RED TRAIL ENERGY, LLC - FORM 10-Q

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EX-32.2 - CERTIFICATION - RED TRAIL ENERGY, LLC	certification3226-30x18.htm
EX-32.1 - CERTIFICATION - RED TRAIL ENERGY, LLC	certification3216-30x18.htm
EX-31.2 - CERTIFICATION - RED TRAIL ENERGY, LLC	certification3126-30x18.htm
EX-31.1 - CERTIFICATION - RED TRAIL ENERGY, LLC	certification3116-30x18.htm

Table of Contents

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 June 30, 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 August 14, 2018, there were 40,148,160 Class A Membership Units outstanding.

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INDEX



	Page Number
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures about Market Risk	23
Item 4. Controls and Procedures	24
PART II. OTHER INFORMATION	24
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities	26
Item 3. Defaults Upon Senior Securities	26
Item 4. Mine Safety Disclosures	26
Item 5. Other Information	26
Item 6. Exhibits	26
SIGNATURES	27

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

RED TRAIL ENERGY, LLC

Condensed Balance Sheets



ASSETS	June 30, 2018		September 30, 2017
	(Unaudited)
Current Assets
Cash and equivalents	$	14,428,327	$	3,223,342
Restricted cash - margin account	4,025,633		5,906,666
Accounts receivable, primarily related party	3,328,277		4,059,227
Other receivables	—		8,764
Inventory	12,302,033		16,413,742
Prepaid expenses	128,186		33,364
Total current assets	34,212,456		29,645,105

Property, Plant and Equipment
Land	1,342,381		1,342,381
Land improvements	4,266,953		4,266,953
Buildings	8,091,522		8,036,031
Plant and equipment	87,263,818		86,460,902
Construction in progress	567,176		628,454
	101,531,850		100,734,721
Less accumulated depreciation	57,138,420		53,592,985
Net property, plant and equipment	44,393,430		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	$	82,521,165	$	80,702,120

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

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RED TRAIL ENERGY, LLC

Condensed Balance Sheets



LIABILITIES AND MEMBERS' EQUITY	June 30, 2018		September 30, 2017
	(Unaudited)
Current Liabilities
Accounts payable	$	9,904,710	$	2,409,171
Accrued expenses	1,717,755		3,670,338
Commodities derivative instruments, at fair value (see note 2)	1,936,750		933,312
Accrued loss on firm purchase commitments (see notes 3 and 7)	—		5,000
Current maturities of notes payable	2,632		2,617
Total current liabilities	13,561,847		7,020,438

Long-Term Liabilities
Notes payable	945		2,921

Members’ Equity (40,148,160 and 41,466,340 as of June 30, 2018 and September 30, 2017, respectively, of Class A Membership Units issued and outstanding)	68,958,373		73,678,761

Total Liabilities and Members’ Equity	$	82,521,165	$	80,702,120

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

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RED TRAIL ENERGY, LLC

Condensed Statements of Operations (Unaudited)



	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Revenues, primarily related party	$	28,726,715		$	28,536,654		$	81,216,304		$	85,616,060

Cost of Goods Sold
Cost of goods sold	28,155,815			26,132,798			80,087,408			80,146,245
Lower of cost or net realizable value adjustment	—			—			82,082			—
Loss on firm purchase commitments	—			—			8,000			—
Total Cost of Goods Sold	28,155,815			26,132,798			80,177,490			80,146,245

Gross Profit	570,900			2,403,856			1,038,814			5,469,815

General and Administrative Expenses	611,006			565,397			2,111,926			2,004,142

Operating Income (Loss)	(40,106		)	1,838,459			(1,073,112		)	3,465,673

Other Income (Expense)
Interest income	54,605			37,297			101,872			80,275
Other income	47,768			25,277			471,049			664,009
Interest expense	(8		)	(12		)	(42		)	(41		)
Total other income (expense), net	102,365			62,562			572,879			744,243

Net Income (Loss)	$	62,259		$	1,901,021		$	(500,233	)	$	4,209,916

Weighted Average Units Outstanding
Basic	41,031,775			41,466,340			41,321,485			41,451,005

Diluted	41,031,775			41,466,340			41,321,485			41,451,005

Net Income (Loss) Per Unit
Basic	$	—		$	0.05		$	(0.01	)	$	0.10

Diluted	$	—		$	0.05		$	(0.01	)	$	0.10

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

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RED TRAIL ENERGY, LLC

Condensed Statements of Cash Flows (Unaudited)



	Nine Months Ended			Nine Months Ended
	June 30, 2018			June 30, 2017
Cash Flows from Operating Activities
Net income (loss)	$	(500,233	)	$	4,209,916
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	3,545,435			3,506,800
Change in fair value of derivative instruments	1,003,438			(89,050		)
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	1,881,033			(1,274,474		)
Accounts receivable	730,950			(580,365		)
Other receivables	8,764			64,872
Inventory	4,021,626			(7,949,799		)
Prepaid expenses	(94,822		)	(13,170		)
Accounts payable	7,495,539			18,899,021
Accrued expenses	(1,952,583		)	(4,475,572		)
Accrued purchase commitment losses	(5,000		)	(74,000		)
Net cash provided by operating activities	16,224,229			12,221,588

Cash Flows from Investing Activities
Capital expenditures	(797,128		)	(945,406		)
Net cash (used in) investing activities	(797,128		)	(945,406		)

Cash Flows from Financing Activities
Dividends paid	(2,901,975		)	(4,977,453		)
Unit repurchase	(1,318,180		)	(681,820		)
Debt repayments	(1,961		)	(1,946		)
Net cash (used in) financing activities	(4,222,116		)	(5,661,219		)

Net Increase in Cash and Equivalents	11,204,985			5,614,963
Cash and Equivalents - Beginning of Period	3,223,342			10,274,166
Cash and Equivalents - End of Period	$	14,428,327		$	15,889,129

Supplemental Disclosure of Cash Flow Information
Interest paid	$	42		$	41
Units issued in exchange for property	$	—		$	3,320,000

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

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 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

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 the first quarter of this fiscal year and there has been no significant impact to our financial statements.

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.

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 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:	June 30, 2018 (unaudited)						September 30, 2017
Contract Type	# of Contracts	Notional Amount (Qty)		Fair Value			# of Contracts	Notional Amount (Qty)		Fair Value
Corn futures	1,500	7,500,000	bushels	$	(1,121,750	)	81	405,000	bushels	$	16,688
Corn options	600	3,000,000	bushels	$	(815,000	)	1,800	9,000,000	bushels	$	(950,000	)
Total fair value				$	(1,936,750	)				$	(933,312	)
Amounts are combined on the balance sheet - negative numbers represent liabilities

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2018

The following tables provide details regarding the Company's derivative financial instruments at June 30, 2018 and September 30, 2017:



Derivatives not designated as hedging instruments:

Balance Sheet - as of June 30, 2018 (unaudited)	Asset		Liability
Commodity derivative instruments, at fair value	$	—	$	1,936,750
Total derivatives not designated as hedging instruments for accounting purposes	$	—	$	1,936,750

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 June 30, 2018 (unaudited)			Amount of gain (loss) recognized in income during the three months ended June 30, 2017 (unaudited)			Amount of gain (loss) recognized in income during the nine months ended June 30, 2018 (unaudited)			Amount of gain (loss) recognized in income during the nine months ended June 30, 2017 (unaudited)
Corn derivative instruments	Cost of Goods Sold	$	(1,901,509	)	$	182,791		$	(767,270	)	$	947,046
Ethanol derivative instruments	Revenue	—			—			1,800			306,180
Soybean oil derivative instruments	Revenue	—			(4,164		)	—			70,518
Natural gas derivative instruments	Cost of Goods Sold	—			—			—			10,780
Total		$	(1,901,509	)	$	178,627		$	(765,470	)	$	1,334,524

3. INVENTORY

Inventory is valued at the lower of cost or net realizable value. Inventory values as of June 30, 2018 and September 30, 2017 were as follows:



As of	June 30, 2018 (unaudited)		September 30, 2017
Raw materials, including corn, chemicals and supplies	$	8,065,229	$	11,952,560
Work in process	806,096		773,786
Finished goods, including ethanol and distillers grains	1,356,601		1,577,066
Spare parts	2,074,107		2,110,330
Total inventory	$	12,302,033	$	16,413,742

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2018

Lower of cost or net realizable value adjustments for the three and nine months ended June 30, 2018 and 2017 were as follows:



	For the three months ended June 30, 2018 (unaudited)		For the three months ended June 30, 2017 (unaudited)		For the nine months ended June 30, 2018 (unaudited)		For the nine months ended June 30, 2017 (unaudited)
Loss on firm purchase commitments	$	—	$	—	$	8,000	$	—
Loss on lower of cost or net realizable value adjustment for inventory on hand	$	—	$	—	$	82,082	$	—
Total loss on lower of cost or net realizable value adjustments	$	—	$	—	$	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 June 30, 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 nine months ended June 30, 2018 and no estimated loss for the nine months ended June 30, 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	June 30, 2018 (unaudited)		September 30, 2017
Capital lease obligations (Note 6)	$	3,577	$	5,538
Total Long-Term Debt	3,577		5,538
Less amounts due within one year	2,632		2,617
Total Long-Term Debt Less Amounts Due Within One Year	$	945	$	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 May 31, 2018, we renewed our $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). The maturity date of the Revolving Loan is May 31, 2019. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At June 30, 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 June 30, 2018. The variable interest rate on June 30, 2018 was 3.90%. 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 June 30, 2018, the Company was in compliance with its quarterly debt covenant.

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 June 30, 2018 and September 30, 2017, respectively.

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2018



					Fair Value Measurement Using
	Carrying Amount as of June 30, 2018 (unaudited)		Fair Value as of June 30, 2018 (unaudited)		Level 1		Level 2		Level 3
Liabilities
Commodities derivative instruments	$	1,936,750	$	1,936,750	$	1,936,750	$	—	$	—
Total	$	1,936,750	$	1,936,750	$	1,936,750	$	—	$	—

					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 July 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 $153,000 and $136,000 for the three months ended June 30, 2018 and 2017, respectively and $465,000 and $395,000 for the nine months ended June 30, 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	June 30, 2018			September 30, 2017
Equipment	$	483,488		$	483,488
Less accumulated amortization	(136,124		)	(120,029		)
Net equipment under capital lease	$	347,364		$	363,459

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2018

At June 30, 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 June 30:



	Operating Leases		Capital Leases
2019	$	525,383	$	2,632
2020	424,463		945
2021	365,663		—
2022	296,640		—
2023	202,290		—
Total minimum lease commitments	$	1,814,439	3,577
Less amount representing interest			—
Present value of minimum lease commitments included in current maturities of long-term debt on the balance sheet			$	3,577

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 June 30, 2018, the Company had various fixed price contracts for the purchase of approximately 2.3 million bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $8.1 million related to the 2.3 million bushels under contract. The Company also has various unpriced basis contracts for the purchase of approximately 113 thousand 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 September 2018 index price less basis. The estimated accrued payable for these bushels is $380 thousand. The deadline for pricing these 113 thousand bushels is August 24, 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:

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2018



	June 30, 2018 (unaudited)		September 30, 2017
Balance Sheet
Accounts receivable	$	3,115,384	$	4,027,061
Accounts Payable	3,648,459		1,569
Accrued Expenses	152,615		925,503



	For the three months ended June 30, 2018 (unaudited)		For the three months ended June 30, 2017 (unaudited)		For the nine months ended June 30, 2018 (unaudited)		For the nine months ended June 30, 2017 (unaudited)
Statement of Operations
Revenues	$	27,381,514	$	27,795,610	$	76,354,225	$	82,706,618
Cost of goods sold	9,012		7,674		21,936		37,625
General and administrative	62,019		17,990		100,330		51,038
Other income/expense	—		—		140,538		247,307
Inventory Purchases	$	7,710,883	$	15,395,091	$	18,036,469	$	35,060,321

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.

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RED TRAIL ENERGY, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 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
April 2018	None	None	None	None
May 2018	1,318,180	$1.00	None	None
June 2018	None	None	None	None
Total	1,318,180	$1.00	None	None

*1,318,180 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.

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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 nine month periods ended June 30, 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 and meet our 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 produced in the United States, and now more recently, in April 2018, the Chinese government increased the tariff on United States

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ethanol imports into China from 30% to 45%. 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 United States 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"). 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"). On May 31, 2018 we renewed our Revolving Loan with US Bank. The renewal extended the maturity date and amended the timing of our compliance covenants. The maturity date of the Revolving Loan is May 31, 2019. 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 is calculated annually and measures our ability to pay our fixed expenses. Our current ratio is calculated quarterly and measures our liquidity and ability to pay short-term and long-term obligations.

Results of Operations for the Three Months Ended June 30, 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 June 30, 2018 and 2017:



	Three Months Ended June 30, 2018 (Unaudited)					Three Months Ended June 30, 2017 (Unaudited)
Statement of Operations Data	Amount			%		Amount		%
Revenues	$	28,726,715		100.00		$	28,536,654	100.00
Cost of Goods Sold	28,155,815			98.01		26,132,798		91.58
Gross Profit	570,900			1.99		2,403,856		8.42
General and Administrative Expenses	611,006			2.13		565,397		1.98
Operating Income (Loss)	(40,106		)	(0.14	)	1,838,459		6.44
Other Income	102,365			0.36		62,562		0.22
Net Income (Loss)	$	62,259		0.22		$	1,901,021	6.66

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The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended June 30, 2018 and 2017.



	Three Months Ended June 30, 2018 (unaudited)		Three Months Ended June 30, 2017 (unaudited)
Production:
Ethanol sold (gallons)	16,030,562		16,344,034
Dried distillers grains sold (tons)	28,905		33,858
Modified distillers grains sold (tons)	25,386		19,864
Corn oil sold (pounds)	3,287,520		4,308,180
Revenues:
Ethanol average price per gallon (net of hedging)	$	1.37	$	1.42
Dried distillers grains average price per ton	149.95		92.76
Modified distillers grains average price per ton	61.27		49.87
Corn oil average price per pound	0.25		0.25
Primary Inputs:
Corn ground (bushels)	5,605,055		5,719,865
Natural gas (MMBtu)	410,950		418,783
Costs of Primary Inputs:
Corn average price per bushel (net of hedging)	$	3.40	$	3.31
Natural gas average price per MMBtu (net of hedging)	1.97		2.78
Other Costs (per gallon of ethanol sold):
Chemical and additive costs	$	0.120	$	0.088
Denaturant cost	0.040		0.037
Electricity cost	0.049		0.048
Direct labor cost	0.061		0.052

Revenue

Our revenue was higher for the third quarter of our 2018 fiscal year compared to the same period of our 2017 fiscal year due to increased distiller grains revenue, partially offset by lower ethanol and corn oil revenue. During the third quarter of our 2018 fiscal year, approximately 76.2% of our total revenue was derived from ethanol sales, approximately 20.5% was from distillers grains sales and approximately 2.8% was from corn oil sales. During the third quarter of our 2017 fiscal year, approximately 81.2% of our total revenue was derived from ethanol sales, approximately 14.5% was from distillers grains sales and approximately 3.8% was from corn oil sales.

Ethanol

The average price we received for our ethanol was approximately 3.5% less during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year. Management attributes this decrease in the price we received for our ethanol during the third quarter of our 2018 fiscal year to excess ethanol supply in the market which impacted market ethanol prices. Ethanol exports have supported domestic ethanol prices, 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. Management anticipates that ethanol prices will remain lower unless domestic ethanol demand increases. Management believes that domestic ethanol demand will only increase through increased usage of higher level blends of ethanol, such as E15, used in the United States.

We sold fewer gallons of ethanol during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year due to lower production from unplanned shutdowns from power outages caused by adverse weather in the area. Management anticipates that our ethanol production and sales will be lower during the final quarter of our 2018 fiscal year compared to our 2017 fiscal year as we anticipate to continue to see adverse weather which cause power outages.

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From time to time we enter into forward sales contracts for our products. At June 30, 2018, we had no open ethanol futures contracts. We also had no ethanol futures contracts for the third quarter of our 2017 fiscal year.

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 third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year. Management attributes these increases to improved distillers grains exports from countries other than China and overall demand for distillers grains. Higher corn prices have also positively impacted distillers grains prices. Management anticipates distillers grains prices will remain at their current levels for the rest of our 2018 fiscal year.

We produced and sold more total tons of distillers grains during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year due to decreased corn oil production during the third 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 lower distillers grains production going forward.

Corn Oil

The total pounds of corn oil we sold was less during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year due to a change in chemicals used during the production process which resulted in less corn oil being extracted. Management anticipates that our corn oil production will continue to remain less for the remaining quarter of our 2018 fiscal year. The average price we received for our corn oil during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year was comparable.

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 higher for the third quarter of our 2018 fiscal year as compared to the third quarter of our 2017 fiscal year due primarily to higher corn costs, partially offset by lower natural gas costs during the third quarter of our 2018 fiscal year as compared to the third quarter of our 2017 fiscal year. The increase in our cost of goods sold was greater than the increase in our revenue during the third quarter of our 2018 fiscal year as compared to the third quarter of our 2017 fiscal year, which resulted in lower profitability during the 2018 period.

Corn Costs

Our cost of goods sold related to corn was higher for the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year due to increased corn costs per bushel. For the third quarter of our 2018 fiscal year, we used approximately 2.0% fewer bushels of corn compared to the third quarter of our 2017 fiscal year. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 2.7% higher for the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year. In addition, during the third quarter of our 2018 fiscal year, we had a realized loss of approximately $1,902,000 for our corn derivative instruments which increased our cost of goods sold related to corn. For the third quarter of our 2017 fiscal year, we had a realized gain of approximately $182,000 for our corn derivative instruments which decreased our cost of goods sold related to corn. Management anticipates that corn prices will remain at the current levels for the remaining quarter of our 2018 fiscal year. However, depending on the size of the harvest, corn prices may change during the first quarter of our 2019 fiscal year. Late planting in many parts of the United States could negatively impact the size of the corn harvest which could result in higher corn prices.

Natural Gas Costs

We consumed approximately 1.9% less MMBtu of natural gas during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year, due to unplanned shutdowns from power outages during the 2018 period. Our average cost per MMBtu of natural gas was approximately 29.1% less during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year due to ample local natural gas supply.

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General and Administrative Expenses

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

Other Income/Expense

We had more interest income during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year due to having more cash on hand during our 2018 fiscal year. We had more other income during the third quarter of our 2018 fiscal year compared to the third quarter of our 2017 fiscal year due to the sale of top soil during the 2018 period.

Results of Operations for the Nine Months Ended June 30, 2018 and 2017



	Nine Months Ended June 30, 2018 (Unaudited)					Nine Months Ended June 30, 2017 (Unaudited)
Statement of Operations Data	Amount			%		Amount		%
Revenues	$	81,216,304		100.00		$	85,616,060	100.00
Cost of Goods Sold	80,177,490			98.72		80,146,245		93.61
Gross Profit	1,038,814			1.28		5,469,815		6.39
General and Administrative Expenses	2,111,926			2.60		2,004,142		2.34
Operating Income (Loss)	(1,073,112		)	(1.32	)	3,465,673		4.05
Other Income	572,879			0.71		744,243		0.87
Net Income (Loss)	$	(500,233	)	(0.62	)	$	4,209,916	4.92

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The following table shows additional data regarding production and price levels for our primary inputs and products for the nine months ended June 30, 2018 and 2017.



	Nine Months Ended June 30, 2018 (unaudited)		Nine Months Ended June 30, 2017 (unaudited)
Production:
Ethanol sold (gallons)	48,009,628		49,036,181
Dried distillers grains sold (tons)	81,073		83,480
Modified distillers grains sold (tons)	92,976		81,927
Corn oil sold (pounds)	9,492,100		12,924,780
Revenues:
Ethanol average price per gallon (net of hedging)	$	1.28	$	1.42
Dried distillers grains average price per ton	136.09		99.67
Modified distillers grains average price per ton	63.17		46.44
Corn oil average price per pound	0.26		0.26
Primary Inputs:
Corn ground (bushels)	16,998,419		17,103,310
Natural gas (MMBtu)	1,258,627		1,225,419
Costs of Primary Inputs:
Corn average price per bushel (net of hedging)	$	3.35	$	3.47
Natural gas average price per MMBtu (net of hedging)	2.38		2.86
Other Costs (per gallon of ethanol sold):
Chemical and additive costs	$	0.108	$	0.084
Denaturant cost	0.038		0.033
Electricity cost	0.045		0.045
Direct labor cost	0.064		0.059

Revenue

Our revenue was lower for the nine months ended June 30, 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, partially offset by increased distillers grains revenue. During the nine months ended June 30, 2018, 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 nine months ended June 30, 2017, approximately 81.6% of our total revenue was derived from ethanol sales, approximately 14.2% 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 9.86% less during the nine months ended June 30, 2018 compared to the nine months ended June 30, 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 along with lower corn prices.

We sold fewer gallons of ethanol during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to lower production from unplanned shutdowns from power outages caused by adverse weather in the area. In addition, the amount of ethanol we produced per bushel of corn we ground was slightly less for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017, which negatively impacted our profitability.

From time to time we enter into forward sales contracts for our products. At June 30, 2018, we had no open ethanol futures contracts. Ethanol futures contracts resulted in a gain of approximately $1,800 during the nine months ended June 30, 2018. Ethanol futures contracts for the nine months ended June 30, 2017 resulted in a gain of approximately $306,000.

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Distillers Grains

The average prices we received for both our dried and modified distillers grains were higher during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017.

We produced and sold more total tons of distillers grains during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to decreased corn oil production during the nine months ended June 30, 2018.

Corn Oil

The total pounds of corn oil we sold was less during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to a change in the production process which resulted in lower corn oil production. The average price we received for our corn oil during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 was comparable.

Cost of Goods Sold

Our cost of goods sold was greater for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017 primarily due to derivative instrument losses we experienced during the nine months ended June 30, 2018 as compared to the derivative instrument gains we experienced during the nine months ended June 30, 2017. The increase in our cost of goods sold occurred during a time when our revenue was lower which further reduced our profitability during the 2018 period.

Corn Costs

Our cost of goods sold related to corn was less for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to decreased corn costs per bushel along with relatively stable corn consumption. During the nine months ended June 30, 2018, we used approximately 0.6% fewer bushels of corn compared to the nine months ended June 30, 2017. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 3.5% less for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017. In addition, during the nine months ended June 30, 2018, we had a realized loss of approximately $767,000 for our corn derivative instruments which increased our cost of goods sold. For the nine months ended June 30, 2017, we had a realized gain of approximately $947,000 for our corn derivative instruments which decreased our cost of goods sold.

Natural Gas Costs

We consumed approximately 2.7% more MMBtu of natural gas during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017, due to colder weather during the 2018 period. Our average cost per MMBtu of natural gas was approximately 16.8% less during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to ample local natural gas supply and relatively stable demand.

General and Administrative Expenses

Our general and administrative expenses were higher for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to higher credit card processing fees and additional meeting expenses during our 2018 fiscal year.

Other Income/Expense

We had more interest income during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to increased cash on hand during the 2018 period. We had less other income during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to a lower capital account refund we received from our marketer during the 2018 period.

Changes in Financial Condition for the Nine Months Ended June 30, 2018

Current Assets. We had more cash and equivalents at June 30, 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 less restricted cash at June 30, 2018 compared to September 30, 2017 related to cash we deposit in our margin account for our

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hedging transactions. Due to the timing of payments from our marketers, we had fewer accounts receivable at June 30, 2018 compared to September 30, 2017. We had less inventory on hand at June 30, 2018 compared to September 30, 2017 due primarily to having less corn inventory at June 30, 2018.

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

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

Long-term Liabilities. Our long-term liabilities were less at June 30, 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 nine months ended June 30, 2018 and 2017:



	June 30, 2018 (unaudited)			June 30, 2017 (unaudited)
Net cash provided by operating activities	$	16,224,229		$	12,221,588
Net cash (used in) investing activities	(797,128		)	(945,406		)
Net cash (used in) financing activities	(4,222,116		)	(5,661,219		)
Net increase in cash	$	11,204,985		$	5,614,963
Cash and cash equivalents, end of period	$	14,428,327		$	15,889,129

Cash Flow from Operations

Our operations provided more cash during the nine months ended June 30, 2018 compared to the same period of our 2017 fiscal year due to less inventory purchases during the 2018 period along with decreased accrued expenses. There were greater outstanding payables to our corn customers during the 2018 period compared to the 2017 period which impacted cash generated by our operations.

Cash Flow From Investing Activities

We used less cash for capital expenditures during the nine months ended June 30, 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 and DDG Stack.

Cash Flow from Financing Activities

We used less cash for financing activities during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 because of fewer 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.

Capital Expenditures

The Company had approximately $567,000 in construction in progress as of June 30, 2018 primarily relating to improvements being made to the centrifuge and DDG Stack. During the nine months ended June 30, 2018, we placed in service

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approximately $839,000 in capital projects with the majority of these costs related to the addition of a hammer mill and upgrades to our cooling tower.

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"). 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"). On May 31, 2018 we renewed the Revolving Loan extending the maturity date to May 31, 2019. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At June 30, 2018, we had $10 million available on the Revolving Loan. We had $0 drawn on the Revolving Loan as of June 30, 2018. Interest accrued on the Revolving Loan as of June 30, 2018 at a rate of 3.90%.

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 is calculated annually and measures our ability to pay our fixed expenses. Our current ratio is calculated quarterly and measures our liquidity and ability to pay short-term and long-term obligations.

As of June 30, 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.

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

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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 June 30, 2018, we had fixed corn purchase contracts for approximately 2,278,000 bushels of corn and we had corn futures and option contracts for approximately 2.3 million bushels of corn. As of June 30, 2018 we had an unrealized loss of approximately $1,936,750 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 June 30, 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 June 30, 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	%	$	(8,946,000	)
Corn	22,821,000	Bushels	10	%	$	(3,415,000	)
Natural gas	1,664,000	MMBtu	10	%	$	(349,000	)

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 June 30, 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 June 30, 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. 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.

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Item 1A. Risk Factors

The risk factors below should be read in conjunction with the risk factors previously discussed in our annual report on Form 10-K for the fiscal year ended September 30, 2017. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

Failures Of Our Information Technology Infrastructure Could Have A Material Adverse Effect On Operations. We utilize various software applications and other information technology that are critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, including production, manufacturing, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected.

A Cyber Attack Or Other Information Security Breach Could Have A Material Adverse Effect On Our Operations and Result In Financial Losses. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. If we are unable to prevent cyber attacks and other information security breaches, we may encounter significant disruptions in our operations which could adversely impact our business, financial condition and results of operations or result in the unauthorized disclosure of confidential information. Such breaches may also harm our reputation, result in financial losses or subject us to litigation or other costs or penalties.

Government Policies And Regulations, Particularly Those Affecting The Agricultural Sector And Related Industries, Could Adversely Affect Our Operations And Profitability. Agricultural commodity production and trade flows are significantly affected by government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, trade tariffs, duties, subsidies, import and export restrictions on commodities and commodity products, can influence industry profitability, the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, and the volume and types of imports and exports. In addition, international trade disputes can adversely affect trade flows by limiting or disrupting trade between countries or regions. Future governmental policies, regulations or actions affecting our industry may adversely affect the supply of, demand for and prices of our products, restrict our ability to do business and cause our financial results to suffer.

We may experience negative impacts of higher ethanol tariffs and other disruptions to international agricultural trade related to current trade actions announced by the Trump administration and responsive actions announced by trading partners, including by China. In April of 2018, the Chinese government increased the tariff on U.S. ethanol imports into China from 30% to 45%. We cannot estimate the exact effect this tariff increase will have on the overall domestic ethanol market. However, the increased tariff is expected to reduce overall U.S. ethanol export demand, which could have a negative effect on U.S. domestic ethanol prices.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



	(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
April 1-30, 2018	None	None	None	None
May 1-31, 2018	1,318,180	$1.00	None	None
June 1-30, 2018	None	None	None	None


Total	1,318,180	$1.00	None	None

*1,318,180 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.

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			Certificate Pursuant to 17 CFR 240.13a-14(a)*
31.2			Certificate Pursuant to 17 CFR 240.13a-14(a)*
32.1			Certificate Pursuant to 18 U.S.C. Section 1350*
32.2			Certificate Pursuant to 18 U.S.C. Section 1350*
101			The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of June 30, 2018 and September 30, 2017, (ii) Statements of Operations for the three and nine months ended June 30, 2018 and 2017, (iii) Statements of Cash Flows for the nine months ended June 30, 2018 and 2017, and (iv) the Notes to Unaudited Condensed Financial Statements.**

(*) Filed herewith.

(**) Furnished herewith.

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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:	August 14, 2018	/s/ Gerald Bachmeier
		Gerald Bachmeier
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	August 14, 2018	/s/ Jodi Johnson
		Jodi Johnson
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

RED TRAIL ENERGY, LLC - FORM 10-Q - August 14, 2018

Attached files

RED TRAIL ENERGY, LLC Reports