Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 CERTIFICATION 1-31-2020 - GOLDEN GRAIN ENERGY | a322certification1-31x2020.htm |
| EX-32.1 - EXHIBIT 32.1 CERTIFICATION 1-31-2020 - GOLDEN GRAIN ENERGY | a321certification1-31x2020.htm |
| EX-31.2 - EXHIBIT 31.2 CERTIFICATION 1-31-2020 - GOLDEN GRAIN ENERGY | a312certification1-31x2020.htm |
| EX-31.1 - EXHIBIT 31.1 CERTIFICATION 1-31-2020 - GOLDEN GRAIN ENERGY | a311certification1-31x2020.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 | January 31, 2020 | |
OR | ||
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the transition period from to . | ||
COMMISSION FILE NUMBER 000-51177 | ||
GOLDEN GRAIN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa | 02-0575361 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
1822 43rd Street SW, Mason City, Iowa 50401 | ||||
(Address of principal executive offices) | ||||
(641) 423-8525 | ||||
(Registrant's telephone number, including area code) | ||||
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 March 16, 2020, there were 18,953,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.
1
INDEX
Page Number | |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GOLDEN GRAIN ENERGY, LLC
Balance Sheets
ASSETS | January 31, 2020 | October 31, 2019 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 16,517,347 | $ | 15,937,266 | ||||
Marketable securities | 910,619 | 870,706 | ||||||
Accounts receivable | 5,901,592 | 2,509,938 | ||||||
Other receivables | 1,070,260 | 215,981 | ||||||
Derivative instruments | 1,042,947 | 1,115,525 | ||||||
Inventory | 7,258,394 | 8,534,358 | ||||||
Prepaid expenses and other | 3,692,276 | 2,909,651 | ||||||
Total current assets | 36,393,435 | 32,093,425 | ||||||
Property and Equipment | ||||||||
Land and land improvements | 16,319,211 | 14,319,211 | ||||||
Building and grounds | 32,891,090 | 30,891,090 | ||||||
Grain handling equipment | 16,084,232 | 16,038,202 | ||||||
Office equipment | 1,017,371 | 458,385 | ||||||
Plant and process equipment | 121,851,854 | 121,636,606 | ||||||
Construction in progress | 2,246,355 | 5,038,278 | ||||||
190,410,113 | 188,381,772 | |||||||
Less accumulated depreciation | 118,529,022 | 116,292,967 | ||||||
Net property and equipment | 71,881,091 | 72,088,805 | ||||||
Other Assets | ||||||||
Investments | 24,254,575 | 25,416,170 | ||||||
Right of use assets from operating leases | 2,597,026 | — | ||||||
Other assets | 1,814,191 | 431,983 | ||||||
Total other assets | 28,665,792 | 25,848,153 | ||||||
Total Assets | $ | 136,940,318 | $ | 130,030,383 | ||||
Notes to the Financial Statements are an integral part of these Statements.
3
GOLDEN GRAIN ENERGY, LLC
Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | January 31, 2020 | October 31, 2019 | ||||||
(Unaudited) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 5,442,706 | $ | 6,188,819 | ||||
Accrued expenses | 3,000,983 | 2,827,791 | ||||||
Other current liabilities | 131,920 | 123,590 | ||||||
Current portion operating lease liabilities | 1,048,441 | — | ||||||
Total current liabilities | 9,624,050 | 9,140,200 | ||||||
Long-term Liabilities | ||||||||
Long-term liabilities, deferred compensation | 500,506 | 469,040 | ||||||
Operating lease liabilities | 1,548,585 | — | ||||||
Deferred revenue, net of current portion | 1,431,816 | — | ||||||
Total long-term liabilities | 3,480,907 | 469,040 | ||||||
Commitments and Contingencies | ||||||||
Members' Equity (19,873,000 units issued and outstanding) | 123,835,361 | 120,421,143 | ||||||
Total Liabilities and Members’ Equity | $ | 136,940,318 | $ | 130,030,383 | ||||
Notes to the Financial Statements are an integral part of these Statements.
4
GOLDEN GRAIN ENERGY, LLC
Statements of Operations (Unaudited)
Three Months Ended | Three Months Ended | |||||||
January 31, 2020 | January 31, 2019 | |||||||
Revenues | $ | 57,432,202 | $ | 46,196,377 | ||||
Cost of Goods Sold | 54,826,337 | 46,817,643 | ||||||
Gross Profit (Loss) | 2,605,865 | (621,266 | ) | |||||
Operating Expenses | 1,273,962 | 971,396 | ||||||
Operating Income (Loss) | 1,331,903 | (1,592,662 | ) | |||||
Other Income | ||||||||
Other income | 8,447 | 200,826 | ||||||
Interest income | 58,598 | 51,668 | ||||||
Equity in net income of investments | 2,015,270 | 160,897 | ||||||
Total Other Income | 2,082,315 | 413,391 | ||||||
Net Income (Loss) | $ | 3,414,218 | $ | (1,179,271 | ) | |||
Basic & diluted net income (loss) per unit | $ | 0.17 | $ | (0.06 | ) | |||
Weighted average units outstanding for the calculation of basic & diluted net income (loss) per unit | 19,873,000 | 19,873,000 | ||||||
Distributions Per Unit for Class A & B | $ | — | $ | 0.25 | ||||
Notes to the Financial Statements are an integral part of these Statements.
5
GOLDEN GRAIN ENERGY, LLC
Statements of Changes in Members' Equity
Members' Equity | |||
Balance - October 31, 2018 | $ | 127,101,795 | |
Net loss for the three-month period ended January 31, 2019 | (1,179,271 | ) | |
Member distributions | (4,968,250 | ) | |
Balance - January 31, 2019 | $ | 120,954,274 | |
Members' Equity | |||
Balance - October 31, 2019 | $ | 120,421,143 | |
Net income for the three-month period ended January 31, 2020 | 3,414,218 | ||
Balance - January 31, 2020 | $ | 123,835,361 | |
Notes to Financial Statements are an integral part of this Statement.
6
GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows (Unaudited)
Three Months Ended | Three Months Ended | |||||||
January 31, 2020 | January 31, 2019 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income (loss) | $ | 3,414,218 | $ | (1,179,271 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,254,569 | 2,489,177 | ||||||
Unrealized loss on risk management & marketable securities | 64,131 | 148,841 | ||||||
Change in accretion of interest on grant & note receivable | — | (2,326 | ) | |||||
Distributions in excess of earnings from investments | 621,595 | 658,858 | ||||||
Proceeds from insurance claims and business interruption | — | 3,000,000 | ||||||
Change in deferred compensation | — | (58,649 | ) | |||||
Change in assets and liabilities | ||||||||
Accounts receivable | (3,391,654 | ) | (1,190,618 | ) | ||||
Inventory | 1,275,964 | 195,768 | ||||||
Prepaid expenses and other | (1,096,904 | ) | (169,285 | ) | ||||
Accounts payable | (109,096 | ) | 772,409 | |||||
Accrued expenses | 173,192 | (134,561 | ) | |||||
Net cash provided by operating activities | 3,206,015 | 4,530,343 | ||||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | (2,625,934 | ) | (3,437,041 | ) | ||||
Purchase of marketable securities | — | (7,515 | ) | |||||
Proceeds from sale of marketable securities | — | 3,701,191 | ||||||
Net cash provided by (used in) investing activities | (2,625,934 | ) | 256,635 | |||||
Cash Flows from Financing Activities | ||||||||
Distributions to members | — | (4,968,250 | ) | |||||
Payments received on grant receivable | — | 84,666 | ||||||
Net cash (used in) financing activities | — | (4,883,584 | ) | |||||
Net Increase (Decrease) in Cash and Equivalents | 580,081 | (96,606 | ) | |||||
Cash and Equivalents – Beginning of Period | 15,937,266 | 9,322,805 | ||||||
Cash and Equivalents – End of Period | $ | 16,517,347 | $ | 9,226,199 | ||||
Supplemental Cash Flow Information | ||||||||
Cash paid for interest | $ | 12,838 | $ | 12,858 | ||||
Supplemental Disclosure of Noncash Operating, Investing & Financing Activities | ||||||||
Accounts payable related to construction in progress | $ | 300,554 | $ | 578,402 | ||||
Deferred revenue received through grant receivable | 1,400,722 | — | ||||||
Initial right-of-use asset and liability recorded | 2,889,785 | — | ||||||
Distributions declared and unpaid by equity method investee | 540,000 | 660,000 | ||||||
Notes to the Financial Statements are an integral part of these Statements.
7
GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and notes disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended October 31, 2019, contained in the Company's annual report on Form 10-K for 2019.
In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.
Nature of Business
Golden Grain Energy, LLC ("Golden Grain Energy" and "the Company") is an approximately 120 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol, distiller grains with solubles and corn oil primarily in the continental United States. The Company also holds several investments in various companies that focus on ethanol production, marketing and/or logistics.
Organization
Golden Grain Energy is organized as an Iowa limited liability company. The members' liability is limited as specified in Golden Grain Energy's operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Cash and Equivalents
The Company's cash balances are maintained in bank depositories and regularly exceed federally insured limits. The Company has not experienced any losses in connection with these balances. Also included in cash and equivalents are highly liquid investments, that are readily convertible into known amounts of cash, which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
Marketable Securities
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short term or long term on the Balance Sheet, based on contractual maturity date and are stated at cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings.
Marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds. For the periods ended January 31, 2020 and 2019, there was no other-than-temporary impairment recognized. Mutual funds are considered trading securities which are measured at fair value using prices obtained from pricing services. Any unrealized or realized gains and losses on the trading securities are recorded as part of other income. The Company recorded interest, dividends and net realized and unrealized gains (losses) from these investments as part of other income as follows:
8
GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
Three Months Ended January 31, | ||||||||
2020 | 2019 | |||||||
Net earnings on marketable securities | $ | 8,000 | $ | 201,000 | ||||
Marketable Securities | ||||||||
As of | Cost | Fair Market Value | ||||||
January 31, 2020 | $ | 772,000 | $ | 911,000 | ||||
October 31, 2019 | $ | 767,000 | $ | 871,000 | ||||
Accounts Receivable
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.
Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. Distributions or dividends received in excess of the carrying value are recognized as income in the statement of operations. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
The fiscal years of Renewable Products Marketing Group, LLC (RPMG) and Guardian Energy Janesville, LLC end on September 30 and the fiscal years of Absolute Energy, LLC, Homeland Energy Solutions, LLC and Lawrenceville Tank, LLC, end on December 31. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company's statement of operations for the period ended January 31, 2020, for all companies, is based on the investee's results for the three months ended December 31, 2019.
Revenue and Cost Recognition
In the first quarter of 2019, the Company adopted Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606). Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and with consideration of short-term nature of customer payments, the Company has adopted the practical expedient related to the financing component of the contract. The Company applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. The Company generally has a single performance obligation in its arrangements with customers. The Company believes for its contracts with customers, control is transferred at a point in time, typically upon delivery to the customers. When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Adopting the practical expedient for contract costs, the Company expenses contract costs when incurred because the amortization period would have been less than one year. The implementation of the new standard does not have any material impact on the measurement or recognition of revenue of prior periods, however additional disclosures have been added in accordance with the ASU.
Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. The principal activities which we generate revenue include: sales of ethanol, sales of distiller grains and sales of corn oil.
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The disaggregation of revenue according to product line, along with accounts receivable from contracts with customers, is as disclosed in Note 5. Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol, distiller grains and corn oil are recorded based on the net selling price reported to the
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
Company from its marketer. Railcar lease costs incurred by the Company in the sale and shipment of distiller grain products are included in cost of goods sold.
Based upon the timing of the transfer of control of our products to our customers, there are no contract assets or liabilities as of January 31, 2020.
Inventory
Inventories are generally valued at the lower of weighted average cost or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.
Grant Receivable and Deferred Revenue
Grants receivables are recorded when the payments to be received can be estimated and when payment is reasonably assured. The Company recorded a grant receivable and corresponding deferred revenue of approximately $1,400,000 associated with an agreement approved in December 2019 for tax increment financing monies associated with the plant expansion that was completed in January 2020 to be received over a 10-year period for the tax increment financing monies. These grants were recorded at their net present value using a discount rate of approximately 5%. Related deferred revenue was recorded and is being amortized into income as a reduction of property taxes over the life of the grant. As of January 31, 2020 the grant receivable was approximately $1,400,000 and was included in long-term other assets and the corresponding current and long-term portions of deferred revenue was approximately $1,400,000.
Property & Equipment
Property and equipment are stated at historical cost. Significant additions and betterments are capitalized, while expenditures for maintenance and repairs are charged to operations when incurred. The Company uses the straight-line method of computing depreciation over the estimated useful lives between 3 and 40 years.
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset group may not be recoverable. If circumstances require a long-lived asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset group to the carrying value of the asset group. If the carrying value of the asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Investment in commodities contracts, derivative instruments and hedging activities
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.
The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company occasionally also enters into derivative contracts to hedge its exposure to price risk as it relates to ethanol sales. As part of its risk management process, the Company uses futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage its risk related to pricing of inventories. All of the Company's derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments net of cash due from/to broker.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
Net earnings (loss) per unit
Basic and diluted earnings (loss) per unit are computed using the weighted-average number of Class A and B units outstanding during the period.
Fair Value
Financial instruments include cash and equivalents, marketable securities, receivables, accounts payable, accrued expenses and derivative instruments. The fair value of marketable securities and derivative financial instruments is based on quoted market prices, as disclosed in Note 8. The fair value, determined using level 3 inputs, of all other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three months ended January 31, 2020, ethanol sales accounted for approximately 79% of total revenue, distiller grains sales accounted for approximately 17% of total revenue and corn oil sales accounted for approximately 4% of total revenue while corn costs averaged approximately 79% of cost of goods sold.
The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets with ethanol selling, in general, for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
Recent Accounting Pronouncements
In February 2016, FASB issued ASU No. 2016-02 "Leases" ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted cash flow basis; and (2) a "right of use" asset, which is an asset that represents the lessee's right to use the specified asset for the lease term. The Company adopted this accounting standard effective November 1, 2019. Upon adoption, the Company elected a practical expedient which allows existing leases to retain their classification as operating leases. The Company has elected to account for lease and related nonlease components as a single lease component. See Note 6 for more detailed information regarding leases.
In August 2018, FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). ASU 2018-13 changes some of the disclosure requirements related to fair value measurements related to the Level 1, 2 and 3 investments. ASU 2018-13 is effective for fiscal
years beginning after December 15, 2019, and for interim periods within that fiscal year. The Company is currently evaluating the impact of its pending adoption of the new standard on the financial statement.
2. INVENTORY
Inventory consisted of the following as of January 31, 2020 and October 31, 2019:
January 31, 2020 | October 31, 2019 | |||||||
Raw Materials | $ | 3,993,021 | $ | 4,259,459 | ||||
Work in Process | 1,820,729 | 1,877,354 | ||||||
Finished Goods | 1,444,644 | 2,397,545 | ||||||
Totals | $ | 7,258,394 | $ | 8,534,358 | ||||
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
3. BANK FINANCING
The Company has entered into a master loan agreement with Farm Credit Services of America (FLCA) which includes revolving term loans with original maximum borrowings of $35 million and which currently has availability of $10 million and matures on September 1, 2020. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (4.82% as of January 31, 2020). The borrowings are secured by substantially all the assets of the Company. The credit agreements are subject to covenants, including requiring the Company to maintain various financial ratios, as well as certain distribution limitations. As of January 31, 2020, the Company was in compliance with all of the loan covenants. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of any outstanding principal balances on the loans and/or imposition of fees and penalties. As of January 31, 2020 and October 31, 2019, the Company had no outstanding borrowings.
4. RELATED PARTY TRANSACTIONS
The Company purchased corn and materials from members of its Board of Directors or Risk Management Committee that own or manage elevators and construction companies (see Note 5). The Company also purchased ingredients from RPMG. Purchases from the related parties during the three months ended January 31, 2020 totaled approximately $11,042,000. Purchases from the related parties during the three months ended January 31, 2019 totaled approximately $9,113,000. As of January 31, 2020 and October 31, 2019, the amount owed to related parties was approximately $496,000 and $547,000, respectively (See Note 5).
5. COMMITMENTS, CONTINGENCIES, AGREEMENTS AND RELATED PARTY
Ethanol, Distiller Grains and Corn Oil marketing agreements and major customers
The Company has entered into marketing agreements with a marketing company, in which the Company has an investment, for the exclusive rights to market, sell and distribute the entire ethanol, distiller grains and corn oil inventory produced by the Company. The marketing fees are presented net in revenues.
Approximate sales and marketing fees related to the agreements in place are as follows:
Three Months Ended January 31, | ||||||||
2020 | 2019 | |||||||
Sales ethanol | $ | 45,561,000 | $ | 34,912,000 | ||||
Sales distiller grains | 9,941,000 | 9,451,000 | ||||||
Sales corn oil | 2,220,000 | 1,809,000 | ||||||
Marketing fees-ethanol | $ | 60,000 | $ | 61,000 | ||||
Marketing fees-distiller grains | 74,000 | 71,000 | ||||||
Marketing fees-corn oil | 20,000 | 14,000 | ||||||
As of | January 31, 2020 | October 31, 2019 | ||||||
Amount due from RPMG | $ | 5,877,000 | $ | 2,489,000 | ||||
The Company entered into multiple construction agreements as part of plans to expand plant capacity and build a new entrance road and administration building. The Company has incurred costs related to the expansion project totaling approximately $23.1 million of which approximately $7.9 million is to a related party. The current planned expansion project costs are estimated at approximately $24.0 million, including remaining commitments of approximately $0.5 million. The project is materially completed including the entrance road and administration building which were materially completed in January 2020. The final phase of the expansion to increase production capacity is currently being reevaluated. No other contracts have been executed.
12
GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
6. LEASE OBLIGATIONS
Effective November 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The Company elected the option to apply the transition provisions at the adoption date instead of the earliest comparative period presented in the financial statements. By making this election, the Company has not applied retrospective reporting for prior years. The Company elected the short-term lease exception provided for in the standard and therefore only recognized right-of-use assets and lease liabilities for leases with a term greater than one year. The Company elected the package of practical expedients to not re-evaluate existing contracts as containing a lease or the lease classification unless it was not previously assessed against the lease criteria. In addition, the Company did not reassess initial direct costs for any existing leases.
A lease exists when a contract conveys to a party the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company recognized a lease liability at the lease commencement date, as the present value of future lease payments, using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis. A lease asset is recognized based on the lease liability value and adjusted for any prepaid lease payments, initial direct costs, or lease incentive amounts. The lease term at the commencement date includes any renewal options or termination options when it is reasonably certain that the Company will exercise or not exercise those options, respectively.
The Company leases rail cars and rail moving equipment with original terms up to 5 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. These costs are in addition to regular lease payments and are not included in lease expense. Rent expense incurred for the operating leases during the three months ended January 31, 2020 was approximately $354,000, and for the same period in 2019 was approximately $383,000. The lease agreements have maturity dates ranging from May 2020 to May 2024. The weighted average remaining life of the lease term for these leases was 1.80 years as of January 31, 2020.
The discount rate used in determining the lease liability for each individual lease was the Company's estimated incremental borrowing rate of 4.95%. The right-of-use asset operating lease, included in other assets, and operating lease liabilities, included in current and long term liabilities was $2,597,000 as of January 31, 2020.
At January 31, 2020, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month period ended January 31:
2021 | $ | 1,152,000 | ||
2022 | 782,000 | |||
2023 | 528,000 | |||
2024 | 268,000 | |||
2025 | 67,000 | |||
Total lease commitments | $ | 2,797,000 | ||
A reconciliation of the undiscounted future payments in the schedule above and the lease liabilities recognized in the consolidated balance sheet as of January 31, 2020, is shown below.
Undiscounted future payments | $ | 2,797,000 | ||
Discount effect | (200,000 | ) | ||
Discounted future payments | $ | 2,597,000 | ||
7. RISK MANAGEMENT
The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of contracts related to corn and natural gas are recorded in cost of goods sold and changes in market prices of contracts related to sale of ethanol are recorded in revenues.
The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for periods ended January 31, 2020 and 2019 and the fair value of derivatives as of January 31, 2020 and October 31, 2019:
Income Statement Classification | Realized Gain (Loss) | Change in Unrealized Gain (Loss) | Total Gain (Loss) | |||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||
Commodity Contracts for the | Revenue | $ | (438,000 | ) | $ | 403,000 | $ | (35,000 | ) | |||||
three months ended January 31, 2020 | Cost of Goods Sold | 1,376,000 | (1,086,000 | ) | 290,000 | |||||||||
Total | $ | 938,000 | $ | (683,000 | ) | $ | 255,000 | |||||||
Commodity Contracts for the | Revenue | $ | (34,000 | ) | $ | 205,000 | $ | 171,000 | ||||||
three months ended January 31, 2019 | Cost of Goods Sold | 585,000 | (375,000 | ) | 210,000 | |||||||||
Total | $ | 551,000 | $ | (170,000 | ) | $ | 381,000 | |||||||
Balance Sheet Classification | January 31, 2020 | October 31, 2019 | ||||||||
Futures and option contracts | ||||||||||
In gain position | $ | 1,220,000 | $ | 1,930,000 | ||||||
In loss position | (581,000 | ) | (608,000 | ) | ||||||
Cash held by (due to) broker | 404,000 | (206,000 | ) | |||||||
Current Asset | $ | 1,043,000 | $ | 1,116,000 | ||||||
As of January 31, 2020, the Company had the following approximate outstanding purchase and sale commitments, of which all sales commitments and approximately $6,696,000 of the purchase commitments were with related parties.
Commitments Through | Amount | |||||
Sale commitments | ||||||
Corn Oil - fixed price | February 2020 | $ | 1,040,000 | |||
Distiller Grains - fixed price | March 2020 | 3,907,000 | ||||
Purchase commitments | ||||||
Corn - fixed price | October 2020 | $ | 5,468,000 | |||
Corn - basis contract | July 2020 | 14,130,000 | ||||
Natural gas - fixed price | July 2021 | 7,849,000 | ||||
As of January 31, 2020, the Company has fixed price futures and forward contracts in place for approximately 13% of its anticipated corn needs and 6% of its ethanol sales for the next 12 months with no open positions beyond that period. As of January 31, 2020, the Company has fixed price futures and forward contracts in place for approximately 68% of its natural gas needs for the next 12 months and approximately 28% of its natural gas needs for the next 24 months with no open positions beyond that period.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
8. FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Marketable Securities: The Company's investments in short-term liquid investments (e.g. mutual funds), are classified within Level 1, carried at fair value based on the quoted market prices.
Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from markets such as the CME and NYMEX. Crush swaps are bundled contracts or combined contracts that include a portion of corn, ethanol and natural gas rolled into a single trading instrument. These contracts are reported at fair value utilizing Level 2 inputs and are based on the various trading activity of the components of each segment of the bundled contract.
The following table summarizes financial assets and financial liabilities measured at the approximate fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Marketable securities: | ||||||||||||||||
Assets, January 31, 2020 | $ | 911,000 | $ | 911,000 | $ | — | $ | — | ||||||||
Assets, October 31, 2019 | 871,000 | 871,000 | — | — | ||||||||||||
Derivative financial instruments: | ||||||||||||||||
January 31, 2020 | ||||||||||||||||
Assets | $ | 1,220,000 | $ | 738,000 | $ | 482,000 | $ | — | ||||||||
Liabilities | (581,000 | ) | (262,000 | ) | (319,000 | ) | — | |||||||||
October 31, 2019 | ||||||||||||||||
Assets | $ | 1,930,000 | $ | 1,650,000 | $ | 280,000 | $ | — | ||||||||
Liabilities | (608,000 | ) | (80,000 | ) | (528,000 | ) | — | |||||||||
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2020
9. INVESTMENTS
Condensed, combined unaudited financial information of the Company’s investments in Absolute Energy, Homeland Energy Solutions, Guardian Energy, Lawrenceville Tank and RPMG is as follows (in 000’s):
Balance Sheet | December 31, 2019 | September 30, 2019 | ||||||
Current Assets | $ | 337,219 | $ | 337,643 | ||||
Other Assets | 254,437 | 258,655 | ||||||
Current Liabilities | 238,144 | 224,439 | ||||||
Long-term Debt | 50,182 | 55,368 | ||||||
Members’ Equity | 303,330 | 316,491 | ||||||
Three Months Ended December 31, | ||||||||
Income Statement | 2019 | 2018 | ||||||
Revenue | $ | 217,042 | $ | 178,823 | ||||
Gross Profit | 23,252 | 4,216 | ||||||
Net Income (Loss) | 21,062 | (458 | ) | |||||
The Company recorded equity in net income of approximately (in 000's):
Three Months Ended January 31, | ||||||||
Equity in Net Income (Loss) | 2020 | 2019 | ||||||
Absolute Energy | $ | 477 | $ | 208 | ||||
Guardian Energy | 959 | — | ||||||
Homeland Energy Solutions | 525 | (166 | ) | |||||
Other | 54 | 119 | ||||||
Total | $ | 2,015 | $ | 161 | ||||
10. SUBSEQUENT EVENTS
On February 17, 2020, the board of directors declared a cash distribution of $0.10 per membership unit to the holders of Class A and Class B units of record at the close of business on February 17, 2020, for a total distribution of $1,987,300. The distribution will be recorded in the Company's second quarter financial statements for the 2020 fiscal year and will be paid in March 2020.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.
• | Demand destruction from the small refinery exemptions to the RFS issued by the EPA; |
• | The impact the Chinese distiller grains and ethanol tariffs have on ethanol and distiller grains prices in the United States; |
• | The impact lower gasoline prices have on the market price of ethanol and our ability to profitably operate the ethanol plant; |
• | Changes in the availability and price of corn and natural gas; |
• | Any elimination or reduction of the renewable fuels use requirements under the RFS; |
• | The impact of the ethanol export and import markets; |
• | The impact of the LCFS in certain parts of the country; |
• | Positions the EPA takes on topics such as RVO, RINS, and SREs; |
• | Our ability to transport our finished goods in order to continue to operate our ethanol plant at capacity; |
• | Our ability to profitably operate the ethanol plant, including the sale of distiller grains and corn oil, and maintain a positive spread between the selling price of our products and our raw material costs; |
• | The ability of the ethanol industry to generate additional demand through higher level blends of ethanol, including E15 and E85; |
• | The effect our hedging activities have on our financial performance and cash flows; |
• | Ethanol, distiller grains and corn oil supply exceeding demand and corresponding price reductions; |
• | Our ability to generate free cash flow to invest in our business, service our debt and satisfy the financial covenants contained in our credit agreement with our lender; |
• | Changes in our business strategy, capital improvements or development plans; |
• | Changes in plant production capacity or technical difficulties in operating the plant; |
• | Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries; |
• | Changes and advances in ethanol production technology; |
• | Changes in interest rates or the lack of credit availability; and |
• | Our ability to retain key employees and maintain labor relations. |
Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements with these cautionary statements. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.
Overview
Golden Grain Energy, LLC was formed as an Iowa limited liability company on March 18, 2002, for the purpose of constructing, owning and operating a fuel-grade ethanol plant near Mason City in north central Iowa. Since December 2004, we have been engaged in the production of ethanol and distiller grains at the plant and have produced corn oil since February 2009. References to "we," "us," "our" and the "Company" refer to Golden Grain Energy, LLC. We have capacity to produce approximately 120 million gallons of ethanol per year.
Our revenue is derived primarily from the sale and distribution of our ethanol, distiller grains and corn oil. We market our products through Renewable Products Marketing Group, Inc. ("RPMG"), a professional third party marketer. We are an equity
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owner of RPMG, LLC, the parent company of RPMG, which allows us to realize favorable marketing fees in the sale of our ethanol, distiller grains and corn oil.
On November 19, 2018, our board of directors declared a distribution of $0.25 per membership unit for members of record as of November 19, 2018. The total amount of the distribution was $4,968,250 which was paid in December 2018. On February 17, 2020, our board of directors declared a distribution of $0.10 per membership unit for members of record as of February 17, 2020. The total amount of the distribution was $1,9873,000 which will be paid in March 2020.
Results of Operations
Comparison of the Three Months Ended January 31, 2020 and 2019
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended January 31, 2020 and 2019:
2020 | 2019 | |||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||
Revenues | $ | 57,432,202 | 100.0 | $ | 46,196,377 | 100.0 | ||||||
Cost of Goods Sold | 54,826,337 | 95.5 | 46,817,643 | 101.3 | ||||||||
Gross Profit (Loss) | 2,605,865 | 4.5 | (621,266 | ) | (1.3 | ) | ||||||
Operating Expenses | 1,273,962 | 2.2 | 971,396 | 2.1 | ||||||||
Operating Income (Loss) | 1,331,903 | 2.3 | (1,592,662 | ) | (3.4 | ) | ||||||
Other Income | 2,082,315 | 3.6 | 413,391 | 0.9 | ||||||||
Net Income (Loss) | $ | 3,414,218 | 5.9 | $ | (1,179,271 | ) | (2.6 | ) | ||||
Revenues. Our total revenue was higher for our first quarter of 2020 compared to the same period of 2019 due to the higher quantities of ethanol sold and higher average price for our products. For our first quarter of 2020, ethanol sales accounted for approximately 79% of our total revenue, distiller grains sales accounted for approximately 17% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our first quarter of 2019, ethanol sales accounted for approximately 76% of our total revenue, distiller grains sales accounted for approximately 20% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue.
The average price per gallon we received for our ethanol was approximately 16% higher for our first quarter of 2020 compared to the same period of 2019. Management attributes this increase in the average price we received for our ethanol to a temporary spike in commodity markets and our ability to sell into a different market which historically has a higher ethanol price. Uncertainty has existed throughout our last several fiscal years related to whether the EPA would grant additional Small Refiner Exemption (SRE) waivers as part of the Renewable Fuels Standard (RFS). SRE waivers have been granted at high levels which is resulting in demand destruction. Management expects that the ethanol price has the potential to be negatively impacted by these waivers in our 2020 fiscal year and beyond.
We sold approximately 12% more gallons of ethanol during our first quarter of 2020 compared to the same period of 2019. Management attributes this increase in ethanol sales with increased production levels. Our total ethanol production was 9% more during our first quarter of 2020 as compared to the same period of 2019. Management attributes this increase to capital projects implemented during our 2019 fiscal year that allow for additional production capacity. Management anticipates that our ethanol sales and production will be similar during the remaining quarters of our 2020 fiscal year compared to our first fiscal quarter of 2020.
During our first quarter of 2020, we experienced combined realized and unrealized loss on our ethanol derivatives of approximately $35,000 which decreased our revenue. By comparison, we experienced combined realized and unrealized gain of $171,000 on ethanol derivative instruments during the same period of 2019.
The average price per ton we received for our dried distillers grains was approximately 4% lower for our first quarter of 2020 compared to the same period of 2019. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 9% lower for our first quarter of 2020 compared to the same period of 2019. Management attributes these lower distiller grains prices to a reduction in exports stemming from negative trade relations as well as a reduction in livestock feed demand in foreign countries. Distiller grains are typically used as a feed substitute for corn. Management anticipates distiller
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grains prices will remain steady unless China reenters the distillers grains market which could result in a significant increase in distiller grains demand.
Our dried distiller grains production increased by approximately 12% during our first quarter of 2020 compared to the same period of 2019. Management attributes this increase to higher ethanol production during the period. Management anticipates distiller grains production to be proportionate to ethanol production, which may or may not be higher for the remaining quarters of 2020 depending on the margin environment and production run rates.
We sold approximately 35% more pounds of corn oil during our first quarter of 2020 compared to the same period of 2019. This increase in corn oil sales is in direct relationship to the increase in ethanol production for the period. In addition, we had increased uptime of our corn oil extraction machines during our first quarter of 2020 compared to the same period of 2019. The average price per pound we received for our corn oil was approximately 10% lower for our first quarter of 2020 compared to the same period of 2019. This decrease in corn oil prices occurred due to an increase in the supply for corn oil and decrease in demand due to uncertainty over the blenders tax credit which slowed usage of corn oil in biodiesel production. Management anticipates that corn oil prices will be steady or higher during the remaining quarters of our 2020 fiscal year as a result of the blenders tax credit being renewed.
Cost of Goods Sold. Our cost of goods sold was higher for our first quarter of 2020 compared to the same period of 2019 due primarily to an increase in the amount of corn ground due to an increase in ethanol production during the 2020 period. Our average cost per bushel of corn was approximately 7% higher during our first quarter of 2020 compared to the same period of 2019 due to tighter local supplies of corn and decreased corn production primarily in the eastern corn belt during the fall of 2019. Management anticipates that global corn supplies will remain favorable during the remaining quarters of our 2020 fiscal year with potentially tighter local supplies. Volatility in prices, specifically local basis levels, could be impacted by the amount of corn in our local draw area which could result in higher corn prices during the remaining quarters of our 2020 fiscal year. In addition, continued trade policy, global health issues and tariffs may impact the corn market and changes in those policies may have a significant impact on the price of corn.
We consumed approximately 10% more bushels of corn during our first quarter of 2020 compared to the same period of 2019 due to increased ethanol production. Management anticipates consistent corn consumption during the remaining quarters of our 2020 fiscal year, provided that we can maintain operating margins or cash flow that allow us to continue to operate the ethanol plant at capacity.
Our natural gas costs decreased by approximately 24% during our first quarter of 2020 compared to the same period of 2019. Our usage was 9% higher, and the average price we paid per MMBtu of natural gas was approximately 30% lower during our first quarter of 2020 compared to the same period of 2019. Management attributes this increase in natural gas usage with higher ethanol production and the decrease in the natural gas price with increases in natural gas production and supplies. Management expects stable natural gas prices during the remaining quarters of our 2020 fiscal year due to current supply levels and derivative positions of natural gas.
We experienced combined realized and unrealized gains of approximately $290,000 for our first quarter of 2020 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $210,000 of combined realized and unrealized gains for the same period of 2019 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.
Operating Expenses. Our operating expenses were higher during our first quarter of 2020 compared to the same period of 2019 due to increases in dues to trade organizations and increases in insurance expense offset by a reduction in personnel expense. Management anticipates that our operating expenses will be higher during the remaining quarters of our 2020 fiscal year compared to our 2019 fiscal year due to higher insurance rates for our 2020 fiscal year compared to 2019.
Other Income (Expense). Other income was higher for our first quarter of 2020 compared to the same period of 2019, due primarily to an increase in equity income from investments partially offset by a decrease in unrealized earnings from marketable securities. Management anticipates volatility in income from our investments during our 2020 fiscal year compared to our 2019 fiscal year due to current market factors. Our investments are in other companies involved in the ethanol industry which, in general, are expected to experience significant volatility in their operating margins during the foreseeable future.
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Changes in Financial Condition for the Three Months Ended January 31, 2020
Current Assets. We had slightly more cash and equivalents and marketable securities at January 31, 2020 compared to October 31, 2019. This increase in our cash and marketable security position is due primarily to positive margins during the first fiscal quarter of 2020 in addition to receiving nearly $2.6 million in cash from our investments in other companies. These increases were offset by approximately $2.6 million of cash used for capital projects primarily in connection to the administration building and new entrance road. The value of our accounts receivable was higher at January 31, 2020 compared to October 31, 2019 due to timing of shipments and payments for products. The value of our inventory was lower due to less ethanol and corn on hand at January 31, 2020 compared to October 31, 2019. Prepaid expenses is higher at January 31, 2020 compared to October 31, 2019 due to payment of our annual insurance premiums in the first fiscal quarter of 2020.
Property and Equipment. The net value of our property and equipment was lower at January 31, 2020 compared to October 31, 2019 due to depreciation offset by approximately $2.6 million of capital projects primarily related to our road and administration building construction. We had approximately $2.2 million in construction in progress at January 31, 2020 primarily related to plant improvement projects specifically in the areas of fermentation and process equipment.
Other Assets. Our other assets were higher at January 31, 2020 compared to October 31, 2019 due to lease right of use assets resulting from a new accounting pronouncement and the addition of a grant receivable for property tax rebate associated with our expansion. These were offset by a reduction in the carrying value of our investments, which decreased by the amount of distributions received in excess of earnings from investments.
Current Liabilities. Our current liabilities at January 31, 2020 were slightly higher compared to October 31, 2019 due to timing of payment on accounts payable including payments for corn.
Long-term Liabilities. Our long-term liabilities increased at January 31, 2020 and October 31, 2019 from the adoption of the new operating lease accounting pronouncement and the deferred revenue associated with the property tax rebate as part of the development agreement with the City of Mason City.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash generated from our operations to continue to operate the ethanol plant at capacity for the next 12 months. However, additional funds may be necessary to fund plant projects or if the current negative margin environment continues for an extended period of time. As of January 31, 2020, we had $10,000,000 available pursuant to our revolving term loan and approximately $17.4 million in cash and equivalents and marketable securities.
We recently completed a multiple phase expansion of the ethanol plant. The expansion was approximately $24 million, including the remaining commitment of approximately $0.5 million, all of which was paid through operating income. The final phase of the expansion to increase capacity by approximately 30 million gallons is currently being reevaluated. However, we may secure additional debt financing, or use existing credit facilities, in the future to pay a portion of the costs associated with the project. Management continually evaluates conditions in the ethanol industry and explores opportunities to improve the efficiency and profitability of our operations which may require additional capital expenditures.
We have a program of investing our excess cash in short-term liquid investments which allows us to access the cash when we need it and preserve our capital while limiting our loss exposure. Only a portion of our cash balances are federally insured when they are deposited with our bank. As a result, our plan is intended to decrease the risk we face when we were concentrating our cash balances with one financial institution.
The following table shows our cash flows for the three months ended January 31, 2020 and 2019:
Three Months Ended January 31, | |||||||
2020 | 2019 | ||||||
Net cash provided by operating activities | $ | 3,206,015 | $ | 4,530,343 | |||
Net cash provided by (used in) investing activities | (2,625,934 | ) | 256,635 | ||||
Net cash (used in) financing activities | — | (4,883,584 | ) | ||||
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Cash Flow From Operations
Our cash flows from operations for the three months ended January 31, 2020 were lower compared to the same period of 2019 due primarily to higher net income offset by changes in working capital components. In addition, we also received an insurance payment during our three months ended January 31, 2019 consisting primarily of equipment repair costs, professional fees and loss of business income from a property and business interruption insurance claims filed in July 2018.
Cash Flow From Investing Activities
We used more cash for investing activities during our three months ended January 31, 2020 compared to the same period of 2019 primarily due to a decrease in proceeds from the sale of marketable securities offset by slight a decrease in capital expenditures. Our capital expenditures during our 2020 and 2019 fiscal years were primarily for plant improvements associated with the expansion of production and construction of a new road and administration building.
Cash Flow From Financing Activities.
During our three months ended January 31, 2020, we used less cash for financing activities due to less distributions being paid in 2020 as compared to the same period of 2019.
Short-Term and Long-Term Debt Sources
In exchange for our credit facility with Farm Credit, we executed a mortgage in favor of Farm Credit covering all of our real property and granted Farm Credit a security interest in all of our equipment and other assets. In the event we default on our loans with Farm Credit, Farm Credit may foreclose on our assets, including both our real property and our machinery and equipment.
Variable Line of Credit
We have a long-term line of credit. Interest on this loan accrues at 3.15% above the One-Month London Interbank Offered Rate (LIBOR). The interest rate is subject to weekly adjustment. We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. During the first fiscal quarter of 2016, we executed an amendment to our credit agreements with Farm Credit which adjusted our loan covenants related to issuing distributions to our members and changed the terms of our revolving line of credit. We have $10 million available pursuant to this long-term revolving line of credit until it matures on September 1, 2020. We agreed to pay an annual fee of 0.5% of the unused portion of this loan. As of January 31, 2020, we had none outstanding on this loan with a potential accrued interest rate of 4.82% per year. As of January 31, 2020, we had $10,000,000 available to be drawn on this loan.
Administrative Agency Agreement
As part of the Farm Credit loan closing, we entered into an Administrative Agency Agreement with CoBank, ACP ("CoBank"). CoBank purchased a participation interest in the Farm Credit loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for Farm Credit with respect to our loans. We agreed to pay CoBank an annual fee of $5,000 as the agent for Farm Credit.
Covenants
Our credit agreements with Farm Credit are subject to numerous covenants requiring us to maintain various financial ratios. As of January 31, 2020, we were in compliance with all of our loan covenants with Farm Credit. Based on current management projections, we anticipate that we will be in compliance with our loan covenants for the next 12 months and beyond.
Grants and Government Programs
In December 2019, our economic development grant was approved and equals the amount of tax assessments imposed by Cerro Gordo County, the county in which our ethanol plant is located, on our ethanol plant expansion that took place during our 2019 fiscal year and was completed in January of 2020. Based on the agreement, the total amount of these grants is expected to be approximately $2 million, which will be paid semi-annually over a 10-year period starting in 2023 and ending with the final payment being made in 2033 or when the $2 million maximum grant has been paid.
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Critical Accounting Policies
Management uses estimates and assumptions in preparing our financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Revenue Recognition
In the first quarter of 2019, we adopted Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606). Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and with consideration of short-term nature of customer payments, we have adopted the practical expedient related to the financing component of the contract. We applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. We generally have a single performance obligation in our arrangements with customers. We believe for our contracts with customers, control is transferred at a point in time, typically upon delivery to the customers. When we perform shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Adopting the practical expedient for contract costs, our expense sales commissions when incurred because the amortization period would have been less than one year. The implementation of the new standard does not have any material impact on the measurement or recognition of revenue of prior periods, however additional disclosures have been added in accordance with the ASU.
Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. The principal activities which we generate revenue include: sales of ethanol, sales of distiller grains and sales of corn oil.
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The disaggregation of revenue according to product line, along with accounts receivable from contracts with customers. Shipping costs we incurred in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol, distiller grains and corn oil are recorded based on the net selling price reported to the Company from its marketer. Railcar lease costs we incurred in the sale and shipment of distiller grain products are included in cost of goods sold.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
We evaluate contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.
We enter into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We occasionally also enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. As part of our risk management process, we use futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage our risk related to pricing of inventories. All of our derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments.
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Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
Off-Balance Sheet Arrangements.
We currently have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to interest rate changes as we did not have any amounts outstanding on our variable interest rate loans as of January 31, 2020. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of January 31, 2020, we had price protection or delivery protection in place for approximately 13% of our anticipated corn needs, 68% of our natural gas needs and 6% of our ethanol sales for the next 12 months and approximately 28% of our natural gas needs for the next 24 months.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of January 31, 2020, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from January 31, 2020. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Natural Gas | 2,840,000 | MMBTU | 10% | $ | 798,000 | ||||||
Ethanol | 113,070,000 | Gallons | 10% | 14,925,000 | |||||||
Corn | 34,625,000 | Bushels | 10% | 13,088,000 | |||||||
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
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such information is accumulated and communicated to our management, including our Executive Vice President and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Executive Vice President (the principal executive officer), Curtis Strong, along with our Chief Financial Officer (the principal financial officer), Christine Marchand, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of January 31, 2020. Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
For the fiscal quarter ended January 31, 2020, there has been no change in our internal control over financial reporting other than review controls in relation to adoption of ASU 2016-02, Leases (Topic 842), that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Upon adoption of ASU 2016-02, we implemented certain review controls by members of our management team; such reviews include completeness of lease schedule, including consideration of embedded leases, and accuracy and evaluation of lease terms used in calculation of related assets and liabilities, including discount rates and renewal options.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended October 31, 2019. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section included in our annual report on Form 10-K for the fiscal year ended October 31, 2019.
We are subject to global and regional economic downturns and related risks.
The level of demand for our products is affected by global and regional demographic and macroeconomic conditions. A significant downturn in global economic growth, or recessionary conditions in major geographic regions for prolonged periods, may lead to reduced demand for our products, which could have a negative effect on the market price of our products in the United States. For example, in December 2019, a novel strain of coronavirus surfaced in Wuhan, China (“COVID-19”). In just a few months, the spread of COVID-19 has resulted in businesses suspending or terminating global operations and travel, self-imposed or government-mandated quarantines, and an overall slowdown of economic activity in some areas. Cases have been confirmed worldwide, including in Japan, Italy, Brazil, Canada and the United States. To the extent that such economic conditions negatively impact consumer and business confidence, travel and consumption patterns or volumes for our products, our business and results of operations could be significantly and adversely affected.
COVID-19 may negatively impact our ability to operate our business which could decrease or eliminate the value of our units.
COVID-19 has resulted in significant uncertainty in many areas of our business. We do not know how long these conditions will last. This uncertainty is expected to negatively impact our operations. We may experience labor shortages if our employees are unable or unwilling to come to work. In addition, if our suppliers cannot deliver the supplies we need to operate our business, including corn and chemicals for our operations, we may be forced to shutdown operations or reduce production. In addition, if we are unable to ship our products because of trucking or rail shipping disruptions, it could also result in a forced shutdown or reduction of production. If we are unable to operate the ethanol plant at capacity, it may result in unfavorable operating results, especially since we will continue to pay our fixed costs of maintaining the facility. Any shutdown or reduction of production, especially for an extended period of time, could reduce or eliminate the value of our units.
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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.
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Item 5. Other Information
None.
Item 6. Exhibits.
(a) | The following exhibits are filed as part of this report. |
Exhibit No. | Exhibit | ||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101 | The following financial information from Golden Grain Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended January 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of January 31, 2020 and October 31, 2019, (ii) Statements of Operations for the three months ended January 31, 2020 and 2019, (iii) Statements of Cash Flows for the three months ended January 31, 2020 and 2019, and (iv) the Notes to Condensed Financial Statements.** | ||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GOLDEN GRAIN ENERGY, LLC | |||
Date: | March 16, 2020 | /s/ Curtis Strong | |
Curtis Strong | |||
Executive Vice-President | |||
(Principal Executive Officer) | |||
Date: | March 16, 2020 | /s/ Christine Marchand | |
Christine Marchand | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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