Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit322-certification3x.htm |
| EX-32.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit321-certification3x.htm |
| EX-31.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit312-certification3x.htm |
| EX-31.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLC | exhibit311-certification3x.htm |
| EX-3.1 - THIRD AMENDMENT TO AMENDED AND RESTATED OPERATING AGREEMENT - HOMELAND ENERGY SOLUTIONS LLC | ex31thirdamendmenttoamende.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 fiscal quarter ended March 31, 2018 | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
Commission file number 000-53202 | |
HOMELAND ENERGY SOLUTIONS, LLC | |||
(Exact name of registrant as specified in its charter) | |||
Iowa | 20-3919356 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
2779 Highway 24, Lawler, Iowa | 52154 | ||
(Address of principal executive offices) | (Zip Code) | ||
(563) 238-5555 | |||
(Registrant's telephone number, including area code) | |||
Securities registered pursuant to Section 12(b) of the Act: None | |||
Securities registered pursuant to Section 12(g) of the Act: Membership Units | |||
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 | |
(Do not check if a smaller reporting company) | 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 Act). o Yes x No
As of May 15, 2018, we had 90,445 membership units outstanding. On June 13, 2013, the Company entered into an agreement with Steve Retterath, the Company's largest equity holder, to repurchase and retire all of the units owned by Mr. Retterath. The Company agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million. Recently, a court ruled that the repurchase agreement was valid and enforceable. The Company's position is as of the closing date of the original agreement, Mr. Retterath is no longer the equitable owner of any membership units in the Company. As a result, the Company has recorded a $30 million short-term liability related to the amount the Company agreed to pay Mr. Retterath to repurchase his membership units and has correspondingly reduced members' equity on the balance sheet. The 90,445 membership units outstanding include the contested membership units the Company agreed to repurchase from Mr. Retterath.
INDEX
Page No. | |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Homeland Energy Solutions, LLC
Balance Sheets
March 31, 2018 | December 31, 2017 | ||||||
ASSETS | (Unaudited) | (Audited) | |||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 25,551,107 | $ | 29,568,227 | |||
Trading securities | 30,047,866 | 30,202,665 | |||||
Accounts receivable | 7,494,084 | 1,260,436 | |||||
Inventory | 16,794,987 | 15,983,934 | |||||
Prepaid and other | 2,936,985 | 2,875,753 | |||||
Derivative instruments | 873,540 | 755,220 | |||||
Total current assets | 83,698,569 | 80,646,235 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land and improvements | 22,848,729 | 22,790,957 | |||||
Buildings | 8,718,139 | 6,580,840 | |||||
Equipment | 207,585,717 | 209,543,737 | |||||
Construction in progress | 213,261 | 91,912 | |||||
239,365,846 | 239,007,446 | ||||||
Less accumulated depreciation | 102,326,122 | 98,564,276 | |||||
Total property and equipment | 137,039,724 | 140,443,170 | |||||
OTHER ASSETS | |||||||
Utility rights, net of amortization of $1,489,703 and $1,455,605 | 818,326 | 852,424 | |||||
Other assets | 3,922,169 | 3,356,239 | |||||
Total other assets | 4,740,495 | 4,208,663 | |||||
TOTAL ASSETS | $ | 225,478,788 | $ | 225,298,068 | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Balance Sheets (continued)
March 31, 2018 | December 31, 2017 | ||||||
LIABILITIES AND MEMBERS' EQUITY | (Unaudited) | (Audited) | |||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 7,927,144 | $ | 12,380,120 | |||
Due to former member | 30,000,000 | 30,000,000 | |||||
Accrued expenses | 938,142 | 1,380,718 | |||||
Current portion long term debt | 6,000,000 | 6,000,000 | |||||
Total current liabilities | 44,865,286 | 49,760,838 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
LONG-TERM LIABILITIES | |||||||
Term note | 23,940,201 | 23,936,683 | |||||
Total long-term liabilities | 23,940,201 | 23,936,683 | |||||
MEMBERS' EQUITY (64,585 units issued and outstanding) | 156,673,301 | 151,600,547 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 225,478,788 | $ | 225,298,068 | |||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Statements of Operations
(Unaudited)
Three Months Ended | Three Months Ended | ||||||
March 31, 2018 | March 31, 2017 | ||||||
Revenue | $ | 76,622,447 | $ | 63,156,498 | |||
Costs of goods sold | 70,696,120 | 58,021,453 | |||||
Gross profit | 5,926,327 | 5,135,045 | |||||
Selling, general and administrative expenses | 745,073 | 1,294,320 | |||||
Operating income | 5,181,254 | 3,840,725 | |||||
Other income (expense) | |||||||
Interest (expense) | (362,768 | ) | — | ||||
Interest income | 2,703 | 762 | |||||
Other income | 251,565 | 312,640 | |||||
Total other income (expense) | (108,500 | ) | 313,402 | ||||
Net income | $ | 5,072,754 | $ | 4,154,127 | |||
Basic & diluted net income per capital unit | $ | 78.54 | $ | 64.32 | |||
Weighted average number of units outstanding for the calculation of basic & diluted net income per capital unit | 64,585 | 64,585 | |||||
See Notes to Unaudited Financial Statements.
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Homeland Energy Solutions, LLC
Statements of Cash Flows
(Unaudited)
Three Months Ended | Three Months Ended | ||||||
March 31, 2018 | March 31, 2017 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income | $ | 5,072,754 | $ | 4,154,127 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 3,799,462 | 3,089,792 | |||||
Unrealized (gain) loss on risk management activities | (118,320 | ) | 205,592 | ||||
Unrealized (gain) loss on trading securities activities | 154,799 | (237,195 | ) | ||||
Change in working capital components: | |||||||
Accounts receivable | (6,233,648 | ) | 4,093,088 | ||||
Inventory | (811,053 | ) | (4,064,384 | ) | |||
Prepaid and other | (61,232 | ) | 137,384 | ||||
Accounts payable and other accrued expenses | (2,457,535 | ) | (1,841,963 | ) | |||
Net cash (used in) provided by operating activities | (654,773 | ) | 5,536,441 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Payments for equipment and construction in progress | (2,796,417 | ) | (11,061,669 | ) | |||
(Increase) decrease in other assets | (565,930 | ) | 31,592 | ||||
Net cash (used in) investing activities | (3,362,347 | ) | (11,030,077 | ) | |||
Net decrease in cash and cash equivalents | (4,017,120 | ) | (5,493,636 | ) | |||
Cash and Cash Equivalents - Beginning | 29,568,227 | 14,168,643 | |||||
Cash and Cash Equivalents - Ending | $ | 25,551,107 | $ | 8,675,007 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
Cash paid for interest | $ | 359,250 | $ | — | |||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||
Accounts payable related to property and equipment | $ | 110,439 | $ | 524,173 | |||
See Notes to Unaudited Financial Statements.
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1. | Nature of Business and 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 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 year ended December 31, 2017, contained in the Company's annual report on Form 10-K for 2017.
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
Homeland Energy Solutions, LLC (an Iowa Limited Liability Company) is located near Lawler, Iowa and was organized to pool investors for a 100 million gallon ethanol plant with distribution primarily throughout the United States. The Company has capacity to produce in excess of 190 million gallons annually and sells distillers dried grains and corn oil as byproducts of ethanol production.
Organization
Homeland Energy Solutions, LLC is organized as an Iowa limited liability company. The members' liability is limited as specified in Homeland Energy Solutions' operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.
Significant Accounting Policies:
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with United States 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 & Cash Equivalents
The Company maintains its accounts primarily at one financial institution. At various times, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced losses in such accounts.
Trading Securities
Investments bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are measured at fair value using prices obtained from pricing services. Any interest, dividends, and unrealized or realized gains and losses on the trading securities are recorded as part of other income.
At March 31, 2018, trading securities consisted of corporate bonds, short term bond mutual funds and money market funds with an approximate cost of $30,731,000 and fair value of $30,048,000. At December 31, 2017, trading securities consisted of corporate bonds and short term bond mutual funds with an approximate cost of $30,569,000 and fair value of $30,203,000. For the three months ended March 31, 2018, the Company recorded interest, dividend and net realized and unrealized gains and (losses) from these investments of approximately $155,000. During the same time period of 2017, the Company recorded interest, dividends and net unrealized gains and losses from these investments of approximately $237,000.
The Board of Directors voted to set aside up to $30 million in trading securities that will be used by the Company for the repurchase of 25,860 membership units per the terms of an agreement with Mr. Retterath entered into on June 13, 2013 with the Company.
Receivables
Credit sales are made primarily to two customers 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.
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Investments
The Company has a less than 20% investment interest in Renewable Products Marketing Group, LLC (RPMG). This investment is being accounted for under the equity method of accounting, as the company has significant influence, under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. The investment balance is included in other assets and the income recognized as other income. The investment is 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.
Revenue and Cost Recognition
In the first quarter of 2018, the Company adopted Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606). Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. The Company generally has a single performance obligation in its arrangements with customers. The Company believes for its contracts with customers, control is transferred at a point in time, typically upon delivery to the customers. When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. The Company generally expenses sales commissions when incurred because the amortization period would have been less than one year. The implementation of the new standard does not have any material impact on the measurement or recognition of revenue of prior periods, however additional disclosures have been added in accordance with the ASU.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
• | sales of ethanol; |
• | sales of distiller grains; |
• | sales of corn oil; |
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The disaggregation of revenue according to product line, along with accounts receivable from contracts with customers, is as disclosed in Note 5.
Shipping costs incurred by the Company in the sale of ethanol and distiller grains are not specifically identifiable and as a result, revenue from the sale of ethanol and distiller grains is recorded based on the net selling price reported to the Company from the marketer. Rail car lease costs incurred by the Company in the sale and shipment of distiller grain products are included in the cost of goods sold.
Inventories
Inventories are generally valued at the lower of cost (first-in, first-out) 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 reasonably predictable costs of completion, disposal, and transportation.
Property & Equipment
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 an asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset group to the carrying value of the asset group. If the carrying value of the 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.
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Derivative Instruments
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.
The Company enters into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of ethanol for the plant and managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
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 revenue in the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presented on the accompanying balance sheet as derivative instruments. All contracts with the same counter party are reported on a net basis.
Committed Shares to be Redeemed
On June 13, 2013, the Company entered into an agreement with Steve Retterath, the Company's largest member, to repurchase and retire all of the membership units owned by Mr. Retterath. The Company agreed to close on this repurchase on or before August 1, 2013. The Company agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million, to be paid in two equal installments payable at closing and on July 1, 2014. The transaction failed to close by the scheduled date due to objections by Mr. Retterath. Due to all conditions of the agreement being met prior to, or on, August 1, 2013, and a court ruling which found the agreement to be binding and enforceable, the Company believes that it has a binding agreement with Mr. Retterath; as such the commitment to repurchase and retire the membership units is reflected in the financial statements as a current liability, due to former member, as if the transaction had closed on August 1, 2013. See Note 9 for additional information.
Net Income per Unit
Basic and diluted net income per unit is computed by dividing net income by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net income per unit are the same.
Prior to, or on, August 1, 2013, the Company believes it has a binding agreement with Steve Retterath to repurchase and retire all 25,860 membership units owned by Mr. Retterath. These membership units have thus been excluded in the determination of net income per capital unit as presented in the Statement of Operations. The Company is currently involved in litigation with Mr. Retterath. There is potential that Mr. Retterath will continue as a unit holder upon conclusion of the litigation and said membership units would not be redeemed under the repurchase agreement. If the units are not redeemed, basic and diluted net income per unit, including the 25,860 units, for the three months ended March 31, 2018 would be $56.09. Net income per unit for the three months ended March 31, 2017 would have been $45.93.
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, distiller grains and corn oil 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 months ended March 31, 2018, ethanol sales averaged approximately 77% of total revenues, while approximately 20% of revenues were generated from the sale of distiller grains. Corn oil sales attributed approximately 3% of revenues during this time period. For the three months ended March 31, 2018, corn costs averaged approximately 70% of cost of goods sold.
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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. 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, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
Recent & Pending Accounting Pronouncements
In February 2016, FASB issued ASU No. 2016-02 "Leases" ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. The Company is currently evaluating the impact of its pending adoption of the new standard on the financial statements.
2. INVENTORY
Inventory consisted of the following as of March 31, 2018 and December 31, 2017:
March 31, 2018 | December 31, 2017 | |||||||
Raw Materials | $ | 12,043,830 | $ | 10,692,802 | ||||
Work in Process | 2,364,263 | 1,827,414 | ||||||
Finished Goods | 2,386,894 | 3,463,718 | ||||||
Totals | $ | 16,794,987 | $ | 15,983,934 | ||||
3. DEBT
Master Loan Agreement with Home Federal Savings Bank
On June 29, 2017, the Company amended and restated the Master Loan Agreement with Home Federal Savings Bank ("Home Federal"), amending the term revolving loan to provide funding to operate the plant and establishing a term loan to help fund the Company's $42 million expansion project. In return, the Company entered into agreements providing Home Federal a security interest in substantially all personal property located on Company property. The Company currently has two loans with Home Federal, a term revolving loan and a term loan.
Term Revolving Loan
Under the terms of the Second Supplement to the Master Loan Agreement, dated June 29, 2017, the Company has a $30 million term revolving loan which has a maturity date of December 31, 2022. Interest on the term revolving loan is due monthly and accrues at a rate equal to the one month LIBOR plus 310 basis points, 4.79% on March 31, 2018. There was no balance outstanding on the term revolving loan and $30 million available to be drawn as of March 31, 2018 and December 31, 2017, respectively.
Term Debt
Under the terms of the Fourth Supplement to the Master Loan Agreement, dated June 29, 2017, the Company has a $30 million term loan which has a maturity date of December 31, 2022. Interest on the term loan is at a fixed rate of 4.79%. The Company is required to make monthly interest payments beginning July 1, 2017 and bi-annual principal payments of $3 million beginning on June 30, 2018. The long-term portion of the outstanding debt is presented net of unamortized debt issuance costs of $59,799 and $63,317 as of March 31, 2018 and December 31, 2017, respectively.
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At March 31, 2018, the Company had the following debt maturities on the term loan for the twelve month periods ended March 31:
2019 | $ | 6,000,000 | ||
2020 | 6,000,000 | |||
2021 | 6,000,000 | |||
2022 | 6,000,000 | |||
2023 | 6,000,000 | |||
Total principal payments | $ | 30,000,000 | ||
Covenants
During the term of the loans, the Company is subject to certain financial covenants at various times calculated monthly, quarterly or annually, including restriction of the payment of dividends and capital expenditures and maintenance of certain financial ratios including the minimum working capital and a fixed charge ratio as defined by the Master Loan Agreement. 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 the imposition of fees, charges or penalties. The Company is in compliance with all debt covenants as of March 31, 2018.
4. RELATED PARTY TRANSACTIONS
Due to former member
On June 13, 2013, we entered into an agreement with Steve Retterath, the Company's largest member, to repurchase and retire all of the units owned by Mr. Retterath. The Company agreed to close on this repurchase on or before August 1, 2013. The Company agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million, to be paid in two equal installments payable at closing and on July 1, 2014. The transaction failed to close by the scheduled date due to objections by Mr. Retterath. The Company believes that it has a binding agreement with Mr. Retterath. On August 14, 2013, the Company filed a lawsuit against Mr. Retterath in Iowa state court to enforce the terms of the repurchase agreement. The Company is asking the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.
Mr. Retterath contends he is not bound by the agreement. The Company's position is as of the closing date, Mr. Retterath is no longer the equitable owner of any membership units in the Company. As a result, in 2013 the Company recorded a $30 million short-term liability related to the amount the Company agreed to pay Mr. Retterath to repurchase his membership units and correspondingly reduced members' equity on the balance sheet. If the Company is ultimately unsuccessful in its lawsuit against Mr. Retterath, the Company will reevaluate the accounting considerations made during the period of time that the lawsuit is pending.
Other matters
The Company has purchased corn and materials from members of its Board of Directors who own or manage elevators or are local producers of corn. Purchases during the three months ended March 31, 2018 totaled approximately $1,187,000 and during the three months ended March 31, 2017 totaled approximately $4,422,000. There was approximately $3,000 due to these members at both March 31, 2018 and December 31, 2017.
5. COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Ethanol, corn oil, and distiller grains marketing agreements and major customers
The Company has entered into a marketing agreement with RPMG to sell all ethanol produced at the plant at a mutually agreed on price, less commission and transportation charges. As of March 31, 2018, the Company had commitments to sell approximately 2,304,000 produced gallons of ethanol at various fixed prices and 43 million of its produced gallons of ethanol at basis price levels indexed against exchanges for delivery through June 30, 2018.
The Company has entered into a marketing agreement with RPMG to sell all corn oil produced at the plant at a mutually agreed on price, less marketing fees and transportation charges. As of March 31, 2018, the Company had commitments to sell approximately 7.8 million pounds of corn oil at various fixed and basis price levels indexed against exchanges for delivery through July 31, 2018.
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The Company also has an investment in RPMG, included in other assets, totaling approximately $2,406,000 as of March 31, 2018.
The Company has entered into a marketing agreement to sell all distiller grains produced at the plant to CHS, an unrelated party, at a mutually agreed on price, less commission and transportation charges. The agreement was renewed for another one year term on April 1, 2018. The agreement calls for automatic renewal for successive one-year terms unless 90-day prior written notice is given before the current term expires. As of March 31, 2018, the Company had approximately 43,000 tons of distiller grains sales commitments for delivery through June 2018 at various fixed prices.
Sales and marketing fees related to the agreements in place for the three months ended March 31, 2018 and 2017 were approximately as follows:
Three Months Ended | Three Months Ended | ||||||
March 31, 2018 | March 31, 2017 | ||||||
Sales ethanol | $ | 59,173,000 | $ | 50,722,000 | |||
Sales distiller grains | 14,795,000 | 9,308,000 | |||||
Sales corn oil | 2,654,000 | 3,126,000 | |||||
Marketing fees ethanol | $ | 66,000 | $ | 61,000 | |||
Marketing fees distiller grains | 206,000 | 194,000 | |||||
Marketing fees corn oil | 22,000 | 25,000 | |||||
As of March 31, 2018 | As of December 31, 2017 | ||||||
Amount due from RPMG | $ | 4,099,000 | $ | 236,000 | |||
Amount due from CHS | 1,998,000 | 900,000 | |||||
At March 31, 2018, the Company had approximately $17 million in outstanding priced corn purchase commitments for bushels at various prices and approximately 7,297,000 bushels of basis contracts through June 2019 accounted for under the normal purchase exclusion.
The Company has commitments for minimum purchases of various utilities such as natural gas and electricity over the next 12 months totaling approximately $3,787,000 accounted for under the normal purchase exclusion.
As of March 31, 2018, the Company had locked in place approximately 749,000 decatherms of natural gas at fixed prices through October 31, 2019 accounted for under the normal purchase exclusion. No fixed price natural gas was committed as of March 31, 2017.
6. LEASE OBLIGATIONS
The Company leases rail cars and rail moving equipment with original terms up to 5 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. Rent expense incurred for the operating leases during the three months ended March 31, 2018 was approximately $374,000, and for the same period in 2017 was approximately $410,000.
12
At March 31, 2018, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month periods ended March 31:
2019 | $ | 1,515,000 | ||
2020 | 1,515,000 | |||
2021 | 1,515,000 | |||
2022 | 1,515,000 | |||
2023 | 511,000 | |||
Total lease commitments | $ | 6,571,000 | ||
7. DERIVATIVE INSTRUMENTS
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 and options contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures and options contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of exchange traded futures and options contracts related to corn and natural gas are recorded in costs of goods sold and changes in market prices of contracts related to the sale of ethanol, if applicable, are recorded in revenues.
The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The Company's plant will grind approximately 63 million bushels of corn per year. Over the next 12 months, the Company has hedged and anticipates hedging between 10% and 25% of its anticipated annual grind. At March 31, 2018, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 11% of its anticipated monthly grind over the next twelve months.
The following table represents the approximate amount of realized/unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the three months ending March 31, 2018 and 2017 and the fair value of derivatives as of March 31, 2018 and December 31, 2017:
Income Statement Classification | Realized Gain (Loss) | Change In Unrealized Gain (Loss) | Total Gain (Loss) | ||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||
Commodity contracts for the | |||||||||||||
three months ended March 31, 2018 | Cost of Goods Sold | $ | (1,142,000 | ) | $ | (766,000 | ) | $ | (1,908,000 | ) | |||
Commodity contracts for the | |||||||||||||
three months ended March 31, 2017 | Cost of Goods Sold | $ | 35,000 | $ | (93,000 | ) | $ | (58,000 | ) | ||||
Balance Sheet Classification | March 31, 2018 | December 31, 2017 | |||||||
Futures contracts | |||||||||
In gain position | $ | 47,000 | $ | 305,000 | |||||
In loss position | (514,000 | ) | (7,000 | ) | |||||
Cash held by broker | 1,341,000 | 457,000 | |||||||
Current Asset | $ | 874,000 | $ | 755,000 | |||||
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8. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
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:
Trading securities: Trading securities consisting of corporate bonds and short term bond mutual funds are reported at fair value utilizing Level 1 inputs. Trading securities are measured at fair value using prices obtained from 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 the CBOT and NYMEX markets.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
As of March 31, 2018 | |||||||||||||||
Trading securities, assets | $ | 30,048,000 | $ | 30,048,000 | $ | — | $ | — | |||||||
Derivative financial instruments | |||||||||||||||
Assets | $ | 47,000 | $ | 47,000 | $ | — | $ | — | |||||||
Liabilities | (514,000 | ) | (514,000 | ) | — | — | |||||||||
As of December 31, 2017 | |||||||||||||||
Trading securities, assets | $ | 30,203,000 | $ | 30,203,000 | $ | — | $ | — | |||||||
Derivative financial instruments | |||||||||||||||
Assets | $ | 305,000 | $ | 305,000 | — | — | |||||||||
Liabilities | (7,000 | ) | (7,000 | ) | — | — | |||||||||
The Company's financial assets and liabilities not recorded at fair value, for which carrying value approximates fair value, consists of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. Additionally, long term
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debt, carried at book value of $30,000,000 at March 31, 2018, had an estimated fair value of $29,643,000, determined based on a discounted cash flows model. As of December 31, 2017, carrying value of long term debt approximated its fair value.
9. LITIGATION MATTERS
Retterath
In relation to the repurchase agreement discussed in Note 4, on August 1, 2013 Mr. Retterath filed a lawsuit against the Company along with several directors, the Company's former CEO, CFO, COO, a former director and the Company's outside legal counsel in Florida state court. In August 2016, this lawsuit was voluntarily dismissed without prejudice by the Retteraths. On August 14, 2013, the Company filed a lawsuit in Iowa state court to enforce the repurchase agreement the Company entered into with Mr. Retterath. No distributions have been paid to Mr. Retterath since the time of the original expected closing date of August 1, 2013. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed various motions with the Iowa Court and was granted a stay regarding his obligation to perform the repurchase agreement while the court considered his post trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling.
GS Cleantech Corporation
On August 9, 2013, GS Cleantech Corporation (GS Cleantech), a subsidiary of Greenshift Corporation, filed a complaint against the Company alleging that the Company's operation of a corn oil extraction process licensed by the Company infringes patent rights claimed by GS Cleantech. GS Cleantech seeks royalties, damages and potentially triple damages associated with the alleged infringement, as well as attorney's fees from the Company. The Company filed a motion for summary judgment which was granted by the Court. The Company expects GS Cleantech will appeal this decision.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report or in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Homeland Energy Solutions, LLC (referred to herein as "we," "us," the "Company," or "Homeland") is an Iowa limited liability company. Homeland was formed on December 7, 2005 for the purpose of pooling investors for the development, construction and operation of a 100 million gallon per year ethanol plant located near Lawler, Iowa. We began producing ethanol and distiller grains at the plant in April 2009. We completed installation of corn oil extraction equipment and commenced selling corn oil during our fourth quarter of 2011. During our fourth quarter of 2017, we completed a plant expansion project. The ethanol plant is now capable of operating at a rate in excess of 190 million gallons of ethanol per year.
Results of Operations
Comparison of Fiscal Quarters Ended March 31, 2018 and 2017
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 March 31, 2018 and 2017:
2018 | 2017 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 76,622,447 | 100.0 | $ | 63,156,498 | 100.0 | ||||||||
Costs of goods sold | 70,696,120 | 92.3 | 58,021,453 | 91.9 | ||||||||||
Gross profit | 5,926,327 | 7.7 | 5,135,045 | 8.1 | ||||||||||
Selling, general and administrative expenses | 745,073 | 1.0 | 1,294,320 | 2.0 | ||||||||||
Operating income | 5,181,254 | 6.8 | 3,840,725 | 6.1 | ||||||||||
Other income (expense) | (108,500 | ) | (0.1 | ) | 313,402 | 0.5 | ||||||||
Net income | $ | 5,072,754 | 6.6 | $ | 4,154,127 | 6.6 | ||||||||
Revenue
Our total revenue for our first quarter of 2018 was approximately 21% greater than our total revenue for our first quarter of 2017. Management attributes this increase in revenue with increased ethanol and distiller grains revenue, partially offset by lower corn oil revenue during the 2018 period.
For our first quarter of 2018, our total ethanol revenue was approximately 17% greater than our first quarter of 2017 due to increased ethanol production from our completed expansion partially offset by a decrease in the average price we received per gallon of ethanol sold during the 2018 period. The average price we received for our ethanol during our first quarter of 2018 was approximately 3% less than during our first quarter of 2017. Management attributes this decrease in ethanol prices with increased
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domestic supplies of ethanol. Management anticipates relatively stable ethanol prices for the rest of our 2018 fiscal year provided ethanol exports remain strong. Export demand is more volatile than domestic demand. If export demand decreases, it may result in excess ethanol in the United States market which could negatively impact prices.
We sold approximately 21% more gallons of ethanol during our first quarter of 2018 compared to the same period of 2017. Management attributes this increase in ethanol sales with increased plant production from our completed expansion. Management anticipates continuing to increase ethanol production as we work to optimize our expanded plant and seek operating efficiencies.
Our total distiller grains revenue was approximately 59% greater during our first quarter of 2018 compared to the same period of 2017, due primarily to increased market distiller grains prices. The average price we received for our dried distiller grains was approximately 41% greater during our first quarter of 2018 compared to the same period of 2017. We sell nearly all of our distiller grains in the dried form. Management attributes these higher distiller grains prices to increased export demand which offset the loss of the Chinese market during our 2017 fiscal year. Distiller grains are typically used as a feed substitute for corn. Management anticipates distiller grains will continue at their current levels unless China reenters the distillers grains market which could result in a significant increase in distiller grains demand.
We sold approximately 13% more total tons of distiller grains during our first quarter of 2018 compared to the same period of 2017 due to increased overall production at the plant due to our completed expansion. Management anticipates distiller grains production will continue to increase as we continue to maximize production of our expanded plant.
Our total corn oil revenue was approximately 15% less for our first quarter of 2018 compared to the same period of 2017 due to lower average corn oil prices and decreased corn oil production during the 2018 period. We sold approximately 6% fewer pounds of corn oil during our first quarter of 2018 compared to the same period of 2017 primarily because of increased downtime for our corn oil extraction equipment. We anticipate our corn oil extraction equipment will run more reliably during the rest of our 2018 fiscal year which may increase our total corn oil production. The average price we received for our corn oil was approximately 10% less during our first quarter of 2018 compared to the same period of 2017. This decrease in corn oil prices occurred, in part, due to decreased corn oil demand from the biodiesel industry due to a reduction in the biodiesel use requirement in the Renewable Fuels Standard along with the loss of the biodiesel blenders' tax credit, both of which impacted biodiesel demand.
Cost of Goods Sold
Our two primary costs of production are corn costs and natural gas costs. Our total cost of goods sold was approximately 22% more for our first quarter of 2018 compared to the same period of 2017. Our cost of goods sold related to corn, without taking into account derivative instruments, was approximately 6% greater during our first quarter of 2018 compared to our first quarter of 2017 due to increased corn consumption, partially offset by decreased average corn costs per bushel. Our average cost per bushel of corn was approximately 1% less during our first quarter of 2018 compared to our first quarter of 2017 due to strong corn carryover and relatively stable corn demand. We processed approximately 7% more bushels of corn during our first quarter of 2018 compared to our first quarter of 2017 due to our increased total production at the ethanol plant partially offset by improved corn to ethanol conversion efficiency. Management anticipates continued lower corn prices due to the balance between corn supply and demand. However, our completed expansion could impact our local corn market in the future due to our increased corn demand, especially during times when the corn market is volatile.
We experienced increased natural gas prices during our first quarter of 2018 compared to the same period of 2017 primarily due to higher energy prices during the 2018 period along with increased natural gas consumption due to our completed expansion. During our first quarter of 2018, the average delivered price we paid per MMBtu of natural gas was approximately 4% greater compared to the same period of 2017. We used approximately 12% more MMBtu of natural gas during our first quarter of 2018 compared to our first quarter of 2017 due to increased production. Management anticipates natural gas prices will be lower in the summer months due to decreased natural gas usage for heating. However, if we experience another cold and long winter next year, it could result in higher natural gas prices during the winter months. Further, if a shortage of natural gas were to occur, it could result in significantly higher natural gas prices which could negatively impact our profitability.
We engage in risk management activities that are intended to fix the purchase price of the corn and natural gas we require to produce ethanol, distiller grains and corn oil. During our first quarter of 2018, we had a realized loss of approximately $1,142,000 and an unrealized loss of approximately $766,000 related to our corn and natural gas derivative instruments. During our first quarter of 2017, we had a realized gain of approximately $35,000 and an unrealized loss of approximately $93,000 related to our corn derivative instruments. We recognize the gains or losses that result from changes in the value of our corn and natural gas derivative instruments in cost of goods sold as the changes occur. Our plant is expected to use approximately 63 million bushels
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of corn per year following our expansion. As of March 31, 2018, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 11% of its anticipated monthly grind for the next twelve months.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were less during our first quarter of 2018 than our first quarter of 2017, due to decreased legal expenses from the Retterath trial during the 2018 period.
Other Income (Expense)
We had more interest expense during our first quarter of 2018 compared to the same period of 2017 due to borrowing we had outstanding for our completed expansion. We had less other income during our first quarter of 2018 compared to the same period of 2017 due to less undistributed income from investments in the current period.
Changes in Financial Condition for the Three Months Ended March 31, 2018.
Balance Sheet Data | March 31, 2018 | December 31, 2017 | ||||||
Total current assets | $ | 83,698,569 | $ | 80,646,235 | ||||
Total property and equipment | 137,039,724 | 140,443,170 | ||||||
Total other assets | 4,740,495 | 4,208,663 | ||||||
Total Assets | $ | 225,478,788 | $ | 225,298,068 | ||||
Total current liabilities | $ | 44,865,286 | $ | 49,760,838 | ||||
Total long-term liabilities | 23,940,201 | 23,936,683 | ||||||
Total members' equity | 156,673,301 | 151,600,547 | ||||||
Total Liabilities and Members' Equity | $ | 225,478,788 | $ | 225,298,068 | ||||
We had less cash and cash equivalents as of March 31, 2018 compared to December 31, 2017. As of March 31, 2018, the value of our trading securities was lower compared to the trading securities we had at December 31, 2017 due to reductions in the value of the bonds we had as of March 31, 2018. In order to fund our purchase obligation related to the Retterath repurchase agreement, we have allocated $30 million of our trading securities to the Retterath repurchase. Our accounts receivable was greater at March 31, 2018 compared to December 31, 2017 due to the timing of our quarter end with respect to shipments of our ethanol and payments from our marketer. We had more inventory on hand at March 31, 2018 compared to December 31, 2017 due primarily to having more raw materials and work in process inventory at March 31, 2018 as a result of our increased production capacity which requires us to maintain additional raw materials on hand and increases the value of our work in process. We had more prepaid expenses at March 31, 2018 compared to December 31, 2017 due to prepaid annual dues. The value of our derivative instruments was greater at March 31, 2018 compared to December 31, 2017 due to more unrealized gains on our risk management positions at March 31, 2018.
Our net property and equipment was lower at March 31, 2018 compared to December 31, 2017 due to the net effect of capital expenditures we have been making at the ethanol plant offset by depreciation. The value of our other assets was greater at March 31, 2018 compared to December 31, 2017 due to an increased value of our investment in RPMG, our ethanol and corn oil marketer.
Our current liabilities were less at March 31, 2018 compared to December 31, 2017, primarily due to decreased accounts payable as of March 31, 2018. Our accounts payable was less at March 31, 2018 compared to December 31, 2017 due primarily to having less deferred corn payments at March 31, 2018. Our accrued expenses were lower at March 31, 2018 compared to December 31, 2017 due to payment of wages and performance bonuses accrued at December 31, 2017.
Our long-term liabilities were comparable at March 31, 2018 and December 31, 2017. Our first principal payment will be due on our term loan during our second fiscal quarter of 2018.
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Liquidity and Capital Resources
Our primary sources of liquidity as of March 31, 2018 were cash from our operations and our $30 million long-term revolving loan. Our credit facilities are described in greater detail below under "Short-Term and Long-Term Debt Sources." As of March 31, 2018, we had $30.0 million available pursuant to our revolving loan and approximately $25.6 million in cash and cash equivalents. We also had $30 million at March 31, 2018 of trading securities for the Retterath repurchase agreement. Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our revolving loan and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity financing for working capital or other purposes.
The following table shows cash flows for the three months ended March 31, 2018 and 2017:
2018 | 2017 | |||||||
Net cash (used in) provided by operating activities | $ | (654,773 | ) | $ | 5,536,441 | |||
Net cash (used in) investing activities | (3,362,347 | ) | (11,030,077 | ) | ||||
Net cash provided by (used in) financing activities | — | — | ||||||
Cash at beginning of period | 29,568,227 | 14,168,643 | ||||||
Cash and restricted cash at end of period | $ | 25,551,107 | $ | 8,675,007 | ||||
Cash Flow From Operations
Our operations provided less cash during our first three months of 2018 compared to the same period of 2017 primarily due to changes in working capital components, including accounts receivable, accounts payable and accrued expenses which decreased our cash during the 2018 period.
Cash Flow From Investing Activities
We used less cash for investing activities during our first three months of 2018 compared to the first three months of 2017 due to having more capital expenditures related to our plant expansion during the 2017 period.
Cash Flow From Financing Activities
There was no activity in our financing activities during either periods covered by this report.
Short-Term and Long-Term Debt Sources
Master Loan Agreement with Home Federal Savings Bank
On June 29, 2017, we entered into a new $30 million term loan (the "Term Loan") and increased and extended our existing revolving loan (the "Revolving Loan") with Home Federal Savings Bank ("Home Federal"). Each loan is described below.
Term Loan
We have a $30 million term loan with a fixed interest rate of 4.79%. We will pay interest on the Term Loan monthly with semi-annual principal payments of $3 million commencing on June 30, 2018. The maturity date of the Term Loan is December 31, 2022. We have the ability to prepay principal on the Term Loan without penalty or premium by giving Home Federal thirty days advance notice. If we choose to refinance the Term Loan within the first thirty-six months following the closing, we will be required to pay Home Federal a prepayment fee. In the event we default on the Term Loan, Home Federal can charge a default interest rate 2% in excess of the current interest rate. As of March 31, 2018, we had $30 million outstanding on the Term Loan.
Revolving Loan
We have a $30 million term revolving loan which has a maturity date of December 31, 2022. Interest on the Revolving Loan accrues at 310 basis points in excess of the 30-day London Interbank Offered Rate (LIBOR). We are required to make monthly payments of interest until the maturity date on December 31, 2022, on which date the unpaid principal balance of the Revolving Loan becomes due. We agreed to pay a fee of 30 basis points on a per annum basis on the unused portion of the
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Revolving Loan payable on a quarterly basis. As of March 31, 2018, we had $0 outstanding on the Revolving Loan and $30 million available to be drawn. Interest accrued on the Revolving Loan as of March 31, 2018 at a rate of 4.79% per year.
Covenants
In connection with the Master Loan Agreement, we are required to comply with certain debt covenants and financial ratios. We agreed to a debt service coverage ratio of 1:15 to 1:00 and agreed to increase our minimum working capital covenant from $27.5 million to $30 million once our expansion is complete. We are permitted to pay distributions to our members up to 100% of our net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and we are in compliance with all of our loan covenants including compliance with the financial covenants. Further, our maximum capital expenditure covenant was increased from $5 million to $10 million per year.
As of March 31, 2018, we were in compliance with all of our debt covenants and financial ratios. Management anticipates that we will be in compliance with all of our debt covenants and financial ratios for at least the next 12 months.
Failure to comply with the loan covenants or to maintain the required financial ratios may cause acceleration of any future outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. Any acceleration of the debt financing or imposition of the fees, charges or penalties may restrict or limit our access to the capital resources necessary to continue plant operations.
Should we default on any of our obligations pursuant to the Home Federal loans, Home Federal may terminate its commitment to provide us funds and declare any future unpaid principal balance of the loans, plus accrued interest, immediately due and payable. Events of default include the failure to make payments when due, our insolvency, any material adverse change in our financial condition or the breach of any of the covenants, representations or warranties we have made in the loan agreements.
Application of Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Derivative Instruments
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative my be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.
The Company enters into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of ethanol for the plant and managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
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 all contracts with the same counter party are presented net on the accompanying balance sheet as derivative instruments net of cash due from/to broker.
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Revenue recognition
Revenue from the sale of the Company's products is recognized at the time control transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Interest income is recognized as earned. Shipping costs incurred by the Company in the sale of ethanol and distiller grains are not specifically identifiable and as a result, revenue from the sale of ethanol and distiller grains is recorded based on the net selling price reported to the Company from the marketer.
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 have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars and we have no amounts outstanding on variable interest rate debt. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, 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 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 March 31, 2018, we had price protection in place for approximately 14% of our anticipated corn needs, none of our natural gas needs and 1% 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 March 31, 2018, 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 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 | ||||||||
Natural Gas | 4,970,000 | MMBTU | 10% | $ | (1,550,640 | ) | |||||
Ethanol | 190,000,000 | Gallons | 10% | (25,270,000 | ) | ||||||
Corn | 56,000,000 | Bushels | 10% | (19,600,000 | ) | ||||||
For comparison purposes, our sensitivity analysis for our first quarter of 2017 is set forth below.
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 | 4,920,000 | MMBTU | 10% | $ | (1,535,040 | ) | |||||
Ethanol | 155,000,000 | Gallons | 10% | (20,615,000 | ) | ||||||
Corn | 52,000,000 | Bushels | 10% | (17,836,000 | ) | ||||||
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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), James Broghammer, along with our Chief Financial Officer, (the principal financial officer), Beth Eiler, 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.
PART II
ITEM 1. LEGAL PROCEEDINGS.
Retterath Lawsuit
On August 14, 2013, the Company filed a lawsuit against Steve Retterath in the Iowa state court located in Polk County, Iowa. The purpose of the lawsuit is to enforce the terms of the repurchase agreement the Company executed with Mr. Retterath on June 13, 2013. The Company asked the Iowa state court to require Mr. Retterath to perform his obligations under the repurchase agreement pursuant to its terms. Mr. Retterath removed the case to federal court in the Federal District Court for the Southern District of Iowa in December 2013. The Company believed that this removal was improper and as a result the Company moved to remand the case back to the Iowa state court in Polk County which was granted. Mr. Retterath answered the lawsuit in August 2014, denying the validity of the repurchase agreement. In addition, the Iowa state court permitted Jason Retterath and Annie Retterath, the son and daughter-in-law of Steve Retterath, to be added as parties to the Iowa state lawsuit. In February 2015, the Company filed a motion for summary judgment asking the Iowa state court to enforce the repurchase agreement. The Retteraths also filed motions for summary judgment asking the Iowa state court to find the repurchase agreement invalid. On October 16, 2015, the Iowa state court entered a ruling granting Homeland's motion for summary judgment and determined no membership vote was required as Mr. Retterath has contended. The Iowa state court also denied the summary judgment motions filed by Mr. Retterath and his son and daughter-in-law.
Mr. Retterath and his son and daughter-in-law filed a motion to add a significant number of additional parties to the Iowa lawsuit along with additional claims against the Company. We filed a resistance to Mr. Retterath's attempts to expand the scope of the Iowa lawsuit. In November 2016, the Iowa Court ruled that our original claims against Mr. Retterath would proceed to trial in January 2017 as scheduled and that any other issues that remain following that trial would be litigated after a ruling is issued in the January 2017 trial. The trial was held in January 2017. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed motions with the Iowa Court to reconsider its ruling or alternatively award Mr. Retterath a new trial. Mr. Retterath also asked the Iowa Court to stay his obligation to perform the repurchase agreement until these motion are ruled on by the Iowa Court. The Iowa Court granted Mr. Retterath's stay while the court considered his post-trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling.
GS Cleantech Patent Litigation
On August 9, 2013, GS Cleantech Corporation ("GS Cleantech"), a subsidiary of Greenshift Corporation, filed a complaint in the United States District for the Northern District of Iowa against the Company. The Company is one of more than twenty ethanol manufacturers that were sued by GS Cleantech. The complaint alleges that the Company's operation of a corn oil extraction process infringes patent rights claimed by GS Cleantech. GS Cleantech seeks royalties, damages and potentially triple damages associated with the alleged infringement, as well as attorney's fees. The complaint was transferred to the United States District Court for the Southern District of Indiana due to a finding that the action involves questions of fact common to several other lawsuits which were joined in a multi-district litigation ("MDL"). The MDL Court developed two tracks of defendants in this
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litigation. The first track includes defendants which were originally sued by GS Cleantech in 2010 and a second track of defendants sued in 2013 which includes the Company. On October 23, 2014, the MDL Court granted summary judgment in favor of the first track defendants and found that the GS Cleantech patents which the Company is alleged to have infringed are invalid. Further, in a January 16, 2015 decision, the MDL ruled in favor of a stipulated motion for partial summary judgment finding that all of the GS Cleantech patents in the suit were invalid and, therefore, not infringed. GS Cleantech has said it will appeal this decision when the remaining claim in the suit has been decided. If GS Cleantech successfully appeals the District Court’s findings of invalidity, damages awarded GS Cleantech may be $1 million or more.
The only remaining claim in the lawsuit alleges that GS Cleantech inequitably conducted itself before the United States Patent Office when obtaining the patents at issue. A trial in the District Court for the Southern District of Indiana on the single issue of inequitable conduct was held in October 2015. The MDL Court ruled that GS Cleantech engaged in inequitable conduct. GS Cleantech has asked the court to amend its ruling. The defendants are seeking damages against GS Cleantech and its attorneys as a result of this finding of inequitable conduct. We anticipate that if the determination of inequitable conduct is not amended, GS Cleantech will appeal this decision along with the summary judgment decision issued earlier.
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 December 31, 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, FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this report.
Exhibit No. | Exhibit |
3.1 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101 | The following financial information from Homeland Energy Solutions, LLC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of March 31, 2018 and December 31, 2017, (ii) Statements of Operations for the three months ended March 31, 2018 and 2017, (iii) Statements of Cash Flows for the three months ended March 31, 2018 and 2017, and (iv) the Notes to Unaudited 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.
HOMELAND ENERGY SOLUTIONS, LLC | |||
Date: | May 15, 2018 | /s/ James Broghammer | |
James Broghammer | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date: | May 15, 2018 | /s/ Beth Eiler | |
Beth Eiler | |||
Chief Financial Officer (Principal Financial Officer) | |||
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