.87, respectively. Net income per unit for the three and nine months ended September 30, 2015 would have been $95.23 and $216.16, respectively.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, 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, 2016, ethanol sales averaged approximately 77% of total revenues, while approximately 19% of revenues were generated from the sale of distiller grains. Corn oil sales attributed for approximately 4% of revenues during this time period. For the nine months ended September 30, 2016, corn costs averaged approximately 81% 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.
2. INVENTORY
Inventory consisted of the following as of September 30, 2016 and December 31, 2015.
September 30, 2016 | December 31, 2015 | |||||||
Raw Materials | $ | 7,423,736 | $ | 5,030,182 | ||||
Work in Process | 1,771,897 | 1,428,646 | ||||||
Finished Goods | 2,149,572 | 1,194,321 | ||||||
Totals | $ | 11,345,205 | $ | 7,653,149 | ||||
3. DEBT
Master Loan Agreement with Home Federal Savings Bank
On November 30, 2007, the Company entered into a Master Loan Agreement with Home Federal Savings Bank ("Home Federal") establishing a senior credit facility with Home Federal for the construction of a 100 million gallon per year natural gas powered dry mill ethanol plant. In return, the Company executed a mortgage in favor of Home Federal creating a senior lien on the real
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estate and plant and a security interest in all personal property located on Company property. The Company currently has a term revolving loan with Home Federal.
Term Revolving Loan
Under the terms of the Master Loan Agreement, the Company has a $20 million term revolving loan which has a maturity date of August 1, 2018. Interest on the term revolving loan accrues at a rate equal to the one month LIBOR plus 310 basis points, 3.623% on September 30, 2016. The Company is required to make monthly payments of interest until the maturity date of the term revolving loan on August 1, 2018, on which date the unpaid principal balance of the term revolving loan becomes due. There was no balance outstanding on the term revolving loan and $20 million available to be drawn as of September 30, 2016 and December 31, 2015.
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.
4. RELATED PARTY TRANSACTIONS
Due to former member
On June 13, 2013, we 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 two 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 asking the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.
Mr. Retterath contends 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 against Mr. Retterath, the Company will reevaluate the accounting considerations made during the period of time that the lawsuit is pending.
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, 2016 totaled approximately $3,480,000 and $7,861,000 and during the three and nine months ended September 30, 2015 totaled approximately $872,000 and $4,066,000 respectively. Amounts due to these members was approximately $3,000 and none at September 30, 2016 and December 31, 2015, 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, a related party, to sell all ethanol produced at the plant at a mutually agreed on price, less commission and transportation charges. As of September 30, 2016, the Company had commitments to sell approximately 6 million of its produced gallons of ethanol at various fixed prices and 30 million of its produced gallons of ethanol at basis price levels indexed against exchanges for delivery through December 31, 2016.
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, 2016, the Company had commitments to sell
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approximately 2 million pounds of corn oil at various fixed and basis price levels indexed against exchanges for delivery through October 31, 2016.
The Company also has an investment in RPMG, included in other assets, totaling approximately $2,473,000 as of September 30, 2016.
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, 2016. The agreement calls for automatic renewal for successive one-year terms unless 90-day prior written notice is given before the current term expires. As of September 30, 2016, the Company had approximately 16,000 tons of distiller grains commitments for delivery through December 2016 at various fixed prices.
Sales and marketing fees related to the agreements in place for the three and nine months months ended September 30, 2016 and 2015 were approximately as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||
September 30, 2016 | September 30, 2016 | September 30, 2015 | September 30, 2015 | ||||||||||||
Sales ethanol | $ | 49,454,000 | $ | 151,689,000 | $ | 50,485,000 | $ | 148,017,000 | |||||||
Sales distiller grains | 12,229,000 | 36,262,000 | 14,491,000 | 47,006,000 | |||||||||||
Sales corn oil | 2,994,000 | 8,182,000 | 2,330,000 | 6,703,000 | |||||||||||
Marketing fees ethanol | $ | 42,000 | $ | 126,000 | $ | 43,000 | $ | 127,000 | |||||||
Marketing fees distiller grains | 200,000 | 595,000 | 199,000 | 565,000 | |||||||||||
Marketing fees corn oil | 28,000 | 78,000 | 24,000 | 70,000 | |||||||||||
As of September 30, 2016 | As of December 31, 2015 | ||||||||||||||
Amount due from RPMG | $ | 1,067,000 | $ | 3,641,000 | |||||||||||
Amount due from CHS | 994,000 | 1,179,000 | |||||||||||||
At September 30, 2016, the Company had approximately $17.8 million in outstanding priced corn purchase commitments for bushels at various prices and approximately 980,000 bushels of basis contracts through October 2017 accounted for under the normal purchase exclusion.
The Company has commitments for minimum purchases of various utilities such as electricity over the next 3 years, accounted for under the normal purchase exclusion, which are anticipated to approximate the following for the twelve month periods ending September 30:
2017 | $ | 3,787,000 | ||
2018 | 3,787,000 | |||
2019 | 1,894,000 | |||
Total anticipated commitments | $ | 9,468,000 | ||
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6. LEASE OBLIGATIONS
The Company leases rail cars and rail moving equipment with original terms up to 5 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. Rent expense incurred for the operating leases during the three and nine months ended September 30, 2016 was approximately $418,000 and $1,249,000, respectively, and for the same periods in 2015 was approximately $381,000 and $1,199,000, respectively.
At September 30, 2016, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month periods ended September 30:
2017 | $ | 1,148,000 | ||
2018 | 284,000 | |||
Total lease commitments | $ | 1,432,000 | ||
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 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 49 million bushels of corn per year. Over the next 12 months, the Company has hedged and anticipates hedging between 5% and 60% of its anticipated monthly grind. At September 30, 2016, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 14% 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, 2016 and 2015 and the fair value of derivatives as of September 30, 2016 and December 31, 2015:
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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, 2016 | Cost of Goods Sold | $ | 4,712,000 | $ | (2,626,000 | ) | $ | 2,086,000 | |||||
Commodity contracts for the | |||||||||||||
three months ended September 30, 2015 | Cost of Goods Sold | $ | (884,000 | ) | $ | 2,702,000 | $ | 1,818,000 | |||||
Commodity contracts for the | |||||||||||||
nine months ended September 30, 2016 | Cost of Goods Sold | $ | 4,682,000 | $ | (269,000 | ) | $ | 4,413,000 | |||||
Commodity contracts for the | |||||||||||||
nine months ended September 30, 2015 | Cost of Goods Sold | $ | 652,000 | $ | 78,000 | $ | 730,000 | ||||||
Balance Sheet Classification | September 30, 2016 | December 31, 2015 | |||||||
Futures contracts through July 2017 | |||||||||
In gain position | $ | 430,000 | $ | 462,000 | |||||
In loss position | (238,000 | ) | — | ||||||
Cash held by broker | 702,000 | 244,000 | |||||||
Current Asset | $ | 894,000 | $ | 706,000 | |||||
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 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.
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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.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, 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, 2016 | |||||||||||||||
Trading securities | $ | 41,809,000 | $ | 41,809,000 | $ | — | $ | — | |||||||
Derivative financial instruments | |||||||||||||||
Assets | $ | 430,000 | $ | 430,000 | $ | — | $ | — | |||||||
Liabilities | (238,000 | ) | (238,000 | ) | — | — | |||||||||
As of December 31, 2015 | |||||||||||||||
Trading securities, assets | $ | 40,731,000 | $ | 40,731,000 | $ | — | $ | — | |||||||
Derivative financial instruments, assets | 462,000 | 462,000 | — | — | |||||||||||
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, 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.
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 filed a motion for summary judgment which was granted by the Court. The Company expects GS Cleantech will appeal this decision. The Company has filed an answer and counterclaims claiming invalidity of the patents, noninfringement, and inequitable conduct. The Company is not currently able to predict the outcome of the litigation with any degree of certainty.
10. SUBSEQUENT EVENT
On October 19, 2016, the board of directors of Homeland Energy Solutions, LLC (the "Company") declared a distribution of $18,665,065 to be paid to 64,585 membership units which equals $289.00 per membership unit as of October 19, 2016. The Company paid this distribution in October 2016.
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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, 2015. 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. The ethanol plant is capable of operating at a rate in excess of 145 million gallons of ethanol per year.
On June 13, 2013, we entered into an agreement with Steve Retterath, 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 is asking the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.
Mr. Retterath contends 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, we have recorded a $30 million short-term liability related to the amount we agreed to pay Mr. Retterath to repurchase his membership units and have correspondingly reduced members' equity on our balance sheet. If we are ultimately unsuccessful in our lawsuit against Mr. Retterath, the Company will reevaluate the accounting considerations made during the period of time that the lawsuit is pending.
On the scheduled closing date for the repurchase agreement, Mr. Retterath sued the Company along with several directors, our former CEO, CFO, COO, a former director and our outside legal counsel in Florida state court. This lawsuit was subsequently removed to federal court in the State of Florida and ultimately to federal court in the State of Iowa. The federal court in the State of Iowa dismissed the only federal claim in Mr. Retterath's lawsuit against the Company and remanded the case to Florida state court. In August 2016, Mr. Retterath voluntarily dismissed the lawsuit without prejudice which was pending in Florida.
On February 18, 2015, we filed a motion for summary judgment asking the Iowa state court to rule that the repurchase agreement was valid and enforceable and ordering Mr. Retterath to perform his obligations pursuant to the repurchase agreement. Mr. Retterath along with his son and daughter-in-law filed motions for summary judgment asking the Iowa state court to rule that the repurchase agreement was invalid. 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. Recently, 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 have filed a resistance to Mr. Retterath's attempts to expand the scope of the Iowa lawsuit. In November 2016, the Iowa Court ruled that Homeland's original claims against Mr. Retterath will proceed to trial in January 2017 as scheduled and that any other issues that remain following that trial will be litigated after a ruling is issued in the January 2017 trial.
Details of both the Company's lawsuit against Mr. Retterath and Mr. Retterath's lawsuit are provided below in the section entitled "PART II - Item 1. Legal Proceedings."
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The Company is in the process of completing various capital improvements designed to increase the production efficiency and production capacity of the ethanol plant. The most significant of the capital projects was the addition of fermentation capacity which was completed during our third quarter of 2016. Management anticipates that this increased fermentation capacity will increase our ethanol production yield and increase our total ethanol production.
On September 23, 2016, the Chinese government instituted a 33.8% anti-dumping duty on all distillers grains produced in the United States and exported to China. The Chinese claimed that ethanol producers in the United States were unfairly benefiting from subsidies which artificially lowered the price of distillers grains. China historically has been the world's top buyer of dried distillers grains and nearly all of the distillers grains China purchases come from the United States. This trade dispute has resulted in fewer exports of distillers grains to China which has had a negative impact on market distillers grains prices received by ethanol producers in the United States. Further, the Chinese duty is preliminary and it is possible that the final duty could be higher, further impacting distillers grains demand and prices. Management believes that this trade dispute has negatively impacted our profitability which could continue.
On October 19, 2016, the board of directors declared a distribution of $18,665,065 to be paid to 64,585 membership units. The distribution was paid in October 2016.
Results of Operations
Comparison of Fiscal Quarters Ended September 30, 2016 and 2015
2016 | 2015 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 64,675,851 | 100.0 | $ | 67,305,574 | 100.0 | ||||||||
Costs of goods sold | 55,045,329 | 85.1 | 58,081,849 | 86.3 | ||||||||||
Gross profit | 9,630,522 | 14.9 | 9,223,725 | 13.7 | ||||||||||
Selling, general and administrative expenses | 1,126,987 | 1.7 | 787,789 | 1.2 | ||||||||||
Operating income | 8,503,535 | 13.1 | 8,435,936 | 12.5 | ||||||||||
Other income | 167,829 | 0.3 | 176,731 | 0.3 | ||||||||||
Net income | $ | 8,671,364 | 13.4 | $ | 8,612,667 | 12.8 | ||||||||
Revenue
Our total revenue for our third quarter of 2016 was approximately 4% less than our total revenue for our third quarter of 2015. Management attributes this decrease in revenue with decreased distiller grains and ethanol revenue, partially offset by increased corn oil revenue during the 2016 period.
For our third quarter of 2016, our total ethanol revenue was approximately 2% less than our third quarter of 2015 due to the net effect of lower ethanol prices partially offset by increased gallons of ethanol sold during the 2016 period. The average price we received for our ethanol during our third quarter of 2016 was approximately 3% less than during our third quarter of 2015. Management attributes this decrease in ethanol prices with decreased gasoline prices which have impacted ethanol prices along with increased ethanol supply in the market. Ethanol prices have increased following the end of our third quarter of 2016.
We sold approximately 1% more gallons of ethanol during our third quarter of 2016 compared to the same period of 2015 due primarily to increased ethanol production and the timing of our ethanol shipments. Management anticipates ethanol production to be slightly higher compared to prior years due to capital improvements we made at the ethanol plant designed to increase ethanol production along with improved corn to ethanol conversion efficiency which we anticipate will increase our total ethanol production.
Our total distiller grains revenue was approximately 16% less during our third quarter of 2016 compared to the same period of 2015, due primarily to decreased distiller grains prices, partially offset by an increase in our total tons of distiller grains sold. The average price we received for our dried distiller grains was approximately 19% less during our third quarter of 2016 compared to the same period of 2015. We sell nearly all of our distiller grains in the dried form. Management attributes these lower distiller grains prices to lower corn prices and decreased export demand from China due to the anti-dumping and
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countervailing duty investigation the Chinese commenced in January 2016 and recently imposed duty which management believes will further reduce distiller grains demand and prices. 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 amount of corn which management believes is indicative of decreased distiller grains demand. Management anticipates distillers grains will continue to trade at a discount compared to the price of corn due to anticipated strong corn supplies and lower demand due to the loss of the Chinese market. We sold approximately 5% more total tons of distiller grains during our third quarter of 2016 compared to the same period of 2015 due to increased total production at the ethanol plant. Management anticipates distiller grains production will continue to be relatively stable despite anticipated increases in total production because of anticipated increases in our corn to ethanol conversion efficiency.
Our total corn oil revenue was approximately 28% greater for our third quarter of 2016 compared to the same period of 2015 due to increased corn oil production and higher market corn oil prices during the 2016 period. We sold approximately 22% more pounds of corn oil during our third quarter of 2016 compared to the same period of 2015 primarily because of an increase in the amount of corn oil we produced per bushel of corn used along with increased total production at the ethanol plant. We added additional corn oil extraction equipment which allows us to increase the amount of corn oil we can produce per ton of distiller grains. The average price we received for our corn oil was approximately 5% greater during our third quarter of 2016 compared to the same period of 2015. This increase in corn oil prices occurred, in part, due to increased corn oil demand from the biodiesel industry. Biodiesel production has benefited from the passage of the biodiesel blenders' tax credit for 2016 (and retroactively for 2015) which management believes positively impacts corn oil demand. Management believes that the increase in corn oil demand may not continue past December 2016 when the biodiesel blenders' tax credit is scheduled to expire which could negatively impact corn oil demand and prices during our 2017 fiscal year.
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% less for our third quarter of 2016 compared to the same period of 2015. Our cost of goods sold related to corn, without taking into account derivative instruments, was approximately 3% less during our third quarter of 2016 compared to our third quarter of 2015 due to decreased market corn prices, partially offset by increased corn consumption due to our increased production. The average price we paid per bushel of corn was approximately 8% less during our third quarter of 2016 compared to our third quarter of 2015 due to increased market corn supplies and anticipated increased corn production during 2016 along with relatively stable corn demand. We processed approximately 5% more bushels of corn during our third quarter of 2016 compared to our third quarter of 2015 due to our increased total production at the ethanol plant, partially offset by improved corn to ethanol conversion efficiency. Management anticipates continued lower corn prices due to the balance between corn supply and demand and the large corn crop harvested in the fall of 2016.
We experienced lower natural gas prices during our third quarter of 2016 compared to the same period of 2015 due to ample natural gas supplies and relatively stable natural gas demand during the 2016 period. During our third quarter of 2016, the average delivered price we paid per MMBtu of natural gas was approximately 11% less compared to the same period of 2015. We used approximately 1% more MMBtu of natural gas during our third quarter of 2016 compared to our third quarter of 2015 due to increased production partially offset by our improved operating efficiencies. Management anticipates relatively stable natural gas prices during the rest of our 2016 fiscal year and into our 2017 fiscal year due to plentiful natural gas supplies and certain natural gas risk management positions we have in place which are designed to protect the price we pay for natural gas. Management does not expect significant shifts in market natural gas prices unless there are disruptions in natural gas production which impact natural gas supplies. If a shortage of natural gas were to occur in the future, it could result in significantly higher natural gas prices which could negatively impact our profitability.
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 2016, we had a realized gain of approximately $4,712,000 and an unrealized loss of approximately $2,626,000 related to our corn derivative instruments. During our third quarter of 2015, we had a realized loss of approximately $884,000 and an unrealized gain of approximately $2,702,000 related to our corn 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. Our plant is expected to use approximately 49 million bushels of corn per year. As of September 30, 2016, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 14% of its anticipated monthly grind for the next twelve months.
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Selling, General and Administrative Expenses
Our selling, general and administrative expenses were greater during our third quarter of 2016 compared to our third quarter of 2015 primarily due to increased accrual for year end employee bonus and our payments to trade organizations.
Other Income (Expense)
We had more interest income during our third quarter of 2016 compared to the same period of 2015 due to having more cash on hand during the 2016 period. Our other income was less during our third quarter of 2016 compared to the same period of 2015 due to decreased income from our trading securities.
Comparison of the Nine Months Ended September 30, 2016 and 2015
2016 | 2015 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 196,132,720 | 100.0 | $ | 201,725,396 | 100.0 | ||||||||
Costs of goods sold | 174,855,824 | 89.2 | 180,370,248 | 89.4 | ||||||||||
Gross profit | 21,276,896 | 10.8 | 21,355,148 | 10.6 | ||||||||||
Selling, general and administrative expenses | 2,697,754 | 1.4 | 2,657,247 | 1.3 | ||||||||||
Operating income | 18,579,142 | 9.5 | 18,697,901 | 9.3 | ||||||||||
Other income | 1,306,828 | 0.7 | 852,224 | 0.4 | ||||||||||
Net income | $ | 19,885,970 | 10.1 | $ | 19,550,125 | 9.7 | ||||||||
Revenue
Our total revenue for the nine months ended September 30, 2016 was approximately 3% less than our total revenue for the nine months ended September 30, 2015. Management attributes this decrease in revenue with decreased market prices for our ethanol and distiller grains, partially offset by increased sales volumes and corn oil prices during the 2016 period.
For the nine months ended September 30, 2016, our total ethanol revenue was approximately 2% greater than the nine months ended September 30, 2015 due to increased gallons of ethanol sold during the 2016 period, partially offset by lower average ethanol prices. The average price we received for our ethanol during the nine months ended September 30, 2016 was approximately 3% less than during the nine months ended September 30, 2015. Management attributes this decrease in ethanol prices with lower gasoline prices. We sold approximately 5% more gallons of ethanol during the nine months ended September 30, 2016 compared to the same period of 2015 due primarily to increased ethanol production.
Our total distiller grains revenue was approximately 23% less during the nine months ended September 30, 2016 compared to the same period of 2015, due primarily to decreased distiller grains prices. The average price we received for our dried distiller grains was approximately 26% less during the nine months ended September 30, 2016 compared to the same period of 2015. Further, the average price we received for our modified/wet distiller grains was approximately 19% less during the nine months ended September 30, 2016 compared to the same period of 2015. Management attributes these lower distiller grains prices to lower corn prices and decreased export demand from China. We sold approximately 4% more total tons of distiller grains during the nine months ended September 30, 2016 compared to the same period of 2015 due to increased total production at the ethanol plant.
Our total corn oil revenue was approximately 22% greater for the nine months ended September 30, 2016 compared to the same period of 2015 due to increased corn oil production combined with higher market corn oil prices during the 2016 period. We sold approximately 20% more pounds of corn oil during the nine months ended September 30, 2016 compared to the same period of 2015 because of an increase in the amount of corn oil we produced per bushel of corn used along with increased total production at the ethanol plant. We added additional corn oil extraction equipment which allows us to increase the amount of corn oil we can produce per ton of distiller grains. The average price we received for our corn oil was approximately 2% greater during the nine months ended September 30, 2016 compared to the same period of 2015 due to increased corn oil demand.
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Cost of Goods Sold
Our cost of goods sold related to corn, without taking into account derivative instruments, was comparable during the nine months ended September 30, 2016 and the nine months ended September 30, 2015 due to the net effect of an increase in the bushels of corn we consumed offset by a decrease in the average price we paid per bushel of corn. We processed approximately 7% more bushels of corn during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to our increased total production. The average price we paid per bushel of corn was approximately 6% less during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increased market corn supplies and relatively stable corn demand.
We experienced lower natural gas costs during the nine months ended September 30, 2016 compared to the same period of 2015 due to a milder winter and more stable market natural gas prices during the 2016 period. During the nine months ended September 30, 2016, the average delivered price we paid per MMBtu of natural gas was approximately 20% less compared to the same period of 2015. We used a comparable volume of natural gas during the nine months ended September 30, 2016 and during the nine months ended September 30, 2015 despite our increased ethanol production due to our improved operating efficiencies.
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. During the nine months ended September 30, 2015, we had a realized gain of approximately $652,000 and an unrealized gain of approximately $78,000 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, 2016 compared to the nine months ended September 30, 2015 primarily due to an increased accrual for year end employee bonus and our payments to trade organizations as well as increased legal fees related to our pending lawsuits.
Other Income (Expense)
Our other income was greater during the nine months ended September 30, 2016 compared to the same period of 2015 due to increased income from trading securities and more interest income during the 2016 period.
Changes in Financial Condition for the Nine Months Ended September 30, 2016.
Balance Sheet Data | September 30, 2016 | December 31, 2015 | ||||||
Total current assets | $ | 88,300,227 | $ | 76,603,773 | ||||
Total property and equipment | 109,501,142 | 105,720,228 | ||||||
Total other assets | 4,343,778 | 4,668,228 | ||||||
Total Assets | $ | 202,145,147 | $ | 186,992,229 | ||||
Total current liabilities | $ | 36,995,461 | $ | 37,661,346 | ||||
Total long-term liabilities | 157,992 | 350,059 | ||||||
Total members' equity | 164,991,694 | 148,980,824 | ||||||
Total Liabilities and Members' Equity | $ | 202,145,147 | $ | 186,992,229 | ||||
We had more cash and cash equivalents as of September 30, 2016 compared to December 31, 2015 due to income we generated from our operations. As of September 30, 2016, the value of our trading securities was higher compared to the trading securities we had at December 31, 2015 due to market changes. 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, 2016 compared to December 31, 2015 due to the timing of our quarter end with respect to shipments of our ethanol and payments from our marketer. We had more inventory on hand at September 30, 2016 compared to December 31, 2015 due to having more finished goods and raw materials inventory on hand at September 30, 2016 as a result of the timing of our quarter end. We also added additional grain storage capacity which increases the value of our corn inventory. The value of our derivative instruments was higher at September 30, 2016 compared to December 31, 2015 because of changing prices for corn which impacts the value of our corn futures position.
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Our net property and equipment was higher at September 30, 2016 compared to December 31, 2015 due to the net effect of capital expenditures we have been making at the ethanol plant offset by depreciation. Our other assets were comparable at September 30, 2016 and December 31, 2015.
Our current liabilities were lower at September 30, 2016 compared to December 31, 2015, primarily due to a reduction in our accounts payable and accrued expenses. We typically experience an increase in our accounts payable at the end of our fiscal year as our corn suppliers seek to defer income into a later tax year by deferring corn payments. Our accrued expenses were lower at September 30, 2016 compared to December 31, 2015 due to payment of wages and performance bonuses accrued at year end.
Our long-term liabilities were lower at September 30, 2016 compared to December 31, 2015 primarily due to payments of vested bonus dollars to employees.
Liquidity and Capital Resources
Our primary sources of liquidity during our quarter ended September 30, 2016 were cash from our operations and our $20 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, 2016, we had $20.0 million available pursuant to our revolving loan and approximately $29.6 million in cash and cash equivalents. We also had approximately $30 million at September 30, 2016 of trading securities for the Retterath repurchase agreement along with an additional approximately $11.8 million in trading securities which are not set aside for the Retterath repurchase. Following the end of our third quarter of 2016, we paid a distribution to our members of approximately $18.7 million which reduced the cash we have available. 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. We do not anticipate seeking additional equity or debt financing in the next 12 months. 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, 2016 and 2015:
2016 | 2015 | |||||||
Net cash provided by operating activities | $ | 24,829,371 | $ | 21,271,263 | ||||
Net cash (used in) investing activities | (11,656,462 | ) | (15,832,453 | ) | ||||
Net cash (used in) financing activities | (3,875,100 | ) | (13,692,020 | ) | ||||
Cash at beginning of period | 20,256,678 | 32,522,840 | ||||||
Cash at end of period | $ | 29,554,487 | $ | 24,269,630 | ||||
Cash Flow From Operations
Our operations provided more cash during our first nine months of 2016 compared to the same period of 2015 primarily due to having more net income and using less cash for the payment of accounts payable and accrued expenses during the 2016 period.
Cash Flow From Investing Activities
We used less cash for investing activities during our first nine months of 2016 compared to the first nine months of 2015 because we purchased less trading securities during the 2016 period, partially offset by more capital expenditures during the 2016 period.
Cash Flow From Financing Activities
We used less cash for financing activities during our first nine months of 2016 compared to the same period of 2015 due to fewer distributions to our members during the 2016 period.
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Short-Term and Long-Term Debt Sources
Master Loan Agreement with Home Federal Savings Bank
On November 30, 2007, we entered into a Master Loan Agreement with Home Federal Savings Bank (Home Federal) establishing a senior credit facility with Home Federal. In return, we executed a mortgage and a security agreement in favor of Home Federal creating a senior lien on substantially all of our assets. We currently have a $20 million term revolving loan with Home Federal.
Term Revolving Loan
We have a $20 million term revolving loan which has a maturity date of August 1, 2018. Interest on the term revolving loan accrues at a rate equal to the one month London Interbank Offered Rate (LIBOR) plus 310 basis points. We are required to make monthly payments of interest until the maturity date of the term revolving loan on August 1, 2018, on which date the unpaid principal balance of the term revolving loan becomes due. As of September 30, 2016, we had $0 outstanding on our term revolving loan and $20,000,000 available to be drawn. Interest accrued on our term revolving loan as of September 30, 2016 at a rate of 3.623% per year.
If we fail to make a payment of principal or interest on our loan within 10 days of the due date, there will be a late charge equal to 5% of the amount of the payment.
Covenants
In connection with the Master Loan Agreement, we are required to maintain working capital of at least $27.5 million. This is our only material financial covenant. As of September 30, 2016, we were in compliance with our working capital covenant. Our actual working capital as of September 30, 2016 was approximately $71.3 million. 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 my 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.
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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 party are presented net on the accompanying balance sheet as derivative instruments net of cash due from/to broker.
Revenue recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. 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. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of September 30, 2016, we had price protection in place for approximately 14% of our anticipated corn needs, 3% of our natural gas needs and 1% 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, 2016, 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, 2016. 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 | 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 | ) | ||||||
For comparison purposes, our sensitivity analysis for our third quarter of 2015 is set forth below.
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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 | 3,800,000 | MMBTU | 10% | $ | (710,334 | ) | |||||
Ethanol | 135,000,000 | Gallons | 10% | (18,900,000 | ) | ||||||
Corn | 47,000,000 | Bushels | 10% | (15,604,470 | ) | ||||||
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 Interim 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 Interim Chief Financial Officer, (the principal financial officer), Christine Marchand, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2016. 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, 2016, 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 II
ITEM 1. LEGAL PROCEEDINGS.
Retterath Florida Lawsuit
On August 1, 2013, Steve Retterath, the Company's largest investor and a former member of the Company's board of directors filed a lawsuit in the Florida Circuit Court located in Palm Beach County, Florida. The lawsuit was subsequently removed to federal court in Florida. In the lawsuit, Mr. Retterath sued the Company, Pat Boyle, Maurice Hyde, Christine Marchand, Mathew Driscoll, Leslie Hansen, and Chad Kuhlers, each members of the Company's board of directors, Walter Wendland, the Company's former Chief Executive Officer, David Finke, the Company's Chief Financial Officer and Kevin Howes, the Company's Chief Operating Officer. Mr. Retterath also sued James Boeding, a former director and the Company's outside legal counsel, Joseph Leo and the BrownWinick Law Firm. Mr. Retterath is claiming that certain actions taken by the Company violated fiduciary duties owed to him as a member or fraudulently induced him to take certain actions. Mr. Retterath is also claiming violations of state and federal securities laws and violations of Florida's deceptive and unfair trade practices statutes. Mr. Retterath claims an unspecified damage in excess of $30 million in monetary damages. The Florida court ruled in favor of the Company's motion to transfer the case to Iowa. Each of the defendants filed motions to dismiss the lawsuit and Mr. Retterath filed a motion for partial summary judgment in the case. The Federal Court in Iowa ruled in favor of the defendants and dismissed the federal claims in this lawsuit. Further, the Federal Court declined jurisdiction to hear the other state law matters in the case and remanded those claims back to Florida state court.
On August 21, 2014, Jason Retterath and Annie Retterath, the son and daughter-in-law of Steve Retterath, filed a motion to intervene in the lawsuit to protect their interests as members of the Company. The Company filed a motion to dismiss the intervenor petition. The Federal Court in Iowa declined to consider the Company's motion to dismiss the intervention and instead remanded the intervenors’ case back to Florida state court.
Recently, Mr. Retterath and his son and daughter-in-law voluntarily dismissed this lawsuit without prejudice.
Retterath Iowa 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 is asking the Iowa state court to require Mr. Retterath to perform his obligations under the
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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. The parties are currently conducting discovery and have a trial scheduled for January 2017.
Recently, 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 Homeland's original claims against Mr. Retterath will proceed to trial in January 2017 as scheduled and that any other issues that remain following that trial will be litigated after a ruling is issued in the January 2017 trial.
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 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.
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. Recently, the MDL Court ruled against GS Cleantech that it had inequitably conducted itself. 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 factor is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2015, included in our annual report on Form 10-K.
Distiller grains demand and prices may be negatively impacted by the Chinese anti-dumping duty. China is the world's largest importer of distiller grains produced in the United States. On January 12, 2016, the Chinese government announced that it would commence an anti-dumping and countervailing duty investigation related to distillers grains imported from the United States. On September 23, 2016, the Chinese instituted a preliminary anti-dumping duty of 33.8% in response to this investigation. Both during the investigation and after the announcement of the duty, distiller grains demand and prices have been negatively impacted. While we expect China to continue to import some distiller grains, we do not anticipate that the imports will be at the same level as previous years which could continue to negatively impact market distiller grains demand and prices. This potential reduction in demand along with lower domestic corn prices could negatively impact our ability to profitably operate the ethanol plant.
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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.
Exhibit No. | Exhibit |
10.1 | Amended and Restated Consulting Agreement between Homeland Energy Solutions, LLC and Cornerstone Resources, LLC dated effective June 1, 2016.* |
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)* |
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)* |
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350* |
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350* |
101 | The following financial information from Homeland Energy Solutions, LLC's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of September 30, 2016 and December 31, 2015, (ii) Statements of Operations for the three and nine months ended September 30, 2016 and 2015, (iii) Statements of Cash Flows for the nine months ended September 30, 2016 and 2015, 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.
HOMELAND ENERGY SOLUTIONS, LLC | |||
Date: | November 14, 2016 | /s/ James Broghammer | |
James Broghammer | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date: | November 14, 2016 | /s/ Christine Marchand | |
Christine Marchand | |||
Interim Chief Financial Officer (Principal Financial Officer) | |||