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EX-32.2 - EX-32.2 - Granite Falls Energy, LLCgfe-20210430ex32241ccc6.htm
EX-32.1 - EX-32.1 - Granite Falls Energy, LLCgfe-20210430ex32134278d.htm
EX-31.2 - EX-31.2 - Granite Falls Energy, LLCgfe-20210430ex312beb1cc.htm
EX-31.1 - EX-31.1 - Granite Falls Energy, LLCgfe-20210430ex311eeed46.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, 2021

OR

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

For the transition period from to .

COMMISSION FILE NUMBER 000-51277

GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)

Minnesota

41-1997390

(State or other jurisdiction of
incorporation or organization)

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

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

(Address of principal executive offices)

(320) 564-3100

(Registrant's telephone number, including area code)

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

None

N/A

N/A

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

Yes    No

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

Yes    No

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

Large Accelerated Filer

Non-Accelerated Filer

Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

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

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

Yes    No

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

As of June 14, 2021, there were 30,606 membership units outstanding.



PART I FINANCIAL INFORMATION

Item 1.  Financial Statements

GRANITE FALLS ENERGY, LLC and Subsidiaries

Condensed Consolidated Balance Sheets

April 30, 2021

October 31, 2020

 ASSETS

(unaudited)

Current Assets

Cash

$

6,133,993

$

11,423,427

Restricted cash

3,505,268

2,156,694

Accounts receivable

 

6,015,361

 

3,386,068

Inventory

 

16,654,492

 

13,791,805

Commodity derivative instruments

 

325,238

 

56,050

Prepaid expenses and other current assets

 

1,691,387

 

901,384

Total current assets

 

34,325,739

 

31,715,428

Property and Equipment, net

 

52,848,924

 

54,965,983

Investments

10,709,390

9,799,384

Operating lease right of use asset

17,551,426

19,383,654

Other Assets

 

333,254

 

333,254

Total Assets

$

115,768,733

$

116,197,703

LIABILITIES AND MEMBERS' EQUITY

Current Liabilities

Checks drawn in excess of bank balances

$

1,040,874

$

692,984

Current maturities of long-term debt

2,094,468

12,954,538

Accounts payable

 

6,796,811

 

12,294,097

Commodity derivative instruments

 

1,358,388

 

816,478

Accrued expenses

 

1,288,633

 

865,883

Operating lease, current liabilities

3,601,381

3,628,259

Total current liabilities

 

16,180,555

 

31,252,239

Long-Term Debt, less current portion

 

18,133,212

 

5,876,318

Operating lease, long-term liabilities

13,950,045

15,755,395

Other Long-Term Liabilities

1,444,886

1,421,924

Commitments and Contingencies

Members' Equity

Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized, issued and outstanding at April 30, 2021 and October 31, 2020

 

56,996,655

 

52,111,525

Non-controlling interest

 

9,063,380

 

9,780,302

Total members' equity

 

66,060,035

 

61,891,827

Total Liabilities and Members' Equity

$

115,768,733

$

116,197,703

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

3


GRANITE FALLS ENERGY, LLC and Subsidiaries

Condensed Consolidated Statements of Operations

Three Months Ended April 30,

Six Months Ended April 30,

2021

2020

2021

2020

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Revenues

$

74,040,361

$

33,106,922

$

123,438,747

$

86,463,248

Cost of Goods Sold

 

65,067,234

 

45,653,163

 

117,855,530

 

99,951,982

Gross Profit (Loss)

 

8,973,127

 

(12,546,241)

 

5,583,217

 

(13,488,734)

Operating Expenses

 

2,002,801

 

1,909,655

 

3,997,038

 

3,683,343

Operating Income (Loss)

 

6,970,326

 

(14,455,896)

 

1,586,179

 

(17,172,077)

Other Income (Expense)

Other income, net

 

1,611,968

 

207,581

 

1,755,425

 

207,527

Interest income

 

1,292

 

8,191

 

2,603

 

43,669

Interest expense

 

(202,452)

 

(113,114)

 

(368,907)

 

(217,112)

Investment income (loss)

 

1,078,453

 

(690,174)

 

1,192,908

 

(591,489)

Total other income (expense), net

 

2,489,261

 

(587,516)

 

2,582,029

 

(557,405)

Net Income (Loss)

$

9,459,587

$

(15,043,412)

$

4,168,208

$

(17,729,482)

Less: Net (Income) Loss Attributable to Non-controlling Interest

(1,323,603)

3,160,225

716,922

4,345,596

Net Income (Loss) Attributable to Granite Falls Energy, LLC

$

8,135,984

$

(11,883,187)

$

4,885,130

$

(13,383,886)

Weighted Average Units Outstanding - Basic and Diluted

 

30,606

 

30,606

 

30,606

 

30,606

Amounts attributable to Granite Falls Energy, LLC:

Net Income (Loss) Per Unit - Basic and Diluted

$

265.83

$

(388.26)

$

159.61

$

(437.30)

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

4


GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Members' Equity

Members' Equity

attributable to

Non-controlling

Total Members'

   

Granite Falls Energy, LLC

   

Interest

   

Equity

Balance - October 31, 2020

$

52,111,525

$

9,780,302

$

61,891,827

Net loss attributable to non-controlling interest

(2,040,525)

(2,040,525)

Net loss attributable to Granite Falls Energy, LLC

(3,250,854)

(3,250,854)

Balance - January 31, 2021

$

48,860,671

$

7,739,777

$

56,600,448

Net income attributable to non-controlling interest

1,323,603

1,323,603

Net income attributable to Granite Falls Energy, LLC

8,135,984

8,135,984

Balance - April 30, 2021

$

56,996,655

$

9,063,380

$

66,060,035

Balance - October 31, 2019

$

65,468,635

$

19,215,914

$

84,684,549

Acquisition of non-controlling interest

(78,817)

(2,146,183)

(2,225,000)

Net loss attributable to non-controlling interest

(1,185,371)

(1,185,371)

Net loss attributable to Granite Falls Energy, LLC

(1,500,699)

(1,500,699)

Balance - January 31, 2020

$

63,889,119

$

15,884,360

$

79,773,479

Net loss attributable to non-controlling interest

(3,160,225)

(3,160,225)

Net loss attributable to Granite Falls Energy, LLC

(11,883,187)

(11,883,187)

Balance - April 30, 2020

$

52,005,932

$

12,724,135

$

64,730,067

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

5


GRANITE FALLS ENERGY, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

    

Six Months Ended April 30,

2021

2020

(Unaudited)

(Unaudited)

Cash Flows from Operating Activities

Net income (loss)

$

4,168,208

$

(17,729,482)

Adjustments to reconcile net income (loss) to net cash used in operations:

Depreciation and amortization

 

3,840,675

 

4,690,652

Paycheck Protection Program loan forgiveness income

(1,299,593)

Change in fair value of  derivative instruments

 

6,794,000

 

1,140,186

Loss (gain) on equity method investments

(1,192,908)

591,489

Return on investment

282,902

Loss on disposal of assets

21,728

Changes in operating assets and liabilities:

Commodity derivative instruments

 

(6,521,278)

 

(434,707)

Accounts receivable

 

(2,629,293)

 

7,268,102

Inventory

 

(2,862,687)

 

267,663

Prepaid expenses and other current assets

 

(790,003)

 

(558,117)

Accounts payable

 

(3,356,661)

 

(9,390,656)

Accrued expenses

 

422,750

 

1,688,599

Accrued railcar rehabilitation costs

22,962

22,962

Net Cash Used In Operating Activities

 

(3,099,198)

 

(12,443,309)

Cash Flows from Investing Activities

Payments for capital expenditures

(3,885,969)

(613,867)

Net Cash Used in Investing Activities

 

(3,885,969)

 

(613,867)

Cash Flows from Financing Activities

Checks drawn in excess of bank balance

347,890

807,756

Proceeds from Paycheck Protection Program loans

1,299,593

1,299,593

Proceeds from long-term debt

8,752,196

17,786,740

Payments on long-term debt

(7,355,372)

(12,191,374)

Acquisition of non-controlling interest

(2,000,000)

Net Cash Provided by Financing Activities

 

3,044,307

 

5,702,715

Net Decrease in Cash and Restricted Cash

 

(3,940,860)

 

(7,354,461)

Cash and Restricted Cash - Beginning of Period

 

13,580,121

 

13,574,290

Cash and Restricted Cash - End of Period

$

9,639,261

$

6,219,829

Reconciliation of Cash and Restricted Cash

Cash - Balance Sheet

$

6,133,993

$

5,868,761

Restricted Cash - Balance Sheet

3,505,268

351,068

Cash and Restricted Cash

$

9,639,261

$

6,219,829

Supplemental Cash Flow Information

Cash paid during the period for:

Interest expense

$

377,867

$

217,112

Supplemental Disclosure of Non-Cash Investing and Financing Activities

Capital expenditures and construction in process included in accounts payable

$

$

13,487

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

6


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

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

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

Basis of Presentation and Principles of Consolidation

The condensed consolidated unaudited financial statements as of April 30, 2021 consolidate the operating results and financial position of GFE, and its approximately 50.7% owned subsidiary, HLBE (through GFE's 100% ownership of Project Viking, LLC). Given the Company’s control over the operations of HLBE and its majority voting interest, the Company consolidates the condensed consolidated unaudited financial statements of HLBE with GFE's condensed consolidated unaudited financial statements. The remaining 49.3% ownership of HLBE is included in the condensed consolidated unaudited financial statements as a non-controlling interest. HLBE, through its wholly owned subsidiary, HLBE Pipeline Company, LLC, owned approximately 73% of Agrinatural through December 11, 2019 when the remaining non-controlling interest was acquired. All significant intercompany balances and transactions are eliminated in consolidation.

The accompanying condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, 2020, 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.

7


Reportable Operating Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Therefore, in applying the criteria set forth in ASC 280, the Company determined that based on the nature of the products and production process and the expected financial results, the Company’s operations at GFE’s ethanol plant and HLBE’s plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

Additionally, the Company also realizes relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE’s owned subsidiary. Before and after accounting for intercompany eliminations, these revenues from Agrinatural represent approximately 1-2% of our consolidated revenues and have little to no impact on the overall performance of the Company. Therefore, the Company does not separately review Agrinatural’s revenues, cost of sales or other operating performance information. Rather, the Company reviews Agrinatural’s natural gas pipeline financial data on a consolidated basis with the Company’s ethanol production operating segment. The Company believes that the presentation of separate operating performance information for Agrinatural’s natural gas pipeline operations would not provide meaningful information to a reader of the Company’s consolidated financial statements and would not achieve the basic principles and objectives of ASC 280.

Accounting Estimates

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

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and other customers as described below. Our performance obligations consist of the delivery of ethanol, distillers' grains, and corn oil to our customers. Our customers primarily consist of two distinct marketing companies as described below. The consideration we receive for these products reflects an amount the Company expects to be entitled to in exchange for these 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.

8


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

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

Inventory

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

Derivative Instruments

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

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

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

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

9


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

Investments

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

2.   RISKS AND UNCERTAINTIES

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

The Company's operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company’s largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have further significant adverse effects 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 2020 and into 2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels, which were compounded by the impact of the novel coronavirus ("COVID-19"). These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. As a result, as of the three months ended January 30, 2021 and the fiscal year ended October 31, 2020, HLBE was not in compliance with its working capital and net worth covenant requirements, for which a waiver was obtained. HLBE was in compliance with its working capital and net worth covenant requirements as of April 30, 2021 and expects future compliance during the next twelve months. GFE was in compliance with its working capital covenant requirement as of April 30, 2021.

We expect to have sufficient cash on hand and availability on our credit facilities and other loans to fund our operations and commitments for at least the next twelve months from the issuance date of these unaudited consolidated financial statements.  However, should unfavorable operating conditions continue in the ethanol industry that prevent us from profitably operating our plant, we may need to seek additional debt or equity funding or further idle ethanol production altogether.

The Company is working toward a merger with HLBE, the Company’s majority owned subsidiary. Pursuant to a Merger Agreement, the Company would acquire the minority ownership interest of HLBE for $14 million, or approximately $0.36405 per unit, and the Company would become the sole owner of HLBE. Management believes the merger would provide HLBE with additional financial resources to assist HLBE’s continued operations and would thereby protect the Company’s investment in HLBE. The Merger is subject to approval by the minority interest unitholders of HLBE. A special meeting of the members of HLBE is expected to be held in summer 2021 to vote on the proposed merger. If approved by the minority unitholders, the merger is expected to close following the special meeting.

10


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, 2021 and 2020:

Three Months Ended April 30, 2021
(unaudited)

Total

Ethanol

$

57,776,747

Distillers’ Grains

11,958,890

Corn Oil

3,677,204

Other

303,513

Natural Gas Pipeline

324,007

Total Revenues

$

74,040,361

Three Months Ended April 30, 2020
(unaudited)

Total

Ethanol

$

23,753,704

Distillers’ Grains

7,389,829

Corn Oil

1,534,832

Other

191,806

Natural Gas Pipeline

236,751

Total Revenues

$

33,106,922

Six Months Ended April 30, 2021

(unaudited)

Total

Ethanol

$

93,915,238

Distillers’ Grains

21,735,980

Corn Oil

6,527,403

Other

529,259

Natural Gas Pipeline

730,867

Total Revenues

$

123,438,747

Six Months Ended April 30, 2020

(unaudited)

Total

Ethanol

$

64,605,693

Distillers’ Grains

17,021,121

Corn Oil

3,422,683

Other

487,723

Natural Gas Pipeline

926,028

Total Revenues

$

86,463,248

Payment Terms

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

11


Shipping and Handling Costs

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

4.   INVENTORY

Inventories consist of the following:

April 30, 2021

October 31, 2020

(unaudited)

    

Raw materials

$

4,128,930

$

4,893,502

Supplies

 

3,450,512

 

3,070,458

Work in process

 

1,966,128

 

1,480,871

Finished goods

 

7,108,922

 

4,346,974

Totals

$

16,654,492

$

13,791,805

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the net realizable values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, as a component of cost of goods sold, the Company recorded a loss on ethanol inventories of approximately $0 and $949,000 for the three months ended April 30, 2021 and 2020, respectively, and approximately $0 and $2,151,000 for the six months ended April 30, 2021 and 2020, respectively. Based on the lower of cost or net realizable value analysis, as a component of cost of goods sold, the Company recorded a loss on corn inventories of approximately $0 and $1,087,000 for the three months ended April 30, 2021 and 2020, respectively, and approximately $0 and $1,213,000 for the six months ended April 30, 2021 and 2020, respectively.

5.   DERIVATIVE INSTRUMENTS

As of April 30, 2021, the total notional amount of GFE’s outstanding corn derivative instruments was approximately 2,710,000 bushels, comprised of long corn futures positions on 180,000 bushels that were entered into to hedge forecasted ethanol sales through July 2021, and short corn futures positions on 2,530,000 bushels that were entered into to hedge forecasted corn purchases through December 2022. Additionally, there are corn options positions of 6,920,000 bushels through September 2021. 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, 2021, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately 2,100,000 bushels, comprised of long corn futures positions on 800,000 bushels that were entered into to hedge forecasted ethanol sales through July 2021, and short corn futures positions on 1,300,000 bushels that were entered into to hedge forecasted corn purchases through July 2022. Additionally, there are corn options positions of 5,120,000 bushels through September 2021. 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, 2021, GFE had approximately $2,858,000 of cash collateral (restricted cash) related to derivatives held by a broker.

As of April 30, 2021, HLBE had approximately $647,000 of cash collateral (restricted cash) related to derivatives held by a broker.

12


The following tables provide details regarding the Company's derivative instruments at April 30, 2021, none of which were designated as hedging instruments:

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts - GFE

Commodity derivative instruments

1,358,388

Corn contracts - HLBE

Commodity derivative instruments

325,238

Totals

$

325,238

$

1,358,388

As of October 31, 2020, the total notional amount of GFE’s outstanding corn derivative instruments was approximately 4,275,000 bushels, comprised of long corn futures positions on 760,000 bushels that were entered into to hedge forecasted ethanol sales through March 2021, and short corn futures positions on 3,515,000 bushels that were entered into to hedge forecasted corn purchases through December 2022 and are directly related to corn forward contracts. Additionally, there are corn options positions of 1,920,000 bushels through March 2021. 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, 2020, GFE had approximately $1,643,000 of cash collateral (restricted cash) related to derivatives held by a broker.

As of October 31, 2020, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately 2,095,000 bushels, comprised of long corn futures positions on 325,000 bushels that were entered into to hedge forecasted ethanol sales through March 2021, and short corn futures positions on 1,770,000 bushels that were entered into to hedge forecasted corn purchases through July 2022 and are directly related to corn forward contracts. Additionally, there are corn options positions of 1,380,000 bushels through March 2021. 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, 2020, HLBE had approximately $514,000 in cash collateral (restricted cash) related to derivatives held by a broker.

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

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

$

$

642,550

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

173,928

Ethanol contracts - GFE

Commodity derivative instruments

40,900

Ethanol contracts - HLBE

 

Commodity derivative instruments

 

15,150

 

Totals

$

56,050

$

816,478

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

Consolidated Statement

Three Months Ended April 30, 

Six Months Ended April 30,

    

 of Operations Location

    

2021

    

2020

2021

    

2020

Corn contracts

 

Cost of Goods Sold

$

(1,071,154)

$

(563,645)

$

(6,965,012)

$

(723,863)

Ethanol contracts

Revenues

57,074

(205,930)

171,012

(416,323)

Total loss

$

(1,014,080)

$

(769,575)

$

(6,794,000)

$

(1,140,186)

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6.   FAIR VALUE

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at April 30, 2021:

Fair Value Measurement Using

 

Quoted Prices

Significant Other

Significant

 

Carrying Amount in

in Active Markets

Observable Inputs

Unobservable Inputs

Financial Assets:

   

Consolidated Balance Sheet

   

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

Commodity Derivative instruments - Corn

$

325,238

$

325,238

$

325,238

$

$

Financial Liabilities:

Commodity Derivative instruments - Corn

$

1,358,388

$

1,358,388

$

1,358,388

$

$

Accounts Payable (1)

$

69,506

$

69,506

$

$

69,506

$

The following table provides information on those derivative assets and liabilities measured at fair value on a recurring basis at October 31, 2020:

Fair Value Measurement Using

 

Quoted Prices

Significant Other

Significant

 

Carrying Amount in

in Active Markets

Observable Inputs

Unobservable Inputs

Financial Assets:

   

Consolidated Balance Sheet

   

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

Commodity Derivative Instruments - Ethanol

$

56,050

$

56,050

$

56,050

$

$

Financial Liabilities:

Commodity Derivative Instruments - Corn

$

816,478

$

816,478

$

816,478

$

$

Accounts Payable (1)

$

792,795

$

792,795

$

$

792,795

$


(1)Accounts payable is generally stated at historical amounts with the exception of amounts in this table related to certain delivered inventory for which the payable fluctuates based on the changes in commodity prices. These payables are hybrid financial instruments for which the company has elected the fair value option.

The Company determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value Level 2 accounts payable based on nearby futures values, plus or minus nearby basis.

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7.  DEBT FACILITIES

Debt financing consists of the following:

April 30, 2021

October 31, 2020

 

(unaudited)

GRANITE FALLS ENERGY:

Revolving term loan, see terms below.

$

112,445

$

Term note payable to Project Hawkeye, see terms below.

5,803,571

 

6,339,286

SBA Paycheck Protection Program loan

703,900

703,900

HERON LAKE BIOENERGY:

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

10,005,520

7,891,426

Single advance term note payable to lending institution, see terms below.

2,700,000

3,000,000

Short term revolving note, see notes below

6,000

 

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

 

300,551

 

300,551

SBA Paycheck Protection Program Loan

595,693

595,693

Totals

 

20,227,680

 

18,830,856

Less: amounts due within one year

 

2,094,468

 

12,954,538

Net long-term debt

$

18,133,212

$

5,876,318

Granite Falls Energy

Revolving Term Loan

GFE has a credit facility with a lender in the form of a revolving term loan in the amount of $11,000,000 that will expire on October 20, 2024. The credit facility also requires GFE to comply with certain financial covenants at various times calculated monthly, quarterly or annually, including a restriction of the payment of dividends and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties The credit facility is secured by substantially all assets of GFE. There are no savings account balance collateral requirements as part of this credit facility.  Interest on the revolving term accrues at a variable weekly rate equal to 3.25% above the higher of 0.00% or One Month London Interbank Offered Rate (“LIBOR”) Index Rate, which totaled 3.37% at April 30, 2021.

GFE also agreed to pay an unused commitment fee on the unused available portion of the revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

Project Hawkeye Loan

On August 2, 2017, GFE entered into a replacement credit facility with Project Hawkeye. The terms of the replacement credit facility allow GFE to borrow up to $7.5 million of variable-rate, amortizing non-recourse debt from Project Hawkeye using the GFE’s $7.5 million investment in Ringneck Energy & Feed, LLC (“Ringneck”), as collateral.  The Project Hawkeye loan bears interest from date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of the One Month LIBOR Index Rate plus 3.05% per annum, with an interest rate floor of 3.55%, which equated to 3.55% at April 30, 2021 and October 31, 2020.

The Project Hawkeye loan requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years three through nine based on a seven- year amortization period.  The monthly

15


amortized payments will be re-amortized following any change in interest rate. The entire outstanding principal balance of the loan, plus any accrued and unpaid interest thereon, is due and payable in full on August 2, 2026. GFE is permitted to voluntarily prepay all or any portion of the outstanding balance of this loan at any time without premium or penalty.

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

SBA Paycheck Protection Program Loan

In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 17, 2020, GFE received a loan in the amount of $703,900 through the Paycheck Protection Program. This note was forgiven in full during February 2021.  Forgiveness income is recorded as a component of other income on the statement of operations.

In February 2021, GFE received a second Paycheck Protection Program loan in the amount of $703,900. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, GFE would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in June 2022 with a final installment in February 2026.

Heron Lake BioEnergy

Revolving Term Note

The 2020 Credit Facility includes an amended and restated revolving term loan with a $13 million principal commitment. The loan is secured by substantially all of the Company’s assets, including a subsidiary guarantee. The 2020 Credit Facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. As of the three months ended January 30, 2021 and the fiscal year ended October 31, 2020, HLBE was not in compliance with its working capital and net worth covenant requirements, for which a waiver was obtained. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties. The Company was in compliance with its debt covenants on April 30, 2021.

During February 2021, the 2020 Credit Facility was amended to reduce the working capital covenant to $8 million through May 31, 2021 and increasing to $10 million beginning June 30, 2021. The 2020 Credit Facility was also amended to decrease the net worth requirement from $32 million to $28 million.

As part of the 2020 Credit Facility closing, the Company entered into an amended administrative agency agreement with CoBank, ACP (“CoBank”).  As a result, CoBank will continue act as the agent for the lender with respect to the 2020 Credit Facility. The Company agreed to pay CoBank an annual fee of $2,500 for its services as administrative agent.

Under the terms of the amended revolving term loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of $13,000,000. Final payment of amounts borrowed under the amended revolving term loan is due December 1, 2022. Interest on the amended revolving term loan accrues at a variable weekly

16


rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which totaled 3.47% at April 30, 2021.

The Company also agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

Single Advance Term Note

In June 2020, HLBE entered into a single advance term note with a $3,000,000 principal commitment, with the purpose to finance the construction of a new grain bin and provide principal reduction on the Revolving Term Note. The interest rate is fixed at 3.80%. Principal with interest is to be paid in 10 consecutive, semi-annual installments, with the first installment due on December 20, 2020 and the last installment due on June 20, 2025. The note is secured as provided in the 2020 Credit Facility.

Short Term Revolving Promissory Note

In February 2021, HLBE entered into a revolving promissory note with its lender in order to finance the operating needs of HLBE. The revolving promissory note is subject to the 2020 Credit Facility. Under the terms, HLBE may borrow, repay and reborrow up to the aggregate principal commitment amount of $5,000,000. Final payment of amounts borrowed under the revolving promissory note is June 1, 2021. Interest of the loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate and is payable monthly in arrears. The rate totaled 3.47% at April 30,2021. In addition, HLBE agreed to pay an unused commitment fee on the unused available portion of the loan at the rate of 0.50% per annum payable monthly in arrears.

SBA Paycheck Protection Program Loan

In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 18, 2020, the Company received a loan in the amount of $595,693 through the Paycheck Protection Program. The loan was forgiven in full during March 2021. Forgiveness income is recorded as a component of other income on the statement of operations.

In February 2021, the Company received a second Paycheck Protection Program loan in the amount of $595,693. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in March 2022 with a final installment in February 2026.

Negotiable Promissory Note with GFE

In December 2020, we entered into a negotiable promissory note with GFE with a $5,000,000 principal commitment. Interest on the loan accrues at a variable weekly rate equal to the higher of 1.00% or the One-Month LIBOR Index rate, plus 3.35%, which totaled 3.47% at April 30, 2021. The note was due on demand, and accrued interest must be paid in full the first business day of each month. The note is unsecured and may be prepaid at any time without penalty.  In January 2021, we borrowed the $5,000,000 on the promissory note, which was classified as a current liability. In February 2021, GFE agreed to modify the promissory note to remove the due on demand feature, instead agreeing that GFE will not require any principal repayment on the loan until March 2023.  However, should there be future violations

17


of the Credit Facility loan covenants, those violations would also be considered a default on this promissory note.  This related party promissory note with GFE is eliminated upon consolidation on the condensed consolidated balance sheet.

Estimated annual maturities of debt at April 30, 2021, are as follows based on the most recent debt agreements:

2022

   

$

2,094,468

2023

11,957,789

2024

1,979,723

2025

2,095,265

2026

1,654,007

Thereafter

446,428

Total debt

$

20,227,680

8. LEASES

The Company leases rail cars for its facility to transport ethanol and dried distillers’ grains to its end customers. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the six months ended April 30, 2021, the Company’s weighted average discount rate was 4.87%.  Operating lease expense is recognized on a straight-line basis over the lease term.

The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining terms of approximately one to seven years. For the six months ended April 30, 2021, the weighted average remaining lease term was four years.

The Company elected to use a portfolio approach for lease classification, which allows for an entity to group together leases with similar characteristics provided that its application does not create a material difference when compared to accounting for the leases at a contract level. For railcar leases, the Company elected to combine the railcars within each rider and account for each rider as an individual lease.

The following table summarizes the remaining annual maturities of the Company’s operating lease liabilities as of April 30, 2021:

    

2022

$

4,348,300

2023

 

4,251,000

2024

 

3,759,000

2025

 

3,163,800

2026

2,623,950

Thereafter

 

1,645,600

Totals

19,791,650

Less: Amount representing interest

2,240,224

Lease liabilities

$

17,551,426

For the three and six months ended April 30, 2021, GFE recorded operating lease costs for these leases of approximately $817,000 and $1,651,000, respectively, in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the periods. For the three and six months ended April 30, 2020, GFE recorded operating lease costs for these leases of approximately $638,000 and $1,279,000, respectively, in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the periods.

For the three and six months ended April 30, 2021, HLBE recorded operating lease costs for these leases of approximately $644,000 and $1,255,000, respectively, in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the periods.  For the three and six months ended April 30, 2020, HLBE recorded

18


operating lease costs for these leases of approximately $490,000 and $1,021,000, respectively, in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the periods.

9.   MEMBERS' EQUITY

Granite Falls Energy

GFE has one class of membership units.  The units have no par value and have identical rights, obligations and privileges.  Income and losses are allocated to all members based upon their respective percentage of units held. As of April 30, 2021 and October 31, 2020, GFE had 30,606 membership units authorized, issued, and outstanding.

10.  RELATED PARTY TRANSACTIONS

Corn Purchases - Members

GFE purchased corn from board members of approximately $1,646,000 and $526,000 for the three months ended April 30, 2021 and 2020, respectively, and approximately $2,623,000 and $840,000 for the six months ended April 30, 2021 and 2020, respectively.

HLBE purchased corn from board members of approximately $4,934,000 and $750,000 for the three months ended April 30, 2021 and 2020, respectively, and approximately $8,676,000 and $5,815,000 for the six months ended April 30, 2021 and 2020, respectively.

11.  COMMITMENTS AND CONTINGENCIES

Corn Forward Contracts

At April 30, 2021, GFE had cash and basis contracts for forward corn purchase commitments for approximately 5,186,000 bushels for deliveries through December 2022.  

At April 30, 2021, HLBE had cash and basis contracts for forward corn purchase commitments for approximately 4,689,000 bushels for deliveries through March 2022.

Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts and its inventories using the lower of cost or net realizable value evaluation, similar to the method used on its inventory, and has determined that an impairment of loss of approximately $47,000 existed at October 31, 2020, for the HLBE forward corn purchase commitments. No impairment loss existed for GFE forward corn purchase commitments as of April 30, 2021.  

19


Ethanol Forward Contracts

At April 30, 2021, GFE had fixed and basis contracts to sell approximately $16,935,000 of ethanol for various delivery periods through June 2021, which approximates 76% of its anticipated ethanol sales for this that period.

At April 30, 2021, HLBE had fixed and basis contracts to sell approximately $21,460,000 of ethanol for various delivery periods through June 2021, which approximates 90% of its anticipated ethanol sales for that period.

Distillers' Grain Forward Contracts

At April 30, 2021, GFE had forward contracts to sell approximately $,1,163,000 of distillers’ grains for various delivery periods through May 2021, which approximates 35% of its anticipated distillers’ grain sales for this that period.

At April 30, 2021, HLBE had forward contracts to sell approximately $2,500,000 of distillers’ grain for various delivery periods through September 2021, which approximates16% of its anticipated distillers’ grain sales for that period.

Corn Oil Forward Contracts

At April 30, 2021, GFE had forward contracts to sell approximately $746,000 of corn oil for delivery through May 2021, which approximates 100% of its anticipated corn oil sales for that period.

At April 30, 2021, HLBE had forward contracts to sell approximately $597,000 of corn oil for delivery through May 2021, which approximates 40% of its anticipated corn oil sales for that period.

Rail Car Rehabilitation Costs

GFE leases 75 hopper rail cars under a multi-year agreement which ends in November 2025. Under the agreement, GFE is required to pay to rehabilitate each car for “damage” that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease. GFE believes that it is probable that GFE may be assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars at April 30, 2021 and October 31, 2020 to be approximately $825,000.  GFE accrues the estimated cost of railcar damages over the term of the lease as the cost of damages are incurred.

HLBE leases 50 hopper rail cars under a multi-year agreement which ends in May 2027. Under the agreement, HLBE is required to pay to rehabilitate each car for “damage” that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease.  HLBE believes that it is probable that we may be assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars at April 30, 2021 and October 31, 2020 to be approximately $620,000 and $597,000, respectively.  HLBE accrues the estimated cost of railcar damages over the term of the lease as the cost of damages are incurred. During the three month periods ended April 30, 2021 and 2020, the Company has recorded an expense for the recognition of damages and actual repairs in cost of goods of approximately $43,000 and $12,000, respectively.  During the six month periods ended April 30, 2021 and 2020, the Company has recorded an expense for the recognition of damages and actual repairs in cost of goods of approximately $55,000 and $23,000, respectively.

20


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three and six months ended April 30, 2021 and 2020.  This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in PART I - Item 1 of this report and the information contained in the Company’s quarterly report on Form 10-Q for the three months ended January 31, 2021, and the Company’s annual report on Form 10-K for the fiscal year ended October 31, 2020.

Disclosure Regarding Forward-Looking Statements

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects in this report.  All statements that are not historical or current facts are forward-looking statements. In some cases,  you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions.  

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us are described more particularly in the “Risk Factors” sections of our annual report on Form 10-K for the year ended October 31, 2020, and our quarterly report on Form 10-Q for the three months ended January 31, 2021. These risks and uncertainties include, but are not limited to, the following:

Fluctuations in the price of ethanol as a result of a number of factors, including: the price and availability of competing fuels; the overall supply and demand for ethanol and corn; the price of gasoline, crude oil and corn; and government policies;
Fluctuations in the price of crude oil and gasoline and the impact of lower oil and gasoline prices on ethanol prices and demand;
Fluctuations in the availability and price of corn, resulting from factors such as domestic stocks, demand from corn-consuming industries, such as the ethanol industry, prices for alternative crops, increasing input costs, changes in government policies, shifts in global markets or damaging growing conditions, such as plant disease or adverse weather, including drought;
Fluctuations in the availability and price of natural gas, which may be affected by factors such as weather, drilling economics, overall economic conditions, and government regulations;
Negative operating margins which may result from lower ethanol and/or high corn prices;
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
Overcapacity and oversupply in the ethanol industry;
Ethanol trading at a premium to gasoline at times, which may act as a disincentive for discretionary blending of ethanol beyond Renewable Fuel Standard (“RFS”) requirements and consequently negatively impacting ethanol prices and demand;
Changes in federal and/or state laws and environmental regulations including elimination, waiver or reduction of corn-based ethanol volume obligations under the RFS and legislative acts taken by state governments such as California related to low-carbon fuels, may have an adverse effect on our business;
Any impairment of the transportation, storage and blending infrastructure that prevents ethanol from reaching markets;
Any effect on prices and demand for our products resulting from actions in international markets, particularly imposition of tariffs;
Changes in our business strategy, capital improvements or development plans;
Effect of our risk mitigation strategies and hedging activities on our financial performance and cash flows;
Competition from alternative fuels and alternative fuel additives;
Changes or advances in plant production capacity or technical difficulties in operating the plant;

21


Our reliance on key management personnel;
A slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from COVID-19:
The election of President Joe Biden and the transition to a new presidential administration may result in new or different regulations and policies that may adversely affect our business; and
Our CEO and General Manager retired effective May 26, 2021, and as a result our Company may face challenges that arise from a transition in leadership, which may adversely affect our business.

We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

Available Information

Our website address is www.granitefallsenergy.com.  Our annual report on Form 10-K, periodic reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC Compliance,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this report on Form 10-Q.

Industry and Market Data

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the United States (“U.S.”) ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent sources.  Although we believe our third-party sources are reliable, we have not independently verified the information.

Overview

Granite Falls Energy, LLC (“Granite Falls Energy” or “GFE”) is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant in Granite Falls, Minnesota.  Additionally, through Project Viking, L.L.C., a wholly owned subsidiary (“Project Viking”), GFE owns an approximately 50.7% controlling interest of Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or “HLBE”).  HLBE is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota.  Additionally, through its wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), HLBE is the sole owner of Agrinatural Gas, LLC (“Agrinatural”), which operates a natural gas pipeline.

Our CEO is Jeffrey Oestmann. We hired Oestmann effective May 26, 2021, pursuant to a letter of employment dated May 20, 2021 (the “Employment Agreement”). Oestmann replaced Steve Christensen, who had served as CEO of the Company since 2014 and who resigned pursuant to a separation agreement between Christensen and the Company (the “Separation Agreement”). Oestmann also serves as the CEO of HLBE pursuant to a management services agreement between the Company and HLBE (the “Management Services Agreement”). The Employment Agreement is available on the Company’s Form 8-K filed with the SEC May 25, 2021 and is hereby incorporated by reference. The Management Services Agreement and Separation Agreement are available on the Company’s Form 8-K filed with the SEC February 22, 2021 and are hereby incorporated by reference.

Ethanol Production

Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S.  Our production operations are carried out at GFE’s ethanol plant located in Granite Falls, Minnesota and at HLBE’s ethanol plant near Heron Lake, Minnesota.    

22


GFE’s ethanol plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but has obtained EPA pathway approval and permits from the Minnesota Pollution Control Authority (“MPCA”) to increase its production capacity to approximately 70 million gallons of undenatured ethanol on a twelve-month rolling sum basis. HLBE’s plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but has obtained EPA pathway approval and permits from the MPCA to increase its production capacity to approximately 72 million gallons of undenatured ethanol on a twelve month rolling sum basis.  We intend to continue working toward increasing production at plants to take advantage of the additional production allowed pursuant to their respective permits so long as we believe it is profitable to do so.

We market and sell the products produced at our plants primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, Inc. to market all of the ethanol produced at our ethanol plants.  GFE also independently markets a small portion of the ethanol production at its plant as E-85 to local retailers.  

We do not have any long-term, fixed price exclusive supply contracts for the purchase of corn for either the GFE or HLBE plants. Both GFE and HLBE purchase the corn necessary for operating directly from grain elevators, farmers, and local dealers within approximately 80 miles of their respective plants. Neither GFE’s nor HLBE’s members are obligated to deliver corn to our plants.

Plan of Operations for the Next Twelve Months

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2020 and in early 2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels, exacerbated by the COVID-19 pandemic. These factors resulted in prolonged negative operating margins, lower cash flow from operations and substantial net losses. Demand for ethanol and ethanol prices have largely rebounded from the onset of the COVID-19 pandemic, and we expect to have sufficient cash generated by continuing operations, availability on our credit facility, and additional debt with the Company’s current lenders to fund our operations.  However, should unfavorable operating conditions occur that prevent us from profitably operating our plant, we may need to seek additional funding or further idle ethanol production altogether.

Over the next twelve months, we will continue our focus on operational improvements at our plants. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plants to take full advantage of our permitted production capacities, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies. Additionally, we expect to continue to conduct routine maintenance and repair activities at our ethanol plants to maintain current plant infrastructure, as well as small capital projects to improve operating efficiency. We anticipate using cash from our revolving term loans to finance these plant upgrade projects.

Proposed Merger with Heron Lake BioEnergy, LLC

During the three months ended April 30, 2021, the Company developed plans to engage in a merger with HLBE. Specifically, on March 24, 2021, the Company and HLBE, executed a Merger Agreement (the “Merger Agreement”), pursuant to which the Company will acquire the minority-owned interest of HLBE (the “Merger”). The structure of the proposed transaction is a merger in which Granite Heron Merger Sub, LLC, (“Merger Sub”) a wholly owned subsidiary of the Company, will merge with and into HLBE, with HLBE surviving the transaction as a wholly owned subsidiary of the Company.

The Company currently owns approximately 50.7% of HLBE’s units. Pursuant to the Merger Agreement, the Company will acquire the remainder of HLBE’s issued and outstanding units (the “Minority Ownership Interest”). The purchase price for the entire Minority Ownership Interest is approximately $14,000,000 in cash payable at the closing of the Merger. Each issued and outstanding unit of the Minority Ownership Interest will be canceled and converted into the right to receive $0.36405 per Unit. (the “Merger Consideration”). Upon the completion of the merger, Minority Ownership Interest unitholders will no longer own any units of HLBE and will no longer have any rights as a member or owner of HLBE.

23


The units of HLBE held by the Company immediately prior closing of Merger shall be cancelled with no consideration issued to the Company. The Company will emerge from the transaction as the sole owner of HLBE.

At the time the Merger becomes effective, 100 percent of the membership interest in the Merger Sub shall be converted into and become 100 percent of the membership interests in HLBE, as the surviving company in the Merger.

The Merger is subject to approval by the Minority Ownership Interest. A Special Meeting of the members of HLBE is expected to be held in summer 2021 to vote on the proposed Merger. If approved by the Minority Ownership Interest, the Merger is expected to close following the special meeting.

Upon closing of the Merger, HLBE will file a Certification and Notice of Termination of Registration with the SEC, which will allow HLBE to operate without being registered with the SEC. Upon termination of HLBE’s SEC registration, we expect HLBE will no longer be required to file quarterly and annual reports with the SEC. The Company, which will be HLBE’s sole owner upon closing of the Merger, will continue to be registered with the SEC and will continue to file required SEC reports after completion of the Merger.

A complete description of the Merger and the Merger Agreement is available in HLBE’s preliminary proxy statement filed with the SEC on May 21, 2021, and is hereby incorporated by reference. Copies of the Merger Agreement, a Plan of Merger and associated voting agreements were published with our Form 8-K filed with SEC on March 25, 2021 and are herein incorporated by reference.

Effect if the Merger is Not Completed  

If the Merger is not completed, HLBE’s unitholders will not receive the Merger Consideration or any other payment for their units of the Company. Instead, HLBE will remain a majority-owned subsidiary of the Company.

Further, HLBE has experienced significant net losses due to several factors, including elevated corn prices, the breakdown of our ethanol plant’s boiler, and reduced demand for ethanol due to several factors, including the COVID-19 pandemic.  As a result, HLBE has experienced instances of noncompliance with certain loan covenants related to HLBE’s working capital and net worth ratio, for which HLBE has obtained waivers from its lender.  Although HLBE was in compliance with its financial covenants as of April 30, 2021, the impact of the COVID19 pandemic could have an adverse impact on HLBE’s operating results, which could result in HLBE’s inability to comply with certain of these financial covenants and require HLBE’s lenders to waive compliance with, or agree to amend, any such covenant to avoid a default.

While HLBE believes the replacement of the boiler has improved the operating performance of the HLBE plant, and led to lower operating costs, market conditions have resulted in losses. If the Merger is not completed, HLBE intends to source other capital sources, which may include re-negotiating its debt agreements and terms or seek potential equity solutions. At this time, there are no commitments to do so and HLBE may not be successful in doing so.

Trends and Uncertainties Impacting Our Operations

The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol.  Other factors that may affect our future results of operation include those risks discussed below and in “PART II - Item 1A. Risk Factors” of this report, “PART II - Item 1A. Risk Factors” of our quarterly report on Form 10-Q for the three months ended January 31, 2021, and “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, 2020.

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons.

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Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production.

Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our plants may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our plants to minimize our variable costs and optimize cash flow.

Management believes that the ethanol outlook in the fiscal year 2021 will remain relatively consistent with this quarter. The widespread distribution of COVID-19 vaccines and the loosening of restrictions related to the pandemic have improved the overall economic outlook and the demand for fuel, including the ethanol we produce. However, lingering effects of the COVID-19 pandemic and other factors could continue to negatively affect our profitability.  Additionally, continued large corn supplies and increases in ethanol production capacity could negatively affect our profitability. This negative impact could worsen if domestic ethanol inventories increase, or if U.S. exports of ethanol decline.

Ethanol production largely rebounded and remained steady in late 2020 after briefly and significantly declining during the second fiscal quarter of 2020 at the onset of the COVID-19 pandemic. In the three months ended April 30, 2021, ethanol production briefly and significantly declined again due to severe weather incidents. Unusually cold weather affecting much of the United States in February 2021 disrupted the supply of natural gas and as a result natural gas spot prices approached record-high levels. Many ethanol production facilities, including our plants, rely on natural gas to process corn into ethanol. In February 2021, estimated fuel ethanol margins fell to negative levels due in part to the elevated natural gas prices and as a result many fuel ethanol producers reduced production rates. U.S. weekly fuel ethanol production fell to an average of 658,000 barrels per day (b/d) during the week of February 21, 2021, which was the lowest weekly production level since May 11, 2020, and 38% lower than at the same time last year, according to the U.S. Energy Information Administration (“EIA”). Production rates have since returned to average levels, but fuel ethanol inventories remain lower than their typical seasonal averages heading into the summer driving season. While the reduction in ethanol inventory may result in higher prices for ethanol and higher operating margins for the Company, management expects ethanol production and inventories to rebound industrywide and margins for our Company to remain tight.

Additionally, decreasing exports could reduce demand for biofuel including the ethanol we produce. Annual U.S. fuel ethanol exports decreased by 9% in 2020, marking the second consecutive annual drop in U.S. fuel ethanol exports and the lowest level for such exports since 2015, according to the EIA. Exports of U.S. fuel ethanol to Brazil, the world’s second largest consumer of fuel ethanol, decreased significantly in 2020. All U.S. fuel ethanol exports to Brazil now face a 20% Brazilian tariff since a tariff-free fuel ethanol quota expired in December 2020. The new tariff will likely lower U.S. fuel ethanol export volumes to Brazil in the near term, according to the EIA. As a result, demand for biofuel, including our ethanol, could decrease.

Further, management believes that the continued issuance of waivers of small refiner renewable volume obligations (“RVOs”) by the U.S. Environmental Protection Agency (“EPA”), as well as uncertainty regarding the RFS reset, could contribute to the projected negative or low margins.

Changes in the price for crude oil and unleaded gasoline could have a negative impact on the demand for gasoline and impact the market price of ethanol, which could adversely impact our profitability. According to the EIA May 2021 Short Term Energy Outlook, EIA estimates that U.S. gasoline consumption will average 9.0 million barrels per day this summer (April through September), up from 7.8 million barrels per day during the summer of 2021 but down from 0.6 million barrels per day from summer 2019. In addition, EIA forecasts relatively stable prices for crude oil, projecting Brent crude oil prices to average $65 per barrel in the second quarter of 2021, $61 per barrel for the remainder of the year, and $61 per barrel in 2022. Decreases in the price for crude oil generally have a negative impact on the demand for ethanol.

Continued ethanol production capacity increases could also have a negative impact on the market price of ethanol, which could be further exacerbated if domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline. Throughout 2020, some U.S. ethanol plants temporarily suspended production due to negative margins, largely resulting from the COVID-19 pandemic, and stagnant export projections caused by trade barriers and decreased global demand in connection with the COVID-19 pandemic.

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Given the inherent volatility in ethanol, distillers’ grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers’ grains, non-food grade corn oil, and grain prices in future periods will be consistent compared to historical periods.

Impact of COVID-19 on the Company

Operations

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout 2020 and into 2021, as the COVID-19 pandemic significantly reduced travel and demand for fuel, including the ethanol we produce. Reduced demand and high industry inventory levels resulted in record low ethanol prices in the second and third fiscal quarters of 2020. As a result, we experienced negative operating margins, significantly lower cash flow from operations and substantial net losses. In response to these adverse market conditions, HLBE idled its ethanol production from on or about March 30, 2020 through approximately May 31, 2020 and GFE temporarily idled its operations from on or about April 3, 2020 through approximately May 18, 2020. Fuel prices generally, and ethanol prices specifically, have rebounded since the spring of 2020 and remained largely steady during the three months ended April 30, 2021, and management believes there is potential for fuel demand to increase as COVID-19 related restrictions are lifted and travel increases.  However, it is possible that unforeseen consequences of the pandemic will cause fuel demand and ethanol prices to remain flat or decrease, thus negatively affecting our business. The Company continues to monitor COVID-19 developments to determine if adjustments to production are warranted.

Employees

The Company has enacted appropriate safety measures to protect the health and safety of our employees, customers, partners and suppliers, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

Management believes that various factors, including unemployment benefits offered in response to the COVID-19 pandemic, have contributed to a labor shortage. While we currently have sufficient employees to operate our production facility, it is possible that a shortage of qualified, available workers could result in higher labor costs and could negatively affect our ability to efficiently operate our production facility.

Supply and Demand

Although we continue to regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to produce our products, adversely affecting our operations. Various factors, including disruptions caused by the COVID-19 pandemic, have resulted in significant increases in the costs of raw materials, including the corn we rely on to produce ethanol. Additionally, restrictions or disruptions of transportation, such as reduced availability of truck, rail or air transport, port closures and increased border controls or closures, may result in higher costs and delays, both with respect to obtaining raw materials and shipping finished products to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers. Additionally, the COVID-19 pandemic has significantly increased economic and demand uncertainty. The pandemic has caused a global economic slowdown, and it is possible that it could cause a global recession. In the event of a recession, demand for our products would decline further and our business would be further adversely affected.

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PPP Loans

On April 17, 2020, the Company received a loan in the amount of $703,900 through the Paycheck Protection Program, which was forgiven in full during February 2021. Additionally, on April 18, 2020 HLBE received a loan in the amount of $595,693 through the Paycheck Protection Program, which was forgiven in full during March 2021.

The Company received a second Paycheck Protection Program loan in February 2021 the amount of $703,900. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in June 2022 with a final installment in February 2026.

HLBE received a second Paycheck Protection Program loan in February 2021 in the amount of $595,693. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, HLBE would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in March 2022 with a final installment in February 2026.

Outlook

The adverse conditions created by the COVID-19 pandemic caused the Company to experience negative operating margins, significantly lower cash flow from operations and substantial net losses. Although there is uncertainty related to the ongoing impact of the COVID-19 pandemic on our future results, we believe our current cash reserves, cash generated from our operations, our Paycheck Protection Program loans and the available cash under our revolving loans leave us well-positioned to manage our business.

While the lifting of restrictions related to the COVID-19 pandemic have improved the overall economic outlook, the pandemic is ongoing, and its dynamic nature makes it difficult to forecast the long-term effects on our industry as a whole and our Company specifically. New variants of the virus that causes COVID-19 may prolong the pandemic, create additional waves of infections, or impose other unforeseen challenges. It is possible that even after the pandemic has subsided, there will be permanent changes to social and economic patterns, such as an increase remote working, that will limit travel and thereby suppress demand for fuel, including the ethanol we produce.

Despite the economic uncertainty resulting from the COVID-19 pandemic, we intend to continue to focus on strategic initiatives designed to improve on our operational efficiencies, which is critical in order to drive positive results in a low-margin environment.

Government Supports and Regulation

The Renewable Fuels Standard

The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the federal RFS.  The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage. Opponents of the RFS have sought to restrict or eliminate the standard through various litigation and legislative actions. Any adverse ruling on, or legislation affecting, the RFS could have an adverse impact on ethanol prices and our financial performance in the future.

The Biden administration has indicated support for RFS blending rules and energy policies that could be beneficial to the ethanol industry and our business. Specifically, the EPA under the Biden administration has announced it supports the interpretation of the RFS’s small-refinery provisions made by U.S. Court of Appeals for the Tenth Circuit in a 2020 decision. In the case, Renewable Fuels Association et al. v. EPA, various agriculture and biofuel groups challenged the EPA’s grant of waivers to three specific refineries. The waived gallons were not redistributed to obligated parties, and thus reduced the aggregate RVOs under the RFS.  In January 2020, the court struck down the exemptions as improperly issued by the EPA. The court interpreted the RFS statute to require that any exemption granted to a small refinery after 2010 must take the form of an “extension.” In February 2021, the EPA announced it supported the 10th Circuit’s interpretation of the RFS, reversing the position the EPA took under the previous administration. Nonetheless, it is uncertain whether the 10th Circuit’s interpretation will be upheld or whether the Biden administration will continue to

27


support energy policies that benefit the ethanol industry and our business. The case was appealed to the U.S. Supreme Court, which heard arguments in the case in April 2021. The Supreme Court’s decision in the case is expected in the summer of 2021.

Additional legal actions related to the RFS are underway. These include lawsuits challenging fuel volume waivers based on “inadequate domestic supply,” challenging the EPA’s lower threshold for granting small refinery exemptions, seeking broader, forward-looking remedy to account for the collective lost volumes caused by recent small refinery exemptions, alleging that the EPA and U.S. Department of Energy have improperly denied access to public records request by RFA, and challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. If these legal actions, which general seek to require the EPA to enforce the renewable fuel blending requirements of the RFS, are unsuccessful, there may negative impacts on the ethanol industry and our financial performance.

The prices of renewable identification number (“RIN”) credits—the compliance mechanisms for the RFS program administered by the EPA—increased during the three months ended April 30, 2021, briefly approaching their highest nominal levels in the history of the program. The corn ethanol (D6) RIN price reached more than $1.00 per gallon in late January and early February 2021, the highest price since 2013, when the D6 RIN price reached an all-time high. The price of RIN credits reflect compliance and trading activity related to the RFS and can either be used to comply with the RFS or traded in the secondary market to buyers seeking to comply with the RFS. Increases in RIN prices can encourage increased biofuel consumption, according to the EIA.

COVID-19 Legislation

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020 in an attempt to offset some of the economic damage arising from the COVID-19 pandemic. The CARES Act created and funded multiple programs that have impacted or could impact our industry. The USDA was given additional resources for the Commodity Credit Corporation (CCC), which it is using to provide direct payments to farmers, including corn farmers from whom we purchase most of our feedstock for ethanol production. Similar to the trade aid payments made by the USDA over the past two years, this cash injection for farmers could cause them to delay marketing decisions and increase the price we have to pay to purchase the corn.

The CARES Act also provided for the Small Business Administration to assist companies that constitute small business and keep them from laying off workers. The Paycheck Protection Program (the “PPP”) was created and quickly paid out all of the funds appropriated, including some to farmers and to ethanol plants. Although we received our first PPP Loan under the CARES Act, as discussed above, the receipt of PPP funds by farmers could, like the CCC funds, incentivize them to delay marketing corn which could increase the price of corn.

On December 27, 2020, the federal government enacted Consolidated Appropriations Act, 2021, a second COVID-19 relief package. Among other things, the legislation authorized additional PPP loans.  In February 2021, GFE received a second Paycheck Protection Program loan in the amount of $703,900 and HLBE received a second Paycheck Protection Program loan in the amount of $595,693. Management expects the entirety of both loans will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven.

On March 11, 2021, the federal government enacted the American Rescue Plan Act of 2021, which provided $1.9 trillion in economic stimulus through various programs intended to accelerate the nation’s recovery from the COVID-19 pandemic.  The American Rescue Plan primarily provided additional funding for programs created in previous COVID-19 legislation, such as increased unemployment benefits, direct payments to households, expanded paid sick leave, increased food stamp benefits, rental assistance, and small business grants. Management believes the legislation could contribute to inflation, including increases in the costs of labor and the raw materials we require to produce ethanol, and thus could negatively affect our operating margins.

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Results of Operations for the Three Months Ended April 30, 2021 and 2020

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the three months ended April 30, 2021 and 2020 (amounts in thousands).

Three Months Ended April 30, 

2021

2020

(unaudited)

(unaudited)

Statement of Operations Data

Amount

    

%  

Amount

    

%  

Revenues

$

74,040

 

100.0

%

$

33,107

 

100.0

%

Cost of Goods Sold

 

65,067

87.9

%

 

45,653

 

137.9

%

Gross Profit (Loss)

 

8,973

 

12.1

%

 

(12,546)

 

(37.9)

%

Operating Expenses

 

2,003

 

2.7

%

 

1,910

 

5.8

%

Operating Income (Loss)

 

6,970

 

9.4

%

 

(14,456)

 

(43.7)

%

Other Income (Expense), net

 

2,489

 

3.4

%

 

(587)

 

(1.7)

%

Net Income (Loss)

 

9,459

 

12.8

%

 

(15,043)

 

(45.4)

%

Less: Net (Income) Loss Attributable to Non-controlling Interest

 

1,324

 

1.8

%

 

3,160

 

9.5

%

Net Income (Loss) Attributable to Granite Falls Energy, LLC

$

8,135

 

11.0

%

$

(11,883)

 

(35.9)

%

Revenues

Our consolidated revenue is derived principally from sales of our three primary products: ethanol, distillers’ grains and corn oil. Revenues from these products represented approximately 99.2% and 98.7% of our total revenues for the three months ended April 30, 2021 and 2020, respectively. The remaining approximately 0.8% and 1.3% is attributable to miscellaneous other revenue for the three months ended April 30, 2021 and 2020, respectively, and is made up of incidental sales of corn syrup at HLBE’s plant and revenues from natural gas pipeline operations at Agrinatural, net of intercompany eliminations for distribution fees paid by HLBE to Agrinatural for natural gas transportation services.

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our condensed consolidated unaudited statements of operations for the three months ended April 30, 2021:

    

Three Months Ended April 30, 2021

    

Sales Revenue

    

% of Total Revenues

Revenue Sources

(in thousands)

Ethanol sales

$

57,777

78.0

%

Distillers' grains sales

 

11,959

16.2

%

Corn oil sales

 

3,677

5.0

%

Miscellaneous other

627

0.8

%

Total Revenues

$

74,040

100.0

%

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our condensed consolidated unaudited statements of operations for the three months ended April 30, 2020:

    

Three Months Ended April 30, 2020

    

Sales Revenue

    

% of Total Revenues

Revenue Sources

(in thousands)

Ethanol sales

$

23,754

71.8

%

Distillers' grains sales

 

7,390

22.3

%

Corn oil sales

 

1,535

4.6

%

Miscellaneous other

428

1.3

%

Total Revenues

$

33,107

100.0

%

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Our total consolidated revenues increased by approximately 123.6% for the three months ended April 30, 2021, as compared to the three months ended April 30, 2020.  This increase in revenue was due to increases in both the quantities sold and the average price received for our three primary products. In the three months ended April 30, 2021, the quantities of ethanol, distillers grains, and corn oil we sold increased approximately 46.9%, 33.7%, and 36.6% respectively, and the average net price we received for ethanol, distillers grains, and corn oil increased approximately 65.6%, 21.1%, and 75.4% respectively, compared to the three months ended April 30, 2020. The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended April 30, 2021 and 2020:

Three Months Ended April 30, 2021

Three Months Ended April 30, 2020

Quantity Sold

Avg. Net Price

Quantity Sold

Avg. Net Price

Product

(in thousands)

(in thousands)

Ethanol (gallons)

34,034

$

1.70

23,175

$

1.02

Distillers' grains (tons)

69

$

172.84

52

$

142.76

Corn oil (pounds)

8,147

$

0.45

5,966

$

0.26

Ethanol

Total revenues from sales of ethanol increased by approximately 143.2% for the three months ended April 30, 2021 compared to the same period a year earlier due to an approximately 46.9% increase in the number of gallons of ethanol sold and an approximately 65.6% increase in the price received for ethanol. The increase in volume sold was attributable to increased production at both plants during the three months ended April 30, 2021, compared to the same period in 2020, when both plants were idled for periods due to the COVID-19 pandemic. The increase in the price of ethanol was due primarily to the rebound in the overall economy and the demand for fuel as COVID-19-related restrictions have eased.

Our ethanol derivative instruments resulted in a gain of approximately $57,000 during the three months ended April 30, 2021.  Comparatively, our derivative positions resulted in a loss of approximately $206,000 during the three months ended April 30, 2020. Based on the lower of cost or net realizable value analysis, as a component of cost of goods sold, the Company recorded a loss on ethanol inventories of approximately $0 and $949,000 for the three months ended April 30, 2021 and 2020, respectively.

At April 30, 2021, GFE had fixed and basis contracts to sell approximately $16.9 million of ethanol for various delivery periods through June 2021, which approximates 76% of its anticipated ethanol sales for this that period.  At April 30, 2021, HLBE had fixed and basis contracts to sell approximately $21.5 million of ethanol for various delivery periods through June 2021, which approximates 90% of its anticipated ethanol sales for that period.

Distillers' Grains

Total revenues from sales of distillers’ grains increased by approximately 61.8% for the three months ended April 30, 2021, compared to the same period a year earlier, due to an approximately 33.7% increase in the volume of distillers’ grains sold coupled with an approximately 21.1.% increase in the average price received per ton of distillers’ grain sold. The increase in volume of distillers’ grain sold was attributable to increased production.

At April 30, 2021, GFE had forward contracts to sell approximately $1,163,000 of distillers’ grain for deliveries through May 2021, which approximates 35% of its anticipated distillers’ grain sales during that period.  At April 30, 2021, HLBE had forward contracts to sell approximately $2,600,000 of distillers’ grains for delivery through September 2021, which approximates 16% of its anticipated distillers' grains sales during that period.

Corn Oil

Total revenues from sales of corn oil increased by approximately 139.6% for the three months ended April 30, 2021 compared to the same period a year earlier due primarily to an approximately 75.4% increase in the average price per pound we received for our corn oil from period to period coupled with an approximately 36.6% increase in pounds sold from period to period. The increase in pounds of corn oil sold was primarily attributable to an increase in production. The increase in the price received for corn oil was primarily attributable to increased demand for biodiesel.

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Although management believes that corn oil prices will remain relatively steady, prices may decrease if there is an oversupply of corn oil production resulting from increased production rates at ethanol plants or if biodiesel producers begin to utilize lower-priced alternatives such as soybean oil or if the biodiesel blenders’ tax credit is not renewed and biodiesel production declines.

At April 30, 2021, GFE had forward contracts to sell approximately $746,000 of corn oil for delivery through May 2021, which approximates 100% of its anticipated corn oil sales for that period.  At April 30, 2021, HLBE had forward contracts to sell approximately $597,000 of corn oil for delivery through May 2021, which approximates 40% of its anticipated corn oil sales for that period.

Cost of Goods Sold

Our cost of goods sold increased by approximately 42.5% for the three months ended April 30, 2021, as compared to the three months ended April 30, 2020 Our cost of goods sold totaled approximately 87.9% of our revenue for the three months ended April 30, 2021, which was a decrease from 137.9% for the same period a year earlier. Approximately 90% of our total costs of goods sold is attributable to our ethanol production. The cost of goods sold per gallon of ethanol sold for the three months ended April 30, 2021, and 2020 was approximately $1.72 and $1.77 per gallon, respectively.

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended April 30, 2021: