10-Q 1 a10-qfqe7x31x19.htm 10-Q FQE 7-31-19 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, 2019
 
 
 
OR
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the transition period from               to               .
 
 
 
COMMISSION FILE NUMBER 000-51177
 
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 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 September 11, 2019, 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, 2019
 
October 31, 2018

 
(Unaudited)
 

Current Assets
 

 

Cash and equivalents
 
$
8,912,248

 
$
9,322,805

Marketable securities
 
856,698

 
10,559,242

Accounts receivable
 
7,123,154

 
1,085,581

Other receivables
 
360,625

 
3,784,114

Derivative instruments
 
1,666,339

 
804,952

Inventory
 
8,428,443

 
6,876,956

Prepaid expenses and other
 
3,004,433

 
2,730,444

Total current assets
 
30,351,940

 
35,164,094


 

 

Property and Equipment
 

 

Land and land improvements
 
14,319,211

 
12,961,713

Building and grounds
 
31,319,540

 
31,319,540

Grain handling equipment
 
16,046,157

 
16,046,157

Office equipment
 
456,566

 
275,086

Plant and process equipment
 
125,982,511

 
108,786,485

Construction in progress
 
2,915,656

 
12,887,773


 
191,039,641

 
182,276,754

Less accumulated depreciation
 
115,951,660

 
108,397,948

Net property and equipment
 
75,087,981

 
73,878,806


 

 

Other Assets
 

 

Investments
 
24,941,420

 
25,719,513

Other assets
 
450,497

 
509,866

Total other assets
 
25,391,917

 
26,229,379


 

 

Total Assets
 
$
130,831,838

 
$
135,272,279

 
 
 
 
 

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, 2019
 
October 31, 2018

 
(Unaudited)
 

Current Liabilities
 

 

Accounts payable
 
$
6,504,330

 
$
4,465,376

Accrued expenses
 
2,939,474

 
2,801,329

Other current liabilities
 
421,253

 
367,365

Total current liabilities
 
9,865,057

 
7,634,070


 

 

Long-term Liabilities, deferred compensation
 
457,932

 
536,414


 

 

Commitments and Contingencies
 

 


 

 

Members' Equity (19,873,000 units issued and outstanding)
 
120,508,849

 
127,101,795


 

 

Total Liabilities and Members’ Equity
 
$
130,831,838

 
$
135,272,279

 
 
 
 
 
 
 
 
 
 

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, 2019
 
July 31, 2018
 
July 31, 2019
 
July 31, 2018

 

 

 
 
 
 
Revenues
 
$
51,773,780

 
$
41,465,388

 
$
147,578,817

 
$
134,830,955


 


 


 
 
 
 
Cost of Goods Sold
 
53,275,986

 
40,632,307

 
148,131,565

 
131,595,219


 


 


 
 
 
 
Gross Profit (Loss)
 
(1,502,206
)
 
833,081

 
(552,748
)
 
3,235,736


 


 


 
 
 
 
Operating Expenses
 
928,357

 
732,383

 
2,876,877

 
2,862,533


 


 

 
 
 
 
Operating Income (Loss)
 
(2,430,563
)
 
100,698

 
(3,429,625
)
 
373,203


 


 


 
 
 
 
Other Income (Expense)
 


 


 
 
 
 
Other income (expense)
 
46,385

 
142,678

 
382,693

 
(586,339
)
Interest income (expense)
 
53,263

 
7,982

 
165,574

 
(571
)
Equity in net income of investments
 
657,049

 
1,189,013

 
1,256,662

 
3,657,785

Total Other Income
 
756,697

 
1,339,673

 
1,804,929

 
3,070,875


 


 


 
 
 
 
Net Income (Loss)
 
$
(1,673,866
)
 
$
1,440,371

 
$
(1,624,696
)
 
$
3,444,078

 
 
 
 


 
 
 
 
Basic & diluted net income (loss) per unit
 
$
(0.08
)
 
$
0.07

 
$
(0.08
)
 
$
0.17

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

 
19,873,000

 
19,873,000

 
19,873,000

Distributions Per Unit for Class A & B
 
$

 
$

 
$
0.25

 
$
0.75

 
 
 
 
 
 
 
 
 

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, 2017
$
135,635,246

 
 
Net loss for the three-month period ended January 31, 2018
(1,317,498
)
 
 
Member distribution
(14,904,750
)
 
 
Balance - January 31, 2018
119,412,998

 
 
Net income for the three-month period ended April 30, 2018
3,321,205

 
 
Balance - April 30, 2018
122,734,203

 
 
Net income for the three-month period ended July 31, 2018
1,440,371

 
 
Balance - July 31, 2018
$
124,174,574


 
Members' Equity
 
(Unaudited)
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

 
 
Net income for the three-month period ended April 30, 2019
1,228,441

 
 
Balance - April 30, 2019
122,182,715

 
 
Net loss for the three-month period ended July 31, 2019
(1,673,866
)
 
 
Balance - July 31, 2019
$
120,508,849


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


6


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

 
Nine Months Ended
 
Nine Months Ended

 
July 31, 2019
 
July 31, 2018
Cash Flows from Operating Activities
 

 

Net income (loss)
 
$
(1,624,696
)
 
$
3,444,078

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 

Depreciation and amortization
 
7,613,081

 
6,777,225

Unrealized (gain) loss on risk management & marketable securities
 
(1,222,886
)
 
290,667

Amortization of deferred revenue
 

 
(65,335
)
Cancellation of note receivable
 

 
599,421

Change in accretion of interest on grant & note receivable
 
(2,326
)
 
(11,959
)
Distributions in excess of earnings from investments
 
778,093

 
434,636

Proceeds from insurance claims and business interruption
 
3,000,000

 

Change in deferred compensation
 
(78,482
)
 
61,547

Change in assets and liabilities
 

 

Accounts receivable
 
(6,037,573
)
 
(606,303
)
Inventory
 
(1,551,487
)
 
(2,325,607
)
Prepaid expenses and other
 
67,160

 
(159,136
)
Accounts payable
 
2,277,933

 
739,622

Accrued expenses
 
138,145

 
(10,577
)
Net cash provided by operating activities
 
3,356,962

 
9,168,279


 

 

Cash Flows from Investing Activities
 

 

Capital expenditures
 
(8,947,978
)
 
(16,079,403
)
Purchase of marketable securities
 
(7,515
)
 
(34,645
)
Proceeds from sale of marketable securities
 
10,071,558

 
9,084,777

   Net cash provided by (used in) investing activities
 
1,116,065

 
(7,029,271
)

 

 

Cash Flows from Financing Activities
 

 

Distributions to members
 
(4,968,250
)
 
(14,904,750
)
Payments received on grant receivable
 
84,666

 
171,330

Net cash (used in) financing activities
 
(4,883,584
)
 
(14,733,420
)

 

 

Net Decrease in Cash and Equivalents
 
(410,557
)
 
(12,594,412
)

 

 

Cash and Equivalents – Beginning of Period
 
9,322,805

 
17,518,187


 

 

Cash and Equivalents – End of Period
 
$
8,912,248

 
$
4,923,775

 
 
 
 

Supplemental Cash Flow Information
 

 

Cash paid for interest
 
$
38,215

 
$
43,805

 
 
 
 
 
Supplemental Disclosure of Noncash Operating, Investing & Financing Activities
 
 
 
 
Accounts payable related to construction in progress
 
$
1,065,957

 
$
618,853


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

7

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2019


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, 2018, contained in the Company's annual report on Form 10-K for 2018.

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 July 31, 2019 and 2018, 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
July 31, 2019


 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
2019
 
2018
 
2019
 
2018
Net earnings (loss) on marketable securities
 
$
46,000

 
$
143,000

 
$
313,000

 
$
(79,000
)
 
 
 
 
 
 
 
 
 
 
 
Marketable Securities
 
 
 
 
As of
 
Cost
 
Fair Market Value
 
 
 
 
July 31, 2019
 
$
762,000

 
$
857,000

 
 
 
 
October 31, 2018
 
$
10,857,000

 
$
10,559,000

 
 
 
 

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, 2019, for all companies, is based on the investee's results for the three and nine months ended June 30, 2019.

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, included in other expense on the statement of operations for the nine months ended July 31, 2018.
  
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.


9

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2019


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 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 July 31, 2019.

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.

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 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.


10

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2019


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, 2019, ethanol sales accounted for approximately 80% and 78%, respectively, of total revenue, distiller grains sales accounted for approximately 16% and 18%, respectively, of total revenue and corn oil sales accounted for approximately 4% of total revenue while corn costs averaged approximately 76% 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. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. Under the new guidance, lessees will be 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 is currently evaluating the impact of its pending adoption of the new standard on the financial statements but expects that upon adoption of this accounting standard, right of use assets and lease obligations recognized on the balance sheet will be material.

2.    INVENTORY

Inventory consisted of the following as of July 31, 2019 and October 31, 2018:

 
 
July 31, 2019

 
October 31, 2018

Raw Materials
 
$
4,482,946

 
$
2,859,081

Work in Process
 
1,887,542

 
1,232,248

Finished Goods
 
2,057,955

 
2,785,627

Totals
 
$
8,428,443

 
$
6,876,956


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 February 1, 2020. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (5.35% as of July 31, 2019). 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 July 31, 2019, 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, 2019 and October 31, 2018, the Company had no outstanding borrowings.

11

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2019


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, 2019 totaled approximately $11,331,000 and $30,800,000 respectively. 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. As of July 31, 2019 and October 31, 2018, the amount owed to related parties was approximately $518,000 and $420,000, 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 July 31,
 
Nine Months Ended July 31,
 
 
2019
 
2018
 
2019
 
2018
Sales ethanol
 
$
42,956,000

 
$
33,153,000

 
$
116,689,000

 
$
107,071,000

Sales distiller grains
 
7,665,000

 
6,925,000

 
26,073,000

 
22,597,000

Sales corn oil
 
1,955,000

 
1,522,000

 
5,707,000

 
5,576,000

 
 
 
 
 
 
 
 
 
Marketing fees-ethanol
 
$
61,000

 
$
66,000

 
$
183,000

 
$
198,000

Marketing fees-distiller grains
 
62,000

 
55,000

 
199,000

 
170,000

Marketing fees-corn oil
 
15,000

 
13,000

 
45,000

 
45,000

 
 
 
 
 
 
 
 
 
As of
 
July 31, 2019
 
October 31, 2018
 
 
 
 
Amount due from RPMG
 
$
7,093,000

 
$
1,080,000

 
 
 
 

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 $20.3 million of which approximately $7.9 million is to a related party. The current planned expansion project costs are estimated at approximately $23 million, including remaining commitments of approximately $2.7 million. The project is materially completed with exception of the entrance road and administration building which are expected to be completed in the winter of 2019. The final phase of the expansion to increase production capacity is currently being reevaluated. 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.


12

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2019


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, 2019 and 2018 and the fair value of derivatives as of July 31, 2019 and October 31, 2018:
 
 
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
 
$
(335,000
)
 
$
(328,000
)
 
$
(663,000
)
three months ended July 31, 2019
 
Cost of Goods Sold
 
(1,477,000
)
 
1,356,000

 
(121,000
)
 
 
Total
 
$
(1,812,000
)
 
$
1,028,000

 
$
(784,000
)
 
 
 
 
 
 
 
 
 
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
 
$
(438,000
)
 
$
(25,000
)
 
$
(463,000
)
nine months ended July 31, 2019
 
Cost of Goods Sold
 
(617,000
)
 
756,000

 
139,000

 
 
Total
 
$
(1,055,000
)
 
$
731,000

 
$
(324,000
)
 
 
 
 
 
 
 
 
 
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


 
 
Balance Sheet Classification
 
July 31, 2019
 
October 31, 2018
Futures and option contracts through July 2020
 
 
 
 
 
 
In gain position
 
 
 
$
2,514,000

 
$
801,000

In loss position
 
 
 
(1,322,000
)
 
(340,000
)
Cash held by broker
 
 
 
474,000

 
344,000

 
 
Current Asset
 
$
1,666,000

 
$
805,000


As of July 31, 2019, the Company had the following approximate outstanding purchase and sale commitments, of which all sales commitments and approximately $2,855,000 of the purchase commitments were with related parties. As of July 31, 2019 and October 31, 2018 the Company recognized an impairment on our forward purchase contracts of approximately $400,000 and $394,000, respectively. This reduced inventory on the balance sheet and increased cost of good sold on the statement of operations.


13

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2019


 
 
Commitments Through
 
Amount
Sale commitments
 
 
 
 
Corn Oil - fixed price
 
August 2019
 
$
994,000

Distiller Grains - fixed price
 
August 2019
 
2,128,000

 
 
 
 
 
Purchase commitments
 
 
 
 
Corn - fixed price
 
May 2020
 
$
10,349,000

Corn - basis contract
 
June 2020
 
11,079,000

Natural gas - fixed price
 
April 2021
 
7,513,000


As of July 31, 2019, the Company has fixed price futures and forward contracts in place for approximately 29% of its anticipated corn needs and 11% of its ethanol sales for the next 12 months with no open positions beyond that period. As of July 31, 2019, the Company has fixed price futures and forward contracts in place for approximately 85% of its natural gas needs for the next 12 months and approximately 22% 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.


14

GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
July 31, 2019


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, 2019
 
$
857,000

 
$
857,000

 
$

 
$

Assets, October 31, 2018
 
10,559,000

 
10,559,000

 

 

Derivative financial instruments:
 
 
 
 
 
 
 
 
July 31, 2019
 


 


 


 

Assets
 
$
2,514,000

 
$
1,999,000

 
$
515,000

 
$

Liabilities
 
(1,322,000
)
 
(401,000
)
 
(921,000
)
 

October 31, 2018
 
 
 

 


 

Assets
 
$
801,000

 
$
195,000

 
$
606,000

 
$

Liabilities
 
(340,000
)
 
(22,000
)
 
(318,000
)
 


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):
Balance Sheet
 
June 30, 2019
 
September 30, 2018
 
 
 
 
Current Assets
 
$
366,204

 
$
309,869

 
 
 
 
Other Assets
 
265,621

 
268,900

 
 
 
 
Current Liabilities
 
252,313

 
199,683

 
 
 
 
Long-term Debt
 
71,636

 
63,535

 
 
 
 
Members’ Equity
 
307,875

 
315,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
Income Statement
 
2019
 
2018
 
2019
 
2018
Revenue
 
$
200,713

 
$
205,722

 
$
569,540

 
$
575,325

Gross Profit
 
9,731

 
24,985

 
23,438

 
55,788

Net Income
 
8,612

 
21,658

 
15,411

 
47,629


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
 
2019
 
2018
 
2019
 
2018
Absolute Energy
 
$
237

 
$
282

 
$
475

 
$
1,161

Guardian Energy
 

 

 

 
1,172

Homeland Energy Solutions
 
350

 
849

 
570

 
1,256

Other
 
70

 
58

 
212

 
69

Total
 
$
657

 
$
1,189

 
$
1,257

 
$
3,658




15


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 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.

16


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.

Results of Operations

Comparison of the Three Months Ended July 31, 2019 and 2018
 
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, 2019 and 2018:
 
2019
 
2018
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenues
$
51,773,780

 
100.0

 
$
41,465,388

 
100.0
Cost of Goods Sold
53,275,986

 
102.9

 
40,632,307

 
98.0
Gross Profit (Loss)
(1,502,206
)
 
(2.9
)
 
833,081

 
2.0
Operating Expenses
928,357

 
1.8

 
732,383

 
1.8
Operating Income (Loss)
(2,430,563
)
 
(4.7
)
 
100,698

 
0.2
Other Income
756,697

 
1.5

 
1,339,673

 
3.2
Net Income (Loss)
$
(1,673,866
)
 
(3.2
)
 
$
1,440,371

 
3.5

Revenues. Our total revenue was higher for our third quarter of 2019 compared to the same period of 2018 due to the higher quantities of ethanol sold. In addition, we received a higher average ethanol price offset by a lower average price for distiller grain for our third quarter of 2019 compared to the same period of 2018. For our third quarter of 2019, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 16% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. 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.
    
The average price per gallon we received for our ethanol was approximately 6% higher for our third quarter of 2019 compared to the same period of 2018. 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 2018 and 2019 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 the ethanol price will continue to be negatively impacted by these waivers in the remaining quarter of 2019 and beyond.

We sold approximately 21% more gallons of ethanol during our third quarter of 2019 compared to the same period of 2018. Management attributes this increase in ethanol sales with increased production levels. During our third quarter of 2018 we had an extended maintenance shutdown which significantly impacted our production in May and June 2018.  Our total ethanol production was 27% more during our third quarter of 2019 as compared to the same period of 2018 for this same reason. Management anticipates that our ethanol sales and production will be similar during the remaining quarter of our 2019 fiscal year compared to our 2018 fiscal year. While we have additional production capacity, we will likely run at less than capacity until margins and local corn supply improve.

During our third quarter of 2019, we experienced combined realized and unrealized loss on our ethanol derivatives of approximately $663,000 which decreased our revenue. By comparison, we experienced no ethanol derivative instruments gains or losses during the same period of 2018.

The average price per ton we received for our dried distillers grains was approximately 15% lower for our third quarter of 2019 compared to the same period of 2018. By comparison, the average price per ton we received for our modified/wet distillers grains was approximately 28% higher for our third quarter of 2019 compared to the same period of 2018.  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 grains prices will remain steady unless China reenters the distillers grains market which could result in a significant increase in distiller grains demand.



17


Our dried distiller grains production increased by approximately 25% during our third quarter of 2019 compared to the same period of 2018. 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 quarter of 2019 depending on the margin environment and production run rates.

We sold approximately 21% more pounds of corn oil during our third quarter of 2019 compared to the same period of 2018. This increase in corn oil sales is in direct relationship to the increase in ethanol production for the period. The average price per pound we received for our corn oil was approximately 6% higher for our third quarter of 2019 compared to the same period of 2018. This increase in corn oil prices occurred due to an increase in demand for corn oil. Management anticipates that corn oil prices will be steady during the remaining quarter of our 2019 fiscal year.

Cost of Goods Sold. Our cost of goods sold was higher for our third quarter of 2019 compared to the same period of 2018 due primarily to an increase in the amount of corn ground due to an increase in ethanol production during the 2019 period.  Our average cost per bushel of corn was approximately 15% higher during our third quarter of 2019 compared to the same period of 2018 due to some delayed planting of corn acres primarily in the eastern corn belt during the spring of 2019.  Since the end of our third quarter of 2019, corn prices have fallen back to levels seen in the first six months of 2019. Management anticipates that global corn supplies will remain favorable during the remaining quarter of our 2019 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 quarter of our 2019 fiscal year. In addition, continued trade policy 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 21% more bushels of corn during our third quarter of 2019 compared to the same period of 2018 due to increased ethanol production. Management anticipates consistent corn consumption during the remaining quarter of our 2019 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 increased by approximately 14% during our third quarter of 2019 compared to the same period of 2018. Our usage was 21% higher, and the average price we paid per MMBtu of natural gas was approximately 6% lower during our third quarter of 2019 compared to the same period of 2018. Management attributes this increase in natural gas costs 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 quarter of our 2019 fiscal year due to current supply levels and derivative positions of natural gas.

We experienced combined realized and unrealized losses of approximately $121,000 for our third quarter of 2019 related to our corn and natural gas derivative instruments which increased our cost of goods sold. By comparison, we experienced approximately $2,504,000 of combined realized and unrealized gains for the same period of 2018 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 third quarter of 2019 compared to the same period of 2018 due to increases in technology and consulting expenses as well as timing of dues to trade organizations. In addition, the amount we pay for property taxes has increased by approximately 42% due to the expiration of the tax rebate that we have qualified for since our expansion in 2007. Management anticipates that our operating expenses will be higher during the remaining quarter of our 2019 fiscal year compared to our 2018 fiscal year.

Other Income (Expense). Other income was lower for our third quarter of 2019 compared to the same period of 2018, due primarily to a decrease in equity income from investments partially offset by an increase in unrealized earnings from marketable securities. Management anticipates decreased income from our investments during our 2019 fiscal year compared to our 2018 fiscal year due to current market factors. Our investments are in other companies involved in the ethanol industry which, in general, experienced less favorable operating margins during our third quarter of 2019 as compared to the same quarter of 2018.


18


Comparison of the Nine Months Ended July 31, 2019 and 2018
 
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, 2019 and 2018:
 
2019
 
2018
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenues
$
147,578,817

 
100.0

 
$
134,830,955

 
100.0
Cost of Goods Sold
148,131,565

 
100.4

 
131,595,219

 
97.6
Gross Profit (Loss)
(552,748
)
 
(0.4
)
 
3,235,736

 
2.4
Operating Expenses
2,876,877

 
1.9

 
2,862,533

 
2.1
Operating Income (Loss)
(3,429,625
)
 
(2.3
)
 
373,203

 
0.3
Other Income
1,804,929

 
1.2

 
3,070,875

 
2.3
Net Income (Loss)
$
(1,624,696
)
 
(1.1
)
 
$
3,444,078

 
2.6

Revenues. Our total revenue was higher for our nine months ended July 31, 2019 compared to the same period of 2018 due to the higher quantities of ethanol sold. Offsetting the increased quantities, we received lower ethanol and distiller grain prices for our nine months ended July 31, 2019 compared to the same period of 2018. For our nine months ended July 31, 2019, ethanol sales accounted for approximately 78% of our total revenue, distiller grains sales accounted for approximately 18% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. 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.
    
The average price per gallon we received for our ethanol was approximately 2% lower for our nine months ended July 31, 2019 compared to the same period of 2018. Management attributes this decrease in the average price we received for our ethanol to higher ethanol supplies and lower demand. Uncertainty has existed throughout our 2018 and 2019 fiscal years related to whether the EPA would grant additional SRE waivers. SRE waivers have been granted at high levels which is leading to demand destruction.

We sold approximately 11% more gallons of ethanol during our nine months ended July 31, 2019 compared to the same period of 2018. Management attributes this increase in ethanol sales with increased production levels. During our third quarter of 2018 we had an extended maintenance shutdown which significantly impacted our production in May and June 2018.  Our total ethanol production was 9% more during our nine months ended July 31, 2019 as compared to the same period of 2018 for that same reason. Management anticipates that our ethanol sales and production will be similar during the remaining quarter of our 2019 fiscal year compared to our 2018 fiscal year unless margins improve in which case production levels could be significantly higher.

During our nine months ended July 31, 2019, we experienced combined realized and unrealized loss on our ethanol derivatives of approximately $463,000 which decreased our revenue. By comparison, we experienced no ethanol derivative instruments gains or losses during the same period of 2018.

The average price per ton we received for our dried distillers grains was approximately 4% higher for our nine months ended July 31, 2019 compared to the same period of 2018. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 23% higher for our nine months ended July 31, 2019 compared to the same period of 2018. Management attributes these higher distiller grains prices to volatility in corn prices, global protein markets, specifically in soybean meal, and increasing domestic livestock production during the last several months. Offsetting the increase in average price per ton we received, the relative value of distiller grains to corn decreased by 4% for our nine months ended July 31, 2019 compared to the same period of 2018. Distiller grains are typically used as a feed substitute for corn. Management anticipates distiller grains prices will continue to decrease as a relative value of corn price unless China reenters the distillers grains market which could result in a significant increase in distiller grains demand.

Our dried distiller grains production was approximately 7% higher during our nine months ended July 31, 2019 compared to the same period of 2018. This increase is due to an increase in ethanol production offset by an increase in the amount of ethanol we are producing per bushel of corn. The more efficient we are at producing ethanol the fewer tons of distiller grains we have available for sale. Management anticipates distiller grains production to be proportionate to ethanol production, which may or may not be higher for the remaining quarter of 2019 depending on the margins we are able to secure.


19


We sold approximately 1% fewer pounds of corn oil during our nine months ended July 31, 2019 compared to the same period of 2018. This decrease in corn oil sales resulted from approximately 6% less oil extracted per bushels of corn processed due to reliability and mechanical downtime of our corn oil machines The average price per pound we received for our corn oil was approximately 4% more for our nine months ended July 31, 2019 compared to the same period of 2018. This increase in corn oil prices occurred due to an increase in demand for corn oil. Management anticipates that corn oil prices will be steady during the remaining quarter of our 2019 fiscal year.

Cost of Goods Sold. Our cost of goods sold was higher for our nine months ended July 31, 2019 compared to the same period of 2018 due primarily to an increase in the amount of corn ground due to an increase in ethanol production during the 2019 period partially offset by a decrease in natural gas costs.  In addition to the amount of corn we ground, our average cost per bushel of corn was approximately 8% higher during our nine months ended July 31, 2019 compared to the same period of 2018.  Management anticipates that global corn supplies will remain favorable during the remaining quarter of our 2019 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 quarter of our 2019 fiscal year. In addition, continued trade policy 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 6% more bushels of corn during our nine months ended July 31, 2019 compared to the same period of 2018 due to increased ethanol production partially offset by increased efficiencies of converting corn into ethanol. Management anticipates consistent corn consumption during the remaining quarter of our 2019 fiscal year, provided that we can maintain positive operating margins or cash flow that allow us to continue to operate the ethanol plant at capacity.

Our natural gas costs decreased by approximately 4% during our nine months ended July 31, 2019 compared to the same period of 2018. Our usage was 8% higher, and the average price we paid per MMBtu of natural gas was approximately 11% lower during our nine months ended July 31, 2019 compared to the same period of 2018. Management attributes this increase in natural gas usage to increased ethanol production rate. We expect stable natural gas prices during the remaining quarters of our 2019 fiscal year due to current supply levels of natural gas and derivative positions. Further, if we experience a supply disruption during our 2019 fiscal year, it may lead to significantly higher natural gas costs for the amount of gas we use that is not covered by risk management practices.

We experienced combined realized and unrealized gains of approximately $139,000 for our nine months ended July 31, 2019 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $1,609,000 of combined realized and unrealized gains for the same period of 2018 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 similar during our nine months ended July 31, 2019 compared to the same period of 2018. We experienced an increase in our expenses associated with technology and property tax expense due to the expiration of property tax rebates. Management anticipates that our operating expenses will be similar during the remaining quarters of our 2019 fiscal year compared to our 2018 fiscal year.

Other Income (Expense). Other income was lower for our nine months ended July 31, 2019 compared to the same period of 2018, due primarily to a decrease in equity income from investments. We wrote off the value of our note receivable due from Golden Renewable Energy, LLC which equaled approximately $599,000 during the first quarter of 2018. Management anticipates decreased income from our investments during our 2019 fiscal year compared to our 2018 fiscal year due to current market factors. 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, 2019 as compared to the same quarter of 2018.

Changes in Financial Condition for the Nine Months Ended July 31, 2019

Current Assets. We had less cash and equivalents and marketable securities at July 31, 2019 compared to October 31, 2018. This decrease in our cash and marketable security position is due primarily to nearly $5 million in distributions we paid to our members during December 2018 and approximately $8.9 million of cash used for capital projects. The value of our accounts receivable and inventory are higher at July 31, 2019 compared to October 31, 2018 due to timing of shipments and payments for products. The value of our other receivables is lower at July 31, 2019 compared to October 31, 2018 due to funds received from an insurance claim.


20


Property and Equipment. The net value of our property and equipment was higher at July 31, 2019 compared to October 31, 2018 due to capital projects primarily related to our capacity expansion. We had approximately $2.9 million in construction in progress at July 31, 2019 primarily related to our road and administration building construction.

Other Assets. Our other assets were lower at July 31, 2019 compared to October 31, 2018 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, 2019.

Current Liabilities. Our current liabilities at July 31, 2019 were higher compared to October 31, 2018 due to timing of payment on accounts payable including payments for corn.

Long-term Liabilities. Our long-term liabilities were similar at July 31, 2019 and October 31, 2018.

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 our plant expansion project or if the current negative margin environment continues for an extended period of time. As of July 31, 2019, we had $10,000,000 available pursuant to our revolving term loan and approximately $9.8 million in cash and equivalents and marketable securities.

We are nearing completion of a multiple phase expansion of the ethanol plant. We expect the expansion to cost approximately $23 million, including the remaining commitment of approximately $2.7 million, some of which we expect to pay 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 nine months ended July 31, 2019 and 2018:
 
Nine Months Ended July 31,
 
2019
 
2018
Net cash provided by operating activities
$
3,356,962

 
$
9,168,279

Net cash provided by (used in) investing activities
1,116,065

 
(7,029,271
)
Net cash (used in) financing activities
(4,883,584
)
 
(14,733,420
)

Cash Flow From Operations 

Our cash flows from operations for the nine months ended July 31, 2019 were lower compared to the same period of 2018 due primarily to lower net income and changes in working capital components. In addition, we also received an insurance payment during our nine months ended July 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 less cash for investing activities during our nine months ended July 31, 2019 compared to the same period of 2018 primarily due to an increase in proceeds from the sale of marketable securities and a decrease in capital expenditures. Our capital expenditures during our 2019 and 2018 fiscal years were primarily for plant improvements associated with the expansion of production and construction of a new road and administration building.


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Cash Flow From Financing Activities.

During our nine months ended July 31, 2019, we used less cash for financing activities due to less distributions being paid in 2019 as compared to the same period of 2018.

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, 2019, we had none outstanding on this loan with a potential accrued interest rate of 5.35% per year. As of July 31, 2019, 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 July 31, 2019, 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

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

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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.

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, 2019. 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.
 

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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, 2019, we had price protection or delivery protection in place for approximately 29% of our anticipated corn needs, 85% of our natural gas needs and 11% of our ethanol sales for the next 12 months and approximately 22% 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 July 31, 2019, 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, 2019. 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
 
453,000

 
MMBTU
 
10%
 
$
118,000

Ethanol
 
107,400,000

 
Gallons
 
10%
 
14,993,000

Corn
 
28,396,000

 
Bushels
 
10%
 
11,498,000


Item 4.  Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our 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, 2019.  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, 2019, 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.



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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, 2018.
    
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information

None.

Item 6. Exhibits.

(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, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of July 31, 2019 and October 31, 2018, (ii) Statements of Operations for the three and nine months ended July 31, 2019 and 2018, (iii) Statements of Cash Flows for the nine months ended July 31, 2019 and 2018, 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 11, 2019
 
/s/ Curtis Strong
 
 
 
Curtis Strong
 
 
 
Executive Vice-President
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
September 11, 2019
 
/s/ Christine Marchand
 
 
 
Christine Marchand
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)


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