Company Quick10K Filing
Quick10K
Heron Lake Bioenergy
10-Q 2019-07-31 Quarter: 2019-07-31
10-Q 2019-04-30 Quarter: 2019-04-30
10-Q 2019-01-31 Quarter: 2019-01-31
10-K 2018-10-31 Annual: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-K 2017-10-31 Annual: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-K 2016-10-31 Annual: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-K 2015-10-31 Annual: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-K 2014-10-31 Annual: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
10-K 2013-10-31 Annual: 2013-10-31
8-K 2019-10-04 Enter Agreement
8-K 2019-05-07 Other Events
8-K 2019-03-25 Shareholder Vote
8-K 2018-12-19 Earnings, Regulation FD, Exhibits
8-K 2018-07-25 Officers
8-K 2018-04-09 Enter Agreement, Off-BS Arrangement
8-K 2018-03-27 Shareholder Vote
DGL Invesco DB Gold Fund 165
PROM Propel Media 68
LWLG Lightwave Logic 61
PROS ProSight Global 0
FUTL Futureland 0
BCTCV Boston Capital Tax Credit Fund V 0
QBSI Quantum Business Strategies 0
PEPL Panhandle Eastern Pipe Line 0
ALTD Altitude International 0
CFFA CF Finance Acquisition 0
C964 2019-07-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 c964-20190731ex311c2b16a.htm
EX-31.2 c964-20190731ex312d756f0.htm
EX-32.1 c964-20190731ex3211608ae.htm
EX-32.2 c964-20190731ex322343ab9.htm

Heron Lake Bioenergy Earnings 2019-07-31

C964 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 c964-20190731x10q.htm 10-Q hlb_Current_Folio_10Q

 

 

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 July 31, 2019

 

OR

 

 

 

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

 

For the transition period from                    to                  .

 

COMMISSION FILE NUMBER 000-51825

 

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-2002393

(State or other jurisdiction of organization)

 

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

 

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

(Address of principal executive offices)

 

(507) 793-0077

(Issuer’s telephone number)

 

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

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

None

 

NA

 

NA

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  Yes  ☐  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒    Yes  ☐  No

 

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

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☐

 

 

Smaller reporting company ☐

Non-accelerated filer  ☒

 

Emerging growth company ☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  Yes  ☒  No

 

As of September 16, 2019, there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

July 31, 2019

    

October 31, 2018

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

6,043,558

 

$

5,995,982

 

Accounts receivable

 

 

760,772

 

 

3,952,687

 

Inventory

 

 

8,830,230

 

 

6,398,686

 

Commodity derivative instruments

 

 

304,690

 

 

425,638

 

Prepaid expenses and other current assets

 

 

690,882

 

 

392,980

 

Total current assets

 

 

16,630,132

 

 

17,165,973

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

40,375,478

 

 

44,149,925

 

 

 

 

 

 

 

 

 

Other assets

 

 

676,347

 

 

704,958

 

 

 

 

 

 

 

 

 

Total Assets

 

$

57,681,957

 

$

62,020,856

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

319,962

 

$

391,934

 

Accounts payable

 

 

4,172,709

 

 

5,413,915

 

Commodity derivative instruments

 

 

43,750

 

 

25,180

 

Accrued expenses

 

 

511,261

 

 

843,875

 

Total current liabilities

 

 

5,047,682

 

 

6,674,904

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

470,778

 

 

567,267

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units issued and outstanding at both July 31, 2019 and October 31, 2018

 

 

50,242,633

 

 

53,054,846

 

Non-controlling interest

 

 

1,920,864

 

 

1,723,839

 

Total members' equity

 

 

52,163,497

 

 

54,778,685

 

 

 

 

 

 

 

 

 

Total Liabilities and Members' Equity

 

$

57,681,957

 

$

62,020,856

 

 

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

1

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  July 31,

 

Nine Months Ended July 31,

 

 

2019

 

2018

 

2019

 

2018

 

 

    

(unaudited)

    

(unaudited)

    

(unaudited)

    

(unaudited)

 

Revenues

 

$

27,367,787

 

$

26,252,916

 

$

78,560,104

 

$

84,106,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

26,119,684

 

 

25,160,502

 

 

78,765,455

 

 

79,304,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit (Loss)

 

 

1,248,103

 

 

1,092,414

 

 

(205,351)

 

 

4,801,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

(866,410)

 

 

(719,371)

 

 

(2,641,692)

 

 

(2,426,398)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

381,693

 

 

373,043

 

 

(2,847,043)

 

 

2,375,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

19,475

 

 

17,721

 

 

61,875

 

 

48,743

 

Interest expense

 

 

(42,990)

 

 

(53,190)

 

 

(58,320)

 

 

(81,556)

 

Other income, net

 

 

3,407

 

 

360

 

 

228,300

 

 

329,584

 

Total other income (expense), net

 

 

(20,108)

 

 

(35,109)

 

 

231,855

 

 

296,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

361,585

 

 

337,934

 

 

(2,615,188)

 

 

2,671,776

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net Income Attributable to Non-controlling Interest

 

 

(35,006)

 

 

(35,248)

 

 

(197,025)

 

 

(236,075)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC

 

$

326,579

 

$

302,686

 

$

(2,812,213)

 

$

2,435,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

77,932,107

 

 

77,932,107

 

 

77,932,107

 

 

77,932,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.00

 

$

0.00

 

$

(0.04)

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions Per Unit (Class A and B)

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.11

 

 

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

 

2

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Members' equity

    

 

 

    

 

 

 

 

 

 

 

 

attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Heron Lake

 

Non-

 

Total

 

 

 

 

 

 

BioEnergy,

 

controlling 

 

Members'

 

 

Class A Units

 

Class B Units

 

LLC

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—October 31, 2018

 

62,932,107

 

15,000,000

 

$

53,054,846

 

$

1,723,839

 

$

54,778,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

91,406

 

 

91,406

Net loss attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

(2,023,640)

 

 

 —

 

 

(2,023,640)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—January 31, 2019

 

62,932,107

 

15,000,000

 

$

51,031,206

 

$

1,815,245

 

$

52,846,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

70,613

 

 

70,613

Net loss attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

(1,115,152)

 

 

 —

 

 

(1,115,152)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—April 30, 2019

 

62,932,107

 

15,000,000

 

$

49,916,054

 

$

1,885,858

 

$

51,801,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

35,006

 

 

35,006

Net income attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

326,579

 

 

 —

 

 

326,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—July 31, 2019

 

62,932,107

 

15,000,000

 

$

50,242,633

 

$

1,920,864

 

$

52,163,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—October 31, 2017

 

62,932,107

 

15,000,000

 

$

60,767,951

 

$

1,493,062

 

$

62,261,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Member Distributions

 

 —

 

 —

 

 

(8,568,321)

 

 

(81,000)

 

 

(8,649,321)

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

115,714

 

 

115,714

Net income attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

861,997

 

 

 —

 

 

861,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—January 31, 2018

 

62,932,107

 

15,000,000

 

$

53,061,627

 

$

1,527,776

 

$

54,589,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

85,113

 

 

85,113

Net income attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

1,271,018

 

 

 —

 

 

1,271,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—April 30, 2018

 

62,932,107

 

15,000,000

 

$

54,332,645

 

$

1,612,889

 

$

55,945,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

35,248

 

 

35,248

Net income attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

302,686

 

 

 —

 

 

302,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—July 31, 2018

 

62,932,107

 

15,000,000

 

$

54,635,331

 

$

1,648,137

 

$

56,283,468

 

 

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

 

3

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended July 31,

 

 

 

2019

 

 

2018

 

    

 

(unaudited)

    

 

(unaudited)

Cash Flow From Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$

(2,615,188)

 

$

2,671,776

Adjustments to reconcile net income (loss) to net cash provided by operations:

 

 

 

 

 

 

Depreciation and amortization

 

 

3,956,087

 

 

3,731,782

(Gain) loss on sale of asset

 

 

4,864

 

 

(24,815)

Change in fair value of commodity derivative instruments

 

 

(670,652)

 

 

(477,288)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

3,191,915

 

 

2,315,785

Inventory

 

 

(2,431,544)

 

 

548,080

Commodity derivative instruments

 

 

810,170

 

 

339,897

Prepaid expenses and other current assets

 

 

(297,902)

 

 

(186,562)

Accounts payable

 

 

(1,192,638)

 

 

(3,042,596)

Accrued expenses

 

 

(332,614)

 

 

(124,960)

Net cash provided by operating activities

 

 

422,498

 

 

5,751,099

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Capital expenditures

 

 

(206,461)

 

 

(1,282,904)

Proceeds from disposal of asset

 

 

 —

 

 

24,815

Net cash used in investing activities

 

 

(206,461)

 

 

(1,258,089)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Payments on long-term debt

 

 

(168,461)

 

 

(280,082)

Distributions to Heron Lake BioEnergy, LLC members

 

 

 —

 

 

(8,568,321)

Distribution to non-controlling interest

 

 

 —

 

 

(81,000)

Net cash used in financing activities

 

 

(168,461)

 

 

(8,929,403)

 

 

 

 

 

 

 

Net increase (decrease) in cash and restricted cash

 

 

47,576

 

 

(4,436,393)

 

 

 

 

 

 

 

Cash and Restricted Cash—Beginning of period

 

 

5,995,982

 

 

10,065,367

 

 

 

 

 

 

 

Cash and Restricted Cash—End of period

 

$

6,043,558

 

$

5,628,974

 

 

 

 

 

 

 

Reconciliation of Cash and Restricted Cash

 

 

 

 

 

 

Cash - Balance Sheet

 

$

6,043,558

 

$

5,605,354

Restricted Cash - Balance Sheet

 

 

 —

 

 

23,620

Cash and Restricted Cash

 

$

6,043,558

 

$

5,628,974

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest expense

 

$

58,320

 

$

81,556

 

 

 

 

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

 —

 

$

934,496

 

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

 

 

4

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2019

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

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

 

Heron Lake BioEnergy, LLC’s wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), owns 73% of Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural operates a natural gas pipeline that provides natural gas to Heron Lake BioEnergy, LLC 's ethanol production facility and other customers.

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated unaudited financial statements as of July 31, 2019 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively the “Company”).  Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the unaudited financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings (loss) attributed to the remaining 27% non-controlling interest identified separately in the accompanying condensed consolidated balance sheets and statements of operations. All significant intercompany balances and transactions are eliminated in consolidation.

 

The condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations.  These condensed consolidated unaudited financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, 2018, contained in the Company’s annual report on Form 10-K.

 

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

 

Accounting Estimates

 

Management uses estimates and assumptions in preparing these condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters including, among others, the economic lives of property and equipment, the analysis of impairment of long-lived assets, valuation of commodity derivative instruments, inventory, inventory purchase and sales commitments, and evaluation of railcar damages contingency. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.  Actual results could differ from those estimates.

 

5

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2019

 

Non-controlling Interest

 

Amounts recorded as non-controlling interest on the balance sheets relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held.  Pursuant to the firm natural gas transportation agreement, Agrinatural will provide natural gas to the plant with a specified price per MMBTU for a term ending on October 31, 2021, with one automatic renewal option to extend the term for an additional five years. 

 

Revenue Recognition

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value. Cost for all inventories is determined using the first in first out method (FIFO). 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 spare parts. Corn is the primary raw material along with other raw materials. Finished goods consist of ethanol, distillers’ grains, and corn oil.

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2019

 

 

Derivative Instruments

 

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

 

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

 

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

 

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

 

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

 

Recently Adopted Accounting Pronouncements

 

Effective November 1, 2018, the Company adopted the amended guidance ASC Topic 606, Revenue from Contracts with Customers. Refer to Note 1 – Summary of Significant Accounting Policies and Note 3 – Revenue for further details.

 

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-18, Restricted Cash, which amended Statement of Cash Flows (Topic 230) of the Accounting Standards Codification. The new guidance requires an entity to reconcile and explain the period-over-period change in total cash, cash equivalents, restricted cash and restricted cash equivalents within its statement of cash flows. Effective November 1, 2018, the Company adopted the new standard and has applied it retrospectively. Accordingly, the condensed consolidated statements of cash flows for the periods ended July 31, 2019 and 2018 have been adjusted from amounts previously reported.

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, "Disclosure Update and Simplification," amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of members’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of members’ equity presented

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2019

 

in the balance sheet must be provided in a note or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed. Accordingly, the condensed consolidated statements of changes in members’ equity for the periods ended July 31, 2019 and 2018 have been presented.

 

Reportable Operating Segments

 

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

 

·

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

 

·

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

 

2.RISKS AND UNCERTAINTIES

 

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers’ grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 70% to 90% of total revenues and corn costs average 70% to 90% of cost of goods sold.

 

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

 

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2018 and into 2019 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. Margins improved for the third fiscal quarter of 2019.  The Company believes its cash on hand and available debt from its lender will provide sufficient liquidity to meets its anticipated working capital, debt service and other liquidity needs through the next twelve months.

 

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2019

 

3.REVENUE

 

Adoption of ASC Topic 606

 

On November 1, 2018, the Company adopted the amended guidance in ASC Topic 606, Revenue from Contracts with Customers, and all related amendments (“new revenue standard”) and applied it to all contracts using the modified retrospective transition method. The adoption of the new revenue standard did not result in any changes to the timing or amount of revenue recognized prior to November 1, 2018, but did result in expanded disclosures to our consolidated financial statements.

 

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 periods ended July 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended July 31, 2019

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

21,645,992

 

$

 

$

21,645,992

Distillers’ Grains

 

4,371,122

 

 

 

 

4,371,122

Corn Oil

 

930,041

 

 

 

 

930,041

Other

 

320,001

 

 

 

 

320,001

Natural Gas

 

 

 

100,631

 

 

100,631

Total Revenues

$

27,267,156

 

$

100,631

 

$

27,367,787

 

 

 

 

 

 

 

 

 

 

Nine Months Ended July 31, 2019

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

60,083,968

 

$

 

$

60,083,968

Distillers’ Grains

 

13,939,013

 

 

 

 

13,939,013

Corn Oil

 

2,619,651

 

 

 

 

2,619,651

Other

 

844,568

 

 

 

 

844,568

Natural Gas

 

 

 

1,072,904

 

 

1,072,904

Total Revenues

$

77,487,200

 

$

1,072,904

 

$

78,560,104

 

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.

 

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.

 

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2019

 

4.INVENTORY

 

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

July 31, 2019

 

October 31, 2018

 

 

    

(unaudited)

    

 

 

 

Raw materials

 

$

1,815,539

 

$

1,215,640

 

Work in process

 

 

790,484

 

 

571,228

 

Finished goods

 

 

4,899,627

 

 

3,436,175

 

Supplies

 

 

1,324,580

 

 

1,175,643

 

Totals

 

$

8,830,230

 

$

6,398,686

 

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol.  Based on the lower of cost or net realizable value analysis, the Company recorded a loss on ethanol inventories, as a component of cost of goods sold, of approximately $581,000 and $169,000 for the nine months ended July 31, 2019 and 2018, respectively. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on corn inventories, as a component of cost of goods sold, of approximately $21,000 for the nine months ended July 31, 2019.

 

5.DERIVATIVE INSTRUMENTS

 

As of July 31, 2019, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 7,835,000 bushels, comprised of long futures positions on 1,200,000 bushels that were entered into to hedge forecasted ethanol sales through September 2019 and short corn futures positions on 2,135,000 bushels that were entered into to hedge forecasted corn purchases through December 2020. Additionally, there are corn options positions of 4,500,000 bushels through December 2019. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of July 31, 2019, the Company had no cash collateral (restricted cash) related to derivatives held by a broker.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

304,690

 

$

 —

 

Ethanol contracts

 

Commodity derivative instruments

 

 

 —

 

 

43,750

 

Totals

 

 

 

$

304,690

 

$

43,750

 

 

As of October 31, 2018, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 2,685,000 bushels, comprised of long corn positions on 510,000 bushels that were entered into to hedge forecasted ethanol sales through July 2019, and short corn positions on 2,175,000 bushels that were entered into to hedge forecasted corn purchases through March 2020.   There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding. 

 

As of October 31, 2018, the Company had no cash collateral (restricted cash) related to derivatives held by a broker.

 

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2019

 

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2018, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

425,638

 

$

25,180

 

Totals

 

 

 

$

425,638

 

$

25,180

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Statement of

    

Three Months Ended  July 31,

 

Nine Months Ended  July 31,

 

 

    

Operations Location

    

2019

    

2018

 

2019

    

2018

 

Corn contracts

 

Cost of goods sold

 

$

409,362

 

$

916,800

 

$

638,832

 

$

425,139

 

Ethanol contracts

 

Revenues

 

 

31,820

 

 

(142,625)

 

 

31,820

 

 

53,747

 

Natural gas contracts

 

Cost of goods sold

 

 

 —

 

 

 —

 

 

 —

 

 

(1,598)

 

Total gain

 

 

 

$

441,182

 

$

774,175

 

$

670,652

 

$

477,288

 

 

 

 

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 July 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount in

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

Consolidated Balance Sheet

 

 

 

 

Active Markets

 

Observable Inputs

 

Unobservable inputs

 

Financial Assets

    

 

 

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Commodity Derivative instruments - Corn

 

$

304,690

 

$

304,690

 

$

304,690

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative instruments - Ethanol

 

$

43,750

 

$

43,750

 

$

43,750

 

$

 —

 

$

 —

 

 

The following table sets forth, by level, the Company assets and liabilities that were accounted for at fair value on a recurring basis at October 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount in

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

Consolidated

 

 

 

 

Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Assets:

    

Balance Sheet

 

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Commodity Derivative instruments - Corn

 

$

425,638

 

$

425,638

 

$

425,638

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative instruments - Corn

 

$

25,180

 

$

25,180

 

$

 —

 

$

25,180

 

$

 

 

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

 

 

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