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HIGHWATER ETHANOL LLC - Quarter Report: 2019 July (Form 10-Q)

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 000-53588
 
HIGHWATER ETHANOL, LLC
(Exact name of registrant as specified in its charter)
 
Minnesota
 
20-4798531
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
24500 US Highway 14, Lamberton, MN 56152
(Address of principal executive offices)
 
(507) 752-6160
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  As of September 11, 2019 there were 4,808 membership units outstanding.

1


INDEX

 
Page Number
 
 


2




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HIGHWATER ETHANOL, LLC
Condensed Balance Sheets
 ASSETS
July 31, 2019
 
October 31, 2018

(Unaudited)
 

Current Assets

 

Cash and cash equivalents
$
1,100,700

 
$
430,702

Derivative instruments
242,646

 
942,885

Accounts receivable
2,172,939

 
1,316,129

Inventories
11,845,324

 
8,068,691

Prepaids and other
194,424

 
91,595

Total current assets
15,556,033

 
10,850,002



 

Property and Equipment

 

Land and land improvements
12,836,332

 
12,647,512

Buildings
38,818,532

 
38,818,532

Office equipment
1,151,330

 
1,151,330

Equipment
77,561,915

 
76,467,906

Vehicles
123,779

 
74,094

Construction in progress
475,226

 
445,455


130,967,114

 
129,604,829

Less accumulated depreciation
(70,531,599
)
 
(63,874,604
)
Net property and equipment
60,435,515

 
65,730,225



 

Other Assets

 

Investments
2,698,979

 
2,775,257

Deposits
191,457

 
191,457

Total other assets
2,890,436

 
2,966,714



 

Total Assets
$
78,881,984

 
$
79,546,941


3




LIABILITIES AND MEMBERS' EQUITY
July 31, 2019
 
October 31, 2018

(Unaudited)
 

Current Liabilities

 

Accounts payable
$
3,714,159

 
$
4,149,907

Accrued expenses
1,728,684

 
1,161,340

Customer Deposits
4,947

 

Current maturities of long-term debt
2,726,163

 
2,715,436

Total current liabilities
8,173,953

 
8,026,683

 
 
 
 
Long-Term Debt
12,989,899

 
7,222,371

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Members' Equity

 

Members' equity, 4,808 and 4,812 units issued and outstanding
57,718,132

 
64,297,887

 
 
 
 
Total Liabilities and Members’ Equity
$
78,881,984

 
$
79,546,941


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

4


HIGHWATER ETHANOL, LLC
Condensed Unaudited Statements of Operations


Three Months Ended
 
Nine Months Ended

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


 

 
 
 
 
Revenues
$
25,605,525

 
$
25,888,608

 
$
71,233,646

 
$
73,131,232



 

 
 
 
 
Cost of Goods Sold
25,781,008

 
27,415,993

 
74,824,640

 
72,426,988



 

 
 
 
 
Gross Profit (Loss)
(175,483
)
 
(1,527,385
)
 
(3,590,994
)
 
704,244



 

 
 
 
 
Operating Expenses
902,582

 
658,967

 
2,475,470

 
2,192,660



 

 
 
 
 
Operating Loss
(1,078,065
)
 
(2,186,352
)
 
(6,066,464
)
 
(1,488,416
)


 

 
 
 
 
Other Income (Expense)

 

 
 
 
 
Interest income
3,071

 
1,665

 
6,352

 
2,360

Other income
23,964

 
548

 
76,881

 
26,457

Interest expense
(226,640
)
 
(167,413
)
 
(642,804
)
 
(523,841
)
Income from equity method investments
29,128

 
20,647

 
78,280

 
34,822

Total other income (expense), net
(170,477
)
 
(144,553
)
 
(481,291
)
 
(460,202
)

 
 
 
 
 
 
 
Net Loss
$
(1,248,542
)
 
$
(2,330,905
)
 
$
(6,547,755
)
 
$
(1,948,618
)
 
 
 
 
 
 
 
 
Weighted Average Units Outstanding
4,808

 
4,814

 
4,810

 
4,814

Net Loss Per Unit, Basic and Diluted
$
(259.68
)
 
$
(484.19
)
 
$
(1,361.28
)
 
$
(404.78
)
Distributions Per Unit
$

 
$

 
$

 
$
345


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

5


HIGHWATER ETHANOL, LLC
Statements of Changes in Members' Equity
 
Members' Equity
 
 
Balance - October 31, 2017
$
72,133,969

 
 
Net loss for the three-month period ended January 31, 2018
(953,195
)
 
 
Member distributions
(1,660,658
)
 
 
Balance - January 31, 2018
69,520,116

 
 
Net income for the three-month period ended April 30, 2018
1,335,482

 
 
Member distributions

 
 
Balance - April 30, 2018
$
70,855,598

 
 
Net loss for the three-month period ended July 31, 2018
(2,330,905
)
 
 
Member distributions

 
 
Balance - July 31, 2018
$
68,524,693


 
Members' Equity
 
 
Balance - October 31, 2018
$
64,297,887

 
 
Net loss for the three-month period ended January 31, 2019
(2,719,712
)
 
 
Member distributions

 
 
Balance - January 31, 2019
61,578,175

 
 
Net loss for the three-month period ended April 30, 2019
(2,579,501
)
 
 
Member unit repurchase, 4 units
(32,000
)
 
 
Balance - April 30, 2019
58,966,674

 
 
Net loss for the three-month period ended July 31, 2019
(1,248,542
)
 
 
Member distributions

 
 
Balance - July 31, 2019
57,718,132


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

6


HIGHWATER ETHANOL, LLC
Condensed Unaudited Statements of Cash Flows

Nine Months Ended

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

 

Net Loss
$
(6,547,755
)
 
$
(1,948,618
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
 
 
 
Depreciation and amortization
6,686,250

 
6,447,183

Distributions in excess of earnings from equity method investments
313,039

 
329,828

Non-cash patronage income
(236,761
)
 
(353,557
)
Changes in assets and liabilities

 

Accounts receivable
(856,810
)
 
(40,793
)
Inventories
(3,776,633
)
 
235,223

Derivative instruments
700,239

 
80,207

Prepaids and other
(102,829
)
 
(54,187
)
Customer deposits
4,947

 

Accounts payable
(475,325
)
 
795,592

Accrued expenses
567,344

 
(40,564
)
Net cash (used in) provided by operating activities
(3,724,294
)
 
5,450,314



 

Cash Flows from Investing Activities

 

Capital expenditures
(1,322,708
)
 
(1,279,264
)
   Net cash provided by (used in) investing activities
(1,322,708
)
 
(1,279,264
)


 

Cash Flows from Financing Activities

 

Payments on long-term debt
(2,251,000
)
 
(3,500,000
)
Proceeds from long-term debt
8,000,000

 
1,000,000

Member unit repurchase
(32,000
)
 

Member distributions

 
(1,660,658
)
Net cash (used in) provided by financing activities
5,717,000

 
(4,160,658
)


 

Net Increase in Cash and Cash Equivalents
669,998

 
10,392



 

Cash and Cash equivalents – Beginning of Period
430,702

 
738,209



 

Cash and Cash equivalents – End of Period
$
1,100,700

 
$
748,601

 
 
 
 
Supplemental Cash Flow Information

 

Cash paid for interest
$
555,819

 
$
414,633



 

Supplemental Disclosure of Noncash Financing and Investing Activities

 

Capital expenditures included in accounts payable
$
107,567

 
$
85,309


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

7

HIGHWATER ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
July 31, 2019


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations.  The accompanying balance sheet and related notes as of October 31, 2018 are derived from the audited financial statements as of that date. These condensed 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 Form 10-K.
 
In the opinion of management, the interim condensed financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for fair presentation of the Company's financial position as of July 31, 2019 and the results of operations and cash flows for all periods presented.

Nature of Business

Highwater Ethanol, LLC, (a Minnesota Limited Liability Company) operates a 59.5 million gallon per year ethanol plant in Lamberton, Minnesota. The Company produces and sells, primarily through third-party professional marketers, fuel ethanol and co-products of the fuel ethanol production process in the continental United States.

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. The Company uses estimates and assumptions in accounting for significant matters, among others, the carrying value of property and equipment and related impairment testing, inventory valuation, and derivative instruments. Actual results could differ from those estimates and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions and the effects of revisions are reflected in the period in which the revision is made.

Revenue Recognition

Effective November 1, 2018, the Company adopted the new guidance required by ASU No. 2014-09 as issued by the FASB, using the modified retrospective approach. ASC Topic 606, Revenue from Contracts with Customers, further details the Company’s requirement to recognize revenue of transferred goods or services to customers in an amount which is expected to be received in exchange for those goods or services. Five steps were required as part of the new guidance: 1. Identify the contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price to the performance obligation 5. Recognize revenue when each performance obligation is satisfied. The adoption of this new guidance did not result in any material changes to our revenue recognition.
The Company generally sells ethanol and related products pursuant to marketing agreements. The Company’s products are shipped FOB shipping point. Upon adoption of ASC Topic 606, the Company recognizes revenue when control of goods is transferred, which is consistent with the Company's previous policy where revenues were recognized when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. For ethanol sales, control transfers when loaded into the rail car and for distiller’s grains when the loaded rail cars leave the plant facility.
In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and freight due to the marketers are deducted from the gross sales price at the time incurred. Revenue is recorded net of these marketing fees and freight as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products.

The following is a description of principal activities from which we generate revenue. 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.


8

HIGHWATER ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
July 31, 2019


ethanol sales
modified distillers grains sales
dried distillers grains sales
corn oil sales

Disaggregation of revenue:

All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line for the three and nine months ended July 31, 2019 and 2018:
 
Three Months Ended July 31, 2019
 
Three Months Ended July 31, 2018
 
Nine Months Ended July 31, 2019
 
Nine Months Ended July 31, 2018
Revenue Sources
Amount (Unaudited)
 
Amount (Unaudited)
 
Amount
(Unaudited)
 
Amount
(Unaudited)
 
 
 
 
 
 
 
 
Ethanol Sales
$
20,374,721

 
$
19,861,538

 
$
54,657,405

 
$
56,458,905

Modified Distillers Grains Sales
892,835

 
882,493

 
3,003,391

 
2,635,981

Dried Distillers Grains Sales
3,428,947

 
4,221,135

 
11,279,498

 
11,724,714

Corn Oil Sales
909,022

 
923,442

 
2,293,352

 
2,311,632

Total Revenues
$
25,605,525

 
$
25,888,608

 
$
71,233,646

 
$
73,131,232


Contract assets and contract liabilities:

The following table provides information about receivables and contract liabilities from contracts with customers:
 
July 31, 2019
 
October 31, 2018*
 
 
 
 
Accounts receivable
$
2,172,939

 
$
1,316,129

Short term contract liabilities
4,947

 


*Derived from audited financial statements

The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract.

Shipping Costs

Shipping costs incurred by the Company in the sale of ethanol, dried distillers grains and corn oil are not specifically identifiable and as a result, revenue from the sale of those products is recorded based on the net selling price reported to the Company from the marketer.

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 fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.

Operating Segment

The Company uses the "management approach" for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the "management approach" model, the Company has determined that its business is comprised of a single operating segment.


9

HIGHWATER ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
July 31, 2019


Derivative Instruments

Derivatives are recognized in the balance sheet and the measurement of these instruments is at fair value. Margin amounts required by the broker are classified as deposits with broker within derivative instruments and any excess is classified as cash equivalents in the balance sheets. In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recognized currently in earnings.

Contracts are evaluated to determine whether the contracts are derivatives. Certain contracts that meet the definition of a derivative may be exempted as “normal purchases or normal sales”. 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. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting as derivatives, therefore, are not marked to market in our financial statements.

The Company enters into corn and ethanol commodity-based and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in prices. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Changes in fair market value of ethanol derivatives are included in revenues. Changes in fair market value of corn and natural gas derivatives are included in costs of goods sold.

Fair Value of Financial Instruments

The carrying value of accounts receivable, accounts payable, and other working capital items approximate fair value at July 31, 2019 due to the short maturity nature of these instruments.

The Company believes the carrying value of the derivative instruments approximates fair value based on quoted market prices or widely accepted valuation techniques including discounted cash flow analysis which includes observable market-based inputs.

The Company believes the carrying amount of the long-term debt approximates the fair value due to a significant portion of total indebtedness containing variable interest rates and that rate is a market interest rate for these borrowings.

Investments

The Company has a 6% investment interest in an unlisted company, Renewable Products Marketing Group, LLC (RPMG), who markets the Company’s ethanol. The Company also has a 7% ownership interest in Lawrenceville Tank, LLC (LT), which owns and operates a trans load/tank facility near Atlanta, Georgia. These investments are flow-through entities and 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 statements of operations and added to the investment account. Distributions or dividends received from the investment are treated as a reduction of the investment account. The Company consistently follows the practice of recognizing the net income from equity method investments 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 is based on the investee’s results of operations for the period ended June 30, 2019.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  This ASU requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve months on its balance sheet.  This ASU is effective in annual and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, and requires a modified retrospective transition method.  The Company is currently in the process of evaluating the impact that this new guidance will have on the financial statements.



10

HIGHWATER ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
July 31, 2019


2. UNCERTAINTIES

The Company derives substantially all of its revenues from the sale of ethanol and distillers grains. These products are commodities and the market prices for these products display substantial volatility and are subject to a number of factors which are beyond the control of the Company. The Company’s most significant manufacturing inputs are corn and natural gas. The price of these commodities is also subject to substantial volatility and uncontrollable market factors. In addition, these input costs do not necessarily fluctuate with the market prices for ethanol and distillers grains. As a result, the Company is subject to significant risk that its operating margins can be reduced or eliminated due to the relative movements in the market prices of its products and major manufacturing inputs. As a result, market fluctuations in the price of or demand for these commodities can have a significant adverse effect on the Company’s operations, profitability, and availability of cash flows to make loan payments and maintain compliance with the loan agreement.

3. INVENTORIES

Inventories consisted of the following at:
 
 
July 31, 2019
 
October 31, 2018
 
 
 
 
 
Raw materials
 
$
5,335,159

 
$
2,339,767

Spare parts and supplies
 
3,649,843

 
3,118,195

Work in process
 
748,778

 
752,454

Finished goods
 
2,111,544

 
1,858,275

 Total
 
$
11,845,324

 
$
8,068,691


The Company recorded a lower of cost or net realizable value write-down on corn inventory of approximately $420,000 and dried distillers grains inventory of approximately $29,000 at July 31, 2019.

4. DERIVATIVE INSTRUMENTS

As of July 31, 2019, the Company had entered into corn and ethanol derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the balance sheet. The Company uses these instruments to manage risks from changes in market rates and prices. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company may designate the hedging instruments based upon the exposure being hedged as a fair value hedge or a cash flow hedge. The derivative instruments outstanding at July 31, 2019 are not designated as effective hedges for accounting purposes.

Commodity Contracts

As of July 31, 2019, the Company has open futures and option positions for 2,100,000 bushels of corn and 203,000 gallons of ethanol. Management expects all open positions outstanding as of July 31, 2019 to be realized within the next twelve months.

The following tables provide details regarding the Company's derivative instruments at July 31, 2019 and October 31, 2018:
          Instrument
Balance Sheet location
 
July 31, 2019
October 31, 2018
 
 
 
 
 
Corn, natural gas and ethanol contracts
 
 




In gain position
 
 
$
100,606

$

In loss position
 
 
(1,050,668
)
(2,280,280
)
Deposits with broker
 
 
1,192,708

3,223,165

 
Current assets
 
$
242,646

$
942,885



11

HIGHWATER ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
July 31, 2019


The following tables provide details regarding the gains (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments:
 
 
Statement of
 
Three Months Ended July 31,
 
 
Operations location
 
2019
2018
Ethanol contracts
 
Revenues
 
(162,349
)
$
50,668

Corn contracts
 
Cost of goods sold
 
(785,094
)
(1,369,076
)
Natural gas contracts
 
Cost of goods sold
 
588


 
 
 
 
 
 
 
 
Statement of
 
Nine Months Ended July 31,
 
 
Operations location
 
2019
2018
Ethanol contracts
 
Revenues
 
$
(257,408
)
$
14,480

Corn contracts
 
Cost of goods sold
 
(877,213
)
289,267

Natural gas contracts
 
Cost of goods sold
 
20,394

35,332


5. FAIR VALUE MEASUREMENTS

The following table provides information on those assets (liabilities) measured at fair value on a recurring basis.
 
 
Fair Value as of
 
Fair Value Measurement Using
 
 
July 31, 2019
 
Level 1
 
Level 2
 
Level 3
Derivative instruments - commodities
 


 


 


 


     In gain position
 
$
100,606

 
$
1,387

 
$
99,219

 
$

     In loss position
 
(1,050,668
)
 
(416,230
)
 
(634,438
)
 


 
 
Fair Value as of
 
Fair Value Measurement Using
 
 
October 31, 2018
 
Level 1
 
Level 2
 
Level 3
Derivative instruments - commodities
 


 


 


 


     In gain position
 
$

 
$

 
$

 
$

     In loss position
 
(2,280,280
)
 
(37,485
)
 
(2,242,795
)
 


The Company determines the fair values of commodities by obtaining the fair value measurements from an independent pricing service based on dealer quotes and live trading levels from the Chicago Board of Trade.
 
6. DEBT FINANCING

Long-term debt consists of the following at:
 
July 31, 2019
 
October 31, 2018
Variable Rate Term Loan
$
4,250,000

 
$
6,500,000

 
 
 
 
Term Revolving Loan
11,499,000

 
3,500,000

 
 
 
 
Total
15,749,000

 
10,000,000

 
 
 
 
Less Debt Issuance Costs
(32,938
)
 
(62,193
)
 
 
 
 
Less amounts due within one year
(2,726,163
)
 
(2,715,436
)
 
 
 
 
Net long-term debt
$
12,989,899

 
$
7,222,371


12

HIGHWATER ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
July 31, 2019


Bank Financing

On January 22, 2016, the Company entered into a Second Amended and Restated Credit Agreement with Compeer Financial PCA f/k/a AgStar Financial Services, PCA, as administrative agent for several financial institutions ("Compeer") which amended the Amended and Restated Credit Agreement dated September 22, 2014. The Second Amended and Restated Credit Agreement decreased the Term Loan to $15,000,000, increased the Term Revolving Loan to $15,000,000 and eliminated the Revolving Line of Credit. Effective April 20, 2018, the Company executed a First Amendment to the Second Amended and Restated Credit Agreement with Compeer Financial which increased the availability under the Term Revolving Loan to $20,000,000. In connection therewith, as of the same date, the Company executed a Third Amended and Restated Term Revolving Note and a Third Amended and Restated Mortgage, Security Agreement, Assignment of Leases and Fixture Financing Statement.
Term Loan

The Term Loan had an original balance of $15,000,000 with a variable interest rate based on the 30-day LIBOR rate plus 325 basis points with no minimum interest rate. The applicable interest rate at July 31, 2019 was 5.66%. Monthly principal payments are due on the Term Loan of approximately $250,000 plus accrued interest. Payments of all amounts outstanding are due on January 22, 2021. The outstanding balance on this note was $4,250,000 at July 31, 2019. The Company may convert the Term Loan to a fixed rate loan, subject to certain conditions as described in the Second Amended and Restated Credit Agreement and with the consent of Compeer.

Term Revolving Loan

The Term Revolving Loan is for $20,000,000 with a variable interest rate based on the 30-day LIBOR rate plus 325 basis points with no minimum interest rate. The applicable interest rate at July 31, 2019 was 5.66%. The Term Revolving Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Term Revolving Loan. Payment of all amounts outstanding are due on January 22, 2023. The outstanding balance on this note was $11,499,000 at July 31, 2019. The Company pays interest at a rate of 1.50% on amounts outstanding for letters of credit which also reduce the amount available under the Term Revolving Loan. The Company has no letters of credit outstanding at July 31, 2019. The Company is also required to pay unused commitment fees for the Term Revolving Loan as defined in the Second Amended and Restated Credit Agreement.

Covenants and other Miscellaneous Terms
    
The loan facility with Compeer is secured by substantially all business assets. The Company executed a mortgage creating a first lien on its real estate and plant and a security interest in all personal property located on the premises and assigned all rents and leases to property, marketing contracts, risk management services contract, and natural gas, electricity, water service and grain procurement agreements.

The Company is also subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, tangible net worth, and working capital requirements. The debt service coverage ratio is no less than 1.25:1.00 measured annually by comparing adjusted EBITDA to scheduled payments of principal and interest. The minimum working capital is $8,250,000, which is calculated as current assets plus the amount available for drawing under the Term Revolving Loan and undrawn amounts on outstanding letters of credit, less current liabilities, and is measured quarterly. The Company believes it is probable that it will violate the debt service coverage ratio covenant measured as of October 31, 2019.
The Company is limited to annual capital expenditures of $5,000,000 without prior approval, incurring additional debt over certain amounts without prior approval, and making additional investments as described in the Second Amended and Restated Credit Agreement without prior approval of Compeer. The Company is allowed to make cash distributions to members as frequently as monthly in an amount equal to 75% of net income if working capital is greater than or equal to $8,250,000, or 100% of net income if working capital is greater than or equal to $11,000,000, or an unlimited amount if working capital is greater than or equal to $11,000,000 and the outstanding balance on the Term Loan is $0.

13

HIGHWATER ETHANOL, LLC
Notes to Condensed Unaudited Financial Statements
July 31, 2019


The estimated maturities of the long-term debt at July 31, 2019 are as follows:
 
Principal
 
Debt Issuance Costs
 
Total
July 2020
$
2,750,000

 
$
(23,837
)
 
$
2,726,163

July 2021
1,500,000

 
(9,101
)
 
1,490,899

July 2022

 

 

July 2023
11,499,000

 

 
11,499,000

     Long-term debt
$
15,749,000

 
$
(32,938
)
 
$
15,716,062


7. COMMITMENTS AND CONTINGENCIES

Marketing Agreements

The Company has an ethanol marketing agreement with a marketer (RPMG) to purchase, market, and distribute all the ethanol produced by the Company. The Company also entered into a member control agreement with the marketer whereby the Company made capital contributions and became a minority owner of the marketer. The member control agreement became effective on February 1, 2011 and provides the Company a membership interest with voting rights. The marketing agreement will terminate if the Company ceases to be a member. The Company will assume certain of the member’s rail car leases if the agreement is terminated. The Company can sell its ethanol either through an index arrangement or at an agreed upon fixed price. The marketing agreement is perpetual until terminated according to the agreement.  The Company may be obligated to continue to market its ethanol through the marketer for a period of time. The amended agreement requires minimum capital amounts invested as required under the agreement.

The Company has a distillers grains marketing agreement with a marketer to market all the dried distillers grains produced at the plant. Under the agreement the marketer charges a maximum of $2.00 per ton and a minimum of $1.50 per ton using 2% of the FOB plant price actually received by them for all dried distillers grains removed. The agreement will remain in effect unless otherwise terminated by either party with 120 days notice. Under the agreement, the marketer is responsible for all transportation arrangements for the distribution of the dried distillers grains. The Company markets and sells its modified and wet distillers grains.

The Company has a corn oil marketing agreement with a marketer (RPMG) which became effective November 15, 2018. The agreement provides for an exclusive marketing arrangement with RPMG for the purposes of marketing and distributing our corn oil in exchange for payment of a marketing fee to RPMG. We may immediately terminate the agreement upon written notice to RPMG if: (1) RPMG fails on three separate occasions within a 12-month period to purchase corn oil or market corn oil, as not otherwise excused under the Agreement; or (2) upon RPMG's insolvency. RPMG may immediately terminate the agreement upon written notice if: (A) during any consecutive three (3) months the actual production or inventory of any corn oil product at the plant varies by twenty (20%) or more from the monthly production and inventory estimates provided to RPMG (other than for reasons permitted under the RPMG Agreement); or (B) upon our insolvency.

Regulatory Agencies

The Company is subject to oversight from regulatory agencies regarding environmental concerns which arise in the ordinary course of its business.

Forward Contracts

At July 31, 2019, the Company had purchase commitments of approximately 220,000 bushels of forward fixed basis corn contracts and 2,649,000 bushels of forward fixed price corn contracts totaling approximately $10,394,000. The Company recorded a lower of cost or net realizable value write-down on the forward fixed price contracts of approximately $400,000 at July 31, 2019. These purchase contracts are for various delivery periods through December 2020. At July 31, 2019, the Company had approximately 3,340,000 MMBTUs of forward fixed price natural gas purchase contracts totaling approximately $8,812,000 for various delivery periods through March 2022. In addition, at July 31, 2019, the Company had approximately 460,000 gallons of forward fixed price denaturant purchase contracts totaling approximately $621,000 for various delivery periods through December 2019.
At July 31, 2019, the Company had approximately 7,545 tons of forward fixed price dried distillers grains sales contracts totaling approximately $982,000 for various delivery periods through September 2019. At July 31, 2019, the Company had approximately 38,000 tons of forward fixed price modified distillers grains sales contracts totaling approximately $2,926,000 for delivery periods through June 2020. In addition, at July 31, 2019, the Company had approximately 235,000 pounds of forward fixed price corn oil sales contracts totaling approximately $58,000 for delivery periods through August 2019.


14


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended July 31, 2019, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2018.

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 “will,” “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:
Ÿ
Changes in the availability and price of corn and natural gas;
Ÿ
Reduction or elimination of the Renewable Fuel Standard;
Ÿ
Volatile commodity and financial markets;
Ÿ
Changes in legislation benefiting renewable fuels;
Ÿ
Our ability to comply with the financial covenants contained in our credit agreements with our lenders;
Ÿ
Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw material costs;
Ÿ
Results of our hedging activities and other risk management strategies;
Ÿ
Ethanol and distillers grains supply exceeding demand and corresponding price reductions;
Ÿ
Our ability to generate cash flow to invest in our business and service our debt;
Ÿ
Changes in the environmental regulations that apply to our plant operations and changes in our ability to comply with such regulations;
Ÿ
Changes in our business strategy, capital improvements or development plans;
Ÿ
Changes in plant production capacity or technical difficulties in operating the plant;
Ÿ
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
Ÿ
Lack of transportation, storage and blending infrastructure preventing ethanol from reaching high demand markets;
Ÿ
Changes in federal and/or state laws or policies impacting the ethanol industry;
Ÿ
Changes and advances in ethanol production technology and the development of alternative fuels and energy sources and advanced biofuels;
Ÿ
Competition from alternative fuel additives;
Ÿ
Changes in interest rates and lending conditions;
Ÿ
Decreases in the price we receive for our ethanol and distillers grains;
Ÿ
Our inability to secure credit or obtain additional equity financing we may require in the future;
Ÿ
Our ability to retain key employees and maintain labor relations;
Ÿ
Changes in the price of oil and gasoline;
Ÿ
Competition from clean power systems using fuel cells, plug-in hybrids and electric cars; and
Ÿ
International trade disputes and the imposition of tariffs by foreign governments on our products.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We are not under any duty to update the forward-looking statements contained in this report. Furthermore, 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 by these cautionary statements.

15


Available Information

Our website address is www.highwaterethanol.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available, free of charge, on our website at www.highwaterethanol.com under the link “SEC Compliance,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Quarterly Report on Form 10-Q.

Overview

Highwater Ethanol, LLC (“we,” “our,” “Highwater Ethanol” or the “Company”) was formed as a Minnesota limited liability company organized on May 2, 2006, for the purpose of constructing, owning, and operating a 50 million gallon per year ethanol plant near Lamberton, Minnesota. Since August 2009, we have been engaged in the production of ethanol and distillers grains at the plant. We have been operating in excess of our nameplate capacity of 50 million gallons per year. We have submitted an application to the Minnesota Pollution Control Agency to increase the emissions limits in our air permit to allow for 70.2 million gallons of denatured ethanol per 12-month rolling average. As such, we anticipate that we may increase our production in the future pending approval of our application. This approval may be received before the end of our 2019 fiscal year.
    
We expect to fund our operations during the next 12 months using cash flow from our continuing operations and our current credit facilities. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us
from profitably operating the ethanol plant, we may need to seek additional funding.

Results of Operations for the Three Months Ended July 31, 2019 and 2018
 
The following table shows the results of our operations and the approximate percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our unaudited statements of operations for the three months ended July 31, 2019 and 2018:
 
2019
 
2018
Statements of Operations Data
Amount
(unaudited)
 
%
 
Amount
(unaudited)
 
%
 
 
 
 
 
 
 
 
Revenues
$
25,605,525

 
100.00
 %
 
$
25,888,608

 
100.00
 %
Cost of Goods Sold
25,781,008

 
100.69
 %
 
27,415,993

 
105.90
 %
Gross Loss
(175,483
)
 
(0.69
)%
 
(1,527,385
)
 
(5.90
)%
Operating Expenses
902,582

 
3.52
 %
 
658,967

 
2.55
 %
Operating Loss
(1,078,065
)
 
(4.21
)%
 
(2,186,352
)
 
(8.45
)%
Other Income (Expense), net
(170,477
)
 
(0.67
)%
 
(144,553
)
 
(0.56
)%
Net Loss
$
(1,248,542
)
 
(4.88
)%
 
$
(2,330,905
)
 
(9.00
)%

The following table shows the sources of our revenue for the three months ended July 31, 2019 and 2018:
 
2019
 
 
 
2018
 
 
Revenue Sources
Amount
(Unaudited)
 
%
 
Amount
(Unaudited)
 
%
 
 
 
 
 
 
 
 
Ethanol Sales
$
20,374,721

 
79.57
%
 
$
19,861,538

 
76.72
%
Modified Distillers Grains Sales
892,835

 
3.49
%
 
882,493

 
3.41
%
Dried Distillers Grains Sales
3,428,947

 
13.39
%
 
4,221,135

 
16.30
%
Corn Oil Sales
909,022

 
3.55
%
 
923,442

 
3.57
%
Total Revenues
$
25,605,525

 
100.00
%
 
$
25,888,608

 
100.00
%


16


Revenue
Ethanol
Our ethanol revenues were greater for the three months ended July 31, 2019, as compared to the three months ended July 31, 2018. Revenue from ethanol sales increased by approximately 2.58% during the three months ended July 31, 2019, as compared to the three months ended July 31, 2018, due primarily to an increase in the average price per gallon of ethanol sold. The average price per gallon of ethanol sold for the three months ended July 31, 2019 was approximately 3.08% higher than the average price we received for the three months ended July 31, 2018.
Ethanol prices will likely continue to be directionally consistent with changes in corn and energy prices. If corn and gasoline prices decrease, that could have a significant negative impact on the price of ethanol particularly if ethanol production remains high. Ethanol prices have been negatively affected by a decline in ethanol exports due to trade disputes with foreign governments such as China resulting in tariffs imposed on ethanol produced in the United States. In addition, the EPA's continued use of the small refinery exemption could also have a negative impact on ethanol prices. However, a positive outcome of trade talks between the United States and China could lead to an increase in ethanol demand from China and higher ethanol prices. In addition, approval of the year-round sale of E15 and a reduction in supply if ethanol plants cut back on production may contribute to higher ethanol prices.
The number of gallons of ethanol sold during the three months ended July 31, 2019 were approximately the same as the number of gallons of ethanol sold for the three months ended July 31, 2018. Management anticipates that the amount of ethanol produced for the three months ended July 31, 2019, will remain relatively consistent in the future until we receive our updated air permit which we applied for in order to allow an increase in gallons produced to approximately 70.2 million gallons of denatured ethanol per 12-month rolling average.

We had losses related to ethanol based derivative instruments of approximately $162,000 for the three months ended July 31, 2019. We had gains related to ethanol based derivative instruments of approximately $51,000 for the three months ended July 31, 2018.

Distillers Grains

Revenue from distillers grains sales decreased by approximately 15.32% during the three months ended July 31, 2019, as compared to the three months ended July 31, 2018. For the three months ended July 31, 2019, the average price per ton of dried distillers grains sold was approximately 9.09% lower than the average price we received during the three months ended July 31, 2018, due to price decreases in the protein market that correlate to the price of soybean meal and lower export demand due to the recent swine flu outbreak in China, Vietnam and other foreign countries. However, for the three months ended July 31, 2019, the average price per ton of modified distillers grains sold was approximately 2.47% higher than during the three months ended July 31, 2018, due to increased demand and reduced production in our local area.

Distillers grains prices typically change in proportion to corn prices and availability of corn. Domestic demand for distillers grains could decrease if corn prices decline and end-users switch to lower priced alternatives or if there is a swine flu outbreak in the U.S. Changes in foreign demand also impact distillers grains prices. If the swine flu outbreak continues in or spreads to other foreign countries that could have a negative effect on distillers grains prices. The imposition by China of anti-dumping and anti-subsidy duties on distillers grains produced in the U.S. have also had a negative effect on export demand from China resulting in lower distillers grains prices. In addition, trade actions by the Trump administration and foreign governments have created additional uncertainty as to future agricultural export demand from China and other countries. However, a positive outcome of trade talks between the United States and China could lead to an increase in distillers grains demand from China.

The tons of dried distillers grains sold decreased by approximately 10.04% during the three months ended July 31, 2019, as compared to the three months ended July 31, 2018. The tons of modified distillers grains sold during the three months ended July 31, 2019, decreased by approximately 1.26% as compared to the three months ended July 31, 2018. The overall tons of distillers grains produced decreased due to less corn being ground due to improved efficiencies in ethanol production. Management anticipates that the overall amount of distillers grains produced for the three months ended July 31, 2019, will remain relatively consistent in the future until we receive our updated air permit which we anticipate will allow us to increase our gallons of ethanol produced and which would also increase our distillers grains production.
        

17


Corn Oil

Revenue from corn oil sales decreased by approximately 1.56% during the three months ended July 31, 2019, as compared to the three months ended July 31, 2018. This is primarily the result of a decrease in corn oil sold during the three months ended July 31, 2019. The pounds of corn oil sold during the three months ended July 31, 2019, decreased by approximately 7.48% as compared to the the three months ended July 31, 2018 due to our corn oil extraction equipment running less efficiently. Management anticipates that the amount of corn oil produced will remain relatively consistent in the future with the amounts produced for the three months ended July 31, 2019, until we receive our updated air permit which we anticipate will allow us to increase our gallons of ethanol produced and which would also increase our corn oil production.

The average price per pound of corn oil sold increased during the three months ended July 31, 2019, as compared to the three months ended July 31, 2018. For the three months ended July 31, 2019, the average price per pound of corn oil we received was approximately 8.70% higher than during the three months ended July 31, 2018, due to increased demand from the corn oil feed market. Management anticipates that corn oil prices in the future will be affected by changes in corn and energy prices and the status of the biodiesel blenders' tax credit.

Cost of Goods Sold

Our two largest costs of production are corn (68.31% of cost of goods sold for the three months ended July 31, 2019) and natural gas (3.94% of cost of goods sold for the three months ended July 31, 2019). Our total cost of goods sold was approximately 5.96% less during the three months ended July 31, 2019, as compared to the three months ended July 31, 2018, due to lower corn costs.

Corn

Our average price per bushel of corn for the three months ended July 31, 2019 decreased by approximately 7.07% per bushel, as compared to the three months ended July 31, 2018, due to lower market value for corn.

Management expects there to be an adequate corn supply available in our area to operate the ethanol plant. However, corn prices have been volatile and are likely to remain so in the future depending on weather conditions, supply and demand, stocks and other factors and could significantly impact our costs of production. The wet spring experienced in the upper Midwest could have a significant impact on corn prices if the delayed planting due to wet conditions results in less corn bushels harvested this fall.

We used approximately 4.11% less bushels of corn in the three months ended July 31, 2019, as compared to the three months ended July 31, 2018, due to improved efficiencies in ethanol production for the period.

At July 31, 2019, we have approximately 220,000 bushels of forward fixed basis corn purchase contracts and 2,649,000 bushels of forward fixed price corn contracts valued at approximately $10,394,000 for various delivery periods through December 2020. We had losses related to corn derivative instruments of approximately $785,000 and $1,369,000 for the three months ended July 31, 2019 and 2018, respectively.

Natural Gas

Our average price per MMBTU of natural gas was approximately 8.92% lower for the three months ended July 31, 2019, as compared to the three months ended July 31, 2018. Natural gas prices were lower due to an increase in natural gas production and our locking in prices for the majority of our natural gas requirements at favorable prices. Management anticipates that natural gas prices will continue at their current levels unless the natural gas industry experiences production problems or if there are large increases in natural gas demand.

For the three months ended July 31, 2019, we purchased approximately 4.12% less natural gas as compared to the three months ended July 31, 2018. This decrease in natural gas usage is primarily due to a decrease in dried distillers grains production.

At July 31, 2019, we have approximately 3,340,000 MMBTUs of forward natural gas sales contracts valued at approximately $8,812,000 for various delivery periods through March 2022. For the three months ended July 31, 2019, we had gains related to natural gas derivative instruments of approximately $1,000. For the same period in 2018, we recorded no change in fair value of our outstanding natural gas derivative positions.


18


Operating Expense

We had operating expenses for the three months ended July 31, 2019 of $902,582, as compared to operating expenses of $658,967 for the three months ended July 31, 2018. Management attributes this increase in operating expenses primarily to our payment of a civil penalty to the Environmental Protection Agency and also an increase in IT fees and advertising costs for the three months ended July 31, 2019, as compared to the three months ended July 31, 2018. Management continues to pursue strategies to optimize efficiencies and maximize production. These efforts may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady.

Operating Loss

We had a loss from operations for the three months ended July 31, 2019 of $1,078,065, which is approximately (4.21%) of our revenues, compared to a loss of $2,186,352, which was approximately (8.45)% of our revenues, for the three months ended July 31, 2018. This decrease in operating loss is primarily due to a decrease in the price we paid for corn relative to the price received for our ethanol.

Other Income (Expense)

We had total other expense for the three months ended July 31, 2019 of $170,477, as compared to total other expense of $144,553 for the three months ended July 31, 2018. Our other expense for the three months ended July 31, 2019, consisted primarily of interest expense offset by income from investments. This increase in other expense is primarily due to an increase in interest expense.

Results of Operations for the Nine Months Ended July 31, 2019 and 2018
 
The following table shows the results of our operations and the approximate percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our unaudited statements of operations for the nine months ended July 31, 2019 and 2018:
 
2019
 
2018
Statements of Operations Data
Amount
(unaudited)
 
%
 
Amount
(unaudited)
 
%
 
 
 
 
 
 
 
 
Revenues
$
71,233,646

 
100.00
 %
 
$
73,131,232

 
100.00
 %
Cost of Goods Sold
$
74,824,640

 
105.04
 %
 
$
72,426,988

 
99.04
 %
Gross Profit (Loss)
$
(3,590,994
)
 
(5.04
)%
 
$
704,244

 
0.96
 %
Operating Expenses
$
2,475,470

 
3.48
 %
 
$
2,192,660

 
3.00
 %
Operating Loss
$
(6,066,464
)
 
(8.52
)%
 
$
(1,488,416
)
 
(2.04
)%
Other Income (Expense), net
$
(481,291
)
 
(0.68
)%
 
$
(460,202
)
 
(0.63
)%
Net Loss
$
(6,547,755
)
 
(9.19
)%
 
$
(1,948,618
)
 
(2.66
)%

The following table shows the sources of our revenue for the nine months ended July 31, 2019 and 2018:
 
2019
 
 
 
2018
 
 
Revenue Sources
Amount
(Unaudited)
 
%
 
Amount
(Unaudited)
 
%
 
 
 
 
 
 
 
 
Ethanol Sales
$
54,657,405

 
76.73
%
 
56,458,905

 
77.20
%
Modified Distillers Grains Sales
3,003,391

 
4.22
%
 
2,635,981

 
3.60
%
Dried Distillers Grains Sales
11,279,498

 
15.83
%
 
11,724,714

 
16.03
%
Corn Oil Sales
2,293,352

 
3.22
%
 
2,311,632

 
3.17
%
Total Revenues
$
71,233,646

 
100.00
%
 
$
73,131,232

 
100.00
%


19


Revenue
Ethanol
Our total revenues were lower for the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018. Revenue from ethanol sales decreased by approximately 3.19% during the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018, due primarily to a decrease in the average price per gallon of ethanol sold. The average price per gallon of ethanol sold for the nine months ended July 31, 2019 was approximately 3.17% lower than the average price we received for the nine months ended July 31, 2018. Ethanol prices were lower for the nine months ended July 31, 2019, due to record levels of domestic production. In addition, ethanol prices have been negatively affected by international trade disputes with foreign governments and the institution of a tariff by China on ethanol produced in the United States resulting in decreased export demand from China.
The number of gallons of ethanol sold during the nine months ended July 31, 2019 were approximately the same as the number of gallons of ethanol sold for the nine months ended July 31, 2018.
We had losses related to ethanol based derivative instruments of approximately $257,000 for the nine months ended July 31, 2019. We had gains related to ethanol based derivative instruments of approximately $14,000 for the nine months ended July 31, 2018.

Distillers Grains

Revenue from distillers grains sales decreased by approximately 0.55% during the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018. This is primarily a result of lower dried distillers grains prices for the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018. For the nine months ended July 31, 2019, the average price per ton of dried distillers grains sold was approximately 0.45% lower than the average price we received during the nine months ended July 31, 2018, due to price decreases in the protein market that correlate to the price of soybean meal and lower export demand due to the recent swine flu outbreak in China, Vietnam and other foreign countries. However, for the nine months ended July 31, 2019, the average price per ton of modified distillers grains sold was approximately 6.11% higher than during the nine months ended July 31, 2018, due to increased demand and reduced production in our local area.

The tons of dried distillers grains sold during the during the nine months ended July 31, 2019, decreased by approximately 3.36% as compared to the nine months ended July 31, 2018. The tons of modified distillers grains sold during the nine months ended July 31, 2019, increased by approximately 7.38% as compared to the nine months ended July 31, 2018. The overall tons of distillers grains produced increased due to the decrease in corn oil production.
        
Corn Oil

Revenue from corn oil sales during the nine months ended July 31, 2019, decreased by approximately 0.79% as compared to the nine months ended July 31, 2018. This is primarily the result of a decrease in corn oil sales during the nine months ended July 31, 2019. The pounds of corn oil sold during the nine months ended July 31, 2019, decreased by approximately 9.97% as compared to the the nine months ended July 31, 2018 due to our corn oil extraction equipment running less efficiently.

The average price per pound of corn oil sold increased during the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018. For the nine months ended July 31, 2019, the average price per pound of corn oil we received was approximately 13.64% higher than during the nine months ended July 31, 2018, due to increased demand from the corn oil feed market.

Cost of Goods Sold

Our two largest costs of production are corn (66% of cost of goods sold for the nine months ended July 31, 2019) and natural gas (5.13% of cost of goods sold for the nine months ended July 31, 2019). Our total cost of goods sold was approximately 3.31% more during the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018, due to higher corn costs.

    

20


Corn

Our average price per bushel of corn for the nine months ended July 31, 2019 increased by approximately 1.56% per bushel, as compared to the nine months ended July 31, 2018, due to increased market value for corn. We used approximately 1.68% less bushels of corn in the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018, due to improved efficiencies in production.

We had losses related to corn derivative instruments of approximately $877,000 for the nine months ended July 31, 2019. We had gains related to corn derivative instruments of approximately $289,000 for the nine months ended July 31, 2018.

Natural Gas

Our average price per MMBTU of natural gas was approximately 3.51% lower for the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018. Natural gas prices were lower due to an increase in natural gas production and our locking in prices for the majority of our natural gas requirements at favorable prices.

For the nine months ended July 31, 2019, we purchased approximately 4.86% less natural gas as compared to the nine months ended July 31, 2018. This decrease in natural gas usage is primarily due to a decrease in dried distillers grains production in favor of an increase in modified distillers grains produced and improved efficiencies.

For the nine months ended July 31, 2019 and 2018, we had gains related to natural gas derivative instruments of approximately $20,000 and $35,000, respectively.

Operating Expense

We had operating expenses for the nine months ended July 31, 2019 of $2,475,470, as compared to operating expenses of $2,192,660 for the nine months ended July 31, 2018. Management attributes this increase in operating expenses primarily to an increase in IT fees and advertising costs for the nine months ended July 31, 2019, as compared to the nine months ended July 31, 2018. Management continues to pursue strategies to optimize efficiencies and maximize production. These efforts may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady.

Operating Loss

We had a loss from operations for the nine months ended July 31, 2019 of $(6,066,464), which is approximately (8.52%) of our revenues, compared to a loss of $(1,488,416), which was approximately (2.04)% of our revenues, for the nine months ended July 31, 2018. This increase in operating loss is primarily due to an increase in the price we paid for corn relative to the price received for our ethanol.

Other Income (Expense)

We had total other expense for the nine months ended July 31, 2019 of $481,291, as compared to total other expense of $460,202 for the nine months ended July 31, 2018. Our other expense for the nine months ended July 31, 2019, consisted primarily of interest expense offset by income from investments. This increase in other expense is primarily due to an increase in interest expense.

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

The following table highlights the changes in our financial condition as of July 31, 2019 from our previous fiscal year ended October 31, 2018:

 
July 31, 2019
 
October 31, 2018
Current Assets
$
15,556,033

 
$
10,850,002

Current Liabilities
8,173,953

 
8,026,683

Long-Term Debt
12,989,899

 
7,222,371

    

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Current Assets

The increase in current assets is primarily the result of increases in accounts receivable, inventories and cash and cash equivalents due to increased borrowings which were offset partially by a decrease in derivative instruments at July 31, 2019, as compared to October 31, 2018.
    
Current Liabilities

The increase in current liabilities is due primarily to an increase in accrued expenses which was partially offset by a decrease in accounts payable at July 31, 2019, as compared to October 31, 2018.

Long-Term Debt

Long-term debt increased at July 31, 2019, as compared to October 31, 2018, primarily due to increased borrowings on the Term Revolving Loan.

Liquidity and Capital Resources

Our primary sources of liquidity are our Term Revolving Loan and cash generated from operations. Based on financial forecasts prepared by our management, we anticipate that we will have sufficient cash on hand, cash from our current credit facilities, and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months. We do not currently anticipate seeking additional equity or debt financing in the near term. However, changes in corn prices significantly affect our cost of goods sold. If increases in cost of goods sold are not offset by corresponding increases in the prices we receive from the sale of our products, these increases in cost of goods sold can have a significant negative impact on our financial performance. If we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity and we may have to secure additional debt or equity financing for working capital or other purposes. We do not currently anticipate that we will need to secure additional capital resources for any other significant purchases of property and equipment in the next 12 months.

The following table shows cash flows for the nine months ended July 31, 2019 and 2018:
 
2019
2018
 
(unaudited)
(unaudited)
Net cash (used in) provided by operating activities
$
(3,724,294
)
$
5,450,314

Net cash used in investing activities
(1,322,708
)
(1,279,264
)
Net cash provided by (used in) financing activities
5,717,000

(4,160,658
)

Cash Flow From Operations

We experienced cash used in operating activities for the nine months ended July 31, 2019, as compared to cash provided by operating activities during the same period in 2018. This decrease was primarily due to an increase in net loss for the nine months ended July 31, 2019, as compared to the same period in 2018.

Cash Flow From Investing Activities

We used more cash in investing activities for the nine month period ended July 31, 2019, as compared to the same period in 2018. This change was due to an increase in capital expenditures primarily due to our addition of expansion plates and joints during the nine months ended July 31, 2019.

Cash Flow From Financing Activities

We had cash provided by financing activities during the nine months ended July 31, 2019, as compared to cash used in financing activities for the same period in 2018. This increase in cash was the result of increased borrowings on long-term debt and decreased distributions to our members during the nine months ended July 31, 2019, as compared to the same period in 2018.


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Short-Term and Long-Term Debt Sources
            
On January 22, 2016, we entered into a Second Amended and Restated Credit Agreement with Compeer Financial f/k/a AgStar Financial Services, PCA ("Compeer"). In connection therewith, as of the same date, we executed Second Amended and Restated Term Notes, Second Amended and Restated Term Revolving Notes, an Amended and Restated Security Agreement and a Second Amended and Restated Mortgage, Security Agreement, Assignment of Leases and Fixture Financing Statement. The Second Amended and Restated Credit Agreement decreased the Variable Rate Term Loan to $15,000,000, increased the Term Revolving Loan to $15,000,000 and eliminated the Revolving Line of Credit. Effective April 20, 2018, we executed a First Amendment to Second Amended and Restated Credit Agreement with Compeer which increased the availability under the Term Revolving Loan to $20,000,000. In connection therewith, as of the same date, we executed a Third Amended and Restated Term Revolving Note and a Third Amended and Restated Mortgage, Security Agreement, Assignment of Leases and Fixture Financing Statement. Subsequent to our fiscal year end, on January 2, 2019, Compeer waived our violation at October 31, 2018, of the minimum debt service coverage ratio set forth in the Second Amended and Restated Credit Agreement.

Term Loan
    
The Term Loan had an original balance of $15,000,000 with a variable interest rate based on the 30-day LIBOR rate plus 325 basis points with no minimum interest rate. The applicable interest rate at July 31, 2019 was 5.66%. Monthly principal payments are due on the Term Loan of approximately $250,000 plus accrued interest. Payments of all amounts outstanding are due on January 22, 2021. The outstanding balance on this note was $4,250,000 at July 31, 2019. We may convert the Term Loan to a fixed rate loan, subject to certain conditions as described in the Second Amended and Restated Credit Agreement and with the consent of Compeer.

Term Revolving Loan

The Term Revolving Loan is for up to $20,000,000 with a variable interest rate based on the 30-day LIBOR rate plus 325 basis points with no minimum interest rate. The applicable interest rate at July 31, 2019 was 5.66%. The Term Revolving Loan may be advanced, repaid and re-borrowed during the term. Monthly interest payments are due on the Term Revolving Loan with payment of all amounts outstanding due on January 22, 2023. The outstanding balance on this note was $11,499,000 at July 31, 2019. We pay interest at a rate of 1.50% on amounts outstanding for letters of credit which also reduce the amount available under the Term Revolving Loan. We had no letters of credit outstanding at July 31, 2019. We are also required to pay unused commitment fees for the Term Revolving Loan as defined in the Second Amended and Restated Credit Agreement.

Covenants and Other Miscellaneous Financing Agreement Terms
    
The loan facility with Compeer is secured by substantially all business assets. We executed a mortgage in favor of Compeer creating a first lien on our real estate and plant and a security interest in all personal property located on the premises and assigned in favor of Compeer, all rents and leases to our property, our marketing contracts, our risk management services contract, and our natural gas, electricity, water service and grain procurement agreements.

We are also subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, tangible net worth, and working capital requirements. Our debt service coverage ratio is to be no less than 1.25:1.00 measured annually by comparing our adjusted EBITDA to our scheduled payments of principal and interest. Our minimum working capital is $8,250,000, which is calculated as current assets plus the amount available for drawing under our Term Revolving Loan and undrawn amounts on outstanding letters of credit, less current liabilities, and is measured quarterly.

We are limited to annual capital expenditures of $5,000,000 without prior approval, incurring additional debt over certain amounts without prior approval, and making additional investments as described in the Amended and Restated Credit Agreement without prior approval of Compeer. We are allowed to make cash distributions to members as frequently as monthly in an amount equal to 75% of net income if working capital is greater than or equal to $8,250,000, or 100% of net income if working capital is greater than or equal to $11,000,000, or an unlimited amount if working capital is greater than or equal to $11,000,000 and there is no outstanding balance on the Term Loan.

Presently, we are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements with Compeer except as to our violation, at October 31, 2018, of the minimum debt service coverage ratio requirement of 1.25:1.00 which was waived by Compeer on January 2, 2019. In addition, we believe it is probable that we will violate the debt service coverage ratio requirement measured as of October 31, 2019. We will continue to work with Compeer to try to ensure that the terms of our loan agreements are met going forward. However, we cannot provide any assurance that our actions will result in sustained profitable operations or that we will not be in violation of our loan covenants or in default on our principal

23


payments in the future. Should unfavorable market conditions result in our violation of the terms or covenants of our loan and we fail to obtain a waiver of any such term or covenant, Compeer could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. In the event of a default, Compeer could also elect to proceed with a foreclosure action on our plant.

Capital Expenditures    
We do not currently anticipate making significant capital expenditures during the remainder of our 2019 fiscal year or our 2020 fiscal year.
Critical Accounting Estimates
    
Management uses various estimates and assumptions in preparing our financial statements in accordance with 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. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:

Long-Lived Assets
         
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets.  Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions, which do not reflect unanticipated events and circumstances that may occur.  Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of carrying value of property and equipment to be a critical accounting estimate.

Inventory Valuation

We value our inventory at lower of cost or net realizable value. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realizable value on inventory to be a critical accounting estimate.

Derivatives

We are exposed to market risks from changes in interest rates, corn, natural gas, and ethanol prices. We may seek to minimize these commodity price fluctuation risks through the use of derivative instruments. In the event we utilize derivative instruments, we will attempt to link these instruments to financing plans, sales plans, market developments, and pricing activities. Such instruments in and of themselves can result in additional costs due to unexpected directional price movements.

We have entered into ethanol, corn and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices. In practice, as markets move, we actively attempt to manage our risk and adjust hedging strategies as appropriate. We do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity contracts being hedged. Instead, we use fair value accounting for our hedge positions, which means that as the current market price of our hedge position changes, the gains and losses are immediately recognized in our statement of operations. The immediate recognition of hedging gains and losses under fair value accounting can cause net income (loss) 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, the fair values of our commodity-based derivative instruments are a net liability of approximately $950,000. As the prices of the hedged commodity moves in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to protect the Company over the term of the contracts for the hedged amounts.


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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.     

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. 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 may use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. 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.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our Term Loan and our Term Revolving Loan, each bearing a variable interest rate.  As of July 31, 2019, we had $4,250,000 outstanding on the Term Loan and $11,499,000 outstanding on the Term Revolving Loan. Interest will accrue at the 30-day LIBOR rate plus 325 basis points. The applicable interest rate on these loans at July 31, 2019 was 5.66%. If we were to experience a 10% adverse change in the applicable interest rate, the annual effect such change would have on our income statement, based on the amount we had outstanding on our Term Loan and Term Revolving Loan at July 31, 2019, would be approximately $90,000.

The specifics of each note are discussed in greater detail in “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

Commodity Price Risk

We expect to be exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process and the sale of ethanol and distillers grains. We may seek to minimize the risks from fluctuations in the prices of raw material inputs through the use of corn commodity-based and natural gas derivatives. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Corn and natural gas derivative changes in fair market value are included in costs of goods sold.

As of July 31, 2019, the fair values of our commodity-based derivative instruments are a net liability of approximately $950,000. As the prices of the hedged commodity moves in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to protect the Company over the term of the contracts for the hedged amounts.

In the ordinary course of business, we enter into forward contracts for our commodity purchases. At July 31, 2019, we have approximately 220,000 bushels of forward fixed basis corn purchase contracts and 2,649,000 bushels of forward fixed price corn purchase contracts valued at approximately $10,394,000. These purchase contracts are for various delivery periods through December 2020. At July 31, 2019, we have approximately 3,340,000 MMBTUs of forward natural gas fixed price purchase contracts valued at approximately $8,812,000 for delivery periods through March 2022. In addition, at July 31, 2019, we have approximately 460,000 gallons of forward fixed price denaturant purchase contracts valued at approximately $621,000 for delivery periods through December 2019.

In the ordinary course of business, we enter into forward contracts for our commodity sales. At July 31, 2019, we have approximately 7,545 tons of forward fixed price dried distillers grains sales contracts valued at approximately $982,000 for delivery periods through September 2019. At July 31, 2019, we have approximately 38,000 tons of forward fixed price modified distillers grains sales contracts valued at approximately $2,926,000 for delivery periods through June 2020. In addition, at July 31, 2019, we have approximately 235,000 pounds of forward fixed price corn oil sales contracts valued at approximately $58,000 for delivery periods through August 2019.
At July 31, 2019, we have open futures and options positions for the sale of 2,100,000 bushels of corn and 203,000 gallons of ethanol. These derivatives have not been designated as effective hedges for accounting purposes and are forecasted to settle within the next twelve months. We had losses related to corn derivative instruments of approximately $785,000 and $1,369,000 for the three months ended July 31, 2019 and 2018, respectively. We had losses related to ethanol based derivative instruments

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of approximately $162,000 for the three months ended July 31, 2019. We had gains related to ethanol based derivative instruments of approximately $51,000 for the three months ended July 31, 2018. For the three months ended July 31, 2019, we had gains related to natural gas derivative instruments of approximately $1,000. For the same period in 2018, we recorded no change in fair value of our outstanding natural gas derivative positions.
    
As commodity prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, distillers grains, 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 and distillers grains prices 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 approximately as follows:
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Hypothetical Adverse Change in Price as of
July 31, 2019
Approximate Adverse Change to Income
Natural Gas
1,499,390

MMBTU
10
%
 
$
375,000

Ethanol
59,500,000

Gallons
10
%
 
$
8,033,000

Corn
20,376,712

Bushels
10
%
 
$
8,090,000

DDGs
141,312

Tons
10
%
 
$
1,766,000


Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures

Our management is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.

Our management, including our Chief Executive Officer (the principal executive officer), Brian Kletscher, along with our Chief Financial Officer (the principal financial officer), Lucas Schneider, 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 Exchange Act) 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended July 31, 2019, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Air Permit

On March 15, 2019, the United States Environmental Protection Agency (the “EPA”) issued a Notice and Finding of Violation alleging violations of our air permit.  The EPA alleges that we (i) operated emission units above the emission limits; and (ii) failed to properly maintain certain emission control components which were leaking. On June 24, 2019, we settled this matter by agreeing to undertake a Supplemental Environment Project ("SEP") which requires us to purchase two alternative fuel school buses for the Lamberton, Minnesota School District. We must spend at least $180,000 on the SEP and complete the project by November 30, 2019. We undertook this project under the settlement of the EPA's enforcement action against us for violations of the Clean Air Act. In addition, we paid a cash civil penalty of $64,000 and implemented certain corrective action to mitigate the alleged violations.

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 Highwater Ethanol, LLC's Quarterly Report on Form 10-Q for the quarter ended July 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of July 31, 2019 and October 31, 2018, (ii) Condensed Statements of Operations for the three and nine months ended July 31, 2019 and 2018, (iii) Statements of Cash Flows for the three and nine months ended July 31, 2019 and 2018, (iv) the Notes to Condensed Financial Statements and (v) Condensed Statements of Changes in Members' Equity for the three and nine months ended July 31, 2019 and 2018.**
(+) Confidential Treatment Requested.
* Filed herewith.
** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
HIGHWATER ETHANOL, LLC
 
 
 
 
Date:
September 11, 2019
 
/s/ Brian Kletscher
 
 
 
Brian Kletscher
 
 
 
Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
September 11, 2019
 
/s/ Lucas Schneider
 
 
 
Lucas Schneider
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
 
 
 
 


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