Company Quick10K Filing
Heron Lake Bioenergy
Price-0.00 EPS-0
Shares78 P/E0
MCap-0 P/FCF-0
Net Debt-5 EBIT-3
TEV-5 TEV/EBIT2
TTM 2019-07-31, in MM, except price, ratios
10-Q 2020-01-31 Filed 2020-03-16
10-K 2019-10-31 Filed 2020-01-29
10-Q 2019-07-31 Filed 2019-09-16
10-Q 2019-04-30 Filed 2019-06-14
10-Q 2019-01-31 Filed 2019-03-18
10-K 2018-10-31 Filed 2019-01-29
10-Q 2018-07-31 Filed 2018-09-14
10-Q 2018-04-30 Filed 2018-06-14
10-Q 2018-01-31 Filed 2018-03-19
10-K 2017-10-31 Filed 2018-01-29
10-Q 2017-07-31 Filed 2017-09-14
10-Q 2017-04-30 Filed 2017-06-14
10-Q 2017-01-31 Filed 2017-03-17
10-K 2016-10-31 Filed 2017-01-30
10-Q 2016-07-31 Filed 2016-09-14
10-Q 2016-04-30 Filed 2016-06-14
10-Q 2016-01-31 Filed 2016-03-16
10-K 2015-10-31 Filed 2016-01-28
10-Q 2015-07-31 Filed 2015-09-14
10-Q 2015-04-30 Filed 2015-06-15
10-Q 2015-01-31 Filed 2015-03-16
10-K 2014-10-31 Filed 2015-01-28
10-Q 2014-07-31 Filed 2014-09-16
10-Q 2014-04-30 Filed 2014-06-16
10-Q 2014-01-31 Filed 2014-03-17
10-K 2013-10-31 Filed 2014-01-29
10-Q 2013-07-31 Filed 2013-09-16
10-Q 2013-04-30 Filed 2013-07-01
10-Q 2013-01-31 Filed 2013-06-11
10-K 2012-10-31 Filed 2013-02-13
10-Q 2012-07-31 Filed 2012-09-14
10-Q 2012-04-30 Filed 2012-06-14
10-Q 2012-01-31 Filed 2012-03-16
10-K 2011-10-31 Filed 2012-01-30
10-Q 2011-07-31 Filed 2011-09-14
10-Q 2011-04-30 Filed 2011-06-14
10-Q 2011-01-31 Filed 2011-03-15
10-K 2010-10-31 Filed 2011-01-21
10-Q 2010-07-31 Filed 2010-08-25
10-Q 2010-04-30 Filed 2010-06-14
10-Q 2010-01-31 Filed 2010-03-17
10-K 2009-10-31 Filed 2010-01-29
8-K 2020-04-29 Other Events
8-K 2020-03-19 Officers
8-K 2020-03-18 Shareholder Vote, Other Events
8-K 2019-12-23 Earnings, Regulation FD, Exhibits
8-K 2019-10-29 Enter Agreement
8-K 2019-10-22
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

C964 10Q Quarterly Report

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 hlb-20200131ex311f257eb.htm
EX-31.2 hlb-20200131ex3128e6538.htm
EX-32.1 hlb-20200131ex3219a56e2.htm
EX-32.2 hlb-20200131ex322f91d10.htm

Heron Lake Bioenergy Earnings 2020-01-31

Balance SheetIncome StatementCash Flow
806448321602012201420172020
Assets, Equity
503929188-22012201420172020
Rev, G Profit, Net Income
10.05.00.0-5.0-10.0-15.02012201420172020
Ops, Inv, Fin

10-Q 1 hlb-20200131x10q.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 January 31, 2020

 

OR

 

 

 

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

 

For the transition period from                    to                  .

 

COMMISSION FILE NUMBER 000-51825

 

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-2002393

(State or other jurisdiction of organization)

 

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

 

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

(Address of principal executive offices)

 

(507) 793-0077

(Issuer’s telephone number)

 

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

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

None

 

NA

 

NA

 

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

 

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

 

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

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☐

 

 

Smaller reporting company ☐

Non-accelerated filer  ☒

 

Emerging growth company ☐

 

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

 

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

 

As of March 16, 2020, there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

    

October 31, 2019

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

2,095,986

 

$

4,541,295

 

Restricted cash

 

 

42,221

 

 

52,516

 

Accounts receivable

 

 

988,463

 

 

4,891,249

 

Inventory

 

 

7,751,957

 

 

6,276,258

 

Commodity derivative instruments

 

 

144,410

 

 

95,823

 

Prepaid expenses and other current assets

 

 

641,557

 

 

408,325

 

Total current assets

 

 

11,664,594

 

 

16,265,466

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

38,175,096

 

 

39,408,195

 

 

 

 

 

 

 

 

 

Operating lease right of use assets

 

 

10,257,425

 

 

 —

 

 

 

 

 

 

 

 

 

Other assets

 

 

697,254

 

 

922,254

 

 

 

 

 

 

 

 

 

Total Assets

 

$

60,794,369

 

$

56,595,915

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

333,977

 

$

333,977

 

Checks drawn in excess of bank balances

 

 

724,292

 

 

 —

 

Accounts payable

 

 

3,124,877

 

 

5,386,618

 

Commodity derivative instruments

 

 

12,912

 

 

 —

 

Accrued expenses

 

 

380,927

 

 

423,266

 

Operating lease, current liabilities

 

 

1,296,140

 

 

 —

 

Total current liabilities

 

 

5,873,125

 

 

6,143,861

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

370,174

 

 

300,203

 

 

 

 

 

 

 

 

 

Operating Lease, long-term liabilities

 

 

8,961,285

 

 

 —

 

 

 

 

 

 

 

 

 

Other Long-Term Liabilities

 

 

562,481

 

 

551,000

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

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

 

 

45,027,304

 

 

47,599,276

 

Non-controlling interest

 

 

 —

 

 

2,001,575

 

Total members' equity

 

 

45,027,304

 

 

49,600,851

 

 

 

 

 

 

 

 

 

Total Liabilities and Members' Equity

 

$

60,794,369

 

$

56,595,915

 

 

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

1

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31,

 

 

 

(unaudited)

 

 

 

2020

 

2019

 

Revenues

 

$

26,680,280

 

$

25,697,520

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

28,129,771

 

 

26,731,320

 

 

 

 

 

 

 

 

 

Gross Loss

 

 

(1,449,491)

 

 

(1,033,800)

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

(899,445)

 

 

(919,527)

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(2,348,936)

 

 

(1,953,327)

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

Interest income

 

 

11,581

 

 

28,802

 

Interest expense

 

 

(11,531)

 

 

(7,914)

 

Other income, net

 

 

339

 

 

205

 

Total other income, net

 

 

389

 

 

21,093

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(2,348,547)

 

 

(1,932,234)

 

 

 

 

 

 

 

 

 

Less: Net Income Attributable to Non-controlling Interest

 

 

(67,827)

 

 

(91,406)

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Heron Lake BioEnergy, LLC

 

$

(2,416,374)

 

$

(2,023,640)

 

 

 

 

 

 

 

 

 

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

 

 

77,932,107

 

 

77,932,107

 

 

 

 

 

 

 

 

 

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

 

$

(0.03)

 

$

(0.03)

 

 

 

 

 

 

 

 

 

Distributions Per Unit (Class A and B)

 

$

 —

 

$

 —

 

 

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

 

2

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Members' equity

    

 

 

    

 

 

 

 

 

 

 

 

attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Heron Lake

 

Non-

 

Total

 

 

 

 

 

 

BioEnergy,

 

controlling 

 

Members'

 

 

Class A Units

 

Class B Units

 

LLC

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—October 31, 2019

 

62,932,107

 

15,000,000

 

$

47,599,276

 

$

2,001,575

 

$

49,600,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of non-controlling interest

 

 —

 

 —

 

 

(155,598)

 

 

(2,069,402)

 

 

(2,225,000)

Net income attributable to non-controlling interest

 

 —

 

 —

 

 

 —

 

 

67,827

 

 

67,827

Net loss attributable to Heron Lake BioEnergy, LLC

 

 —

 

 —

 

 

(2,416,374)

 

 

 —

 

 

(2,416,374)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—January 31, 2020

 

62,932,107

 

15,000,000

 

$

45,027,304

 

$

 —

 

$

45,027,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31,

 

 

 

 

2020

 

 

2019

 

 

    

 

(unaudited)

    

 

(unaudited)

 

Cash Flow From Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(2,348,547)

 

$

(1,932,234)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,316,198

 

 

1,286,722

 

Change in fair value of commodity derivative instruments

 

 

162,620

 

 

(94,292)

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

3,902,786

 

 

2,368,689

 

Inventory

 

 

(1,475,699)

 

 

(1,040,419)

 

Commodity derivative instruments

 

 

(198,295)

 

 

391,575

 

Prepaid expenses and other current assets

 

 

(233,232)

 

 

(291,950)

 

Accounts payable

 

 

(2,136,555)

 

 

(3,098,498)

 

Accrued expenses

 

 

(42,339)

 

 

(220,187)

 

Accrued railcar rehabilitation costs

 

 

11,481

 

 

 —

 

Net cash used in operating activities

 

 

(1,041,582)

 

 

(2,630,594)

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(208,285)

 

 

(92,921)

 

Net cash used in investing activities

 

 

(208,285)

 

 

(92,921)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Checks drawn in excess of bank balance

 

 

724,292

 

 

 —

 

Proceeds from long-term debt

 

 

7,039,706

 

 

 —

 

Payments on long-term debt

 

 

(6,969,735)

 

 

(7,763)

 

Acquisition of non-controlling interest

 

 

(2,000,000)

 

 

 —

 

Net cash used in financing activities

 

 

(1,205,737)

 

 

(7,763)

 

 

 

 

 

 

 

 

 

Net decrease in Cash and Restricted Cash

 

 

(2,455,604)

 

 

(2,731,278)

 

 

 

 

 

 

 

 

 

Cash and Restricted Cash—Beginning of Period

 

 

4,593,811

 

 

5,995,982

 

 

 

 

 

 

 

 

 

Cash and Restricted Cash—End of Period

 

$

2,138,207

 

$

3,264,704

 

 

 

 

 

 

 

 

 

Reconciliation of Cash and Restricted Cash

 

 

 

 

 

 

 

Cash - Balance Sheet

 

$

2,095,986

 

$

3,125,463

 

Restricted Cash - Balance Sheet

 

 

42,221

 

 

139,241

 

Cash and Restricted Cash

 

$

2,138,207

 

$

3,264,704

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest expense

 

$

11,531

 

$

7,914

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

 —

 

$

8,148

 

 

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

January 31, 2020

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

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

 

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

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated unaudited financial statements as of January 31, 2020 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively, the “Company”).  Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the unaudited financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings attributed to the remaining 27% non-controlling interest identified separately in the accompanying condensed consolidated balance sheets and statements of operations through December 11, 2019, when the remaining non-controlling interest was acquired. All significant intercompany balances and transactions are eliminated in consolidation.

 

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

 

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

 

Accounting Estimates

 

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

 

5

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

Non-controlling Interest

 

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

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

goods, and supplies. Corn is the primary raw material along with other raw materials. Finished goods consist of ethanol, distillers’ grains, and corn oil.

 

Derivative Instruments

 

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

 

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

 

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

 

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

 

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

 

Recently Adopted Accounting Pronouncements

 

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

 

Reportable Operating Segments

 

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

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

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

 

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

3.REVENUE

 

Revenue by Source

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 2020

 

(unaudited)

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

20,291,884

 

$

 

$

20,291,884

Distillers’ Grains

 

4,488,804

 

 

 

 

4,488,804

Corn Oil

 

914,398

 

 

 

 

914,398

Other

 

295,917

 

 

 

 

295,917

Natural Gas

 

0

 

 

689,277

 

 

689,277

Total Revenues

$

25,991,003

 

$

689,277

 

$

26,680,280

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 2019

 

(unaudited)

 

 

Ethanol Production

 

 

Natural Gas Pipeline

 

 

Total

Ethanol

$

18,398,152

 

$

 

$

18,398,152

Distillers’ Grains

 

5,485,355

 

 

 

 

5,485,355

Corn Oil

 

964,411

 

 

 

 

964,411

Other

 

264,303

 

 

 

 

264,303

Natural Gas

 

 

 

585,299

 

 

585,299

Total Revenues

$

25,112,221

 

$

585,299

 

$

25,697,520

 

Payment Terms

 

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

 

Shipping and Handling Costs

 

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

 

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

4.INVENTORY

 

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

October 31, 2019

 

 

    

(unaudited)

    

 

 

 

Raw materials

 

$

1,939,236

 

$

932,503

 

Work in process

 

 

696,617

 

 

732,243

 

Finished goods

 

 

3,673,218

 

 

3,157,429

 

Supplies

 

 

1,442,886

 

 

1,454,083

 

Totals

 

$

7,751,957

 

$

6,276,258

 

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol.  Based on the lower of cost or net realizable value analysis, the Company recorded a loss on ethanol inventories, as a component of cost of goods sold, of approximately $877,000 and $981,000 for the three months ended January 31, 2020 and 2019, respectively. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on corn inventories, as a component of cost of goods sold, of approximately $126,000 and $24,000 for the three months ended January 31, 2020 and 2019, respectively.

 

5.DERIVATIVE INSTRUMENTS

 

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

 

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

 

The following table provides detail regarding the Company’s derivative instruments at January 31, 2020, none of which are designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

144,410

 

$

 —

 

Ethanol contracts

 

Commodity derivative instruments

 

 

 —

 

 

12,912

 

Totals

 

 

 

$

144,410

 

$

12,912

 

 

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

 

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

 

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

20,060

 

$

 —

 

Ethanol contracts

 

Commodity derivative instruments

 

 

75,763

 

 

 —

 

Totals

 

 

 

$

95,823

 

$

 —

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Statement of

    

Three Months Ended  January 31,

 

 

    

Operations Location

    

2020

    

2019

 

Corn contracts

 

Cost of goods sold

 

$

(80,768)

 

$

94,292

 

Ethanol contracts

 

Revenues

 

 

(81,852)

 

 

 —

 

Total gain (loss)

 

 

 

$

(162,620)

 

$

94,292

 

 

 

 

6.FAIR VALUE

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

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

 

$

144,410

 

$

144,410

 

$

144,410

 

$

 —

 

$

 —

 

Commodity Derivative instruments - Ethanol

 

$

12,912

 

$

12,912

 

$

12,912

 

$

 —

 

$

 —

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount in

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

Consolidated

 

 

 

 

Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Assets:

    

Balance Sheet

 

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Commodity Derivative instruments - Corn

 

$

20,060

 

$

20,060

 

$

20,060

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative instruments - Ethanol

 

$

75,763

 

$

75,763

 

$

75,763

 

$

 —

 

$

 —

 

 

We determine 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 corn Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

 

 

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

7.DEBT FINANCING

 

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

October 31, 2019

 

 

 

(unaudited)

 

 

 

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

 

$

69,971

 

$

 —

 

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

 

 

634,180

 

 

634,180

 

Totals

 

 

704,151

 

 

634,180

 

Less amounts due within one year

 

 

333,977

 

 

333,977

 

Net long-term debt

 

$

370,174

 

$

300,203

 

 

Revolving Term Note

 

The 2020 Credit Facility includes an amended and restated revolving term loan with an $8,000,000 principal commitment.  This loan replaces the amended revolving term note and seasonal revolving loan made under the 2018 Credit Facility. The loan is secured by substantially all of 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. 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.

 

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 to 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 $8,000,000. 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 rate equal to 3.10% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which totaled 4.76% at January 31, 2020    

 

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.

 

Estimated annual maturities of long-term debt at January 31, 2020 are as follows based on the most recent debt agreements:

 

 

 

 

 

 

2020

    

$

333,977

 

2021

 

 

300,203

 

2022

 

 

69,971

 

Total debt

 

$

704,151

 

 

8.LEASES

 

Adoption of ASC 842

 

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Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

As discussed in Note 1, on November 1, 2019, the Company adopted the provisions of ASC 842 using the modified retrospective approach, which applies the provisions of ASC 842 upon adoption, with no change to prior periods. This adoption resulted in the Company recognizing initial right of use assets and lease liabilities of approximately $10.9 million at November 1, 2019. The adoption did not have a significant impact on the Company’s statement of operations.

 

 

Upon the initial adoption of ASC 842, the Company elected the following practical expedients allowable under the guidance: not to reassess whether any expired or existing contracts are or contain leases; not to reassess the lease classification for any expired or existing leases; not to reassess initial direct costs for any existing leases. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to only long-term (greater than one year) 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 three months ended January 31, 2020, 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 three months ended January 31, 2020, 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 maturities of the Company’s operating lease liabilities as of January 31, 2020:

 

 

 

 

 

 

Twelve Months Ended January 31,

 

 

 

 

2021

 

$

1,767,000

 

2022

 

 

1,767,000

 

2023

 

 

1,767,000

 

2024

 

 

1,757,250

 

2025

 

 

1,650,000

 

Thereafter

 

 

3,400,000

 

Totals

 

 

12,108,250

 

Less: Amount representing interest

 

 

1,850,825

 

Lease liabilities

 

$

10,257,425

 

 

For the three months ended January 31, 2020, the Company recorded operating lease costs of approximately $575,000 in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the period.

 

9.COMMITMENTS AND CONTINGENCIES

 

Corn Forward Contracts

 

At January 31, 2020, the Company had cash and basis contracts for forward corn purchase commitments for approximately 7,966,000 bushels for deliveries through December 2021.

 

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

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 no impairment loss existed at January 31, 2020 or October 31, 2019.

 

Ethanol Forward Contracts

 

At January 31, 2020, the Company had fixed and basis contracts to sell approximately $11,566,000 of ethanol for various delivery periods through March 2020, which approximates 85% of its anticipated ethanol sales for that period. 

 

Distillers’ Grains Forward Contracts

 

At January 31, 2020, the Company had forward contracts to sell approximately $2,211,000 of distillers’ grains for delivery through March 2020, which approximates 55% of its anticipated distillers’ grains sales during that period.

 

Corn Oil Forward Contracts

 

At January 31, 2020, the Company had forward contracts to sell approximately $289,000 of corn oil for various delivery periods through February 2020, which approximates 75% of its anticipated corn oil sales for that period.

 

Rail Car Rehabilitation Costs

 

The Company leases 50 hopper rail cars under a multi-year agreement which ends in May 2027. Under the agreement, the Company 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. Prior to the year ending October 31, 2019, the Company believed ongoing repairs resulted in an insignificant future rehabilitation expense. During the year ending October 31, 2019, based on new information, we re-evaluated our assumptions and believe that it is probable that we may be assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars at January 31, 2020 to be approximately $562,000. During the quarter ended January 31, 2020, the Company has recorded an expense in cost of goods of approximately $11,000.

 

10.MEMBERS’ EQUITY

 

Heron Lake BioEnergy, LLC is authorized to issue up to 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of Heron Lake BioEnergy, LLC are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by Heron Lake BioEnergy, LLC’s Board of Governors to become members. Members are entitled to one vote for each unit held. Subject to Heron Lake BioEnergy, LLC’s Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

 

Heron Lake BioEnergy, LLC has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding at January 31, 2020 and October 31, 2019.

 

On December 11, 2019, HLBE Pipeline Company acquired the remaining non-controlling interest of Agrinatural for a total price of $2.225 million. A deposit of $225,000 was paid in October 2019 and recorded within other assets at October 31, 2019, and the remaining amount was paid on December 11, 2019. The change of interest is recorded as an equity transaction in accordance with ASC 805. 

 

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2020

 

11.RELATED PARTY TRANSACTIONS