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EX-32.2 - EX-32.2 - Granite Falls Energy, LLCgfe-20200131ex3220a7fb1.htm
EX-32.1 - EX-32.1 - Granite Falls Energy, LLCgfe-20200131ex3213e46ef.htm
EX-31.2 - EX-31.2 - Granite Falls Energy, LLCgfe-20200131ex31298600c.htm
EX-31.1 - EX-31.1 - Granite Falls Energy, LLCgfe-20200131ex3115db457.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended January 31, 2020

 

OR

 

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

 

For the transition period from               to               .

 

COMMISSION FILE NUMBER 000-51277

 

GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-1997390

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

15045 Highway 23 SE, Granite Falls, MN 56241-0216

(Address of principal executive offices)

 

(320) 564-3100

(Registrant's telephone number, including area code)

 

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

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

None

 

N/A

 

N/A

 

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

☒Yes    ☐No

 

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

☒Yes    ☐No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

 

 

 

Large Accelerated Filer

Non-Accelerated Filer

Accelerated Filer

Smaller Reporting Company

 

 

Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

Yes    ☒No

 

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

As of March 16, 2020, there were 30,606 membership units outstanding.

 

 

 

 

2

 

PART IFINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

    

January 31, 2020

    

October 31, 2019

 

 ASSETS

    

(unaudited)

    

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

8,426,643

 

$

13,521,774

 

Restricted cash

 

 

42,221

 

 

52,516

 

Accounts receivable

 

 

1,961,046

 

 

7,427,895

 

Inventory

 

 

18,254,904

 

 

13,803,025

 

Commodity derivative instruments

 

 

571,198

 

 

823,098

 

Prepaid expenses and other current assets

 

 

1,060,639

 

 

534,948

 

Total current assets

 

 

30,316,651

 

 

36,163,256

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

55,986,043

 

 

58,269,142

 

 

 

 

 

 

 

 

 

Goodwill

 

 

1,372,473

 

 

1,372,473

 

 

 

 

 

 

 

 

 

Investments

 

 

9,426,269

 

 

9,327,584

 

 

 

 

 

 

 

 

 

Operating lease right of use asset

 

 

22,163,764

 

 

 —

 

 

 

 

 

 

 

 

 

Other Assets

 

 

697,254

 

 

922,254

 

 

 

 

 

 

 

 

 

Total Assets

 

$

119,962,454

 

$

106,054,709

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

1,405,406

 

$

1,405,406

 

Checks drawn in excess of bank balances

 

 

724,292

 

 

 —

 

Accounts payable

 

 

7,058,001

 

 

11,168,471

 

Commodity derivative instruments

 

 

17,175

 

 

 —

 

Accrued expenses

 

 

991,254

 

 

780,795

 

Operating lease, current liabilities

 

 

3,575,612

 

 

 —

 

Total current liabilities

 

 

13,771,740

 

 

13,354,672

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

6,441,602

 

 

6,639,488

 

 

 

 

 

 

 

 

 

Operating Lease, long-term liabilities

 

 

18,588,152

 

 

 —

 

 

 

 

 

 

 

 

 

Other Long-Term Liabilities

 

 

1,387,481

 

 

1,376,000

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized, issued, and outstanding at both January 31, 2020 and October 31, 2019

 

 

63,889,119

 

 

65,468,635

 

Non-controlling interest

 

 

15,884,360

 

 

19,215,914

 

Total members' equity

 

 

79,773,479

 

 

84,684,549

 

 

 

 

 

 

 

 

 

Total Liabilities and Members' Equity

 

$

119,962,454

 

$

106,054,709

 

 

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

 

3

 

 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 

 

 

 

2020

 

2019

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

Revenues

 

$

53,356,326

 

$

49,375,097

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

54,298,819

 

 

52,110,622

 

 

 

 

 

 

 

 

 

Gross Loss

 

 

(942,493)

 

 

(2,735,525)

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

1,773,688

 

 

1,770,173

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(2,716,181)

 

 

(4,505,698)

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

Other income (expense), net

 

 

(54)

 

 

1,459

 

Interest income

 

 

35,478

 

 

73,275

 

Interest expense

 

 

(103,998)

 

 

(113,663)

 

Investment income

 

 

98,685

 

 

 —

 

Total other income (expense), net

 

 

30,111

 

 

(38,929)

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(2,686,070)

 

$

(4,544,627)

 

 

 

 

 

 

 

 

 

Less: Net Loss Attributable to Non-controlling Interest

 

 

1,185,371

 

 

967,125

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Granite Falls Energy, LLC

 

$

(1,500,699)

 

$

(3,577,502)

 

 

 

 

 

 

 

 

 

Weighted Average Units Outstanding - Basic and Diluted

 

 

30,606

 

 

30,606

 

 

 

 

 

 

 

 

 

Amounts attributable to Granite Falls Energy, LLC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Per Unit - Basic and Diluted

 

$

(49.03)

 

$

(116.89)

 

 

 

 

 

 

 

 

 

Distributions Per Unit

 

$

 —

 

$

40.00

 

 

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

4

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Members’ Equity

 

 

 

 

 

 

 

 

 

Members' Equity attributable to

 

 

 

 

 

 

Granite Falls Energy, LLC

 

Non-controlling Interest

 

Total Members' Equity

 

 

 

 

 

 

 

Balance - October 31, 2019

 

$ 65,468,635

 

$ 19,215,914

 

$ 84,684,549

 

 

 

 

 

 

 

Acquisition of non-controlling interest

 

(78,817)

 

(2,146,183)

 

(2,225,000)

Net loss attributable to non-controlling interest

 

 -

 

(1,185,371)

 

(1,185,371)

Net loss attributable to Granite Falls Energy, LLC

 

(1,500,699)

 

 -

 

(1,500,699)

 

 

 

 

 

 

 

Balance - January 31, 2020

 

$ 63,889,119

 

$ 15,884,360

 

$ 79,773,479

 

 

 

 

 

 

 

Balance - October 31, 2018

 

$ 75,083,782

 

$ 21,846,265

 

$ 96,930,047

 

 

 

 

 

 

 

Member distribution

 

(1,196,000)

 

 -

 

(1,196,000)

Net loss attributable to non-controlling interest

 

 -

 

(967,125)

 

(967,125)

Net loss attributable to Granite Falls Energy, LLC

 

(3,577,502)

 

 -

 

(3,577,502)

 

 

 

 

 

 

 

Balance - January 31, 2019

 

$ 70,310,280

 

$ 20,879,140

 

$ 91,189,420

 

 

 

 

 

 

 

 

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

 

 

 

 

5

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended January 31, 

 

 

 

 

 

2020

 

2019

 

    

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,686,070)

 

$

(4,544,627)

 

 

 

Adjustments to reconcile net loss to net cash used in operations:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,366,198

 

 

2,351,722

 

 

 

Change in fair value of  derivative instruments

 

 

370,611

 

 

(44,228)

 

 

 

Gain on equity method investments

 

 

(98,685)

 

 

 —

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Commodity derivative instruments

 

 

(101,536)

 

 

735,556

 

 

 

Accounts receivable

 

 

5,466,849

 

 

1,611,324

 

 

 

Inventory

 

 

(4,451,879)

 

 

84,362

 

 

 

Prepaid expenses and other current assets

 

 

(525,691)

 

 

(538,574)

 

 

 

Accounts payable

 

 

(3,985,284)

 

 

(5,789,620)

 

 

 

Accrued expenses

 

 

210,459

 

 

(37,320)

 

 

 

Accrued railcar rehabilitation costs

 

 

11,481

 

 

 —

 

 

 

Net Cash Used In Operating Activities

 

 

(3,423,547)

 

 

(6,171,405)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

Payments for capital expenditures

 

 

(208,285)

 

 

(332,814)

 

 

 

Net Cash Used in Investing Activities

 

 

(208,285)

 

 

(332,814)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

Checks drawn in excess of bank balances

 

 

724,292

 

 

 —

 

 

 

Proceeds from long-term debt

 

 

7,039,706

 

 

 —

 

 

 

Payments on long-term debt

 

 

(7,237,592)

 

 

(7,763)

 

 

 

Acquisition of non-controlling interest

 

 

(2,000,000)

 

 

 —

 

 

 

Member distributions paid

 

 

 —

 

 

(1,196,000)

 

 

 

Net Cash Used in Financing Activities

 

 

(1,473,594)

 

 

(1,203,763)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Decrease in Cash and Restricted Cash

 

 

(5,105,426)

 

 

(7,707,982)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Restricted Cash - Beginning of Period

 

 

13,574,290

 

 

14,901,091

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Restricted Cash - End of Period

 

$

8,468,864

 

$

7,193,109

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Cash and Restricted Cash

 

 

 

 

 

 

 

 

 

Cash - Balance Sheet

 

$

8,426,643

 

$

6,902,900

 

 

 

Restricted Cash - Balance Sheet

 

 

42,221

 

 

290,209

 

 

 

Cash and Restricted Cash

 

$

8,468,864

 

$

7,193,109

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

Interest expense

 

$

103,998

 

$

113,663

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

 

Capital expenditures and construction in process included in accounts payable

 

$

 —

 

$

18,291

 

 

 

 

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

 

6

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

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

 

Additionally, GFE owns a majority interest in Heron Lake BioEnergy, LLC (“HLBE”). HLBE is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains, and crude corn oil near Heron Lake, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States. HLBE's plant has an approximate annual production capacity of 60 million gallons, but is permitted to produce approximately 72.3 million gallons of undenatured ethanol on a twelve-month rolling sum basis. Beginning December 11, 2019, HLBE owns a 100% interest in Agrinatural Gas, LLC (“Agrinatural”), which operates a natural gas pipeline that provides natural gas to HLBE's ethanol production facility and other customers. At October 31, 2019, HLBE held a 73% interest in Agrinatural.

 

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

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated unaudited financial statements as of January 31, 2020 consolidate the operating results and financial position of GFE, and its approximately 50.7% owned subsidiary, HLBE (through GFE's 100% ownership of Project Viking, LLC). Given the Company’s control over the operations of HLBE and its majority voting interest, the Company consolidates the condensed consolidated unaudited financial statements of HLBE with GFE's condensed consolidated unaudited financial statements. The remaining 49.3% ownership of HLBE is included in the condensed consolidated unaudited financial statements as a non-controlling interest. HLBE, through its wholly owned subsidiary, HLBE Pipeline Company, LLC, owned approximately 73% of Agrinatural as of October 31, 2019. Given HLBE’s control over the operations of Agrinatural and its majority voting interest, HLBE consolidates the financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings attributed to the remaining approximately 27% noncontrolling interest through December 11, 2019 when the remaining non-controlling interest was acquired. All significant intercompany balances and transactions are eliminated in consolidation.

 

The accompanying condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, 2019, contained in the Company’s annual report on Form 10-K.

 

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

 

Reportable Operating Segments

 

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Therefore, in applying the criteria set forth in ASC 280, the Company determined that based on the nature of the products and production process and the expected financial results,

7

the Company’s operations at GFE’s ethanol plant and HLBE’s plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

 

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

 

Accounting Estimates

 

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

 

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and other customers as described below. Our performance obligations consist of the delivery of ethanol, distillers' grains, and corn oil to our customers. Our customers primarily consist of two distinct marketing companies as described below. The consideration we receive for these products is fixed or determinable based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. We sell each of the products via different marketing channels as described below.

 

·

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

 

·

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

 

·

Distillers’ corn oil (corn oil). The Company sells one hundred percent of its corn oil production to RPMG, Inc.  The process for selling corn oil is the same as our distillers’ grains. RPMG takes title and control once a rail car is released to the railroad or a truck is released from the Company's scales. Prices are agreed upon between RPMG

8

 

and the Company. Our performance obligations consist of our obligation to deliver corn oil to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. Revenue is recognized net of commissions, freight and fees.

 

Inventory

 

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

 

Derivative Instruments

 

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

 

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

 

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

 

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

 

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 5.

 

Investments 

 

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

 

9

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance on accounting for leases under Accounting Standards Codification 842 (ASC 842). Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted cash flow basis; and (2) a “right of use” asset, which is an asset that represents the lessee’s right to use the specified asset for the lease term. Lease expense under the new guidance is substantially the same as prior to the adoption. See Note 8 for further information. 

 

2.   RISKS AND UNCERTAINTIES

 

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

 

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

 

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2019 and into 2020 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. The Company believes its cash on hand and available debt from its lender will provide sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs through the next twelve months.

 

3.   REVENUE

 

Revenue by Source

 

All revenues from contracts with customers under ASC Topic 606 are recognized at a point in time. The following table disaggregates revenue by major source for the three months ended January 31, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 2020

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

40,851,988

 

$

 

$

40,851,988

Distillers’ Grains

 

9,631,292

 

 

 

 

9,631,292

Corn Oil

 

1,887,852

 

 

 

 

1,887,852

Other

 

295,917

 

 

 

 

295,917

Natural Gas

 

 

 

689,277

 

 

689,277

Total Revenues

$

52,667,049

 

$

689,277

 

$

53,356,326

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 2019

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

35,965,285

 

$

 

$

35,965,285

10

 

Distillers’ Grains

 

10,566,874

 

 

 

 

10,566,874

Corn Oil

 

1,993,336

 

 

 

 

1,993,336

Other

 

264,303

 

 

 

 

264,303

Natural Gas

 

 

 

585,299

 

 

585,299

Total Revenues

$

48,789,798

 

$

585,299

 

$

49,375,097

 

Payment Terms

 

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

 

Shipping and Handling Costs

 

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

 

4.   INVENTORY

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

    

January 31,  2020

    

October 31,  2019

 

 

 

(unaudited)

    

 

 

Raw materials

 

$

6,152,060

 

$

3,253,361

 

Supplies

 

 

3,288,976

 

 

3,330,513

 

Work in process

 

 

1,434,157

 

 

1,434,552

 

Finished goods

 

 

7,379,711

 

 

5,784,599

 

Totals

 

$

18,254,904

 

$

13,803,025

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the net realizable values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, as a component of cost of goods sold, the Company recorded a loss on ethanol inventories of approximately $1,202,000 and $1,488,000 for the three months ended January 31, 2020 and 2019, respectively. Based on the lower of cost or net realizable value analysis, as a component of cost of goods sold, the Company recorded a loss on corn inventories of approximately $126,000 and $24,000 for the three months ended January 31, 2020 and 2019, respectively.

 

5.   DERIVATIVE INSTRUMENTS

 

As of January 31, 2020, the total notional amount of GFE’s outstanding corn derivative instruments was approximately 8,120,000 bushels, comprised of long corn futures positions on 675,000 bushels that were entered into to hedge forecasted ethanol sales through July 2020, and short corn futures positions on 3,445,000 bushels that were entered into to hedge forecasted corn purchases through December 2022. Additionally, there are corn options positions of 4,000,000 bushels through July 2020. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of January 31, 2020, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately 5,528,000 bushels, comprised of long futures positions on 391,000 bushels that were entered into to hedge forecasted ethanol sales through July 2020 and short corn futures positions on 1,607,000 bushels that were entered into to hedge forecasted corn purchases through December 2021. Additionally, there are corn options positions of 3,530,000 bushels through July 2020. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of January 31, 2020, GFE did not have any cash collateral (restricted cash) related to derivatives held by a broker.

 

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As of January 31, 2020, HLBE had approximately $42,000 of cash collateral (restricted cash) related to derivatives held by a broker.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

426,788

 

$

 —

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

144,410

 

 

 —

 

Ethanol contracts - GFE

 

Commodity derivative instruments

 

 

 —

 

 

4,263

 

Ethanol contracts - HLBE

 

Commodity derivative instruments

 

 

 —

 

 

12,912

 

Totals

 

 

 

$

571,198

 

$

17,175

 

 

As of October 31, 2019, the total notional amount of GFE’s outstanding corn derivative instruments was approximately 7,495,000 bushels, comprised of long corn futures positions on 3,345,000 bushels that were entered into to hedge forecasted ethanol sales through July 2020, and short corn futures positions on 4,150,000 bushels that were entered into to hedge forecasted corn purchases through December 2022. Additionally, there are corn options positions of 4,000,000 bushels through March 2020. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of October 31, 2019, GFE did not have any cash collateral (restricted cash) related to derivatives held by a broker.

 

As of October 31, 2019, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately 5,398,000 bushels, comprised of long corn futures positions on 2,131,000 bushels that were entered into to hedge forecasted ethanol sales through July 2020, and short corn futures positions on 3,267,000 bushels that were entered into to hedge forecasted corn purchases through December 2021. Additionally, there are corn options positions of 4,000,000 bushels through March 2020. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of October 31, 2019, HLBE had approximately $52,000 in cash collateral (restricted cash) related to derivatives held by a broker.

 

The following tables provide details regarding the Company's derivative instruments at October 31, 2019, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

612,713

 

$

 —

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

20,060

 

 

 —

 

Ethanol contracts - GFE

 

Commodity derivative instruments

 

 

114,562

 

 

 —

 

Ethanol contracts - HLBE

 

Commodity derivative instruments

 

 

75,763

 

 

 —

 

Totals

 

 

 

$

823,098

 

$

 —

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement

 

Three Months Ended  January 31, 

 

 

    

 of Operations Location

    

2020

    

2019

 

Corn contracts

 

Cost of Goods Sold

 

$

(160,218)

 

$

44,228

 

Ethanol contracts

 

Revenues

 

 

(210,393)

 

 

 —

 

Total gain

 

 

 

$

(370,611)

 

$

44,228

 

 

 

 

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6.   FAIR VALUE

 

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at January 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

Carrying Amount in

 

 

 

 

in Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Assets:

 

Consolidated Balance Sheet

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Commodity Derivative Instruments - Corn

 

$

571,198

 

$

571,198

 

$

571,198

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative Instruments - Ethanol

 

$

17,175

 

$

17,175

 

$

17,175

 

$

 —

 

$

 —

 

 

The following table provides information on those derivative assets and liabilities measured at fair value on a recurring basis at October 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

Carrying Amount in

 

 

 

 

in Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Assets:

 

Consolidated Balance Sheet

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Commodity Derivative Instruments - Corn

 

$

632,773

 

$

632,773

 

$

632,773

 

$

 —

 

$

 —

 

Commodity Derivative Instruments - Ethanol

 

$

190,325

 

$

190,325

 

$

190,325

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value of ethanol, corn, and natural gas Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

 

7.  DEBT FACILITIES

 

Debt financing consists of the following:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

October 31, 2019

 

 

 

(unaudited)

 

 

 

 

GRANITE FALLS ENERGY:

 

 

 

 

 

 

 

Seasonal revolving loan, see terms below.

 

 

 —

 

 

 

Term note payable to Project Hawkeye, see terms below.

 

 

7,142,857

 

 

7,410,714

 

 

 

 

 

 

 

 

 

HERON LAKE BIOENERGY:

 

 

 

 

 

 

 

Amended revolving term note payable to lending institution, see terms below.

 

 

69,971

 

 

 

Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. HLBE made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.

 

 

634,180

 

 

634,180

 

Totals

 

 

7,847,008

 

 

8,044,894

 

Less: amounts due within one year

 

 

1,405,406

 

 

1,405,406

 

Net long-term debt

 

$

6,441,602

 

$

6,639,488

 

 

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Granite Falls Energy

 

Seasonal Revolving Loan

 

GFE has a credit facility with a lender. This credit facility was originally a revolving term loan facility with an aggregate principal commitment amount of $18,000,000 that reduced by $2,000,000 semi-annually beginning September 1, 2014, until final payment at maturity on March 1, 2018. On September 8, 2017, the revolving term loan was converted to a seasonal revolving loan in the amount of $6,000,000. GFE had no outstanding balance on the revolving term loan at the time of conversion. There was no outstanding balance on the seasonal revolving loan at January 31, 2020. Therefore, the aggregate principal amount available for borrowing by GFE under this seasonal revolving loan at January 31, 2020 was $6,000,000.

 

The interest rate on the seasonal revolving loan is based on the bank’s One Month London Interbank Offered Rate (“LIBOR”) Index Rate, plus 2.75%, which was 4.41% and 4.52% at January 31, 2020 and October 31, 2019, respectively.

 

The credit facility also requires GFE to comply with certain financial covenants, at various times calculated monthly, quarterly, or annually, including restriction of the payment of dividends and maintenance of certain financial ratios including minimum working capital, minimum net worth, and a debt service coverage ratio as defined by the credit facility.  Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties. For the fiscal year ended October 31, 2019, GFE had an event of non-compliance with the debt service coverage ratio as defined in the credit facility. In December 2019, GFE received a waiver from its lender waiving this event of non-compliance.

 

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

 

Project Hawkeye Loan

 

On August 2, 2017, GFE entered into a credit facility with Project Hawkeye to finance its investment in Ringneck. Pursuant to this credit facility, GFE borrowed $7.5 million from Project Hawkeye using the Ringneck investment as collateral.  The Project Hawkeye loan bears interest from the date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of the One Month LIBOR Index Rate plus 3.05% per annum, with an interest rate floor of 3.55%, which equated to 4.78% and 4.82% at January 31, 2020 and October 31, 2019 respectively.

 

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

 

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

 

Heron Lake BioEnergy

 

Amended Credit Facility

 

The 2020 Credit Facility includes an amended and restated revolving term loan with an $8,000,000 principal commitment. This loan replaces the amended revolving term note and seasonal revolving loan made under the 2018 Credit Facility. The loan is secured by substantially all of HLBE’s assets, including a subsidiary guarantee.  The 2020 Credit Facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility.  Failure to comply with the protective loan covenants or

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