Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 12/31/2019 - RED TRAIL ENERGY, LLC | certification31212312019.htm |
| EX-10.1 - EXHIBIT 10.1 PROMISSORY NOTE - 10 MILLION - RED TRAIL ENERGY, LLC | a101promissorynote-10milli.htm |
| EX-32.2 - EXHIBIT 32.2 12/31/2020 - RED TRAIL ENERGY, LLC | certification32212312019.htm |
| EX-32.1 - EXHIBIT 32.1 12/31/2019 - RED TRAIL ENERGY, LLC | certification32112312019.htm |
| EX-31.1 - EXHIBIT 31.1 - RED TRAIL ENERGY, LLC | certification31112312019.htm |
| EX-10.4 - EXHIBIT 10.4 BUSINESS LOAN AGREEMENT - RED TRAIL ENERGY, LLC | a104businessloanagreement.htm |
| EX-10.3 - EXHIBIT 10.3 COMMERCIAL SECURITY AGREEMENT - 7 MILLION - RED TRAIL ENERGY, LLC | a103commercialsecurityagre.htm |
| EX-10.2 - EXHIBIT 10.2 PROMISSORY NOTE - 7 MILLION - RED TRAIL ENERGY, LLC | a102promissorynote-7million.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended December 31, 2019 | |
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) | ||||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth 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 February 14, 2020, there were 40,148,160 Class A Membership Units outstanding.
1
INDEX
Page Number | |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
ASSETS | December 31, 2019 | September 30, 2019 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 6,999,650 | $ | 8,565,038 | ||||
Restricted cash - margin account | 2,121,853 | 1,957,031 | ||||||
Accounts receivable,net, primarily related party | 4,157,139 | 3,910,384 | ||||||
Inventory | 8,220,612 | 6,962,825 | ||||||
Prepaid expenses | 593,814 | 109,500 | ||||||
Total current assets | 22,093,068 | 21,504,778 | ||||||
Property, Plant and Equipment | ||||||||
Land | 1,333,681 | 1,333,681 | ||||||
Land improvements | 4,465,311 | 4,465,311 | ||||||
Buildings | 8,111,074 | 8,111,074 | ||||||
Plant and equipment | 88,061,649 | 88,038,476 | ||||||
Construction in progress | 1,163,627 | 455,825 | ||||||
103,135,342 | 102,404,367 | |||||||
Less accumulated depreciation | 64,290,297 | 63,092,175 | ||||||
Net property, plant and equipment | 38,845,045 | 39,312,192 | ||||||
Other Assets | ||||||||
Right of use operating lease assets, net | 1,304,657 | — | ||||||
Investment in RPMG | 605,000 | 605,000 | ||||||
Patronage equity | 4,119,151 | 4,119,151 | ||||||
Deposits | 40,000 | 40,000 | ||||||
Total other assets | 6,068,808 | 4,764,151 | ||||||
Total Assets | $ | 67,006,921 | $ | 65,581,121 | ||||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
3
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | December 31, 2019 | September 30, 2019 | ||||||
(Unaudited) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 3,674,470 | $ | 4,331,521 | ||||
Accrued expenses | 2,498,302 | 598,209 | ||||||
Commodities derivative instruments, at fair value (see note 3) | 40,865 | 8,875 | ||||||
Accrued loss on firm purchase commitments (see notes 4 and 8) | 144,000 | 68,000 | ||||||
Current maturities of notes payable | 4,483 | 252 | ||||||
Current portion of operating leases | 390,454 | — | ||||||
Total current liabilities | 6,752,574 | 5,006,857 | ||||||
Commitments and Contingencies (Notes 4, 5, 7 and 8) | ||||||||
Long-Term Liabilities | ||||||||
Notes payable | 17,793 | — | ||||||
Long-term operating lease liabilities | 914,203 | — | ||||||
Total long-term liabilities | 931,996 | — | ||||||
Members’ Equity 40,148,160 Class A Membership Units issued and outstanding | 59,322,351 | 60,574,264 | ||||||
Total Liabilities and Members’ Equity | $ | 67,006,921 | $ | 65,581,121 | ||||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
4
RED TRAIL ENERGY, LLC
Condensed Statements of Operations (Unaudited)
Three Months Ended | Three Months Ended | |||||||
December 31, 2019 | December 31, 2018 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues, primarily related party | $ | 26,340,913 | $ | 25,909,136 | ||||
Cost of Goods Sold | ||||||||
Cost of goods sold | 26,740,778 | 24,856,341 | ||||||
Lower of cost or net realizable value adjustment | 22,705 | — | ||||||
Loss on firm purchase commitments | 76,000 | 5,000 | ||||||
Total Cost of Goods Sold | 26,839,483 | 24,861,341 | ||||||
Gross Profit (Loss) | (498,570 | ) | 1,047,795 | |||||
General and Administrative Expenses | 799,505 | 674,885 | ||||||
Operating Income (Loss) | (1,298,075 | ) | 372,910 | |||||
Other Income (Expense) | ||||||||
Interest income | 39,277 | 27,443 | ||||||
Other income, net | 6,976 | 2,496 | ||||||
Interest expense | (91 | ) | (5 | ) | ||||
Total other income, net | 46,162 | 29,934 | ||||||
Net Income (Loss) | $ | (1,251,913 | ) | $ | 402,844 | |||
Weighted Average Units Outstanding | ||||||||
Basic | 40,148,160 | 40,148,160 | ||||||
Diluted | 40,148,160 | 40,148,160 | ||||||
Net Income (Loss) Per Unit | ||||||||
Basic | $ | (0.03 | ) | $ | 0.01 | |||
Diluted | $ | (0.03 | ) | $ | 0.01 | |||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
5
RED TRAIL ENERGY, LLC
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended | Three Months Ended | ||||||
December 31, 2019 | December 31, 2018 | ||||||
Cash Flows from Operating Activities | |||||||
Net income (loss) | $ | (1,251,913 | ) | $ | 402,844 | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization | 1,198,122 | 1,189,514 | |||||
Loss on disposal of fixed assets | 13,254 | ||||||
Change in fair value of derivative instruments | 31,990 | (2,123,150 | ) | ||||
Lower of cost of net realizable value adjustment | 22,705 | — | |||||
Loss on firm purchase commitments | 76,000 | 5,000 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net, primarily related party | (246,755 | ) | (231,671 | ) | |||
Inventory | (1,356,492 | ) | 141,450 | ||||
Prepaid expenses | (484,314 | ) | (228,582 | ) | |||
Accounts payable | (657,051 | ) | 20,831 | ||||
Accrued expenses | 1,900,093 | (371,472 | ) | ||||
Accrued loss on firm purchase commitments | 76,000 | 5,000 | |||||
Net cash used in operating activities | (691,615 | ) | (1,176,982 | ) | |||
Cash Flows from Investing Activities | |||||||
Capital expenditures | (707,802 | ) | (80,306 | ) | |||
Net cash used in investing activities | (707,802 | ) | (80,306 | ) | |||
Cash Flows from Financing Activities | |||||||
Payments on notes payable | (1,149 | ) | (657 | ) | |||
Net cash used in financing activities | (1,149 | ) | (657 | ) | |||
Net Decrease in Cash, Cash Equivalents and Restricted Cash | (1,400,566 | ) | (1,257,945 | ) | |||
Cash, Cash Equivalents and Restricted Cash - Beginning of Period | 10,522,069 | 10,873,339 | |||||
Cash, Cash Equivalents and Restricted Cash - End of Period | $ | 9,121,503 | $ | 9,615,394 | |||
Reconciliation of Cash, Cash Equivalents and Restricted Cash | |||||||
Cash and cash equivalents | $ | 6,999,650 | $ | 3,370,561 | |||
Restricted cash | 2,121,853 | 6,244,833 | |||||
Total Cash, Cash Equivalents and Restricted Cash | $ | 9,121,503 | $ | 9,615,394 | |||
Supplemental Disclosure of Cash Flow Information | |||||||
Interest paid | $ | 91 | $ | 5 | |||
Noncash Investing and Financing Activities | |||||||
Finance lease asset acquired | 23,173 | — | |||||
Capital expenditures in accounts payable | $ | — | $ | 10,176 | |||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
6
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2019
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, 2019, 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, 2020.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”).
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, inventory and allowance for doubtful accounts. Actual results could differ from those estimates.
Net Income Per Unit
Net income per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period.
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued ASC 606, “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. ASC 606 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. Effective October 1, 2018, the Company adopted ASC 606 for all of its contracts using the modified retrospective approach. See note 2.
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. Effective October 1, 2018 the Company retrospectively adopted ASU No. 2016-18.
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
7
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2019
fiscal years beginning after December 15, 2018, included interim periods within those years with early adoption permitted. Effective October 1, 2019 the Company adopted ASU No. 2016-02 using the modified retrospective approach. See note 7 for current operating and financing lease commitments.
2. REVENUE
Adoption of ASC 606
Effective October 1, 2018, the Company adopted ASC 606 using the modified retrospective approach for all of its contracts. Following the adoption of ASC 606, the Company continues to recognize revenue at a point-in-time when control of goods transfers to the customer. This is consistent with the Company's previous revenue recognition accounting policy under which the Company recognized revenue when title and risk of loss pass to the customer and collectability was reasonably assured. ASC 606 did not impact the Company's presentation of revenue on a gross or net basis. The Company recognizes revenue primarily from sales of ethanol and its related co-products.
Revenue Recognition
The Company recognizes revenue from sales of ethanol and co-products at the point in time when the performance obligations in the contract are met, which is when the customer obtains control of such products and typically occurs upon shipment depending on the terms of the underlying contracts. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. In some instances, the Company enters into contracts with customers that contain multiple performance obligations to deliver volumes of co-products over a contractual period of less than 12 months. The Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product is transferred to the customer in satisfaction of the corresponding performance obligation.
Revenue by Source
The following table disaggregates revenue by major source for the three months ended December 31, 2019 and 2018.
Revenues | For the three months ended December 31, 2019 (unaudited) | For the three months ended December 31, 2018 (unaudited) | ||||||
Ethanol and E85 | $ | 20,420,028 | $ | 19,539,168 | ||||
Distillers Grains | 4,814,637 | 5,616,777 | ||||||
Syrup | 92,359 | 92,009 | ||||||
Corn Oil | 965,372 | 605,140 | ||||||
Other | 48,517 | 56,042 | ||||||
Total revenue from contracts with customers | $ | 26,340,913 | $ | 25,909,136 | ||||
Shipping and Handling Costs
We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, we record customer payments associated with shipping and handling costs as a component of revenue, and classify such costs as a component of cost of goods sold.
3. 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
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RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2019
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: | December 31, 2019 (unaudited) | September 30, 2019 | ||||||||||||||||
Contract Type | # of Contracts | Notional Amount (Qty) | Fair Value | # of Contracts | Notional Amount (Qty) | Fair Value | ||||||||||||
Corn futures | 10 | 50,000 | bushels | $ | 4,625 | — | — | bushels | $ | — | ||||||||
Corn options | 270 | 1,350,000 | bushels | $ | (30,750 | ) | 30 | 150,000 | bushels | $ | (8,875 | ) | ||||||
Natural gas futures | 35 | 350,000 | dk | $ | (6,900 | ) | — | — | dk | $ | — | |||||||
Natural gas options | 7 | 70,000 | dk | $ | (7,840 | ) | — | — | dk | $ | — | |||||||
Total fair value | $ | (40,865 | ) | $ | (8,875 | ) | ||||||||||||
Amounts are combined on the balance sheet - negative numbers represent liabilities | ||||||||||||||||||
The following tables provide details regarding the Company's derivative financial instruments at December 31, 2019 and September 30, 2019:
Derivatives not designated as hedging instruments: | ||||||||
Balance Sheet - as of December 31, 2019 (unaudited) | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | — | $ | 40,865 | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | — | $ | 40,865 | ||||
Balance Sheet - as of September 30, 2019 | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | — | $ | 8,875 | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | — | $ | 8,875 | ||||
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 December 31, 2019 (unaudited) | Amount of gain (loss) recognized in income during the three months ended December 31, 2018 (unaudited) | |||||||
Corn derivative instruments | Cost of Goods Sold | $ | 104,683 | $ | 2,068,502 | |||||
Natural gas derivative instruments | Cost of Goods Sold | (27,850 | ) | — | ||||||
Total | $ | 76,833 | $ | 2,068,502 | ||||||
4. INVENTORY
Inventory is valued at the lower of cost or net realizable value. Inventory values as of December 31, 2019 and September 30, 2019 were as follows:
As of | December 31, 2019 (unaudited) | September 30, 2019 | ||||||
Raw materials, including corn, chemicals and supplies | $ | 4,249,606 | $ | 2,679,126 | ||||
Work in process | 877,881 | 956,509 | ||||||
Finished goods, including ethanol and distillers grains | 1,150,551 | 1,459,561 | ||||||
Spare parts | 1,942,574 | 1,867,629 | ||||||
Total inventory | $ | 8,220,612 | $ | 6,962,825 | ||||
9
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2019
Lower of cost or net realizable value adjustments for the three months ended December 31, 2019 and 2018 were as follows:
For the three months ended December 31, 2019 (unaudited) | For the three months ended December 31, 2018 (unaudited) | |||||||
Loss on firm purchase commitments | $ | 76,000 | $ | 5,000 | ||||
Loss on lower of cost or net realizable value adjustment for inventory on hand | $ | 22,705 | $ | — | ||||
Total loss on lower of cost or net realizable value adjustments | $ | 98,705 | $ | 5,000 | ||||
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 December 31, 2019, 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 a $76,000 estimated loss on firm purchase commitments for the three months ended December 31, 2019. 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.
5. BANK FINANCING
On October 1, 2019, we terminated our $7 million Revolving Loan with U.S. Bank National Association ("U.S. Bank"). The maturity date of the Revolving Loan was May 31, 2020. Our ability to draw funds on the Revolving Loan was subject to a borrowing base calculation as set forth in the Credit Agreement.
On January 22, 2020 we entered into a new $10 million revolving loan (the "Revolving Loan") with Cornerstone Bank ("Cornerstone"). The Revolving Loan replaced a similar revolving loan we had with U.S. Bank National Association. The maturity date of the Revolving Loan is January 21, 2021. The variable interest rate on December 31, 2019 will be 3.55%.
On January 22, 2020, we entered into a new $7 million construction loan (the "Construction Loan") with Cornerstone. The maturity date of the Construction Loan is June 1, 2021. The variable interest rate on December 31, 2019 will be 3.55%.
The Company's loans are secured by a lien on substantially all of the assets of the Company.
6. FAIR VALUE MEASUREMENTS
The following table provides information on those liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and September 30, 2019, respectively.
10
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2019
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of December 31, 2019 (unaudited) | Fair Value as of December 31, 2019 (unaudited) | Level 1 | Level 2 | Level 3 | |||||||||||||||
Liabilities | |||||||||||||||||||
Commodities derivative instruments | $ | 40,865 | $ | 40,865 | $ | 40,865 | $ | — | $ | — | |||||||||
Total | $ | 40,865 | $ | 40,865 | $ | 40,865 | $ | — | $ | — | |||||||||
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of September 30, 2019 | Fair Value as of September 30, 2019 | Level 1 | Level 2 | Level 3 | |||||||||||||||
Liabilities | |||||||||||||||||||
Commodities derivative instruments | $ | 8,875 | $ | 8,875 | $ | 8,875 | $ | — | $ | — | |||||||||
Total | $ | 8,875 | $ | 8,875 | $ | 8,875 | $ | — | $ | — | |||||||||
The fair value of the corn, ethanol, soybean oil and natural gas derivative instruments is based on quoted market prices in an active market.
7. LEASES
Effective October 1, 2019, the Company adopted the provisions of ASU No. 2016-02, "Leases (topic 842)" using the modified retrospective approach which applies the provisions of ASU No. 2016-02 upon adoption, with no change to prior periods. This adoption resulted in the Company recognizing initial right of use assets and lease liabilities of $1,418,000. The adoption did not have a significant impact on the Company's statement of operations.
Upon the initial adoption of ASU No. 2016-02, the Company elected the following practical expedients allowable under the guidance: not to reassess whether any expired or existing contracts are or contain leases; not to reassess the lease classification for any expired or existing leases; not to reassess initial direct costs for any existing leases; not to separately identify lease and nonlease components; and not to evaluate historical land easements. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASU No. 2016-02 to only long-term (greater than 1 year) leases.
The Company leases railcar and plant equipment. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the three months ended December 31, 2019, the Company's estimated discount rate was 3.55%. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company's leases have remaining lease terms of approximately 1 year to 4 years, which may include options to extend the lease when it is reasonably certain the Company will exercise those options. At December 31, 2019 the weighted average remaining lease term is 3.5 years. The Company does not have lease arrangements with residual value guarantees, sale leaseback terms or material restrictive covenants. The Company does not have any sublease agreements.
The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Rent expense for operating leases was approximately $205,000 and $161,000 for the three months ended December 31, 2019 and 2018, respectively.
Equipment under financing leases consists of office equipment and plant equipment. Equipment under financing leases is as follows at:
11
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2019
As of | December 31, 2019 | September 30, 2019 | ||||||
Equipment | $ | 506,661 | $ | 483,488 | ||||
Less accumulated amortization | (168,613 | ) | (162,940 | ) | ||||
Net equipment under financing lease | $ | 338,048 | $ | 320,548 | ||||
At December 31, 2019, 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 month periods ending December 31:
Operating Leases | Financing Leases | |||||||
2020 | $ | 390,454 | $ | 4,483 | ||||
2021 | 350,349 | 4,517 | ||||||
2022 | 326,349 | 4,551 | ||||||
2023 | 215,493 | 4,585 | ||||||
2024 | 22,012 | 4,140 | ||||||
Thereafter | — | — | ||||||
Total minimum lease commitments | $ | 1,304,657 | 22,276 | |||||
Less amount representing interest | — | |||||||
Present value of minimum lease commitments included in notes payable on the balance sheet | $ | 22,276 | ||||||
8. 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 December 31, 2019, the Company had various fixed price contracts for the purchase of approximately 1.3 million bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $4.7 million related to the 1.3 million bushels under contract.
Water
To meet the plant's water requirements, we entered into a ten-year contract with Southwest Water Authority to purchase raw water. Our contract requires us to purchase a minimum of 160 million gallons of water per year. The minimum estimated liability for this contract is $424,000 per year.
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. The Company has paid Bismarck Land Company, LLC $28,315 as of December 31, 2019.
Carbon Capture and Storage Project
The Company has entered into a research agreement with the University of North Dakota Energy and Environmental Research Center to explore the feasibility of injecting CO2 from the fermentation process into a saline formation to lower the carbon intensity
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value of our ethanol. The Company has committed to fund up to $950,000 for this research. The Company has paid $612,140 as of December 31, 2019.
9. 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”). Significant related party activity affecting the financial statements is as follows:
December 31, 2019 (unaudited) | September 30, 2019 | |||||||
Balance Sheet | ||||||||
Accounts receivable | $ | 3,757,314 | $ | 3,695,462 | ||||
Accounts Payable | 6,825 | 298,638 | ||||||
Accrued Expenses | 580,975 | 41,643 | ||||||
For the three months ended December 31, 2019 (unaudited) | For the three months ended December 31, 2018 (unaudited) | |||||||
Statement of Operations | ||||||||
Revenues | $ | 24,561,170 | $ | 24,188,143 | ||||
Cost of goods sold | 602,869 | 14,104 | ||||||
General and administrative | 41,304 | 30,910 | ||||||
Inventory Purchases | $ | 2,671,939 | $ | 3,703,065 | ||||
10. 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, 2019 and 2020 RFS final rules.
The Company anticipates that the results of operations during the remainder of fiscal year 2020 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 DECEMBER 31, 2019
11. MEMBER'S EQUITY
Changes in member's equity for the fiscal year ended September 30, 2019 and the three months ended December 31, 2019.
Class A Member Units | Additional Paid in Capital | Accumulated Deficit/Retained Earnings | Treasury Units | Total Member Equity | ||||||||||||||||
Balances - September 30, 2018 | $ | 39,044,595 | $ | 75,541 | $ | 25,358,139 | $ | (159,540 | ) | $ | 64,318,735 | |||||||||
Net income (loss) | — | — | 402,844 | — | 402,844 | |||||||||||||||
Balances - December 31, 2018 | 39,044,595 | 75,541 | 25,760,983 | (159,540 | ) | 64,721,579 | ||||||||||||||
Distribution | — | — | (1,782 | ) | — | (1,782 | ) | |||||||||||||
Net income | — | — | (1,423,308 | ) | — | (1,423,308 | ) | |||||||||||||
Balances - March 31, 2019 | $ | 39,044,595 | $ | 75,541 | $ | 24,335,893 | $ | (159,540 | ) | $ | 63,296,489 | |||||||||
Net income | — | — | 817,986 | — | 817,986 | |||||||||||||||
Balances - June 30, 2019 | $ | 39,044,595 | $ | 75,541 | $ | 25,153,879 | $ | (159,540 | ) | $ | 64,114,475 | |||||||||
Net income | $ | (3,540,211 | ) | $ | (3,540,211 | ) | ||||||||||||||
Balances - September 30, 2019 | $ | 39,044,595 | $ | 75,541 | $ | 21,613,668 | $ | (159,540 | ) | $ | 60,574,264 | |||||||||
Class A Member Units | Additional Paid in Capital | Accumulated Deficit/Retained Earnings | Treasury Units | Total Member Equity | ||||||||||||||||
Balances - September 30, 2019 | $ | 39,044,595 | $ | 75,541 | $ | 21,613,668 | $ | (159,540 | ) | $ | 60,574,264 | |||||||||
Net income (loss) | — | — | (1,251,913 | ) | — | (1,251,913 | ) | |||||||||||||
Balances December 31, 2019 | 39,044,595 | 75,541 | 20,361,755 | (159,540 | ) | 59,322,351 | ||||||||||||||
12. SUBSEQUENT EVENTS
On January 22, 2020 the Company entered into a new revolving loan and new construction loan with Cornerstone Bank. See Note 5.
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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 month period ended December 31, 2019, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the financial statements, notes and information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. 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; |
• | Small refinery exemptions from the RFS granted by the EPA; |
• | 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.
On January 22, 2020, following the end of our quarter ended December 31, 2019, we entered into two loans with Cornerstone Bank ("Cornerstone"). We entered into a $10,000,000 revolving line of credit (the "Revolving Loan") and a $7,000,000 construction line of credit (the "Construction Loan") for our carbon dioxide capture and storage project. The details of these loans are described in more detail below in the section entitled "Capital Resources."
Results of Operations for the Three Months Ended December 31, 2019 and 2018
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 December 31, 2019 and 2018:
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Three Months Ended December 31, 2019 (Unaudited) | Three Months Ended December 31, 2018 (Unaudited) | |||||||||||
Statement of Operations Data | Amount | % | Amount | % | ||||||||
Revenues | $ | 26,340,913 | 100.00 | $ | 25,909,136 | 100.00 | ||||||
Cost of Goods Sold | 26,839,483 | 101.89 | 24,861,341 | 95.96 | ||||||||
Gross Profit (Loss) | (498,570 | ) | (1.89 | ) | 1,047,795 | 4.04 | ||||||
General and Administrative Expenses | 799,505 | 3.04 | 674,885 | 2.60 | ||||||||
Operating Income (Loss) | (1,298,075 | ) | (4.93 | ) | 372,910 | 1.44 | ||||||
Other Income, net | 46,162 | 0.18 | 29,934 | 0.12 | ||||||||
Net Income (Loss) | $ | (1,251,913 | ) | (4.75 | ) | $ | 402,844 | 1.55 | ||||
The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended December 31, 2019 and 2018.
Three Months Ended December 31, 2019 (unaudited) | Three Months Ended December 31, 2018 (unaudited) | |||||||
Production: | ||||||||
Ethanol sold (gallons) | 15,014,837 | 16,629,602 | ||||||
Dried distillers grains sold (tons) | 22,889 | 28,115 | ||||||
Modified distillers grains sold (tons) | 30,293 | 34,024 | ||||||
Corn oil sold (pounds) | 3,834,090 | 2,700,300 | ||||||
Revenues: | ||||||||
Ethanol average price per gallon (net of hedging) | $ | 1.36 | $ | 1.18 | ||||
Dried distillers grains average price per ton | 129.90 | 136.95 | ||||||
Modified distillers grains average price per ton | 60.79 | 51.92 | ||||||
Corn oil average price per pound | 0.25 | 0.22 | ||||||
Primary Inputs: | ||||||||
Corn ground (bushels) | 5,330,858 | 6,040,959 | ||||||
Natural gas (MMBtu) | 357,329 | 432,265 | ||||||
Costs of Primary Inputs: | ||||||||
Corn average price per bushel (net of hedging) | $ | 3.53 | $ | 3.20 | ||||
Natural gas average price per MMBtu (net of hedging) | 2.30 | 2.84 | ||||||
Other Costs (per gallon of ethanol sold): | ||||||||
Chemical and additive costs | $ | 0.091 | $ | 0.108 | ||||
Denaturant cost | 0.036 | 0.037 | ||||||
Electricity cost | 0.050 | 0.046 | ||||||
Direct labor cost | 0.072 | 0.061 | ||||||
Revenue
Our revenue was greater in the first quarter of our 2020 fiscal year compared to the same period of our 2019 fiscal year due to increased prices for our products, partially offset by decreased sales of our products during the 2020 period. During the first quarter of our 2020 fiscal year, approximately 79.3% of our total revenue was derived from ethanol sales, approximately 18.2% was from distillers grains sales and approximately 1.9% was from corn oil sales. During the first quarter of our 2019 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.
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Ethanol
The average price we received for our ethanol was higher during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year. Management attributes the increase in the price we received for our ethanol during the first quarter of our 2020 fiscal year to decreased demand reductions from small refinery exemptions from the RFS along with higher corn prices which typically results in higher ethanol prices. In addition, ethanol exports have supported domestic ethanol prices, however, export demand is more volatile than domestic demand which can result in additional volatility. If ethanol 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 at current levels 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. During 2019, the Trump administration passed rules which allow the year-round use of E15. Management believes that this may lead the way for increased domestic availability of E15 which could lead to increased domestic demand, especially if ethanol prices are lower compared to the price of gasoline.
We sold fewer gallons of ethanol during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year. Management attributes this decreased production to slower production rates during the beginning of the quarter due to lower new crop corn availability from our producers. Management anticipates that our ethanol production and sales will be comparable during the rest of our 2020 fiscal year compared to our 2019 fiscal year provided we do not encounter any plant production issues which prevent us from operating at capacity during our 2020 fiscal year.
From time to time we enter into forward sales contracts for our products. At December 31, 2019, we had no open ethanol futures contracts. We also had no ethanol futures contracts for the first quarter of our 2020 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 price we received for our modified distillers grains were higher during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to higher corn prices which impacted local demand for modified distillers grains. The average price we received for our dried distillers grains were lower during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to lower export demand. Management anticipates distillers grains prices will be higher for the rest of our 2020 fiscal year due to anticipated increases in export demand from China provided recent tariff negotiations between the United States and China continue.
We produced and sold fewer total tons of distillers grains during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to decreased overall production during the first quarter of our 2020 fiscal year. Management anticipates relatively consistent distillers grains production going forward provided we can maintain favorable operating margins.
Corn Oil
The total pounds of corn oil we sold was significantly greater during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to improved corn oil yields which increased the amount of corn oil we have available to sell. Management anticipates that our corn oil production will remain at current levels for the remaining quarters of our 2020 fiscal year. The average price we received for our corn oil during the first quarter of our 2020 fiscal year was approximately 13.6% greater compared to the first quarter of our 2019 fiscal year due to increased biodiesel demand. Recently, the biodiesel blenders' tax credit was renewed retroactively from January 1, 2018 through December 31, 2022. This extension of the tax credit has created greater certainty in the biodiesel industry which has resulted in increased demand for corn oil which is frequently used as a feedstock to produce biodiesel.
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 greater for the first quarter of our 2020 fiscal year as compared to the first quarter of our 2019 fiscal year due primarily to increased corn costs per bushel during the 2020 period.
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Corn Costs
Our cost of goods sold related to corn was greater for the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to higher corn costs per bushel, without taking derivative instrument positions into account, partially offset by decreased corn consumption. We also had an adjustment to our cost of goods sold based on forward purchase contracts we had in place during the 2020 period. For the first quarter of our 2020 fiscal year, we used approximately 11.8% fewer bushels of corn compared to the first quarter of our 2019 fiscal year due to decreased production at the plant. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 10.3% greater for the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to higher market corn prices and less favorable basis during the 2020 period. In addition, during the first quarter of our 2020 fiscal year, we had a realized gain of approximately $105,000 for our corn derivative instruments which decreased our cost of goods sold related to corn. For the first quarter of our 2019 fiscal year, we had a realized gain of approximately $2.1 million for our corn derivative instruments which decreased our cost of goods sold related to corn. Management anticipates comparable corn prices during the rest of our 2020 fiscal year unless unfavorable weather conditions and late planting negatively impact the 2020 growing season which could result in higher corn prices. In addition, if China reenters the market if trade disputes between China and the United States are resolved, this may lead to additional demand for corn which may increase local prices.
Natural Gas Costs
We consumed approximately 17.3% less MMBtu of natural gas during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year, due to decreased production during the 2020 period. Our average cost per MMBtu of natural gas was approximately 19.0% less during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to plentiful natural gas supply.
General and Administrative Expenses
Our general and administrative expenses were greater for the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year primarily due to increased labor and consulting costs during the 2020 period.
Other Income/Expense
We had more interest income during the first quarter of our 2020 fiscal year compared to the first quarter of our 2019 fiscal year due to having more cash on hand during our 2020 fiscal year.
Changes in Financial Condition for the Three Months Ended December 31, 2019
Current Assets. We had less cash and equivalents at December 31, 2019 compared to September 30, 2019 primarily due to the timing of our quarter end compared to when we received payments from our marketer. We had more restricted cash at December 31, 2019 compared to September 30, 2019 because we had more cash in our margin account associated with our hedging transactions. Due to the timing of payments from our marketers, we had more accounts receivable at December 31, 2019 compared to September 30, 2019. We had more inventory on hand at December 31, 2019 compared to September 30, 2019 due primarily to having more corn and ethanol inventory at December 31, 2019.
Property, Plant and Equipment. The value of our property, plant and equipment was lower at December 31, 2019 compared to September 30, 2019 due to the regular depreciation of our assets partially offset by capital projects which were underway during our first quarter of 2020.
Current Liabilities. Our accounts payable were lower at December 31, 2019 compared to September 30, 2019 due to having more deferred corn payments at December 31, 2019. Our accrued expenses were higher at December 31, 2019 compared to September 30, 2019 because we had more deferred payments for corn deliveries at December 31, 2019 compared to September 30, 2019. We also had a larger accrued loss on our deferred corn purchase commitments at December 31, 2019 compared to September 30, 2019.
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.
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The following table shows cash flows for the three months ended December 31, 2019 and 2018:
December 31, 2019 (unaudited) | December 31, 2018 (unaudited) | |||||||
Net cash (used in) operating activities | $ | (691,615 | ) | $ | (1,176,982 | ) | ||
Net cash (used in) investing activities | (707,802 | ) | (80,306 | ) | ||||
Net cash (used in) financing activities | (1,149 | ) | (657 | ) | ||||
Net decrease in cash | $ | (1,400,566 | ) | $ | (1,257,945 | ) | ||
Cash, cash equivalents and restricted cash, end of period | $ | 9,121,503 | $ | 9,615,394 | ||||
Cash Flow from Operations
Our operations provided less cash during the three months ended December 31, 2019 compared to the same period of our 2019 fiscal year due to decreased net income along with changes in our derivative instrument positions and inventory which resulted in less cash being generated by our operations.
Cash Flow From Investing Activities
We used more cash for capital expenditures during the three months ended December 31, 2019 compared to the same period of our 2019 fiscal year. During the 2019 period, our primary capital expenditures were for our Carbon Capture and Storage Project research.
Cash Flow from Financing Activities
We used more cash for financing activities during the three months ended December 31, 2019 compared to the three months ended December 31, 2019 due to a new copier financing lease.
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 $1.2 million in construction in progress as of December 31, 2019 primarily relating to the carbon capture and storage project research.
Capital Resources
Revolving Loan
On January 22, 2020, we entered into a new $10 million revolving loan (the "Revolving Loan") with Cornerstone Bank ("Cornerstone"). Interest accrues on any outstanding balance on the Revolving Loan at a rate of 1.2% less than the prime rate as published by the Wall Street Journal, adjusted monthly. The Revolving Loan has a minimum interest rate of 3.0%. The maturity date of the Revolving Loan is January 21, 2021. The Revolving Loan is secured by a lien on all of our assets.
Construction Loan
On January 22, 2020, we entered into a new $7 million construction loan (the "Construction Loan") with Cornerstone to finance our carbon capture and storage project. Interest accrues on any outstanding balance on the Construction Loan at a rate of 1.2% less than the prime rate as published by the Wall Street Journal, adjusted monthly. The maturity date of the Construction Loan is June 1, 2021. The Construction Loan is secured by a lien on all of our assets.
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, 2019. We discuss our
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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, 2019. There has been no significant change in our critical accounting estimates since the end of our 2019 fiscal year. Effective October 1, 2019 the Company adopted ASU No. 2016-02 using the modified retrospective approach. Effective October 1, 2018, the Company has adopted ASC 606 using the modified retrospective approach for all of its contracts. The Company also retrospectively adopted ASU No. 2016-18 on October 1, 2018.
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 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 December 31, 2019, we had fixed corn purchase contracts for approximately 1.30 million bushels of corn and we had corn futures and option contracts for approximately 1.40 million bushels of corn. As of December 31, 2019 we had an unrealized gain of approximately $26,000 related to our corn futures and option contracts.
It is the current position of our ethanol marketing company, RPMG, that under current market conditions, selling ethanol in the spot market will yield the best price for our ethanol. RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.
We estimate that our corn usage will be between 21 million and 23 million bushels per calendar year for the production of approximately 59 million to 64 million gallons of ethanol. As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.
A sensitivity analysis has been prepared to estimate our exposure to corn, natural gas and ethanol price risk. Market risk related to our corn, natural gas and ethanol prices is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas, and our average ethanol sales price as of December 31, 2019, 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 December 31, 2019. The results of this analysis, which may differ from actual results, are as follows:
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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 | % | $ | (7,668,000 | ) | ||||
Corn | 22,821,000 | Bushels | 10 | % | $ | (7,069,000 | ) | ||||
Natural gas | 1,664,000 | MMBtu | 10 | % | $ | (96,000 | ) | ||||
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 December 31, 2019. 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 December 31, 2019, the Company worked to remediate a material weakness identified at the end of the Company's 2019 fiscal year by: (a) performing a review and updating month-end standard operating procedures; (b) assuring operating procedures will include specific instructions for the payment of invoices that crossover into the following month; and (c) providing an additional step for the CFO to review the posting date of all checks issued the first week after month-end prior to financial statement preparation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers' compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously discussed in our annual report on Form 10-K for the fiscal year ended September 30, 2019.
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.
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Item 6. Exhibits.
(a) | The following exhibits are filed as part of this report. |
Exhibit No. | Exhibits | ||
10.1 | |||
10.2 | |||
10.3 | |||
10.4 | |||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101 | The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of December 31, 2019 and September 30, 2019, (ii) Statements of Operations for the three months ended December 31, 2019 and 2018, (iii) Statements of Cash Flows for the three months ended December 31, 2019 and 2018, and (iv) the Notes to Unaudited Condensed Financial Statements.** | ||
(*) Filed herewith.
(**) Furnished herewith.
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: | February 14, 2020 | /s/ Gerald Bachmeier | |
Gerald Bachmeier | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | February 14, 2020 | /s/ Jodi Johnson | |
Jodi Johnson | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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