Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - CERTIFICATION 3-31-2020 - HOMELAND ENERGY SOLUTIONS LLC | exhibit322-certification3x.htm |
| EX-32.1 - EXHIBIT 32.1 - CERTIFICATION 3-31-2020 - HOMELAND ENERGY SOLUTIONS LLC | exhibit321-certification3x.htm |
| EX-31.2 - EXHIBIT 31.2 - CERTIFICATION 3-31-2020 - HOMELAND ENERGY SOLUTIONS LLC | exhibit312-certification3x.htm |
| EX-31.1 - EXHIBIT 31.1 - CERTIFICATION 3-31-2020 - HOMELAND ENERGY SOLUTIONS LLC | exhibit311-certification3x.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 March 31, 2020 | |
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 | |||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | x | Smaller Reporting Company | o | |
(Do not check if a smaller reporting company) | Emerging Growth Company | o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
As of May 15, 2020, we had 64,560 membership units outstanding. Following the end of our first fiscal quarter of 2020, we closed on the unit repurchase transaction with Steve Retterath and the membership units previously held by Mr. Retterath have been retired.
INDEX
Page No. | |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Homeland Energy Solutions, LLC
Balance Sheets
March 31, 2020 | December 31, 2019 | ||||||
ASSETS | (Unaudited) | (Audited) | |||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 17,270,326 | $ | 17,274,703 | |||
Trading securities | 42,189,476 | 42,508,451 | |||||
Accounts receivable | 2,593,299 | 7,159,632 | |||||
Inventory | 16,406,975 | 15,311,396 | |||||
Prepaid and other | 3,881,485 | 4,119,486 | |||||
Derivative instruments | 1,020,904 | 799,484 | |||||
Total current assets | 83,362,465 | 87,173,152 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land and improvements | 23,181,342 | 23,181,342 | |||||
Buildings | 8,777,302 | 8,777,302 | |||||
Equipment | 222,826,042 | 222,979,738 | |||||
Construction in progress | 1,171,270 | 722,507 | |||||
255,955,956 | 255,660,889 | ||||||
Less accumulated depreciation | 132,909,155 | 129,105,903 | |||||
Total property and equipment | 123,046,801 | 126,554,986 | |||||
OTHER ASSETS | |||||||
Right of use asset operating leases | 4,294,978 | 4,678,365 | |||||
Utility rights, net of amortization of $1,762,477 and $1,728,386 | 545,552 | 579,643 | |||||
Other assets | 4,185,762 | 3,973,846 | |||||
Total other assets | 9,026,292 | 9,231,854 | |||||
TOTAL ASSETS | $ | 215,435,558 | $ | 222,959,992 | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Balance Sheets (continued)
March 31, 2020 | December 31, 2019 | ||||||
LIABILITIES AND MEMBERS' EQUITY | (Unaudited) | (Audited) | |||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 13,423,524 | $ | 14,834,053 | |||
Due to former member | 30,000,000 | 30,000,000 | |||||
Accrued expenses | 1,021,723 | 1,507,195 | |||||
Current portion long term debt | 6,000,000 | 6,000,000 | |||||
Current portion operating lease liability | 1,580,195 | 1,561,422 | |||||
Total current liabilities | 52,025,442 | 53,902,670 | |||||
COMMITMENTS AND CONTINGENCIES (Note 5) | — | — | |||||
LONG-TERM LIABILITIES | |||||||
Term note | 11,968,343 | 11,964,824 | |||||
Operating lease liability | 2,714,783 | 3,116,943 | |||||
Total long-term liabilities | 14,683,126 | 15,081,767 | |||||
MEMBERS' EQUITY (64,560 units issued and outstanding) | 148,726,990 | 153,975,555 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 215,435,558 | $ | 222,959,992 | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Statements of Operations
(Unaudited)
Three Months Ended | Three Months Ended | ||||||
March 31, 2020 | March 31, 2019 | ||||||
Revenue | $ | 65,037,238 | $ | 82,074,397 | |||
Costs of goods sold | 68,964,823 | 76,506,526 | |||||
Gross profit (loss) | (3,927,585 | ) | 5,567,871 | ||||
Selling, general and administrative expenses | 1,005,013 | 1,165,504 | |||||
Operating income (loss) | (4,932,598 | ) | 4,402,367 | ||||
Other income (expense) | |||||||
Interest (expense) | (225,056 | ) | (296,107 | ) | |||
Interest income | 28,544 | 12,400 | |||||
Other income (expense) | (119,455 | ) | 600,395 | ||||
Total other income (expense) | (315,967 | ) | 316,688 | ||||
Net income (loss) | $ | (5,248,565 | ) | $ | 4,719,055 | ||
Basic & diluted net income (loss) per capital unit | $ | (81.30 | ) | $ | 73.10 | ||
Weighted average number of units outstanding for the calculation of basic & diluted net income per capital unit | 64,560 | 64,560 | |||||
Distribution per Unit | $ | — | $ | — | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Statements of Cash Flows
(Unaudited)
Three Months Ended | Three Months Ended | ||||||
March 31, 2020 | March 31, 2019 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income (loss) | $ | (5,248,565 | ) | $ | 4,719,055 | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization | 4,019,713 | 3,927,855 | |||||
Unrealized gain on risk management activities | (221,420 | ) | (299,867 | ) | |||
Unrealized (gain) loss on trading securities activities | 318,975 | (585,399 | ) | ||||
Gain on disposal of property and equipment | (3,254 | ) | — | ||||
Change in working capital components: | |||||||
Accounts receivable | 4,566,333 | (82,664 | ) | ||||
Inventory | (1,095,579 | ) | (441,316 | ) | |||
Prepaid and other | 238,001 | (156,490 | ) | ||||
Accounts payable and other accrued expenses | (1,827,854 | ) | (1,374,954 | ) | |||
Net cash provided by operating activities | 746,350 | 5,706,220 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of trading securities | — | (15,000,000 | ) | ||||
Payments for equipment and construction in progress | (570,811 | ) | (2,589,410 | ) | |||
Proceeds from sale of equipment | 32,000 | — | |||||
Decrease (increase) in other assets | (211,916 | ) | 218,352 | ||||
Net cash (used in) investing activities | (750,727 | ) | (17,371,058 | ) | |||
Net decrease in cash and cash equivalents | (4,377 | ) | (11,664,838 | ) | |||
Cash and Cash Equivalents - Beginning | 17,274,703 | 28,751,994 | |||||
Cash and Cash Equivalents - Ending | $ | 17,270,326 | $ | 17,087,156 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
Cash paid for interest | $ | 147,293 | $ | 193,596 | |||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||
Establishment of lease liability and right-of-use asset | $ | — | $ | 6,320,411 | |||
Accounts payable issued for property and equipment additions | $ | 120,683 | $ | 710,736 | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Statements of Changes in Members' Equity
Members' Equity | |||
Balance - December 31, 2018 | $ | 157,094,802 | |
Net income for the three-month period ended March 31, 2019 | 4,719,055 | ||
Balance - March 31, 2019 | $ | 161,813,857 | |
Members' Equity | |||
Balance - December 31, 2019 | $ | 153,975,555 | |
Net loss for the three-month period ended March 31, 2020 | (5,248,565 | ) | |
Balance - March 31, 2020 | $ | 148,726,990 | |
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, 2019, contained in the Company's annual report on Form 10-K for 2019.
In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.
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 190 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. Also included in cash and equivalents are highly liquid investment that are readily convertible into known amounts of cash, which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
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.
At March 31, 2020, trading securities consisted of short term bond mutual funds with an approximate cost of $42,632,000 and fair value of $42,189,000. At December 31, 2019, trading securities consisted of corporate bonds and short term bond mutual funds with an approximate cost of $42,370,000 and fair value of $42,508,000. For the three months ended March 31, 2020, the Company recorded interest, dividend and net realized and unrealized loss from these investments of approximately $319,000 included in other income on the statement of operations. During the same time period of 2019, the Company recorded interest, dividends and net unrealized gains and losses from these investments of approximately $585,000.
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 per the terms of an agreement with Mr. Retterath entered into on June 13, 2013 with the Company.
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Receivables
Credit sales are made primarily to two customers and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.
Note Receivable
The Company has a note receivable from an unrelated company. The Company carries the note at the current principal balance included in other assets. The note commenced in July, 2019 with a face value of $350,000 and matures August, 2021.
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, as the Company has significant influence, under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. The investment balance is included in other assets and the income recognized as other income. The investment is evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
Revenue and Cost Recognition
In the first quarter of 2018, the Company adopted Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606). Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. The Company generally has a single performance obligation in its arrangements with customers. The Company believes for its contracts with customers, control is transferred at a point in time, typically upon delivery to the customers. When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. The Company generally expenses sales commissions when incurred because the amortization period would have been less than one year.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
• | sales of ethanol; |
• | sales of distiller grains; and |
• | sales of corn oil; |
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The disaggregation of revenue according to product line, along with accounts receivable from contracts with customers, is as disclosed in Note 5.
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.
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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 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, and a court ruling which found the agreement to be binding and enforceable, the Company believes that it has a binding agreement with Mr. Retterath; as such the commitment to repurchase and retire the membership units is reflected in the financial statements as a current liability, due to former member, as 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.
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 three months ended March 31, 2020, ethanol sales averaged approximately 74% of total revenues, while approximately 21% of revenues were generated from the sale of distiller grains. Corn oil sales attributed approximately 5% of revenues during this time period. For the three months ended March 31, 2020, corn costs averaged approximately 80% of cost of goods sold.
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The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
On January 30, 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a “Public Health Emergency of International Concern” and on March 11, 2020, declared COVID-19 a pandemic. The impact of COVID-19 could negatively impact the Company’s operations, suppliers or other vendors, and customer base. Any quarantines, labor shortages or other disruptions to the Company’s operations, or those of their customers, may adversely impact the Company’s revenues, ability to provide its services and operating results. In addition, a significant outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the geographical area in which the Company operates, resulting in an economic downturn that could affect demand for its goods and services. The extent to which the coronavirus impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.
Recent & Pending Accounting Pronouncements
In August 2018, FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). ASU 2018-13 changes some of the disclosure requirements related to fair value measurements related to the Level 1, 2 and 3 investments. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and for interim periods within that fiscal year. The Company is currently evaluating the impact of its pending adoption of the new standard on the financial statement.
2. INVENTORY
Inventory consisted of the following as of March 31, 2020 and December 31, 2019:
March 31, 2020 | December 31, 2019 | |||||||
Raw Materials | $ | 10,236,774 | $ | 10,757,505 | ||||
Work in Process | 2,258,551 | 2,617,916 | ||||||
Finished Goods | 3,911,650 | 1,935,975 | ||||||
Totals | $ | 16,406,975 | $ | 15,311,396 | ||||
As of March 31, 2020 and December 31, 2019, the Company recognized a lower of cost or net realizable value adjustment of approximately $1,281,000 and $0, respectively, related to inventory.
3. DEBT
Master Loan Agreement with Home Federal Savings Bank
On June 29, 2017, the Company amended and restated the Master Loan Agreement with Home Federal Savings Bank ("Home Federal"), amending the term revolving loan to provide funding to operate the plant and establishing a term loan to help fund the Company's $42 million expansion project. In return, the Company entered into agreements providing Home Federal a security interest in substantially all personal property located on Company property. The Company currently has two loans with Home Federal, a term revolving loan and a term loan.
Term Revolving Loan
Under the terms of the Second Supplement to the Master Loan Agreement, dated June 29, 2017, the Company has a $30 million term revolving loan which has a maturity date of December 31, 2022. Interest on the term revolving loan is due monthly and
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accrues at a rate equal to Prime Rate less 60 basis points, 2.65% on March 31, 2020. There was no balance outstanding on the term revolving loan and $30 million available to be drawn as of March 31, 2020 and December 31, 2019, respectively.
Term Debt
Under the terms of the Fourth Supplement to the Master Loan Agreement, dated June 29, 2017, the Company has a $30 million term loan which has a maturity date of December 31, 2022. Interest on the term loan is at a fixed rate of 4.79%. The Company is required to make monthly interest payments beginning July 1, 2017 and bi-annual principal payments of $3 million beginning on June 30, 2018. The long-term portion of the outstanding debt is presented net of unamortized debt issuance costs of $31,657 and $35,176 as of March 31, 2020 and December 31, 2019, respectively.
At March 31, 2020, the Company had the following debt maturities on the term loan for the twelve month periods ended March 31:
2021 | $ | 6,000,000 | ||
2022 | 6,000,000 | |||
2023 | 6,000,000 | |||
Total principal payments | $ | 18,000,000 | ||
Covenants
During the term of the loans, the Company is subject to certain financial covenants at various times calculated monthly, quarterly or annually, including restriction of the payment of dividends and capital expenditures and maintenance of certain financial ratios including the minimum working capital and a fixed charge ratio as defined by the Master Loan Agreement. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. The Company is in compliance with all debt covenants as of March 31, 2020.
4. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENT
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. On August 14, 2013, the Company filed a lawsuit against Mr. Retterath in Iowa state court to enforce the terms of the repurchase agreement. The Company asked the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.
Mr. Retterath's contention was he is not bound by the agreement. The Company's position is as of the closing date, Mr. Retterath is no longer the equitable owner of any membership units in the Company. As a result, in 2013 the Company recorded a $30 million short-term liability related to the amount the Company agreed to pay Mr. Retterath to repurchase his membership units and correspondingly reduced members' equity on the balance sheet. Following the end of our first quarter of 2020, Mr. Retterath agreed to complete the repurchase and the units were repurchased and retired.
Other matters
The Company has purchased corn and materials from members of its Board of Directors who own or manage elevators or are local producers of corn. Purchases during the three months ended March 31, 2020 totaled approximately $662,000, and during the three months ended March 31, 2019 totaled approximately $1,421,000. There is nothing due to these members at March 31, 2020 and December 31, 2019, respectively.
5. COMMITMENTS, CONTINGENCIES, AGREEMENTS
Ethanol, corn oil, and distiller grains marketing agreements and major customers
The Company has entered into a marketing agreement with RPMG to sell all denatured fuel ethanol produced at the plant at a mutually agreed on price, less commission and transportation charges. As of March 31, 2020, the Company had no commitments
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to sell ethanol at fixed prices and 36 million of its produced gallons of ethanol at basis price levels indexed against exchanges for delivery through June 30, 2020.
The Company has entered into a marketing agreement with RPMG to sell all corn oil produced at the plant at a mutually agreed on price, less marketing fees and transportation charges. As of March 31, 2020, the Company had commitments to sell approximately 6 million pounds of corn oil at various fixed and basis price levels indexed against exchanges for delivery through April 30, 2020.
The Company also has an investment in RPMG, included in other assets, totaling approximately $2,523,000 and $2,422,000 as of March 31, 2020 and December 31, 2019, respectively.
The Company has entered into a marketing agreement to sell all distiller grains produced at the plant to CHS, an unrelated party, at a mutually agreed on price, less commission and transportation charges. The agreement was renewed for another one year term on April 1, 2020. 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 March 31, 2020, the Company had approximately 43,000 tons of distiller grains sales commitments for delivery through May 2020 at various fixed prices.
Sales and marketing fees related to the agreements in place for the three months ended March 31, 2020 and 2019 were approximately as follows:
Three Months Ended | Three Months Ended | ||||||
March 31, 2020 | March 31, 2019 | ||||||
Sales ethanol | $ | 47,953,000 | $ | 63,621,000 | |||
Sales distiller grains | 13,643,000 | 15,282,000 | |||||
Sales corn oil | 3,441,000 | 3,172,000 | |||||
Marketing fees ethanol | $ | 60,000 | $ | 61,000 | |||
Marketing fees distiller grains | 205,000 | 234,000 | |||||
Marketing fees corn oil | 29,000 | 24,000 | |||||
As of March 31, 2020 | As of December 31, 2019 | ||||||
Amount due (to) from RPMG | $ | (639,000 | ) | $ | 4,712,000 | ||
Amount due from CHS | 1,948,000 | 2,388,000 | |||||
At March 31, 2020, the Company had approximately $4,961,000 in outstanding priced corn purchase commitments for bushels at various prices and approximately 1,920,000 bushels of basis contracts through September 2022 accounted for under the normal purchase exclusion. As of March 31, 2020 the Company recognized an impairment on forward purchase contracts of approximately $707,000. This reduced inventory on the balance sheet and increased cost of good sold on the statement of operations. There was no impairment on forward purchase contracts as of December 31, 2019
The Company has commitments for minimum purchases of various utilities such as natural gas and electricity over the next 12 months totaling approximately $9,100,000 accounted for under the normal purchase exclusion.
As of March 31, 2020, the Company had locked in place approximately 2,887,500 decatherms of natural gas at fixed prices through December 31, 2020 accounted for under the normal purchase exclusion. As of March 31, 2019, approximately 3,362,000 decatherms of natural gas was locked into place at fixed prices through December 31, 2019.
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6. LEASE OBLIGATIONS
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The Company elected the option to apply the transition provisions at the adoption date instead of the earliest comparative period presented in the financial statements. By making this election, the Company has not applied retrospective reporting for 2018. The Company elected the short-term lease exception provided for in the standard and therefore only recognized right-of-use assets and lease liabilities for leases with a term greater than one year. The Company elected the package of practical expedients to not re-evaluate existing contracts as containing a lease or the lease classification unless it was not previously assessed against the lease criteria. In addition, the Company did not reassess initial direct costs for any existing leases.
A lease exists when a contract conveys to a party the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company recognized a lease liability at the lease commencement date, as the present value of future lease payments, using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis. A lease asset is recognized based on the lease liability value and adjusted for any prepaid lease payments, initial direct costs, or lease incentive amounts. The lease term at the commencement date includes any renewal options or termination options when it is reasonably certain that the Company will exercise or not exercise those options, respectively.
The Company leases rail cars and rail moving equipment with original terms up to 7 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. These costs are in addition to regular lease payments and are not included in lease expense. Rent expense incurred for the operating leases during the three months ended March 31, 2020 was approximately $444,000, and for the same period in 2019 was approximately $417,000. The lease agreements have maturity dates ranging from March 2022 to October 2025. The weighted average remaining life of the lease term for these leases was 2.64 years as of March 31, 2020.
The discount rate used in determining the lease liability for each individual lease was the Company's estimated incremental borrowing rate of 4.79%. The right-of-use asset operating lease, included in other assets, and operating lease liability, included in current and long term liabilities was $4,294,978 as of March 31, 2020.
At March 31, 2020, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month period ended March 31:
2021 | $ | 1,752,000 | ||
2022 | 1,752,000 | |||
2023 | 752,000 | |||
2024 | 184,000 | |||
2025 | 109,000 | |||
Thereafter | 63,000 | |||
Total lease commitments | $ | 4,612,000 | ||
A reconciliation of the undiscounted future payments in the schedule above and the lease liability recognized in the consolidated balance sheet as of March 31, 2020, is shown below.
Undiscounted future payments | $ | 4,612,000 | ||
Discount effect | (317,022 | ) | ||
$ | 4,294,978 | |||
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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 65 million bushels of corn per year. Over the next twelve months, the Company has hedged and anticipates hedging between 5% and 25% of its anticipated annual grind. At March 31, 2020, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 7% 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 months ending March 31, 2020 and 2019 and the fair value of derivatives as of March 31, 2020 and December 31, 2019:
Income Statement Classification | Realized Gain | Change In Unrealized Gain (Loss) | Total Gain | ||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||
Commodity contracts for the | |||||||||||||
three months ended March 31, 2020 | Cost of Goods Sold | $ | 2,750,000 | $ | (153,000 | ) | $ | 2,597,000 | |||||
Commodity contracts for the | |||||||||||||
three months ended March 31, 2019 | Cost of Goods Sold | $ | 823,000 | $ | 459,000 | $ | 1,282,000 | ||||||
Balance Sheet Classification | March 31, 2020 | December 31, 2019 | |||||||
Futures contracts | |||||||||
In gain position | $ | 936,000 | $ | 1,126,000 | |||||
In loss position | — | (37,000 | ) | ||||||
Cash (owed to) held by broker | 85,000 | (290,000 | ) | ||||||
Current Asset | $ | 1,021,000 | $ | 799,000 | |||||
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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.
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 March 31, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
As of March 31, 2020 | |||||||||||||||
Trading securities, assets | $ | 42,189,000 | $ | 42,189,000 | $ | — | $ | — | |||||||
Derivative financial instruments | |||||||||||||||
Assets | $ | 936,000 | $ | 936,000 | $ | — | $ | — | |||||||
As of December 31, 2019 | |||||||||||||||
Trading securities, assets | $ | 42,508,000 | $ | 42,508,000 | $ | — | $ | — | |||||||
Derivative financial instruments | |||||||||||||||
Assets | $ | 1,126,000 | $ | 1,126,000 | — | — | |||||||||
Liabilities | (37,000 | ) | (37,000 | ) | — | — | |||||||||
The Company's financial assets and liabilities not recorded at fair value, for which carrying value approximates fair value, consists of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. Additionally, fixed rate term debt, carried at book value of $18,000,000 at March 31, 2020, had an estimated fair value of approximately $18,190,000, determined based on a discounted cash flows model. As of December 31, 2019, carrying value of long term debt carried at book value of $18,000,000 at December 31, 2019, had an estimated fair value of approximately $17,965,000.
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9. LITIGATION MATTERS
Retterath
In relation to the repurchase agreement discussed in Note 4, on August 1, 2013 Mr. Retterath filed a lawsuit against the Company along with several directors, the Company's former CEO, former CFO, COO, a former director and the Company's outside legal counsel in Florida state court. In August 2016, this lawsuit was voluntarily dismissed without prejudice by the Retteraths. On August 14, 2013, the Company filed a lawsuit in Iowa state court to enforce the repurchase agreement the Company entered into with Mr. Retterath. No distributions have been paid to Mr. Retterath since the time of the original expected closing date of August 1, 2013. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed various motions with the Iowa Court and was granted a stay regarding his obligation to perform the repurchase agreement while the court considered his post trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling. In February 2020 the Iowa Supreme Court ruled in favor of the Company that the repurchase agreement was valid. In April 2020, the Company closed the repurchase of the membership units held by Mr. Retterath.
GS Cleantech Corporation
On August 9, 2013, GS Cleantech Corporation (GS Cleantech), a subsidiary of Greenshift Corporation, filed a complaint against the Company alleging that the Company's operation of a corn oil extraction process licensed by the Company infringes patent rights claimed by GS Cleantech. GS Cleantech seeks royalties, damages and potentially triple damages associated with the alleged infringement, as well as attorney's fees from the Company. The Company has filed an answer and counterclaims claiming invalidity of the patents, noninfringement, and inequitable conduct. Recently the federal appeals court rejected GS Cleantech's appeal. It is unclear if GS Cleantech intends to seek additional appeals. The Company is not currently able to predict the outcome of the litigation with any degree of certainty.
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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, 2019. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Homeland Energy Solutions, LLC (referred to herein as "we," "us," the "Company," or "Homeland") is an Iowa limited liability company. Homeland was formed on December 7, 2005 for the purpose of pooling investors for the development, construction and operation of a 100 million gallon per year ethanol plant located near Lawler, Iowa. We began producing ethanol and distiller grains at the plant in April 2009. We completed installation of corn oil extraction equipment and commenced selling corn oil during our fourth quarter of 2011. During our fourth quarter of 2017, we completed a plant expansion project. The ethanol plant is now capable of operating at a rate in excess of 190 million gallons of ethanol per year.
On April 13, 2020, we paid Steve Retterath $30,000,000 and Mr. Retterath transferred his 25,860 membership units to complete the membership unit repurchase agreement the Company executed with Mr. Retterath in 2013. The current status of the litigation with Mr. Retterath is described further in Part II, Item 1. Legal Proceedings.
Results of Operations
Comparison of Fiscal Quarters Ended March 31, 2020 and 2019
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended March 31, 2020 and 2019:
2020 | 2019 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 65,037,238 | 100.0 | $ | 82,074,397 | 100.0 | ||||||||
Costs of goods sold | 68,964,823 | 106.0 | 76,506,526 | 93.2 | ||||||||||
Gross profit (loss) | (3,927,585 | ) | (6.0 | ) | 5,567,871 | 6.8 | ||||||||
Selling, general and administrative expenses | 1,005,013 | 1.5 | 1,165,504 | 1.4 | ||||||||||
Operating income (loss) | (4,932,598 | ) | (7.6 | ) | 4,402,367 | 5.4 | ||||||||
Other income (expense) | (315,967 | ) | (0.5 | ) | 316,688 | 0.4 | ||||||||
Net income (loss) | $ | (5,248,565 | ) | (8.1 | ) | $ | 4,719,055 | 5.7 | ||||||
Revenue
Our total revenue for our three months ended March 31, 2020 was approximately 21% less than our total revenue for our three months ended March 31, 2019 due primarily to less ethanol and distiller grains revenue, partially offset by increased corn oil revenue.
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For our three months ended March 31, 2020, our total ethanol revenue was approximately 25% less than our three months ended March 31, 2019 due to less gallons of ethanol sold along with lower average prices we received for our ethanol during the 2020 period.
The average price per gallon we received for our ethanol during our three months ended March 31, 2020 was approximately 12% less than the average price we received for our ethanol during our three months ended March 31, 2019. Management attributes this decrease in the average price we received for our ethanol with significantly lower gasoline prices early in our first quarter of 2020 along with decreased gasoline demand at the end of our first quarter of 2020 due to the COVID-19 pandemic. Management believes that gasoline demand has been reduced in the United States by 50% or more due to the pandemic which has significantly impacted ethanol prices. We have continued to sell ethanol and are working to secure additional markets for our ethanol during this period of low ethanol demand. As a result of the current market conditions in the ethanol industry, many ethanol producers are reducing production or have ceased operating altogether. Management anticipates that the impact of the COVID-19 pandemic will continue for the rest of our 2020 fiscal year and potentially beyond.
We sold approximately 14% fewer gallons of ethanol during our three months ended March 31, 2020 compared to the same period of 2019 due to market conditions which have impacted demand for ethanol. During times when ethanol prices are low, we are focusing on operating the ethanol plant as efficiently as possible in order to maximize the amount of ethanol we can produce per bushel of corn ground.
Our total distiller grains revenue was approximately 11% less during our three months ended March 31, 2020 compared to the same period of 2019, primarily due to decreased distiller grains production. We sold approximately 10% fewer tons of distiller grains during our three months ended March 31, 2020 compared to the same period of 2019 due to reduced production at the ethanol plant overall along with increased production of corn oil. When we produce more pounds of corn oil, it reduces the volume of distiller grains we have available to sell. The average price we received for our dried distiller grains was approximately 1% less during our three months ended March 31, 2020 compared to the same period of 2019. Management anticipates that distiller grains prices will remain lower during our 2020 fiscal year, especially because reduced demand for corn from ethanol is likely to keep corn prices lower. In addition, difficulties in the meat packing industry may lead to decreased animal feed demand which would likely impact distiller grains demand.
Our total corn oil revenue was approximately 8% greater for our three months ended March 31, 2020 compared to the same period of 2019 due to increased pounds of corn oil that we sold, partially offset by lower corn oil prices per pound during the 2020 period. We sold approximately 16% more pounds of corn oil during our three months ended March 31, 2020 compared to the same period of 2019 primarily because of increased corn oil extraction efficiency during the 2020 period. The average price we received for our corn oil was approximately 7% less during our three months ended March 31, 2020 compared to the same period of 2019 due to lower commodity prices generally, including lower energy prices. Since a significant user of corn oil is the biodiesel industry, lower energy prices has impacted demand and prices for corn oil. Management anticipates that corn oil prices will remain lower for the rest of our 2020 fiscal year.
Cost of Goods Sold
Our total cost of goods sold was approximately 10% less for our three months ended March 31, 2020 compared to the same period of 2019. Our cost of goods sold related to corn, without taking into account derivative instruments, was approximately 5% less during our three months ended March 31, 2020 compared to our three months ended March 31, 2019 due to using less bushels of corn, partially offset by higher corn costs. We used approximately 9% fewer bushels of corn during our three months ended March 31, 2020 compared to the same period of 2019 due to reduced overall production at the ethanol plant along with improved corn to ethanol conversion efficiency. Our average cost per bushel of corn was approximately 4% greater during our three months ended March 31, 2020 compared to our three months ended March 31, 2019 due primarily to higher basis costs needed to purchase corn in our market. Management anticipates that corn costs will remain higher unless current market conditions persist and corn demand is lower due to less ethanol production.
We experienced decreased natural gas costs during our three months ended March 31, 2020 compared to the same period of 2019 primarily due to decreased energy prices generally during the 2020 period. During our three months ended March 31, 2020, our average delivered cost per MMBtu of natural gas was approximately 4% less compared to the same period of 2019. In addition, we used approximately 1% fewer MMBtu of natural gas during three months ended March 31, 2020 compared to our three months ended March 31, 2019 due to decreased production at the ethanol plant.
We engage in risk management activities that are intended to fix the purchase price of the corn and natural gas we require to produce ethanol, distiller grains and corn oil. During our three months ended March 31, 2020, we had a realized gain of approximately $2.75 million related to our corn and natural gas derivative instruments and an unrealized loss of approximately
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$153,000 related to our corn and natural gas derivative instruments. During our three months ended March 31, 2019, we had a realized gain of approximately $823,000 and an unrealized gain of approximately $459,000 related to our corn and natural gas derivative instruments. We recognize the gains or losses that result from changes in the value of our corn and natural gas derivative instruments in cost of goods sold as the changes occur.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were less during the three months ended March 31, 2020 than during our three months ended March 31, 2019, primarily due to decreased bonus accruals pursuant to our compensation plans.
Other Income (Expense)
We had less interest expense during our three months ended March 31, 2020 compared to the same period of 2019 due to having less borrowing during the 2020 period. We had less other income during our three months ended March 31, 2020 compared to the same period of 2019 due to losses we experienced on our equity method investments in the 2020 period which are also involved in the ethanol industry.
Changes in Financial Condition for the Three Months Ended March 31, 2020
Balance Sheet Data | March 31, 2020 | December 31, 2019 | ||||||
Total current assets | $ | 83,362,465 | $ | 87,173,152 | ||||
Total property and equipment | 123,046,801 | 126,554,986 | ||||||
Total other assets | 9,026,292 | 9,231,854 | ||||||
Total Assets | $ | 215,435,558 | $ | 222,959,992 | ||||
Total current liabilities | $ | 52,025,442 | $ | 53,902,670 | ||||
Total long-term liabilities | 14,683,126 | 15,081,767 | ||||||
Total members' equity | 148,726,990 | 153,975,555 | ||||||
Total Liabilities and Members' Equity | $ | 215,435,558 | $ | 222,959,992 | ||||
We had less accounts receivable at March 31, 2020 compared to December 31, 2019 due to the timing of our quarter end compared to payments we received from our marketers. As of March 31, 2020 we had more inventory compared to December 31, 2019 due to more finished goods on hand on the last day of the month. We had fewer prepaid assets at March 31, 2020 compared to December 31, 2019 due to less prepaid insurance at March 31, 2020. As of March 31, 2020, the value of our derivative instruments was greater compared to December 31, 2019 due to changes in the value of our corn derivative instruments.
Our net property and equipment was lower at March 31, 2020 compared to December 31, 2019 due to the net effect of capital projects offset by depreciation. The value of our other assets was less at March 31, 2020 compared to December 31, 2019 due to amortization of our right of use asset, partially offset by increased other assets at March 31, 2020 compared to December 31, 2019.
Our accounts payable was less at March 31, 2020 compared to December 31, 2019 due primarily to having less deferred corn payments at March 31, 2020. Our accrued expenses were less at March 31, 2020 compared to December 31, 2019 due to decreased employee bonuses pursuant to employee compensation plans accrued at December 31, 2019.
Our long-term liabilities were less at March 31, 2020 compared to December 31, 2019 due to amortization of our operating lease liability at March 31, 2020.
Liquidity and Capital Resources
Our primary sources of liquidity as of March 31, 2020 were cash from our operations and our $30 million long-term revolving loan. Our credit facilities are described in greater detail below under "Short-Term and Long-Term Debt Sources." As of March 31, 2020, we had $30.0 million available pursuant to our revolving loan and approximately $17.3 million in cash and cash equivalents. We also had $42 million at March 31, 2020 of trading securities, of which $30 million was set aside related to the Retterath repurchase agreement. We paid this $30 million to Steve Retterath following the end of our first fiscal quarter of our 2020 fiscal year. Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash
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from our revolving loan and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity financing for working capital or other purposes.
The following table shows cash flows for the three months ended March 31, 2020 and 2019:
2020 | 2019 | |||||||
Net cash provided by operating activities | $ | 746,350 | $ | 5,706,220 | ||||
Net cash (used in) investing activities | (750,727 | ) | (17,371,058 | ) | ||||
Cash at beginning of period | 17,274,703 | 28,751,994 | ||||||
Cash and cash equivalents at end of period | $ | 17,270,326 | $ | 17,087,156 | ||||
Cash Flow From Operations
Our operations provided less cash during our first three months of 2020 compared to the same period of 2019 due primarily to decreased net income during the 2020 period due to poor operating margins in the ethanol industry.
Cash Flow From Investing Activities
We used more cash for investing activities during the 2019 period because we purchased $15 million in trading securities during that time. We also had fewer payments for construction in progress during the 2020 period compared to the 2019 period.
Short-Term and Long-Term Debt Sources
Master Loan Agreement with Home Federal Savings Bank
On June 29, 2017, we entered into a new $30 million term loan (the "Term Loan") and increased and extended our existing revolving loan (the "Revolving Loan") with Home Federal Savings Bank ("Home Federal"). Each loan is described below.
Term Loan
We have a $30 million term loan with a fixed interest rate of 4.79%. We will pay interest on the Term Loan monthly with semi-annual principal payments of $3 million commencing on June 30, 2018. The maturity date of the Term Loan is December 31, 2022. We have the ability to prepay principal on the Term Loan without penalty or premium by giving Home Federal thirty days advance notice. If we choose to refinance the Term Loan within the first thirty-six months following the closing, we may be required to pay Home Federal a prepayment fee. In the event we default on the Term Loan, Home Federal can charge a default interest rate 2% in excess of the current interest rate. As of March 31, 2020, we had approximately $18 million outstanding on the Term Loan.
Revolving Loan
We have a $30 million term revolving loan which has a maturity date of December 31, 2022. Interest on the Revolving Loan accrues at Prime Rate less 60 basis points. We are required to make monthly payments of interest until the maturity date on December 31, 2022, on which date the unpaid principal balance of the Revolving Loan becomes due. We agreed to pay a fee of 30 basis points on a per annum basis on the unused portion of the Revolving Loan payable on a quarterly basis. As of March 31, 2020, we had $0 outstanding on the Revolving Loan and $30 million available to be drawn. Interest accrued on the Revolving Loan as of March 31, 2020 at a rate of 2.65% per year.
Covenants
In connection with the Master Loan Agreement, we are required to comply with certain debt covenants and financial ratios. We agreed to a debt service coverage ratio of 1:15 to 1:00 and agreed to increase our minimum working capital covenant from $27.5 million to $30 million once our expansion is complete. We are permitted to pay distributions to our members up to 100% of our net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and we are in compliance with all of our loan covenants including compliance with the financial covenants. Further, our maximum capital expenditure covenant was increased from $5 million to $10 million per year. The maximum capital expenditure covenant was increased to $15 million in 2019.
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As of March 31, 2020, we were in compliance with all of our debt covenants and financial ratios. Management anticipates that we will be in compliance with all of our debt covenants and financial ratios for at least the next 12 months.
Failure to comply with the loan covenants or to maintain the required financial ratios may cause acceleration of any future outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. Any acceleration of the debt financing or imposition of the fees, charges or penalties may restrict or limit our access to the capital resources necessary to continue plant operations.
Should we default on any of our obligations pursuant to the Home Federal loans, Home Federal may terminate its commitment to provide us funds and declare any future unpaid principal balance of the loans, plus accrued interest, immediately due and payable. Events of default include the failure to make payments when due, our insolvency, any material adverse change in our financial condition or the breach of any of the covenants, representations or warranties we have made in the loan agreements.
Application of Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Derivative Instruments
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative 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.
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 control 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.
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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 March 31, 2020, we had price protection in place for approximately 7% of our anticipated corn needs, 55% of our natural gas needs and none of our ethanol sales for the next 12 months. A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of March 31, 2020, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from March 31, 2020. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to income | ||||||||
Natural Gas | 2,313,000 | MMBTU | 10% | $ | (439,470 | ) | |||||
Ethanol | 186,000 | Gallons | 10% | (18,600 | ) | ||||||
Corn | 60,500,000 | Bushels | 10% | (18,150,000 | ) | ||||||
For comparison purposes, our sensitivity analysis for our first quarter of 2019 is set forth below.
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to income | ||||||||
Natural Gas | 1,800,000 | MMBTU | 10% | $ | (540,000 | ) | |||||
Ethanol | 200,000,000 | Gallons | 10% | (24,800,000 | ) | ||||||
Corn | 60,000,000 | Bushels | 10% | (20,400,000 | ) | ||||||
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our President and Chief Executive Officer (the principal executive officer), James Broghammer, along with our Chief Financial Officer, (the principal financial officer), Beth Eiler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2020. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is
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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 March 31, 2020, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II.
ITEM 1. LEGAL PROCEEDINGS.
Retterath Lawsuit
On August 14, 2013, the Company filed a lawsuit against Steve Retterath in the Iowa state court located in Polk County, Iowa. The purpose of the lawsuit is to enforce the terms of the repurchase agreement the Company executed with Mr. Retterath on June 13, 2013. The Company asked the Iowa state court to require Mr. Retterath to perform his obligations under the repurchase agreement pursuant to its terms. Mr. Retterath removed the case to federal court in the Federal District Court for the Southern District of Iowa in December 2013. The Company believed that this removal was improper and as a result the Company moved to remand the case back to the Iowa state court in Polk County which was granted. Mr. Retterath answered the lawsuit in August 2014, denying the validity of the repurchase agreement. In addition, the Iowa state court permitted Jason Retterath and Annie Retterath, the son and daughter-in-law of Steve Retterath, to be added as parties to the Iowa state lawsuit. In February 2015, the Company filed a motion for summary judgment asking the Iowa state court to enforce the repurchase agreement. The Retteraths also filed motions for summary judgment asking the Iowa state court to find the repurchase agreement invalid. On October 16, 2015, the Iowa state court entered a ruling granting Homeland's motion for summary judgment and determined no membership vote was required as Mr. Retterath has contended. The Iowa state court also denied the summary judgment motions filed by Mr. Retterath and his son and daughter-in-law.
Mr. Retterath and his son and daughter-in-law filed a motion to add a significant number of additional parties to the Iowa lawsuit along with additional claims against the Company. We filed a resistance to Mr. Retterath's attempts to expand the scope of the Iowa lawsuit. In November 2016, the Iowa Court ruled that our original claims against Mr. Retterath would proceed to trial in January 2017 as scheduled and that any other issues that remain following that trial would be litigated after a ruling is issued in the January 2017 trial. The trial was held in January 2017. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed motions with the Iowa Court to reconsider its ruling or alternatively award Mr. Retterath a new trial. Mr. Retterath also asked the Iowa Court to stay his obligation to perform the repurchase agreement until these motion are ruled on by the Iowa Court. The Iowa Court granted Mr. Retterath's stay while the court considered his post-trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling. Mr. Retterath filed an appeal of the Iowa Court's decision. In February 2020, the Iowa Supreme Court ruled that the repurchase agreement is valid and enforceable. In April 2020, we closed the repurchase transaction. Now that the first part of the case is resolved, the additional matters Mr. Retterath added to the case in 2016 will be resolved by the court.
GS Cleantech Patent Litigation
On August 9, 2013, GS Cleantech Corporation ("GS Cleantech"), a subsidiary of Greenshift Corporation, filed a complaint in the United States District for the Northern District of Iowa against the Company. The Company is one of more than twenty ethanol manufacturers that were sued by GS Cleantech. The complaint alleges that the Company's operation of a corn oil extraction process infringes patent rights claimed by GS Cleantech. GS Cleantech seeks royalties, damages and potentially triple damages associated with the alleged infringement, as well as attorney's fees. The complaint was transferred to the United States District Court for the Southern District of Indiana due to a finding that the action involves questions of fact common to several other lawsuits which were joined in a multi-district litigation ("MDL"). The MDL Court developed two tracks of defendants in this litigation. The first track includes defendants which were originally sued by GS Cleantech in 2010 and a second track of defendants sued in 2013 which includes the Company. On October 23, 2014, the MDL Court granted summary judgment in favor of the first track defendants and found that the GS Cleantech patents which the Company is alleged to have infringed are invalid. Further, in a January 16, 2015 decision, the MDL ruled in favor of a stipulated motion for partial summary judgment finding that all of the GS Cleantech patents in the suit were invalid and, therefore, not infringed. GS Cleantech appealed these decisions. The federal appeals court recently rejected GS Cleantech's appeal.
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ITEM 1A. RISK FACTORS.
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2019.
We are subject to global and regional economic downturns and related risks. The level of demand for our products is affected by global and regional demographic and macroeconomic conditions. A significant downturn in global economic growth, or recessionary conditions in major geographic regions for prolonged periods, may lead to reduced demand for our products, which could have a negative effect on the market price of our products in the United States. In December 2019, a novel strain of coronavirus surfaced in Wuhan, China (“COVID-19”). In just a few months, the spread of COVID-19 has resulted in businesses suspending or terminating global operations and travel, self-imposed or government-mandated quarantines, and an overall slowdown of economic activity in some areas. Cases have been confirmed worldwide, including in Japan, Italy, Brazil, Canada and the United States. To the extent that such economic conditions negatively impact consumer and business confidence, travel and consumption patterns or volumes for our products, our business and results of operations could be significantly and adversely affected.
COVID-19 may negatively impact our ability to operate our business which could decrease or eliminate the value of our units. COVID-19 has resulted in significant uncertainty in many areas of our business. We do not know how long these conditions will last. This uncertainty is expected to negatively impact our operations. We may experience labor shortages if our employees are unable or unwilling to come to work. In addition, if our suppliers cannot deliver the supplies we need to operate our business, including corn and chemicals for our operations, we may be forced to shutdown operations or reduce production. In addition, if we are unable to ship our products because of trucking or rail shipping disruptions, it could also result in a forced shutdown or reduction of production. If we are unable to operate the ethanol plant at capacity, it may result in unfavorable operating results, especially since we will continue to pay our fixed costs of maintaining the facility. Any shutdown or reduction of production, especially for an extended period of time, could reduce or eliminate the value of our units.
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.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this report.
Exhibit No. | Exhibit |
Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
Certificate Pursuant to 18 U.S.C. Section 1350* | |
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 March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Statements of Cash Flows for the three months ended March 31, 2020 and 2019, and (iv) the Notes to Unaudited Financial Statements.** |
________________________________
(*) Filed herewith.
(**) Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HOMELAND ENERGY SOLUTIONS, LLC | |||
Date: | May 15, 2020 | /s/ James Broghammer | |
James Broghammer | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date: | May 15, 2020 | /s/ Beth Eiler | |
Beth Eiler | |||
Chief Financial Officer (Principal Financial Officer) | |||
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