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EX-32.2 - CERTIFICATION - GOLDEN GRAIN ENERGYa322certification73116.htm
EX-32.1 - CERTIFICATION - GOLDEN GRAIN ENERGYa321certification73116.htm
EX-31.2 - CERTIFICATION - GOLDEN GRAIN ENERGYa312certification73116.htm
EX-31.1 - CERTIFICATION - GOLDEN GRAIN ENERGYa311certification73116.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the quarterly period ended
July 31, 2016
 
 
 
OR
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the transition period from               to               .
 
 
 
COMMISSION FILE NUMBER 000-51177
 
GOLDEN GRAIN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa
 
02-0575361
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1822 43rd Street SW, Mason City, Iowa 50401
(Address of principal executive offices)
 
(641) 423-8525
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).
x Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o
Accelerated Filer  o
Non-Accelerated Filer x
Smaller Reporting Company o

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

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

As of September 14, 2016, there were 18,953,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.


1


INDEX



2


PART I    FINANCIAL INFORMATION

Item 1. Financial Statements

GOLDEN GRAIN ENERGY, LLC
Balance Sheets

 ASSETS
 
July 31, 2016
 
October 31, 2015

 
(Unaudited)
 

Current Assets
 

 

Cash and equivalents
 
$
7,663,088

 
$
21,084,029

Marketable securities
 
15,381,564

 
13,241,062

Accounts receivable
 
5,481,641

 
2,717,592

Other receivables
 
1,325,767

 
669,930

Derivative instruments
 
1,309,314

 
879,332

Inventory
 
6,882,912

 
6,866,505

Prepaid expenses and other
 
1,890,467

 
1,578,458

Total current assets
 
39,934,753

 
47,036,908


 

 

Property and Equipment
 

 

Land and land improvements
 
13,916,479

 
12,516,479

Building and grounds
 
26,861,752

 
25,761,752

Grain handling equipment
 
15,833,823

 
15,178,214

Office equipment
 
220,527

 
217,424

Plant and process equipment
 
95,829,611

 
84,802,333

Construction in progress
 
2,513,370

 
5,887,270


 
155,175,562

 
144,363,472

Less accumulated depreciation
 
88,676,050

 
82,232,924

Net property and equipment
 
66,499,512

 
62,130,548


 

 

Other Assets
 

 

Investments
 
25,007,111

 
27,334,443

Other assets
 
1,509,231

 
1,653,421

Total other assets
 
26,516,342

 
28,987,864


 

 

Total Assets
 
$
132,950,607

 
$
138,155,320

 
 
 
 
 


Notes to the Financial Statements are an integral part of these Statements.

3


GOLDEN GRAIN ENERGY, LLC
Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
 
July 31, 2016
 
October 31, 2015

 
(Unaudited)
 

Current Liabilities
 

 

Accounts payable
 
$
6,160,638

 
$
6,324,850

Accrued expenses
 
1,406,991

 
1,679,336

Other current liabilities
 
118,561

 
110,392

Total current liabilities
 
7,686,190

 
8,114,578


 

 

Long-term Liabilities
 

 

Deferred compensation
 
304,252

 
278,798

Deferred revenue, net of current portion
 
107,201

 
198,164

Total long-term liabilities
 
411,453

 
476,962


 

 

Commitments and Contingencies
 

 


 

 

Members' Equity (19,873,000 units issued and outstanding)
 
124,852,964

 
129,563,780


 

 

Total Liabilities and Members’ Equity
 
$
132,950,607

 
$
138,155,320

 
 
 
 
 
 
 
 
 
 

Notes to the Financial Statements are an integral part of these Statements.

4


GOLDEN GRAIN ENERGY, LLC
Statements of Operations (Unaudited)


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

 
July 31, 2016
 
July 31, 2015
 
July 31, 2016
 
July 31, 2015

 

 

 

 

Revenues
 
$
48,641,969

 
$
52,082,545

 
$
148,934,083

 
$
165,984,860


 

 

 

 

Cost of Goods Sold
 
41,658,299

 
46,027,948

 
138,375,585

 
143,749,608


 

 

 

 

Gross Profit
 
6,983,670

 
6,054,597

 
10,558,498

 
22,235,252


 

 

 

 

Operating Expenses
 
648,383

 
739,917

 
2,544,110

 
2,491,322


 

 

 

 

Operating Income
 
6,335,287

 
5,314,680

 
8,014,388

 
19,743,930


 

 

 

 

Other Income (Expense)
 

 

 

 

Other income
 
187,296

 
44,897

 
477,280

 
543,329

Interest income (expense)
 
(6,626
)
 
(25,087
)
 
(7,706
)
 
(94,694
)
Equity in net income of investments
 
1,830,948

 
2,021,660

 
5,684,572

 
6,033,904

Total Other Income
 
2,011,618

 
2,041,470

 
6,154,146

 
6,482,539


 

 

 

 

Net Income
 
$
8,346,905

 
$
7,356,150

 
$
14,168,534

 
$
26,226,469

 
 
 
 

 
 
 

Basic & diluted net income per unit
 
$
0.42

 
$
0.37

 
$
0.71

 
$
1.32

Weighted average units outstanding for the calculation of basic & diluted net income per unit
 
19,873,000

 
19,873,000

 
19,873,000

 
19,873,000

Distributions Per Unit
 
$
0.25

 
$
0.50

 
$
0.95

 
$
3.10

 
 
 
 
 
 
 
 
 






Notes to the Financial Statements are an integral part of these Statements.

5


GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows (Unaudited)

 
Nine Months Ended
 
Nine Months Ended

 
July 31, 2016
 
July 31, 2015
Cash Flows from Operating Activities
 

 

Net income
 
$
14,168,534

 
$
26,226,469

Adjustments to reconcile net income to net cash provided by operating activities:
 

 

Depreciation and amortization
 
6,509,582

 
6,043,295

Unrealized (gain) on risk management & marketable securities
 
(820,484
)
 
(366,969
)
Amortization of deferred revenue
 
(82,794
)
 
(227,641
)
Change in accretion of interest on grant & note receivable
 
(46,927
)
 
(45,592
)
Distributions in excess of earnings from investments
 
2,327,332

 
8,559,089

Deferred compensation expense
 
25,454

 
157,079

Change in assets and liabilities
 

 

Accounts receivable
 
(2,764,049
)
 
5,653,891

Inventory
 
(16,407
)
 
(2,627,050
)
Prepaid expenses and other
 
(843,185
)
 
(775,430
)
Accounts payable
 
(443,354
)
 
(1,163,525
)
Accrued expenses
 
(272,345
)
 
(516,630
)
Deferred compensation payable
 

 
(126,014
)
Net cash provided by operating activities
 
17,741,357

 
40,790,972


 

 

Cash Flows from Investing Activities
 

 

Capital expenditures
 
(10,532,948
)
 
(5,631,484
)
Purchase of marketable securities
 
(12,250,000
)
 
(3,000,000
)
Proceeds from sale of marketable securities
 
10,500,000

 
5,150,000

   Net cash (used in) investing activities
 
(12,282,948
)
 
(3,481,484
)

 

 

Cash Flows from Financing Activities
 

 

Payments for long-term debt
 

 
(13,114
)
Distributions to members
 
(18,879,350
)
 
(61,606,300
)
Payments received on grant receivable
 

 
506,224

Net cash (used in) financing activities
 
(18,879,350
)
 
(61,113,190
)

 

 

Net (Decrease) in Cash and Equivalents
 
(13,420,941
)
 
(23,803,702
)

 

 

Cash and Equivalents – Beginning of Period
 
21,084,029

 
47,444,566


 

 

Cash and Equivalents – End of Period
 
$
7,663,088

 
$
23,640,864

 
 
 
 

Supplemental Cash Flow Information
 

 

Cash paid for interest
 
$
33,023

 
$
108,598

 
 
 
 
 
Supplemental Disclosure of Noncash Operating, Investing & Financing Activities
 
 
 
 
Accounts payable related to construction in process
 
$
675,342

 
$
820,989

Distributions declared and unpaid by equity method investee
 
852,576

 


Notes to the Financial Statements are an integral part of these Statements.

6

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and notes disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended October 31, 2015, contained in the Company's annual report on Form 10-K for 2015.

In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.

Nature of Business
Golden Grain Energy, LLC ("Golden Grain Energy" and "the Company") is approximately a 115 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol, distiller grains with solubles and corn oil primarily in the continental United States. The Company also holds several investments in various companies that focus on ethanol production, marketing and/or logistics.

Organization
Golden Grain Energy is organized as an Iowa limited liability company.  The members' liability is limited as specified in Golden Grain Energy's operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act. 

Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

Cash and Equivalents
The Company's cash balances are maintained in bank depositories and regularly exceed federally insured limits. The Company has not experienced any losses in connection with these balances. Also included in cash and equivalents are highly liquid investments, that are readily convertible into known amounts of cash, which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
Marketable Securities
Marketable securities consist of certificates of deposits with original maturities of greater than three months and mutual funds. Certificates of deposit are considered held to maturity securities, which are measured at cost. Mutual funds are considered trading securities which are measured at fair value using prices obtained from pricing services. Any unrealized or realized gains and losses on the trading securities are recorded as part of other income (expense).

At July 31, 2016, marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds with an approximate cost and fair market value of $12,925,000 and $13,132,000, respectively, and certificates of deposit all with maturities of less than one year and approximate value of $2,250,000. At October 31, 2015, marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds with an approximate cost and fair market value of $6,257,000 and $6,241,000, respectively, and certificates of deposit all with maturities of less than one year and an approximate value of $7,000,000. For the periods ended July 31, 2016 and 2015, there was no other-than-temporary impairment recognized. For the three months ended July 31, 2016 and 2015, the Company recorded interest, dividends and net realized and unrealized gains of approximately $187,000 and $1,000, respectively, from these investments as part of other income. For the nine months ended July 31, 2016 and 2015, the Company recorded interest, dividends and net realized and unrealized gains of approximately $390,000 and $66,000, respectively, from these investments as part of other income.

Receivables
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.


7

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016


Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.

The fiscal years of Renewable Products Marketing Group, LLC (RPMG) and Guardian Energy Janesville, LLC end on September 30 and the fiscal years of Absolute Energy, LLC, Homeland Energy Solutions, LLC and Lawrenceville Tank, LLC end on December 31. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company's income statement for the period ended July 31, 2016, for all companies, is based on the investee's results for the three and nine months ended June 30, 2016.
  
Revenue and Cost Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers.  This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers. Interest income is recognized as earned.

Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol, distiller grains and corn oil are recorded based on the net selling price reported to the Company from its marketer. Railcar lease costs incurred by the Company in the sale and shipment of distiller grain products are included in cost of goods sold.

Inventory
Inventories are generally valued 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.

Effective November 1, 2015, the Company adopted Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, requiring the measurement of inventory at the lower of cost or net realizable value. The adoption of this standard did not have a material effect on the financial statements.

Property & Equipment
Property and equipment are stated at historical cost. Significant additions and betterments are capitalized, while expenditures for maintenance and repairs are charged to operations when incurred. The Company uses the straight-line method of computing depreciation over the estimated useful lives between 3 and 40 years.

The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset group may not be recoverable. If circumstances require a long-lived asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset group to the carrying value of the asset group. If the carrying value of the long-lived asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

Investment in commodities contracts, derivative instruments and hedging activities
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. 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.

The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company occasionally also enters into derivative contracts to hedge its exposure to price risk as it relates to ethanol sales. As part of its risk management process, the Company

8

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016


uses futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage its risk related to pricing of inventories. All of the Company's derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
 
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments net of cash due from/to broker.

Net income per unit
Basic and diluted earnings per unit are computed using the weighted-average number of Class A and B units outstanding during the period.

Fair Value
Financial instruments include cash and equivalents, certificates of deposit, marketable securities, receivables, accounts payable, accrued expenses and derivative instruments. The fair value of marketable securities and derivative financial instruments is based on quoted market prices, as disclosed in Note 7. The fair value, determined using level 3 inputs, of all other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments.

Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three and nine months ended July 31, 2016, ethanol sales accounted for approximately 80% of total revenue, distiller grains sales accounted for approximately 16% of total revenue, and corn oil sales accounted for approximately 4% of total revenue, while corn costs averaged approximately 87% and 81% , respectively, of cost of goods sold.

The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets with ethanol selling, in general, for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.

2.    INVENTORY

Inventory consisted of the following as of July 31, 2016 and October 31, 2015:

 
 
July 31, 2016

 
October 31, 2015

Raw Materials
 
$
3,422,967

 
$
4,032,244

Work in Process
 
1,261,287

 
1,208,661

Finished Goods
 
2,198,658

 
1,625,600

Totals
 
$
6,882,912

 
$
6,866,505



9

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016


3.    BANK FINANCING

The Company has entered into a master loan agreement with Farm Credit Services of America (FLCA) which includes a revolving term loan with original maximum borrowings of $35,000,000 and maturity on February 1, 2020. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (3.67% as of July 31, 2016). The borrowings are secured by substantially all the assets of the Company. The agreement allows for additional reductions in the maximum borrowings at the Company's request. The Company is subject to certain financial covenants including but not limited to minimum working capital and net worth requirements and limitations on distributions. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the loans and/or imposition of fees or penalties. As of July 31, 2016, the Company had no outstanding borrowings and $10 million available to borrow under the credit agreement. As of October 31, 2015, the Company had no borrowings outstanding.

4.    RELATED PARTY TRANSACTIONS

The Company purchased corn and materials from members of its Board of Directors or Risk Management Committee that own or manage elevators. Purchases from the related parties during the three and nine months ended July 31, 2016 totaled approximately $7,510,000 and $55,312,000, respectively. Purchases during the three and nine months ended July 31, 2015 totaled approximately $16,056,000 and $53,816,000, respectively. As of July 31, 2016 and October 31, 2015, the amount owed to related parties was approximately $316,000 and $666,000, respectively.

5.    COMMITMENTS, CONTINGENCIES AND AGREEMENTS

Ethanol, Distiller Grains and Corn Oil marketing agreements and major customers

The Company has entered into marketing agreements with a marketing company, in which the Company has an investment, for the exclusive rights to market, sell and distribute the entire ethanol, distiller grains and corn oil inventory produced by the Company. The marketing fees are presented net in revenues.

Approximate sales and marketing fees related to the agreements in place are as follows:

 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
2016
 
2015
 
2016
 
2015
Sales ethanol, distiller grains & corn oil
 
$
48,808,000

 
$
52,137,000

 
$
149,319,000

 
$
166,309,000

Marketing fees
 
115,000

 
113,000

 
334,000

 
320,000

 
 
 
 
 
 
 
 
 
As of
 
July 31, 2016
 
October 31, 2015
 
 
 
 
Amount due from RPMG
 
$
5,482,000

 
$
2,717,000

 
 
 
 


10

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016


6.    RISK MANAGEMENT

The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of contracts related to corn and natural gas are recorded in cost of goods sold and changes in market prices of contracts related to sale of ethanol are recorded in revenues.

Unrealized gains and losses on forward contracts are deemed "normal purchases" under derivative accounting guidelines and, therefore, are not marked to market in the Company's financial statements. The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the periods ended July 31, 2016 and 2015 and the fair value of derivatives as of July 31, 2016 and October 31, 2015:

 
 
Income Statement Classification
 
Realized Gain (Loss)
 
Change in Unrealized Gain (Loss)
 
Total Gain (Loss)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
(50,000
)
 
$

 
$
(50,000
)
three months ended July 31, 2016
 
Cost of Goods Sold
 
586,000

 
3,348,000

 
3,934,000

 
 
Total
 
$
536,000

 
$
3,348,000

 
$
3,884,000

 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
91,000

 
$
(32,000
)
 
$
59,000

three months ended July 31, 2015
 
Cost of Goods Sold
 
(423,000
)
 
(184,000
)
 
(607,000
)
 
 
Total
 
$
(332,000
)
 
$
(216,000
)
 
$
(548,000
)
 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
(50,000
)
 
$

 
$
(50,000
)
nine months ended July 31, 2016
 
Cost of Goods Sold
 
1,410,000

 
3,179,000

 
4,589,000

 
 
Total
 
$
1,360,000

 
$
3,179,000

 
$
4,539,000

 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
43,000

 
$
(48,000
)
 
$
(5,000
)
nine months ended July 31, 2015
 
Cost of Goods Sold
 
8,000

 
496,000

 
504,000

 
 
Total
 
$
51,000

 
$
448,000

 
$
499,000


 
 
Balance Sheet Classification
 
July 31, 2016
 
October 31, 2015
Futures and option contracts through July 2018
 
 
 
 
 
 
In gain position
 
 
 
$
3,408,000

 
$
58,000

In loss position
 
 
 
(409,000
)
 
(237,000
)
Cash held by (due to) broker
 
 
 
(1,690,000
)
 
1,058,000

 
 
Current Asset
 
$
1,309,000

 
$
879,000


11

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016



As of July 31, 2016, the Company had the following approximate outstanding purchase and sale commitments, of which approximately $5,280,000 of the purchase commitments were with related parties.

 
 
Commitments Through
 
Amount
Sale commitments
 
 
 
 
Corn Oil - fixed price
 
December 2016
 
$
2,229,000

Distiller Grains - fixed price
 
September 2016
 
2,466,000

 
 
 
 
 
Purchase commitments
 
 
 
 
Corn - fixed price
 
July 2017
 
$
8,920,000

Corn - basis contract
 
July 2018
 
15,405,000


As of July 31, 2016, the Company has fixed price futures and forward contracts in place for approximately 19% of our anticipated corn needs, 10% of our natural gas needs and 0% of our ethanol sales for the next 12 months with limited open positions beyond that period.


7.    FAIR VALUE MEASUREMENTS

Financial assets and liabilities carried at fair value are 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.

A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Marketable Securities: The Company's short-term investments, classified as trading securities, are classified within Level 1 and comprised of short-term liquid investments (e.g. mutual funds) which are carried at fair value based on the quoted market prices. Corporate bonds are classified within Level 2 and comprised of short-term corporate bonds which are carried at fair value based on third party pricing services.

Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts 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 markets such as the CME and NYMEX.  Crush swaps are bundled contracts or combined contracts that include a portion of corn, ethanol and natural gas rolled into a single trading instrument. These contracts are reported at fair value utilizing Level 2 inputs and are based on the various trading activity of the components of each segment of the bundled contract.

The following table summarizes financial assets and financial liabilities measured at the approximate fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

12

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016


 
 
Total
 
Level 1
 
Level 2
 
Level 3
Marketable securities:
 


 
 
 
 
 
 
Assets, July 31, 2016
 
$
13,132,000

 
$
12,632,000

 
$
500,000

 
$

Assets, October 31, 2015
 
6,241,000

 
6,241,000

 

 

Derivative financial instruments:
 
 
 
 
 
 
 
 
July 31, 2016
 


 


 


 

Assets
 
$
3,408,000

 
$
3,255,000

 
$
153,000

 
$

Liabilities
 
(409,000
)
 
(392,000
)
 
(17,000
)
 

October 31, 2015
 
 
 

 


 

Assets
 
$
58,000

 
$
33,000

 
$
25,000

 
$

Liabilities
 
(237,000
)
 
(85,000
)
 
(152,000
)
 


8. INVESTMENTS

Condensed, combined unaudited financial information of the Company’s investments in Absolute Energy, Homeland Energy Solutions, Guardian Energy, Lawrenceville Tank and RPMG is as follows (in 000’s):

Balance Sheet
 
 
 
 
 
6/30/2016
 
9/30/2015
Current Assets
 


 


 
$
336,324

 
$
285,879

Other Assets
 

 

 
248,379
 
256,144
Current Liabilities
 

 

 
202,862
 
142,927
Long-term Debt
 

 

 
65,694
 
49,241
Members’ Equity
 

 

 
316,147
 
349,855
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
Income Statement
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
186,458

 
$
198,940

 
$
548,210

 
$
594,186

Gross Profit
 
25,377

 
27,932

 
61,465

 
84,973

Net Income
 
20,824

 
23,251

 
48,876

 
70,581


The Company recorded equity in net income of approximately (in 000's):
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
Equity in Net Income
 
2016
 
2015
 
2016
 
2015
Absolute Energy
 
$
223

 
$
498

 
$
1,046

 
$
1,936

Guardian Energy
 
853

 
767

 
3,074

 
1,788

Homeland Energy Solutions
 
697

 
667

 
1,314

 
1,878

Other
 
58

 
90

 
251

 
432

Total
 
$
1,831

 
$
2,022

 
$
5,685

 
$
6,034


During the three and nine months ended July 31, 2016, Guardian Energy made distributions in excess of the equity balance recorded by the Company. The excess distributions were approximately $853,000 and $1,444,000, respectively, and are recorded as part of income for the three and nine months ended July 31, 2016. The following table (in 000's) shows the condensed unaudited financial information of Guardian Energy, which represents greater than 10% of the net income during certain periods presented.


13

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2016


Guardian Energy Condensed Unaudited Financial Information
Balance Sheet
 
 
 
 
 
6/30/2016
 
9/30/2015
Current Assets
 


 


 
$
24,866

 
$
23,053

Other Assets
 

 

 
43,624
 
47,653
Current Liabilities
 

 

 
10,118
 
7,918
Long-term Debt
 

 

 
65,536
 
49,000
Members’ Equity
 

 

 
(7,164)
 
13,788
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
Income Statement
 
6/30/2016
 
6/30/2015
 
6/30/2016
 
6/30/2015
Revenue
 
$
60,415

 
$
62,256

 
$
169,593

 
$
177,373

Gross Profit
 
12,261
 
10,896
 
26,651
 
28,543
Net Income
 
8,053

 
7,157
 
15,298

 
17,033

The following table (in 000's) shows the condensed unaudited financial information of Homeland Energy Solutions. The Company's equitable portion of assets of Homeland Energy Solutions is greater than 10% of the Company's assets for certain periods presented:

Homeland Energy Solutions Condensed Unaudited Financial Information
Balance Sheet
 
 
 
 
 
6/30/2016
 
9/30/2015
Current Assets
 


 


 
$
83,905

 
$
80,156

Other Assets
 

 

 
111,688
 
109,910
Current Liabilities
 

 

 
35,240
 
36,118
Long-term Debt
 

 

 
158
 
241
Members’ Equity
 

 

 
160,195
 
153,707
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
Income Statement
 
6/30/2016
 
6/30/2015
 
6/30/2016
 
6/30/2015
Revenue
 
$
70,146

 
$
72,750

 
$
199,702

 
$
212,068

Gross Profit
 
9,069
 
9,225
 
17,634
 
26,018
Net Income
 
8,741
 
8,345
 
16,176
 
23,465


14


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

Forward Looking Statements

This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions.  In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings. 

Reduced corn ethanol use requirements in the EPA's renewable volume obligations under the Renewable Fuels Standard for 2014, 2015, 2016 and 2017;
The impact lower gasoline prices have on the market price of ethanol and our ability to profitably operate the ethanol plant;
Changes in the availability and price of corn and natural gas;
Any elimination of the renewable fuels use requirements under the RFS;
Our ability to transport our finished goods in order to continue to operate our ethanol plant at capacity;
Our ability to profitably operate the ethanol plant, including the sale of distiller grains and corn oil, and maintain a positive spread between the selling price of our products and our raw material costs;
Lower distillers grains prices which result from the Chinese antidumping investigation;
The ability of the ethanol industry to generate additional demand through higher level blends of ethanol, including E15 and E85;
The effect our hedging activities have on our financial performance and cash flows;
Ethanol, distiller grains and corn oil supply exceeding demand and corresponding price reductions;
Our ability to generate free cash flow to invest in our business, service our debt and satisfy the financial covenants contained in our credit agreement with our lender;
Changes in our business strategy, capital improvements or development plans;
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 and advances in ethanol production technology;
Changes in interest rates or the lack of credit availability; and
Our ability to retain key employees and maintain labor relations.

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

Overview

Golden Grain Energy, LLC was formed as an Iowa limited liability company on March 18, 2002, for the purpose of constructing, owning and operating a fuel-grade ethanol plant near Mason City in north central Iowa. Since December 2004, we have been engaged in the production of ethanol and distiller grains at the plant and have produced corn oil since February 2009. References to "we," "us," "our" and the "Company" refer to Golden Grain Energy, LLC. We have capacity to produce approximately 115 million gallons of ethanol per year.

Our revenue is derived primarily from the sale and distribution of our ethanol, distiller grains and corn oil. We market our products through Renewable Products Marketing Group, Inc. ("RPMG"), a professional third party marketer. We are an equity owner of RPMG, LLC, the parent company of RPMG, which allows us to realize favorable marketing fees in the sale of our ethanol, distiller grains and corn oil.

On November 16, 2015, our board of directors declared a distribution of $0.70 per membership unit for members of record as of November 16, 2015. The total amount of the distribution was $13,911,100 which was paid in December 2015. On

15


May 16, 2016, our board of directors declared a distribution of $0.25 per membership unit for members of record as of that date. The total amount to be distributed was $4,968,250 and was paid in June 2016.

On November 30, 2015, the EPA released its final renewable volume obligations for corn-based ethanol under the RFS which is lower than the statutory requirements for 2014, 2015 and 2016. The RFS required the use of 14.40 billion gallons of conventional biofuels in 2014 and 15 billion gallons in 2015 and 2016. Pursuant to the EPA regulation, the requirement for conventional biofuels in 2014 was 13.61 billion gallons, 14.05 billion gallons in 2015 and 14.5 billion gallons in 2016. On May 31, 2016, the EPA issued a proposed renewable volume obligation for 2017 of 14.8 billion gallons of conventional biofuels, still lower than the statutory requirement in the RFS. Due to the lower price of gasoline, we do not anticipate that renewable fuels blenders will use more ethanol than is required by the RFS which may result in a significant decrease in ethanol demand. This departure by the EPA from the statutory requirements in the RFS is expected to have a negative impact on ethanol prices and demand, and is expected to result in reduced operating margins in the future. This reduction in ethanol demand is expected to have a material negative impact on our operating performance and financial condition.

Results of Operations

Comparison of the Three Months Ended July 31, 2016 and 2015
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended July 31, 2016 and 2015:

 
2016
 
2015
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenues
$
48,641,969

 
100.0
 
$
52,082,545

 
100.0
Cost of Goods Sold
41,658,299

 
85.6
 
46,027,948

 
88.4
Gross Profit
6,983,670

 
14.4
 
6,054,597

 
11.6
Operating Expenses
648,383

 
1.3
 
739,917

 
1.4
Operating Income
6,335,287

 
13.0
 
5,314,680

 
10.2
Other Income
2,011,618

 
4.1
 
2,041,470

 
3.9
Net Income
$
8,346,905

 
17.2
 
$
7,356,150

 
14.1

Revenues. Our total revenue was lower for our third quarter of 2016 compared to the same period of 2015 due to the lower average prices we received for our ethanol and distiller grains. For our third quarter of 2016, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 16% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our third quarter of 2015, ethanol sales accounted for approximately 77% of our total revenue, distiller grains sales accounted for approximately 20% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue.
    
The average price per gallon we received for our ethanol was approximately 2% lower for our third quarter of 2016 compared to the same period of 2015. Management attributes this decrease in the average price we received for our ethanol to lower gasoline and corn prices which typically impacts market ethanol prices. Management anticipates that ethanol prices will remain steady during the last quarter of our 2016 fiscal year. In addition, management anticipates that ethanol exports may remain at their current levels due to low ethanol prices, which could provide some price support for ethanol. However, without a significant increase in domestic ethanol demand, ethanol prices may remain low compared to recent history. Due to the stronger United States Dollar compared to the Brazilian Reis along with very favorable prices for sugarcane based ethanol in the United States, specifically in California, management anticipates increased ethanol imports from Brazil which will further impact ethanol supplies in the United States. If we experience significantly more ethanol imports compared to our ethanol exports, it may result in ethanol price decreases.

Management believes that ethanol prices were negatively impacted by the EPA's renewable volume obligations for 2014, 2015 and 2016 and proposed renewable volume obligations for 2017 which reduced the amount of corn-based ethanol which must be used in the United States during those years. Management believes that this reduction has had a negative impact on ethanol demand and prices which may continue through the next two years. This negative impact is especially pronounced due to recent low gasoline prices. In the past, many fuel blenders used ethanol because of the difference in price between gasoline and ethanol. This voluntary use of ethanol in excess of the requirements in the RFS has decreased due to the fact that the spread between the

16


price of ethanol and gasoline is smaller. Management anticipates continued volatility in the ethanol market as a result of changing gasoline prices which impacts ethanol demand and ultimately prices.

We sold approximately 1% fewer gallons of ethanol during our third quarter of 2016 compared to the same period of 2015. Management attributes this decrease in ethanol sales with timing of ethanol shipments. Our total ethanol production was approximately 4% higher during our third quarter of 2016 as compared to the same period of 2015 due to increased ethanol production stemming from plant improvement projects we implemented during our 2015 and 2016 fiscal years that have targeted plant efficiency improvement. Management anticipates that our ethanol sales and production will be slightly greater during the last quarter of our 2016 fiscal year compared to our 2015 fiscal year due to these plant efficiency improvements.

During our third quarter of 2016, we experienced combined realized and unrealized losses on our ethanol derivative instruments of approximately $50,000, which decreased our revenue. By comparison, we experienced combined realized and unrealized gain on our ethanol derivative instruments of approximately $59,000 during our third quarter of 2015 which increased our revenue.

The average price per ton we received for our dried distillers grains was approximately 27% less for our third quarter of 2016 compared to the same period of 2015. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 33% less for our third quarter of 2016 compared to the same period of 2015. Management attributes these price decreases with lower market corn prices and higher corn supplies after the 2015 harvest. In addition, China started refusing distiller grains from the United States in January 2016 which resulted in lower distiller grains prices and will result in uncertainty regarding future distiller grains demand. This uncertainty may continue to negatively impact market distiller grains prices. Management anticipates that distiller grains will begin to consistently trade at a relative value of less than 100% of corn for the foreseeable future primarily due to China filing antidumping and countervailing duty claims against the United States distiller grain markets.

Our distiller grains production was similar during our third quarter of 2016 and the same period of 2015. Management anticipates distiller grains production to be comparable for the final quarter of our 2016 fiscal year compared to the final quarter of 2015 due to the net effect of an anticipated increase in total ethanol production, partially offset by improved ethanol conversion rates and corn oil production.

We sold approximately 14% more pounds of corn oil during our third quarter of 2016 compared to the same period of 2015. This increase in corn oil sales resulted from increased ethanol production during the 2016 period along with improved corn oil extraction efficiency. The average price per pound we received for our corn oil was approximately 9% greater for our third quarter of 2016 compared to the same period of 2015. This increase in corn oil prices occurred despite an increase in corn oil supply. Management believes that an increase in total corn oil demand from increased biodiesel production offset the increase in the market corn oil supply. Biodiesel production was spurred by the renewal of the biodiesel blenders' tax credit for 2016 (and retroactively for 2015) which management believes positively impacts corn oil demand. Management anticipates relatively stable corn oil prices going forward, despite anticipated increases in corn oil supplies, unless corn oil demand increases significantly for biodiesel production. However, the biodiesel tax credit is set to expire at the end of 2016. If the credit is not renewed it may negatively impact biodiesel production and corn oil demand.

Cost of Goods Sold. Our cost of goods sold was lower for our third quarter of 2016 compared to the same period of 2015 due primarily to decreased corn costs because of gains we experienced on our risk management positions.  Our average cost per bushel of corn, before our derivative instrument gain, was approximately 4% greater during our third quarter of 2016 compared to the same period of 2015. This increase in our cost per bushel of cash corn was primarily related to a short term spike in the corn market. When adjusting the cost of corn for derivative gains the total cost of corn was approximately 12% lower during our third quarter of 2016 compared to the same period of 2015.   Management anticipates corn prices to remain low due to an improved balance between corn supply and demand as a result of the larger corn crops harvested in recent years along with relatively stable corn demand, however, we may still experience some short term corn price volatility.  In addition, the 2016 crop is anticipated to be one of the largest corn crops in history which may drive the costs of corn even lower.
 
We consumed approximately 3% more corn during our third quarter of 2016 compared to the same period of 2015 due to increased ethanol production. Management anticipates consistent corn consumption during the rest of our 2016 fiscal year, provided we continue to experience profitable operating margins which allow us to operate the ethanol plant at capacity.

Our natural gas costs decreased by approximately 7% during our third quarter of 2016 compared to the same period of 2015. The average price we paid per MMBtu of natural gas was approximately 13% lower during our third quarter of 2016 compared to the same period of 2015. Management attributes this decrease in natural gas prices with lower commodity and energy prices during the 2016 period as well as growing supplies of natural gas. Management anticipates that natural gas prices will

17


continue to trade lower than recent history. Our natural gas consumption during our third quarter of 2016 was approximately 7% greater compared to the same period of 2015. Management attributes this increase in our natural gas consumption with increased production.

We experienced combined realized and unrealized gains of approximately $3,934,000 for our third quarter of 2016 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $607,000 of combined realized and unrealized losses for the same period of 2015 related to our corn and natural gas derivative instruments which increased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur.  As corn and natural gas prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.

Operating Expenses. Our operating expenses were lower during our third quarter of 2016 compared to the same period of 2015 primary due to less dues and subscription expense for the 2016 quarter due to timing of when we make payments to trade organizations. We also experienced a decrease in personnel expense during our third quarter of 2016 compared to the same period of 2015 due to a decrease in the accrual for employee bonuses. These decreases were partially offset by an increase in accounting expenses associated with income tax projects and an increase in property tax expense. The increase in our property taxes was due to a reduction in the property tax rebate we received from Cerro Gordo County. We received a tax reduction as part of an incentive package we received when the plant was being constructed. Management anticipates that our operating expenses will be higher during the final quarter of our 2016 fiscal year compared to our 2015 fiscal year due to these reasons as well as balancing out of payments for the dues and subscriptions that we pay to trade organizations.

Other Income (Expense). Other income was similar for our third quarter of 2016 compared to the same period of 2015. Our investments are in other companies involved in the ethanol industry which in general experienced favorable operating margins during our third quarter of 2016. However, one of our investments made distributions in excess of the equity balance recorded by the Company totaling approximately $853,000 and therefore that entire amount is recorded as income for the quarter. We had more interest income and less interest expense during our third quarter of 2016 compared to the same period of 2015 due to less outstanding borrowing on our revolving loan and more interest income earned from cash investments during 2016. We also had more other income during our third quarter of 2016 compared to the same period of 2015 due to an increase in income from marketable securities and investments not recorded on the equity method of accounting.

Comparison of the Nine Months Ended July 31, 2016 and 2015
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the nine months ended July 31, 2016 and 2015:

 
2016
 
2015
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenues
$
148,934,083

 
100.0
 
$
165,984,860

 
100.0
Cost of Goods Sold
138,375,585

 
92.9
 
143,749,608

 
86.6
Gross Profit
10,558,498

 
7.1
 
22,235,252

 
13.4
Operating Expenses
2,544,110

 
1.7
 
2,491,322

 
1.5
Operating Income
8,014,388

 
5.4
 
19,743,930

 
11.9
Other Income
6,154,146

 
4.1
 
6,482,539

 
3.9
Net Income
$
14,168,534

 
9.5
 
$
26,226,469

 
15.8

Revenues. Our total revenue was lower for our nine months ended July 31, 2016 compared to the same period of 2015 due to the lower average prices we received for our products. For our nine months ended July 31, 2016, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 16% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our nine months ended July 31, 2015, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 17% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue.
    
The average price per gallon we received for our ethanol was approximately 14% lower for our nine months ended July 31, 2016 compared to the same period of 2015. Management attributes this decrease in the average price we received for our ethanol to lower gasoline and corn prices which typically impacts market ethanol prices.


18


We sold approximately 5% more gallons of ethanol during the nine months ended July 31, 2016 compared to the same period of 2015. We have experienced increased production due to plant improvement projects we implemented during our 2015 and 2016 fiscal years which have increased the gallons of ethanol we are able to produce and sell.

During our nine months ended July 31, 2016, we experienced a combined realized and unrealized loss on our ethanol derivatives of approximately $50,000 which decreased our revenue. By comparison, we experienced combined realized and unrealized losses on our ethanol derivative instruments of approximately $5,000 during our nine months ended July 31, 2015 which also decreased our revenue.

The average price per ton we received for our dried distillers grains was approximately 21% less for our nine months ended July 31, 2016 compared to the same period of 2015. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 26% less for our nine months ended July 31, 2016 compared to the same period of 2015. Management attributes these price decreases with lower market corn prices and higher corn supplies after the 2015 harvest.

Our distiller grains production was approximately 6% greater during our nine months ended July 31, 2016 compared to the same period of 2015 due primarily to an increase in ethanol production.

We sold approximately 22% more pounds of corn oil during our nine months ended July 31, 2016 compared to the same period of 2015. This increase in corn oil sales resulted from increased ethanol production during the 2016 period along with improved corn oil extraction efficiency. The average price per pound we received for our corn oil was approximately 7% less for our nine months ended July 31, 2016 compared to the same period of 2015. Management attributes this decline in corn oil prices with increased corn oil supply in the market which was not met by corresponding increases in corn oil demand for most of our 2016 fiscal year.

Cost of Goods Sold. Our cost of goods sold was lower for our nine months ended July 31, 2016 compared to the same period of 2015 due primarily to lower corn costs and natural gas costs but offset by higher usage of both commodities due to increases in production. Our average cost per bushel of corn, before our derivative instrument gains, was approximately 4% lower during our nine months ended July 31, 2016 compared to the same period of 2015. When adjusting the cost of corn for derivative gains the total cost of corn was approximately 9% lower during our nine months ended July 31, 2016 compared to the same period of 2015. In addition, the average cost per MMBTU of natural gas of 33% lower during our nine months ended July 31, 2016 compared to the same period of 2015. The decreases were primarily related to decreased market prices of both commodities.
 
We consumed approximately 3% more corn during our nine months ended July 31, 2016 compared to the same period of 2015 due to increased ethanol production which was offset by improved corn conversion efficiency. We were able to improve our corn conversion rate by approximately 1% during our nine months ended July 31, 2016 compared to the same period of 2015 which allowed us to produce more ethanol per bushel of corn.

We experienced combined realized and unrealized gains of approximately $4,589,000 for our nine months ended July 31, 2016 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $504,000 of combined realized and unrealized gains for the same period of 2015 related to our corn and natural gas derivative instruments which decreased our cost of goods sold.

Operating Expenses. Our operating expenses were slightly higher during our nine months ended July 31, 2016 compared to the same period of 2015 primary due to more property tax, accounting and legal expenses. We had more legal expenses associated with China's antidumping and countervailing duty claims and more accounting expenses associated with income tax projects. The increase in our property taxes was due to a reduction in the property tax rebate we received from Cerro Gordo County. We received a tax reduction as part of an incentive package we received when the plant was being constructed. Management anticipates that our operating expenses will remain higher during the last quarter of our 2016 fiscal year compared to our 2015 fiscal year due to these reasons.

Other Income (Expense). Other income was lower for our nine months ended July 31, 2016 compared to the same period of 2015 due to a decrease in our portion of the net income generated by our investments. Our investments are in other companies involved in the ethanol industry which experienced less favorable operating margins during our nine months ended July 31, 2016 compared to the same period of 2015. However, one of our investments made distributions in excess of the equity balance recorded by the Company totaling approximately $1,444,000 and therefore that entire amount is recorded as income for the nine months ended July 31, 2016. We had less interest expense during our nine months ended July 31, 2016 compared to the same period of 2015 due to less outstanding borrowing on our revolving loan and more interest income earned from cash investments. We had less other income during our nine months ended July 31, 2016 compared to the same period of 2015 due to a decrease in income from marketable securities and investments not recorded on the equity method of accounting.

19


 
Changes in Financial Condition for the Nine Months Ended July 31, 2016

Current Assets. We had less cash and equivalents at July 31, 2016 compared to October 31, 2015. This decrease in our cash position is due primarily to nearly $19 million in distributions we paid to our members during December 2015 and June 2016 as well as cash spent for plant improvements. The increase in our accounts receivable at July 31, 2016 compared to October 31, 2015 was due to the timing of our product shipments and payments at the end of our third fiscal quarter of 2016 compared to the end of our 2015 fiscal year. The value of our inventory was similar at July 31, 2016 compared to October 31, 2015. The increase in other receivable at July 31, 2016 compared to October 31, 2015 was due to distribution receivable from one of our investments.

Property and Equipment. The net value of our property and equipment was higher at July 31, 2016 compared to October 31, 2015 due to an increase in capital projects offset by depreciation. We had approximately $2.5 million in construction in progress at July 31, 2016 related to various capital projects we were conducting during our 2015 and 2016 fiscal years, the largest of which is improvements to our plant associated with a co-generation.

Other Assets. Our other assets were lower at July 31, 2016 compared to October 31, 2015 due to a decrease in the value of our various investments caused by distributions received in excess of earnings recorded for the nine months ended July 31, 2016.

Current Liabilities. Our accounts payable at July 31, 2016 were comparable to October 31, 2015. Our accrued expenses were lower at July 31, 2016 compared to October 31, 2015 due to lower employee benefit accrual as it relates to bonuses for our 2016 fiscal year, which are partially based on net income and therefore are not expected to be as high in 2016 as they were in 2015.

Long-term Liabilities. Our long-term liabilities were similar at July 31, 2016 and October 31, 2015.

Liquidity and Capital Resources

Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash generated from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. As of July 31, 2016, we had $10 million available pursuant to our revolving term loan and approximately $23 million in cash and equivalents and marketable securities.

We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next 12 months. We expect to fund our current capital projects using cash we have on hand as well as our revolving line of credit. However, management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require capital expenditures.

We commenced a program of investing our excess cash in short-term liquid investments which allows us to access the cash when we need it and preserve our capital while limiting our loss exposure. Only a portion of our cash balances are federally insured when they are deposited with our bank. As a result, our plan is intended to decrease the risk we face when we were concentrating our cash balances with one financial institution.

The following table shows our cash flows for the nine months ended July 31, 2016 and 2015:
 
Nine Months Ended July 31,
 
2016
 
2015
Net cash provided by operating activities
$
17,741,357

 
$
40,790,972

Net cash (used in) investing activities
(12,282,948
)
 
(3,481,484
)
Net cash (used in) financing activities
(18,879,350
)
 
(61,113,190
)

Cash Flow From Operations 

Our cash flows from operations for the nine months ended July 31, 2016 were lower compared to the same period of 2015 due primarily to decreased net income in addition to a decrease in working capital associated with account receivable and distributions received from our investments in excess of earnings.
 

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Cash Flow From Investing Activities 

We used more cash for investing activities during our nine months ended July 31, 2016 compared to the same period of 2015. During the 2016 period, we had more capital expenditures compared to the 2015 period due to our plant improvement projects.

Cash Flow From Financing Activities.

During our nine months ended July 31, 2016, we used significantly less cash for financing activities related to less distributions paid to members as compared to the same period of 2015.

Short-Term and Long-Term Debt Sources

We have a credit facility with Farm Credit Services of America "Farm Credit" with an initial availability of $35 million, which currently has availability of $10 million. In exchange for this credit facility, we executed a mortgage in favor of Farm Credit covering all of our real property and granted Farm Credit a security interest in all of our equipment and other assets. In the event we default on our loans with Farm Credit, Farm Credit may foreclose on our assets, including both our real property and our machinery and equipment.
 
Variable Line of Credit

We have a long-term line of credit. Interest on this loan accrues at 3.15% above the One-Month London Interbank Offered Rate (LIBOR). The interest rate is subject to weekly adjustment. We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. During the first fiscal quarter of 2016, we executed an amendment to our credit agreements with Farm Credit which adjusted our loan covenants related to issuing distributions to our members and changed the terms of our revolving line of credit. We have $10 million available pursuant to this long-term revolving line of credit until it matures on February 1, 2020. We agreed to pay an annual fee of 0.5% of the unused portion of this loan. As of July 31, 2016, we had $0 outstanding on this loan with an accrued interest rate of 3.67% per year. As of July 31, 2016, we had $10 million available to be drawn on this loan.

Administrative Agency Agreement

As part of the Farm Credit loan closing, we entered into an Administrative Agency Agreement with CoBank, ACP ("CoBank"). CoBank purchased a participation interest in the Farm Credit loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for Farm Credit with respect to our loans. We agreed to pay CoBank an annual fee of $5,000 as the agent for Farm Credit.

Covenants

Our credit agreements with Farm Credit are subject to numerous covenants requiring us to maintain various financial ratios. As of July 31, 2016, we were in compliance with all of our loan covenants with Farm Credit. Based on current management projections, we anticipate that we will be in compliance with our loan covenants for the next 12 months and beyond.

Grants and Government Programs

In December 2006, we received the first payment from our semi-annual economic development grants equal to the amount of the tax assessments imposed on our ethanol plant by Cerro Gordo County, the county in which our ethanol plant is located. Based on our 2009 assessment, the total amount of these grants is expected to be approximately $9 million, which will be paid semi-annually over a 10-year period with the final payment being made in 2019.
 
Critical Accounting Policies

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


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Revenue Recognition

Revenue from the sale of our products is recognized at the time title to the goods and all risks of ownership transfer to the customers.  The time of transfer is defined in the specific sales agreement; however, it generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between us and our customers. Interest income is recognized as earned.

Shipping costs incurred by us in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to us from our marketer. Shipping costs incurred by us in the sale of distiller grain products are included in cost of goods sold.

Investment in Commodities Contracts, Derivative Instruments and Hedging Activities

We evaluate contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. 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.
 
We enter into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We occasionally also enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. As part of our risk management process, we use futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage our risk related to pricing of inventories. All of our derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
 
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments.

Investments

The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.

Off-Balance Sheet Arrangements.
 
We currently have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to interest rate changes as we did not have any amounts outstanding on our variable interest rate loans as of July 31, 2016. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
 
Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match

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the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As of July 31, 2016, we had price protection in place for approximately 19% of our anticipated corn needs, 10% of our natural gas needs and 0% of our ethanol sales for the next 12 months.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of July 31, 2016, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from July 31, 2016. The results of this analysis, which may differ from actual results, are as follows:
 
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
 
Unit of Measure
 
Hypothetical Adverse Change in Price
 
Approximate Adverse Change to Income
Natural Gas
 
2,690,000

 
MMBTU
 
10%
 
$
665,000

Ethanol
 
115,000,000

 
Gallons
 
10%
 
16,296,000

Corn
 
31,539,000

 
Bushels
 
10%
 
11,944,000


Liability Risk

We participate, along with other plants in the industry, in a group captive insurance company (Captive). The Captive insures losses related to workman's compensation, commercial property and general liability. The Captive reinsures catastrophic losses for all participants, including the Company, in excess of predetermined amounts. Our premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. These premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed over the amount in the collateral fund.

Item 4.  Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Executive Vice President and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

Our management, including our Executive Vice President (the principal executive officer), Curtis Strong, along with our Chief Financial Officer (the principal financial officer), Christine Marchand, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of July 31, 2016.  Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

For the fiscal quarter ended July 31, 2016, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


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Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The following risk factor is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended October 31, 2015, included in our annual report on Form 10-K.

Distillers grains demand and prices may be negatively impacted by the Chinese antidumping and countervailing duty investigation. China is the world's largest importer of distillers grains produced in the United States. On January 12, 2016, the Chinese government announced that it will commence an antidumping and countervailing duty investigation related to distillers grains imported from the United States. During the investigation, it is likely that distillers grains exports to China will be reduced, regardless of whether China ends up instituting a tariff on distillers grains produced in the United States and exported to China. Further, if China introduces a tariff on distillers grains produced in the United States and exported to China, it could remove the largest source of export demand for distillers grains. This antidumping and countervailing duty investigation could significantly decrease demand and prices for distillers grains produced in the United States. This potential reduction in demand along with lower domestic corn prices could negatively impact our ability to profitably operate the ethanol plant.
    
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information

None.

Item 6. Exhibits.

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

 
Certificate Pursuant to 17 CFR 240.13a-14(a)*
31.2

 
Certificate Pursuant to 17 CFR 240.13a-14(a)*
32.1

 
Certificate Pursuant to 18 U.S.C. Section 1350*
32.2

 
Certificate Pursuant to 18 U.S.C. Section 1350*
101

 
The following financial information from Golden Grain Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended July 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of July 31, 2016 and October 31, 2015, (ii) Statements of Operations for the three and nine months ended July 31, 2016 and 2015, (iii) Statements of Cash Flows for the nine months ended July 31, 2016 and 2015, and (iv) the Notes to Condensed Financial Statements.**

*    Filed herewith.
**    Furnished herewith.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
GOLDEN GRAIN ENERGY, LLC
 
 
 
 
Date:
September 14, 2016
 
/s/ Curtis Strong
 
 
 
Curtis Strong
 
 
 
Executive Vice-President
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
September 14, 2016
 
/s/ Christine Marchand
 
 
 
Christine Marchand
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)


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