Company Quick10K Filing
Southwest Iowa Renewable Energy
Price-0.00 EPS-88
Shares0 P/E0
MCap-0 P/FCF-0
Net Debt25 EBIT-1
TEV25 TEV/EBIT-47
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-07
10-Q 2020-03-31 Filed 2020-05-22
10-Q 2019-12-31 Filed 2020-02-07
10-K 2019-09-30 Filed 2019-12-20
10-Q 2019-06-30 Filed 2019-08-07
10-Q 2019-03-31 Filed 2019-05-09
10-Q 2018-12-31 Filed 2019-02-14
10-K 2018-09-30 Filed 2018-12-14
10-Q 2018-06-30 Filed 2018-08-08
10-Q 2018-03-31 Filed 2018-05-09
10-Q 2017-12-31 Filed 2018-02-08
10-K 2017-09-30 Filed 2017-12-15
10-Q 2017-06-30 Filed 2017-08-03
10-Q 2017-03-31 Filed 2017-05-10
10-Q 2016-12-31 Filed 2017-02-08
10-K 2016-09-30 Filed 2016-12-16
10-Q 2016-06-30 Filed 2016-08-03
10-Q 2016-03-31 Filed 2016-05-12
10-Q 2015-12-31 Filed 2016-02-10
10-K 2015-09-30 Filed 2015-12-02
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-06
10-Q 2014-12-31 Filed 2015-02-11
10-K 2014-09-30 Filed 2014-12-04
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-06
10-Q 2013-12-31 Filed 2014-02-06
10-K 2013-09-30 Filed 2013-11-19
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-Q 2012-12-31 Filed 2013-02-14
10-K 2012-09-30 Filed 2012-12-19
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-01
10-Q 2011-12-31 Filed 2012-01-30
10-K 2011-09-30 Filed 2011-11-22
10-Q 2011-06-30 Filed 2011-08-05
10-Q 2011-03-31 Filed 2011-05-09
10-Q 2010-12-31 Filed 2011-02-09
10-K 2010-11-23 Filed 2010-11-23
10-Q 2010-06-30 Filed 2010-08-06
10-Q 2010-03-31 Filed 2010-05-11
10-Q 2009-12-31 Filed 2010-02-12
8-K 2020-08-14 Regulation FD, Exhibits
8-K 2020-06-19
8-K 2020-05-22
8-K 2020-05-22
8-K 2020-05-15
8-K 2020-02-13
8-K 2019-12-31
8-K 2019-12-13
8-K 2019-11-26
8-K 2019-11-15
8-K 2019-11-08
8-K 2019-09-04
8-K 2019-08-16
8-K 2019-08-07
8-K 2019-05-10
8-K 2019-05-09
8-K 2019-03-21
8-K 2019-02-15
8-K 2019-02-15
8-K 2019-02-14
8-K 2019-01-14
8-K 2018-12-14
8-K 2018-12-14
8-K 2018-10-02
8-K 2018-09-24
8-K 2018-09-18
8-K 2018-08-08
8-K 2018-05-10
8-K 2018-05-09
8-K 2018-03-31
8-K 2018-02-16
8-K 2018-02-16
8-K 2018-02-08
8-K 2018-01-22
8-K 2018-01-16

SIRE 10Q Quarterly Report

Part I - Financial Statements
Item 1. Financial Statements
Note 1: Nature of Business
Note 2: Summary of Significant Accounting Policies
Note 3: Inventory
Note 4: Revolving Loan/Credit Agreements
Note 5: Fair Value Measurement
Note 6: Related Party Transactions
Note 7: Major Customer
Note 8. Lease Obligations
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
EX-31.1 sire-20200630x10qex311.htm
EX-31.2 sire-20200630x10qex312.htm
EX-32.1 sire-20200630x10qex321.htm
EX-32.2 sire-202003630x10qex322.htm

Southwest Iowa Renewable Energy Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
195156117783902012201420172020
Assets, Equity
10582593613-102012201420172020
Rev, G Profit, Net Income
2512-1-14-27-402012201420172020
Ops, Inv, Fin

Document
P180DP180DP180DP180D0.01002022-04-28P120MP5YP5YP5YP5Yfalse712--09-30Q320202020-06-30truefalse10-Q10868 189th StreetCouncil Bluffs51503IA0001424844897500Yesfalse000-53041 Non-accelerated FilerIAYesSOUTHWEST IOWA RENEWABLE ENERGY, LLCfalsetrue20-2735046366-039201332789750.04150.03500.0340.034LIBOR plus 3.40%LIBOR plus 3.40%0.03580.035800P3Y2M5DP7YP3YP20YP10YP40Y 0001424844 2019-10-01 2020-06-30 0001424844 us-gaap:CapitalUnitClassAMember 2020-06-30 0001424844 us-gaap:CommonClassCMember 2020-06-30 0001424844 us-gaap:CommonClassBMember 2020-06-30 0001424844 us-gaap:CommonClassAMember 2020-06-30 0001424844 2019-09-30 0001424844 2020-06-30 0001424844 2020-04-01 2020-06-30 0001424844 cik:DenominatorMember 2019-04-01 2019-06-30 0001424844 cik:DenominatorMember 2019-10-01 2020-06-30 0001424844 2019-04-01 2019-06-30 0001424844 2018-10-01 2019-06-30 0001424844 cik:DenominatorMember 2020-04-01 2020-06-30 0001424844 cik:DenominatorMember 2018-10-01 2019-06-30 0001424844 cik:MembersContributionMember 2019-12-31 0001424844 cik:MembersContributionMember 2018-10-01 2018-12-31 0001424844 us-gaap:RetainedEarningsMember 2020-03-31 0001424844 2020-01-01 2020-03-31 0001424844 cik:MembersContributionMember 2018-12-31 0001424844 2018-10-01 2018-12-31 0001424844 2019-01-01 2019-03-31 0001424844 us-gaap:RetainedEarningsMember 2018-10-01 2018-12-31 0001424844 us-gaap:RetainedEarningsMember 2019-09-30 0001424844 2018-09-30 0001424844 us-gaap:RetainedEarningsMember 2018-09-30 0001424844 2019-03-31 0001424844 2019-10-01 2019-12-31 0001424844 2020-03-31 0001424844 us-gaap:RetainedEarningsMember 2018-12-31 0001424844 us-gaap:RetainedEarningsMember 2020-06-30 0001424844 cik:MembersContributionMember 2019-03-31 0001424844 cik:MembersContributionMember 2020-03-31 0001424844 us-gaap:RetainedEarningsMember 2019-10-01 2019-12-31 0001424844 us-gaap:RetainedEarningsMember 2019-04-01 2019-06-30 0001424844 us-gaap:RetainedEarningsMember 2020-01-01 2020-03-31 0001424844 cik:MembersContributionMember 2019-10-01 2019-12-31 0001424844 cik:MembersContributionMember 2019-06-30 0001424844 cik:MembersContributionMember 2020-01-01 2020-03-31 0001424844 cik:MembersContributionMember 2019-01-01 2019-03-31 0001424844 us-gaap:RetainedEarningsMember 2019-06-30 0001424844 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0001424844 cik:MembersContributionMember 2020-06-30 0001424844 2019-06-30 0001424844 cik:MembersContributionMember 2019-09-30 0001424844 2018-12-31 0001424844 us-gaap:RetainedEarningsMember 2020-04-01 2020-06-30 0001424844 2019-12-31 0001424844 cik:MembersContributionMember 2018-09-30 0001424844 cik:MembersContributionMember 2020-04-01 2020-06-30 0001424844 us-gaap:RetainedEarningsMember 2019-03-31 0001424844 us-gaap:RetainedEarningsMember 2019-12-31 0001424844 cik:MembersContributionMember 2019-04-01 2019-06-30 0001424844 cik:CornMember us-gaap:ForwardContractsMember 2018-10-01 2019-06-30 0001424844 cik:CornMember cik:FutureAndOptionContractsMember 2020-04-01 2020-06-30 0001424844 cik:CornMember cik:FutureAndOptionContractsMember 2018-10-01 2019-06-30 0001424844 cik:CornMember cik:FutureAndOptionContractsMember 2019-04-01 2019-06-30 0001424844 cik:CornMember cik:FutureAndOptionContractsMember 2019-10-01 2020-06-30 0001424844 cik:CornMember us-gaap:ForwardContractsMember 2019-04-01 2019-06-30 0001424844 cik:CornMember us-gaap:ForwardContractsMember 2020-04-01 2020-06-30 0001424844 cik:CornMember us-gaap:ForwardContractsMember 2019-10-01 2020-06-30 0001424844 cik:DistillersGrainsMember 2019-10-01 2020-06-30 0001424844 cik:CornMember 2019-10-01 2020-06-30 0001424844 cik:CornOilMember 2019-10-01 2020-06-30 0001424844 cik:CornMember us-gaap:ForwardContractsMember 2019-10-01 2020-06-30 0001424844 us-gaap:CapitalUnitClassAMember 2019-10-01 2020-06-30 0001424844 cik:CapitalUnitClassCMember 2019-10-01 2020-06-30 0001424844 cik:NumeratorMember 2019-10-01 2020-06-30 0001424844 cik:NumeratorMember 2020-04-01 2020-06-30 0001424844 cik:NumeratorMember us-gaap:RetainedEarningsMember 2020-04-01 2020-06-30 0001424844 cik:NumeratorMember us-gaap:RetainedEarningsMember 2018-10-01 2019-06-30 0001424844 cik:NumeratorMember 2018-10-01 2019-06-30 0001424844 cik:NumeratorMember 2019-04-01 2019-06-30 0001424844 cik:NumeratorMember us-gaap:RetainedEarningsMember 2019-10-01 2020-06-30 0001424844 cik:InlosspositionMember 2019-09-30 0001424844 cik:FutureAndOptionContractsMember 2020-06-30 0001424844 cik:FuturesAndOptionContractsInGainPositionMember 2019-09-30 0001424844 cik:FutureAndOptionContractsMember 2019-09-30 0001424844 us-gaap:FairValueInputsLevel2Member 2020-06-30 0001424844 cik:InlosspositionMember 2020-06-30 0001424844 us-gaap:FairValueInputsLevel1Member 2020-06-30 0001424844 cik:FuturesAndOptionContractsCashHeldByDueToBrokerMember 2019-09-30 0001424844 cik:FuturesAndOptionContractsCashHeldByDueToBrokerMember 2020-06-30 0001424844 cik:CornMember us-gaap:ForwardContractsMember 2019-09-30 0001424844 cik:ProcessEquipmentMaximumMemberMember 2019-10-01 2020-06-30 0001424844 cik:ProcessEquipmentMinimumMember 2019-10-01 2020-06-30 0001424844 cik:OfficeEquipmentMinimumMember 2019-10-01 2020-06-30 0001424844 cik:OfficeEquipmentMaximumMember 2019-10-01 2020-06-30 0001424844 us-gaap:BuildingMember 2019-10-01 2020-06-30 0001424844 cik:FSCAMember 2019-09-30 0001424844 cik:ConvertibleNotePayableUnitHoldersMember 2019-09-30 0001424844 cik:FSCAMember 2020-06-30 0001424844 cik:ConvertibleNotePayableUnitHoldersMember 2020-06-30 0001424844 cik:FSCAMember 2018-10-01 2019-06-30 0001424844 2020-04-14 0001424844 cik:FSCAMember 2019-06-30 0001424844 cik:FSCATermRevolverMember 2019-06-30 0001424844 srt:MinimumMember cik:VariousOtherMember 2019-10-01 2020-06-30 0001424844 cik:FSCATermFacilityMember 2019-10-01 2020-06-30 0001424844 cik:FSCATermRevolverMember 2019-10-01 2020-06-30 0001424844 srt:MaximumMember cik:VariousOtherMember 2019-10-01 2020-06-30 0001424844 cik:ICMMember 2019-11-15 2019-11-15 0001424844 cik:ICMMember cik:CapitalUnitClassCMember 2020-06-30 0001424844 cik:ICMMember us-gaap:CapitalUnitClassAMember 2020-06-30 0001424844 cik:ICMMember 2020-06-30 0001424844 2018-10-01 2019-09-30 0001424844 us-gaap:FairValueInputsLevel3Member 2020-06-30 0001424844 us-gaap:FairValueInputsLevel2Member 2019-09-30 0001424844 us-gaap:FairValueInputsLevel1Member 2019-09-30 0001424844 us-gaap:FairValueInputsLevel3Member 2019-09-30 0001424844 cik:HopperCarsMember cik:BungeMember cik:ExtendedRailcarAgreementMember 2014-10-01 2014-12-31 0001424844 cik:EthanolCarsMember cik:BungeMember cik:RailcarAgreementMember 2014-10-01 2014-12-31 0001424844 cik:BungeMember cik:ServicesAgreementMember 2019-10-01 2020-06-30 0001424844 cik:EthanolCarsMember cik:OtherunrelatedpartiesMember cik:ExtendedRailcarAgreementMember 2019-10-01 2020-06-30 0001424844 cik:BungeMember cik:DGAgreementMember 2019-04-01 2019-06-30 0001424844 cik:BungeMember cik:EthanolAgreementMember 2018-10-01 2019-06-30 0001424844 cik:HopperCarsMember cik:BungeMember cik:ExtendedRailcarAgreementMember 2019-10-01 2020-06-30 0001424844 cik:EthanolCarsMember cik:OtherunrelatedpartiesMember cik:RailcarAgreementMember 2014-10-01 2014-12-31 0001424844 cik:BungeMember cik:GrainFeedstockAgencyAgreementMember 2020-04-01 2020-06-30 0001424844 cik:BungeMember cik:GrainFeedstockAgencyAgreementMember 2018-10-01 2019-06-30 0001424844 cik:BungeMember cik:GrainFeedstockAgencyAgreementMember 2019-10-01 2020-06-30 0001424844 cik:BungeMember cik:DGAgreementMember 2019-10-01 2020-06-30 0001424844 cik:BungeMember us-gaap:CapitalUnitClassBMember 2020-06-30 0001424844 cik:BungeMember cik:EthanolAgreementMember 2020-04-01 2020-06-30 0001424844 cik:HopperCarsMember cik:BungeMember cik:ExtendedRailcarAgreementMember 2019-11-15 2019-11-15 0001424844 cik:BungeMember cik:DGAgreementMember 2018-10-01 2019-06-30 0001424844 cik:BungeMember cik:EthanolAgreementMember 2019-04-01 2019-06-30 0001424844 cik:BungeMember cik:EthanolAgreementMember 2019-10-01 2020-06-30 0001424844 cik:RailcarAgreementMember 2018-10-01 2019-06-30 0001424844 cik:HopperCarsMember cik:OtherunrelatedpartiesMember cik:ExtendedRailcarAgreementMember 2019-10-01 2020-06-30 0001424844 cik:ICMMember 2019-10-01 2020-06-30 0001424844 cik:RailcarAgreementMember 2020-04-01 2020-06-30 0001424844 cik:RailcarAgreementMember 2019-10-01 2020-06-30 0001424844 cik:EthanolCarsMember cik:BungeMember cik:ExtendedRailcarAgreementMember 2014-10-01 2014-12-31 0001424844 cik:RailcarAgreementMember 2019-04-01 2019-06-30 0001424844 cik:BungeMember cik:GrainFeedstockAgencyAgreementMember 2019-04-01 2019-06-30 0001424844 cik:BungeMember cik:DGAgreementMember 2020-04-01 2020-06-30 0001424844 cik:EthanolCarsMember cik:OtherunrelatedpartiesMember cik:RailcarAgreementMember 2019-10-01 2020-06-30 0001424844 cik:HopperCarsMember cik:BungeMember cik:RailcarAgreementMember 2014-10-01 2014-12-31 0001424844 cik:BungeMember 2019-10-01 2020-06-30 0001424844 cik:BungeMember 2019-04-01 2019-06-30 0001424844 cik:BungeMember 2018-10-01 2019-06-30 0001424844 cik:BungeMember 2020-04-01 2020-06-30 0001424844 cik:EthanolCarsMember 2019-10-01 2020-06-30 utreg:bu iso4217:USD utreg:T utreg:Rate utreg:gal xbrli:shares iso4217:USD xbrli:shares utreg:lb xbrli:pure utreg:acre


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
quarterly period ending June 30, 2020
 
 
 
 
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number 000-53041

SOUTHWEST IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
 
Iowa
20-2735046
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
10868 189th Street, Council Bluffs, Iowa
51503
(Address of principal executive offices)
(Zip Code)
 
 
Registrant’s telephone number (712) 366-0392
 
 
Securities registered under Section 12(b) of the Exchange Act:
None.
 
 
Title of each class
Name of each exchange on which registered
 
 
Securities registered under Section 12(g) of the Exchange Act:
Series A Membership Units
(Title of class)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer  o       Accelerated filer (do not check if a smaller reporting company) o         Non-accelerated filer o       Smaller reporting company x
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x


As of August 3, 2020, the Company had 8,975 Series A Membership Units outstanding.










TABLE OF CONTENTS
 




PART I – FINANCIAL STATEMENTS
 
Item 1. Financial Statements

SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Balance Sheets
(Dollars in thousands)
ASSETS
June 30, 2020
 
September 30, 2019
 
(Unaudited)
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
822

 
$
1,075

Accounts receivable
7,739

 
1,431

Accounts receivable, related party

 
7,885

Derivative financial instruments
18

 
78

Inventory
17,008

 
17,167

Prepaid expenses and other
630

 
331

Total current assets
26,217

 
27,967

 
 
 
 
Property, Plant and Equipment
 
 
 
Land
2,064

 
2,064

Plant, building and equipment
246,625

 
239,446

Office and other equipment
1,803

 
1,803

 
250,492

 
243,313

Accumulated depreciation
(139,786
)
 
(131,864
)
Net property, plant and equipment
110,706

 
111,449

 
 
 
 
Other Assets
 
 
 
Right of use asset operating leases, net
7,612

 

Other assets
1,172

 
1,447

 
8,784

 
1,447

Total Assets
$
145,707

 
$
140,863

 
 
 
 
Notes to Financial Statements are an integral part of this statement

4



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Balance Sheets
(Dollars in thousands)
LIABILITIES AND MEMBERS' EQUITY
June 30, 2020
 
September 30, 2019
 
(Unaudited)
 
 
Current Liabilities
 
 
 
Accounts payable
$
2,069

 
$
4,151

Accounts payable, related party

 
2

Derivative financial instruments
77

 
597

Accrued expenses
7,060

 
9,906

Accrued expenses, related parties

 
581

Accrued put option liability, related parties

 
6,037

Current maturities of notes payable
8,084

 
580

Current portion of operating lease liability
3,142

 

Total current liabilities
20,432

 
21,854

 
 
 
 
Long Term Liabilities
 
 
 
Notes payable, less current maturities
52,575

 
25,832

Other long-term liabilities
4,298

 
3,872

Operating lease liability, less current maturities
4,470

 

Total long term liabilities
61,343

 
29,704

 
 
 
 
Members' Equity
 
 
 
Members' capital, 8,975 and 13,327 units issued and outstanding as of June 30, 2020 and September 30, 2019, respectively
64,106

 
87,165

Retained earnings (deficit)
(174
)
 
2,140

Total members' equity
63,932

 
89,305

 
 
 
 
Total Liabilities and Members' Equity
$
145,707

 
$
140,863

 
 
 
 
Notes to Financial Statements are an integral part of this statement

5



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Statements of Operations
(Dollars in thousands except for net income per unit)
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
June 30, 2020
 
June 30, 2019
 
June 30, 2020
 
June 30, 2019
 
 
 
 
 
 
 
 
Revenues
$
34,107

 
$
53,505

 
$
146,500

 
$
160,077

Cost of Goods Sold
 
 
 
 
 
 
 
Cost of goods sold-non hedging
34,807

 
54,275

 
145,426

 
162,735

Realized & unrealized hedging (gains)
(767
)
 
(1,372
)
 
(1,569
)
 
(3,195
)
 
34,040

 
52,903

 
143,857

 
159,540

 
 
 
 
 
 
 
 
Gross Margin
67

 
602

 
2,643

 
537

 
 
 
 
 
 
 
 
General and administrative expenses
1,288

 
1,061

 
3,811

 
3,737

 
 
 
 
 
 
 
 
Operating (Loss)
(1,221
)
 
(459
)
 
(1,168
)
 
(3,200
)
 
 
 
 
 
 
 
 
Interest and other expense, net
196

 
292

 
1,146

 
676

 
 
 
 
 
 
 
 
Net (Loss)
$
(1,417
)
 
$
(751
)
 
$
(2,314
)
 
$
(3,876
)
 
 
 
 
 
 
 
 
Weighted average units outstanding - basic
8,975

 
13,327

 
10,210

 
13,327

Weighted average units outstanding - diluted
8,975

 
13,327

 
10,210

 
13,327

(Loss) per unit - basic
$
(157.88
)
 
$
(56.35
)
 
$
(226.64
)
 
$
(290.84
)
(Loss) per unit - diluted
$
(157.88
)
 
$
(56.35
)
 
$
(226.64
)
 
$
(290.84
)
 
 
 
 
 
 
 
 
Notes to Financial Statements are an integral part of this statement

6



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Statements of Members' Equity
(Dollars in thousands)
 
Members' Capital
 
Retained Earnings (Deficit)
 
Total
 
 
 
 
 
 
Balance, September 30, 2018
$
87,165

 
$
10,637

 
$
97,802

Net (Loss)

 
(1,309
)
 
(1,309
)
Balance, December 31, 2018
$
87,165

 
$
9,328

 
$
96,493

Net (Loss)

 
(1,816
)
 
(1,816
)
Balance, March 31, 2019
$
87,165

 
$
7,512

 
$
94,677

Net (Loss)

 
(751
)
 
(751
)
Balance, June 30, 2019
$
87,165

 
$
6,761

 
$
93,926

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
$
87,165

 
$
2,140

 
$
89,305

Repurchase of membership units
(23,059
)
 

 
(23,059
)
Net Income

 
3,853

 
3,853

Balance, December 31, 2019
$
64,106

 
$
5,993

 
$
70,099

Net (Loss)

 
(4,750
)
 
(4,750
)
Balance, March 31, 2020
$
64,106

 
$
1,243

 
$
65,349

Net (Loss)

 
(1,417
)
 
(1,417
)
Balance, June 30, 2020
$
64,106

 
$
(174
)
 
$
63,932

 
 
 
 
 
 
Notes to Financial Statements are an integral part of this statement


7



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

Nine Months Ended
 
Nine Months Ended

June 30, 2020
 
June 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES

 

Net (Loss)
$
(2,314
)
 
$
(3,876
)
Adjustments to reconcile to net cash provided by (used in) operating activities:

 

Depreciation
7,946

 
7,670

Amortization
83

 
54

Loss on disposal of property and equipment
12

 

Change in other assets, net
275

 
291

(Increase) decrease in current assets:

 

Accounts receivable
1,577

 
5,036

Inventory
159

 
(6,322
)
Prepaid expenses and other
(299
)
 
(168
)
Derivative financial instruments
60

 
(2,441
)
Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(2,084
)
 
(206
)
Derivative financial instruments
(520
)
 
(1,567
)
Accrued expenses
(3,427
)
 
4,843

Increase in other long-term liabilities
426

 
(5,205
)
Net cash provided by (used in) operating activities
1,894

 
(1,891
)


 

CASH FLOWS FROM INVESTING ACTIVITIES

 

Purchase of property and equipment
(7,221
)
 
(5,759
)
Proceeds from sale of property and equipment
6

 

Net cash (used in) investing activities
(7,215
)
 
(5,759
)


 

CASH FLOWS FROM FINANCING ACTIVITIES

 

Payments for financing costs
(223
)
 

Settlement of put option liability
(6,037
)
 

Proceeds from debt
186,171

 
137,960

Payments on debt
(151,784
)
 
(130,674
)
Repurchase of membership units
(23,059
)
 

Net cash provided by financing activities
5,068

 
7,286




 


Net (decrease) in cash and cash equivalents
(253
)
 
(364
)


 

CASH AND CASH EQUIVALENTS

 

Beginning
1,075

 
1,440

Ending
$
822

 
$
1,076



 

SUPPLEMENTAL CASH FLOW INFORMATION

 

Cash paid for interest
$
1,399

 
$
633

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
     Establishment of lease liability and right-of-use asset
$
9,684

 
$

Notes to Financial Statements are an integral part of this statement

 
 
 

8



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Notes to Financial Statements
Note 1:  Nature of Business
Southwest Iowa Renewable Energy, LLC (the “Company”), located in Council Bluffs, Iowa, was formed in March, 2005, and began producing ethanol in February, 2009.   The Company is permitted to produce up to 140 million gallons of ethanol per year. The Company sells its ethanol, distillers grains, corn syrup and corn oil in the continental United States, Mexico, and the Pacific Rim.
Note 2:  Summary of Significant Accounting Policies
Basis of Presentation and Other Information
The accompanying financial statements are for the three months and nine months ended June 30, 2020 and 2019, and are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the fiscal year ended September 30, 2019 ("Fiscal 2019") contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.
Revenue Recognition
The Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) on October 1, 2018. Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the considerations the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from the contracts with customers. The Company applied the five-step method outlined in the ASU to all contracts with customers, and elected the modified retrospective implementation method. The new revenue standard did not have an impact on the Company's financial statements.
The Company sells ethanol and related products pursuant to marketing agreements.  Revenues are recognized when the risk of loss has been transferred to the marketing company and the marketing company has taken title to the product, prices are fixed or determinable and collectability is reasonably assured. 
The Company’s products are generally shipped Free on Board ("FOB") shipping point, and recorded as a sale upon delivery of the applicable bill of lading and transfer of risk of loss.  The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”) which was restated effective January 1, 2020 in connection with the Company's repurchase of the Series B Units from Bunge under the Bunge Membership Interest Purchase Agreement (the "Bunge Repurchase Agreement").  Syrup and distillers grains (co-products) were sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices. As discussed in Note 6, the initial term of this DG Agreement expired December 31, 2019, and as set forth in the Bunge Repurchase Agreement, Bunge provided transition services for all duties and responsibilities of the original DG Agreement through March 31, 2020. Commencing April 1, 2020, the Company is responsible for these functions. The Company markets and distributes all of the corn oil it produces directly to end users at market prices.   Carbon dioxide is sold through a Carbon Dioxide Purchase and Sale Agreement (the “CO2 Agreement”) with Air Products and Chemicals, Inc. Marketing fees, agency fees, and commissions due to the marketer are calculated separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold.  Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold.
Accounts Receivable
Accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating customer receivables and considering the customer’s financial condition, credit history and current economic

9



conditions.  As of June 30, 2020 and September 30, 2019, management had determined no allowance was necessary.  Accounts receivables are written off when deemed uncollectable and recoveries of receivables written off are recorded when received.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices.  The Company is subject to significant market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products.  Exposure to commodity price risk results from its dependence on corn in the ethanol production process.  Rising corn prices may result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow the Company to pass along increased corn costs to customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol, and distillers grains purchase and sales contracts, over-the-counter and exchange-traded futures and option contracts.  When the Company has sufficient working capital available, it enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts.  
Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.  Gains and losses on contracts that are designated as normal purchases or normal sales contracts are not recognized until quantities are delivered or utilized in production.
The Company applies the normal sale exemption to forward contracts relating to ethanol, distillers grains, and corn oil and therefore these forward contracts are not marked to market. As of June 30, 2020, the Company had 7.6 million gallons of open contracts for ethanol, 0.1 million tons of wet and dried distillers grains and 4.4 million pounds of corn oil.
Corn purchase contracts are treated as derivative financial instruments. Changes in market value of forward corn contracts, which are marked to market each period, are included in costs of goods sold.  As of June 30, 2020, the Company was committed to purchasing 2.1 million bushels of corn on a forward contract basis resulting in a total commitment of $6.9 million. In addition, the Company was committed to purchase 0.2 million bushels of corn on basis contracts.
In addition, the Company enters into short-term cash, options and futures contracts as a means of managing exposure to changes in commodity prices.  The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations.  The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility.  The Company’s specific goal is to protect itself from large moves in commodity costs.  All derivatives are designated as non-hedge derivatives and the contracts will be accounted for at fair value.  Although the contracts will be effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
Derivatives not designated as hedging instruments along with cash held by brokers at June 30, 2020 and September 30, 2019 at market value are as follows:

Balance Sheet Classification
 
June 30, 2020
 
September 30, 2019
 
 
 
in 000's
 
in 000's
Futures and option contracts

 

 

In gain position

 
$
43

 
$
368

In loss position

 
(112
)
 
(364
)
Cash held by broker

 
87

 
74


Current asset
 
18

 
78



 


 


Forward contracts, corn
Current liability
 
77

 
597

Net futures, options, and forward contracts

 
$
(59
)
 
$
(519
)
    

10



The net realized and unrealized gains and losses on the Company’s derivative contracts for the nine months ended June 30, 2020 and 2019 consist of the following:
 
 
 
Three Months Ended
 
Nine Months Ended

Statement of Operations Classification
 
June 30, 2020
 
June 30, 2019
 
June 30, 2020
 
June 30, 2019
 
 
 
in 000's
 
in 000's
 
in 000's
 
in 000's
Net realized and unrealized (gains) losses related to:

 

 

 
 
 
 


 

 

 
 
 
 
Forward purchase corn contracts
Cost of Goods Sold
 
$
266

 
$
(3,298
)
 
$
1,166

 
$
(4,072
)
Futures and option corn contracts
Cost of Goods Sold
 
(1,033
)
 
1,926

 
(2,735
)
 
877


Leases
In February 2016, FASB issued ASU 2016-02 "Leases” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted cash flow basis; and 2) a "right to use" asset, which is an asset that represents the lessee's right to use the specified asset for the lease term. The Company adopted this accounting standard effective October 1, 2019, the start of our current fiscal year. Upon adoption, the Company elected a practical expedient which allows existing leases to retain their classification as operating leases. The Company has elected to account for lease and related non-lease components as a single lease component. See Note 8 for more detailed information regarding leases.
Inventory
Inventory is stated at the lower of weighted average cost or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.  For both the three months ended June 30, 2020, and for the three months ended June 30, 2019, there was no lower of cost or market adjustment. For both the nine months ended June 30, 2020 and the nine months ended June 30, 2019, there was no lower of cost or market adjustment.
Put Option liability
The put option liability consisted of an agreement between the Company and ICM, Inc. ("ICM") that contained a conditional obligation to repurchase feature. Under the Unit Agreement between the Company and ICM dated December 17, 2014 (the "Unit Agreement"), the Company granted ICM the right to sell to the Company its 1,000 Series C and 18 Series A Membership Units (the "ICM Units") commencing anytime during the earliest of several alternative dates and events at a price equal to the greater of $10,987 per unit or the fair market value (as defined in the Unit Agreement) on the date of exercise (the "Put Option"). On August 16, 2019, ICM notified the Company of its intent to exercise the Put Option and waived its right to determine the fair market value for the ICM Units. On November 15, 2019, the Company repurchased the ICM Units for $11.1 million in accordance with the terms of the Put Option set forth in the Unit Agreement. The effective date of the Company's repurchase of the ICM Units was October 31, 2019.
Income Per Unit
Basic income per unit is calculated by dividing net income by the weighted average units outstanding for each period. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):

11



 
Three Months Ended
 
Nine Months Ended
 
June 30, 2020
 
June 30, 2019
 
June 30, 2020
 
June 30, 2019
Numerator:
 
 
 
 
 
 
 
Net (Loss) for basic earnings per unit
$
(1,417
)
 
$
(751
)
 
$
(2,314
)
 
$
(3,876
)
Net (Loss) for diluted earnings per unit
$
(1,417
)
 
$
(751
)
 
$
(2,314
)
 
$
(3,876
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average units outstanding - basic
8,975

 
13,327

 
10,210

 
13,327

Weighted average units outstanding - diluted
8,975

 
13,327

 
10,210

 
13,327

      (Loss) per unit - basic
$
(157.88
)
 
$
(56.35
)
 
$
(226.64
)
 
$
(290.84
)
      (Loss) per unit - diluted
$
(157.88
)
 
$
(56.35
)
 
$
(226.64
)
 
$
(290.84
)




12



Note 3:  Inventory
Inventory is comprised of the following:
 
June 30, 2020
 
September 30, 2019
 
in 000's
 
in 000's
Raw Materials - corn
$
4,427

 
$
4,270

Supplies and Chemicals
4,840

 
5,063

Work in Process
1,510

 
1,724

Finished Goods
6,231

 
6,110

Total
$
17,008

 
$
17,167



Note 4:   Revolving Loan/Credit Agreements
FCSA/CoBank
On November 8, 2019 the Company amended the credit agreement with Farm Credit Services of America, FLCA (“FCSA”) and CoBank, ACB, as cash management provider and agent (“CoBank”) which provides the Company with a term loan in the amount of $30.0 million (the “Term Loan”) and a revolving term loan in the amount of up to $40.0 million (the “Revolving Term Loan”), together with the Term Loan, the “ FCSA Credit Facility ”). The FCSA Credit Facility is secured by a security interest on all of the Company’s assets.
 
The Term Loan provides for semi-annual payments by the Company to FCSA of $3.75 million beginning September 1, 2020 and a maturity date of November 15, 2024. The Revolving Term Loan also has a maturity date of November 15, 2024. Under the FCSA Credit Facility, the Company has the right to select from several LIBOR based interest rate options with respect to each of the loans, with a LIBOR spread of 3.4% per annum. The interest rate at June 30, 2020 was 3.58%.

As of June 30, 2020, there was $12.3 million available under the Revolving Term Loan.

Paycheck Protection Program Loan

On April 14, 2020, the Company received $1.1 million under the new Paycheck Protection Program Loan ("PPP loan") legislation passed by Congress and signed by President Trump. The PPP loan may be forgiven based upon various factors, including, without limitation, the borrower's payroll cost over an eight to twenty-four week period starting upon the receipt of the funds. Expenses for approved payroll costs, lease payments on agreements before February 15, 2020 and utility payments under agreements before February 1, 2020 and certain other specified costs can be paid with these funds and eligible for payment forgiveness by the federal government. At least 60% of the proceeds must be used for approved payroll costs, and no more than 40% for non payroll expenses. PPP loan proceeds used by a borrower for the approved expense categories will generally be fully forgiven by the lender if the borrower satisfies certain employee headcount and compensation requirements . The Company incorporated the provisions of its PPP loan into our third fiscal quarter financial statements.


Notes payable


13



Notes payable consists of the following:

June 30, 2020
 
September 30, 2019
 
(000's)
 
(000's)
Term Loan bearing interest at LIBOR plus 3.40% (3.58% at June 30, 2020)
$
30,000

 
$

Revolving Term Loan bearing interest at LIBOR plus 3.40% (3.58% at June 30, 2020)
27,661

 
23,902

Note payable, PPP Loan bearing interest at 1.00% maturing April 28, 2022
1,063

 

Other debt with interest rates ranging from 3.50% to 4.15% and maturities through 2022
2,134

 
2,569


60,858

 
26,471

Less Current Maturities
8,084

 
580

Less Financing Costs, net of amortization
199

 
59

Total Long Term Debt
52,575

 
25,832



The approximate aggregate maturities of notes payable as of June 30, 2020 for the twelve months of payments for each year are as follows:
2021
$
8,084

 
 
2022
9,171

 
 
2023
8,442

 
 
2024
7,500

 
 
2025
27,661

 
 
Total
$
60,858


 
Note 5:  Fair Value Measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company used various methods including market, income and cost approaches.  Based on these approaches, the Company often utilized certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 -
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 -
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

14



A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.
Put Option liability. The put option liability consisted of a Unit Agreement between the Company and ICM that contains a conditional obligation to repurchase feature. Under the Unit Agreement, the Company granted ICM the right to sell to the Company its 1,000 Series C Units and 18 Series A Membership Units (the "ICM Units") commencing anytime during the earliest of several alternative dates and events at the price equal to the greater of $10,987 per unit or the fair market value (as defined in the agreement) on the date of exercise (the "Put Option"). On August 16, 2019, ICM notified the Company of its intent to exercise the Put Option and waived its right to determine the fair market value for the ICM Units. On November 15, 2019, the Company repurchased the ICM Units for $11.1 million in settlement of the Put Option consistent with the terms of the Unit Agreement. The Company's repurchase of the ICM Units was effective October 31, 2019.
Derivative financial instruments.  Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“CME”) market.  Ethanol contracts are reported at fair value utilizing Level 2 inputs from third-party pricing services.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.   For these contracts, the Company obtains fair value measurements from local grain terminal values.  The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based on the CME market.
The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and September 30, 2019, categorized by the level of the valuation inputs within the fair value hierarchy (in '000s):
 
June 30, 2020

Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 

Derivative financial instruments
$
43

 
$

 
$


 
 
 
 

Liabilities:
 
 
 
 

Derivative financial instruments
112

 
77

 

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019

Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Derivative financial instruments
$
368

 
$

 
$

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative financial instruments
364

 
597

 

Put option liability

 

 
6,037




The following table summarizes the assumptions used in computing the fair value of the put option liability subject to fair value accounting at September 30, 2019:

 
 
September 30, 2019
Put option assumptions:
 
 
Risk-free interest rate
 
%
Expected volatility
 
%
Expected life (years)
 
0.25

Exercise price
 
$10,897
Company unit price
 
$4,967


15



 
The following table reflects the activity for liabilities measured at fair value using Level 3 inputs during the nine months ended June 30, 2020 and for Fiscal 2019 that ended September 30, 2019:

 
June 30, 2020

 
September 30, 2019

Beginning Balance
$
6,037

 
$
5,400

Put Option (Redeemed)
(6,037
)
 

Change in Value

 
637

Ending Balance
$

 
$
6,037



Note 6:   Related Party Transactions

On November 15, 2019, the Company repurchased all of the ICM Units, which repurchase had an effective date of October 31, 2019. On December 31, 2019, the effective date, the Company repurchased the 3,334 Series B membership units owned by Bunge. Effective as of the date of the respective repurchase of the ICM Units and the Series B Units from Bunge, ICM and Bunge no longer constituted related parties. However, the activities discussed below reflect related party activity during the quarter ended December 31, 2019 up to and through the date of the respective repurchase, and historical expenses incurred in Fiscal 2019 for comparable periods.
Bunge
Under the original Ethanol Agreement between the Company and Bunge, the Company sold Bunge all of the ethanol produced by the Company and the Company paid Bunge a percentage fee for ethanol sold by Bunge, subject to a minimum and maximum annual fee.  The initial term of the original Ethanol Agreement expired on December 31, 2019. As part of the Bunge Membership Interest Purchase Agreement (the "Bunge Repurchase Agreement"), the parties entered into a restated Ethanol Agreement effective January 1, 2020 (the "Restated Ethanol Agreement") which provides that the Company will pay Bunge a flat monthly marketing fee. The term of the Restated Ethanol Agreement expires on December 31, 2026. The Company incurred related party ethanol marketing expenses of $0.0 million and $0.4 million during the three months ended June 30, 2020 and 2019. The Company incurred related party ethanol marketing expenses of $0.4 million and $1.1 million for the nine months ended June 30, 2020 and 2019.
Under the DG Purchase Agreement, Bunge purchased all distillers grains produced by the Company, and receives a fee based on the net sale price of distillers grains, subject to a minimum and maximum annual fee.  The initial term of the DG Purchase Agreement expired on December 31, 2019.  As part of the Bunge Repurchase Agreement, Bunge agreed to provide transition services until March 31, 2020 for all duties and responsibilities of the original DG Purchase Agreement. The Company is now responsible for all duties and responsibilities previously performed by Bunge. The Company incurred related party distillers grains marketing expenses of $0.0 million and $0.3 million during the three months ended June 30, 2020 and 2019, respectively. The Company incurred related party distillers grains marketing expenses of $0.3 million and $1.0 million for the nine months ended June 30, 2020 and 2019, respectively.
The Company and Bunge entered into an Amended and Restated Grain Feedstock Agency Agreement on December 5, 2014 (the “ Agency Agreement ”).  The Agency Agreement provided that Bunge procure corn for the Company and that the Company pay Bunge a per bushel fee, subject to a minimum and maximum annual fee.  The initial term of the Agency Agreement expired on December 31, 2019. As part of the Bunge Repurchase Agreement, Bunge agreed to provide transition services until March 31, 2020 for all duties and responsibilities of the original Agency Agreement. The Company is now responsible for all duties and responsibilities previously performed by Bunge. Related party expenses for corn procurement by Bunge were $0.0 million and $0.2 million during the three months ended June 30, 2020 and 2019, respectively. The Company incurred related party corn procurement expenses of $0.2 million and $0.5 million for the nine months ended June 30, 2020 and 2019, respectively.

16



Starting with the 2015 crop year, the Company began using corn containing Syngenta Seeds, Inc.’s proprietary Enogen® technology (“ Enogen Corn ”) for a portion of its ethanol production needs.  The Company contracts directly with growers to produce Enogen Corn for sale to the Company.  The Company has contracted for 25,500 acres of Enogen corn for the fiscal year ending September 30, 2020 ("Fiscal 2020"). Concurrent with the Agency Agreement, the Company and Bunge entered into a Services Agreement regarding Enogen Corn purchases (the “ Services Agreement ”).  Under this Services Agreement, the Company originated all Enogen Corn contracts for its facility and Bunge assisted the Company with certain administrative matters related to Enogen Corn, including facilitating delivery to the facility.  The Company paid Bunge a per bushel service fee.  The initial term of the Services Agreement expired on December 31, 2019 and the Company notified Bunge of its election not to extend the Services Agreement, but to allow corn planted this fiscal year to be planted and harvested under the terms of the Services Agreement. Expenses under the Services Agreement are included as part of the Amended and Restated Grain Feedstock Agency Agreement discussed above.
On June 26, 2009, the Company executed a Railcar Agreement with Bunge for the lease of 325 ethanol cars and 300 hopper cars which are used for the delivery and marketing of ethanol and distillers grains. The Company subleased 40 hopper cars to an unrelated third party, which sublease expired March 25, 2019. In June 2018, one of the third party customers entered into an assignment agreement for their 52 hopper cars with the Company and Bunge which was phased in over the fourth quarter of Fiscal 2018, and was implemented during the first quarter of Fiscal 2019.
The Company entered into an amendment to the Railcar Agreement effective March 24, 2019 to provide for the lease of 323 ethanol cars and 111 hopper cars which will be used for the delivery and marketing of ethanol and distiller grains (effective November 15, 2019, the parties reduced the number of leased hopper cars to 110 hopper cars). Under the terms of the amended Railcar Agreement, the original DOT111 cars will be leased over a four year term running from March 24, 2019 to April 30, 2023, with the ability to start returning cars after January 1, 2023 to conform to the requirement for DOT117 cars with enhanced safety specifications which is scheduled to become effective May 2023. The 110 hopper cars will be leased over a three year term running from March 24, 2019 to March 31, 2022 and continuing on a month-to-month basis thereafter. The Company's lease of the hopper cars will terminate upon the expiration of all such hopper cars. The amendments to the Railcar Agreement lowered the cost for the leases by approximately 15% as compared to the prior lease terms. The Company has subleased 30 tanker cars and 60 hopper cars to two unrelated third parties, which subleases expire November 8, 2020 and December 31, 2020, respectively Related party expenses under the Railcar Agreements were $0.0 million and $0.8 million for the three months ended June 30, 2020 and 2019, respectively, net of subleases and accretion. The Company incurred related party railcar lease expenses of $0.8 million and $2.7 million for the nine months ended June 30, 2020 and 2019, respectively. The Bunge Repurchase Agreement did not impact the Railcar Agreement.
    
ICM    
In connection with the payoff of the ICM subordinated debt, the Company entered into the SIRE ICM Unit Agreement dated December 17, 2014 (the “Unit Agreement”).  Under the Unit Agreement, the Company granted ICM the right to sell to the Company its 1,000 Series C and 18 Series A Membership Units (the “ICM Units”) commencing anytime during the earliest of  several alternative dates and events at the greater of $10,897 per unit or the fair market value (as defined in the agreement) on the date of exercise (the "Put Option"). On August 16, 2019, ICM notified the Company of its intent to exercise the Put Option and waived its right to determine the fair market value for the ICM Units. On November 15, 2019, the Company repurchased the ICM Units for $11.1 million in settlement of the Put Option consistent with the terms of the Unit Agreement. The effective date of the Company's repurchase of the ICM Units was October 31, 2019.
Note 7: Major Customer
The Company is party to the Restated Ethanol Agreement with Bunge for the exclusive marketing, selling, and distributing of all the ethanol produced by the Company through December 31, 2026 and was a party to the Distillers Grain Purchase Agreement with Bunge for the exclusive marketing, selling and distributing of all distillers grains and syrup produced by the Company through March 31, 2020. Revenues from Bunge were $20.3 million and $50.8 million for the three months ended June 30, 2020 and 2019, respectively. Revenues from Bunge were $126.4 million and $151.2 million for the nine months ended June 30, 2020 and 2019, respectively.

17



Note 8. Lease Obligations
Effective October 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The Company elected the option to apply the transition provisions at the adoption date instead of the earliest comparative period presented in the financial statements. By making this election, the Company has not applied retrospective reporting for the year ended September 30, 2019. The Company elected the short-term lease exception provided for in the standard and therefore only recognized right-of-use assets and lease liabilities for leases with a term greater than one year. The Company elected the package of practical expedients to not re-evaluate existing contracts as containing a lease or the lease classification unless it was not previously assessed against the lease criteria. In addition, the Company did not reassess initial direct costs for any existing leases.
A lease exists when a contract conveys to a party the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company recognized a lease liability at the lease commencement date, as the present value of future lease payments, using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis. A lease asset is recognized based on the lease liability value and adjusted for any prepaid lease payments, initial direct costs, or lease incentive amounts. The lease term at the commencement date includes any renewal options or termination options when it is reasonably certain that the Company will exercise or not exercise those options, respectively.
The Company leases rail cars and rail moving equipment with original terms up to 3 years for hopper cars and 4 years for tanker cars from Bunge. An additional 60 cars are leased from a third party under two separate leases for 3 years for half and 4 years for the second half. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. These costs are in addition to regular lease payments and are not included in lease expense. The Company subleased 73 tanker cars to two unrelated third parties, which subleases expired March 31, 2020 and June 30, 2020. Approximately 40% of the cars subleased under the March 31, 2020 agreement had been returned by the contract end date. Expense incurred for the operating leases during the three months ended June 30, 2020 was approximately $0.7 million and $1.5 million for the nine months ended June 30, 2020. The lease agreements have maturity dates ranging from January 2022 to May 2023. The average remaining life of the lease term for these leases was 3.18 years as of June 30, 2020.
The discount rate used in determining the lease liability for each individual lease was the Company's estimated incremental borrowing rate of 3.5% . The right-of-use asset operating lease, included in other assets, and operating lease liability, included in current and long term liabilities was $7.6 million as of June 30, 2020.
At June 30, 2020, the Company had the following approximate minimum rental commitments under non-cancellable operating leases for the twelve month period ended June 30:

2021
$
3,204

2022
2,909

2023
1,861

Total
$
7,974

 
 
Undiscounted future payments
$
7,974

Discount effect
(362
)
 
$
7,612





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
General
The following management discussion and analysis provides information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year ended September 30, 2019 including the financial statements, accompanying notes and the risk factors contained herein.


18



CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q of Southwest Iowa Renewable Energy, LLC (the "Company," "SIRE," "we," or "us") 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, without limitation:
Changes in the availability and price of corn, natural gas, and steam;
Negative impacts resulting from reductions in, or other modifications to, the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency;
Our inability to comply with our credit agreements required to continue our operations;
Negative impacts that our hedging activities may have on our operations;
Decreases in the market prices of ethanol, distillers grains;
Ethanol supply exceeding demand and corresponding ethanol price reductions;
Changes in the environmental regulations that apply to our plant operations;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
Changes in other federal or state laws and regulations relating to the production and use of ethanol;
Changes and advances in ethanol production technology;
Competition from larger producers as well as competition from alternative fuel additives;
Changes in interest rates and lending conditions of our loan covenants;
Volatile commodity and financial markets;
Decreases in export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distiller grains produced in the United States;
Disruptions, failures or security breaches relating to our information technology infrastructure;
Trade actions by the Trump Administration, particularly those affecting the biofuels and agricultural sectors and related industries; and
Disruption caused by health epidemics, such as the novel strain of the coronavirus, and the adverse impact of such epidemics on global economic and business conditions.

 
These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include various assumptions that underlie such statements.  Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the management discussion and analysis, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 ("Fiscal 2019") under the section entitled “Risk Factors” and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations set forth in the forward-looking statements made in this document or elsewhere by Company or on its behalf.  We undertake no obligation to revise or update any forward-looking statements.  The forward-looking statements contained in this quarterly report on Form 10-Q are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

Overview
The Company is an Iowa limited liability company, located in Council Bluffs, Iowa, formed in March, 2005. The Company is permitted to produce 140 million gallons of ethanol annually.  We began producing ethanol in February, 2009 and sell our ethanol, distillers grains, corn oil and corn syrup in the continental United States, Mexico, and the Pacific Rim.

19




Impact of COVID-19 on our Business

A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019 and on March 11, 2020, the World Health Organization characterized the spread of COVID-19 as a pandemic. Since then, several world governments, including the United States and many individual states and municipalities, have imposed lock-downs, self-quarantine requirements, and travel restrictions on their citizens. These actions, as well as oil production actions by Russia and Saudi Arabia, have dramatically decreased the demand for and price of blended gasoline across the globe and in the United States. Because the United States requires ethanol to be blended into the nation’s fuel supplies, gasoline consumption and demand plays a key role in the demand for and price of ethanol.

Operations

Throughout most of 2018 and 2019 as well as early 2020, the Company, and the ethanol industry as a whole, experienced significant adverse conditions as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors, which have been compounded by the impact of COVID-19 in 2020, resulted and continue to result in negative operating margins, significantly lower cash flow from operations and substantial net losses. In response to these adverse market conditions, commencing in the middle of March 2020, we elected to reduce ethanol production at our plant by approximately fifty percent in the month of April. May and June also saw lower than normal ethanol production levels.This cautionary strategy during the third quarter reduced ethanol production levels to twenty five percent as compared to the first half of 2020 production levels levels. However, we operated at 96% of historical levels in the month of June, which was included in the production levels for the third quarter. Management believes that this reduction is warranted due to current negative margins in the ethanol industry resulting in part from a slowdown in global and regional economic activity and decreased ethanol demand due to the COVID-19 pandemic. Limiting ethanol production also results in a corresponding decrease in distillers grains and corn oil production.

Recently, pursuant to temporary regulatory relief issued by the U.S. Food and Drug Administration (“FDA”) in light of the COVID-19 pandemic, several ethanol plants and industrial chemical companies have found ways to process ethanol into hand sanitizer for medical and consumer applications. During this period of reduced production, the Company has found several customers seeking ethanol in bulk for use in hand sanitizers. The Company has also bottled several sizes of "SIREtizer" hand sanitizer for local distribution. Given current economic conditions and the unprecedented decrease in the price and demand for blended gasoline, the Company was able to command a higher margin supplying ethanol used to produce these hand sanitizer products than for its conventional ethanol product.  The Company sold and produced ethanol based hand sanitizer as a new line of business in the months of April and May. In June 2020, the FDA and Environmental Protection Agency (the "EPA") prohibited certain ethanol plants from producing and distributing hand sanitizer by limiting chemicals permitted in the finished product and forced such ethanol plants, including the C to halt production and cancel supply agreements.

The Company will continue to monitor COVID-19 developments and the effect on fuel demand and terminal capacity in order to determine whether further adjustments to production will be necessary.

Employee Health and Safety

From the earliest signs of the outbreak, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners and suppliers. We enacted appropriate safety measures, including implementing social distancing protocols, requiring working from home for those employees that do not need to be physically present at the plant, staggering schedules and shifts for those that must be on-site to perform their work, extensively and frequently disinfecting our workspaces and requiring employees who must be physically present at the plant to wear masks. The Company also suspended all plant tours, and instituted a policy for contractor/vendors to answer a health questionnaire and provide the work environment where they have been for the past fourteen days. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

Supply and Demand Impact

Although we continue to regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to produce our products, adversely affecting our operations, even when operating at reduced production levels. Additionally, restrictions or disruptions of transportation, such as reduced availability of truck, rail or air transport, port closures and increased border controls or closures, may result in higher costs and delays, both on obtaining raw materials and

20



shipping finished products to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers.

The COVID-19 outbreak has significantly increased economic and demand uncertainty. We anticipate that the current outbreak or continued spread of COVID-19 will cause a global economic slowdown, and it is possible that it could cause a global recession. In the event of a recession, demand for our products would decline and our business would be adversely effected.

Paycheck Protection Program Loan

On April 15, 2020, the Company received $1.1 million under the new Paycheck Protection Program ("PPP Loan") legislation passed in response to the economic downturn triggered by COVID-19. Our PPP Loan may be forgiven based upon various factors, including, without limitation, our payroll cost over an eight to twenty-four week period starting upon our receipt of the funds. Expenses for approved payroll costs, lease payments on agreements before February 15, 2020 and utility payments under agreements before February 1, 2020 and certain other specified costs can be paid with these funds and eligible for payment forgiveness by the federal government. At least 60% of the proceeds must be used for approved payroll costs, and no more than 40% on non-payroll expenses. Management believes that our use of our PPP Loan proceeds for the approved expense categories will generally be fully forgiven if we satisfy certain employee headcount and compensation conditions.

Outlook

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our current cash reserves, cash generated from our operations, our PPP Loan and the available cash under our revolving term loan leave us well-positioned to manage our business through this crisis as it continues to unfold. However, the impacts of the COVID-19 pandemic are broad-reaching and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses. As a result, although we were in compliance with our financial covenants set forth in our loan agreements (the "FCSA Credit Facility") with Farm Credit Services of America, FLCA (“FCSA”) and CoBank, ACB (“CoBank”) as of June 30, 2020, the impact the COVID-19 pandemic could have an adverse impact on our operating results which could result in our inability to comply with certain of these financial covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default. However, based on our current forecast of market conditions and our financial performance, we expect that we will be in a position to satisfy all all of the financial covenants in our FCSA Credit Facility for the next twelve months.

The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, and actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast any effects on our Fiscal 2020 results. However, the challenges posed by the COVID-19 pandemic on the global economy increased significantly as the third quarter of Fiscal 2020 progressed and as of the date of this filing, management does not anticipate material improvement in the macroeconomic environment and, as a result our results for Fiscal 2020 may be significantly affected.

Despite the economic uncertainty resulting from the COVID-19 pandemic, we intend to continue to focus on strategic initiatives designed to improve on our operational efficiencies and diversify our products which is critical in order to drive positive results in a low margin environment. Our management team is currently in the process of implementing several projects to enhance our plant's operational efficiencies and we also continue to evaluate opportunities to add value to our production process by diversifying into high protein feed along with measures to reduce the carbon index ("CI") of the ethanol we produce.

In addition, we are also continuing with our efforts to de-bottleneck the production process. On September 1, 2019, we placed into service a dehydration membrane technology that is expected to allow for a more efficient increase in dehydration capability and slight reduction in our CI score.

Also, we believe that consolidation within the ethanol industry, coupled with our location, good operating efficiencies and our solid team may provide new opportunities for our plant.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.


21




Ethanol Supply and Demand    
The ethanol industry is experiencing the lowest margin environment seen in the past nine to ten years principally due to the fact that the supply of ethanol is outstripping demand and markets are reacting accordingly by disincentivizing production. In March 2020, the COVID-19 virus impact upon the economy, coupled with the uncertainty within the oil industry between Russia and Saudi Arabia, drove the price of gasoline downwards, and the price of ethanol plummeted at or below production costs. Many plants in the U.S. have shut down production or cut production levels. According to the Renewable Fuels Association ("RFA"), 75 ethanol plants have been idled, 79 plants are operating at reduced levels and 50 plants are operating near normal capacity. This means 50% of the industry's production capacity is off line. Adding to the supply/demand imbalance is the stance taken by the EPA under the Trump Administration with regard to the issuance of “hardship waivers” to so-called small refineries which is discussed further in the section below entitled "Renewable Fuel Standard".
Domestic ethanol use is around 14 billion gallons per year. The industry currently has capacity to produce over 16.6 billion gallons. Exports play a critical role in keeping the United States from being awash in production. Worldwide exports from the U.S. increased almost 24% between calendar years 2017 and 2018. But in calendar year 2019, ethanol exports decreased 13.6% as compared to the calendar year 2018 according to the most recent available data from the U.S. Energy Information Administration ("EIA"). In the first quarter of 2020, ethanol exports increased 27% as compared to the similar period in 2019 but 2019 exports where substantially less than exports during prior years. During the first calendar quarter of 2020, exports still remain more than 10% lower than the first quarter of 2018. Despite recent reductions in exports to Brazil, which has historically been one of the largest customers of U.S. ethanol, Brazil remains one of the three largest customers for U.S. ethanol exports together with Canada and India. Exports of U.S. ethanol to these three countries constituted almost 50% of all U.S. ethanol exports during calendar year 2019 as compared to 59% during the same period in 2018. In the first calendar quarter of 2020, these three countries totaled 63% of total U.S. ethanol exports.
Similar to Brazil, tariffs implemented by China on U.S. ethanol has essentially eliminated China as an export market for U.S. ethanol. China was included in the top export markets during the first half of 2018; however, approximately 99% of the exports to China occurred in the first three months of 2018 and since then, U.S. ethanol exports to China have been reduced to zero due to increased tariffs. On December 13, 2019, the U.S. and China announced an agreement to the first phase of a trade deal (the "Phase One Agreement") where China agreed to purchase billions of dollars in agricultural products in exchange for the U.S. agreeing not to pursue a new round of tariffs starting January 2020. The impact on the ethanol market cannot be determined at this time.

Recent Regulatory Developments

Renewable Fuel Standard

The ethanol industry receives support through the Federal Renewable Fuels Standard (the “RFS”) which has been, and will continue to be, a driving factor in the growth of ethanol usage. The RFS requires that each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that allows refiners to use renewable fuel blends in those areas of the country where it is most cost-effective.   The EPA is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

The RFS original volume requirements increased incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels.  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.

Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. On November 30, 2018, the EPA issued the final rule that set the 2019 annual volume requirements for renewable fuel at 19.92 billion gallons of renewable fuels per year (the "Final 2019 Rule"). On July 5, 2019, the EPA issued a proposed rule for 2020 which set the annual volume requirements renewable fuel at 19.92 billion gallons of renewable fuel (the "Proposed 2020 Rule"). Both the Final 2019 Rule and the Proposed 2020 Rule maintained the number of gallons that may be met by conventional renewable fuels such as corn based ethanol at 15.0 billion gallons.

However, on October 15, 2019, the EPA released a supplemental notice seeking additional comments on a proposed rule on adjustments to the way that annual renewable fuel percentages are calculated. The supplemental notice was issued in response to an announcement on October 4, 2019, by President Trump of a proposed plan to require refiners not exempt from the rules to

22



blend additional gallons of ethanol to make up for the gallons exempted by the EPA's expanded 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 Renewable Identification Numbers or "RINs", negatively affecting ethanol demand and resulting in lower ethanol prices. The proposed plan was expected to calculate the volume that refiners were required to blend by using a three-year average of exempted gallons. However, the EPA proposed to use a three-year average to account for the reduction in demand resulting from the waivers using the number of gallons of relief recommended by the United States Department of Energy. A public hearing on the proposed rule was held October 30 and the public comment period expired on November 30, 2019. On December 19, 2019, the EPA issued the final rule that set out the 2020 annual volume requirements (the "Final 2020 Rule") at 20.09 billion gallons up from the 19.92 billion gallons for 2019. Similar to the Final 2019 Rule, the Final 2020 Rule included 15.0 billion gallons of conventional corn-based ethanol.

Although the volume requirements set forth in the Final 2019 Rule are slightly higher than the final 2018 volume requirements (the "Final 2018 Rule") and the Final 2020 Rule volume requirements are slightly higher than those set forth in the Final 2019 Rule, the volume requirements under the Final 2018 Rule, the Final 2019 Rule and the Final 2020 Rule are all still significantly below the statutory mandates of 26 billion gallons, 28 billion gallons and 30 billion gallons, respectively, with significant reductions in the volume requirements for advanced biofuels as well.

Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. The Final 2018 Rule represented the first year the total proposed volume requirements were more than 20% below statutory levels. In response, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The Final 2019 Rule is approximately 29% below the statutory levels representing the second consecutive year of reductions of more than 20% below the statutory mandates therefore triggering the mandatory reset under the RFS. The Final 2020 Rule is approximately 34% below the statutory targets, which represents the third consecutive year of reductions of more than 20% below the statutory mandates. After the issuance of the Final 2019 Rule, the EPA became statutorily required to modify the statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022. These factors include environmental impact, domestic energy security, expected production, infrastructure impact, consumer costs, job creation, price of agricultural commodities, food prices, and rural economic development.

In October 2018, the Trump administration released timelines for certain EPA rulemaking initiatives relating to the RFS including the “reset” of the statutory blending targets. The EPA is expected to propose rules modifying the applicable statutory volume targets for cellulosic biofuel, advanced biofuel, and total renewable fuel for the years 2020-2022. The proposed rules are also expected to include proposed diesel renewable volume obligations for 2021 and 2022.

Federal mandates supporting the use of renewable fuels like the RFS are a significant driver of ethanol demand in the U.S. Ethanol policies are influenced by environmental concerns, diversifying our fuel supply, and an interest in reducing the country’s dependence on foreign oil. Consumer acceptance of flex-fuel vehicles and higher ethanol blends of ethanol in non-flex-fuel vehicles may be necessary before ethanol can achieve significant growth in U.S. market share. Another important factor is a waiver in the Clean Air Act, known as the "One-Pound Waiver", which allows E10 to be sold year-round, even though it exceeds the RVP limitation of nine pounds per square inch. At the end of May 2019, the EPA finalized a rule which extended the One-Pound Waiver to E15 so its sale can expand beyond flex-fuel vehicles during the June 1 to September 15 summer driving season. Although this rule is being challenged in court, the One-Pound Waiver is in effect and E15 can be sold year round. However, with respect to the 2019 summer driving season, because the rule was not finalized until the end of May, the ethanol industry was unable to fully capitalize on increased E15 sales during the 2019 peak summer driving season.The EIA first quarter estimate, which did not take into account the COVID-19 virus impact on the U.S. economy, or the previously mentioned Russia-Saudi Arabia oil production differences, had gasoline consumption for 2020 flat with last year, with gasoline prices being 18% lower than in 2019. The COVID-19 virus will have a significant impact on the U.S. and worldwide economy over the next few months, all unchartered territory that makes forecasting nearly impossible. The EIA forecast for summer driving put consumption down 23% as compared to the same period in 2019, as a result of travel restrictions and reduced economic activity related to COVID-19.

Despite the recent actions by the Trump administration relating to E15, there continues to be uncertainty regarding the future of the RFS as a result of the significant number of small refinery waivers granted.  Under the RFS, the EPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. The mechanism that provides accountability in RFS compliance is the Renewable Identification Number (RIN). RIN’s are a tradeable commodity given that if refiners (obligated parties) need additional RIN’s to be compliant, they have to purchase them from those that have excess. Thus, there is an economic incentive to use renewable fuels like ethanol, or in the alternative, buy RIN’s. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by ethanol producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market.

23



The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties.

On April 15, 2020, five Governors sent a letter to the EPA requesting a general waiver from the RFS due to the drop in demand caused by COVID-19 travel restrictions. They contend that the compliance costs (i.e. cost to purchase RINs) is onerous and could put some refineries out of business. In June 2020, the Attorneys General of seven states joined in the request made to waive the 2020 RFS compliance burdens. The EPA has 90 days to respond, and as of this filing had indicated only that they are “watching the situation closely, and reviewing the governors’ letter.”

Although the Final 2019 Rule and the Final 2020 Rule maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons this number does not take into account waivers granted by the EPA to small refiners for "hardship." The EPA can, in consultation with the Department of Energy, waive the obligation for individual smaller refineries that are suffering “disproportionate economic hardship” due to compliance with the RFS. To qualify, for this “small refinery waiver,” the refineries must be under total throughput of 75,000 barrels per day and state their case for an exemption in an application to the EPA each year.

As of June 2020, the EPA has approved 85 exemptions for compliance years 2016 to 2018, freeing refineries from using 4 billion gallons of renewable fuel. This effectively reduces the annual renewable volume obligation for each year by that amount as the waivers exempt the obligating parties from meeting the RFS blending targets and the waived gallons are not reallocated to other obligated parties at this time. As discussed above, the mechanism that provides accountability in RFS compliance is the Renewable Identification Number ("RIN"). RINs are a tradeable commodity given that if refiners (obligated parties) need additional RINs to be compliant, they have to purchase them from those that have excess. Thus, there is an economic incentive to use renewable fuels like ethanol, or in the alternative, buy RINs. Granting these small refinery waivers effectively reduces the annual renewable volume obligation for each year by that amount as the waivers exempt the obligating parties from meeting the RFS blending targets and the waived gallons are not reallocated to other obligated parties at this time. The resulting surplus of RINs in the market has brought values down significantly to under $0.20. In late 2017 D6 RIN prices were about $0.75 per gallon, averaged $0.30 in 2018, and less than $0.20 in 2019. Since higher RIN values help to make higher blends of ethanol more cost competitive, lower RIN values could hinder or at least slow retailer and consumer adoption of E15 and higher blends. As discussed further below, the Tenth Circuit Court of Appeals ruled that multiple small refinery exemptions were improperly extended by the EPA which caused D6 RIN trading prices to increase to approximately $0.24 per gallon in January 2020. As of June 30, 2020, the EPA has received 52 requests for small refinery waivers that will be up for consideration during 2020. If the EPA approves all 52 of the pending applications, the ethanol market would suffer another loss of 2 billion gallons of biofuel blending requirements which will adversely impact RIN prices and the ethanol market. These waiver requests represent an effort by refineries to bypass the ruling of the Tenth Circuit and establish a continuous chain of exemptions. If the EPA continues to grant discretionary waivers and RIN prices continue to fall, it could negatively affect ethanol prices.

The Trump Administration has not announced a plan to reallocate ethanol gallons lost to exemptions in the current year and therefore, the continued granting of waivers and the failure of the Trump Administration to take any action to reallocate the lost exemptions will continue to negatively impact ethanol demand and RIN and ethanol prices
    
Biofuels groups have filed a lawsuit in the U.S. Federal District Court for the D.C. Circuit, challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. This is the first RFS rulemaking since the expanded use of the exemptions came to light, however the EPA has refused to cap the number of waivers it grants or how it accounts for the retroactive waivers in its percentage standard calculations. The EPA has a statutory mandate to ensure the volume requirements are met, which are achieved by setting the percentage standards for obligated parties. The EPA's current approach runs counter to this statutory mandate and undermines Congressional intent. Biofuels groups argue the EPA must therefore adjust its percentage standard calculations to make up for past retroactive waivers and adjust the standards to account for any waivers it reasonably expects to grant in the future.

In a supplemental rulemaking to the Proposed 2020 Rule, the EPA changed their approach, and for the first time accounted for the gallons that they anticipate they will be waiving from the blending requirements due to small refinery exemptions. To accomplish this, they are adding in the trailing three year average of gallons the Department of Energy (the "DOE") recommended be waived, in effect raising the blending volumes across the board in anticipation of waiving the obligations in whole or in part for certain refineries that qualify for the exemptions. Although in past years the EPA has disregarded recommendations from the Department of Energy in the rule the DOE stated its intent to adhere to these recommendations going forward, including granting partial waivers rather than an all or nothing approach. The EPA will be adjudicating the 2020 compliance year small refinery exemption applications in early 2021, but have indicated they will adhere to DOE recommendations for the 2019 compliance year applications as well, which should be adjudicated in 2020.


24



If the EPA’s decisions to reduce the volume requirements under the RFS statutory mandates are allowed to stand, if the volume requirements are further reduced or if the EPA continues to grant waivers to small refineries, the market price and demand for ethanol would be adversely affected which would negatively impact our financial performance. The EPA's based the projected volume of gasoline and diesel that was exempt in 2020 on utilizing the three year rolling average of relief recommended by the Department of Energy, rather than the three year rolling level of actual exemptions advocated by agricultural interests.

On May 29, 2018, the National Corn Growers Association, National Farmers Union, and the Renewable Fuels Association filed a petition challenging the EPA’s grant of waivers to three specific refineries seeking that the court reject the waivers granted to the three as an abuse of EPA authority.  These waived gallons are not redistributed to obligated parties, and in effect, reduce the aggregate Renewable Volume Obligations ("RVOs") under the RFS. If the specific waivers granted by the EPA and/or its lower criteria for granting small refinery waivers under the RFS are allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance. On January 24, 2020, the U.S. Court of Appeals for the Tenth Circuit announced that the three exemptions were improperly issued by the EPA. The Court held that the EPA cannot "extend" exemptions to any small refineries whose earlier, temporary exemptions had lapsed. The Court concluded that the EPA exceeded its statutory authority in granting these petitions because there was nothing for the agency to "extend". Utilizing this criteria, there would have been a maximum of seven small refineries that could have received continuous extensions, yet the EPA has granted thirty five exemptions in a single year. The Court also found the EPA had abused their discretion in failing to explain how the EPA could maintain that such refineries would incur an economic hardship while continuing to claim that the costs of RIN compliance are passed through and recovered by those same refineries.

Related to the recent lawsuits, the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy, National Biodiesel Board, National Corn Growers Association, Biotechnology Industry Organization, and National Farmers Union petitioned the EPA on June 4, 2018 to change its regulations to account for lost volumes of renewable fuel resulting from the retroactive small refinery exemptions. This petition to the EPA seeks a broader, forward-looking remedy to account for the collective lost volumes caused by the recent increase in retroactive small refinery RVO exemptions. The EPA has not reallocated volume exemptions in prior years, and continued to approve 31 new requests in 2019. On October 29, 2019, the U.S. House of Representatives Committee on Energy and Commerce met to examine the effects of the small refinery exemptions on biofuels and agriculture since 2016. Companies were seeking the EPA to make available more information on refinery exemptions.
On February 4, 2019, Growth Energy filed a lawsuit in the Court of Appeals for the District of Columbia against the EPA challenging the EPA’s failure to address small refinery exemptions in the Final 2019 Rule. An administrative stay has been granted to research the contents of the lawsuit.
Although the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol in the Final 2019 Rule and the Final 2020 Rule together with the application of the One-Pound Waiver to E15 permitting the year round sale of E15 signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of any such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

COVID-19 Legislation

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") in late March 2020 in an attempt to offset the subsequent economic damage. The CARES Act created and funded multiple programs that have impacted or could impact our industry. The United States Department of Agriculture ("USDA") was given additional resources for the Commodity Credit Corporation (CCC) and they are using those funds to provide direct payments to farmers, including corn farmers from whom we purchase most of our feedstock for ethanol production. Similar to the trade aid payments made by the USDA over the past two years, this cash injection for farmers could cause them to delay marketing decisions and increase the price we have to pay to purchase the corn. The USDA did not include any CCC funds for ethanol plants as of this filing.

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

Ethanol is the primary ingredient in hand sanitizer. The CARES Act provided a tax exclusion on the shipment of undenatured ethanol for use in manufacturing hand sanitizer. The FDA has provided expanded guidance to allow for more

25



denaturants to be used in ethanol intended for hand sanitizer production, and has expanded the grades of ethanol allowed for the duration of the public health crisis. In June 2020, the FDA and EPA prohibited certain ethanol plants from producing and distributing hand sanitizer by limiting chemicals permitted in the finished product and forced such ethanol plants, including the Company to halt production and cancel supply agreements.

Industry Factors Affecting our Results of Operations
Ethanol prices decreased 10.5% during the three months ended June 30, 2020 as compared to the same period in the previous fiscal year, and this was coupled with a decrease of 31.8% in ethanol shipments during the three months ended June 30, 2020 as compared to the prior year. The COVID-19 pandemic is the primary reason for the decrease in shipments during the three-month period. Ethanol prices increased 4.5% for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. The ethanol shipment volume decreased 12.9% for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. The COVID-19 pandemic in 2020 and the historically low prices in 2019 also impacted the nine months' comparison.
Management currently believes that the ethanol market for the fourth quarter of our fiscal year ending September 30, 2020 ("Fiscal 2020") as well as the market for certain of our co-products will worsen due to the following factors:
The latest estimates of supply and demand provided by the USDA changed the estimate for 2019/20 ending corn stocks to 2.1 billion bushels. For 2019/20, the USDA lowered corn consumption for ethanol and co-products by 10.0% to 4.9 billion bushels but left their forecast for the corn supply basically flat at 13.6 billion bushels which was 0.7 billion bushels lower than the 2018/19 crop. The USDA lowered their corn price estimates 6.5% for Fiscal 2020 to $3.60 per bushel, which is in line with ending prices for 2018/19. Yield per acre and production numbers from those set forth in the prior report remained unchanged, but yield per acre is forecast 5.1% below the 2018/19 yield number of 176 bushels per acre. The impact of the COVID-19 pandemic is reflected in the above numbers, but management expects that the pandemic will continue to have a depressing effect on the U.S. and global economy, as management believes the prior estimates have underestimated the impact of the pandemic
The EIA released its Short Term Energy Outlook report in June 2020 and indicated that U.S. gasoline demand is expected to decrease by 23% due to reduced gasoline consumption because of unemployment, government implementation of stay-at-home restrictions and many people are working exclusively or partially from home. The EIA forecasts that gasoline demand will probably recover in 2021, but current conditions make it difficult to determine when travel bottoms-out. The EIA's latest 2020 report also forecasts that retail gasoline prices will decrease by 17.7% in 2020, and increase by 8.9% for 2021. The price decrease is a result by recent actions in March 2020 by the Organization of Petroleum Exporting Countries and their allies to increase production and emphasize market share instead of a balance global oil market. Any increase in gasoline demand could have a positive impact on ethanol demand whereas decreased gasoline demand would have an adverse impact on ethanol demand and therefore, ethanol prices.

We currently believe that our margins will remain tight in light of mixed signals on support for the RFS and waivers of refiner RVOs by the EPA. A decrease in the price for crude oil and unleaded gasoline could have a positive impact on the demand for gasoline and impact the market price of ethanol, but the effect of the COVID-19 pandemic on the economy is expected to have a substantial negative impact on demand, which could adversely impact our profitability during the balance of Fiscal 2020. This negative impact could worsen in the event that domestic ethanol inventories remain high, or if U.S. exports of ethanol remain low or decline further. Unless additional demand can be found in foreign or domestic markets, a continued level of current ethanol stocks or any increase in domestic ethanol supply could further adversely impact the price of ethanol. The risk of an escalating trade war with foreign countries is a great threat to the U.S. agriculture economy in the short term.
Our distiller grain margins have been impacted positively in the short term due to plant shutdowns and plant slowdowns by local competitors which resulted in increased demand for our dried distiller grains ("DDG") and wet distiller grains ("WDG"). We have experienced a price increase of 2.2% for the nine months ended June 30, 2020, as compared to the nine months ended June 30, 2019, on a 8.8% increase in tons sold for those same periods. In 2018, an estimated 31% of U.S. DDG production was exported, and 2018 was the second highest export year on record for DDG. In 2019, the U.S. implemented tariffs on a cross section of Chinese products, and China did not order products from the U.S., including DDG. In January 2020, the U.S. and China signed a "Phase One" agreement where the U.S. lowered tariffs in exchange for China reinstating orders for U.S. products, including agriculture products. We cannot forecast how much demand from China will come back into the marketplace, or if additional demand can be created from other foreign markets or domestically. Domestic demand for distiller grains could also remain low if corn prices decline and end-users switch to lower priced alternatives.

26



On December 18, 2019, Congress extended the biodiesel tax credit through 2022 with retroactive application to January 1, 2018. The extension of the tax credit may increase demand for corn oil, which is a feedstock for biodiesel, and could have a positive impact on corn oil prices in the future.

Results of Operations
The following table shows our results of operations, stated as a percentage of revenue for the three months ended June 30, 2020 and 2019.
 
Three Months Ended June 30, 2020
 
Three Months Ended June 30, 2019
 
Amounts
 
% of Revenues
 
Amounts
 
% of Revenues
 
in 000's
 
 
 
in 000's
 
 
Income Statement Data
 
 
 
 
 
 
 
Revenues
$
34,107

 
100.0
 %
 
$
53,505

 
100.0
 %
Cost of Goods Sold
 
 
 
 
 
 
 
Material Costs
22,224

 
65.2
 %
 
38,201

 
71.4
 %
Variable Production Expense
4,336

 
12.7
 %
 
7,305

 
13.7
 %
Fixed Production Expense
7,480

 
21.9
 %
 
7,397

 
13.8
 %
Gross Margin
67

 
0.2
 %
 
602

 
1.1
 %
General and Administrative Expenses
1,288

 
3.8
 %
 
1,061

 
2.0
 %
Interest and other expense, net
196

 
0.6
 %
 
292

 
0.5
 %
Net (Loss)
$
(1,417
)
 
(4.2
)%
 
$
(751
)
 
(1.4
)%

The following table shows our results of operations, stated as a percentage of revenue for the nine months ended June 30, 2020 and 2019.
 
Nine Months Ended June 30, 2020
 
Nine Months Ended June 30, 2019
 
Amounts
 
% of Revenues
 
Amounts
 
% of Revenues
 
in 000's
 
 
 
in 000's
 
 
Income Statement Data
 
 
 
 
 
 
 
Revenues
$
146,500

 
100.0
 %
 
$
160,077

 
100.0
 %
Cost of Goods Sold
 
 
 
 
 
 
 
Material Costs
105,448

 
72.0
 %
 
116,347

 
72.7
 %
Variable Production Expense
18,482

 
12.6
 %
 
23,685

 
14.8
 %
Fixed Production Expense
19,927

 
13.6
 %
 
19,508

 
12.2
 %
Gross Margin
2,643

 
1.8
 %
 
537

 
0.3
 %
General and Administrative Expenses
3,811

 
2.6
 %
 
3,737

 
2.3
 %
Interest and other expense, net
1,146

 
0.8
 %
 
676

 
0.4
 %
Net (Loss)
$
(2,314
)
 
(1.6
)%
 
$
(3,876
)
 
(2.4
)%


Revenues

27



Our revenue from operations is derived from three primary sources: sales of ethanol, distillers grains, and corn oil.  The chart below displays statistical information regarding our revenues. During the three months ended June 30, 2020, the average price per gallon of ethanol decreased by 10.5% as compared to the same period in 2019, compounded by a 31.8% decrease in gallons of ethanol sold, primarily due to oversupply situation for the industry and the impact of the COVID-19 pandemic on the economy. The net effect was a 39.0% decrease in ethanol revenue for the three months ended June 30, 2020. During the nine months ended June 30, 2020, the average price per gallon of ethanol increased 4.5% as compared to the first nine months ended June 30, 2019. Offsetting this was a 12.9% decrease in the volume of ethanol gallons sold during the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. Overall, ethanol revenue decreased 9.0% for the first nine months ended June 30, 2020 compared to the first nine months ended June 30, 2019.
An increase in the average price per ton of distillers grains of approximately 3.9% coupled with a 34.7% decrease in volume sold resulted in a decrease of 32.1% in revenue for this category in the three months ended June 30, 2020 as compared to the same three month period in 2019. Distillers grain revenue decreased primarily due to decreased distiller grain production resulting from our reduced ethanol production. For the nine months ended June 30, 2020, distillers grain price per ton increased 2.2%, and tons sold decreased 8.8% for an overall decrease of 6.8% as compared to the nine months ended June 30, 2019.
Corn oil revenue decreased 19.3% in the three months ended June 30, 2020 compared to the three months ended June 30, 2019 with the 6.4% increase in price offset by lower volume of 24.2%. Comparing the nine months ended June 30, 2020 to the nine months ended June 30, 2019, corn oil revenue decreased 11.3% as tons sold decreased by 9.1% combined with a lower average price per ton of 2.5%. Our market for corn oil is primarily local middlemen that compete for our available supply. On December 18, 2019, Congress extended the biodiesel tax credit through 2022 with retroactive application to January 1, 2018. The extension of the tax credit may increase demand for corn oil, which is a feedstock for biodiesel, and could have a positive impact on corn oil prices in the future, but this has not been experienced to date because of the impact of COVID-19 on the economy.

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019
 
Amounts in 000's

% of Revenues

Amounts in 000's

% of Revenues
Product Revenue Information
 

 

 

 
Denatured and Undenatured Ethanol
$
24,931


73.1
%

$
40,857


76.4
%
Distillers Grains
6,677


19.6
%

9,840