Attached files

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EX-32.2 - EX-32.2 - Heron Lake BioEnergy, LLChlb-20200430ex32276a3f4.htm
EX-32.1 - EX-32.1 - Heron Lake BioEnergy, LLChlb-20200430ex3215a9478.htm
EX-31.2 - EX-31.2 - Heron Lake BioEnergy, LLChlb-20200430ex3125936b6.htm
EX-31.1 - EX-31.1 - Heron Lake BioEnergy, LLChlb-20200430ex3113dcaf1.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 April 30, 2020

 

OR

 

 

 

Transition report under Section 13 or 15(d) of the Exchange Act.

 

For the transition period from                    to                  .

 

COMMISSION FILE NUMBER 000-51825

 

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-2002393

(State or other jurisdiction of organization)

 

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

 

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

 

(507) 793-0077

(Issuer’s telephone number)

 

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

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

None

 

NA

 

NA

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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, or a smaller reporting 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  ☐

 

Accelerated filer  ☐

 

 

Smaller reporting company ☐

Non-accelerated filer  ☒

 

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

 

As of June 15, 2020, there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

April 30, 2020

    

October 31, 2019

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

2,735,136

 

$

4,541,295

 

Restricted cash

 

 

351,068

 

 

52,516

 

Accounts receivable

 

 

125,572

 

 

4,891,249

 

Inventory

 

 

7,385,861

 

 

6,276,258

 

Commodity derivative instruments

 

 

 —

 

 

95,823

 

Prepaid expenses and other current assets

 

 

755,701

 

 

408,325

 

Total current assets

 

 

11,353,338

 

 

16,265,466

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

37,271,711

 

 

39,408,195

 

 

 

 

 

 

 

 

 

Operating lease right of use assets

 

 

9,939,272

 

 

 —

 

 

 

 

 

 

 

 

 

Other assets

 

 

697,254

 

 

922,254

 

 

 

 

 

 

 

 

 

Total Assets

 

$

59,261,575

 

$

56,595,915

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

333,977

 

$

333,977

 

Checks drawn in excess of bank balances

 

 

807,756

 

 

 —

 

Accounts payable

 

 

1,027,469

 

 

5,386,618

 

Commodity derivative instruments

 

 

241,650

 

 

 —

 

Accrued expenses

 

 

525,458

 

 

423,266

 

Operating lease, current liabilities

 

 

1,311,986

 

 

 —

 

Total current liabilities

 

 

4,248,296

 

 

6,143,861

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

7,026,976

 

 

300,203

 

 

 

 

 

 

 

 

 

Operating Lease, long-term liabilities

 

 

8,627,286

 

 

 —

 

 

 

 

 

 

 

 

 

Other Long-Term Liabilities

 

 

573,962

 

 

551,000

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units issued and outstanding at April 30, 2020 and October 31, 2019

 

 

38,785,055

 

 

47,599,276

 

Non-controlling interest

 

 

 —

 

 

2,001,575

 

Total members' equity

 

 

38,785,055

 

 

49,600,851

 

 

 

 

 

 

 

 

 

Total Liabilities and Members' Equity

 

$

59,261,575

 

$

56,595,915

 

 

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

1

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  April 30,

 

Six Months Ended April 30,

 

 

(unaudited)

 

(unaudited)

 

 

2020

 

2019

 

2020

 

2019

Revenues

 

$

15,604,969

 

$

25,494,797

 

$

42,285,249

 

$

51,192,317

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

21,049,520

 

 

25,914,451

 

 

49,179,291

 

 

52,645,771

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Loss

 

 

(5,444,551)

 

 

(419,654)

 

 

(6,894,042)

 

 

(1,453,454)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

(974,949)

 

 

(855,755)

 

 

(1,874,394)

 

 

(1,775,282)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(6,419,500)

 

 

(1,275,409)

 

 

(8,768,436)

 

 

(3,228,736)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

826

 

 

13,598

 

 

12,407

 

 

42,400

Interest expense

 

 

(30,074)

 

 

(7,416)

 

 

(41,605)

 

 

(15,330)

Other income, net

 

 

206,499

 

 

224,688

 

 

206,838

 

 

224,893

Total other income, net

 

 

177,251

 

 

230,870

 

 

177,640

 

 

251,963

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(6,242,249)

 

 

(1,044,539)

 

 

(8,590,796)

 

 

(2,976,773)

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net Income Attributable to Non-controlling Interest

 

 

 —

 

 

(70,613)

 

 

(67,827)

 

 

(162,019)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Heron Lake BioEnergy, LLC

 

$

(6,242,249)

 

$

(1,115,152)

 

$

(8,658,623)

 

$

(3,138,792)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Units Outstanding—Basic and Diluted (Class A and B)

 

 

77,932,107

 

 

77,932,107

 

 

77,932,107

 

 

77,932,107

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Per Unit Attributable to Heron Lake BioEnergy, LLC—Basic and Diluted (Class A and B)

 

$

(0.08)

 

$

(0.01)

 

$

(0.11)

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions Per Unit (Class A and B)

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

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

 

2

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Members’ Equity (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Members' equity

    

 

 

    

 

 

 

 

 

 

 

 

attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Heron Lake

 

Non-

 

Total

 

 

 

 

 

 

BioEnergy,

 

controlling 

 

Members'

 

 

Class A Units

 

Class B Units

 

LLC

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—October 31, 2019

 

62,932,107

 

15,000,000

 

$

47,599,276

 

$

2,001,575

 

$

49,600,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of non-controlling interest

 

 —

 

 —

 

 

(155,598)

 

 

(2,069,402)

 

 

(2,225,000)

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

67,827

 

 

67,827

Net loss attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

(2,416,374)

 

 

 —

 

 

(2,416,374)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—January 31, 2020

 

62,932,107

 

15,000,000

 

$

45,027,304

 

$

 —

 

$

45,027,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

(6,242,249)

 

 

 —

 

 

(6,242,249)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—April 30, 2020

 

62,932,107

 

15,000,000

 

$

38,785,055

 

$

 —

 

$

38,785,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—October 31, 2018

 

62,932,107

 

15,000,000

 

$

53,054,846

 

$

1,723,839

 

$

54,778,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

91,406

 

 

91,406

Net loss attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

(2,023,640)

 

 

 —

 

 

(2,023,640)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—January 31, 2019

 

62,932,107

 

15,000,000

 

$

51,031,206

 

$

1,815,245

 

$

52,846,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

70,613

 

 

70,613

Net loss attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

(1,115,152)

 

 

 —

 

 

(1,115,152)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—April 30, 2019

 

62,932,107

 

15,000,000

 

$

49,916,054

 

$

1,885,858

 

$

51,801,912

 

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

 

3

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended April 30,

 

 

 

 

2020

 

 

2019

 

 

    

 

(unaudited)

    

 

(unaudited)

 

Cash Flow From Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(8,590,796)

 

$

(2,976,773)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,638,652

 

 

2,575,009

 

Change in fair value of commodity derivative instruments

 

 

679,921

 

 

(229,470)

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

4,765,677

 

 

238,138

 

Inventory

 

 

(1,109,603)

 

 

818,723

 

Commodity derivative instruments

 

 

(342,448)

 

 

696,991

 

Prepaid expenses and other current assets

 

 

(347,376)

 

 

(413,633)

 

Accounts payable

 

 

(4,247,450)

 

 

(2,920,501)

 

Accrued expenses

 

 

102,192

 

 

(191,571)

 

Accrued railcar rehabilitation costs

 

 

22,962

 

 

 —

 

Net cash used in operating activities

 

 

(6,428,269)

 

 

(2,403,087)

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(613,867)

 

 

(142,671)

 

Net cash used in investing activities

 

 

(613,867)

 

 

(142,671)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Checks drawn in excess of bank balance

 

 

807,756

 

 

 —

 

Proceeds from paycheck protection program loan

 

 

595,693

 

 

 —

 

Proceeds from long-term debt

 

 

17,786,740

 

 

 —

 

Payments on long-term debt

 

 

(11,655,660)

 

 

(11,901)

 

Acquisition of non-controlling interest

 

 

(2,000,000)

 

 

 —

 

Net cash used in financing activities

 

 

5,534,529

 

 

(11,901)

 

 

 

 

 

 

 

 

 

Net decrease in Cash and Restricted Cash

 

 

(1,507,607)

 

 

(2,557,659)

 

 

 

 

 

 

 

 

 

Cash and Restricted Cash—Beginning of Period

 

 

4,593,811

 

 

5,995,982

 

 

 

 

 

 

 

 

 

Cash and Restricted Cash—End of Period

 

$

3,086,204

 

$

3,438,323

 

 

 

 

 

 

 

 

 

Reconciliation of Cash and Restricted Cash

 

 

 

 

 

 

 

Cash - Balance Sheet

 

$

2,735,136

 

$

3,178,667

 

Restricted Cash - Balance Sheet

 

 

351,068

 

 

259,656

 

Cash and Restricted Cash

 

$

3,086,204

 

$

3,438,323

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest expense

 

$

41,605

 

$

15,330

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

13,487

 

$

29,464

 

 

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

 

 

4

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Heron Lake BioEnergy, LLC owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 72.3 million gallons per year of undenatured ethanol on a twelve-month rolling sum basis.  In addition, Heron Lake BioEnergy, LLC produces and sells distillers’ grains with solubles and corn oil as co-products of ethanol production. 

 

Heron Lake BioEnergy, LLC’s wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), is the sole owner of Agrinatural Gas, LLC (“Agrinatural”). Agrinatural is a natural gas pipeline company that was formed to construct, own, and operate the natural gas pipeline that provides natural gas to the Company’s ethanol production facility and other customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota. Beginning as of December 11, 2019, HLBE holds a 100% interest in Agrinatural. At October 31, 2019, HLBE held a 73% interest in Agrinatural. 

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated unaudited financial statements as of April 30, 2020 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively, the “Company”).  Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the unaudited financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings attributed to the remaining 27% non-controlling interest identified separately in the accompanying condensed consolidated balance sheets and statements of operations through December 11, 2019, when the remaining non-controlling interest was acquired. All significant intercompany balances and transactions are eliminated in consolidation.

 

The 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 condensed consolidated unaudited 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.

 

Accounting Estimates

 

Management uses estimates and assumptions in preparing these condensed consolidated unaudited financial statements in accordance with 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. The Company uses estimates and assumptions in accounting for significant matters including, among others, the economic lives of property and equipment, the assumptions used in the analysis of impairment of long-lived assets, valuation of commodity derivative instruments, inventory, inventory purchase and sales commitments, and evaluation of railcar rehabilitation costs. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.  Actual results could differ from those estimates.

 

5

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

Non-controlling Interest

 

Amounts recorded as non-controlling interest on the October 31, 2019 balance sheet relates to the net investment by an unrelated party in Agrinatural through December 11, 2019 when the remaining non-controlling interest was acquired.

 

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 three distinct marketing companies as discussed below. The consideration we receive for these products reflects an amount that the Company expects to be entitled to in exchange for those products, based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of 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, Gavilon, Inc, to sell one hundred percent of the distillers grains it produces at the plant. Gavilon 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 Gavilon and the Company.  Our performance obligations consist of our obligation to deliver distillers grains to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. Revenue is recognized net of commissions, freight and fees.

 

·

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

 

·

Agrinatural generates revenue from the transportation of natural gas to residential and commercial customers. Revenue is recognized at the point when natural gas is delivered at the transaction price established in the contract.

 

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.

 

6

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

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.

 

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. 

 

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. Based on the related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

 

7

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

·

Ethanol Production.   Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

 

·

Natural Gas Pipeline.  The Company has majority ownership in Agrinatural, through its wholly owned subsidiary, HLBE Pipeline, LLC, and operations of Agrinatural’s natural gas pipeline are aggregated into another financial reporting segment.

 

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 and distillers’ grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 70% to 90% of total revenues and corn costs average 70% to 90% of cost of goods sold.

 

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol, distillers’ grains, and corn oil and the related costs of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, 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 commodities 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 2018 and 2019, and thus far into 2020, as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors, which are compounded by the recent impact of the novel coronavirus (“COVID-19”), resulted and continue to result in negative operating margins, lower cash flow from operations and net operating losses, which included write downs of inventory and impairment of corn forward purchase contracts of approximately $1.9 million for the six months ended April 30, 2020. In response to the low margin environment, the Company idled its ethanol production from on or about March 30, 2020 through approximately May 31, 2020 and continues to monitor COVID-19 developments in order to determine whether further adjustments to production are warranted. The Company believes its cash on hand and available debt from its lender will provide sufficient liquidity to meets its anticipated working capital, debt service and other liquidity needs through the next twelve months. If market conditions worsen affecting our ability to profitably operate the plant or if we are unable to transport ethanol, we may be forced to further idle ethanol production altogether.

8

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

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 and six months ended April 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended April 30, 2020

 

(unaudited)

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

11,094,276

 

$

 

$

11,094,276

Distillers’ Grains

 

3,347,108

 

 

 

 

3,347,108

Corn Oil

 

735,028

 

 

 

 

735,028

Other

 

191,806

 

 

 

 

191,806

Natural Gas

 

 

 

236,751

 

 

236,751

Total Revenues

$

15,368,218

 

$

236,751

 

$

15,604,969

 

 

 

 

 

 

 

 

 

 

Three Months Ended April 30, 2019

 

(unaudited)

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

20,039,824

 

$

 

$

20,039,824

Distillers’ Grains

 

4,082,536

 

 

 

 

4,082,536

Corn Oil

 

725,199

 

 

 

 

725,199

Other

 

260,264

 

 

 

 

260,264

Natural Gas

 

 

 

386,974

 

 

386,974

Total Revenues

$

25,107,823

 

$

386,974

 

$

25,494,797

 

 

 

 

 

 

 

 

 

 

Six Months Ended April 30, 2020

 

(unaudited)

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

31,386,160

 

$

 

$

31,386,160

Distillers’ Grains

 

7,835,912

 

 

 

 

7,835,912

Corn Oil

 

1,649,426

 

 

 

 

1,649,426

Other

 

487,723

 

 

 

 

487,723

Natural Gas

 

 

 

926,028

 

 

926,028

Total Revenues

$

41,359,221

 

$

926,028

 

$

42,285,249

 

 

 

 

 

 

 

 

 

 

Six Months Ended April 30, 2019

 

(unaudited)

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

38,437,976

 

$

 

$

38,437,976

Distillers’ Grains

 

9,567,891

 

 

 

 

9,567,891

Corn Oil

 

1,689,610

 

 

 

 

1,689,610

Other

 

524,567

 

 

 

 

524,567

Natural Gas

 

 

 

972,273

 

 

972,273

Total Revenues

$

50,220,044

 

$

972,273

 

$

51,192,317

 

9

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

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 the 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

 

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

April 30, 2020

 

October 31, 2019

 

 

    

(unaudited)

    

 

 

 

Raw materials

 

$

1,464,134

 

$

932,503

 

Work in process

 

 

507,172

 

 

732,243

 

Finished goods

 

 

4,049,807

 

 

3,157,429

 

Supplies

 

 

1,364,748

 

 

1,454,083

 

Totals

 

$

7,385,861

 

$

6,276,258

 

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the market 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, the Company recorded a loss on ethanol inventories, as a component of cost of goods sold, of approximately $745,000 and $981,000 for the three months ended April 30, 2020 and 2019, respectively, and approximately $1,622,000 and $555,000 for the six months ended April 30, 2020 and 2019, respectively. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on corn inventories, as a component of cost of goods sold, of approximately $48,000 and $34,000 for the three months ended April 30, 2020 and 2019, respectively, and approximately $174,000 and $58,000 for the six months ended April 30, 2020 and 2019, respectively.

 

5.DERIVATIVE INSTRUMENTS

 

As of April 30, 2020, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 1,246,000 bushels, comprised of long corn futures positions on 50,000 bushels that were entered into to hedge forecasted ethanol sales through July 2020, and short corn futures positions on 246,000 bushels that were entered into to hedge forecasted corn purchases through December 2021. Additionally, there are corn options positions of 950,000 bushels through December 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 April 30, 2020, the Company had approximately $351,000 of cash collateral (restricted cash) related to derivatives held by a broker.

 

The following table provides detail regarding the Company’s derivative instruments at April 30, 2020, none of which are designated as hedging instruments:

10

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

 —

 

$

227,550

 

Ethanol contracts

 

Commodity derivative instruments

 

 

 —

 

 

14,100

 

Totals

 

 

 

$

 —

 

$

241,650

 

 

As of October 31, 2019, the total notional amount of the Company’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, the Company had a $52,000 in cash collateral (restricted cash) related to derivatives held by a broker.

 

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2019, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

20,060

 

$

 —

 

Ethanol contracts

 

Commodity derivative instruments

 

 

75,763

 

 

 —

 

Totals

 

 

 

$

95,823

 

$

 —

 

 

The following tables provide detail regarding the gains (losses) from Company’s derivative financial instruments in its condensed consolidated unaudited statements of operations, none of which are designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Statement of

    

Three Months Ended  April 30,

 

Six Months Ended April 30,

 

    

Operations Location

    

2020

    

2019

 

2020

    

2019

    

Corn contracts

 

Cost of goods sold

 

$

(435,563)

 

$

135,178

 

$

(516,331)

 

$

229,470

 

Ethanol contracts

 

Revenues

 

 

(81,738)

 

 

 —

 

 

(163,590)

 

 

 —

 

Total gain (loss)

 

 

 

$

(517,301)

 

$

135,178

 

$

(679,921)

 

$

229,470

 

 

 

 

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 April 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount in

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

Consolidated Balance Sheet

 

 

 

 

Active Markets

 

Observable Inputs

 

Unobservable inputs

 

Financial Liabilities:

    

 

 

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Commodity Derivative instruments - Corn

 

$

227,550

 

$

227,550

 

$

227,550

 

$

 —

 

$

 —

 

Commodity Derivative instruments - Ethanol

 

$

14,100

 

$

14,100

 

$

14,100

 

$

 —

 

$

 —

 

11

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2020

 

 

The following table sets forth, by level, the Company assets and liabilities that were accounted for at fair value on a recurring basis at October 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount in

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

Consolidated

 

 

 

 

Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Assets:

    

Balance Sheet

 

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Commodity Derivative instruments - Corn

 

$

20,060

 

$

20,060

 

$

20,060

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative instruments - Ethanol

 

$

75,763

 

$

75,763

 

$

75,763

 

$