10-Q 1 a10-qfqe7x31x2018.htm 10-Q FQE 7-31-18 Document

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
July 31, 2018
 
 
 
OR
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the transition period from               to               .
 
 
 
COMMISSION FILE NUMBER 000-51177
 
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)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o
Accelerated Filer  o
Non-Accelerated Filer x
Smaller Reporting Company o
 
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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

As of September 14, 2018, there were 18,953,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.


1


INDEX



2


PART I    FINANCIAL INFORMATION

Item 1. Financial Statements

GOLDEN GRAIN ENERGY, LLC
Balance Sheets

 ASSETS
 
July 31, 2018
 
October 31, 2017

 
(Unaudited)
 

Current Assets
 

 

Cash and equivalents
 
$
4,923,775

 
$
17,518,187

Marketable securities
 
13,220,233

 
22,311,983

Accounts receivable
 
6,546,500

 
5,940,197

Other receivables
 
573,184

 
674,150

Derivative instruments
 
515,664

 
764,713

Inventory
 
6,630,403

 
4,304,796

Prepaid expenses and other
 
2,734,666

 
2,474,564

Total current assets
 
35,144,425

 
53,988,590


 

 

Property and Equipment
 

 

Land and land improvements
 
12,961,713

 
12,961,713

Building and grounds
 
28,617,796

 
28,617,796

Grain handling equipment
 
16,046,157

 
15,833,823

Office equipment
 
213,207

 
213,207

Plant and process equipment
 
107,164,070

 
104,222,168

Construction in progress
 
14,684,924

 
1,562,807


 
179,687,867

 
163,411,514

Less accumulated depreciation
 
106,647,098

 
99,934,025

Net property and equipment
 
73,040,769

 
63,477,489


 

 

Other Assets
 

 

Investments
 
24,574,504

 
25,009,140

Other assets
 
531,252

 
1,354,196

Total other assets
 
25,105,756

 
26,363,336


 

 

Total Assets
 
$
133,290,950

 
$
143,829,415

 
 
 
 
 


Notes to the Financial Statements are an integral part of these Statements.

3


GOLDEN GRAIN ENERGY, LLC
Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
 
July 31, 2018
 
October 31, 2017

 
(Unaudited)
 

Current Liabilities
 

 

Accounts payable
 
$
6,790,052

 
$
5,853,480

Accrued expenses
 
1,758,786

 
1,769,363

Other current liabilities
 
28,108

 
93,443

Total current liabilities
 
8,576,946

 
7,716,286


 

 

Long-term Liabilities, deferred compensation
 
539,430

 
477,883


 

 

Commitments and Contingencies
 

 


 

 

Members' Equity (19,873,000 units issued and outstanding)
 
124,174,574

 
135,635,246


 

 

Total Liabilities and Members’ Equity
 
$
133,290,950

 
$
143,829,415

 
 
 
 
 
 
 
 
 
 

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
 
Nine Months Ended
 
Nine Months Ended

 
July 31, 2018
 
July 31, 2017
 
July 31, 2018
 
July 31, 2017

 

 

 
 
 
 
Revenues
 
$
41,465,388

 
$
49,760,291

 
$
134,830,955

 
$
156,784,396


 

 

 
 
 
 
Cost of Goods Sold
 
40,632,307

 
46,034,429

 
131,595,219

 
140,214,791


 

 

 
 
 
 
Gross Profit
 
833,081

 
3,725,862

 
3,235,736

 
16,569,605


 

 

 
 
 
 
Operating Expenses
 
732,383

 
1,042,348

 
2,862,533

 
2,884,924


 

 

 
 
 
 
Operating Income
 
100,698

 
2,683,514

 
373,203

 
13,684,681


 

 

 
 
 
 
Other Income (Expense)
 

 

 
 
 
 
Other income (expense)
 
142,678

 
173,407

 
(586,339
)
 
279,850

Interest income (expense)
 
7,982

 
(13,080
)
 
(571
)
 
(13,101
)
Equity in net income of investments
 
1,189,013

 
996,733

 
3,657,785

 
5,591,396

Total Other Income
 
1,339,673

 
1,157,060

 
3,070,875

 
5,858,145


 

 

 
 
 
 
Net Income
 
$
1,440,371

 
$
3,840,574

 
$
3,444,078

 
$
19,542,826

 
 
 
 

 
 
 
 
Basic & diluted net income per unit
 
$
0.07

 
$
0.19

 
$
0.17

 
$
0.98

Weighted average units outstanding for the calculation of basic & diluted net income per unit
 
19,873,000

 
19,873,000

 
19,873,000

 
19,873,000

Distributions Per Unit
 
$

 
$
0.50

 
$
0.75

 
$
1.25

 
 
 
 
 
 
 
 
 






Notes to the Financial Statements are an integral part of these Statements.

5


GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows (Unaudited)

 
Nine Months Ended
 
Nine Months Ended

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

 

Net income
 
$
3,444,078

 
$
19,542,826

Adjustments to reconcile net income to net cash provided by operating activities:
 

 

Depreciation and amortization
 
6,777,225

 
6,907,938

Unrealized gain (loss) on risk management & marketable securities
 
290,667

 
(927,410
)
Amortization of deferred revenue
 
(65,335
)
 
(122,913
)
Cancellation of note receivable
 
599,421

 

Change in accretion of interest on grant & note receivable
 
(11,959
)
 
(40,013
)
Distributions in excess of earnings from investments
 
434,636

 
514,256

Gain on insurance proceeds from involuntary conversion
 

 
(489,852
)
Deferred compensation expense
 
61,547

 
64,915

Change in assets and liabilities
 

 

Accounts receivable
 
(606,303
)
 
(892,067
)
Inventory
 
(2,325,607
)
 
1,785,886

Prepaid expenses and other
 
(159,136
)
 
(931,167
)
Accounts payable
 
739,622

 
(618,092
)
Accrued expenses
 
(10,577
)
 
56,284

Net cash provided by operating activities
 
9,168,279

 
24,850,591


 

 

Cash Flows from Investing Activities
 

 

Capital expenditures
 
(16,079,403
)
 
(5,184,469
)
Insurance proceeds from involuntary conversion
 

 
648,752

Purchase of marketable securities
 
(34,645
)
 
(6,750,000
)
Proceeds from sale of marketable securities
 
9,084,777

 
2,750,000

   Net cash (used in) investing activities
 
(7,029,271
)
 
(8,535,717
)

 

 

Cash Flows from Financing Activities
 

 

Distributions to members
 
(14,904,750
)
 
(24,841,250
)
Payments received on grant receivable
 
171,330

 
84,258

Net cash (used in) financing activities
 
(14,733,420
)
 
(24,756,992
)

 

 

Net (Decrease) in Cash and Equivalents
 
(12,594,412
)
 
(8,442,118
)

 

 

Cash and Equivalents – Beginning of Period
 
17,518,187

 
16,532,190


 

 

Cash and Equivalents – End of Period
 
$
4,923,775

 
$
8,090,072

 
 
 
 

Supplemental Cash Flow Information
 

 

Cash paid for interest
 
$
43,805

 
$
38,296

 
 
 
 
 
Supplemental Disclosure of Noncash Operating, Investing & Financing Activities
 
 
 
 
Accounts payable related to construction in progress
 
$
618,853

 
$


Notes to the Financial Statements are an integral part of these Statements.

6

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018


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, 2017, contained in the Company's annual report on Form 10-K for 2017.

In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.

Nature of Business
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 certificates of deposits with original maturities of greater than three months and mutual funds. Certificates of deposit are considered held-to-maturity securities, which are measured at cost. 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.

Marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds and certificates of deposit all with maturities of less than one year. For the periods ended July 31, 2018 and 2017, there was no other-than-temporary impairment recognized. The Company recorded interest, dividends and net realized and unrealized gains (losses) from these investments as part of other income as follows:

7

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018


 
 
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
 
 
2018
 
2017
 
2018
 
2017
Net earnings (loss) on marketable securities
 


 
$
143,000

 
$
28,000

 
$
(79,000
)
 
$
134,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable Securities
 
 
 
 
 
 
As of
 
Cost
 
Fair Market Value
 
Certificates of Deposit
 
 
 
 
July 31, 2018
 
$
13,506,000

 
$
13,220,000

 
$

 
 
 
 
October 31, 2017
 
$
22,411,000

 
$
22,312,000

 
$
1,250,000

 
 
 
 

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 July 31, 2018, for all companies, is based on the investee's results for the three and nine months ended June 30, 2018.

Note Receivable
The Company carried a note receivable from an unrelated party with a balance of approximately $599,000 as of October 31, 2017, included in other assets. This balance included the original face value plus accrued interest. During 2018, the Company deemed the likelihood of collecting on the note receivable remote and wrote-off the entire balance, which is included in other expense on the statement of operations for the nine months ended July 31, 2018.
  
Revenue and Cost Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers.  This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers. Interest income is recognized as earned.

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 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.

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.

8

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018



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.

Net income per unit
Basic and diluted earnings 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 7. 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 and nine months ended July 31, 2018, ethanol sales accounted for approximately 80% and 79%, respectively, of total revenue, distiller grains sales accounted for approximately 17% of total revenue and corn oil sales accounted for approximately 3% and 4%, respectively, of total revenue while corn costs averaged approximately 70% and 74%, respectively, 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

9

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018


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. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. The Company is currently evaluating the impact of its pending adoption of the new standard on the financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the revenue recognition requirements in "Accounting Standard Codification 605 - Revenue Recognition" and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within that fiscal year. Although early application as of the original date is permitted, the Company will adopt ASU No. 2014-09 and the related ASUs on November 1, 2018. The Company has evaluated the effect of this standard as well as its existing contracts with customers and it plans to use the modified retrospective method, if material. Under the modified retrospective method, the Company will present revenue under the new method required by ASU No. 2014-09 beginning in our 2019 fiscal year. The Company expects to have enhanced disclosures, but does not expect this standard to have a material financial impact on the Company's financial statements.

2.    INVENTORY

Inventory consisted of the following as of July 31, 2018 and October 31, 2017:

 
 
July 31, 2018

 
October 31, 2017

Raw Materials
 
$
3,938,639

 
$
2,657,993

Work in Process
 
1,240,206

 
1,126,913

Finished Goods
 
1,451,558

 
519,890

Totals
 
$
6,630,403

 
$
4,304,796


3.    BANK FINANCING

The Company has entered into a master loan agreement with Farm Credit Services of America (FLCA) which includes revolving loans with original maximum borrowings of $35 million, which currently has availability of $10 million and matures on February 1, 2020. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (5.28% as of July 31, 2018). The borrowings are secured by substantially all the assets of the Company. The credit agreements are subject to covenants, requiring the Company to maintain various financial ratios, as well as certain distribution limitations. As of July 31, 2018, 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 July 31, 2018 and October 31, 2017, the Company had no borrowings outstanding.

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 and nine months ended July 31, 2018 totaled approximately $8,187,000 and $31,083,000, respectively. Purchases during the three and nine months ended July 31, 2017 totaled approximately $5,611,000 and $24,991,000, respectively. As of July 31, 2018 and October 31, 2017, the amount owed to related parties was approximately $529,000 and $205,000, respectively (See Note 5).

10

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018


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 July 31,
 
Nine Months Ended July 31,
 
 
2018
 
2017
 
2018
 
2017
Sales ethanol, distiller grains & corn oil
 
$
41,599,000

 
$
49,892,000

 
$
135,244,000

 
$
157,132,000

Marketing fees
 
134,000

 
132,000

 
413,000

 
379,000

 
 
 
 
 
 
 
 
 
As of
 
July 31, 2018
 
October 31, 2017
 
 
 
 
Amount due from RPMG
 
$
6,546,000

 
$
5,940,000

 
 
 
 

During 2017, the Company entered into multiple construction agreements as part of plans to expand plant capacity. Total commitment under these agreements total approximately $16.1 million of which approximately $7.3 million is to a related party. The Company has incurred costs related to the expansion project totaling approximately $11.9 million of which approximately $5.4 million is to a related party. The total expansion project costs are estimated at approximately $34 million. The project is expected to be completed in the spring of 2019 and no other contracts have been executed.

6.    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.

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.


11

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018


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 July 31, 2018 and 2017 and the fair value of derivatives as of July 31, 2018 and October 31, 2017:
 
 
Income Statement Classification
 
Realized Gain (Loss)
 
Change in Unrealized Gain (Loss)
 
Total Gain (Loss)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$

 
$

 
$

three months ended July 31, 2018
 
Cost of Goods Sold
 
1,511,000

 
993,000

 
2,504,000

 
 
Total
 
$
1,511,000

 
$
993,000

 
$
2,504,000

 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$

 
$

 
$

three months ended July 31, 2017
 
Cost of Goods Sold
 
(307,000
)
 
268,000

 
(39,000
)
 
 
Total
 
$
(307,000
)
 
$
268,000

 
$
(39,000
)
 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$

 
$

 
$

nine months ended July 31, 2018
 
Cost of Goods Sold
 
1,585,000

 
24,000

 
1,609,000

 
 
Total
 
$
1,585,000

 
$
24,000

 
$
1,609,000

 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
(1,000
)
 
$
32,000

 
$
31,000

nine months ended July 31, 2017
 
Cost of Goods Sold
 
(103,000
)
 
466,000

 
363,000

 
 
Total
 
$
(104,000
)
 
$
498,000

 
$
394,000


 
 
Balance Sheet Classification
 
July 31, 2018
 
October 31, 2017
Futures and option contracts through March 2020
 
 
 
 
 
 
In gain position
 
 
 
$
887,000

 
$
371,000

In loss position
 
 
 
(512,000
)
 
(21,000
)
Cash held by broker
 
 
 
141,000

 
415,000

 
 
Current Asset
 
$
516,000

 
$
765,000


As of July 31, 2018, the Company had the following approximate outstanding purchase and sale commitments, of which approximately $3,548,000 of the purchase commitments were with related parties.

 
 
Commitments Through
 
Amount
Sale commitments
 
 
 
 
Corn Oil - fixed price
 
December 2018
 
$
1,564,000

Distiller Grains - fixed price
 
September 2018
 
2,684,000

 
 
 
 
 
Purchase commitments
 
 
 
 
Corn - fixed price
 
June 2019
 
$
11,592,000

Corn - basis contract
 
October 2018
 
8,627,000

Natural gas - fixed price
 
July 2020
 
5,552,000


12

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018



As of July 31, 2018, the Company has fixed price futures and forward contracts in place for approximately 20% of its anticipated corn needs and none of its ethanol sales for the next 12 months with no open positions beyond that period. As of July 31, 2018, the Company has fixed price futures and forward contracts in place for approximately 36% of its natural gas needs for the next 12 months and approximately 29% of its natural gas needs for the next 24 months with no open positions beyond that period.

7.    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, July 31, 2018
 
$
13,220,000

 
$
13,220,000

 
$

 
$

Assets, October 31, 2017
 
22,312,000

 
22,312,000

 

 

Derivative financial instruments:
 
 
 
 
 
 
 
 
July 31, 2018
 


 


 


 

Assets
 
$
887,000

 
$
741,000

 
$
146,000

 
$

Liabilities
 
(512,000
)
 
(430,000
)
 
(82,000
)
 

October 31, 2017
 
 
 

 


 

Assets
 
$
371,000

 
$
360,000

 
$
11,000

 
$

Liabilities
 
(21,000
)
 
(1,000
)
 
(20,000
)
 


8. 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):


13

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2018


Balance Sheet
 
June 30, 2018
 
September 30, 2017
 
 
 
 
Current Assets
 
$
306,206

 
$
294,535

 
 
 
 
Other Assets
 
269,331

 
265,004
 
 
 
 
Current Liabilities
 
209,423

 
170,289
 
 
 
 
Long-term Debt
 
65,498

 
78,122
 
 
 
 
Members’ Equity
 
300,616

 
311,128
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
Income Statement
 
2018
 
2017
 
2018
 
2017
Revenue
 
$
205,722

 
$
191,493

 
$
575,325

 
$
570,217

Gross Profit
 
24,985

 
21,127

 
55,788

 
76,509

Net Income
 
21,658

 
17,628

 
47,629

 
68,602


The Company recorded equity in net income of approximately (in 000's):
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
Equity in Net Income
 
2018
 
2017
 
2018
 
2017
Absolute Energy
 
$
282

 
$
437

 
$
1,161

 
$
1,728

Guardian Energy
 

 

 
1,172

 
1,652

Homeland Energy Solutions
 
849

 
503

 
1,256

 
1,996

Other
 
58

 
57

 
69

 
215

Total
 
$
1,189

 
$
997

 
$
3,658

 
$
5,591




14


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. 

The impact of 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;
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 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 20, 2017, our board of directors declared a distribution of $0.75 per membership unit for members of record as of November 20, 2017. The total amount of the distribution was $14,904,750 which was paid in December 2017.


15


Results of Operations

Comparison of the Three Months Ended July 31, 2018 and 2017
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended July 31, 2018 and 2017:

 
2018
 
2017
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenues
$
41,465,388

 
100.0
 
$
49,760,291

 
100.0
Cost of Goods Sold
40,632,307

 
98.0
 
46,034,429

 
92.5
Gross Profit
833,081

 
2.0
 
3,725,862

 
7.5
Operating Expenses
732,383

 
1.8
 
1,042,348

 
2.1
Operating Income
100,698

 
0.2
 
2,683,514

 
5.4
Other Income
1,339,673

 
3.2
 
1,157,060

 
2.3
Net Income
$
1,440,371

 
3.5
 
$
3,840,574

 
7.7

Revenues. Our total revenue was lower for our third quarter of 2018 compared to the same period of 2017 due to the lower quantities of ethanol and dried distiller grains sold. In addition, we received lower ethanol and corn oil prices for our third quarter of 2018 compared to the same period of 2017 partially offset by higher average prices for our distillers. For our third quarter of 2018, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 17% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue. For our third quarter of 2017, ethanol sales accounted for approximately 84% of our total revenue, distiller grains sales accounted for approximately 11% of our total revenue, and corn oil sales accounted for approximately 5% of our total revenue.
    
The average price per gallon we received for our ethanol was approximately 5% lower for our third quarter of 2018 compared to the same period of 2017. Management attributes this decrease with a greater supply of ethanol in the market which was not met by corresponding increases in ethanol demand. While export demand was strong during 2017, the ethanol tariffs imposed by Brazil and China negatively impacted market ethanol prices and limited ethanol demand. Many ethanol producers expanded their production capacities during 2017 and others are expected to complete expansions in 2018 which may continue to result in excess market ethanol supplies which could further impact market ethanol prices. If ethanol supply increases at a greater pace compared to ethanol demand, it could negatively impact ethanol prices and could negatively impact our profitability for the remaining quarter of 2018.

We sold approximately 16% fewer gallons of ethanol during our third quarter of 2018 compared to the same period of 2017. Management attributes this decrease in ethanol sales with reduced production levels due to an extended maintenance shutdown which significantly impacted our production in May and June 2018. Our total ethanol production was 20% less during our third quarter of 2018 as compared to the same period of 2017. Management anticipates that our ethanol sales and production will be similar during the remaining quarter of our 2018 fiscal year compared to our 2017 fiscal year.

We had no ethanol derivative instruments gains and losses during our third quarter of 2018 or 2017.

The average price per ton we received for our dried distillers grains was approximately 59% higher for our third quarter of 2018 compared to the same period of 2017. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 10% higher for our third quarter of 2018 compared to the same period of 2017.  Management attributes these higher distiller grains prices to increased export demand from countries other than China along with higher market corn prices. Distiller grains are typically used as a feed substitute for corn. Management anticipates distiller grains prices will remain at their current levels unless China reenters the distillers grains market which could result in a significant increase in distiller grains demand. However, due to anticipated increases in ethanol production during 2018, we expect that additional distiller grains supply will enter the market which may decrease market distiller grains prices.

Our dried distiller grains production decreased by approximately 20% during our third quarter of 2018 compared to the same period of 2017. Management attributes this decrease to lower ethanol production during the period. Management anticipates distiller grains production to be slightly less for the remaining quarter of our 2018 fiscal year compared to our 2017 fiscal year assuming the mix of products between dried distiller grains and modified distiller grains remains positive.


16


We sold approximately 21% fewer pounds of corn oil during our third quarter of 2018 compared to the same period of 2017. This decrease in corn oil sales resulted from decreased corn oil extraction in combination with reduced ethanol production. The average price per pound we received for our corn oil was approximately 17% less for our third quarter of 2018 compared to the same period of 2017. This decrease in corn oil prices occurred due to an increase in market corn oil supply. Management anticipates that corn oil prices may be lower during our 2018 fiscal year due to a reduction in the biodiesel use requirement in the Renewable Fuels Standard along with the loss of the biodiesel blenders' tax credit, both of which impacted biodiesel demand. Further, management anticipates stronger corn oil production during our 2018 fiscal year due to anticipated increases in production capacity which may further impact corn oil prices.

Cost of Goods Sold. Our cost of goods sold was lower for our third quarter of 2018 compared to the same period of 2017 due primarily to a decrease in the amount of corn ground due to a reduction in ethanol production during the 2018 period.  Our average cost per bushel of corn was approximately 1% higher during our third quarter of 2018 compared to the same period of 2017.  Management anticipates corn prices to decrease slightly due to increased corn stocks. We may continue to experience some short-term corn price volatility. 
 
We consumed approximately 18% less bushels of corn during our third quarter of 2018 compared to the same period of 2017 due to reduced ethanol production. Management anticipates consistent corn consumption during the fourth fiscal quarter of 2018 compared to the fourth fiscal quarter of 2017, provided we continue to experience profitable operating margins which allow us to operate the ethanol plant at capacity.

Our natural gas costs decreased by approximately 19% during our third quarter of 2018 compared to the same period of 2017. Our usage was 14% lower, and the average price we paid per MMBtu of natural gas was approximately 6% lower during our third quarter of 2018 compared to the same period of 2017. Management attributes this decrease in natural gas usage to less ethanol production. We expect stable natural gas prices during the remaining quarter of our 2018 fiscal year due to current supply levels of natural gas. Further, if we experience a supply disruption during our 2018 fiscal year, it may lead to significantly higher natural gas costs.

We experienced combined realized and unrealized gains of approximately $2,504,000 for our third quarter of 2018 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $39,000 of combined realized and unrealized losses for the same period of 2017 related to our corn and natural gas derivative instruments which increased 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 lower during our third quarter of 2018 compared to the same period of 2017 due to decreased dues and subscriptions to trade organizations and property tax expense partially offset by higher personnel costs. Management anticipates that our operating expenses will be similar during the remaining quarters of our 2018 fiscal year compared to our 2017 fiscal year.

Other Income (Expense). Other income was slightly higher for our third quarter of 2018 compared to the same period of 2017, due primarily to an increase in equity income from investments. Our investments are in other companies involved in the ethanol industry which, in general, experienced slightly more favorable operating margins and higher production levels during our third quarter of 2018 as compared to the same quarter of 2017.


17


Comparison of the Nine Months Ended July 31, 2018 and 2017
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the nine months ended July 31, 2018 and 2017:
 
2018
 
2017
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenues
$
134,830,955

 
100.0
 
$
156,784,396

 
100.0
Cost of Goods Sold
131,595,219

 
97.6
 
140,214,791

 
89.4
Gross Profit
3,235,736

 
2.4
 
16,569,605

 
10.6
Operating Expenses
2,862,533

 
2.1
 
2,884,924

 
1.8
Operating Income
373,203

 
0.3
 
13,684,681

 
8.7
Other Income
3,070,875

 
2.3
 
5,858,145

 
3.7
Net Income
$
3,444,078

 
2.6
 
$
19,542,826

 
12.5

Revenues. Our total revenue was lower for our nine months ended July 31, 2018 compared to the same period of 2017 due to the lower quantities of ethanol and distiller grains sold. In addition, we received lower ethanol and corn oil prices for our nine months ended July 31, 2018 compared to the same period of 2017 partially offset by higher average prices for our distiller grains. For our nine months ended July 31, 2018, 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 nine months ended July 31, 2017, ethanol sales accounted for approximately 84% of our total revenue, distiller grains sales accounted for approximately 12% 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 10% lower for our nine months ended July 31, 2018 compared to the same period of 2017. Management attributes this decrease with a greater supply of ethanol in the market which was not met by corresponding increases in ethanol demand. While export demand was strong during 2017, the ethanol tariffs imposed by Brazil and China negatively impacted market ethanol prices and limited ethanol demand. Many ethanol producers expanded their production capacities during 2017 and others are expected to complete expansions in 2018 which may continue to result in excess market ethanol supplies which could further impact market ethanol prices. If ethanol supply increases at a greater pace compared to ethanol demand, it could negatively impact ethanol prices and could negatively impact our profitability for the remaining quarter of 2018.

We sold approximately 9% fewer gallons of ethanol during our nine months ended July 31, 2018 compared to the same period of 2017. Management attributes this decrease in ethanol sales with an extensive maintenance shutdown experienced during the third quarter of our 2018 fiscal year which significantly reduced production during May and June 2018. In addition, we produced and sold non US-grade ethanol for export for a portion of the nine months ended July 31, 2018. This specialized ethanol was exported to an export market at a premium over domestic sales but required us to operate the plant at a reduced capacity. Our total ethanol production was approximately 8% lower during our nine months ended July 31, 2018 as compared to the same period of 2017. Management anticipates that our ethanol sales and production will be similar during the remaining quarter of our 2018 fiscal year compared to our 2017 fiscal year.

During our nine months ended July 31, 2017, we experienced combined realized and unrealized gains on our ethanol derivative instruments of approximately $31,000, which increased our revenue. By comparison, we had no ethanol derivative instruments gains and losses during our nine months ended July 31, 2018.

The average price per ton we received for our dried distillers grains was approximately 35% higher for our nine months ended July 31, 2018 compared to the same period of 2017. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 35% higher for our nine months ended July 31, 2018 compared to the same period of 2017. Management attributes these price increases with higher domestic and export demand. Recently, distiller grains have traded at a relative value closer to 100% of the corn value which is due to higher soybean meal prices. Management anticipates that distiller grains prices will be slightly higher during the remaining quarter of our 2018 fiscal year as long as corn and soybean meal prices remain on their upward trend. However, due to anticipated increases in ethanol production during 2018, we expect that additional distiller grains supply will enter the market which may decrease market distiller grains prices.

Our dried distiller grains production decreased by approximately 5% during our nine months ended July 31, 2018 compared to the same period of 2017. Management attributes this decrease to lower ethanol production during the period. Management

18


anticipates distiller grains production to be similar for the remaining quarter of our 2018 fiscal year compared to our 2017 fiscal year assuming the mix of products between dried distiller grains and modified distiller grains remains positive.

We sold approximately 9% fewer pounds of corn oil during our nine months ended July 31, 2018 compared to the same period of 2017. This decrease in corn oil sales resulted from decreased ethanol production and corn oil extraction. The average price per pound we received for our corn oil was approximately 13% less for our nine months ended July 31, 2018 compared to the same period of 2017. This decrease in corn oil prices occurred due to an increase in market corn oil supply and a decrease in the price of soybean oil, which may be used as a substitute for corn oil in certain circumstances. Management expects corn oil prices to remain lower during our 2018 fiscal year.

Cost of Goods Sold. Our cost of goods sold was lower for our nine months ended July 31, 2018 compared to the same period of 2017 due primarily to a decrease in our corn consumption offset by an increase in the price of natural gas.  Our average cost per bushel of corn during our nine months ended July 31, 2018 was comparable to the same period of 2017.  Management anticipates corn prices to decrease slightly due to increased global corn stocks. Increased corn supply and recently implemented tariffs have resulted in the recent decrease in corn prices. We may continue to experience some short term corn price volatility.  
 
We consumed approximately 8% fewer bushels of corn during our nine months ended July 31, 2018 compared to the same period of 2017 due to an 8% reduction in ethanol production and similar corn conversion efficiency. Management anticipates consistent corn consumption during the rest of our 2018 fiscal year. These assumptions are provided that we continue to experience profitable operating margins which allow us to operate the ethanol plant at capacity.

Our natural gas costs increased by approximately 12% during our nine months ended July 31, 2018 compared to the same period of 2017. Our usage decreased by approximately 4% but the average price we paid per MMBtu of natural gas was approximately 17% higher during our nine months ended July 31, 2018 compared to the same period of 2017. Management attributes this increase in natural gas prices to colder weather during our first quarter of 2018 compared to the same period of 2017 which led to a spike in natural gas prices. We expect more stable natural gas prices during the remaining months of our 2018 fiscal year due. However, if we experience a supply disruption it may lead to significantly higher natural gas costs.

We experienced combined realized and unrealized gains of approximately $1,609,000 for our nine months ended July 31, 2018 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $363,000 of combined realized and unrealized gains for the same period of 2017 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 during our nine months ended July 31, 2018 were comparable to the same period of 2017. Management anticipates that our operating expenses will be similar during the remaining quarters of our 2018 fiscal year compared to our 2017 fiscal year due to slightly higher property tax expense potentially offset by differences in employee bonus accruals that are tied to net income.

Other Income (Expense). Other income was lower for our nine months ended July 31, 2018 compared to the same period of 2017, due to a decrease in equity income from investments. Our investments are in other companies involved in the ethanol industry which, in general, experienced less favorable operating margins during our nine months ended July 31, 2018 compared to the same period of 2017. One of our investments made distributions in excess of the equity balance recorded by the Company, totaling approximately $1,172,000 during our nine months ended July 31, 2018, which we recorded as a gain through other income. In comparison, approximately $1,652,000 of excess distributions were received during the same period of 2017. In addition, we had an unrealized loss on our marketable securities during our nine months ended July 31, 2018 which increased our other expenses and we wrote off the value of our note receivable due from Golden Renewable Energy, LLC which equaled approximately $599,000 during our nine months ended July 31, 2018 which also increased our other expenses.

Changes in Financial Condition for the Nine Months Ended July 31, 2018

Current Assets. We had less cash and equivalents and marketable securities at July 31, 2018 compared to October 31, 2017. This decrease in our cash and marketable security position is due primarily to nearly $15 million in distributions we paid to our members during December 2017 and approximately $16.1 million of cash used for capital projects. The value of our accounts receivable was higher at July 31, 2018 compared to October 31, 2017 due to timing of ethanol shipments. The value of our inventory was higher at July 31, 2018 compared to October 31, 2017 due to higher levels of raw materials and ethanol inventory.


19


Property and Equipment. The net value of our property and equipment was higher at July 31, 2018 compared to October 31, 2017 due to capital projects primarily related to our capacity expansion. We had approximately $14.7 million in construction in progress at July 31, 2018 primarily related to our capacity expansion.

Other Assets. Our other assets were lower at July 31, 2018 compared to October 31, 2017 due to a decrease in the value of our various investments caused by distributions declared in excess of earnings recorded for the nine months ended July 31, 2018. In addition, we wrote off our note receivable due from Golden Renewable Energy, LLC which reduced our other assets during our first quarter of 2018.

Current Liabilities. Our accounts payable at July 31, 2018 were higher compared to October 31, 2017 due to higher payables to our vendors for expansion related expenses.

Long-term Liabilities. Our long-term liabilities were similar at July 31, 2018 and October 31, 2017.

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, except for additional funds which may be necessary to fund our plant expansion project.  As of July 31, 2018, we had $10 million available pursuant to our revolving term loan and approximately $18 million in cash and equivalents and marketable securities.

We are in the process of expanding the ethanol plant by approximately 30 million gallons per year. We have entered into significant agreements or contracts related to the expansion, totaling approximately $16.1 million, and we anticipate the project will cost approximately $34.0 million, some of which we expect to pay through operating income. 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 nine months ended July 31, 2018 and 2017:
 
Nine Months Ended July 31,
 
2018
 
2017
Net cash provided by operating activities
$
9,168,279

 
$
24,850,591

Net cash (used in) investing activities
(7,029,271
)
 
(8,535,717
)
Net cash (used in) financing activities
(14,733,420
)
 
(24,756,992
)

Cash Flow From Operations 

Our cash flows from operations for the nine months ended July 31, 2018 were lower compared to the same period of 2017 due primarily to decreased net income. This decrease was offset by changes in working capital components.
 
Cash Flow From Investing Activities 

We used less cash for investing activities during our nine months ended July 31, 2018 compared to the same period of 2017 primarily due to an increase in proceeds from the sale of marketable securities offset by an increase in capital expenditures. Our capital expenditures during the 2018 fiscal year were primarily for plant improvements associated with the expansion of production.

Cash Flow From Financing Activities.

During our nine months ended July 31, 2018, we used less cash for financing activities due to less distributions being paid in 2018 as compared to the same period of 2017.

20



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 February 1, 2020. We agreed to pay an annual fee of 0.5% of the unused portion of this loan. As of July 31, 2018, we had $0 outstanding on this loan with a potential accrued interest rate of 5.28% per year. As of July 31, 2018, we had $10 million 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 July 31, 2018, 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 2006, we received the first payment from our semi-annual economic development grants equal to the amount of the tax assessments imposed on our ethanol plant by Cerro Gordo County, the county in which our ethanol plant is located. Based on our 2009 assessment, the total amount of these grants is expected to be approximately $9 million, which will be paid semi-annually over a 10-year period with the final payment being made in 2019.
 
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

Revenue from the sale of our products is recognized at the time title to the goods and all risks of ownership transfer to the customers.  The time of transfer is defined in the specific sales agreement; however, it generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between us and our customers. Interest income is recognized as earned.

Shipping costs incurred by us in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to us from our marketer. Shipping costs incurred by us in the sale of distiller grain products are included in cost of goods sold.


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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.

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 July 31, 2018. 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 July 31, 2018, we had price protection in place for approximately 20% of our anticipated corn needs, 36% of our natural gas needs and none of our ethanol sales for the next 12 months.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the

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average cost of our corn and natural gas prices and average ethanol price as of July 31, 2018, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from July 31, 2018. The results of this analysis, which may differ from actual results, are as follows:
 
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
 
Unit of Measure
 
Hypothetical Adverse Change in Price
 
Approximate Adverse Change to Income
Natural Gas
 
1,360,000

 
MMBTU
 
10%
 
$
377,000

Ethanol
 
120,000,000

 
Gallons
 
10%
 
15,744,000

Corn
 
32,117,000

 
Bushels
 
10%
 
11,328,000


Liability Risk

We participate, along with other plants in the industry, in a group captive insurance company (Captive). The Captive insures losses related to workman's compensation, commercial property and general liability. The Captive reinsures catastrophic losses for all participants, including the Company, in excess of predetermined amounts. Our premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. These premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed over the amount in the collateral fund.

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 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 July 31, 2018.  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 July 31, 2018, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There has not been any material change to the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended October 31, 2017.
    
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
None.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information

None.

Item 6. Exhibits.

(a)
The following exhibits are filed as part of this report.
Exhibit No.
 
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 July 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of July 31, 2018 and October 31, 2017, (ii) Statements of Operations for the three and nine months ended July 31, 2018 and 2017, (iii) Statements of Cash Flows for the nine months ended July 31, 2018 and 2017, 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:
September 14, 2018
 
/s/ Curtis Strong
 
 
 
Curtis Strong
 
 
 
Executive Vice-President
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
September 14, 2018
 
/s/ Christine Marchand
 
 
 
Christine Marchand
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)


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