Company Quick10K Filing
Red Trail Energy
Price-0.00 EPS-0
Shares40 P/E0
MCap-0 P/FCF-0
Net Debt-11 EBIT-4
TEV-11 TEV/EBIT3
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-09-30 Filed 2020-12-18
10-Q 2020-06-30 Filed 2020-08-14
10-Q 2020-03-31 Filed 2020-05-15
10-Q 2019-12-29 Filed 2020-02-14
10-K 2019-09-30 Filed 2019-12-20
10-Q 2019-06-30 Filed 2019-08-12
10-Q 2019-03-31 Filed 2019-05-10
10-Q 2018-12-31 Filed 2019-02-14
10-K 2018-09-30 Filed 2018-12-17
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-14
10-Q 2017-12-31 Filed 2018-02-14
10-K 2017-09-30 Filed 2017-12-15
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-11
10-Q 2016-12-31 Filed 2017-02-14
10-K 2016-09-30 Filed 2016-12-15
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-13
10-Q 2015-12-31 Filed 2016-02-16
10-K 2015-09-30 Filed 2015-12-18
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-15
10-Q 2014-12-31 Filed 2015-02-13
10-K 2014-09-30 Filed 2014-12-15
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-13
10-Q 2013-12-31 Filed 2014-02-12
10-K 2013-09-30 Filed 2013-12-16
10-Q 2013-06-30 Filed 2013-08-12
10-Q 2013-03-31 Filed 2013-05-13
10-Q 2012-12-31 Filed 2013-02-14
10-K 2012-09-30 Filed 2012-12-21
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-11
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-12
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-19
10-Q 2010-06-30 Filed 2010-08-13
10-Q 2010-03-31 Filed 2010-05-13
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-06-24
8-K 2020-03-16
8-K 2019-10-08
8-K 2019-04-04
8-K 2018-09-04
8-K 2018-03-22
8-K 2018-01-24
8-K 2017-12-29

RTE 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Member Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Governor, Executive Officers and Corporate Governance
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Member Matters.
Item 13. Certain Relationships and Related Transactions, and Governor Independence
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
Item 16. Form 10 - K Summary
EX-31.1 certification3119-30x20.htm
EX-31.2 certification3129-30x20.htm
EX-32.1 certification3219-30x20.htm
EX-32.2 certification3229-30x20.htm

Red Trail Energy Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
1008060402002012201420172020
Assets, Equity
453525155-42012201420172020
Rev, G Profit, Net Income
20136-1-8-152012201420172020
Ops, Inv, Fin

rte-20200930
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anolMemberus-gaap:SalesMemberus-gaap:CommodityContractMemberus-gaap:NondesignatedMember2018-10-012019-09-300001359687rte:EthanolMemberus-gaap:SalesMemberus-gaap:CommodityContractMemberus-gaap:NondesignatedMember2017-10-012018-09-300001359687rte:SoybeanOilMemberus-gaap:SalesMemberus-gaap:CommodityContractMemberus-gaap:NondesignatedMember2019-10-012020-09-300001359687rte:SoybeanOilMemberus-gaap:SalesMemberus-gaap:CommodityContractMemberus-gaap:NondesignatedMember2018-10-012019-09-300001359687rte:SoybeanOilMemberus-gaap:SalesMemberus-gaap:CommodityContractMemberus-gaap:NondesignatedMember2017-10-012018-09-300001359687srt:NaturalGasReservesMemberus-gaap:CommodityContractMemberus-gaap:CostOfSalesMemberus-gaap:NondesignatedMember2019-10-012020-09-300001359687srt:NaturalGasReservesMemberus-gaap:CommodityContractMemberus-gaap:CostOfSalesMemberus-gaap:NondesignatedMember2018-10-012019-09-300001359687srt:NaturalGasReservesMemberus-gaap:CommodityContractMemberus-gaap:CostOfSalesMemberus-gaap:NondesignatedMember2017-10-012018-09-300001359687us-gaap:CommodityContractMemberus-gaap:NondesignatedMember2019-10-012020-09-300001359687us-gaap:CommodityContractMemberus-gaap:NondesignatedMember2018-10-012019-09-300001359687us-gaap:CommodityContractMemberus-gaap:NondesignatedMember2017-10-012018-09-300001359687us-gaap:InventoriesMember2019-10-012020-09-300001359687us-gaap:InventoriesMember2018-10-012019-09-300001359687us-gaap:InventoriesMember2017-10-012018-09-300001359687us-gaap:RevolvingCreditFacilityMemberus-gaap:DomesticLineOfCreditMember2020-09-300001359687us-gaap:RevolvingCreditFacilityMemberus-gaap:ConstructionLoansMember2020-09-300001359687us-gaap:RevolvingCreditFacilityMemberrte:PaycheckProtectionProgramMember2020-09-300001359687rte:BankOfNorthDakotaEthanolRecoveryProgramMemberus-gaap:RevolvingCreditFacilityMember2020-09-300001359687us-gaap:FairValueMeasurementsRecurringMemberus-gaap:CommodityContractMember2020-09-300001359687us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CommodityContractMember2020-09-300001359687us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberus-gaap:CommodityContractMember2020-09-300001359687us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:CommodityContractMember2020-09-300001359687us-gaap:FairValueMeasurementsRecurringMemberus-gaap:CommodityContractMember2019-09-300001359687us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CommodityContractMember2019-09-300001359687us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberus-gaap:CommodityContractMember2019-09-300001359687us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:CommodityContractMember2019-09-3000013596872019-10-010001359687us-gaap:TransportationEquipmentMember2019-10-012020-09-300001359687us-gaap:TransportationEquipmentMember2018-10-012019-09-300001359687us-gaap:TransportationEquipmentMember2017-10-012018-09-300001359687us-gaap:EquipmentMember2020-09-300001359687us-gaap:EquipmentMember2019-09-300001359687us-gaap:TransportationEquipmentMember2020-09-300001359687us-gaap:CommonClassAMember2020-09-300001359687us-gaap:CommonClassAMember2019-09-300001359687rte:BismarkLandCompanyLLCMember2016-12-31utr:acre00013596872018-06-012018-06-300001359687us-gaap:CommodityMemberus-gaap:FixedPriceContractMember2019-10-012020-09-300001359687rte:RawWaterPurchaseMember2019-10-012020-09-300001359687rte:ProfitAndCostSharingAgreementMember2016-11-010001359687rte:ProfitAndCostSharingAgreementMember2016-11-012016-11-010001359687rte:ProfitAndCostSharingAgreementMember2016-10-112016-10-110001359687rte:ProfitAndCostSharingAgreementMember2019-10-012020-09-300001359687rte:CarbonCaptureAndStorageProjectResearchAgreementMember2020-09-300001359687rte:CarbonCaptureAndStorageProjectResearchAgreementMember2019-10-012020-09-3000013596872016-10-012017-09-300001359687srt:AffiliatedEntityMember2020-09-300001359687srt:AffiliatedEntityMember2019-09-300001359687srt:AffiliatedEntityMember2019-10-012020-09-300001359687srt:AffiliatedEntityMember2018-10-012019-09-300001359687srt:AffiliatedEntityMember2017-10-012018-09-3000013596872019-10-012019-12-3100013596872020-01-012020-03-3100013596872020-04-012020-06-3000013596872020-07-012020-09-3000013596872018-10-012018-12-3100013596872019-01-012019-03-3100013596872019-04-012019-06-3000013596872019-07-012019-09-3000013596872017-10-012017-12-3100013596872018-01-012018-03-3100013596872018-04-012018-06-3000013596872018-07-012018-09-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
xAnnual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended September 30, 2020 

 oTransition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
For the transition period from __________ to __________
 
COMMISSION FILE NUMBER000-52033

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)

Securities registered pursuant to Section 12(b) of the Act: None.

Title of each classTrading Symbol(s)Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act: Class A Membership Units

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes     x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes     x No

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 Accelerated Filer  
Non-Accelerated Filer Smaller Reporting Company
Emerging Growth Company

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.                 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

The aggregate market value of the membership units held by non-affiliates of the registrant as of March 31, 2020 was $34,969,920.  There is no established public trading market for our membership units.  The aggregate market value was computed by reference to the most recent offering price of our Class A units which was $1 per unit.
 
As of December 18, 2020, there were 40,148,160 Class A Membership Units outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report.

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INDEX
Page Number
PART I
Item 1. Business
Item IA. Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant's Common Equity, Related Member Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Member Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES


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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," or "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information 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 reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

A slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from pandemics including COVID-19;
The reduction or elimination of the renewable fuels use requirement in the Federal Renewable Fuels Standard (RFS);
The Chinese distillers grains tariffs and their impact on world distillers grains markets;
The Chinese and Brazilian ethanol import duties and their impact on world ethanol demand and prices;
Any delays in shipping our products by rail and corresponding decreases in our sales as a result of these shipping delays;
An unfavorable spread between the market price of our products and our feedstock costs;
Fluctuations in the price and market for ethanol, distillers grains and corn oil;
Availability and costs of our raw materials, particularly corn and natural gas;
Changes in or lack of availability of credit;
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, meet debt service requirements and 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 in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices that currently benefit the ethanol industry including:
national, state or local energy policy - examples include legislation already passed such as the California low-carbon fuel standard as well as potential legislation in the form of carbon cap and trade;
legislation mandating the use of ethanol or other oxygenate additives; or
environmental laws and regulations that apply to our plant operations and their enforcement.
Changes and advances in ethanol production technology; and
Competition from alternative fuels and alternative fuel additives.

Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

AVAILABLE INFORMATION
 
Information about us is also available at our website at www.redtrailenergyllc.com, under "SEC Compliance," which includes links to reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.
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PART I
ITEM 1.    BUSINESS

Business Development

    Red Trail Energy, LLC was formed as a North Dakota limited liability company in July of 2003, for the purpose of constructing, owning and operating a fuel-grade ethanol plant near Richardton, North Dakota in western North Dakota. References to "we," "us," "our" and the "Company" refer to Red Trail Energy, LLC. We began production in January 2007.

On January 22, 2020, we entered into two loans with Cornerstone Bank ("Cornerstone"). We entered into a $10,000,000 revolving line of credit (the "Revolving Loan") and a $7,000,000 construction line of credit (the "Construction Loan") for our carbon dioxide capture and storage project. The details of these loans are described in more detail below in the section entitled "Capital Resources."

On April 16, 2020, the Company received a Paycheck Protection Program Loan (the "PPP Loan") for $873,400 with Cornerstone. The maturity date of the PPP Loan is April 16, 2022. The fixed interest rate on September 30, 2020 was 1%. Under the terms of the loan, the Company may apply for forgiveness under the PPP regulations if the Company uses the proceeds of the loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company used the entire PPP Loan amount for qualifying expenses and applied for forgiveness on October 31, 2020, but we can provide no assurance that we will be able to gain forgiveness for all or any portion of the loan. The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020 and allows for the amendment of the maturity date on existing loans from two years to five years.

On July 13, 2020 the Company received a loan through the Bank of North Dakota Ethanol Recovery Program and Cornerstone Bank for $5.41 million. The Ethanol Recovery Program was developed by the North Dakota Ethanol Producers Association and the Bank of North Dakota to use the existing Biofuels Pace program and value-added loan guarantee program to help ethanol production facilities weather the pandemic economic challenges. Ethanol producers could qualify for up to $15 million dollars of a low interest loan of 1% based on the amount of annual corn grind. The maturity date of the loan is July 13, 2025. The fixed interest rate on September 30, 2020 was 3.75% with an interest rate buy down through the Bank of North Dakota to 1%.

Principal Products
    
    The principal products that we produce are ethanol, distillers grains and corn oil. The table below shows the approximate percentage of our total revenue which is attributed to each of our primary products for each of our last three fiscal years.
ProductFiscal Year 2020Fiscal Year 2019Fiscal Year 2018
Ethanol76.1 %77.7 %76.4 %
Distillers Grains19.4 %19.3 %20.5 %
Corn Oil4.0 %2.5 %3.1 %

Ethanol

Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. Ethanol produced in the United States is primarily used for blending with unleaded gasoline and other fuel products. Ethanol blended fuel is typically designated in the marketplace according to the percentage of the fuel that is ethanol, with the most common fuel blend being E10, which contains 10% ethanol. The United States Environmental Protection Agency (the "EPA") has approved the use of gasoline blends that contain 15% ethanol, or E15, for use in all vehicles manufactured in model year 2001 and later. In 2019, the EPA changed regulations which now allow E15 to be sold year-round in all markets in the United States. In addition, flexible fuel vehicles can use gasoline blends that contain up to 85% ethanol called E85.

As a result of an emergency domestic need resulting from the COVID-19 pandemic, some ethanol plants provided ethanol to be used for the production of hand sanitizer and related products. Some ethanol plants have subsequently announced plans to install equipment to allow USP-grade ethanol production which can also be used for disinfectants, pharmaceuticals,
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fragrances, cosmetics and other industrial applications. We engaged in some limited ethanol sales for sanitizer use during our 2020 fiscal year. Approximately 3.9% of our revenues were from industrial ethanol sales.

Distillers Grains

The principal co-product of the ethanol production process is distillers grains, a high protein animal feed supplement primarily marketed to the dairy and beef industry. We produce two forms of distillers grains: distillers dried grains and modified distillers grains. Modified distillers grains is processed corn mash that has been dried to approximately 50% moisture which has a shelf life of approximately seven days and is often sold to nearby markets. Distillers dried grains is processed corn mash that has been dried to approximately 10% moisture. It has a longer shelf life and may be sold and shipped to any market regardless of its vicinity to our ethanol plant.

Corn Oil

    In March 2012, we commenced operating our corn oil extraction equipment. The corn oil that we are capable of producing is not food grade corn-oil and it cannot be used for human consumption. The primary uses of the corn oil that we produce are for animal feed, industrial uses and biodiesel production.

Principal Product Markets

We market nearly all of our products through a professional third party marketer, RPMG, Inc. ("RPMG"). The only products we sell which are not marketed by RPMG are E85 and E30 and certain modified distillers grains which we market internally to local customers. RPMG is a subsidiary of Renewable Products Marketing Group, LLC ("RPMG, LLC"). We are a part owner of RPMG, LLC which allows us to realize favorable marketing fees for our products and allows us to share in the profits generated by RPMG, LLC. Our ownership interest in RPMG, LLC also entitles us to a seat on its board of directors which is filled by Gerald Bachmeier, our Chief Executive Officer.  Except for the modified distillers grains and E85/E30 we market locally, RPMG decides where our products are marketed and sold. Our products are primarily sold in the domestic market; however, as domestic production of ethanol, distillers grains and corn oil continue to expand, we anticipate increased international sales of our products. Recently, the United States has exported a significant amount of distillers grains to Mexico, Vietnam, Indonesia, South Korea and the European Union. China was not a significant source of export demand due to increased tariffs which make United States distillers grains not feasible for export to China. In addition, the United States exported significant amounts of ethanol to Brazil, Canada, India and the European Union.

    We expect our product marketer to explore all markets for our products, including export markets. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.

Distribution Methods

    Our ethanol plant is located near Richardton, North Dakota in Stark County, in the western half of North Dakota. We selected the Richardton site because of its proximity to existing coal supplies, the initial fuel source for our ethanol plant, and accessibility to road and rail transportation. Our plant is served by the Burlington Northern and Santa Fe Railway Company.
 
    We sell and market the ethanol, distillers grains and corn oil produced at the plant through normal and established markets, including local, regional and national markets. Our products are primarily shipped by rail and by truck in our local market. We have separate marketing agreements with RPMG for our ethanol, distillers grains and corn oil. Whether or not our products are sold in local markets will depend on decisions made by RPMG, except for the E85/E30 and the modified distillers grains which we internally market locally. Local markets are evaluated on a case-by-case basis.
 
Ethanol
 
    We have an exclusive marketing agreement with RPMG for the purposes of marketing and distributing all of the ethanol we produce at the ethanol plant. Because we are an owner of RPMG, LLC, our marketing fees are based on RPMG's actual cost to market our ethanol. Our ethanol marketing agreement provides that we can sell our ethanol either through an index arrangement or at a fixed price agreed to between us and RPMG. The term of our ethanol marketing agreement is perpetual, until it is terminated according to the terms of the agreement. The primary reasons the ethanol marketing agreement would terminate are if we cease to be an owner of RPMG, LLC, if there is a breach of the agreement which is not cured, or if we give advance notice to RPMG that we would like to terminate the agreement. Notwithstanding our right to terminate the ethanol marketing agreement, we may be obligated to continue to market our ethanol through RPMG for a period of time after
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the termination. Further, following the termination, we agreed to accept an assignment of certain railcar leases which RPMG has secured to service us. If the ethanol marketing agreement is terminated, it would trigger a redemption of our ownership interest in RPMG, LLC.

Distillers Grains
 
    On August 29, 2013, we executed a distillers grain marketing agreement with RPMG effective starting on October 1, 2013. Pursuant to the marketing agreement, RPMG markets all of the dried distillers grains we produce and we will continue to internally market our modified distillers grains. Due to the fact that we are a part owner of RPMG, LLC, RPMG will only charge us its actual cost of marketing our distillers grains to its customers.  The initial term of the marketing agreement was one year and thereafter the agreement renews for additional one year periods unless we elect not to renew the agreement. The agreement may be terminated by either party based on certain events described in the agreement or based on the bankruptcy or insolvency of either party.

    We market and sell our modified distillers grains internally.  Substantially all of our sales of modified distillers grains are to local farmers and feed lots.

Corn Oil

    In March 2012, we executed a corn oil marketing agreement with RPMG to sell all of the corn oil that we produce. We pay RPMG a commission based on each pound of corn oil that RPMG sells on our behalf. The initial term of the corn oil marketing agreement was one year and the agreement automatically renews for additional one year terms unless either party gives notice that it will not extend the agreement past the current term.

New Products and Services

    We started selling industrial grade ethanol for sanitizer use during our 2020 fiscal year. We do not anticipate introducing any new products or services during our 2021 fiscal year.

Sources and Availability of Raw Materials

Corn

Our ethanol plant used approximately 21.3 million bushels of corn during our 2020 fiscal year, or approximately 62,000 bushels per day, as the feedstock for its dry milling process. Our commodity manager is responsible for purchasing corn for our operations, scheduling corn deliveries and establishing hedging positions to protect the price we pay for corn.

    During our 2020 fiscal year, we were able to secure sufficient corn to operate the plant and do not anticipate any problems securing enough corn during our 2021 fiscal year. Almost all of our corn is supplied from farmers and local grain elevators in North Dakota and South Dakota. During our 2020 fiscal year, corn prices have been lower than prior years, mainly due to concerns related to the COVID-19 pandemic. On October 9, 2020, the USDA released a report estimating the 2020 corn crop in the United States at approximately 14.7 billion bushels, up 8% from last year's production, with yields averaging 178.4 bushels per acre. The USDA forecasted area harvested for grain at 82.5 million acres, up 1% from 2019. We have not had difficulty securing the corn we require for our operations and we anticipate that we will be able to secure the corn we need to operate the ethanol plant during our 2021 fiscal year, although potentially at a higher price. While we do not anticipate encountering problems sourcing corn, a shortage of corn could develop, particularly if we experience an extended drought or other production problem during our 2021 fiscal year.  Poor weather can be a major factor in increasing corn prices.  If the United States were to endure an entire growing season with poor weather conditions, it could result in a prolonged period of higher than normal corn prices.  

    Corn prices are also impacted by world supply and demand, the price of other commodities, current and anticipated stocks, domestic and export prices and supports and the government's current and anticipated agricultural policy.  Corn prices have been volatile in the past and volatility could return to the market in the future. While we have experienced several years of very favorable corn crops with relatively flat corn demand which reduced market corn prices, if poor weather conditions lead to a decrease in the amount of corn produced in the future, it could result in corn price volatility and increased corn prices.


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Natural Gas

    Following our natural gas conversion project which was completed during the second quarter of our 2015 fiscal year, we use natural gas as the fuel source to power our ethanol plant. We are using natural gas to produce process steam and to dry our distillers grains products. Due to our close proximity to the Bakken oil field which produces a significant amount of natural gas, we anticipate that natural gas prices in our area will remain lower and the cost to transport the natural gas to our ethanol plant will be low. We entered into a natural gas supply agreement with Rainbow Gas Company which provides a supply of natural gas to the ethanol plant. We do not anticipate any difficulty securing the natural gas we require to operate the ethanol plant.

Electricity
    
    The production of ethanol uses significant amounts of electricity. We entered into a contract with Roughrider Electric Cooperative to provide our needed electrical energy.   This contract was renewed in August 2019. This contract automatically renews unless either party gives notice of its intent not to renew the agreement.

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.  We anticipate receiving adequate water supplies during our 2021 fiscal year.

Patents, Trademarks, Licenses, Franchises and Concessions

    We do not currently hold any patents, trademarks, franchises or concessions. We were granted a perpetual and royalty free license by ICM, Inc. ("ICM") to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM was included in the amount we paid to Fagen, Inc. to design and build the plant.

Seasonality of Sales

    We experience some seasonality of demand for our ethanol, distillers grains and corn oil. Since ethanol is predominantly blended with gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving and, as a result, increased gasoline demand. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand. We also experience decreased distillers grains demand during the summer months due to natural depletion in the number of animals at feed lots and during times when cattle are turned out to pasture. Finally, corn oil is used for biodiesel production which typically decreases in the winter months due to decreased biodiesel demand.

Working Capital

    We primarily use our working capital for purchases of raw materials necessary to operate our ethanol plant and for capital expenditures to maintain and upgrade the plant. During our 2020 fiscal year, our primary sources of working capital were cash from our operations as well as our revolving line-of-credit with Cornerstone.
    
Dependence on a Few Major Customers

    As discussed above, we rely on RPMG for the sale and distribution of all of our ethanol, dried distillers grains and corn oil. Accordingly, we are highly dependent on RPMG for the successful marketing of most of our products. We anticipate that we would be able to secure alternate marketers should RPMG fail, however, a loss of our relationship with RPMG could significantly harm our financial performance.

Competition

We are in direct competition with numerous ethanol producers, many of which have greater resources than we have. Larger ethanol producers may be able to take advantage of economies of scale due to their larger size and increased bargaining power with both customers and raw material suppliers. As of October 21, 2020, the Renewable Fuels Association ("RFA") estimates that there are 210 ethanol production facilities in the United States with capacity to produce approximately 17.6 billion gallons of ethanol annually. In the past, the ethanol industry experienced consolidation where a few larger ethanol producers emerged who control a large portion of United States ethanol production. The largest ethanol producers include
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Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, each of which is capable of producing significantly more ethanol than we produce. Collectively this group controls approximately 40% of the ethanol production capacity in the United States.

The following table identifies the largest ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL PRODUCTION CAPACITY BY TOP PRODUCERS
Producers of Approximately 800
million gallons per year (MMgy) or more
CompanyCurrent Capacity
(MMgy)
Percent of Total Industry Capacity
Archer Daniels Midland1,716 9.7 %
POET Biorefining1,805 10.2 %
Valero Renewable Fuels1,730 9.8 %
Green Plains Renewable Energy1,128 6.4 %
Flint Hills Resources840 4.8 %
TOTAL7,219 39.9 %
        Updated: October 21, 2020

Ethanol Competition

Ethanol is a commodity product where competition in the industry is predominantly based on price and consistent fuel quality. Larger ethanol producers may be able to realize economies of scale in their operations that we are unable to realize. Further, we have experienced increased competition from oil companies who have purchased ethanol production facilities, including Valero Renewable Fuels and Flint Hills Resources, which are subsidiaries of larger energy companies. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate our ethanol plant. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. This added flexibility may allow these ethanol producers to compete more effectively, especially during periods when operating margins are unfavorable in the ethanol industry. Finally some ethanol producers who own ethanol plants in geographically diverse areas of the United States may spread the risk they encounter related to feedstock prices due to localized decreased corn production and supplies.

    We anticipate competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock that is being explored is cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn-based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

    A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has grown in popularity, especially in urban areas. While in the past there were a limited number of vehicle recharging stations, making electric cars not feasible for all consumers, there has been increased focus on developing these recharging stations which have made electric car technology more widely available. Additional competition from these other sources of alternative energy, particularly in the automobile market, could reduce the demand for ethanol, which would negatively impact our profitability.

In addition to domestic producers of ethanol, we face competition from ethanol produced in foreign countries, particularly Brazil. Ethanol imports have been lower in recent years and ethanol exports have been higher which was one of the reasons for improved operating margins in the ethanol industry. As of May 1, 2013, Brazil increased its domestic ethanol use requirement from 20% to 25% which decreased the amount of ethanol available in Brazil for export. Further, in August 2017, Brazil instituted a quota and tariff on ethanol produced in the United States and exported to Brazil which decreased the amount of ethanol Brazil has available for export. Brazil increased the quota during our 2019 fiscal year which resulted in additional demand from Brazil. In December 2020, Brazil removed the import quota so all gallons of ethanol exported to Brazil from the
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United States is subject to the Brazilian tariff. In the future, we may experience increased ethanol imports from Brazil which could put negative pressure on domestic ethanol prices and result in excess ethanol supply in the United States.

    Competition among ethanol producers may continue to increase as gasoline demand decreases due to more fuel efficient vehicles being produced. If the concentration of ethanol used in most gasoline does not increase and gasoline demand is lower due to increased fuel efficiency by the vehicles operated in the United States, competition may increase among ethanol producers to supply the ethanol market.

    Finally, many ethanol producers increased their production capacities through expansion projects which started becoming operational during our 2018 fiscal year. These expansion projects have increased the supply of ethanol in the market which has negatively impacted market ethanol prices and may continue to result in excess ethanol supply in the future. During our 2019 fiscal year, many ethanol producers reduced production or ceased production altogether due to unfavorable operating margins which somewhat offset the additional ethanol production from these expansion projects. During 2020, the ethanol industry was impacted by decreased gasoline and ethanol demand because of social distancing restrictions implemented because of the COVID-19 pandemic.

Distillers Grains Competition

    Our ethanol plant competes with other ethanol producers in the production and sales of distillers grains. Distillers grains are primarily used as an animal feed which replaces corn and soybean meal. As a result, we believe that distillers grains prices are positively impacted by increases in corn and soybean prices. In addition, in recent years the United States ethanol industry has increased exports of distillers grains which management believes has positively impacted demand and prices for distillers grains in the United States. In the event these distillers grains exports decrease, it could lead to an oversupply of distillers grains in the United States which could result in increased competition among ethanol producers for sales of distillers grains and could negatively impact distillers grains prices in the United States.

Corn Oil Competition

    We compete with many ethanol producers for the sale of corn oil. Many ethanol producers have installed the equipment necessary to separate corn oil from the distillers grains they produce which has increased competition for corn oil sales and has resulted in lower market corn oil prices.

Governmental Regulation and Federal Ethanol Supports

Federal Ethanol Supports

    The ethanol industry is dependent on the ethanol use requirement in 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 is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. 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. Starting in 2009, the RFS required that a portion of the RFS must be met by certain "advanced" renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

    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 required 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 ("RVO").

    The statutory RVO for all renewable fuels for 2018 was 19.29 billion gallons, of which corn-based ethanol could meet 15 billion gallons of the RVO. On November 30, 2018, the final RVO for 2019 was set at 19.92 billion gallons and the corn-based ethanol RVO was set at 15 billion gallons. On December 19, 2019, the final RVO for 2020 was set at 20.09 billion gallons and the corn-based ethanol RVO was set at 15 billion gallons. The EPA has not yet released the proposed rule to set the renewable volume obligation for 2021.

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During 2019 it came to light that the EPA was issuing waivers of the RVO obligations for certain small refineries. These small refinery waivers resulted in significant decreases in ethanol demand during 2018 and 2019 which are below the RVO requirements. Many in the ethanol industry believe these waivers did not meet the standards set out in the RFS. The ethanol industry has been pushing to EPA and the Trump administration to reverse the effects of these small refinery waivers which we believe contributed to poor operating margins starting in 2018 and continuing through our 2020 fiscal year. In January 2020, the Tenth Circuit Court of Appeals ruled that small refinery exemptions may only be granted to refineries that had secured them continuously each year since 2010. Consistent with this ruling, in September 2020, the EPA denied certain small refinery exemption petitions filed by oil refineries in 2020 seeking retroactive relief from their ethanol use requirements for prior years.

    Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the United States in most years is approximately 143 billion gallons per year. Gasoline demand was lower in 2020 due to the COVID-19 pandemic. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum domestic demand for ethanol is approximately 14.3 billion gallons per year. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the use of higher percentage blends such as E15 or E85. These higher percentage blends may lead to additional ethanol demand if they become more widely available and accepted by the market.

    Many in the ethanol industry believe that it will be impossible to meet the RFS requirement in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. The EPA has approved the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. However, there are still state hurdles that need to be addressed in some states before E15 will become more widely available. Many states still have regulatory issues that prevent the sale of E15. Sales of E15 may be limited because it is not approved for use in all vehicles, the EPA requires a label that management believes may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In June 2019, the Trump Administration approved the use of E15 year-round which has somewhat expanded the use of E15, but has not been significant enough to offset demand losses which resulted from the small refinery exemption waivers from the RFS.

In May 2020, the United States Department of Agriculture ("USDA") announced the Higher Blends Infrastructure Incentive Program which consists of up to $100 million in funding for grants to be used to increase the availability of higher blends of ethanol and biodiesel fuels. Funds may be awarded to retailers such as fueling stations and convenience stores to assist in the cost of installation or upgrading of fuel pumps and other infrastructure. In October 2020, the USDA announced the first round of awards to recipients of $22 million worth of grants.

Effect of Governmental Regulation

The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the ethanol plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. Plant operations are governed by the Occupational Safety and Health Administration ("OSHA"). OSHA regulations may change such that the costs of operating the ethanol plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.

We have obtained all of the necessary permits to operate the ethanol plant. During our 2020 fiscal year, we incurred costs and expenses of approximately $54,000 complying with environmental laws, including the cost of obtaining permits. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations. Management believes converting the plant to use natural gas as the fuel source instead of coal has reduced our environmental compliance costs.

    In late 2009, California passed a Low Carbon Fuels Standard ("LCFS"). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to the RFS. The LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices affecting our ability to operate profitably.

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    In August 2017, Brazil instituted an import quota for ethanol produced in the United States and exported to Brazil, along with a 20% tariff on ethanol imports in excess of the quota. In September 2019, the Brazilians increased the tariff free import quota from 600 million liters to 750 million liters. In December 2020, the tariff free quota was revoked and all U.S. ethanol now faces a 20% tariff when imported into Brazil. This tariff and quota have reduced exports of ethanol to Brazil and may continue to negatively impact ethanol exports from the United States. Any reduction in ethanol exports could negatively impact market ethanol prices in the United States. In addition, the Chinese government increased the tariff on United States ethanol imports into China from 30% to 45% and subsequently to 70%. 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, despite recent positive discussions. 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.
    
Employees

As of December 18, 2020, we had 46 full-time employees. We anticipate that we will have approximately 47 full-time employees during the next 12 months.

Item 1A. Risk Factors

    You should carefully read and consider the risks and uncertainties below and the other information contained in this report.  The risks and uncertainties described below are not the only ones we may face.  The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.

Risks Relating to Our Business

We are subject to global and regional economic downturns and related risks and the effects of COVID-19 or another pandemic may materially and adversely affect demand and the market price for our products. The level of demand for our products is affected by global and regional demographic and macroeconomic conditions. A significant downturn in global economic growth, or recessionary conditions in major geographic regions for prolonged periods, may lead to reduced demand for our products, which could have a negative effect on the market price of our products. In December 2019, a novel coronavirus surfaced in Wuhan, China (“COVID-19”). The spread of COVID-19 worldwide has resulted in businesses suspending or substantially curtailing global operations and travel, quarantines, and an overall substantial slowdown of economic activity. Transportation fuels in particular, including ethanol, have experienced significant price declines and reduced demand. The effects of COVID-19 have and may continue to materially and adversely affect the market price for our products, our business, results of operations and liquidity.

COVID-19 or another pandemic may negatively impact our ability to operate our business which could decrease or eliminate the value of our units. COVID-19 has resulted in significant uncertainty in many areas of our business. We do not know how long these conditions will last. This uncertainty is expected to negatively impact our operations. We may experience labor shortages if our employees are unable or unwilling to come to work. If our suppliers cannot deliver the supplies we need to operate our business or if we are unable to ship our products due to trucking or rail shipping disruptions, we may be forced to suspend operations or reduce production. If we are unable to operate the ethanol plant at capacity, it may result in unfavorable operating results. Any shut down of operations or reduction in production, especially for an extended period of time, could reduce or eliminate the value of our units.

    The EPA has issued small refinery waivers to the RFS requirement which has resulted in demand destruction and negatively impacted profitability in the ethanol industry. During 2019, the ethanol industry learned that the EPA has been issuing small refinery waivers to the ethanol use requirements in the RFS. In previous years, when the EPA issued small refinery waivers, it reallocated the waived requirements to other refiners. The EPA under the Trump Administration was granting significantly more waivers than in the past and was not reallocating the waived amounts to other refiners. These actions have resulted in demand destruction starting in 2018 which has continued to result in reduced demand for ethanol. This reduction in ethanol demand has negatively impacted profitability in the ethanol industry. These small refinery waivers could be issued in future years which could impact ethanol demand.

    A decrease in the spread between the price we receive for our products and our raw material costs will negatively impact our profitability. Practically all of our revenue is derived from the sale of our ethanol, distillers grains and corn oil. Our primary raw material costs are corn costs and energy costs. Our profitability depends on a positive spread between the market price of the ethanol, distillers grains and corn oil we produce and the raw material costs related to these products. While ethanol, distillers grains and corn oil prices typically change in relation to corn prices, this correlation may not always exist. In
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the event the prices for our products decrease at a time when our raw material costs are increasing, we may not be able to profitably operate the plant. In the event the spread between the price we receive for our products and the raw material costs associated with producing those products is negative for an extended period of time, we may not be able to maintain liquidity and we may fail which could negatively impact the value of our units.

    Declines in the price of ethanol or distillers grain would significantly reduce our revenues. The sales prices of ethanol and distillers grains can be volatile as a result of a number of factors such as overall supply and demand, the price of gasoline and corn, levels of government support, tariffs and import quotas, and the availability and price of competing products. We are dependent on a favorable spread between the price we receive for our ethanol and distillers grains and the price we pay for corn and natural gas. Any lowering of ethanol and distillers grains prices, especially if it is associated with increases in corn and natural gas prices, may affect our ability to operate profitably. We anticipate the price of ethanol and distillers grains to continue to be volatile in our 2021 fiscal year as a result of the net effect of changes in the price of gasoline and corn and increased ethanol supply offset by changes in ethanol demand. Declines in the prices we receive for our ethanol and distillers grains will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably for an extended period of time which could decrease the value of our units.

    Decreasing gasoline prices could negatively impact our ability to operate profitably. Discretionary blending is an important secondary market which is often determined by the price of ethanol versus the price of gasoline. In periods when discretionary blending is financially unattractive, demand for ethanol may be reduced. Historically, the price of ethanol has been less than the price of gasoline which increased demand for ethanol from fuel blenders. However, recently, low oil prices have driven down the price of gasoline which has reduced the spread between the price of gasoline and the price of ethanol which could discourage discretionary blending, and result in a downwards market adjustment in the price of ethanol. If oil and gasoline prices remain lower for a significant period of time, it could hurt our ability to profitably operate the ethanol plant which could decrease the value of our units.

    Increases in the price of corn or natural gas would reduce our profitability. Our primary source of revenue is from the sale of ethanol, distillers grains and corn oil. Our results of operations and financial condition are significantly affected by the cost and supply of corn and natural gas. Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control including weather and general economic factors.

    Ethanol production requires substantial amounts of corn. Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to operate profitably because of the higher cost of operating our plant. We may not be able to offset any increase in the price of corn by increasing the price of our products. If we cannot offset increases in the price of corn, our financial performance may be negatively affected.

    The prices for and availability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond our control such as higher prices as a result of colder than average weather conditions or natural disasters, overall economic conditions and foreign and domestic governmental regulations and relations. Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and more significantly, distillers grains for our customers. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition.

    Our business is not diversified which could negatively impact our ability to operate profitably. Our success depends largely on our ability to profitably operate our ethanol plant. We do not have any other lines of business or other sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol, distillers grains and corn oil. If economic or political factors adversely affect the market for ethanol, distillers grains or corn oil, we have no other line of business to fall back on. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.

    Our inability to maintain or secure credit facilities we may require in the future may negatively impact our liquidity. While we do not currently require more financing than we have, in the future we may need additional financing. If we require financing in the future and we are unable to secure such financing, or we are unable to secure the financing we require on reasonable terms, it may have a negative impact on our liquidity. This could negatively impact the value of our units.

We engage in hedging transactions which involve risks that could harm our business.  We are exposed to market risk from changes in commodity prices, including the prices we pay for our raw materials and the prices we receive for our finished products. We seek to minimize our exposure to fluctuations in the prices of corn, ethanol and distillers grains through the use of hedging instruments. However, our hedging activities may not successfully reduce the risk caused by price
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fluctuations which may leave us vulnerable to volatility in corn, ethanol and distillers grains prices. Alternatively, we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which the prices for these commodities fluctuate. Further, using cash for margin calls to support our hedge positions can have an impact on the cash we have available for our operations which could negatively impact our liquidity. The effects of our hedging activities may negatively impact our ability to profitably operate which could reduce the value of our units.

    We may violate the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans. Management anticipates that we will be in compliance with our loan covenants in our Cornerstone loans. However, if we violate the terms of our credit agreement, Cornerstone could deem us in default of our loans and require us to immediately repay any outstanding balance of our loans.

Changes and advances in ethanol production technology could require us to incur costs to update the ethanol plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.  Advances and changes in the technology of ethanol production are expected to occur.  Such advances and changes may make the ethanol production technology installed in our ethanol plant less desirable or obsolete.  These advances could allow our competitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause the ethanol plant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive.  Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures.  These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms.  These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income which could decrease the value of our units.

    We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their employment with us, they may choose to seek other employment. Any loss of these officers and key employees may prevent us from operating the ethanol plant profitably and could decrease the value of our units.

    Failures of our information technology infrastructure could have a material adverse effect on operations. We utilize various software applications and other information technology that are critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, including production, manufacturing, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected.
    A cyber attack or other information security breach could have a material adverse effect on our operations and result in financial losses. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. If we are unable to prevent cyber attacks and other information security breaches, we may encounter significant disruptions in our operations which could adversely impact our business, financial condition and results of operations or result in the unauthorized disclosure of confidential information. Such breaches may also harm our reputation, result in financial losses or subject us to litigation or other costs or penalties.

Risks Related to the Ethanol Industry

The ethanol industry is an industry that is changing rapidly which can result in unexpected developments that could negatively impact our operations and the value of our units. The ethanol industry has grown significantly in the last
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decade. This rapid growth has resulted in significant shifts in supply and demand of ethanol over a very short period of time. As a result, past performance by the ethanol plant or the ethanol industry generally might not be indicative of future performance. We may experience a rapid shift in the economic conditions in the ethanol industry which may make it difficult to operate the ethanol plant profitably. If changes occur in the ethanol industry that make it difficult for us to operate the ethanol plant profitably, it could result in a reduction in the value of our units.

Excess ethanol supply in the market could put negative pressure on the price of ethanol which could lead to tight operating margins and may impact our ability to operate profitably. In the past the ethanol industry has confronted market conditions where ethanol supply exceeded demand which led to unfavorable operating conditions. A disconnect between ethanol supply and demand can result in lower ethanol prices which can result in unfavorable operating conditions. The United States has recently benefited from additional exports of ethanol which may not continue to occur during our 2021 fiscal year. We may experience periods of ethanol supply and demand imbalance during our 2021 fiscal year, particularly if the EPA issues additional small refinery waivers from the RFS. If we experience excess ethanol supply, either due to increased ethanol production, lower ethanol demand or lower overall gasoline demand, it could negatively impact the price of ethanol which could hurt our ability to profitably operate the ethanol plant.

    Distillers grains demand and prices have been negatively impacted by the Chinese anti-dumping duty. China was previously the world's largest importer of distillers grains produced in the United States. On January 12, 2016, the Chinese government announced that it would commence an anti-dumping and countervailing duty investigation related to distillers grains imported from the United States. On January 10, 2017, China announced a final ruling related to its anti-dumping and countervailing duty investigation imposing anti-dumping duties from a range of 42.2% to 53.7% and anti-subsidy duties from 11.2% to 12.0%. The imposition of these duties has resulted in a significant decline in demand from this top importer and negatively impacted prices for distillers grains produced in the United States. Due to recent trade disputes between the United States and China we expect these tariffs to continue into our 2021 fiscal year. This reduction in demand has negatively impacted our ability to profitably operate the ethanol plant.

    Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for standard vehicles.  Currently, ethanol is primarily blended with gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% gasoline.  Estimates indicate that approximately 143 billion gallons of gasoline are sold in the United States each year.  Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum domestic demand for ethanol is 14.3 billion gallons. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool.  Many in the ethanol industry believe that the ethanol industry has reached and surpassed this blend wall.  In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in standard vehicles.  Such higher percentage blends of ethanol are a contentious issue.  Automobile manufacturers and environmental groups have fought against higher percentage ethanol blends. The EPA approved the use of E15 for standard vehicles produced in the model year 2001 and later. The fact that E15 has not been approved for use in all vehicles and the labeling requirements associated with E15 may lead to gasoline retailers refusing to carry E15.  Without an increase in the allowable percentage blends of ethanol that can be used in all vehicles, demand for ethanol may not continue to increase which could decrease the selling price of ethanol and could result in our inability to operate the ethanol plant profitably which could reduce or eliminate the value of our units.

    A reduction in ethanol exports to Brazil due to the imposition by the Brazilian government of a tariff on U.S. ethanol could have a negative impact on ethanol prices. Brazil has historically been a top destination for ethanol produced in the United States. However, in 2017, Brazil imposed a tariff on ethanol which is produced in the United States and exported to Brazil. This tariff has resulted in a decline in demand for ethanol from Brazil and could negatively impact the market price of ethanol in the United States and could negatively impact our ability to profitably operate the ethanol plant.

    Chinese ethanol tariffs could have a negative impact on ethanol prices. As a result of recent trade disputes between the United States and China, China imposed a 70% tariff on ethanol produced in the United States. This tariff has effectively closed the Chinese market for United States ethanol exports. China represents a significant potential source of demand for ethanol. Without access to the Chinese market, we may continue to experience excess ethanol supply which could negatively impact ethanol prices in the United States. These lower ethanol prices could negatively impact our ability to profitably operate the ethanol plant.

We operate in an intensely competitive industry and compete with larger, better financed entities which could impact our ability to operate profitably.  There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants operating throughout the Midwest and elsewhere in the United States.  We also face competition from outside of the United States. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, each of which is capable of producing
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significantly more ethanol than we produce. Further, many believe that there will be further consolidation occurring in the ethanol industry in the future which could lead to a few companies which control a significant portion of the United States ethanol production market. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could negatively impact our financial performance. 

Technology advances in the commercialization of cellulosic ethanol may decrease demand for corn-based ethanol which may negatively affect our profitability.  The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas of the country which are unable to grow corn.  The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer strong incentives to develop commercial scale cellulosic ethanol.  The RFS requires that 16 billion gallons per year of advanced bio-fuels must be consumed in the United States by 2022.  Additionally, state and federal grants have been awarded to several companies which are seeking to develop commercial-scale cellulosic ethanol plants.  This has encouraged innovation and has led to several companies which are either in the process or have completed construction of commercial scale cellulosic ethanol plants. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and our financial condition will be negatively impacted.

Risks Related to Regulation and Governmental Action

    Government incentives for ethanol production may be eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal ethanol production and tax incentives, including the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive. The United States Environmental Protection Agency ("EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided certain conditions have been met. Annually, the EPA passes 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. In the past, the EPA has set the renewable volume obligations below the statutory volume requirements. In addition, the EPA has recently expanded its use of waivers to small refineries. The effect of these waivers is that the refinery is no longer required to earn or purchase blending credits, known as RINs, negatively affecting ethanol demand and resulting in lower ethanol prices. If the EPA were to significantly reduce the volume requirements under the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress, the market price and demand for ethanol could decrease which will negatively impact our financial performance.

    Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability. We are subject to extensive air, water and other environmental laws and regulations. In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns. In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.

    The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability. California passed a Low Carbon Fuels Standard ("LCFS") which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations could preclude corn-based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn-based ethanol to California, it could significantly reduce demand for the ethanol we produce which could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.

    Government policies and regulations, particularly those affecting the agricultural sector and related industries, could adversely affect our operations and profitability.  Agricultural commodity production and trade flows are significantly affected by government policies and regulations.  Governmental policies affecting the agricultural industry, such as taxes, trade tariffs, duties, subsidies, import and export restrictions on commodities and commodity products, can influence industry profitability, the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, and the volume and types of imports and exports.  In addition, international trade disputes can
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adversely affect trade flows by limiting or disrupting trade between countries or regions. Future governmental policies, regulations or actions affecting our industry may adversely affect the supply of, demand for and prices of our products, restrict our ability to do business and cause our financial results to suffer. We may experience negative impacts of higher ethanol tariffs and other disruptions to international agricultural trade related to current trade actions announced by the Trump administration and responsive actions announced by trading partners, including by China. In April of 2018, the Chinese government increased the tariff on U.S. ethanol imports into China from 30% to 45% and ultimately to 70%.  This tariff increase has had a negative impact on overall U.S. ethanol export demand, which could have a negative effect on U.S. domestic ethanol prices.

ITEM 2. PROPERTIES

    Our ethanol plant is located just east of the city limits of Richardton, North Dakota, and just north and east of the entrance/exit ramps to Interstate I-94. The plant complex is situated inside a footprint of approximately 25 acres of land which is part of an approximately 135 acre parcel.  We acquired ownership of the land in 2004 and 2005. Included in the immediate campus area of the plant are perimeter roads, buildings, tanks and equipment. An administrative building and parking area are located approximately 400 feet from the plant complex.  During 2008, we purchased an additional 10 acre parcel of land that is adjacent to our current property.  Our rail unloading facility and storage site was built on this property. During our 2012 fiscal year, we purchased an additional approximately 110 acres of land that is adjacent to our current property. During our 2017 fiscal year, we purchased approximately 338 acres of land which we use as part of our rail yard allowing us to ship larger trains.
 
    The site also contains improvements such as rail tracks and a rail spur, landscaping, drainage systems and paved access roads.  The ethanol plant was placed in service in January 2007 and is in excellent condition and is capable of functioning in excess of its 50 million gallon name-plate production capacity.

During our 2020 fiscal year, all of our tangible and intangible property, real and personal, served as the collateral for our senior credit facility with Cornerstone Bank. Our senior credit facility is discussed in more detail under "ITEM 7. Management's Discussion and Analysis - Capital Resources."

ITEM 3.    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.

ITEM 4.    MINE SAFETY DISCLOSURES

    None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

    There is no established trading market for our membership units.  We have engaged FNC Ag Stock, LLC to create a Qualified Matching Service ("QMS") in order to facilitate trading of our units.  The QMS consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units.  Please see the table below for information on the prices of units transferred in transactions completed via the QMS.  We do not become involved in any purchase or sale negotiations arising from the QMS and we take no position as to whether the average price or the price of any particular sale is an accurate measure of the value of our units.  As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status.  Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof).  All transfers are subject to a determination that the transfer will not cause the Company to be deemed a publicly traded partnership.

    We have no role in effecting the transactions beyond approval, as required under our Operating Agreement and the issuance of new certificates.  So long as we remain a publicly reporting company, information about us will be publicly available through the SEC's EDGAR filing system.  However, if at any time we cease to be a publicly reporting company, we may continue to make information about us publicly available on our website.

    As of December 18, 2020, there were 932 holders of record of our Class A membership units.

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The following table contains historical information by quarter for the past two years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. The information was compiled by reviewing the completed unit transfers that occurred on the QMS bulletin board or through private transfers during the quarters indicated.
QuarterLow PriceHigh PriceAverage Price# of
Units Traded
2019 1st
$1.25 $1.28 $1.27 45,000 
2019 2nd
$— $— $— — 
2019 3rd
$1.00 $1.00 $1.00 80,000 
2019 4th
$1.00 $1.00 $1.00 59,500 
2020 1st
$1.03 $1.05 $1.04 80,000 
2020 2nd
$0.85 $1.00 $0.90 140,000 
2020 3rd
$0.90 $0.95 $0.95 43,000 
2020 4th
$0.95 $0.95 $0.95 20,000 

Distributions

    Our board of governors has complete discretion over the timing and amount of distributions to our members. Our expectations with respect to our ability to make future distributions are discussed in greater detail in "Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations."

PERFORMANCE GRAPH

    The graph below matches the cumulative 5-Year total return of holders of Red Trail Energy, LLC's common membership units with the cumulative total returns of the NASDAQ Composite index and a customized peer group of eighteen companies that includes: Aemetis Inc., Amyris Inc., Benchmark Energy Corp, Celanese Corp, Cleantech Biofuels Inc., Data443 Risk Mitigation Inc., Glyeco Inc., Green Plains Inc., Greenbelt Resources Corp, Methes Energies International Ltd, New America Energy Corp, Newmarket Corp, Pacific Ethanol Inc., Rayonier Advanced Materials Inc., Renewable Energy Group Inc., Rex American Resources Corp, Sino United Worldwide Consolidated Ltd and Westlake Chemical Partners LP. The graph assumes that the value of the investment in our common membership units, in each index, and in the peer group (including reinvestment of dividends) was $100 on September 30, 2015 and tracks it through September 30, 2020.

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rte-20200930_g1.jpg

    Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data as of September 30, 2018, 2017 and 2016 and the selected income statement data and other financial data for the periods ended September 30, 2017 and 2016 have been derived from our audited financial statements that are not included in this Form 10-K. The selected balance sheet financial data as of September 30, 2020 and 2019 and the selected statement of operations data and other financial data for the fiscal years ended September 30, 2020, 2019 and 2018 have been derived from the audited Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following financial data.
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Years Ended
Statement of Operations Data:September 30, 2020September 30, 2019September 30, 2018September 30, 2017September 30, 2016
Revenues$94,175,793 $103,697,726 $103,577,061 $109,609,359 $105,159,602 
Cost of Goods Sold90,134,689 104,690,474 106,713,199 102,061,933 97,414,865 
Gross Profit (Loss)4,041,104 (992,748)(3,136,138)7,547,426 7,744,737 
General and Administrative4,329,824 3,135,825 2,557,189 2,382,272 2,399,733 
Operating Income (Loss)(288,720)(4,128,573)(5,693,327)5,165,154 5,345,004 
Other Income (Expense)295,308 385,884 554,156 3,199,696 558,757 
Net Income (Loss)$6,588 $(3,742,689)$(5,139,171)$8,364,850 $5,903,761 
Weighted Average Units Outstanding - Basic40,148,160 40,148,160 41,025,743 41,454,828 40,148,160 
Weighted Average Units Outstanding - Diluted40,148,160 40,148,160 41,025,743 41,454,828 40,148,160 
Net Income (Loss) Per Unit - Basic and Diluted$— $(0.09)$(0.13)$0.20 $0.15 
Balance Sheet Data:September 30, 2020September 30, 2019September 30, 2018September 30, 2017September 30, 2016
Current Assets$23,626,885 $21,504,778 $24,984,683 $29,645,105 $24,681,404 
Net Property and Equipment44,327,660 39,312,192 43,357,257 47,141,736 47,224,703 
Total Assets74,149,185 65,581,121 72,465,492 80,702,120 75,591,411 
Current Liabilities8,008,436 5,006,857 8,146,757 7,020,438 7,932,689 
Long-Term Liabilities5,559,896 — — 2,921 5,538 
Members' Equity60,580,853 60,574,264 64,318,735 73,678,761 67,653,184 
Book Value Per Unit$1.51 $1.51 $1.57 $1.78 $1.69 
Dividends Declared Per Unit$— $— $0.07 $0.12 $0.10 

* See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of our financial results.





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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the Years Ended September 30, 2020 and 2019
 
    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 statements of operations for the years ended September 30, 2020 and 2019:
 Year Ended
September 30, 2020
Year Ended
September 30, 2019
Statement of Operations DataAmount%Amount%
Revenues$94,175,793 100.00 $103,697,726 100.00 
Cost of Goods Sold90,134,689 95.71 104,690,474 100.96 
Gross Profit (Loss)4,041,104 4.29 (992,748)(0.96)
General and Administrative Expenses4,329,824 4.60 3,135,825 3.02 
Operating (Loss)(288,720)(0.31)(4,128,573)(3.98)
Other Income (Expense)295,308 0.31 385,884 0.37 
Net Income (Loss)$6,588 0.01 $(3,742,689)(3.61)
    
    The following table shows additional data regarding production and price levels for our primary inputs and products for the years ended September 30, 2020 and 2019:
Year Ended
September 30, 2020
Year Ended
September 30, 2019
Production:
  Ethanol sold (gallons)56,510,51763,401,876
  Industrial ethanol sold (gallons)1,130,347
  Dried distillers grains sold (tons)91,07398,758
  Modified distillers grains sold (tons)109,691127,310
Corn oil sold (pounds)15,385,43010,697,030
Revenues:
  Ethanol average price per gallon (net of hedging)$1.20 $1.27 
  Industrial ethanol average price per gallon3.27 — 
  Dried distillers grains average price per ton128.63 135.15 
  Modified distillers grains average price per ton59.20 52.73 
Corn oil average price per pound0.24 0.23 
Primary Inputs:
  Corn ground (bushels)21,346,380 22,641,392 
Natural gas (MMBtu)
1,425,450 1,630,853 
Costs of Primary Inputs:
  Corn average price per bushel (net of hedging)$2.98 $3.56 
Natural gas average price per MMBtu (net of hedging)2.06 2.42 
Other Costs (per gallon of ethanol sold):
  Chemical and additive costs$0.077 $0.080 
  Denaturant cost0.030 0.034 
  Electricity cost0.042 0.038 
  Direct labor cost0.067 0.062 


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Revenue

    For our 2020 fiscal year, ethanol sales comprised approximately 76.1% of our revenues, distillers grains sales comprised approximately 19.4% of our revenues and corn oil sales comprised approximately 4.0% of our revenues. For our 2019 fiscal year, ethanol sales comprised approximately 77.7% of our revenues, distillers grains sales comprised approximately 19.3% of our revenues and corn oil sales comprised approximately 2.5% of our revenues.

    Our total revenue for our 2020 fiscal year was approximately 9.6% less compared to our 2019 fiscal year, however, our cost of goods sold was less during our 2020 fiscal year compared to our 2019 fiscal year which resulted in positive net income during the 2020 period compared to a net loss during the 2019 period.

    Ethanol

    The average price we received per gallon of ethanol sold was approximately 5.5% less during our 2020 fiscal year compared to our 2019 fiscal year. The ethanol industry struggled during both our 2020 fiscal year and 2019 fiscal year with lower ethanol prices due to decreased domestic demand. This decreased domestic demand was due to small refinery waivers from the ethanol use requirements under the RFS granted by the EPA which reduced the volume of ethanol which was required to be used in the United States. Early in 2020, lower oil prices resulted in decreased gasoline and ethanol prices. In addition, starting in March 2020, social distancing measures resulted in significant decreases in ethanol demand. Many states instituted social distancing measures which resulted in less gasoline demand as people stayed home to avoid infection. While we were able to maintain production due to commitments we had in place during our second quarter of 2020, we saw a 40% decrease in ethanol demand and a 32% decrease in ethanol price during that time due to the COVID-19 pandemic. While gasoline demand rebounded during our fourth quarter of 2020, management expects that recent increases in COVID-19 infections will result in decreased gasoline demand early in our 2021 fiscal year until an effective vaccine is widely available. As a result of the decreased gasoline demand, many ethanol producers have reduced production or have started to diversify their product offerings. Approximately 3.9% of our ethanol sales were from industrial alcohol sales made during our 2020 fiscal year due to shortages experienced early in the COVID-19 pandemic. These shortages may return during our 2021 fiscal year due to the resurgence of the COVID-19 pandemic. Management expects that these circumstances will result in additional uncertainty and volatility in the ethanol market during our 2021 fiscal year.

    We sold approximately 11.1% fewer gallons of ethanol during our 2020 fiscal year compared our 2019 fiscal year due to significantly lower gasoline demand due to the COVID-19 social distances measures which were implemented during our 2020 fiscal year. While gasoline demand rebounded later in our 2020 fiscal year, with recent increases in COVID-19 infections, management anticipates that gasoline demand will decrease which will have a correspondence impact on ethanol demand. These factors are expected to result in volatility during our 2021 fiscal year.

    We experienced a gain of approximately $383,000 related to our ethanol derivative instruments during our 2020 fiscal year which increased our revenue. We had no soybean oil derivative instruments during our 2020 fiscal year. We held no ethanol or soybean oil derivative instruments during our 2019 fiscal year.

    Distillers Grains

    The average price we received for our dried distillers grains during our 2020 fiscal year was approximately 4.8% less than the average price we received during our 2019 fiscal year primarily due to lower average corn prices during our 2020 fiscal year which typically impacts distillers grains prices. The average price we received from our modified distillers grains during our 2020 fiscal year was approximately 12.3% more compared to our 2019 fiscal year due to stronger local demand for distillers grains. Our modified distillers grains are primarily sold in our local market. Management anticipates higher distillers grains prices during our 2021 fiscal year due to the decreased bushels of corn harvested in the fall of 2020 which is anticipated to result in higher market corn prices during our 2021 fiscal year. Further, if export demand for distillers grains increases during our 2021 fiscal year, it could result in significantly higher distillers grains prices.

    We produced approximately 7.0% fewer tons of dried distillers grains and approximately 16.4% fewer tons of modified distillers grains during our 2020 fiscal year compared to our 2019 fiscal year due to decreased overall production during our 2020 fiscal year because of market disruptions from COVID-19. We significantly reduced production during March and April 2020 which negatively impacted our production for the year. In addition, we produced more corn oil during the 2020 period which resulted in a net decrease in the total distillers grains we produced during the 2020 fiscal year. When we produce more corn oil, it results in fewer tons of distillers grains produced. We decide whether to produce dried distillers grains versus modified/wet distillers grains based on market conditions and the relative cost of producing each form of distillers grains.
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Management anticipates that distillers grains production will remain at its current mix during our 2021 fiscal year unless distillers grains exports increase significantly which could favor producing more dried distillers grains.

    Corn Oil

    The average price we received for our corn oil was approximately 4.0% greater during our 2020 fiscal year compared to our 2019 fiscal year primarily due to additional corn oil demand from the biodiesel industry. In addition, due to reductions in the amount of ethanol produced during our 2020 fiscal year, the supply of corn oil in the market was lower during our 2020 fiscal year. On December 17, 2019, Congress renewed the biodiesel blenders' credit retroactively for 2019 and for a total of five years. This certainty for the biodiesel blenders' credit has positively impacted demand for corn oil during that time period which has supported market corn oil prices.

    Our corn oil sales increased by approximately 37.2% during our 2020 fiscal year compared to our 2019 fiscal year due to increased corn oil production per bushel of corn we ground. This increase in the amount of corn oil we produced per bushel of corn we ground was due to a change in chemicals used during the production process which resulted in more corn oil being extracted. Management anticipates that corn oil production will continue to be higher during our 2021 fiscal year.
    
Cost of Goods Sold

    Our cost of goods sold is primarily made up of corn and energy expenses. Our total cost of goods sold was approximately 14.0% less for our 2020 fiscal year compared to our 2019 fiscal year due primarily to lower corn and natural gas costs during our 2020 fiscal year.

Corn Costs

Our cost of goods sold related to corn was approximately 22.5% lower during our 2020 fiscal year compared to our 2019 fiscal year due to lower average corn costs per bushel along with slightly fewer bushels of corn used during our 2020 fiscal year. Our average cost per bushel of corn used, without including our derivative instrument gains and losses, was approximately 16.3% lower during our 2020 fiscal year compared to our 2019 fiscal year. Management attributes this decrease in corn costs to lower corn demand from the ethanol industry during our 2020 fiscal year. However, following the end of our 2020 fiscal year, corn prices have been increasing due to less corn harvested in the fall of 2020 which management expects will negatively impact corn prices during our 2021 fiscal year. Management believes that there will be sufficient corn in our local market to continue to operate the ethanol plant at capacity during our 2021 fiscal year but we may experience higher prices in order to purchase the corn we need. Our corn use decreased by approximately 5.7% during our 2020 fiscal year compared to our 2019 fiscal year due to decreased overall production at the ethanol plant. Management anticipates that we will use a comparable amount of corn in the future provided operating margins remain favorable.

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At September 30, 2020, we had forward corn purchase contracts for various delivery periods through March 2021 for a total commitment of approximately $9.42 million for a total of approximately 2.8 million bushels of corn. We had a loss of approximately $455,000 related to our corn derivative instruments which increased our cost of goods sold during our 2020 fiscal year. We had a gain of approximately $4.4 million related to our corn derivative instruments during our 2019 fiscal year which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.

    Natural Gas Costs

    Our total natural gas costs to operate the ethanol plant were lower for our 2020 fiscal year compared to our 2019 fiscal year due primarily to decreased natural gas costs per MMBtu during the 2020 period. Our average cost per MMBtu of natural gas was approximately 14.9% lower during our 2020 fiscal year compared to our 2019 fiscal year. Management believes this decrease in natural gas costs during our 2020 fiscal year was due to lower energy prices generally during our 2020 fiscal year. We used approximately the same amount of natural gas during both our 2020 fiscal year and our 2019 fiscal year. Management expects that natural gas prices will remain steady during our 2021 fiscal year unless we experience supply disruptions which impact the amount of natural gas available in the market, particularly during the winter months when natural gas demand for heating needs is higher.


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General and Administrative Expenses

    Our general and administrative expense was higher during our 2020 fiscal year and our 2019 fiscal year due to increased labor and consulting costs related to the carbon capture and storage project which is designed to decrease the carbon intensity of our ethanol, making it more valuable in the California fuel market.

Other Income/Expense

    We had more interest income during our 2020 fiscal year compared to our 2019 fiscal year due to having more cash on hand during the 2020 period. Our other income was lower during our 2020 fiscal year compared to our 2019 fiscal year due to a lower capital account distribution from RPMG, our marketer.

Results of Operations for the Years Ended September 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 statements of operations for the years ended September 30, 2019 and 2018:
 Year Ended
September 30, 2019
Year Ended
September 30, 2018
Statement of Operations DataAmount%Amount%
Revenues$103,697,726 100.00 $103,577,061 100.00 
Cost of Goods Sold104,690,474 100.96 106,713,199 103.03 
Gross Loss(992,748)(0.96)(3,136,138)(3.03)
General and Administrative Expenses3,135,825 3.02 2,557,189 2.47 
Operating Loss(4,128,573)(3.98)(5,693,327)(5.50)
Other Income (Expense)385,884 0.37 554,156 0.54 
Net Loss$(3,742,689)(3.61)$(5,139,171)(4.96)
    

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    The following table shows additional data regarding production and price levels for our primary inputs and products for the years ended September 30, 2019 and 2018:
Year Ended
September 30, 2019
Year Ended
September 30, 2018
Production:
  Ethanol sold (gallons)63,401,87661,901,487
  Dried distillers grains sold (tons)98,758110,497
  Modified distillers grains sold (tons)127,310107,533
Corn oil sold (pounds)10,697,03012,591,310
Revenues:
  Ethanol average price per gallon (net of hedging)$1.27 $1.27 
  Dried distillers grains average price per ton135.15 132.62 
  Modified distillers grains average price per ton52.73 61.29 
Corn oil average price per pound0.23 0.25 
Primary Inputs:
  Corn ground (bushels)22,641,392 22,088,221 
Natural gas (MMBtu)
1,630,853 1,635,138 
Costs of Primary Inputs:
  Corn average price per bushel (net of hedging)$3.56 $3.35 
Natural gas average price per MMBtu (net of hedging)2.42 2.36 
Other Costs (per gallon of ethanol sold):
  Chemical and additive costs$0.080 $0.108 
  Denaturant cost0.034 0.040 
  Electricity cost0.038 0.043 
  Direct labor cost0.062 0.066 

Revenue

    For our 2019 fiscal year, ethanol sales comprised approximately 78% of our revenues, distillers grains sales comprised approximately 19% of our revenues and corn oil sales comprised approximately 3% of our revenues. For our 2018 fiscal year, ethanol sales comprised approximately 76% of our revenues, distillers grains sales comprised approximately 21% of our revenues and corn oil sales comprised approximately 3% of our revenues.

    Our total revenue for our 2019 fiscal year was comparable to our 2018 fiscal year, however, our cost of goods sold was less during our 2019 fiscal year compared to our 2018 fiscal year which resulted in a smaller net loss during the 2019 period. The ethanol industry continued to struggle with ethanol demand destruction from EPA policies which limited domestic demand for ethanol along with foreign trade policies which impacted global distillers grains demand.

    Ethanol

    The average price we received per gallon of ethanol sold was the same during both our 2019 fiscal year and our 2018 fiscal year. The ethanol industry struggled during both our 2018 fiscal year and 2019 fiscal year with lower ethanol prices due to decreased domestic demand. This decreased domestic demand was due to small refinery waivers from the ethanol use requirements under the RFS granted by the EPA which reduced the volume of ethanol which was required to be used in the United States.

    Brazil increased its quota of ethanol that can be imported from the United States before a tariff is imposed which resulted in some additional export demand. However, China maintained its high ethanol tariffs which essentially eliminated China as an export market for United States ethanol.

    We sold approximately 2% more gallons of ethanol during our 2019 fiscal year compared our 2018 fiscal year due to fewer unplanned shutdowns during our 2019 fiscal year.
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    We held no ethanol or soybean oil derivative instruments during our 2019 fiscal year. We experienced a gain of approximately $1,800 in our soybean oil derivative instruments during our 2018 fiscal year which increased our revenue.

    Distillers Grains

    The average price we received for our dried distillers grains during our 2019 fiscal year was approximately 2% greater than the average price we received during our 2018 fiscal year primarily due to increased corn prices during our 2019 fiscal year. The average price we received from our modified distillers grains during our 2019 fiscal year was approximately 14% less compared to our 2018 fiscal year due to weaker local demand for distillers grains. Our modified distillers grains were primarily sold in our local market.

    We produced approximately 11% fewer tons of dried distillers grains and approximately 18% more tons of modified distillers grains during our 2019 fiscal year compared to our 2018 fiscal year due to market factors favoring more modified distillers grains. We also produced less corn oil which resulted in a net increase in the total distillers grains we produced during the 2019 fiscal year. When we produce less corn oil, it results in additional tons of distillers grains that we produce. We decide whether to produce dried distillers grains versus modified/wet distillers grains based on market conditions and the relative cost of producing each form of distillers grains.

    Corn Oil

    The average price we received for our corn oil was approximately 8% less during our 2019 fiscal year compared to our 2018 fiscal year primarily due to additional corn oil supplies in the market along with less corn oil demand from the biodiesel industry.

    Our corn oil sales decreased by approximately 15% during our 2019 fiscal year compared to our 2018 fiscal year due to decreased corn oil production per bushel of corn we ground. This decrease in the amount of corn oil we produced per bushel of corn we ground was due to a change in chemicals used during the production process which resulted in less corn oil being extracted.
    
Cost of Goods Sold

    Our total cost of goods sold was approximately 2% less for our 2019 fiscal year compared to our 2018 fiscal year due primarily to lower chemical and ingredient costs associated with our production during our 2019 fiscal year along with lower electricity, denaturant and labor expense.

Corn Costs

Our cost of goods sold related to corn was approximately 9% greater during our 2019 fiscal year compared to our 2018 fiscal year due to increased corn bushels used, partially offset by derivative gains which decreased our corn cost per bushel used after hedging gains and losses during our 2019 fiscal year. Our average cost per bushel of corn used, without including our derivative instrument gains and losses, was approximately 6% greater during our 2019 fiscal year compared to our 2018 fiscal year. Management attributes this increase in corn costs to late planting and unfavorable weather conditions which impacted the corn market during our 2019 fiscal year. Our corn use increased by approximately 3% during our 2019 fiscal year compared to our 2018 fiscal year due to increased overall production at the ethanol plant.

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At September 30, 2019, we had forward corn purchase contracts for various delivery periods through March 2020 for a total commitment of approximately $8.19 million for a total of approximately 2.2 million bushels of corn. We had a gain of approximately $4.4 million related to our corn derivative instruments which decreased our cost of goods sold during our 2019 fiscal year. We had a loss of approximately $2 million related to our corn derivative instruments during our 2018 fiscal year which increased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.

    Natural Gas Costs

    Our total natural gas costs to operate the ethanol plant were higher for our 2019 fiscal year compared to our 2018 fiscal year due primarily to increased natural gas costs per MMBtu during the 2019 period. Our average cost per MMBtu of natural
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gas was approximately 3% greater during our 2019 fiscal year compared to our 2018 fiscal year. Management believes this increase in natural gas costs during our 2019 fiscal year was due to a basis change off the CIG Rockies Natural Gas Basis Futures which increased the price per MMBtu we had to pay. We used approximately the same amount of natural gas during both our 2019 fiscal year and our 2018 fiscal year.

General and Administrative Expenses

    Our general and administrative expense was higher during our 2019 fiscal year and our 2018 fiscal year due to increased consulting fees and meeting expense. We 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.

Other Income/Expense

    We had more interest income during our 2019 fiscal year compared to our 2018 fiscal year due to having more cash on hand during the 2019 period. Our other income was lower during our 2019 fiscal year compared to our 2018 fiscal year due to a loss on sale of corn that could not be used in the production process.
Changes in Financial Condition for the Year Ended September 30, 2020 and 2019

    Current Assets. We had more cash and equivalents on our balance sheet at September 30, 2020 compared to September 30, 2019 due to increased deferred corn payments at September 30, 2020 compared to September 30, 2019. We had less restricted cash at September 30, 2020 compared to September 30, 2019 as a result of having less cash deposited in our margin account with our commodities broker related to our risk management positions. We had less accounts receivable at September 30, 2020 compared to September 30, 2019 due primarily to the timing of payments from our product marketers at the end of our 2020 fiscal year compared to the end of our 2019 fiscal year. We had more inventory on hand at September 30, 2020 compared to September 30, 2019 due to more corn and finished goods inventory at September 30, 2020. Our increased finished goods inventory was higher due to the timing of ethanol shipments at the end of our 2020 fiscal year.

    Property, Plant and Equipment. The gross value of our property, plant and equipment was higher at September 30, 2020 compared to September 30, 2019 due primarily to the start of construction on our carbon capture and storage project during our 2020 fiscal year. The carbon capture and storage project will inject CO2 from the fermentation process into a saline formation to lower the carbon intensity value of our ethanol so it qualifies for the west coast clean fuels programs. The net value of our property, plant and equipment was lower at September 30, 2020 compared to September 30, 2019 due to depreciation.

    Other Assets. Our other assets were higher at September 30, 2020 than at September 30, 2019 due primarily to an accounting change we made for our lease agreements due to ASU No. 2016-02. ASU No. 2016-02 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, therefore we now include an asset value for our leases along with a liability related to future lease payments.

    Current Liabilities. Our accounts payable was comparable at September 30, 2020 and at September 30, 2019. Our accrued expenses were higher at September 30, 2020 compared to September 30, 2019 due to having more accrued corn payables at September 30, 2020 compared to September 30, 2019. We had a larger accrued loss on our firm corn purchase commitments at September 30, 2020 compared to September 30, 2019. The current maturities of our long-term debt was higher at September 30, 2020 compared to September 30, 2019 due to increased borrowing for our carbon sequestration project. We received a loan pursuant to the Paycheck Protection Program ("PPP") a portion of which was included in our current liabilities. Due to a change in accounting treatment of leases, we included a liability related to the current portion of our operating leases at September 30, 2020 compared to September 30, 2019.

    Long-term Liabilities. We had more long-term liabilities at September 30, 2020 compared to September 30, 2019 due to borrowing for our carbon sequestration project and the PPP loan. Due to the different accounting treatment for leases, we had a long-term liability related to operating leases at September 30, 2020 compared to September 30, 2019.


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Critical Accounting Policies

    Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical.

Inventory

    Corn is the primary raw material and, along with other raw materials and supplies, is stated at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.  Work in process and finished goods, which consists of ethanol, distillers grains and corn oil produced, is stated at the lower of average cost or net realizable value.  Spare parts inventory is valued at lower of cost or net realizable value on a FIFO basis.

Allowance for Doubtful Accounts

    Management's estimate of the Allowance for Doubtful Accounts is based on management's estimate of the collectability of identified receivables, as well as the aging of customer accounts. A 10% change in management's estimate regarding the Allowance for Doubtful Accounts as of September 30, 2020 could impact net income by approximately $43,000 for our 2021 fiscal year.

Revenue Recognition
    
    The Company sells ethanol and related products pursuant to marketing agreements. 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. Revenues are shown net of any fees incurred under the terms of the Company's agreements for the marketing and sale of ethanol and related products.

Long Lived Assets

    Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized. The present values of finance lease obligations are classified as long-term debt and the related assets are included in property, plant and equipment. Amortization of equipment under finance leases is included in depreciation expense. Management does not believe it is reasonably likely that the valuation of its property, plant and equipment will change in any material manner in future estimates.

Liquidity and Capital Resources

    Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our expected 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. We do not have any planned capital projects for which we anticipate requiring additional borrowing.
    

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    The following table shows cash flows for the years ended September 30, 2020 and 2019:
20202019
Net cash provided by operating activities$3,292,949 $378,740 
Net cash (used in) investing activities(8,871,441)(725,559)
Net cash provided by (used in) financing activities6,168,912 (4,451)
Net increase (decrease) in cash$590,420 $(351,270)
Cash and equivalents, end of period$11,112,489 $10,522,069 

Cash Flow from Operations

Our operations provided more cash during our 2020 fiscal year compared to our 2019 fiscal year due to net income we generated during the 2020 period compared to a net loss during the 2019 period. Our derivative instruments, accounts receivable and accounts payable positively impacted the cash generated by our operating activities during our 2020 fiscal year.

Cash Flow from Investing Activities

We used more cash for capital expenditures during our 2020 fiscal year compared to our 2019 fiscal year. During our 2020 fiscal year, we had capital expenditures primarily related to our carbon sequestration project. During our 2019 fiscal year, we had capital expenditures primarily related to improvements to our centrifuges and heat exchangers.
    
Cash Flow from Financing Activities

Our financing activities provided cash during our 2020 fiscal year due to increased cash from our debt instruments. We used cash during our 2019 fiscal year for lease repayments.

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.

    The following table shows cash flows for the years ended September 30, 2019 and 2018:
20192018
Net cash provided by operating activities$378,740 $6,914,549 
Net cash (used in) investing activities(725,559)(947,746)
Net cash (used in) financing activities(4,451)(4,223,472)
Net increase (decrease) in cash$(351,270)1,743,331 
Cash and equivalents, end of period$10,522,069 $10,873,339 

Cash Flow from Operations

Our operations provided less cash during our 2019 fiscal year compared to our 2018 fiscal year. Changes in our inventory accounts receivable positively impacted the cash generated by our operating activities during the 2019 fiscal year.

Cash Flow from Investing Activities

We used less cash for capital expenditures during our 2019 fiscal year compared to our 2018 fiscal year. During our 2019 fiscal year we had capital projects related to the addition of a hammer mill and upgrades to the centrifuges. During our 2018 fiscal year we had capital expenditures related to a project to expand the cooling capacity of our beer mash exchangers.
    
Cash Flow from Financing Activities

We used less cash for financing activities during our our 2019 fiscal year compared to our 2018 fiscal year due to fewer distributions made during the 2019 fiscal year compared to the 2018 fiscal year. We used approximately $3 million during our 2019 fiscal year for distributions to our members compared to approximately $5 million during our 2018 fiscal year.
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Capital Expenditures
 
    We had approximately $9.8 million in construction in progress as of September 30, 2020 related to our carbon capture and storage project. During the fiscal year ended September 30, 2020, we placed in service approximately $332,000 in capital projects.

Capital Resources

    On January 22, 2020, we entered into a series of loans with Cornerstone Bank ("Cornerstone"), described below.

Revolving Loan

On January 22, 2020, we entered into a new $10 million revolving loan (the "Revolving Loan") with Cornerstone. Interest accrues on any outstanding balance on the Revolving Loan at a rate of 1.2% less than the prime rate as published by the Wall Street Journal, adjusted monthly. The Revolving Loan has a minimum interest rate of 3.0%. The maturity date of the Revolving Loan is January 21, 2021. The Revolving Loan is secured by a lien on all of our assets. At September 30, 2020, we had $10 million available on the Revolving Loan. The variable interest rate on September 30, 2020 was 3.00%.

Construction Loan

On January 22, 2020, we entered into a new $7 million construction loan (the "Construction Loan") with Cornerstone to finance our carbon capture and storage project. Interest accrues on any outstanding balance on the Construction Loan at a rate of 1.2% less than the prime rate as published by the Wall Street Journal, adjusted monthly. The maturity date of the Construction Loan is June 1, 2021. The Construction Loan is secured by a lien on all of our assets. At September 30, 2020, we had $7 million available on the Construction Loan. The variable interest rate on September 30, 2020 was 3.00%.

Paycheck Protection Program Loan

On April 16, 2020, we entered into a new $873,400 Paycheck Protection Program Loan (the "PPP Loan) with Cornerstone. Interest accrues on any outstanding balance on the PPP Loan at a rate of 1.0%. The maturity date of the PPP Loan is April 16, 2022. Under the terms of the loan, we may apply for forgiveness for all or a portion of the loan as designated under the PPP regulations. While we may apply for forgiveness of the PPP Loan in accordance with the requirements and limitations under the CARES Act and the SBA regulations and requirements, no assurance can be given that any portion of the PPP Loan will be forgiven. The Company believes that it used the entire PPP Loan amount for qualifying expenses and applied for forgiveness on October 31, 2020.

Ethanol Recovery Program

On July 13, 2020, we entered into a loan with the Bank of North Dakota Ethanol Recovery Program and Cornerstone for $5.41 million. The Ethanol Recovery Program was developed by the North Dakota Ethanol Producers Association and the Bank of North Dakota to use the existing Biofuels Pace program and value-added loan guarantee program to help ethanol production facilities weather the pandemic economic challenges. Ethanol producers could qualify for up to $15 million dollars of a low interest loan of 1% based on the amount of annual corn grind. The maturity date of the loan is July 13, 2025. The fixed interest rate as of September 30, 2020 was 3.75% with an interest rate buy down through the Bank of North Dakota to 1%. We make monthly payments of approximately $74,000 per month with the balance outstanding on September 30, 2020 of approximately $5,300,000.


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Contractual Obligations and Commercial Commitments

    We have the following contractual obligations as of September 30, 2020:
Contractual Obligations:TotalLess than 1 Yr1-3 Years3-5 Years
Corn purchases *$9,420,534 $9,420,534 
Water purchases2,332,000 424,000 1,272,000 636,000 
Operating lease obligations1,008,677 364,862 643,815 
Finance leases18,917 4,508 13,729 680 
Total$12,780,128 $10,213,904 $1,929,544 $636,680 

* - Amounts determined assuming prices, including freight costs, at which corn had been contracted for cash corn contracts and current market prices as of September 30, 2020 for basis contracts that had not yet been fixed.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

    We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars and we have no exposure to interest rate risk as we have no amounts outstanding on variable interest debt. 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 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 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 September 30, 2020, we had approximately 2.8 million bushels of corn under fixed price 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 expected 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
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information, our income statements 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 September 30, 2020, 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 September 30, 2020. 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 MeasureHypothetical Adverse Change in PriceApproximate Adverse Change to Income
Ethanol63,900,000 Gallons10 %$(8,143,200)
Corn22,822,000 Bushels10 %$(5,992,000)
Natural gas1,664,000 MMBtu10 %$(333,000)


    For comparison purposes, below is our analysis for our fiscal year ended September 30, 2019.
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)Unit of MeasureHypothetical Adverse Change in PriceApproximate Adverse Change to Income
Ethanol63,900,000 Gallons10 %$(8,946,000)
Corn22,820,000 Bushels10 %$(7,332,000)
Natural gas1,664,000 MMBtu10 %$(164,000)

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
rte-20200930_g2.jpg
Report of Independent Registered Public Accounting Firm

To the Board of Governors
Red Trail Energy, LLC
Richardton, North Dakota

Opinion on the Financial Statements
We have audited the accompanying balance sheets of Red Trail Energy, LLC (the Company) as of September 30, 2020 and 2019, and the related statements of operations, changes in members’ equity, and cash flows, for the years ended September 30, 2020, 2019, and 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for the years ended September 30, 2020, 2019, and 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Red Trail Energy, LLC in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

rte-20200930_g3.jpg
We have served as Red Trail Energy, LLC’s auditor since 2012.

Minneapolis, Minnesota
December 18, 2020
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RED TRAIL ENERGY, LLC
Balance Sheets
 ASSETSSeptember 30, 2020September 30, 2019
Current Assets
Cash and equivalents$9,304,638 $8,565,038 
Restricted cash1,807,851 1,957,031 
Accounts receivable, net, primarily related party1,963,236 3,910,384 
Commodities derivative instruments, at fair value42,005  
Inventory10,137,872 6,962,825 
Prepaid expenses371,283 109,500 
Total current assets23,626,885 21,504,778 
Property, Plant and Equipment
Land1,333,681 1,333,681 
Land improvements4,465,311 4,465,311 
Buildings8,135,994 8,111,074 
Plant and equipment and railroad88,442,644 88,038,476 
Construction in progress9,805,770 455,825 
112,183,400 102,404,367 
Less accumulated depreciation67,855,740 63,092,175 
Net property, plant and equipment44,327,660 39,312,192 
Other Assets
Right of use operating lease assets, net1,008,677  
Investment in RPMG605,000 605,000 
Patronage equity4,540,963 4,119,151 
Deposits40,000 40,000 
Total other assets6,194,640 4,764,151 
Total Assets$74,149,185 $65,581,121 

Notes to Financial Statements are an integral part of this Statement.
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RED TRAIL ENERGY, LLC
Balance Sheets
LIABILITIES AND MEMBERS' EQUITYSeptember 30, 2020September 30, 2019
Current Liabilities
Accounts payable$4,299,764 $4,331,521 
Accrued expenses1,937,555 598,209 
Commodities derivative instruments, at fair value 8,875 
Accrued loss on firm purchase commitments (see note 5)130,000 68,000 
Current maturities of notes payable1,276,256 252 
Current portion of operating lease liabilities364,862  
Total current liabilities8,008,437 5,006,857 
Long-Term Liabilities
Notes payable, less current maturities 4,916,081  
Long-term operating lease liabilities643,815  
Total long-term liabilities5,559,896  
Commitments and Contingencies (Notes 5, 6, 8, 10 and 14)
Members’ Equity (40,148,160 Class A Membership Units issued and outstanding on September 30, 2020 and 2019, respectively)
60,580,852 60,574,264 
Total Liabilities and Members’ Equity$74,149,185 $65,581,121 

Notes to Financial Statements are an integral part of this Statement.
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RED TRAIL ENERGY, LLC
Statements of Operations
Year EndedYear EndedYear Ended
September 30, 2020September 30, 2019September 30, 2018
Revenues, primarily related party$94,175,793 $103,697,726 $103,577,061 
Cost of Goods Sold
Cost of goods sold89,676,395 104,479,424 106,193,402 
Lower of cost or net realizable value adjustment241,294 119,050 307,797 
Loss on firm purchase commitments217,000 92,000 212,000 
Total Cost of Goods Sold90,134,689 104,690,474 106,713,199 
Gross Profit (Loss)4,041,104 (992,748)(3,136,138)
General and Administrative Expenses4,329,824 3,135,825 2,557,189 
Operating Loss(288,720)(4,128,573)(5,693,327)
Other Income (Expense)
Interest income117,143 116,922 71,427 
Other income187,626 268,974 482,777 
Interest expense(9,461)(12)(48)
Total other income (expense), net295,308 385,884 554,156 
Net Income (Loss)$6,588 $(3,742,689)$(5,139,171)
Weighted Average Units Outstanding
  Basic40,148,160 40,148,160 41,025,743 
  Diluted40,148,160 40,148,160 41,025,743 
Net Income (Loss) Per Unit
  Basic$ $(0.09)$(0.13)
  Diluted$ $(0.09)$(0.13)

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


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RED TRAIL ENERGY, LLC
Statements of Changes in Members' Equity
Years Ended September 30, 2020, 2019 and 2018
Class A Member UnitsTreasury Units
Units (a)AmountAdditional Paid in CapitalAccumulated Retained EarningsUnitsAmountTotal Member Equity
Balances - September 30, 201741,466,340 40,362,775 75,541 33,399,985 140,000 (159,540)73,678,761 
Units Issued— — — — — — — 
Units repurchased and retired(1,318,180)(1,318,180)— — — — (1,318,180)
Distribution— — — (2,902,675)— — (2,902,675)
Net Income (Loss)— — — (5,139,171)— — (5,139,171)
Balances - September 30, 201840,148,160 39,044,595 75,541 25,358,139 140,000 (159,540)64,318,735 
Units Issued— — — — — — — 
Units repurchased and retired— — — — — — — 
Distribution— — — (1,782)— — (1,782)
Net Income (Loss)— — — (3,742,689)— — (3,742,689)
Balances - September 30, 201940,148,160 $39,044,595 $75,541 $21,613,668 140,000 $(159,540)$60,574,264 
Units Issued— — — — — — — 
Units repurchased and retired— — — — — — — 
Distribution— — — — — — — 
Net Income— — — 6,588 — — 6,588 
Balances - September 30, 202040,148,160 39,044,595 75,541 21,620,256 140,000 (159,540)60,580,852 
(a) - Amounts shown represent member units outstanding.

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

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RED TRAIL ENERGY, LLC
Statements of Cash Flows
Year EndedYear EndedYear Ended
September 30, 2020September 30, 2019September 30, 2018
Cash Flows from Operating Activities
Net income (loss)$6,588 $(3,742,689)$(5,139,171)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization4,799,667 4,766,966 4,732,225 
Loss on disposal of fixed assets(26,213)3,659  
Change in fair value of derivative instruments(50,880)(2,236,775)1,312,338 
Accrued purchase commitment losses62,000 (136,000)199,000 
Lower of cost or net realizable value adjustment241,294 119,050 307,797 
Loss on firm purchase commitments217,000 92,000 212,000