Company Quick10K Filing
Quick10K
Red Trail Energy
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-10-08 Leave Agreement
8-K 2019-04-04 Shareholder Vote
8-K 2018-09-04 Other Events, Exhibits
8-K 2018-03-22 Shareholder Vote, Other Events, Exhibits
8-K 2018-01-24 Other Events
8-K 2017-12-29 Earnings, Other Events, Exhibits
WYN Wyndham 10,152
SLV iShares Silver Trust 5,663
KS Kapstone Paper & Packaging 3,397
GOSS Gossamer Bio 1,150
SURG Surge Holdings 42
PAYD Paid 5
JFU 9F 0
ETCK Enerteck 0
WWIN Wewin Group 0
XTRIB Xtribe 0
RTE 2019-06-30
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 certification3116-30x19.htm
EX-31.2 certification3126-30x19.htm
EX-32.1 certification3216-30x19.htm
EX-32.2 certification3226-30x19.htm

Red Trail Energy Earnings 2019-06-30

RTE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a10-qfqe6x30x19.htm 10-Q FQE 6-30-19 Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the quarterly period ended June 30, 2019
 
 
 
OR
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the transition period from               to               .
 
 
 
COMMISSION FILE NUMBER 000-52033
 
RED TRAIL ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
North Dakota
 
76-0742311
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3682 Highway 8 South, P.O. Box 11, Richardton, ND 58652
(Address of principal executive offices)
 
(701) 974-3308
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o
Accelerated Filer  o
Non-Accelerated Filer x
Smaller Reporting Company o
 
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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

As of August 12, 2019, there were 40,148,160 Class A Membership Units outstanding.

1


INDEX



2


PART I.        FINANCIAL INFORMATION

Item 1. Financial Statements

RED TRAIL ENERGY, LLC
Condensed Balance Sheets

 ASSETS
 
June 30, 2019
 
September 30, 2018

 
 (Unaudited)
 

Current Assets
 

 

Cash and equivalents
 
$
9,367,657

 
$
4,573,858

Restricted cash - margin account
 
843,714

 
6,299,481

Accounts receivable, primarily related party
 
3,738,824

 
3,029,314

Commodities derivative instruments, at fair value (see note 3)
 
797,138

 

Inventory
 
8,659,293

 
10,971,056

Prepaid expenses
 
203,925

 
110,974

Total current assets
 
23,610,551

 
24,984,683


 

 

Property, Plant and Equipment
 

 

Land
 
1,333,681

 
1,342,381

Land improvements
 
4,465,311

 
4,465,311

Buildings
 
8,111,074

 
8,091,522

Plant and equipment
 
87,940,601

 
87,740,511

Construction in progress
 
396,997

 
42,742


 
102,247,664

 
101,682,467

Less accumulated depreciation
 
61,897,947

 
58,325,210

Net property, plant and equipment
 
40,349,717

 
43,357,257


 

 

Other Assets
 

 

Investment in RPMG
 
605,000

 
605,000

Patronage equity
 
3,478,552

 
3,478,552

Deposits
 
40,000

 
40,000

Total other assets
 
4,123,552

 
4,123,552


 

 

Total Assets
 
$
68,083,820

 
$
72,465,492


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

3


RED TRAIL ENERGY, LLC
Condensed Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
 
June 30, 2019
 
September 30, 2018

 
 (Unaudited)
 

Current Liabilities
 

 

Accounts payable
 
$
3,099,252

 
$
4,689,119

Accrued expenses
 
771,148

 
1,005,067

Commodities derivative instruments, at fair value (see note 3)
 

 
2,245,650

Accrued loss on firm purchase commitments (see notes 4 and 8)
 
98,000

 
204,000

Current maturities of notes payable
 
945

 
2,921

Total current liabilities
 
3,969,345

 
8,146,757

 
 
 
 
 
Commitments and Contingencies (Notes 4, 5, 7 and 8)
 

 

Members’ Equity 40,148,160 Class A Membership Units issued and outstanding
 
64,114,475

 
64,318,735

 
 
 
 
 
Total Liabilities and Members’ Equity
 
$
68,083,820

 
$
72,465,492


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

4


RED TRAIL ENERGY, LLC
Condensed Statements of Operations (Unaudited)


Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended

June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018

(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Revenues, primarily related party
$
26,302,894

 
$
28,726,715

 
$
78,443,830

 
$
81,216,304



 

 
 
 
 
Cost of Goods Sold

 

 
 
 
 
Cost of goods sold
24,475,143

 
28,155,815

 
76,585,250

 
80,087,408

Lower of cost or net realizable value adjustment
74,170

 

 
74,170

 
82,082

Loss on firm purchase commitments
87,000

 

 
92,000

 
8,000

Total Cost of Goods Sold
24,636,313

 
28,155,815

 
76,751,420

 
80,177,490



 

 
 
 
 
Gross Profit
1,666,581

 
570,900

 
1,692,410

 
1,038,814



 

 
 
 
 
General and Administrative Expenses
891,302

 
611,006

 
2,222,067

 
2,111,926



 

 
 
 
 
Operating Income (Loss)
775,279

 
(40,106
)
 
(529,657
)
 
(1,073,112
)


 

 
 
 
 
Other Income (Expense)

 

 
 
 
 
Interest income
31,785

 
54,605

 
66,547

 
101,872

Other income, net
10,924

 
47,768

 
260,643

 
471,049

Interest expense
(2
)
 
(8
)
 
(11
)
 
(42
)
Total other income, net
42,707

 
102,365

 
327,179

 
572,879



 

 
 
 
 
Net Income (Loss)
$
817,986

 
$
62,259

 
$
(202,478
)
 
$
(500,233
)


 

 
 
 
 
Weighted Average Units Outstanding
 
 
 
 
 
 
 
  Basic
40,148,160

 
41,031,775

 
40,148,160

 
41,321,485



 

 
 
 
 
  Diluted
40,148,160

 
41,031,775

 
40,148,160

 
41,321,485

 
 
 
 
 
 
 
 
Net Income (Loss) Per Unit

 
 
 
 
 
 
  Basic
$
0.02

 
$

 
$
(0.01
)
 
$
(0.01
)


 

 
 
 
 
  Diluted
$
0.02

 
$

 
$
(0.01
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.



5


RED TRAIL ENERGY, LLC
Condensed Statements of Cash Flows (Unaudited)

Nine Months Ended
 
Nine Months Ended

June 30, 2019
 
June 30, 2018
Cash Flows from Operating Activities

 

Net loss
$
(202,478
)
 
$
(500,233
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation and amortization
3,572,737

 
3,545,435

Loss on disposal of fixed assets
3,659

 

Change in fair value of derivative instruments
(3,042,788
)
 
1,003,438

Lower of cost of net realizable value adjustment
74,170

 
82,082

Loss on firm purchase commitments
92,000

 
8,000

Changes in operating assets and liabilities:

 

Accounts receivable
(709,509
)
 
730,950

Other receivables

 
8,764

Inventory
2,145,592

 
4,021,626

Prepaid expenses
(92,951
)
 
(94,822
)
Accounts payable
(1,589,867
)
 
7,495,539

Accrued expenses
(233,919
)
 
(1,952,583
)
Accrued loss on firm purchase commitments
(106,000
)
 
(5,000
)
Net cash (used in) provided by operating activities
(89,354
)
 
14,343,196

 
 
 
 
Cash Flows from Investing Activities

 

Proceeds from disposal of fixed assets
18,295

 

Capital expenditures
(587,151
)
 
(797,128
)
   Net cash (used in) investing activities
(568,856
)
 
(797,128
)
 
 
 
 
Cash Flows from Financing Activities

 

Dividends paid
(1,782
)
 
(2,901,975
)
Unit repurchase

 
(1,318,180
)
Debt repayments
(1,976
)
 
(1,961
)
Net cash (used in) financing activities
(3,758
)
 
(4,222,116
)


 

Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash
(661,968
)
 
9,323,952

Cash, Cash Equivalents and Restricted Cash - Beginning of Period
10,873,339

 
9,130,008

Cash, Cash Equivalents and Restricted Cash - End of Period
$
10,211,371

 
$
18,453,960

 
 
 
 
Reconciliation of Cash, Cash Equivalents and Restricted Cash
 
 
 
Cash and cash equivalents
$
9,367,657

 
$
14,428,327

Restricted cash
843,714

 
4,025,633

Total Cash, Cash Equivalents and Restricted Cash
$
10,211,371

 
$
18,453,960



 

Supplemental Disclosure of Cash Flow Information

 

Interest paid
$
11

 
$
42


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


6


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


The accompanying condensed unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the fiscal year ended September 30, 2018, contained in the Company's Annual Report on Form 10-K.

In the opinion of management, the interim condensed unaudited financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2019.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”).

Accounting Estimates

Management uses estimates and assumptions in preparing these 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. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, inventory and allowance for doubtful accounts. Actual results could differ from those estimates.
 
Net Income Per Unit

Net income per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the FASB issued ASC 606, “Revenue from Contracts with Customers” which supersedes the guidance in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASC 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. Effective October 1, 2018, the Company adopted ASC 606 for all of its contracts using the modified retrospective approach. See note 2.

Statement of Cash Flows; Restricted Cash

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annal periods beginning after December 15, 2017, and interim periods within those annual periods.

Effective October 1, 2018 the Company retrospectively adopted ASU No. 2016-18. As a result, net cash used in operating activities for the nine months ended June 30, 2019 was adjusted to exclude the change in restricted cash and decreased the previously reported balance by approximately $1,881,000. Also the previously reported cash and cash equivalent balance was adjusted to include restricted cash and has increased by approximately $4,026,000.


7


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


Lease Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, "Leases (topic 842)" which requires a lessee to recognize a right to use asset and a lease liability on its balance sheet for all leases with terms of twelve months or greater. This guidance is effective for fiscal years beginning after December 15, 2018, included interim periods within those years with early adoption permitted. The Company has evaluated the new standard and expects it will have a material impact on the financial statements as we will have to begin capitalizing leases on the balance sheet when the new standard is implemented. See note 7 for current operating lease commitments.

2. REVENUE

Adoption of ASC 606

Effective October 1, 2018, the Company adopted ASC 606 using the modified retrospective approach for all of its contracts. Following the adoption of ASC 606, the Company continues to recognize revenue at a point-in-time when control of goods transfers to the customer. This is consistent with the Company's previous revenue recognition accounting policy under which the Company recognized revenue when title and risk of loss pass to the customer and collectability was reasonably assured. ASC 606 did not impact the Company's presentation of revenue on a gross or net basis. The Company recognizes revenue primarily from sales of ethanol and its related co-products. In addition, there was no impact of adoption on the statement of operations or balance sheet for the nine months ended June 30, 2019. The Company expects the impact of adopting the new revenue standard to be immaterial to net income on an ongoing basis.

Revenue Recognition

The Company recognizes revenue from sales of ethanol and co-products at the point in time when the performance obligations in the contract are met, which is when the customer obtains control of such products and typically occurs upon shipment depending on the terms of the underlying contracts. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. In some instances, the Company enters into contracts with customers that contain multiple performance obligations to deliver volumes of co-products over a contractual period of less than 12 months. The Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product is transferred to the customer in satisfaction of the corresponding performance obligation.

Revenue by Source

The following table disaggregates revenue by major source for the three and nine months ended June 30, 2019 and 2018.
Revenues
 
For the three months ended June 30, 2019 (unaudited)
 
For the three months ended June 30, 2018 (unaudited)
 
For the nine months ended June 30, 2019 (unaudited)
 
For the nine months ended June 30, 2018 (unaudited)
Ethanol and E85
 
$
20,862,325

 
$
21,892,641

 
$
60,517,057

 
$
61,456,649

Distillers Grains
 
4,797,738

 
5,889,714

 
15,706,453

 
16,906,013

Syrup
 
73,563

 
67,886

 
267,573

 
227,366

Corn Oil
 
505,587

 
806,768

 
1,798,732

 
2,475,487

Other
 
63,681

 
69,706

 
154,015

 
150,789

Total revenue from contracts with customers
 
$
26,302,894

 
$
28,726,715

 
$
78,443,830

 
$
81,216,304


Shipping and Handling Costs

We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, we record customer payments associated with shipping and handling costs as a component of revenue, and classify such costs as a component of cost of goods sold.



8


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


3. DERIVATIVE INSTRUMENTS

Commodity Contracts

As part of its hedging strategy, the Company may enter into ethanol, soybean, soybean oil, natural gas and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales, corn oil sales, and corn purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Ethanol derivative fair market value gains or losses are included in the results of operations and are classified as revenue and corn derivative changes in fair market value are included in cost of goods sold.
As of:
 
June 30, 2019 (unaudited)
 
September 30, 2018
Contract Type
 
# of Contracts
Notional Amount (Qty)
Fair Value
 
# of Contracts
Notional Amount (Qty)
Fair Value
Corn futures
 


bushels
$

 
800

4,000,000

bushels
$
(319,400
)
Corn options
 
1,530

7,650,000

bushels
$
797,688

 
2,800

14,000,000

bushels
$
(1,926,250
)
Natural gas options
 
3

30,000

dk
$
(550
)
 


dk
$

Total fair value
 
 
 
 
$
797,138

 
 
 
 
$
(2,245,650
)
Amounts are combined on the balance sheet - negative numbers represent liabilities

The following tables provide details regarding the Company's derivative financial instruments at June 30, 2019 and September 30, 2018:
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Balance Sheet - as of June 30, 2019 (unaudited)
 
Asset
 
Liability
Commodity derivative instruments, at fair value
 
$
797,138

 
$

Total derivatives not designated as hedging instruments for accounting purposes
 
$
797,138

 
$

 
 
 
 
 
Balance Sheet - as of September 30, 2018
 
Asset
 
Liability
Commodity derivative instruments, at fair value
 
$

 
$
2,245,650

Total derivatives not designated as hedging instruments for accounting purposes
 
$

 
$
2,245,650


Statement of Operations Income/(Expense)
 
Location of gain (loss) in fair value recognized in income
 
Amount of gain (loss) recognized in income during the three months ended June 30, 2019 (unaudited)
 
Amount of gain (loss) recognized in income during the three months ended June 30, 2018 (unaudited)
 
Amount of gain (loss) recognized in income during the nine months ended June 30, 2019 (unaudited)
 
Amount of gain (loss) recognized in income during the nine months ended June 30, 2018 (unaudited)
Corn derivative instruments
 
Cost of Goods Sold
 
$
3,225,402

 
$
(1,901,509
)
 
$
4,107,834

 
$
(767,270
)
Ethanol derivative instruments
 
Revenue
 

 

 

 
1,800

Natural gas derivative instruments
 
Cost of Goods Sold
 
(550
)
 

 
(550
)
 

Total
 
 
 
$
3,224,852

 
$
(1,901,509
)
 
$
4,107,284

 
$
(765,470
)



9


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


4. INVENTORY
Inventory is valued at the lower of cost or net realizable value. Inventory values as of June 30, 2019 and September 30, 2018 were as follows:
As of
 
June 30, 2019
(unaudited)
 
September 30, 2018
Raw materials, including corn, chemicals and supplies
 
$
4,051,477

 
$
6,684,322

Work in process
 
935,838

 
738,991

Finished goods, including ethanol and distillers grains
 
1,430,557

 
1,405,806

Spare parts
 
2,241,421

 
2,141,937

Total inventory
 
$
8,659,293

 
$
10,971,056


Lower of cost or net realizable value adjustments for the three and nine months ended June 30, 2019 and 2018 were as follows:
 
 
For the three months ended June 30, 2019 (unaudited)
 
For the three months ended June 30, 2018 (unaudited)
 
For the nine months ended June 30, 2019 (unaudited)
 
For the nine months ended June, 2018 (unaudited)
Loss on firm purchase commitments
 
$
87,000

 
$

 
$
92,000

 
$
8,000

Loss on lower of cost or net realizable value adjustment for inventory on hand
 
$
74,170

 
$

 
$
74,170

 
$
82,082

Total loss on lower of cost or net realizable value adjustments
 
$
161,170

 
$

 
$
166,170

 
$
90,082


The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of June 30, 2019, the average price of corn purchased under certain fixed price contracts, that had not yet been delivered, was greater than approximated market price. Based on this information, the Company has an $87,000 and $92,000 estimated loss on firm purchase commitments for the three and nine months ended June 30, 2019. The loss is recorded in “Loss on firm purchase commitments” on the statement of operations. The amount of the potential loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, further losses on the outstanding purchase commitments could be recorded in future periods.

5. BANK FINANCING
As of
 
June 30, 2019 (unaudited)
 
September 30, 2018
Capital lease obligations (Note 7)
 
$
945

 
$
2,921

Total Long-Term Debt
 
945

 
2,921

Less amounts due within one year
 
945

 
2,921

Total Long-Term Debt Less Amounts Due Within One Year
 
$

 
$


On June 30, 2019, we renewed our $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). The principle was lowered to $7 million. The maturity date of the Revolving Loan is June 30, 2020. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At June 30, 2019 we had $6,300,000 available on the Revolving Loan, taking into account the borrowing base calculation. At September 30, 2018 we had $8,800,000 available on the Revolving Loan. We had $0 drawn on the Revolving Loan as of June 30, 2019 and September 30, 2018. The variable interest rate on June 30, 2019 was 4.21%. See note 7 for the Company's additional future minimum lease commitments.
        
The Company's loans are secured by a lien on substantially all of the assets of the Company. As of June 30, 2019, the Company was in compliance with its quarterly debt covenant.

10


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


6. FAIR VALUE MEASUREMENTS

The following table provides information on those liabilities that are measured at fair value on a recurring basis as of June 30, 2019 and September 30, 2018, respectively.
 
 
 
 
 
Fair Value Measurement Using
 
Carrying Amount as of June 30, 2019 (unaudited)
 
Fair Value as of June 30, 2019 (unaudited)
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Commodities derivative instruments
$
797,138

 
$
797,138

 
$
797,138

 
$

 
$

Total
$
797,138

 
$
797,138

 
$
797,138

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement Using
 
Carrying Amount as of September 30, 2018
 
Fair Value as of September 30, 2018
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
 
 
Commodities derivative instruments
$
2,245,650

 
$
2,245,650

 
$
2,245,650

 
$

 
$

Total
$
2,245,650

 
$
2,245,650

 
$
2,245,650

 
$

 
$


The fair value of the corn, ethanol, soybean oil and natural gas derivative instruments is based on quoted market prices in an active market.

7. LEASES

The Company leases equipment under operating and capital leases through July 2023. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating leases includes a locomotive and rail cars. Rent expense for operating leases was approximately $138,000 and $153,000 for the three months ended June 30, 2019 and 2018, respectively, and $455,000 and $465,000 for the nine months ended June 30, 2019 and 2018, respectively. Equipment under capital leases consists of office equipment and plant equipment.

Equipment under capital leases is as follows at:
As of
 
June 30, 2019
 
September 30, 2018
Equipment
 
$
483,488

 
$
483,488

Less accumulated amortization
 
(157,583
)
 
(141,488
)
Net equipment under capital lease
 
$
325,905

 
$
342,000



11


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


At June 30, 2019, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending June 30:
 
 
Operating Leases
 
Capital Leases
2019
 
$
444,505

 
$
945

2020
 
365,663

 

2021
 
296,640

 

2022
 
202,290

 

2023
 

 

Thereafter
 

 

Total minimum lease commitments
 
$
1,309,098

 
945

Less amount representing interest
 
 
 

Present value of minimum lease commitments included in current maturities of long-term debt on the balance sheet
 
 
 
$
945


8. COMMITMENTS AND CONTINGENCIES

Firm Purchase Commitments for Corn

To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At June 30, 2019, the Company had various fixed price contracts for the purchase of approximately 2.3 million bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $8.9 million related to the 2.3 million bushels under contract.

Water

To meet the plant's water requirements, we entered into a ten-year contract with Southwest Water Authority to purchase raw water. Our contract requires us to purchase a minimum of 160 million gallons of water per year. The minimum estimated liability for this contract is $424,000 per year.

Profit and Cost Sharing Agreement

The Company has entered into a Profit and Cost Sharing Agreement with Bismarck Land Company, LLC which became effective on November 1, 2016. The Profit and Cost Sharing Agreement provides that the Company will share 70% of the net revenue generated by the Company from business activities which are brought to the Company by Bismarck Land Company, LLC and conducted on the real estate purchased from the Bismarck Land Company, LLC. The real estate was initially purchased in exchange for 2 million membership units at $1.66 per unit. This obligation will terminate ten years after the real estate closing date of October 11, 2016 or after Bismarck Land Company, LLC receives $10 million in proceeds from the agreement. In addition, the Company will pay Bismarck Land Company, LLC 70% of any net proceeds received by the Company from the sale of the subject real estate if a sale were to occur in the future, subject to the $10 million cap and the 10 year termination of this obligation. The Company has accrued payments of $28,315 to the Bismarck Land Company, LLC as of June 30, 2019.

Carbon Capture and Storage Project

The Company has entered into a research agreement with the University of North Dakota Energy and Environmental Research Center to explore the feasibility of injecting CO2 from the fermentation process into a saline formation to lower the carbon intensity value of our ethanol. The Company has committed to fund up to $950,000 for this research. The Company has paid $255,728 as of June 30, 2019.

9. RELATED PARTY TRANSACTIONS

The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). The Company received a capital account refund from RPMG of $267,111 during the

12


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


second quarter of 2019 which is included in other income (expense) in the Company's Statement of Operations. A refund of $140,539 was received during the Company's first quarter of 2018. Significant related party activity affecting the financial statements is as follows:
 
 
June 30, 2019
(unaudited)
 
September 30, 2018
Balance Sheet
 
 
 
 
Accounts receivable
 
$
3,485,391

 
$
2,680,445

Accounts Payable
 
143,147

 
312,701

Accrued Expenses
 
494

 
95,704

 
 
 
 
 

 
 
For the three months ended June 30, 2019 (unaudited)
 
For the three months ended June 30, 2018 (unaudited)
 
For the nine months ended June 30, 2019 (unaudited)
 
For the nine months ended June 30, 2018 (unaudited)
Statement of Operations
 
 
 
 
 
 
 
 
Revenues
 
$
24,642,959

 
$
27,381,514

 
$
72,619,534

 
$
76,354,225

Cost of goods sold
 

 
9,012

 
537,987

 
21,936

General and administrative
 
523,883

 
62,019

 
159,691

 
100,330

Other income
 
73,097

 

 
267,111

 
140,538

Inventory Purchases
 
$
4,176,641

 
$
7,710,883

 
$
11,125,096

 
$
18,036,469


10. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS

The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the United States. Corn for the production process is supplied to the Plant primarily from local agricultural producers and from purchases on the open market. The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and by the cost at which it is able to purchase corn for operations. The price of ethanol is influenced by factors such as prices, supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.

The Company's financial performance is highly dependent on the Federal Renewable Fuels Standard ("RFS") which requires that a certain amount of renewable fuels must be used each year in the United States. Corn based ethanol, such as the ethanol the Company produces, can be used to meet a portion of the RFS requirement. In November 2013, the EPA issued a proposed rule which would reduce the RFS for 2014, including the RFS requirement related to corn based ethanol. The EPA proposed rule was subject to a comment period which expired in January 2014. On November 30, 2015, the EPA released its final ethanol use requirements for 2014, 2015 and 2016 which were lower than the statutory requirements in the RFS. However, the final RFS for 2017 equaled the statutory requirement which was also the case for the 2018 and 2019 RFS final rules.

The Company anticipates that the results of operations during the remainder of fiscal year 2019 will continue to be affected by volatility in the commodity markets. The volatility is due to various factors, including uncertainty with respect to the availability and supply of corn, increased demand for grain from global and national markets, speculation in the commodity markets and demand for corn from the ethanol industry.


13


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


11. MEMBER'S EQUITY

Unregistered Units Sales by the Company.

On October 10, 2016, the Company issued two million of the Company's membership units to Bismarck Land Company, LLC as part of the consideration for the acquisition of 338 acres of land adjacent to the ethanol plant that the Company will use to expand its rail yard. The membership units were issued pursuant to the exemption from registration set forth in Regulation D, Rule 506(b), as Bismarck Land Company, LLC is an accredited investor.

Unit Purchases By the Company.
 
(a)
(b)
(c)
(d)
Period
Total Number of Units Purchased
 Average Price Paid per Unit
 Total Number of Units Purchased as Part of Publicly Announced Plans or Programs
 Maximum Number (or Approximate Dollar Value) of the Units that May Yet Be Purchased Under the Plans or Programs
April 2018
None
None
None
None
May 2018
1,318,180
$1.00
None
None
June 2018
None
None
None
None
Total
1,318,180
$1.00
None
None

*1,318,180 Units were purchased other than through a publicly announced plan or program, pursuant to a Membership Unit Repurchase Agreement, a private transaction between the Company and a Member. No other activity has occurred since the third quarter of our 2018 fiscal year.

Changes in member's equity for the nine months ended June 30, 2019 and 2018.
 
 
Class A Member Units
 
Additional Paid in Capital
 
Accumulated Deficit/Retained Earnings
 
Treasury Units
 
Total Member Equity
Balances - September 30, 2017
 
$
40,362,775

 
$
75,541

 
$
33,399,985

 
$
(159,540
)
 
$
73,678,761

Net income (loss)
 

 

 
(1,984,666
)
 

 
(1,984,666
)
Balances - December 31, 2017
 
40,362,775

 
75,541

 
31,415,319

 
(159,540
)
 
71,694,095

Distribution, $0.05 per unit
 

 

 
(2,901,975
)
 

 
(2,901,975
)
Net income
 

 

 
1,422,174

 

 
1,422,174

Balances - March 31, 2018
 
$
40,362,775

 
$
75,541

 
$
29,935,518

 
$
(159,540
)
 
$
70,214,294

Membership unit repurchase
 
(1,318,180
)
 

 

 

 
(1,318,180
)
Net income
 

 

 
62,259

 

 
62,259

Balances - June 30, 2018
 
$
39,044,595

 
$
75,541

 
$
29,997,777

 
$
(159,540
)
 
$
68,958,373



14


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2019


 
 
Class A Member Units
 
Additional Paid in Capital
 
Accumulated Deficit/Retained Earnings
 
Treasury Units
 
Total Member Equity
Balances - September 30, 2018
 
$
39,044,595

 
$
75,541

 
$
25,358,139

 
$
(159,540
)
 
$
64,318,735

Net income
 

 

 
402,844

 

 
402,844

Balances December 31, 2018
 
39,044,595

 
75,541

 
25,760,983

 
(159,540
)
 
64,721,579

Distribution
 

 

 
(1,782
)
 

 
(1,782
)
Net income (loss)
 

 

 
(1,423,308
)
 

 
(1,423,308
)
Balances - March 31, 2019
 
$
39,044,595

 
$
75,541

 
$
24,335,893

 
$
(159,540
)
 
$
63,296,489

Net income
 

 

 
817,986

 

 
817,986

Balances - June 30, 2019
 
$
39,044,595

 
$
75,541

 
$
25,153,879

 
$
(159,540
)
 
$
64,114,475


12. SUBSEQUENT EVENTS

Management evaluated all other activity of the Company and concluded that no subsequent events have occurred that would require recognition in the condensed financial statements or disclosure in the notes to the condensed financial statements.


15


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

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended June 30, 2019, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the financial statements, notes and information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Unless otherwise stated, references in this report to particular years, quarters, months, or periods refer to our fiscal years ended in September and the associated quarters, months, or periods of those fiscal years.

Forward Looking Statements

This report contains forward-looking statements that involve future events, our future performance and our future operations and actions.  In some cases you can identify forward-looking statements by the use of words such as "may," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the following factors:

Reductions in the corn-based ethanol use requirement in the Federal Renewable Fuels Standard;
Small refinery exemptions from the RFS granted by the EPA;
Lower oil prices which result in lower ethanol prices;
Negative operating margins which result from lower ethanol prices;
Lower distillers grains prices which result from the Chinese anti-dumping and countervailing duty tariffs;
Lower ethanol prices due to the Chinese ethanol tariff and the Brazilian ethanol tariff;
Logistics difficulties preventing us from delivering our products to our customers;
Fluctuations in the price and market for ethanol, distillers grains and corn oil;
Availability and costs of products and raw materials, particularly corn and natural gas;
Changes in the environmental regulations that apply to our plant operations and our ability to comply with such regulations;
Ethanol supply exceeding demand and corresponding ethanol price reductions impacting our ability to operate profitably and maintain a positive spread between the selling price of our products and our raw material costs;
Our ability to generate and maintain sufficient liquidity to fund our operations and meet our necessary capital expenditures;
Our ability to continue to meet our loan covenants;
Limitations and restrictions contained in the instruments and agreements governing our indebtedness;
Results of our hedging transactions and other risk management strategies;
Changes and advances in ethanol production technology; and
Competition from alternative fuels and alternative fuel additives.

Overview
 
Red Trail Energy, LLC, a North Dakota limited liability company (the "Company," "Red Trail," or "we," "our," or "us"), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota. Our revenues are derived from the sale and distribution of our ethanol, distillers grains and corn oil primarily in the continental United States. Corn is our largest cost component and our profitability is highly dependent on the spread between the price of corn and the price of ethanol.

The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the Federal Renewable Fuels Standard (the "RFS"). The RFS requires that in each year, a certain amount of renewable fuels must be used in the United States. The RFS statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. The United States Environmental Protection Agency (the "EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States.

Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations. The RFS statutory Renewable Volume Obligation ("RVO") for corn-based ethanol was 15 billion gallons for 2018 and 2019. However, during our 2018 fiscal year we learned that the EPA issued exemptions to the RFS use requirements for certain small refineries. Management believes that these small refinery exemptions reduced ethanol demand by more than 2 billion gallons during 2018 which severely impacted ethanol demand during our 2018 fiscal year. This practice of granting RFS waivers has continued into our 2019 fiscal year which has

16


continued to negatively impact ethanol demand. Management expects this negative impact to continue so long as the EPA issues these small refinery exemptions from the RFS.

In recent years, the ethanol industry in the United States has increased exports of ethanol and distillers grains. However, in 2017 China instituted tariffs on ethanol and distillers grains produced in the United States and Brazil instituted a tariff on ethanol produced in the United States, and now more recently, in April 2018, the Chinese government increased the tariff on United States ethanol imports into China from 30% to 45%. Further, the Chinese again increased the ethanol tariff to 65% on an un-denatured basis. Due to other recent tariff activity between the United States and China, management does not expect these Chinese tariffs to be removed in the near term but trade talks are continuing regarding this tariff and others. Both China and Brazil have been major sources of import demand for United States ethanol and distillers grains. These trade actions may result in negative operating margins for United States ethanol producers.

Results of Operations for the Three Months Ended June 30, 2019 and 2018
 
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our unaudited statements of operations for the three months ended June 30, 2019 and 2018:
 
Three Months Ended
June 30, 2019 (Unaudited)
 
Three Months Ended
June 30, 2018 (Unaudited)
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
26,302,894

 
100.00
 
$
28,726,715

 
100.00

Cost of Goods Sold
24,636,313

 
93.66
 
28,155,815

 
98.01

Gross Profit
1,666,581

 
6.34
 
570,900

 
1.99

General and Administrative Expenses
891,302

 
3.39
 
611,006

 
2.13

Operating Income (Loss)
775,279

 
2.95
 
(40,106
)
 
(0.14
)
Other Income, net
42,707

 
0.16
 
102,365

 
0.36

Net Income
$
817,986

 
3.11
 
$
62,259

 
0.22

        

17


The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended June 30, 2019 and 2019.
 
 
Three Months Ended June 30, 2019 (unaudited)
 
Three Months Ended
June 30, 2018
(unaudited)
Production:
 
 
 
 
  Ethanol sold (gallons)
 
15,761,481

 
16,030,562

  Dried distillers grains sold (tons)
 
23,797

 
28,905

  Modified distillers grains sold (tons)
 
27,730

 
25,386

Corn oil sold (pounds)
 
2,153,040

 
3,287,520

Revenues:
 
 
 
 
  Ethanol average price per gallon (net of hedging)
 
$
1.32

 
$
1.37

  Dried distillers grains average price per ton
 
135.97

 
149.95

  Modified distillers grains average price per ton
 
56.33

 
61.27

Corn oil average price per pound
 
0.23

 
0.25

Primary Inputs:
 
 
 
 
  Corn ground (bushels)
 
5,361,333

 
5,605,055

Natural gas (MMBtu)
 
390,031

 
410,950

Costs of Primary Inputs:
 
 
 
 
  Corn average price per bushel (net of hedging)
 
$
3.79

 
$
3.40

Natural gas average price per MMBtu (net of hedging)
 
2.01

 
1.97

Other Costs (per gallon of ethanol sold):
 
 
 
 
  Chemical and additive costs
 
$
0.065

 
$
0.120

  Denaturant cost
 
0.035

 
0.040

  Electricity cost
 
0.048

 
0.049

  Direct labor cost
 
0.065

 
0.061


Revenue

Our revenue was less in the third quarter of our 2019 fiscal year compared to the same period of our 2018 fiscal year due to decreased production and lower market prices for our products. During the third quarter of our 2019 fiscal year, approximately 79.3% of our total revenue was derived from ethanol sales, approximately 18.2% was from distillers grains sales and approximately 1.9% was from corn oil sales. During the third quarter of our 2018 fiscal year, approximately 76.2% of our total revenue was derived from ethanol sales, approximately 20.5% was from distillers grains sales and approximately 2.8% was from corn oil sales.

Ethanol

The average price we received for our ethanol was lower during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year. Management attributes the decrease in the price we received for our ethanol during the third quarter of our 2019 fiscal year to demand destruction related to the EPA's small refinery exemptions from the RFS, partially offset by stronger ethanol exports. Ethanol exports have supported domestic ethanol prices, however, export markets are not as reliable as the domestic ethanol market which can lead to ethanol price volatility. If export demand slows in the future, it could negatively impact ethanol demand, especially due to increased production capacity in the United States. Management anticipates that ethanol prices will remain lower unless domestic ethanol demand increases. Management believes that domestic ethanol demand will only increase through increased usage of higher level blends of ethanol, such as E15, used in the United States. Recently, the Trump administration passed rules which allow the year-round use of E15. Management believes that this may lead the way for increased domestic availability of E15 which could lead to increased domestic demand, especially if ethanol prices are lower compared to the price of gasoline.
 
We sold fewer gallons of ethanol during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year. Management anticipates that our ethanol production and sales will be comparable during the rest of our 2019 fiscal year compared to our 2018 fiscal year provided we do not encounter any plant production issues which prevent us from operating at capacity during our 2019 fiscal year.

18


From time to time we enter into forward sales contracts for our products. At June 30, 2019, we had no open ethanol futures contracts. We also had no ethanol futures contracts for the third quarter of our 2019 fiscal year.
    
Distillers Grains

Previously, we sold a majority of our distillers grains in the dried form due to market conditions which favored that product. However, due to the Chinese anti-dumping and countervailing duty tariffs which have decreased export demand for distillers grains, we increased the amount of modified distillers grains we produced and sold. Modified distillers grains are used in our local market and are less impacted by world distillers grains markets. The average price we received for our distillers grains were lower during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year. Management attributes these price decreases to lower export demand and lower domestic demand during the summer months when herds are out to pasture. Management anticipates distillers grains prices will be higher for the rest of our 2019 fiscal year due to higher market corn prices.

We produced and sold fewer total tons of distillers grains during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to decreased overall production during the third quarter of our 2019 fiscal year from improved efficiency at the plant converting corn to ethanol. When our corn conversion efficiency improves, we produce fewer tons of distiller grains as the co-product of our ethanol production process. Management anticipates relatively consistent distillers grains production going forward.
    
Corn Oil

The total pounds of corn oil we sold was less during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to a change in chemicals used during the production process which resulted in less corn oil being extracted. Management anticipates that our corn oil production will remain lower for the remaining quarter of our 2019 fiscal year. The average price we received for our corn oil during the third quarter of our 2019 fiscal year was approximately 8% less compared to the third quarter of our 2018 fiscal year due to decreased biodiesel demand.
    
Cost of Goods Sold

Our cost of goods sold is primarily made up of corn and natural gas expenses. Our cost of goods sold was lower for the third quarter of our 2019 fiscal year as compared to the third quarter of our 2018 fiscal year due to decreased production which decreased corn and natural gas consumption along with lower chemical costs per gallon during the 2019 period.

Corn Costs

Our cost of goods sold related to corn was greater for the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to higher corn costs per bushel, without taking derivative instrument positions into account, partially offset by decreased corn consumption. For the third quarter of our 2019 fiscal year, we used approximately 4.3% fewer bushels of corn compared to the third quarter of our 2018 fiscal year due to decreased production at the plant along with greater corn to ethanol conversion efficiency. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 11.5% greater for the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to higher market corn prices and less favorable basis during the 2019 period. In addition, during the third quarter of our 2019 fiscal year, we had a realized gain of approximately $3.2 million for our corn derivative instruments which increased our cost of goods sold related to corn. For the third quarter of our 2018 fiscal year, we had a realized loss of approximately $1.9 million for our corn derivative instruments which increased our cost of goods sold related to corn. Management anticipates comparable corn prices during the rest of our 2019 fiscal year unless unfavorable weather conditions and late planting negatively impact the 2019 growing season which could result in higher corn prices.

Natural Gas Costs

We consumed approximately 5.1% less MMBtu of natural gas during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year, due to decreased production during the 2019 period. Our average cost per MMBtu of natural gas was approximately 2.0% greater during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to increased market demand.


19


General and Administrative Expenses

Our general and administrative expenses were greater for the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to increased consulting fees and meeting expense for the carbon capture and storage project.

Other Income/Expense

We had less interest income during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to having less cash on hand during our 2019 fiscal year. We had less other income during the third quarter of our 2019 fiscal year compared to the third quarter of our 2018 fiscal year due to a sale of top soil in our 2018 fiscal year.

Results of Operations for the Nine Months Ended June 30, 2019 and 2018
 
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our unaudited statements of operations for the nine months ended June 30, 2019 and 2018:
 
Nine Months Ended
June 30, 2019 (Unaudited)
 
Nine Months Ended
June 30, 2018 (Unaudited)
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
78,443,830

 
100.00

 
$
81,216,304

 
100.00

Cost of Goods Sold
76,751,420

 
97.84

 
80,177,490

 
98.72

Gross Profit
1,692,410

 
2.16

 
1,038,814

 
1.28

General and Administrative Expenses
2,222,067

 
2.83

 
2,111,926

 
2.60

Operating Income (Loss)
(529,657
)
 
(0.68
)
 
(1,073,112
)
 
(1.32
)
Other Income, net
327,179

 
0.42

 
572,879

 
0.71

Net Income (Loss)
$
(202,478
)
 
(0.26
)
 
$
(500,233
)
 
(0.62
)
    

20


The following table shows additional data regarding production and price levels for our primary inputs and products for the nine months ended June 30, 2019 and 2019.
 
 
Nine Months Ended June 30, 2019 (unaudited)
 
Nine Months Ended
June 30, 2018
(unaudited)
Production:
 
 
 
 
  Ethanol sold (gallons)
 
48,225,293

 
48,009,628

  Dried distillers grains sold (tons)
 
71,219

 
81,073

  Modified distillers grains sold (tons)
 
108,414

 
92,976

Corn oil sold (pounds)
 
7,707,320

 
9,492,100

Revenues:
 
 
 
 
  Ethanol average price per gallon (net of hedging)
 
$
1.25

 
$
1.28

  Dried distillers grains average price per ton
 
139.85

 
136.09

  Modified distillers grains average price per ton
 
53.01

 
63.17

Corn oil average price per pound
 
0.23

 
0.26

Primary Inputs:
 
 
 
 
  Corn ground (bushels)
 
17,312,371

 
16,998,419

Natural gas (MMBtu)
 
1,243,916

 
1,258,627

Costs of Primary Inputs:
 
 
 
 
  Corn average price per bushel (net of hedging)
 
$
3.42

 
$
3.35

Natural gas average price per MMBtu (net of hedging)
 
2.58

 
2.38

Other Costs (per gallon of ethanol sold):
 
 
 
 
  Chemical and additive costs
 
$
0.083

 
$
0.108

  Denaturant cost
 
0.034

 
0.038

  Electricity cost
 
0.047

 
0.045

  Direct labor cost
 
0.062

 
0.064


Revenue

Our revenue was lower for the nine months ended June 30, 2019 compared to the same period of our 2018 fiscal year due to decreased revenue from our products during the 2019 period. During the nine months ended June 30, 2019, approximately 79.3% of our total revenue was derived from ethanol sales, approximately 18.2% was from distillers grains sales and approximately 1.9% was from corn oil sales. During the nine months ended June 30, 2018, approximately 75.4% of our total revenue was derived from ethanol sales, approximately 21.0% was from distillers grains sales and approximately 3.2% was from corn oil sales.

Ethanol

The average price we received for our ethanol was approximately 2.34% less during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to demand decreases which resulted from the small refinery waivers issued by the EPA.

We sold slightly more gallons of ethanol during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to increased plant production.

From time to time we enter into forward sales contracts for our products. At June 30, 2019, we had no open ethanol futures contracts. We also had no ethanol futures contracts for the nine months ended June 30, 2019. Ethanol futures contracts resulted in a gain of approximately $1,800 during the nine months ended June 30, 2018.

Distillers Grains

The average prices we received for our dried distillers grains was approximately 2.76% greater during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to increased export demand for distillers

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grains. The average prices we received for our modified distillers grains was approximately 16.08% lower during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to weaker local demand for distillers grains.

We sold approximately 12.15% fewer tons of dried distillers grains during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018. We sold approximately 16.60% more total tons of modified distillers grains during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to production decisions we make based on local market demand and the relative costs of producing dried distillers grains versus modified distillers grains.
    
Corn Oil

The total pounds of corn oil we sold was approximately 18.80% less during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to a change in chemicals used during the production process which resulted in lower corn oil production. The average price we received for our corn oil was approximately 11.54% lower during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due primarily to decreased corn oil demand from the biodiesel industry.
    
Cost of Goods Sold

Our cost of goods sold is primarily made up of corn and natural gas expenses. Our cost of goods sold was lower for the nine months ended June 30, 2019 as compared to the nine months ended June 30, 2018 due primarily to lower chemical and ingredient costs, partially offset by higher corn and natural gas costs during the 2019 period.

Corn Costs

Our cost of goods sold related to corn was approximately 3.87% greater for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to increased corn consumption and higher corn costs per bushel. During the nine months ended June 30, 2019, we used approximately 1.85% more bushels of corn compared to the nine months ended June 30, 2018. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 2.09% greater for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018. In addition, during the nine months ended June 30, 2019, we had a realized gain of approximately $4.1 million for our corn derivative instruments which decreased our cost of goods sold. For the nine months ended June 30, 2018, we had a realized loss of approximately $767,200 for our corn derivative instruments which increased our cost of goods sold.

Natural Gas Costs

We consumed approximately 1.17% fewer MMBtu of natural gas during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018, due to improved operating efficiency at the plant. Our average cost per MMBtu of natural gas was approximately 8.40% greater during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018.

General and Administrative Expenses

Our general and administrative expenses were greater for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to increased consulting fees and meeting expenses for the carbon capture and storage project.

Other Income/Expense

We had less other income during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 due to having less interest income due to having less cash on hand during the 2019 period along with having a loss on sale of corn that could not be used in the production process.

Changes in Financial Condition for the Nine Months Ended June 30, 2019

Current Assets. We had more cash and equivalents at June 30, 2019 compared to September 30, 2018 primarily due to the transfer of funds from out restricted margin account. We had less restricted cash at June 30, 2019 compared to September 30, 2018 because we had less cash in our margin account associated with our hedging transactions. Due to the timing of payments from our marketers, we had more accounts receivable at June 30, 2019 compared to September 30, 2018. We had less inventory on hand at June 30, 2019 compared to September 30, 2018 due primarily to having less corn inventory at June 30, 2019.


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Property, Plant and Equipment. The value of our property, plant and equipment was lower at June 30, 2019 compared to September 30, 2018 primarily due to the regular depreciation of our assets.

Current Liabilities. Our accounts payable were lower at June 30, 2019 compared to September 30, 2018 due to having fewer deferred corn payments at June 30, 2019. Our accrued expenses were lower at June 30, 2019 compared to September 30, 2018 because we had less unpriced corn deliveries at June 30, 2019 compared to September 30, 2018. We also had a smaller accrued loss on our deferred corn purchase commitments.

Liquidity and Capital Resources

Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.
    
The following table shows cash flows for the nine months ended June 30, 2019 and 2019:
 
 
June 30, 2019 (unaudited)
 
June, 2018 (unaudited)
Net cash (used in) provided by operating activities
 
$
(89,354
)
 
$
14,343,196

Net cash (used in) investing activities
 
(568,856
)
 
(797,128
)
Net cash (used in) financing activities
 
(3,758
)
 
(4,222,116
)
Net (decrease) increase in cash
 
$
(661,968
)
 
$
9,323,952

Cash, cash equivalents and restricted cash, end of period
 
$
10,211,371

 
$
18,453,960


Cash Flow from Operations

Our operations provided less cash during the nine months ended June 30, 2019 compared to the same period of our 2018 fiscal year due to decreased net income along with changes in our derivative instrument positions, inventory and accounts payable which resulted in less cash being generated by our operations.

Cash Flow From Investing Activities

We used less cash for capital expenditures during the nine months ended June 30, 2019 compared to the same period of our 2018 fiscal year. During the 2019 period, our primary capital expenditures were for improvements to the centrifuges and heat exchangers.
    
Cash Flow from Financing Activities

We used less cash for financing activities during the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 because we did not make a distribution to our members during the 2019 period and we did not have any unit repurchases during the 2019 period.

Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs.  Assuming future relative price levels for corn, ethanol and distillers grains remain consistent, we expect operations to generate adequate cash flows to maintain operations.

Capital Expenditures
 
The Company had approximately $397,000 in construction in progress as of June 30, 2019 primarily relating to the carbon capture and storage project research.


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Capital Resources

Revolving Loan

On March 20, 2017, we entered into a new $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). Interest accrues on any outstanding balance on the Revolving Loan at a rate of 1.77% in excess of the one-month London Interbank Offered Rate ("LIBOR"). On May 31, 2019 we renewed the Revolving Loan and extended the maturity date to May 31, 2020 and decreasing the principle to $7 million. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At June 30, 2019, we had approximately $6,300,000 available on the Revolving Loan. We had $0 drawn on the Revolving Loan as of June 30, 2019. Interest accrued on the Revolving Loan as of June 30, 2019 at a rate of 4.21%.

Restrictive Covenants

The Revolving Loan is subject to certain financial covenants as set forth in the Credit Agreement. The most significant financial covenants require us to maintain a fixed charge coverage ratio of no less than 1.10:1.00 and a current ratio of no less than 1.50:1.00. Our fixed charge coverage ratio is calculated annually and measures our ability to pay our fixed expenses. Our current ratio is calculated quarterly and measures our liquidity and ability to pay short-term and long-term obligations.
    
As of June 30, 2019, we were in compliance with our loan covenants.

Significant Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. We discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. There has been no significant change in our critical accounting estimates since the end of our 2018 fiscal year. Effective October 1, 2018, the Company has adopted ASC 606 using the modified retrospective approach for all of its contracts. The Company also retrospectively adopted ASU No. 2016-18 on October 1, 2018.

Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP"). 

Commodity Price Risk
 
We expect to be exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process and the sale of ethanol.
 
We enter into fixed price contracts for corn purchases on a regular basis.  It is our intent that, as we enter into these contracts, we will use various hedging instruments (puts, calls and futures) to maintain a near even market position.  For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because our ethanol marketing company (RPMG) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
 
Although we believe our hedge positions will accomplish an economic hedge against our future purchases, they are not designated as hedges for accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged.  We use fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of sales.  The immediate recognition of

24


hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter and year to year due to the timing of the change in value of derivative instruments relative to the cost of the commodity being hedged.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
 
As of June 30, 2019, we had fixed corn purchase contracts for approximately 2.30 million bushels of corn and we had corn futures and option contracts for approximately 7.65 million bushels of corn.  As of June 30, 2019 we had an unrealized gain of approximately $797,000 related to our corn futures and option contracts.
 
It is the current position of our ethanol marketing company, RPMG, that under current market conditions, selling ethanol in the spot market will yield the best price for our ethanol.  RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.  
 
We estimate that our corn usage will be between 21 million and 23 million bushels per calendar year for the production of approximately 59 million to 64 million gallons of ethanol.  As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.
 
A sensitivity analysis has been prepared to estimate our exposure to corn, natural gas and ethanol price risk. Market risk related to our corn, natural gas and ethanol prices is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas, and our average ethanol sales price as of June 30, 2019, net of the forward and future contracts used to hedge our market risk for corn, natural gas and ethanol. The volumes are based on our expected use and sale of these commodities for a one year period from June 30, 2019. The results of this analysis, which may differ from actual results, are as follows:
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
 
Unit of Measure
 
Hypothetical Adverse Change in Price
 
Approximate Adverse Change to Income
Ethanol
63,900,000

 
Gallons
 
10
%
 
$
(8,946,000
)
Corn
22,821,000

 
Bushels
 
10
%
 
$
(4,375,000
)
Natural gas
1,664,000

 
MMBtu
 
10
%
 
$
(327,000
)

Item 4.  Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

Our management, including our President and Chief Executive Officer (the principal executive officer), Gerald Bachmeier, along with our Chief Financial Officer, (the principal financial officer), Jodi Johnson, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.

For the fiscal quarter ended June 30, 2019,  there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.     OTHER INFORMATION

Item 1. Legal Proceedings

From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers' compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.



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Item 1A. Risk Factors

There have been no material changes to the risk factors previously discussed in our annual report on Form 10-K for the fiscal year ended September 30, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information

None.

Item 6. Exhibits.

(a)
The following exhibits are filed as part of this report.
Exhibit No.
 
Exhibits
31.1

 
31.2

 
32.1

 
32.2

 
101

 
The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of June 30, 2019 and September 30, 2018, (ii) Statements of Operations for the three and nine months ended June 30, 2019 and 2018, (iii) Statements of Cash Flows for the nine months ended June 30, 2019 and 2018, and (iv) the Notes to Unaudited Condensed Financial Statements.**

(*)    Filed herewith.
(**)    Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
RED TRAIL ENERGY, LLC
 
 
 
 
Date:
August 12, 2019
 
/s/ Gerald Bachmeier
 
 
 
Gerald Bachmeier
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 12, 2019
 
/s/ Jodi Johnson
 
 
 
Jodi Johnson
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)

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