Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - RED TRAIL ENERGY, LLCcertification3223-31x17.htm
EX-32.1 - CERTIFICATION - RED TRAIL ENERGY, LLCcertification3213-31x18.htm
EX-31.2 - CERTIFICATION - RED TRAIL ENERGY, LLCcertification3123-31x18.htm
EX-31.1 - CERTIFICATION - RED TRAIL ENERGY, LLCcertification3113-31x18.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 March 31, 2018
 
 
 
OR
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the transition period from               to               .
 
 
 
COMMISSION FILE NUMBER 000-52033
 
RED TRAIL ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
North Dakota
 
76-0742311
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3682 Highway 8 South, P.O. Box 11, Richardton, ND 58652
(Address of principal executive offices)
 
(701) 974-3308
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

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

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

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

As of May 14, 2018, there were 41,466,340 Class A Membership Units outstanding.

1


INDEX



2


PART I        FINANCIAL INFORMATION

Item 1. Financial Statements

RED TRAIL ENERGY, LLC
Condensed Balance Sheets

 ASSETS
 
March 31, 2018
 
September 30, 2017

 
 (Unaudited)
 

Current Assets
 

 

Cash and equivalents
 
$
9,275,708

 
$
3,223,342

Restricted cash - margin account
 
6,240,642

 
5,906,666

Accounts receivable, primarily related party
 
3,187,599

 
4,059,227

Other receivables
 
1,600

 
8,764

Inventory
 
15,683,437

 
16,413,742

Prepaid expenses
 
199,818

 
33,364

Total current assets
 
34,588,804

 
29,645,105


 

 

Property, Plant and Equipment
 

 

Land
 
1,342,381

 
1,342,381

Land improvements
 
4,266,953

 
4,266,953

Buildings
 
8,036,031

 
8,036,031

Plant and equipment
 
87,194,526

 
86,460,902

Construction in progress
 
317,541

 
628,454


 
101,157,432

 
100,734,721

Less accumulated depreciation
 
55,951,041

 
53,592,985

Net property, plant and equipment
 
45,206,391

 
47,141,736


 

 

Other Assets
 

 

Investment in RPMG
 
605,000

 
605,000

Patronage equity
 
3,270,279

 
3,270,279

Deposits
 
40,000

 
40,000

Total other assets
 
3,915,279

 
3,915,279


 

 

Total Assets
 
$
83,710,474

 
$
80,702,120


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

3


RED TRAIL ENERGY, LLC
Condensed Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
 
March 31, 2018
 
September 30, 2017

 
 (Unaudited)
 

Current Liabilities
 

 

Accounts payable
 
$
723,356

 
$
2,409,171

Accrued expenses
 
12,624,342

 
3,670,338

Commodities derivative instruments, at fair value (see note 2)
 
131,250

 
933,312

Accrued loss on firm purchase commitments (see notes 3 and 7)
 
13,000

 
5,000

Current maturities of notes payable
 
2,627

 
2,617

Total current liabilities
 
13,494,575

 
7,020,438


 

 

Long-Term Liabilities
 

 

Notes payable
 
1,605

 
2,921


 

 

Members’ Equity (41,466,340 as of March 31, 2018 and September 30, 2017, respectively, of Class A Membership Units issued and outstanding)
 
70,214,294

 
73,678,761

 
 
 
 
 
Total Liabilities and Members’ Equity
 
$
83,710,474

 
$
80,702,120


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

4


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


Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended

March 31, 2018
 
March 31, 2017
 
March 31, 2018
 
March 31, 2017
Revenues, primarily related party
$
26,366,732

 
$
27,074,946

 
$
52,489,589

 
$
57,079,406



 

 
 
 
 
Cost of Goods Sold

 

 
 
 
 
Cost of goods sold
24,188,309

 
26,885,515

 
51,931,593

 
54,013,447

Lower of cost or net realizable value adjustment
11,103

 

 
82,082

 

Loss on firm purchase commitments

 

 
8,000

 

Total Cost of Goods Sold
24,199,412

 
26,885,515

 
52,021,675

 
54,013,447



 

 
 
 
 
Gross Profit
2,167,320

 
189,431

 
467,914

 
3,065,959



 

 
 
 
 
General and Administrative Expenses
785,008

 
747,812

 
1,500,919

 
1,438,745



 

 
 
 
 
Operating Income (Loss)
1,382,312

 
(558,381
)
 
(1,033,005
)
 
1,627,214



 

 
 
 
 
Other Income (Expense)

 

 
 
 
 
Interest income
23,839

 
24,865

 
47,267

 
42,977

Other income
16,047

 
70,462

 
423,280

 
638,731

Interest expense
(24
)
 
(14
)
 
(34
)
 
(28
)
Total other income (expense), net
39,862

 
95,313

 
470,513

 
681,680



 

 
 
 
 
Net Income (Loss)
$
1,422,174

 
$
(463,068
)
 
$
(562,492
)
 
$
2,308,894



 

 
 
 
 
Weighted Average Units Outstanding
 
 
 
 
 
 
 
  Basic
41,466,340

 
41,480,466

 
41,466,340

 
41,443,380



 

 
 
 
 
  Diluted
41,466,340

 
41,480,466

 
41,466,340

 
41,443,380

 
 
 
 
 
 
 
 
Net Income (Loss) Per Unit

 
 
 
 
 
 
  Basic
$
0.03

 
$
(0.01
)
 
$
(0.01
)
 
$
0.06



 

 
 
 
 
  Diluted
$
0.03

 
$
(0.01
)
 
$
(0.01
)
 
$
0.06

 
 
 
 
 
 
 
 

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



5


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

Six Months Ended
 
Six Months Ended

March 31, 2018
 
March 31, 2017
Cash Flows from Operating Activities

 

Net income (loss)
$
(562,492
)
 
$
2,308,894

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

Depreciation and amortization
2,358,057

 
2,339,638

Change in fair value of derivative instruments
(802,063
)
 
(37,899
)
Lower of cost or net realizable value adjustment
82,082

 

Loss on firm purchase commitments
8,000

 

Noncash patronage equity

 
(2,591
)
Change in operating assets and liabilities:

 

Restricted cash
(333,976
)
 
(1,146,998
)
Accounts receivable
871,628

 
(639,038
)
Other receivables
7,164

 
(63,005
)
Inventory
640,224

 
(8,040,578
)
Prepaid expenses
(166,455
)
 
(86,124
)
Accounts payable
(1,685,815
)
 
(848,702
)
Accrued expenses
8,944,380

 
17,737,791

Accrued purchase commitment losses
8,000

 
(74,000
)
Net cash provided by operating activities
9,368,734

 
11,447,388

 
 
 
 
Cash Flows from Investing Activities

 

Capital expenditures
(422,711
)
 
(228,096
)
   Net cash (used in) investing activities
(422,711
)
 
(228,096
)
 
 
 
 
Cash Flows from Financing Activities

 

Dividends paid
(2,892,350
)
 
(32,955
)
Unit repurchase

 
(681,820
)
Debt repayments
(1,307
)
 
(1,296
)
Net cash (used in) financing activities
(2,893,657
)
 
(716,071
)


 

Net Increase in Cash and Equivalents
6,052,366

 
10,503,221

Cash and Equivalents - Beginning of Period
3,223,342

 
10,274,166

Cash and Equivalents - End of Period
$
9,275,708

 
$
20,777,387



 

Supplemental Disclosure of Cash Flow Information

 

Interest paid
$
959

 
$
28

Distribution declared but not paid
9,625

 

Units issued in exchange for property
$

 
$
3,320,000


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


6


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018



The accompanying condensed unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the fiscal year ended September 30, 2017, contained in the Company's Annual Report on Form 10-K.

In the opinion of management, the interim condensed unaudited financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2018.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, inventory and allowance for doubtful accounts. Actual results could differ from those estimates.
 
Net Income Per Unit

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

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which supersedes the guidance in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company has evaluated the new standard and anticipates a change in the reporting of revenue as enhanced disclosures will be required. The Company does not anticipate a significant impact on our financial statements due to the nature of our revenue streams and our revenue recognition policy.

Simplifying the Measurement of Inventory

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurements of Inventory" regarding inventory that is measured using the first-in, first-out or average cost method. The guidance does not apply to inventory measured using the last-in, first-out or the retail inventory method. The guidance requires inventory within its scope to be measured at the lower of cost or net realizable value, which is the estimated selling price in the normal course of business less reasonable predictable costs of completion, disposal and transportation. These amendments more closely align GAAP with International Financial Reporting Standards (IFRS). ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and should be applied prospectively with early adoption permitted as of the beginning of an interim or annual reporting period. The Company has adopted the new standard during last quarter and there has been no significant impact to our financial statements.

7


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018



Lease Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, "Leases (topic 842)" which requires a lessee to recognize a right to use asset and a lease liability on its balance sheet for all leases with terms of twelve months or greater. This guidance is effective for fiscal years beginning after December 15, 2018, included interim periods within those years with early adoption permitted. The Company has evaluated the new standard and expects it will have a material impact on the financial statements as we will have to begin capitalizing leases on the balance sheet when the new standard is implemented. See note 6 for current operating lease commitments.

Statement of Cash Flows; Restricted Cash

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

2. DERIVATIVE INSTRUMENTS

Commodity Contracts

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

As of:
 
March 31, 2018 (unaudited)
 
September 30, 2017
Contract Type
 
# of Contracts
Notional Amount (Qty)
Fair Value
 
# of Contracts
Notional Amount (Qty)
Fair Value
Corn futures
 


bushels
$

 
81

405,000

bushels
$
16,688

Corn options
 
500

2,500,000

bushels
$
(131,250
)
 
1,800

9,000,000

bushels
$
(950,000
)
Total fair value
 
 
 
 
$
(131,250
)
 
 
 
 
$
(933,312
)
Amounts are combined on the balance sheet - negative numbers represent liabilities



8


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018


The following tables provide details regarding the Company's derivative financial instruments at March 31, 2018 and September 30, 2017:
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Balance Sheet - as of March 31, 2018 (unaudited)
 
Asset
 
Liability
Commodity derivative instruments, at fair value
 
$

 
$
131,250

Total derivatives not designated as hedging instruments for accounting purposes
 
$

 
$
131,250

 
 
 
 
 
Balance Sheet - as of September 30, 2017
 
Asset
 
Liability
Commodity derivative instruments, at fair value
 
$

 
$
933,312

Total derivatives not designated as hedging instruments for accounting purposes
 
$

 
$
933,312


Statement of Operations Income/(Expense)
 
Location of gain (loss) in fair value recognized in income
 
Amount of gain(loss) recognized in income during the three months ended March 31, 2018 (unaudited)
 
Amount of gain (loss) recognized in income during the three months ended March 31, 2017 (unaudited)
 
Amount of gain(loss) recognized in income during the six months ended March 31, 2018 (unaudited)
 
Amount of gain (loss) recognized in income during the six months ended March 31, 2017 (unaudited)
Corn derivative instruments
 
Cost of Goods Sold
 
$
1,702,775

 
$
545,897

 
$
1,134,239

 
$
764,255

Ethanol derivative instruments
 
Revenue
 

 
265,230

 
1,800

 
306,180

Soybean oil derivative instruments
 
Revenue
 

 
62,466

 

 
74,682

Natural gas derivative instruments
 
Cost of Goods Sold
 

 
280

 

 
10,780

Total
 
 
 
$
1,702,775

 
$
873,873

 
$
1,136,039

 
$
1,155,897


3. INVENTORY
Inventory is valued at the lower of cost or net realizable value. Inventory values as of March 31, 2018 and September 30, 2017 were as follows:
As of
 
March 31, 2018
(unaudited)
 
September 30, 2017
Raw materials, including corn, chemicals and supplies
 
$
11,293,737

 
$
11,952,560

Work in process
 
723,739

 
773,786

Finished goods, including ethanol and distillers grains
 
1,619,788

 
1,577,066

Spare parts
 
2,046,173

 
2,110,330

Total inventory
 
$
15,683,437

 
$
16,413,742


9


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018


Lower of cost or net realizable value adjustments for the three and six months ended March 31, 2018 and 2017 were as follows:
 
 
For the three months ended March 31, 2018 (unaudited)
 
For the three months ended March 31, 2017 (unaudited)
 
For the six months ended March 31, 2018 (unaudited)
 
For the six months ended March 31, 2017 (unaudited)
Loss on firm purchase commitments
 
$

 
$

 
$
8,000

 
$

Loss on lower of cost or net realizable value adjustment for inventory on hand
 
$
11,103

 
$

 
$
82,082

 
$

Total loss on lower of cost or net realizable value adjustments
 
$
11,103

 
$

 
$
90,082

 
$


The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of March 31, 2018, the average price of corn purchased under certain fixed price contracts, that had not yet been delivered, was greater than approximated market price. Based on this information, the Company has an $8,000 estimated loss on firm purchase commitments for the six months ended March 31, 2018 and no estimated loss for the six months ended March 31, 2017. The loss is recorded in “Loss on firm purchase commitments” on the statement of operations. The amount of the potential loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, further losses on the outstanding purchase commitments could be recorded in future periods.

4. BANK FINANCING
As of
 
March 31, 2018 (unaudited)
 
September 30, 2017
Capital lease obligations (Note 6)
 
$
4,232

 
$
5,538

Total Long-Term Debt
 
4,232

 
5,538

Less amounts due within one year
 
2,627

 
2,617

Total Long-Term Debt Less Amounts Due Within One Year
 
$
1,605

 
$
2,921


The Company had a $10 million operating line-of-credit with First National Bank of Omaha that matured on March 20, 2017.

On March 20, 2017, we entered into a new $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). The Revolving Loan replaced the revolving loan we had with First National Bank of Omaha. The maturity date of the Revolving Loan is May 31, 2018. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At March 31, 2018, we had $10,000,000 available on the Revolving Loan, taking into account the borrowing base calculation. We had $0 drawn on the Revolving Loan as of March 31, 2018. The variable interest rate on March 31, 2018 was 3.71%. Of the $10 million revolving line-of-credit, the Company was not allowed to draw $687,597 which is reserved as a source of funds to support a guaranteed payment the Company agreed to related to its natural gas pipeline. While the Company does not expect that it will be required to make a direct payment for the natural gas pipeline, the Company's agreement requires it to have funds available in the event the Company is required to make the guaranteed payment. See note 6 for the Company's additional future minimum lease commitments.
        
The Company's loans are secured by a lien on substantially all of the assets of the Company. As of March 31, 2018, the Company was in compliance with all of its debt covenants.

5. FAIR VALUE MEASUREMENTS

The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2018 and September 30, 2017, respectively.

10


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018


 
 
 
 
 
Fair Value Measurement Using
 
Carrying Amount as of March 31, 2018 (unaudited)
 
Fair Value as of March 31, 2018 (unaudited)
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
 
 
Commodities derivative instruments
$
131,250

 
$
131,250

 
$
131,250

 
$

 
$

Total
$
131,250

 
$
131,250

 
$
131,250

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement Using
 
Carrying Amount as of September 30, 2017
 
Fair Value as of September 30, 2017
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
 
 
Commodities derivative instruments
$
933,312

 
$
933,312

 
$
933,312

 
$

 
$

Total
$
933,312

 
$
933,312

 
$
933,312

 
$

 
$


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

6. LEASES

The Company leases equipment under operating and capital leases through January 2023. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars. Rent expense for operating leases was approximately $158,000 and $166,000 for the three months ended March 31, 2018 and 2017, respectively and $311,000 and $258,000 for the six months ended March 31, 2018 and 2017, respectively. Equipment under capital leases consists of office equipment and plant equipment.

Equipment under capital leases is as follows at:
As of
 
March 31, 2018
(unaudited)
 
September 30, 2017
Equipment
 
$
483,488

 
$
483,488

Less accumulated amortization
 
(130,759
)
 
(120,029
)
Net equipment under capital lease
 
$
352,729

 
$
363,459



11


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018


At March 31, 2018, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending December 31:

 
 
Operating Leases
 
Capital Leases
2018
 
$
460,383

 
$
2,627

2019
 
391,555

 
1,605

2020
 
295,463

 

2021
 
243,696

 

2022
 
188,700

 

Total minimum lease commitments
 
$
1,579,797

 
4,232

Less amount representing interest
 
 
 

Present value of minimum lease commitments included in current maturities of long-term debt on the balance sheet
 
 
 
$
4,232


7. COMMITMENTS AND CONTINGENCIES

Firm Purchase Commitments for Corn

To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At March 31, 2018, the Company had various fixed price contracts for the purchase of approximately 2.7 million bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $9.2 million related to the 2.7 million bushels under contract. The Company also has various unpriced basis contracts for the purchase of approximately 2.76 million bushels of corn that have been delivered to the Plant. The purchase price of these bushels will be set at the time of pricing the contracts at the July 2018 index price less basis. The estimated accrued payable for these bushels is $10.67 million. The deadline for pricing these 2.76 million bushels is June 29, 2018.

Profit and Cost Sharing Agreement

The Company has entered into a Profit and Cost Sharing Agreement with Bismarck Land Company, LLC which became effective on November 1, 2016. The Profit and Cost Sharing Agreement provides that the Company will share 70% of the net revenue generated by the Company from business activities which are brought to the Company by Bismarck Land Company, LLC and conducted on the real estate purchased from the Bismarck Land Company, LLC. The real estate was initially purchased in exchange for 2 million membership units at $1.66 per unit. This obligation will terminate ten years after the real estate closing date of October 11, 2016 or after Bismarck Land Company, LLC receives $10 million in proceeds from the agreement. In addition, the Company will pay Bismarck Land Company, LLC 70% of any net proceeds received by the Company from the sale of the subject real estate if a sale were to occur in the future, subject to the $10 million cap and the 10 year termination of this obligation. No payments have been made to the Bismarck Land Company, LLC at this time.

8. RELATED PARTY TRANSACTIONS

The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). During the Company's first quarter of 2018, the Company received a capital account refund from RPMG which is included in other income (expense) in the Company's Statement of Operations. Significant related party activity affecting the financial statements is as follows:

12


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018


 
 
March 31, 2018
(unaudited)
 
September 30, 2017
Balance Sheet
 
 
 
 
Accounts receivable
 
$
2,639,086

 
$
4,027,061

Accounts Payable
 
105,208

 
1,569

Accrued Expenses
 
2,526,995

 
925,503

 
 
 
 
 

 
 
For the three months ended March 31, 2018 (unaudited)
 
For the three months ended March 31, 2017 (unaudited)
 
For the six months ended March 31, 2018 (unaudited)
 
For the six months ended March 31, 2017 (unaudited)
Statement of Operations
 
 
 
 
 
 
 
 
Revenues
 
$
24,174,597

 
$
25,912,237

 
$
48,972,741

 
$
54,911,008

Cost of goods sold
 
6,462

 
20,221

 
12,924

 
29,951

General and administrative
 
19,244

 
16,887

 
38,311

 
33,048

Other income/expense
 

 

 
140,539

 
247,307

Inventory Purchases
 
$
6,031,607

 
$
13,586,244

 
$
10,325,586

 
$
19,665,230


9. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS

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

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

The Company anticipates that the results of operations during the remainder of fiscal year 2018 will continue to be affected by volatility in the commodity markets. The volatility is due to various factors, including uncertainty with respect to the availability and supply of corn, increased demand for grain from global and national markets, speculation in the commodity markets and demand for corn from the ethanol industry.


13


RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2018


10. MEMBER'S EQUITY

Unregistered Units Sales by the Company.

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

Unit Purchases By the Company.
 
(a)
(b)
(c)
(d)
Period
Total Number of Units Purchased
 Average Price Paid per Unit
 Total Number of Units Purchased as Part of Publicly Announced Plans or Programs
 Maximum Number (or Approximate Dollar Value) of the Units that May Yet Be Purchased Under the Plans or Programs
October 2016
None
None
None
None
November 2016
None
None
None
None
December 2016
564,963
$1.00
None
None
January 2017
116,857
$1.00
None
None
February 2017
None
None
None
None
March 2017
None
None
None
None
April 2017
None
None
None
None
May 2017
None
None
None
None
June 2017
None
None
None
None
Total
681,820
$1.00
None
None
*681,820 Units were purchased other than through a publicly announced plan or program, pursuant to a Membership Unit Repurchase Agreement, a private transaction between the Company and a Member.

11. SUBSEQUENT EVENT

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



14


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

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month periods ended March 31, 2018, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements, notes and information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017. Unless otherwise stated, references in this report to particular years, quarters, months, or periods refer to our fiscal years ended in September and the associated quarters, months, or periods of those fiscal years.

Forward Looking Statements

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

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

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

The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the Federal Renewable Fuels Standard (the "RFS"). The RFS requires that in each year, a certain amount of renewable fuels must be used in the United States. The RFS statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. The United States Environmental Protection Agency (the "EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations. The RFS statutory Renewable Volume Obligation ("RVO") for all renewable fuels for 2017 was 24 billion gallons, of which corn-based ethanol could meet 15 billion gallons of the RVO. On November 30, 2017, the final RVO for 2018 was set at 19.29 billion gallons and the corn-based ethanol RVO was set at 15 billion gallons.

In recent years, the ethanol industry in the United States has increased exports of ethanol and distillers grains. However, in 2017 China instituted tariffs on ethanol and distillers grains produced in the United States and Brazil instituted a tariff on ethanol

15


produced in the United States. Due to other recent tariff activity between the United States and China, management does not expect these Chinese tariffs to be removed in the near term. Both China and Brazil have been major sources of import demand for United States ethanol and distillers grains. These trade actions may result in negative operating margins for U.S. ethanol producers.

On March 20, 2017, we entered into a new $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). As part of this transaction, we signed a Credit Agreement dated March 17, 2017 (the "Credit Agreement"). The Revolving Loan replaces our credit facilities with First National Bank of Omaha. Interest accrues on any outstanding balance on the Revolving Loan at a rate of 1.77% in excess of the one-month London Interbank Offered Rate ("LIBOR"). The maturity date of the Revolving Loan is May 31, 2018. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. The Revolving Loan is subject to certain financial covenants as set forth in the Credit Agreement. The most significant financial covenants require us to maintain a fixed charge coverage ratio of no less than 1.25:1.00 and a current ratio of no less than 1.50:1.00. Our fixed charge coverage ratio measures our ability to pay our fixed expenses. Our current ratio measures our liquidity and ability to pay short-term and long-term obligations.

Results of Operations for the Three Months Ended March 31, 2018 and 2017
 
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our unaudited statements of operations for the three months ended March 31, 2018 and 2017:
 
Three Months Ended
March 31, 2018 (Unaudited)
 
Three Months Ended
March 31, 2017 (Unaudited)
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
26,366,732

 
100.00
 
$
27,074,946

 
100.00

Cost of Goods Sold
24,199,412

 
91.78
 
26,885,515

 
99.30

Gross Profit
2,167,320

 
8.22
 
189,431

 
0.70

General and Administrative Expenses
785,008

 
2.98
 
747,812

 
2.76

Operating Income (Loss)
1,382,312

 
5.24
 
(558,381
)
 
(2.06
)
Other Income
39,862

 
0.15
 
95,313

 
0.35

Net Income (Loss)
$
1,422,174

 
5.39
 
$
(463,068
)
 
(1.71
)
    

16


The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended March 31, 2018 and 2017.
 
 
Three Months ended March 31, 2018 (unaudited)
 
Three Months ended
March 31, 2017
(unaudited)
Production:
 
 
 
 
  Ethanol sold (gallons)
 
15,351,960

 
16,489,312

  Dried distillers grains sold (tons)
 
21,205

 
19,997

  Modified distillers grains sold (tons)
 
40,084

 
36,941

Corn oil sold (pounds)
 
3,087,540

 
4,202,980

Revenues:
 
 
 
 
  Ethanol average price per gallon (net of hedging)
 
$
1.30

 
$
1.35

  Dried distillers grains average price per ton
 
137.64

 
104.44

  Modified distillers grains average price per ton
 
64.04

 
40.82

Corn oil average price per pound
 
0.26

 
0.25

Primary Inputs:
 
 
 
 
  Corn ground (bushels)
 
5,672,421

 
5,695,831

Natural gas (MMBtu)
 
415,714

 
391,050

Costs of Primary Inputs:
 
 
 
 
  Corn average price per bushel (net of hedging)
 
$
3.39

 
$
3.56

Natural gas average price per MMBtu (net of hedging)
 
2.49

 
3.08

Other Costs (per gallon of ethanol sold):
 
 
 
 
  Chemical and additive costs
 
$
0.099

 
$
0.065

  Denaturant cost
 
0.038

 
0.028

  Electricity cost
 
0.048

 
0.041

  Direct labor cost
 
0.065

 
0.056


Revenue

Our revenue was lower for the second quarter of our 2018 fiscal year compared to the same period of our 2017 fiscal year due to a decrease in the average sales prices we received for our ethanol during the first quarter of our 2018 fiscal year. During the second quarter of our 2018 fiscal year, approximately 75.7% of our total revenue was derived from ethanol sales, approximately 20.8% was from distillers grains sales and approximately 3.0% was from corn oil sales. During the second quarter of our 2017 fiscal year, approximately 82.5% of our total revenue was derived from ethanol sales, approximately 13.3% was from distillers grains sales and approximately 3.9% was from corn oil sales.

Ethanol

The average price we received for our ethanol was approximately 3.7% less during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year. Management attributes this decrease in the price we received for our ethanol during the second quarter of our 2018 fiscal year to excess ethanol supply in the market which impacted market ethanol prices, especially early in the second quarter of our 2018 fiscal year. Management anticipates that ethanol prices will be higher during the rest of our 2018 fiscal year due to strong export demand for ethanol which has positively impacted ethanol demand along with the summer driving season which results in increased ethanol demand. However, export markets are not as reliable as the domestic ethanol market which can lead to ethanol price volatility. If export demand slows in the future, it could negatively impact ethanol demand, especially due to increased production capacity in the United States.

We sold fewer gallons of ethanol during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to switching from a manifest rail car shipper to a unit train shipper during the second quarter of our 2017 fiscal. Our first unit train was shipped the end of the second quarter of our 2017 fiscal year which increased the amount of rail cars shipped that quarter. Management anticipates that our ethanol production and sales will remain consistent during our 2018 fiscal year compared to our 2017 fiscal year since we are now running a regular unit train shipping schedule. In addition, the amount of ethanol we produced per bushel of corn we ground decreased for the second quarter of our 2018 fiscal year compared

17


to the second quarter of our 2017 fiscal year, which negatively impacted our profitability. We continue to work to maximize the additional production capacity of our ethanol plant and improve our ethanol production efficiency.

From time to time we enter into forward sales contracts for our products. At March 31, 2018, we had no open ethanol futures contracts. Ethanol futures contracts for the second quarter of our 2017 fiscal year resulted in a gain of approximately $265,000.

Distillers Grains

Previously, we sold a majority of our distillers grains in the dried form due to market conditions which favored that product. However, due to the Chinese anti-dumping and countervailing duty tariffs which have decreased export demand for distillers grains, we increased the amount of modified distillers grains we produced and sold. Modified distillers grains are used in our local market and are less impacted by world distillers grains markets. The average prices we received for both our dried and modified distillers grains were higher during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year. Management attributes these increases to improved distillers grains exports and overall demand for distillers grains. Management anticipates distillers grains prices will remain at current levels for the rest of our 2018 fiscal year.

We produced and sold more total tons of distillers grains during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to decreased corn oil production during the second quarter of our 2018 fiscal year. When we produce fewer pounds of corn oil, it increases the volume of distillers grains we produce. Management anticipates relatively consistent distillers grains production going forward.
    
Corn Oil

The total pounds of corn oil we sold was less during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to a change in chemicals used during the production process which results in less corn oil being extracted. Management anticipates that our corn oil production will continue to remain less for the remaining quarters of our 2018 fiscal year. The average price we received for our corn oil was slightly higher during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due primarily to increased corn oil demand from the biodiesel industry.
    
Cost of Goods Sold

Our cost of goods sold is primarily made up of corn and natural gas expenses. Our cost of goods sold was lower for the second quarter of our 2018 fiscal year as compared to the second quarter of our 2017 fiscal year due primarily to decreased corn and natural gas prices, partially offset by increased natural gas consumption during the second quarter of our 2018 fiscal year as compared to the second quarter of our 2017 fiscal year. The decrease in our cost of goods sold was greater than the decrease in our revenue during the second quarter of our 2018 fiscal year as compared to the second quarter of our 2017 fiscal year, which resulted in improved profitability during the 2018 period.

Corn Costs

Our cost of goods sold related to corn was less for the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to decreased corn costs per bushel. For the second quarter of our 2018 fiscal year, we used approximately 0.4% fewer bushels of corn compared to the second quarter of our 2017 fiscal year. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 4.8% less for the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year. In addition, during the second quarter of our 2018 fiscal year, we had a realized gain of approximately $1,703,000 for our corn derivative instruments which decreased our cost of goods sold related to corn. For the second quarter of our 2017 fiscal year, we had a realized gain of approximately $546,000 for our corn derivative instruments which decreased our cost of goods sold related to corn. Management anticipates that corn prices will remain at current levels during our 2018 fiscal year due to plentiful corn supplies and relatively stable corn demand. However, the late planting in many parts of the United States could negatively impact corn prices during our 2018 fiscal year and the beginning of our 2019 fiscal year.

Natural Gas Costs

We consumed approximately 6.3% more MMBtu of natural gas during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year, due to increased production and colder weather during the 2018 period. Our average cost per MMBtu of natural gas was approximately 19.2% less during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to ample local natural gas supply.

18



General and Administrative Expenses

Our general and administrative expenses were higher for the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to higher fees paid in 2018 for our line of credit.

Other Income/Expense

We had less interest income during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to having less cash on hand during our 2018 fiscal year. We had less other income during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to receiving less land rent during the 2018 period. Our interest expense was higher during the second quarter of our 2018 fiscal year compared to the second quarter of our 2017 fiscal year due to amounts outstanding on our leases.

Results of Operations for the Six Months Ended March 31, 2018 and 2017
 
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our unaudited statements of operations for the six months ended March 31, 2018 and 2017:
 
Six Months Ended
March 31, 2018 (Unaudited)
 
Six Months Ended
March 31, 2017 (Unaudited)
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
52,489,589

 
100.00

 
$
57,079,406

 
100.00
Cost of Goods Sold
52,021,675

 
99.11

 
54,013,447

 
94.63
Gross Profit
467,914

 
0.89

 
3,065,959

 
5.37
General and Administrative Expenses
1,500,919

 
2.86

 
1,438,745

 
2.52
Operating Income (Loss)
(1,033,005
)
 
(1.97
)
 
1,627,214

 
2.85
Other Income
470,513

 
0.90

 
681,680

 
1.19
Net Income (Loss)
$
(562,492
)
 
(1.07
)
 
$
2,308,894

 
4.05
        
    

19


The following table shows additional data regarding production and price levels for our primary inputs and products for the six months ended March 31, 2018 and 2017.
 
 
Six Months ended March 31, 2018 (unaudited)
 
Six Months ended
March 31, 2017
(unaudited)
Production:
 
 
 
 
  Ethanol sold (gallons)
 
31,979,066

 
32,692,147

  Dried distillers grains sold (tons)
 
52,168

 
49,622

  Modified distillers grains sold (tons)
 
67,590

 
62,063

Corn oil sold (pounds)
 
6,204,580

 
8,616,600

Revenues:
 
 
 
 
  Ethanol average price per gallon (net of hedging)
 
$
1.24

 
$
1.43

  Dried distillers grains average price per ton
 
128.41

 
104.39

  Modified distillers grains average price per ton
 
63.88

 
45.34

Corn oil average price per pound
 
0.27

 
0.26

Primary Inputs:
 
 
 
 
  Corn ground (bushels)
 
11,393,364

 
11,383,445

Natural gas (MMBtu)
 
847,677

 
806,636

Costs of Primary Inputs:
 
 
 
 
  Corn average price per bushel (net of hedging)
 
$
3.33

 
$
3.55

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

 
2.91

Other Costs (per gallon of ethanol sold):
 
 
 
 
  Chemical and additive costs
 
$
0.102

 
$
0.081

  Denaturant cost
 
0.037

 
0.031

  Electricity cost
 
0.043

 
0.043

  Direct labor cost
 
0.065

 
0.062


Revenue

Our revenue was lower for the six months ended March 31, 2018 compared to the same period of our 2017 fiscal year due to a decrease in the average sales prices we received for our ethanol during the first quarter of our 2018 fiscal year. During the six months ended March 31, 2018, approximately 75.4% of our total revenue was derived from ethanol sales, approximately 21.0% was from distillers grains sales and approximately 3.2% was from corn oil sales. During the six months ended March 31, 2017, approximately 81.7% of our total revenue was derived from ethanol sales, approximately 14.0% was from distillers grains sales and approximately 3.9% was from corn oil sales.

Ethanol

The average price we received for our ethanol was approximately 13.29% less during the six months ended March 31, 2018 compared to the six months ended March 31, 2017. Management attributes this decrease in the price we received for our ethanol during the 2018 fiscal year to increased market supplies of ethanol along with relatively stable ethanol demand.

We sold fewer gallons of ethanol during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to switching from a manifest rail car shipper to a unit train shipper last fiscal year. More gallons were shipped during the transition period last year compared to that same time frame this year. In addition, the amount of ethanol we produced per bushel of corn we ground was slightly less for the six months ended March 31, 2018 compared to the six months ended March 31, 2017, which negatively impacted our profitability.

From time to time we enter into forward sales contracts for our products. At March 31, 2018, we had no open ethanol futures contracts. Ethanol futures contracts resulted in a gain of approximately $1,800 during the six months ended March 31, 2018. Ethanol futures contracts for the six months ended March 31, 2017 resulted in a gain of approximately $306,000.


20


Distillers Grains

Previously, we sold a majority of our distillers grains in the dried form due to market conditions which favored that product. However, due to the Chinese anti-dumping and countervailing duty tariffs which have decreased export demand for distillers grains, we increased the amount of modified distillers grains we produced and sold. Modified distillers grains are used in our local market and are less impacted by world distillers grains markets. The average prices we received for both our dried and modified distillers grains were higher during the six months ended March 31, 2018 compared to the six months ended March 31, 2017.

We produced and sold more total tons of distillers grains during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to decreased corn oil production during the six months ended March 31, 2018. When we produce fewer pounds of corn oil, it increases the volume of distillers grains we produce.
    
Corn Oil

The total pounds of corn oil we sold was less during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to a change in chemicals used during the production process which results in lower corn oil production. The average price we received for our corn oil was slightly higher during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due primarily to increased demand from the biodiesel industry.
    
Cost of Goods Sold

Our cost of goods sold is primarily made up of corn and natural gas expenses. Our cost of goods sold was less for the six months ended March 31, 2018 as compared to the six months ended March 31, 2017 due primarily to decreased corn and natural gas prices during the six months ended March 31, 2018 as compared to the six months ended March 31, 2017. The decrease in our cost of goods sold was less than the decrease in our revenue during the six months ended March 31, 2018 as compared to the six months ended March 31, 2017, which reduced our profitability during the 2018 period.

Corn Costs

Our cost of goods sold related to corn was less for the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to decreased corn costs per bushel along with relatively stable corn consumption. During six months ended March 31, 2018, we used approximately 0.9% more bushels of corn compared to the six months ended March 31, 2017. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 6.2% less for the six months ended March 31, 2018 compared to the six months ended March 31, 2017. In addition, during the six months ended March 31, 2018, we had a realized gain of approximately $1,134,000 for our corn derivative instruments which decreased our cost of goods sold. For the six months ended March 31, 2017, we had a realized gain of approximately $764,000 for our corn derivative instruments which decreased our cost of goods sold.

Natural Gas Costs

We consumed approximately 5.09% more MMBtu of natural gas during the six months ended March 31, 2018 compared to the six months ended March 31, 2017, due to increased production and colder weather during the 2018 period. Our average cost per MMBtu of natural gas was approximately 11.34% less during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to ample local natural gas supply.

General and Administrative Expenses

Our general and administrative expenses were higher for the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to additional consulting services needed during our 2018 fiscal year.

Other Income/Expense

We had more interest income during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to increased cash on hand during the 2018 period. We had less other income during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to a lower capital account refund we received from our marketer during the 2018 period. We had more interest expense during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 due to amounts outstanding on our lease agreements.


21


Changes in Financial Condition for the Six Months Ended March 31, 2018

Current Assets. We had more cash and equivalents at March 31, 2018 compared to September 30, 2017 primarily due to an increase in our accounts payable due to deferred corn payments owed to our corn suppliers in our 2018 fiscal year. We had more restricted cash at March 31, 2018 compared to September 30, 2017 related to cash we deposit in our margin account for our hedging transactions. Due to the timing of payments from our marketers, we had fewer accounts receivable at March 31, 2018 compared to September 30, 2017. We had less inventory on hand at March 31, 2018 compared to September 30, 2017 due primarily to having less ethanol and finished goods inventory at March 31, 2018.

Property, Plant and Equipment. The value of our property, plant and equipment was lower at March 31, 2018 compared to September 30, 2017 primarily due to the regular depreciation of our assets.

Current Liabilities. Our accounts payable were lower at March 31, 2018 compared to September 30, 2017 due to having fewer deferred corn payments at March 31, 2018. Our accrued expenses were higher at March 31, 2018 compared to September 30, 2017 because we had more unpriced corn deliveries at March 31, 2018 compared to September 30, 2017.

Long-term Liabilities. Our long-term liabilities were less at March 31, 2018 compared to September 30, 2017 because of capital lease payments we made during our 2018 fiscal year.

Liquidity and Capital Resources

Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.
    
The following table shows cash flows for the six months ended March 31, 2018 and 2017:
 
 
March 31, 2018
(unaudited)
 
March 31, 2017
(unaudited)
Net cash provided by operating activities
 
$
9,368,734

 
$
11,447,388

Net cash (used in) investing activities
 
(422,711
)
 
(228,096
)
Net cash (used in) financing activities
 
(2,893,657
)
 
(716,071
)
Net increase in cash
 
$
6,052,366

 
$
10,503,221

Cash and cash equivalents, end of period
 
$
9,275,708

 
$
20,777,387


Cash Flow from Operations

Our operations provided less cash during the six months ended March 31, 2018 compared to the same period of our 2017 fiscal year due to decreased profitability during the 2018 period along with decreased accrued expenses. There are fewer outstanding payables to our corn customers during the 2018 period compared to the 2017 period.

Cash Flow From Investing Activities

We used more cash for capital expenditures during the six months ended March 31, 2018 compared to the same period of our 2017 fiscal year. During the 2018 period, our primary capital expenditures were for completing the hammer mill project that was started last fiscal year plus upgrades being made to the bin sweeps.
    
Cash Flow from Financing Activities

We used more cash for financing activities during the six months ended March 31, 2018 compared to the six months ended March 31, 2017 because of increased distributions paid during the 2018 period.

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


22


Capital Expenditures
 
The Company had approximately $317,000 in construction in progress as of March 31, 2018 primarily relating to improvements being made to the bin sweeps and the additional land and railroad track purchased last fiscal year.

Capital Resources

Revolving Loan

On March 20, 2017, we entered into a new $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). The Revolving Loan replaced a similar revolving loan we had with First National Bank of Omaha. Interest accrues on any outstanding balance on the Revolving Loan at a rate of 1.77% in excess of the one-month London Interbank Offered Rate ("LIBOR"). The maturity date of the Revolving Loan is May 31, 2018. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At March 31, 2018, we had $10 million available on the Revolving Loan. We had $0 drawn on the Revolving Loan as of March 31, 2018. Interest accrued on the Revolving Loan as of March 31, 2018 at a rate of 3.71%.

Restrictive Covenants

The Revolving Loan is subject to certain financial covenants as set forth in the Credit Agreement. The most significant financial covenants require us to maintain a fixed charge coverage ratio of no less than 1.25:1.00 and a current ratio of no less than 1.50:1.00. Our fixed charge coverage ratio measures our ability to pay our fixed expenses. Our current ratio measures our liquidity and ability to pay short-term and long-term obligations.
    
As of March 31, 2018, we were in compliance with our loan covenants.

Significant Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. We discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of our 2017 fiscal year.

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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

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

Commodity Price Risk
 
We expect to be exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process and the sale of ethanol.
 
We enter into fixed price contracts for corn purchases on a regular basis.  It is our intent that, as we enter into these contracts, we will use various hedging instruments (puts, calls and futures) to maintain a near even market position.  For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because our ethanol marketing company (RPMG) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
 

23


Although we believe our hedge positions will accomplish an economic hedge against our future purchases, they are not designated as hedges for accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged.  We use fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of sales.  The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter and year to year due to the timing of the change in value of derivative instruments relative to the cost of the commodity being hedged.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
 
As of March 31, 2018, we had fixed corn purchase contracts for approximately 2,680,000 bushels of corn and we had corn futures and option contracts for approximately 2.5 million bushels of corn.  As of March 31, 2018 we had an unrealized loss of approximately $131,000 related to our corn futures and option contracts.
 
It is the current position of our ethanol marketing company, RPMG, that under current market conditions selling ethanol in the spot market will yield the best price for our ethanol.  RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.  
 
We estimate that our corn usage will be between 21 million and 23 million bushels per calendar year for the production of approximately 59 million to 64 million gallons of ethanol.  As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.
 
A sensitivity analysis has been prepared to estimate our exposure to corn, natural gas and ethanol price risk. Market risk related to our corn, natural gas and ethanol prices is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas, and our average ethanol sales price as of March 31, 2018, net of the forward and future contracts used to hedge our market risk for corn, natural gas and ethanol. The volumes are based on our expected use and sale of these commodities for a one year period from March 31, 2018. The results of this analysis, which may differ from actual results, are as follows:
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
 
Unit of Measure
 
Hypothetical Adverse Change in Price
 
Approximate Adverse Change to Income
Ethanol
63,900,000

 
Gallons
 
10
%
 
$
(8,307,000
)
Corn
22,820,000

 
Bushels
 
10
%
 
$
(5,820,000
)
Natural gas
1,664,000

 
MMBtu
 
10
%
 
$
(383,000
)

Item 4.  Controls and Procedures

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

Our management, including our President and Chief Executive Officer (the principal executive officer), Gerald Bachmeier, along with our Chief Financial Officer, (the principal financial officer), Jodi Johnson, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2018. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.

For the fiscal quarter ended March 31, 2018, 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.


24


PART II.     OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There has not been any material change to the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information

None.

Item 6. Exhibits.

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

 
31.2

 
32.1

 
32.2

 
101

 
The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of March 31, 2018 and September 30, 2017, (ii) Statements of Operations for the three and six months ended March 31, 2018 and 2017, (iii) Statements of Cash Flows for the six months ended March 31, 2018 and 2017, and (iv) the Notes to Unaudited Condensed Financial Statements.**

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


25


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
RED TRAIL ENERGY, LLC
 
 
 
 
Date:
May 14, 2018
 
/s/ Gerald Bachmeier
 
 
 
Gerald Bachmeier
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
May 14, 2018
 
/s/ Jodi Johnson
 
 
 
Jodi Johnson
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)

26