UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


⌧	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended ~~July~~January 31, ~~2020~~ 2021


◻	Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from to .

COMMISSION FILE NUMBER 000-51825

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)


Minnesota		41-2002393
(State or other jurisdiction of organization)		(I.R.S. Employer Identification No.)

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

(507) 793-0077

(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
None	NA	NA

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. ⌧ Yes ◻ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ⌧ Yes ◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ◻ Accelerated filer ◻ Smaller reporting company ◻⌧ Non-accelerated filer ⌧ Emerging growth company ◻

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. ◻

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

As of ~~September~~March 1417, ~~2020~~2021, there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.

Table of Contents

INDEX


	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3929
Item 4. Controls and Procedures	4029
PART II. OTHER INFORMATION	30
Item 1. Legal Proceedings	4030
Item 1A. Risk Factors	4030
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4130
Item 3. Defaults Upon Senior Securities	4130
Item 4. Mine Safety Disclosures	4130
Item 5. Other Information	4130
Item 6. Exhibits	4231
SIGNATURES	4231

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


	~~July~~January 31, ~~2020~~2021		`	~~October 31, 2019~~
	(unaudited)			October 31, 2020
ASSETS
Current Assets
Cash	$	23,~~119~~348,~~603~~244		$	43,~~541~~276,~~295~~301
Restricted cash		~~227~~242,~~505~~159			52514,~~516~~050
Accounts receivable		~~273~~2,~~062~~038,282			41,~~891~~616,~~249~~489
Inventory		38,~~867~~128,~~419~~065			67,~~276~~063,~~258~~675
Commodity derivative instruments		2822,~~492~~837			9515,~~823~~150
Prepaid expenses and other current assets		~~586~~1,~~018~~124,050			~~408~~782,~~325~~280
Total current assets		714,~~102~~903,~~099~~637			1613,~~265~~267,~~466~~945

Property and Equipment, net		3738,~~602~~889,~~164~~918			3940,~~408~~187,~~195~~733

Operating lease right of use assets		9,617,229			—
Operating lease right of use asset, net		8,961,285			9,291,249

Other assets		697,254			922,254
Other Assets		333,254			333,254

Total Assets	$	5563,~~018~~088,~~746~~094		$	5663,~~595~~080,~~915~~181

LIABILITIES AND MEMBERS' EQUITY

Current Liabilities
Current maturities of long-term debt	$	118,~~241~~146,~~000~~353		$	~~333~~11,~~977~~492,059
Checks drawn in excess of bank balances		685,724			—
Checks drawn in excess of bank balance		1,652,836			692,984
Accounts payable		13,~~834~~843,~~453~~683			56,~~386~~916,~~618~~045
Commodity derivative instruments		31143,~~826~~900			—173,928
Accrued expenses		1437,~~105,612~~860			~~423~~496,~~266~~513
Operating lease, current liabilities		1,~~328~~360,~~023~~691			—1,344,258
Total current liabilities		625,~~226~~585,~~638~~323			621,~~143~~115,~~861~~787

Long-Term Debt, less current portion		5148,~~092,977~~923			~~300~~295,~~203~~611

Operating Lease, long-term liabilities		8,289,206			—
Operating leases, long-term liabilities		7,600,594			7,946,991

Other Long-Term Liabilities		~~585~~608,~~443~~405			~~551~~596,~~000~~924

Commitments and Contingencies

Members' Equity
Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units issued and outstanding at July 31, 2020 and October 31, 2019		34,824,482			47,599,276
Members' equity consists of 77,932,107 units issued and outstanding at both January 31, 2021 and October 31, 2020.		29,144,849			33,124,868
Non-controlling interest		—			2,001,575
Total Liabilities and Members' Equity	$	63,088,094		$	63,080,181
Total members' equity		34,824,482			49,600,851

Total Liabilities and Members' Equity	$	55,018,746		$	56,595,915

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

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations


	Three ~~Months~~months ~~Ended July 31,~~ended		Three months ended		~~Nine Months Ended July 31,~~
	~~(unaudited)~~January 31, 2021		January 31, 2020		~~(unaudited)~~
	~~2020~~(Unaudited)		~~2019~~(Unaudited)		~~2020~~		~~2019~~
Revenues	$	1424,~~165~~441,~~041~~069	$	2726,~~367~~680,~~787~~280	$	~~56,450,290~~	$	~~78,560,104~~

Cost of Goods Sold		1727,~~314~~375,~~863~~537		2628,~~119~~129,~~684~~771		~~66,494,154~~		~~78,765,455~~

Gross Profit (Loss)		(3,149,822)		1,248,103		(10,043,864)		(205,351)
Gross Loss		(2,934,468)		(1,449,491)

Operating Expenses		(~~769~~1,~~859~~087,891)		(~~866~~899,~~410~~445)		~~(2,644,253)~~		~~(2,641,692)~~

Operating Income (Loss)		(3,919,681)		381,693		(12,688,117)		(2,847,043)
Operating Loss		(4,022,359)		(2,348,936)

Other Income (Expense):
Other Income (Expense)
Interest income		~~740~~879		1911,~~475~~581		~~13,147~~		~~61,875~~
Interest expense		(74102,~~737~~412)		(4211,~~990~~531)		~~(116,342)~~		~~(58,320)~~
Other income, net		33143,~~105~~873		~~3,407~~339		~~239,943~~		~~228,300~~
Total other income (expense), net		(40,892)		(20,108)		136,748		231,855
Total other income, net		42,340		389

Net Income (Loss)		(3,960,573)		361,585		(12,551,369)		(2,615,188)
Net Loss		(3,980,019)		(2,348,547)

Less: Net Income Attributable to Non-controlling Interest		—		(3567,~~006~~827)		~~(67,827)~~		~~(197,025)~~

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	(3,960,573)	$	326,579	$	(12,619,196)	$	(2,812,213)
Net Loss Attributable to Heron Lake BioEnergy, LLC	$	(3,980,019)	$	(2,416,374)

Weighted Average Units Outstanding—Basic and Diluted (Class A and B)		77,932,107		77,932,107		77,932,107		77,932,107
Weighted Average Units Outstanding—Basic and diluted (Class A and B)		77,932,107		77,932,107

Net Income (Loss) Per Unit Attributable to Heron Lake BioEnergy, LLC—Basic and Diluted (Class A and B)	$	(0.05)	$	—	$	(0.16)	$	(0.04)
Net Loss Per Unit Attributable to Heron Lake BioEnergy, LLC- Basic and Diluted (Class A and B)	$	(0.05)	$	(0.03)

Distributions Per Unit (Class A and B)	$	—	$	—	$	—	$	—

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

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of ~~Changes~~Change in Members’ Equity (unaudited)


			Members' equity
			attributable to
			Heron Lake		Non-		Total
			BioEnergy,		controlling		Members'
	Class A Units	Class B Units	LLC		Interest		Equity

Balance—October 31, 2019	62,932,107	15,000,000	$	47,599,276	$	2,001,575	$	49,600,851

Acquisition of non-controlling interest	—	—		(155,598)		(2,069,402)		(2,225,000)
Net income attributable to non-controlling interest	—	—		—		67,827		67,827
Net loss attributable to Heron Lake BioEnergy, LLC	—	—		(2,416,374)		—		(2,416,374)

Balance—January 31, 2020	62,932,107	15,000,000	$	45,027,304	$	—	$	45,027,304

Net loss attributable to Heron Lake BioEnergy, LLC	—	—		(6,242,249)		—		(6,242,249)

Balance—April 30, 2020	62,932,107	15,000,000	$	38,785,055	$	—	$	38,785,055

Net loss attributable to Heron Lake BioEnergy, LLC	—	—		(3,960,573)		—		(3,960,573)

Balance—July 31, 2020	62,932,107	15,000,000	$	34,824,482	$	—	$	34,824,482

Balance—October 31, 2018	62,932,107	15,000,000	$	53,054,846	$	1,723,839	$	54,778,685

Net income attributable to non-controlling interest	—	—		—		91,406		91,406
Net loss attributable to Heron Lake BioEnergy, LLC	—	—		(2,023,640)		—		(2,023,640)

Balance—January 31, 2019	62,932,107	15,000,000	$	51,031,206	$	1,815,245	$	52,846,451

Net income attributable to non-controlling interest	—	—		—		70,613		70,613
Net loss attributable to Heron Lake BioEnergy, LLC	—	—		(1,115,152)		—		(1,115,152)

Balance—April 30, 2019	62,932,107	15,000,000	$	49,916,054	$	1,885,858	$	51,801,912

Net income attributable to non-controlling interest	—	—		—		35,006		35,006
Net income attributable to Heron Lake BioEnergy, LLC	—	—		326,579		—		326,579

Balance—July 31, 2019	62,932,107	15,000,000	$	50,242,633	$	1,920,864	$	52,163,497


			Members' Equity
			attributable to
			Heron Lake		Non-		Total
			BioEnergy,		controlling		Members'
	Class A Units	Class B Units	LLC		Interest		Equity

Balance—October 31, 2020	62,932,107	15,000,000	$	33,124,868	$	—	$	33,124,868

Net loss attributable to Heron Lake BioEnergy, LLC	—	—		(3,980,019)		—		(3,980,019)

Balance—January 31, 2021	62,932,107	15,000,000	$	29,144,849	$	—	$	29,144,849

Balance—October 31, 2019	62,932,107	15,000,000	$	47,599,276	$	2,001,575	$	49,600,851

Acquisition of non-controlling interest	—	—		(155,598)		(2,069,402)		(2,225,000)
Net income attributable to non-controlling interest	—	—		—		67,827		67,827
Net loss attributable to Heron Lake BioEnergy, LLC	—	—		(2,416,374)		—		(2,416,374)

Balance—January 31, 2020	62,932,107	15,000,000	$	45,027,304	$	—	$	45,027,304

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

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows


	Three months ended	~~Nine Months Ended July 31,~~	Three months ended
	January 31, 2021	~~2020~~	January 31, 2020	~~2019~~
	(Unaudited)	~~(unaudited)~~	(Unaudited)	~~(unaudited)~~
Cash Flow From Operating Activities:
Cash Flow From Operating Activities
Net loss	$	(123,~~551~~980,~~369~~019)	$	(2,~~615~~348,~~188~~547)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		31,~~936~~283,~~813~~857		31,~~956~~316,~~087~~198
(Gain) loss on sale of asset		(2,000)		4,864
Loss on disposal of asset		21,728		—
Change in fair value of commodity derivative instruments		~~999~~2,~~167~~868,176		~~(670~~162,~~652)~~620
Change in operating assets and liabilities:
Accounts receivable		4(421,~~618,187~~793)		3,~~191~~902,~~915~~786
Inventory		2(1,~~408~~064,~~839~~390)		(21,~~431~~475,~~544~~699)
Commodity derivative instruments		(~~900~~2,~~010~~905,891)		~~810~~(198,~~170~~295)
Prepaid expenses and other current assets		(~~177~~341,~~693~~770)		(~~297~~233,~~902~~232)
Accounts payable		(3931,~~428,588~~737)		(12,~~192~~136,~~638~~555)
Accrued expenses		~~682~~(58,~~346~~653)		(~~332~~42,~~614~~339)
Accrued railcar rehabilitation costs		3411,~~443~~481		—11,481
Net cash provided by (used in) operating activities		(4,379,865)		422,498
Net cash used in operating activities		(5,519,011)		(1,041,582)

Cash Flows from Investing Activities:
Cash Flows from Investing Activities
Capital expenditures		(2,~~252~~148,~~359~~395)		(~~206~~208,~~461~~285)
Net cash used in investing activities		(2,~~252~~148,~~359~~395)		(~~206~~208,~~461~~285)

Cash Flows from Financing Activities:
Cash Flows from Financing Activities
Checks drawn in excess of bank balance		~~685~~959,~~724~~852		—724,292
Proceeds from Paycheck Protection Program loan		595,693		—
Proceeds from long-term debt		2,151,673		7,039,706
Proceeds from long-term debt		22,070,984		—
Payments on long-term debt		(644,067)		(6,969,735)
Payments on long-term debt		(16,966,880)		(168,461)
Proceeds from related party debt		5,000,000		—
Acquisition of non-controlling interest		~~(2,000,000)~~—		—(2,000,000)
Net cash provided by (used in) financing activities		4,385,521		(168,461)
Net cash provide by (used in) financing activities		7,467,458		(1,205,737)

Net increase (decrease) in Cash and Restricted Cash		(2,246,703)		47,576
Net decrease in cash and restricted cash		(199,948)		(2,455,604)

Cash and Restricted Cash—Beginning of Period		4,593,811		5,995,982
Cash and Restricted Cash - Beginning of period		3,790,351		4,593,811

Cash and Restricted Cash—End of Period	$	2,347,108	$	6,043,558
Cash and Restricted Cash - End of period	$	3,590,403	$	2,138,207

Reconciliation of Cash and Restricted Cash
Reconcilation of Cash and Restricted Cash
Cash - Balance Sheet	$	23,~~119~~348,~~603~~244	$	62,~~043~~095,~~558~~986
Restricted Cash - Balance Sheet		~~227~~242,~~505~~159		—42,221
Cash and Restricted Cash	$	23,~~347~~590,~~108~~403	$	62,~~043~~138,~~558~~207

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest expense	$	~~116~~99,~~342~~717	$	5811,~~320~~531

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Capital expenditures included in accounts payable	$	1,609	$	—

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

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Heron Lake BioEnergy, LLC owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 72.3 million gallons per year of undenatured ethanol on a twelve-month rolling sum basis. In addition, Heron Lake BioEnergy, LLC produces and sells distillers’ grains with solubles and corn oil as co-products of ethanol production.

Heron Lake BioEnergy, LLC’s wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), is the sole owner of Agrinatural Gas, LLC (“Agrinatural”). Agrinatural is a natural gas pipeline company that was formed to construct, own, and operate the natural gas pipeline that provides natural gas to the Company’s ethanol production facility and other customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota. Beginning as of December 11, 2019, HLBE holds a 100% interest in Agrinatural. ~~At October 31, 2019, HLBE held a 73% interest in Agrinatural.~~

Basis of Presentation and Principles of Consolidation

The condensed consolidated unaudited financial statements as of ~~July~~January 31, ~~2020~~2021 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively, the “Company”). ~~Given~~As ~~the~~of ~~Company’s~~December ~~control~~11, ~~over~~2019, the ~~operations~~Company ofacquired ~~Agrinatural~~the ~~and~~27% ~~its majority voting~~ interest, ~~the~~in ~~Company~~Agrinatural ~~consolidates~~that ~~the~~was ~~unaudited~~not ~~financial~~previously ~~statements~~in ofits ~~Agrinatural~~control. As ~~with~~such, ~~its~~results ~~consolidated~~prior ~~unaudited~~to ~~financial~~December ~~statements~~11, ~~with~~2019 ~~the~~reflect ~~equity and~~ earnings ~~attributed~~attributable to the ~~remaining 27%~~ non-controlling interest ~~identified~~ separately in the ~~accompanying~~ condensed consolidated ~~balance~~statement ~~sheets and statements~~ of operations ~~through~~during ~~December~~fiscal ~~11,~~year ~~2019, when the remaining non-controlling interest was acquired~~2020. All significant intercompany balances and transactions are eliminated in consolidation.

The condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and 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 condensed consolidated unaudited financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, ~~2019~~2020, contained in the Company’s annual report on Form 10-K.

In the opinion of management, the condensed consolidated unaudited financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position, and cash flows. The results reported in these condensed consolidated unaudited financial statements should not be regarded as necessarily indicative of results that may be expected for any other fiscal period or for the fiscal year.

Accounting Estimates

Management uses estimates and assumptions in preparing these condensed consolidated unaudited 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 including, among others, the economic lives of property and equipment, the assumptions used in the analysis of impairment of long-lived assets, valuation of commodity derivative instruments, inventory, inventory purchase and sales commitments, ~~and~~ evaluation of railcar rehabilitation costs and evaluation of going concern. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

Non-controlling Interest

Amounts recorded as non-controlling interest on the October 31, 2019 balance sheet relates to the net investment by an unrelated party in Agrinatural through December 11, 2019 when the remaining non-controlling interest was acquired.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and other customers as described below. Our performance obligations consist of the delivery of ethanol, distillers' grains, and corn oil to our customers. Our customers primarily consist of three distinct marketing companies as discussed below. The consideration we receive for these products reflects an amount that the ~~Company~~company expects to be entitled to in exchange for those products, based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. We sell each of the products via different marketing channels as described below.

●

Ethanol. The Company sells its ethanol via a marketing agreement with Eco-Energy, Inc. Eco-Energy sells one hundred percent of the Company’s ethanol production based on agreements with end users at prices agreed upon mutually among the end user, Eco-Energy and the Company. Our performance obligations consist of our obligation to deliver ethanol to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. The marketing agreement calls for control and title to pass to Eco-Energy once a rail car is released to the railroad or a truck is released from the Company’s scales. Revenue is recognized then at the price in the agreement with the end user, net of commissions, freight, and fees.

● Distillers’ grains. The Company engages another third-party marketing company, Gavilon, Inc, to sell one hundred percent of the distillers’ grains it produces at the plant. Gavilon takes title and control once a rail car is released to the railroad or a truck is released from the Company’s scales. Prices are agreed upon between Gavilon and the Company. Our performance obligations consist of our obligation to deliver distillers grains to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. Revenue is recognized net of commissions, freight and fees.

●

Distillers’ corn oil (corn oil). The Company sells one hundred percent of its corn oil production to RPMG, Inc. The process for selling corn oil is the same as our distillers’ grains. RPMG takes title and control once a rail car is released to the railroad or a truck is released from the Company's scales. Prices are agreed upon between RPMG and the Company. Our performance obligations consist of our obligation to deliver corn oil to our customers. Our customer contracts consist of orders received from the customer pursuant to a marketing agreement. Revenue is recognized net of commissions, freight and fees.

●

Agrinatural generates revenue from the transportation of natural gas to residential and commercial customers. Revenue is recognized at the point when natural gas is delivered at the transaction price established in the contract.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost for all inventories is determined using the first in first out method. Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Inventory consists of raw materials, work in process, finished goods, and supplies. Corn is the primary raw material along with other raw materials. Finished goods consist of ethanol, distillers’ grains, and corn oil.

Derivative Instruments

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives on the balance sheets at fair value.

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

~~Derivative~~immediately ~~Instruments~~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 recorded in earnings.

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 recorded in earnings.

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally 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 and reporting requirements, and therefore, are not marked to market in our condensed consolidated unaudited financial statements.

In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company's ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 56.

~~Property~~Reportable ~~and~~Operating ~~Equipment~~Segments

InAccounting ~~July~~Standards ~~2020,~~Codification ~~the~~(“ASC”) ~~Company experienced major issues with its boiler~~280, ~~which~~“Segment ~~negatively impacted production. The Company ordered a temporary boiler~~Reporting”, ~~which~~establishes ~~allowed operations to continue in August 2020 until repair or replacement of~~ the ~~boiler~~standards ~~could~~for bereporting ~~completed.~~information ~~The~~about ~~Company~~segments ~~determined that the purchase and installation of a new boiler would be more economical and efficient than attempted repairs to the failing boiler. The new boiler is expected to be installed~~ in ~~October~~financial ~~2020~~statements. OnOperating ~~September~~segments 2,are ~~2020,~~defined ~~the~~as ~~Company~~components ~~received notice~~ of ~~approval~~an ofenterprise ~~the~~for ~~new~~which ~~boiler~~separate ~~from~~financial ~~the~~information ~~Minnesota~~is ~~Pollution~~available ~~Control~~that ~~Agency.~~is Asevaluated aregularly ~~result,~~by the ~~Company~~chief ~~abandoned the failing boiler, is currently~~ operating ~~with~~decision ~~the~~maker ~~temporary~~in ~~boiler,~~deciding ~~and~~how ~~plans~~ to ~~operate~~allocate ~~with~~resources ~~the~~and ~~new~~in ~~boiler~~assessing ~~upon its completed installation~~performance. ~~The~~Based ~~Company~~on ~~will record~~ the ~~cost~~related ~~for~~business ~~the~~nature ~~abandonment~~and ~~during~~expected ~~the~~financial ~~fourth~~results ~~fiscal~~criteria ~~quarter~~set ~~once~~forth itin ~~has~~ASC ~~determined the asset value~~280, ~~and what, if any, of~~ the ~~existing equipment can be salvaged. The~~ Company ~~anticipates~~has atwo ~~loss~~reportable ofoperating ~~approximately~~segments ~~$1.8~~for ~~million~~financial inreporting ~~the fourth fiscal quarter of 2020 due to the abandonment of the failing boiler~~purposes. ~~The estimated cost of the new boiler is approximately $5.2 million.~~

~~Recently~~● ~~Adopted~~Ethanol ~~Accounting~~Production. ~~Pronouncements~~Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

In● ~~February~~Natural ~~2016,~~Gas ~~the~~Pipeline. ~~Financial~~The ~~Accounting~~Company ~~Standards~~has ~~Board~~majority ~~(FASB)~~ownership ~~issued~~in ~~new~~Agrinatural, ~~guidance~~through onits ~~accounting~~wholly ~~for~~owned ~~leases~~subsidiary, ~~under~~HLBE ~~Accounting~~Pipeline, ~~Standards Codification 842 (ASC 842). Under the new guidance~~LLC, ~~lessees~~and ~~are~~operations ~~required to recognize the following for all leases (with the exception~~ of ~~short-term leases) at the commencement date: (1) a lease liability, which is a lessee~~Agrinatural’s ~~obligation~~natural togas ~~make~~pipeline ~~lease~~are ~~payments~~aggregated ~~arising~~into ~~from~~another afinancial ~~lease,~~reporting ~~measured on a discounted cash flow basis; and (2) a~~ segment.

2.GOING CONCERN

The financial statements have been prepared on a going-concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. The Company has suffered recurring operating and cash flow losses related to difficult market conditions and operating performance. The Company was out of compliance with certain debt covenants on January 31, 2021, for which a waiver was obtained from the lender. The Company has forecasted that it is probable that there will be future instances of noncompliance with debt covenants within the next twelve months. These conditions result in the classification of all debt with the lender as current as of January 31, 2021. The Company has insufficient cash on hand and additional borrowing capacity, and current forecasts indicate insufficient

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

~~“right~~cash offlows ~~use”~~from ~~asset~~operations, ~~which~~to isrepay anthe ~~asset~~debt ~~that~~if ~~represents~~it ~~the~~were ~~lessee’s right~~ to ~~use~~come ~~the~~due ~~specified~~as ~~asset~~a ~~for~~result ~~the~~of ~~lease~~covenant ~~term~~noncompliance. ~~Lease~~These ~~expense~~factors ~~under~~raise ~~the~~substantial ~~new~~doubt ~~guidance~~about ~~is substantially~~ the ~~same~~Company's asability ~~prior~~ to ~~the~~continue ~~adoption.~~as ~~See~~a ~~Note~~going ~~8 for further information~~concern.

~~Reportable~~While ~~Operating~~the ~~Segments~~Company believes the replacement of the boiler has improved the operating performance of the plant, and led to lower operating costs, market conditions have resulted in losses. The Company intends to source other capital sources, which may include re-negotiating their debt agreements and terms or seek potential equity solutions. At this time, there are no commitments to do so and we may not be successful in doing so.

~~Accounting Standards Codification (“ASC”) 280, “Segment Reporting”, establishes the standards for reporting information about segments in financial statements~~3.RISKS ~~Operating~~AND segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.UNCERTAINTIES

● Ethanol Production. Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

● Natural Gas Pipeline. The Company has majority ownership in Agrinatural, through its wholly owned subsidiary, HLBE Pipeline, LLC, and operations of Agrinatural’s natural gas pipeline are aggregated into another financial reporting segment.

2.RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers’ grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 70% to 90% of total revenues and corn costs average 70% to 90% of cost of goods sold.

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol, distillers’ grains, and corn oil and the related costs of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices, and the petroleum markets as a whole. 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, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these commodities may have afurther significant adverse ~~effect~~effects on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements. The Company's risk management program is used to protect against the price volatility of these commodities.

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of ~~2018~~2020 and ~~2019, and thus far~~ into ~~2020,~~2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels~~. These factors~~, which are compounded by the ~~recent~~ impact of the novel coronavirus (~~“COVID~~"Covid-19”"),. ~~resulted~~These ~~and~~factors ~~continue~~resulted ~~to result~~ in prolonged negative operating margins, significantly lower cash flow from operations and substantial net ~~operating~~ losses~~, which included write downs of inventory and impairment of corn forward purchase contracts of approximately $1 million for the nine months ended July 31, 2020~~. In response to the low margin environment, the Company idled its ethanol production from on or about March 30, 2020 through approximately May 31, 2020 and continues to monitor COVID-19 developments in order to determine whether further adjustments to production are warranted. The Company believes its cash on hand and available debt from its lender will provide sufficient liquidity to meets its anticipated working capital, debt service and other liquidity needs through the next twelve months. If market conditions worsen affecting our ability to profitably operate the plant or if we are unable to transport ethanol, we may be forced to further idle ethanol production altogether.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

34.REVENUE

Revenue by Source

All revenues from contracts with customers under ASC Topic 606 are recognized at a point in time. The following table disaggregates revenue by major source for the three ~~and nine~~ months ended ~~July~~January 31, ~~2020~~2021 and ~~2019~~2020:


	~~Three Months Ended July 31, 2020~~	Three Months Ended January 31, 2021
	~~(unaudited)~~	(unaudited)
		Ethanol Production			Natural Gas Pipeline			Total
Ethanol	$	~~11,920,049~~$	18,720,349	$	—$	—	$	~~11,920,049~~$	18,720,349
Distillers’ Grains		~~1,645,859~~	3,699,036		—	—		~~1,645,859~~	3,699,036
Corn Oil		~~401,623~~	1,389,078		—	—		~~401,623~~	1,389,078
Other		~~71,519~~	225,746		—	—		~~71,519~~	225,746
Natural Gas		—	—		~~125,991~~	406,860		~~125,991~~	406,860
Total Revenues	$	~~14,039,050~~$	24,034,209	$	~~125,991~~$	406,860	$	~~14,165,041~~$	24,441,069

	~~Nine Months Ended July 31, 2020~~	Three Months Ended January 31, 2020
	~~(unaudited)~~	(unaudited)
		Ethanol Production			Natural Gas Pipeline			Total
Ethanol	$	~~43,306,209~~$	20,291,884	$	—$	—	$	~~43,306,209~~$	20,291,884
Distillers’ Grains		~~9,481,770~~	4,488,804		—	—		~~9,481,770~~	4,488,804
Corn Oil		~~2,051,049~~	914,398		—	—		~~2,051,049~~	914,398
Other		~~559,242~~	295,917		—	—		~~559,242~~	295,917
Natural Gas		—	—		~~1,052,020~~	689,277		~~1,052,020~~	689,277
Total Revenues	$	~~55,398,270~~$	25,991,003	$	~~1,052,020~~$	689,277	$	~~56,450,290~~$	26,680,280

	Three Months Ended July 31, 2019
	(unaudited)
		Ethanol Production			Natural Gas Pipeline			Total
Ethanol	$	21,645,992		$	—		$	21,645,992
Distillers’ Grains		4,371,122			—			4,371,122
Corn Oil		930,041			—			930,041
Other		320,001			—			320,001
Natural Gas		—			100,631			100,631
Total Revenues	$	27,267,156		$	100,631		$	27,367,787

	Nine Months Ended July 31, 2019
	(unaudited)
		Ethanol Production			Natural Gas Pipeline			Total
Ethanol	$	60,083,968		$	—		$	60,083,968
Distillers’ Grains		13,939,013			—			13,939,013
Corn Oil		2,619,651			—			2,619,651
Other		844,568			—			844,568
Natural Gas		—			1,072,904			1,072,904
Total Revenues	$	77,487,200		$	1,072,904		$	78,560,104

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2020

Payment Terms

The Company has contractual payment terms with each respective marketer that sells ethanol, distillers’ grains and corn oil. These terms are 10 calendar days after the transfer of control date. The Company has contractual payment terms with the natural gas customers of 20 days.

Shipping and Handling Costs

Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of goods sold. Accordingly, amounts billed to customers for such costs are included as a component of revenue.

45.INVENTORY

Inventory consisted of the following:


	~~July~~January 31, ~~2020~~2021		October 31, ~~2019~~2020
	(unaudited)
Raw materials	$	1,~~575~~576,~~307~~160	$	~~932~~2,~~503~~440,997
Work in process		~~599~~805,~~085~~008		~~732~~713,~~243~~037
Finished goods		~~358~~4,~~621~~463,703		32,~~157~~677,~~429~~095
Supplies		1,~~334~~283,~~406~~194		1,~~454~~232,~~083~~546
Totals	$	38,~~867~~128,~~419~~065	$	67,~~276~~063,~~258~~675

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on ethanol inventories, as a component of cost of goods sold, of approximately $155,000 and $581,000 for the nine months ended July 31, 2020 and 2019, respectively. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on corn inventories, as a component of cost of goods sold, of approximately $184,000 and $21,000 for the nine months ended July 31, 2020 and 2019, respectively.9

5.DERIVATIVE INSTRUMENTS

As of July 31, 2020, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 3,355,000 bushels, comprised of long corn futures positions on 2,055,000 bushels that were entered into to hedge forecasted ethanol sales through December 2020, and short corn futures positions on 1,085,000 bushels that were entered into to hedge forecasted corn purchases through December 2021. Additionally, there are corn options positions of 215,000 bushels through December 2020. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of July 31, 2020, the Company had approximately $228,000 of cash collateral (restricted cash) related to derivatives held by a broker.

The following table provides detail regarding the Company’s derivative instruments at July 31, 2020, none of which are designated as hedging instruments:

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

inventories, as a component of cost of goods sold, of approximately $274,000 and $877,000 for the three months ended January 31, 2021 and 2020, respectively. No loss was recorded for the three months ended January 31, 2021.


	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	28,492	$	—
Ethanol contracts	Commodity derivative instruments		—		31,826
Totals		$	28,492	$	31,826

6.DERIVATIVE INSTRUMENTS

As of ~~October~~January 31, ~~2019~~2021, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 5730,~~398,~~000 bushels, comprised of long corn futures positions on 2340,~~131,~~000 bushels that were entered into to hedge forecasted ethanol sales through July ~~2020~~2021, and short corn futures positions on 3390,~~267,~~000 bushels that were entered into to hedge forecasted corn purchases through ~~December~~July ~~2021~~2022. Additionally, there are corn options positions of 43,~~000~~710,000 bushels through ~~March~~December ~~2020~~2021. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of ~~October~~January 31, ~~2019~~2021, the Company had aapproximately $52242,000 inof cash collateral (restricted cash) related to derivatives held by a broker.

The following table provides detail regarding the Company’s derivative ~~financial~~ instruments at ~~October~~January January 31, ~~2019~~2021, none of which ~~were~~are designated as hedging instruments:


	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	~~20,060~~—	$	—143,900
Ethanol contracts	Commodity derivative instruments		7522,~~763~~837		—
Totals		$	9522,~~823~~837	$	—143,900

~~The~~As ~~following~~of ~~tables~~October ~~provide~~31, ~~detail~~2020, ~~regarding~~ the ~~gains~~total ~~(losses)~~notional ~~from~~amount of the Company’s ~~derivative~~outstanding ~~financial~~corn derivative instruments inwas ~~its~~approximately ~~condensed~~2,095,000 ~~consolidated~~bushels, ~~unaudited~~comprised ~~statements~~ of ~~operations~~long corn futures positions on 325,000 ~~none~~bushels that were entered into to hedge forecasted ethanol sales through March 2021, and short corn futures positions on 1,770,000 bushels that were entered into to hedge forecasted corn purchases through July 2022 and are directly related to corn forward contracts. Additionally, there are corn options positions of ~~which~~1,380,000 bushels through March 2021. There may be offsetting positions that are ~~designated~~not asshown ~~hedging~~on ~~instruments:~~a net basis that could lower the notional amount of positions outstanding.


	Consolidated Statement of	Three Months Ended July 31,				Nine Months Ended July 31,
	Operations Location	2020		2019		2020		2019
Corn contracts	Cost of goods sold	$	(287,301)	$	409,362	$	(803,632)	$	638,832
Ethanol contracts	Revenues		(31,945)		31,820		(195,535)		31,820
Total gain (loss)		$	(319,246)	$	441,182	$	(999,167)	$	670,652

As of October 31, 2020, the Company had approximately $514,000 in cash collateral (restricted cash) related to derivates held by a broker.

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2020, none of which were designated as hedging instruments:


	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	—	$	173,928
Ethanol contracts	Commodity derivative instruments		15,150		—
Totals		$	15,150	$	173,928

~~6.FAIR~~The ~~VALUE~~following tables provide detail regarding the gains (losses) from Company’s derivative financial instruments in its condensed consolidated unaudited statements of operations, none of which are designated as hedging instruments:

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at July 31, 2020:


	Consolidated Statement of	Three Months Ended January 31,
	Operations Location	2021		2020
Corn contracts	Cost of goods sold	$	(2,924,654)	$	(80,768)
Ethanol contracts	Revenues		56,478		(81,852)
Total loss		$	(2,868,176)	$	(162,620)


					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices		Significant Other		Significant
	Consolidated Balance Sheet				Active Markets		Observable Inputs		Unobservable inputs
Financial Assets:			Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	28,492	$	28,492	$	28,492	$	—	$	—

Financial Liabilities:
Commodity Derivative instruments - Ethanol	$	31,826	$	31,826	$	31,826	$	—	$	—

1110

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

7.FAIR VALUE

The following table sets forth, by level, the Company assets ~~and liabilities~~ that were accounted for at fair value on a recurring basis at ~~October~~January 31, ~~2019~~2021:


					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices in		Significant Other		Significant
	Consolidated				Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	20,060	$	20,060	$	20,060	$	—	$	—
Commodity Derivative instruments - Ethanol	$	22,837	$	22,837	$	22,837	$	—	$	—
Commodity Derivative instruments - Ethanol	$	75,763	$	75,763	$	75,763	$	—	$	—

Financial Liabilities:
Commodity Derivative instruments - Corn	$	143,900	$	143,900	$	143,900	$	—	$	—
Accounts Payable (1)	$	40,411	$	40,411	$	—	$	40,411	$	—

WeThe ~~determine~~following ~~the~~table ~~fair~~sets ~~value~~forth, ~~of commodity derivative instruments~~ by ~~obtaining~~level, ~~fair~~the ~~value~~Company ~~measurements~~assets ~~from~~and anliabilities ~~independent~~that ~~pricing~~were ~~service.~~accounted ~~The~~for at fair value ~~measurements~~on ~~consider~~a ~~observable~~recurring ~~data~~basis ~~that~~at ~~may~~October ~~include~~31, ~~dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange.~~ 2020:

7.DEBT FINANCING


					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices in		Significant Other		Significant
	Consolidated				Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Ethanol	$	15,150	$	15,150	$	15,150	$	—	$	—

Financial Liabilities:
Commodity Derivative instruments - Corn	$	173,928	$	173,928	$	173,928	$	—	$	—
Accounts Payable (1)	$	553,248	$	553,248	$	—	$	553,248	$	—

(1)

Accounts payable is generally stated at historical amounts with the exception of amounts in this table related to certain delivered inventory for which the payable fluctuates based on the changes in commodity prices. These payables are hybrid financial instruments for which the company has elected the fair value option.

~~Long-term~~We ~~debt~~determine ~~consists~~the fair value of commodity derivative instruments by obtaining 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 the ~~following:~~Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value of Level 2 accounts payable based on nearby futures values, plus or minus nearby basis.


	July 31, 2020		October 31, 2019
	(unaudited)
Amended revolving term note payable to lending institution, see terms below.	$	2,270,918	$	—
Single advance term note payable to lending institution, see terms below.		3,000,000		—
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.		467,366		634,180
SBA Paycheck Protection Program Loan		595,693		—
Totals		6,333,977		634,180
Less amounts due within one year		1,241,000		333,977
Net long-term debt	$	5,092,977	$	300,203

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

8.DEBT FACILITIES

Long-term debt consists of the following:


	January 31, 2021		October 31, 2020
Amended revolving term note payable to lending institution, see terms below.	$	9,699,032	$	7,891,426
Single advance term note payable to lending institution, see terms below.		2,700,000		3,000,000
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in October 2021. The Company made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other current assets that are held on deposit to be applied with the final payments of the assessment.		300,551		300,551
SBA Paycheck Protection Program Loan, see terms below.		595,693		595,693
Granite Falls Energy note, see terms below.		5,000,000		—
Totals		18,295,276		11,787,670
Less amounts due within one year		18,146,353		11,492,059
Net long-term debt	$	148,923	$	295,611

Revolving Term Note

The 2020 Credit Facility includes an amended and restated revolving term loan with a $~~8,000,000 principal commitment, which was increased to a $~~13~~,000,000~~ million principal commitment ~~in June 2020~~. ~~This loan replaces the amended revolving term note and seasonal revolving loan made under the 2018 Credit Facility.~~ The loan is secured by substantially all of the Company’s assets, including a subsidiary guarantee. The 2020 Credit Facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. During the second fiscal quarter of 2020, the 2020 Credit Facility was amended to reduce the working capital covenant to $8 million, from the original $10 million working capital covenant, for the period of April 30, 2020 through December 31, 2020, and increasing to $10 million beginning January 1, 2021. Additionally, the amendment excludes current portion of leases ~~will be excluded~~ from the calculation of current liabilities. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties. ~~In May 2020, the Company had an event of non-compliance related to the minimum working capital requirement as defined in the amended credit facility.~~ The Company ~~has~~was ~~obtained~~out ~~a waiver from its lender for this event~~ of ~~non-~~compliance. ~~The Company was in compliance~~ with ~~all~~certain debt covenants on ~~July~~January 31, ~~2020. However~~2021, ~~the Company anticipates an event of non-compliance with respect to our debt service coverage ratio~~ for ~~the~~which ~~period ended October 31, 2020. The Company intends to obtain~~ a waiver ~~from~~was ~~its~~obtained ~~lender~~from ~~for~~the ~~this anticipated event of noncompliance~~lender.

AsDuring ~~part~~February of2021, the 2020 Credit Facility ~~closing,~~was ~~the~~amended ~~Company~~to ~~entered~~reduce ~~into~~the anworking ~~amended~~capital ~~administrative~~covenant ~~agency~~to ~~agreement~~$8 ~~with~~million ~~CoBank,~~through ~~ACP~~May ~~(“CoBank”). As a result~~31, ~~CoBank~~2021 ~~will~~and ~~continue~~increasing to ~~act~~$10 asmillion ~~the~~beginning ~~agent~~June ~~for~~30, ~~the~~2021. The ~~lender with respect to the~~ 2020 Credit Facility. ~~The~~was ~~Company~~also ~~agreed~~amended to ~~pay~~decrease ~~CoBank~~the annet ~~annual~~worth ~~fee~~requirement offrom $~~2,500~~32 ~~for~~million ~~its~~to ~~services~~$28 ~~as administrative agent~~million.

~~Under~~As ~~the~~part ~~terms~~ of the ~~amended~~2020 ~~revolving~~Credit ~~term~~Facility ~~loan~~closing, the Company ~~may~~entered ~~borrow,~~into ~~repay,~~an ~~and~~amended ~~reborrow~~administrative upagency toagreement ~~the~~with ~~aggregate~~CoBank, ~~principal~~ACP ~~commitment~~(“CoBank”). As ~~amount~~a ~~of $13~~result,~~000,000.~~ ~~Final~~CoBank ~~payment~~will ofcontinue ~~amounts~~act ~~borrowed~~as ~~under~~ the ~~amended~~agent ~~revolving~~for ~~term loan is due December 1, 2022. Interest on~~ the ~~amended~~lender ~~revolving~~with ~~term~~respect ~~loan accrues at a variable weekly rate equal~~ to ~~3.35% above~~ the ~~higher~~2020 ofCredit 0Facility.~~00%~~ orThe ~~the~~Company ~~One-Month~~agreed ~~London~~to ~~Interbank~~pay ~~Offered~~CoBank ~~Rate~~an ~~(“LIBOR”)~~annual ~~Index~~fee ~~rate~~of $2,500 ~~which~~for ~~totaled~~its ~~3.50%~~services atas ~~July~~administrative ~~31, 2020~~agent.

Under the terms of the amended revolving term loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of $13,000,000. Final payment of amounts borrowed under the amended revolving term loan is due December 1, 2022. Interest on the amended revolving term loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which totaled 3.48% at January 31, 2021.

The Company also agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2021

Single Advance Term Note

In June 2020, the Company entered into a single advance term note with a $3,000,000 principal commitment, with the purpose to finance the construction of a new grain bin and provide principal reduction on the Revolving Term Note. The interest rate is fixed at 3.80%. Principal with interest is to be paid in 10 consecutive, semi-annual installments, with the first installment due on December 20, 2020 and the last installment due on June 20, 2025. The note is secured as provided in the 2020 Credit Facility.

Short Term Revolving Promissory Note

In February 2021, the Company entered into a revolving promissory note with its lender in order to finance the operating needs of the Company. The revolving promissory note is subject to the 2020 Credit Facility. Under the terms, the Company may borrow, repay and reborrow up to the aggregate principal commitment amount of $5,000,000. Final payment of amounts borrowed under the revolving promissory note is June 1, 2021. Interest of the loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate and is payable monthly in arrears. In addition, the Company agreed to pay an unused commitment fee on the unused available portion of the loan at the rate of 0.50% per annum payable monthly in arrears.

The Company has forecasted that it is probable that there will be future instances of non-compliance with debt covenants within the next twelve months. As a result, approximately $11,800,000 of long term debt has been reclassified as current maturities.

SBA Paycheck Protection Program Loan

In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 18, 2020, the Company received a loan in the amount of $595,693 through the Paycheck Protection Program. ~~Management~~The ~~expects~~Company ~~that~~has ~~the~~applied ~~entire~~for ~~loan~~forgiveness ~~will~~of bethis ~~used~~loan ~~for payroll, utilities~~ and ~~interest;~~expects ~~therefore, management anticipates that~~ the loan ~~will~~to be ~~substantially~~ forgiven in March 2021. To the extent it is not forgiven, ~~the~~HLBE ~~Company~~ would be required to repay that portion at an interest rate of 1% over a period of two years, ~~beginning~~with principal repayment installments in May 2021 with a final installment in May 2022.

Also in February 2021, the Company received a second Paycheck Protection Program loan in the amount of $595,693. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in March 2022 with a final installment in February 2026.

Negotiable Promissory Note with GFE

In December 2020, we entered into a negotiable promissory note with GFE with a $5,000,000 principal commitment. Interest on the loan accrues at a variable weekly rate equal to the higher of 1.00% or the One-Month LIBOR Index rate, plus 3.35%, which totaled 3.48% at January 31, 2021. The note was due on demand, and accrued interest must be paid in full the first business day of each month. The note is unsecured and may be prepaid at any time without penalty. In January 2021, we borrowed the $5,000,000 on the promissory note, which is classified as a current liability. In February 2021, GFE agreed to modify the promissory note to remove the due on demand feature, instead agreeing that GFE will not require any principal repayment on the loan until March 2023. However, should there be future violations of the Credit Facility loan covenants, those violations would also be considered a default on this promissory note.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

Estimated annual maturities of long-term debt at ~~July~~January 31, ~~2020~~2021 are as follows based on the most recent debt agreements, ~~for~~and ~~the~~violation ~~twelve~~of ~~months~~certain ~~ended~~loan ~~July 31~~covenants:


2021	$	1,241,000
2022	$	18,146,353
2022		3,292,977
2023		148,923
2023		600,000
Total debt	$	18,295,276
2024		600,000
2025		600,000
Total debt	$	6,333,977

8.LEASES

~~Adoption of ASC 842~~9.LEASES

AsThe ~~discussed~~Company inelected ~~Note 1, on November 1, 2019,~~ the ~~Company~~following ~~adopted~~practical ~~the~~expedients ~~provisions~~allowable ofunder ASC 842: ~~using~~not ~~the~~to ~~modified~~reassess ~~retrospective~~whether ~~approach,~~any ~~which~~expired ~~applies~~or ~~the~~existing ~~provisions~~contracts ofare ~~ASC~~or ~~842~~contain ~~upon~~leases; ~~adoption,~~not ~~with~~to noreassess ~~change~~the tolease ~~prior~~classification ~~periods.~~for ~~This~~any ~~adoption~~expired ~~resulted~~or inexisting ~~the~~leases; ~~Company~~not ~~recognizing~~to reassess initial ~~right~~direct ofcosts ~~use~~for ~~assets~~any ~~and~~existing ~~lease~~leases. ~~liabilities~~Additionally, ofthe ~~approximately~~Company ~~$10.9~~elected ~~million~~the atshort-term ~~November~~lease 1exemption policy, ~~2019.~~applying ~~The~~the ~~adoption~~requirements ~~did~~of ~~not~~ASC ~~have~~842 ato ~~significant~~only ~~impact~~long-term on(greater ~~the~~than ~~Company’s~~one ~~statement~~year) ~~of operations~~leases.

~~Upon~~The ~~the~~Company ~~initial~~leases ~~adoption~~rail ofcars ~~ASC~~for ~~842,~~its ~~the~~facility ~~Company~~to ~~elected~~transport ~~the~~ethanol ~~following~~and ~~practical~~dried ~~expedients~~distillers’ ~~allowable~~grains ~~under~~to ~~the~~its ~~guidance:~~end ~~not~~customers. toOperating ~~reassess~~lease ~~whether~~right ~~any~~of ~~expired~~use orassets ~~existing~~and ~~contracts~~liabilities are orrecognized ~~contain~~at ~~leases;~~commencement ~~not~~date tobased ~~reassess~~on the present value of lease ~~classification~~payments ~~for~~over ~~any~~the ~~expired~~lease orterm. ~~existing~~The ~~leases;~~Company ~~not~~uses toits ~~reassess~~estimated ~~initial~~incremental ~~direct~~borrowing ~~costs~~rate, ~~for~~unless ~~any~~an ~~existing~~implicit ~~leases.~~rate ~~Additionally~~is readily determinable, as the ~~Company~~discount ~~elected~~rate for each lease in determining the ~~short-term~~present value of lease ~~exemption~~payments. ~~policy~~For the three months ended January 31, ~~applying~~2021, the ~~requirements~~Company’s ofweighted ~~ASC~~average ~~842~~discount torate ~~only~~was ~~long~~4.87%. Operating lease expense is recognized on a straight-~~term~~line ~~(greater~~basis ~~than~~over ~~one~~the ~~year)~~lease ~~leases~~term.

The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining terms of approximately one to seven years. For the three months ended January 31, 2021, the weighted average remaining lease term was four years.

The Company ~~leases~~elected ~~rail cars for its facility~~ to ~~transport~~use ~~ethanol~~a ~~and~~portfolio ~~dried~~approach ~~distillers’~~for ~~grains to its end customers. Operating~~ lease ~~right~~classification, ofwhich ~~use~~allows ~~assets~~for ~~and~~an ~~liabilities~~entity ~~are~~to ~~recognized~~group attogether ~~commencement~~leases ~~date~~with ~~based~~similar oncharacteristics ~~the~~provided ~~present~~that ~~value of lease payments over the lease term. The Company uses~~ its ~~estimated~~application ~~incremental~~does ~~borrowing~~not ~~rate,~~create ~~unless~~a anmaterial ~~implicit~~difference ~~rate~~when iscompared ~~readily~~to ~~determinable,~~accounting ~~as the discount rate~~ for ~~each lease in determining~~ the ~~present~~leases ~~value~~at ofa ~~lease~~contract ~~payments~~level. For ~~the~~railcar ~~nine months ended July 31~~leases, ~~2020,~~ the Company’s ~~weighted~~elected ~~average~~to ~~discount~~combine ~~rate~~the ~~was~~railcars ~~4.87%. Operating~~within ~~lease~~each ~~expense~~rider isand ~~recognized~~account onfor aeach ~~straight-line~~rider ~~basis~~as ~~over~~an ~~the~~individual lease ~~term~~.

The ~~Company~~following ~~determines~~table ifsummarizes anthe ~~arrangement~~remaining ismaturities aof ~~lease~~the ~~or contains a lease at inception. The~~ Company’s ~~leases~~operating ~~have~~lease ~~remaining~~liabilities ~~terms~~as of ~~approximately~~January ~~one to seven years. For the nine months ended July~~ 31, ~~2020, the weighted average remaining lease term was four years.~~2021:

The Company elected to use a portfolio approach for lease classification, which allows for an entity to group together leases with similar characteristics provided that its application does not create a material difference when compared to accounting for the leases at a contract level. For railcar leases, the Company elected to combine the railcars within each rider and account for each rider as an individual lease.


Twelve Months Ended January 31,
2022	$	1,767,000
2023		1,767,000
2024		1,757,250
2025		1,650,000
2026		1,650,000
Thereafter		1,750,000
Totals		10,341,250
Less: Amount representing interest		1,379,965
Lease liabilities	$	8,961,285

~~The~~For ~~following~~the ~~table~~three ~~summarizes~~months ~~the~~ended ~~remaining~~January ~~maturities~~31, of2021 and 2020, the Company’s recorded operating lease ~~liabilities~~costs asof approximately $610,000 and $575,000, respectively, in cost of ~~July~~goods 31sold in the Company’s statement of operations, ~~2020:~~which approximates the cash paid for the period.


Twelve Months Ended July 31,
2021	$	1,767,000
2022		1,767,000
2023		1,767,000
2024		1,698,750
2025		1,650,000
Thereafter		2,575,000
Totals		11,224,750
Less: Amount representing interest		1,607,521

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

~~Lease~~10.COMMITMENTS ~~liabilities~~AND ~~ $ 9,617,229 ~~CONTINGENCIES

For the three months ended July 31, 2020, the Company recorded operating lease costs of approximately $591,000 in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the period. For the nine months ended July 31, 2020, the Company recorded operating lease costs of approximately $1,731,000 in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the period.

9.COMMITMENTS AND CONTINGENCIES

Corn Forward Contracts

At ~~July~~January 31, ~~2020~~2021, the Company had cash and basis contracts for forward corn purchase commitments for approximately 4,~~613~~402,000 bushels for deliveries through ~~March~~July ~~2021~~2022.

Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts and its inventories using the lower of cost or net realizable value evaluation, similar to the method used on its inventory, and has determined that anno impairment loss ~~of $824,000~~ existed at ~~July~~January 31, ~~2020~~2021, and noapproximately ~~impairment~~$47,000 ~~loss existed~~ at or October 31, ~~2019~~2020.

Ethanol Forward Contracts

At ~~July~~January 31, ~~2020~~2021, the Company had ~~forward~~fixed and basis contracts to sell approximately $614,~~069~~720,000 of ethanol for various delivery periods through ~~September~~March ~~2020~~2021, which approximates 97% of its anticipated ethanol sales for that period.

Distillers’ Grains Forward Contracts

At ~~July~~January 31, ~~2020~~2021, the Company had forward contracts to sell approximately $~~325~~5,473,000 of distillers’ grains for delivery through ~~December~~September ~~2020~~2021, which approximates 27% of its anticipated distillers' grains sales during that period.

Corn Oil Forward Contracts

At ~~July~~January 31, ~~2020~~2021, the Company had forward contracts to sell approximately $~~701~~435,000 of corn oil for delivery through ~~September~~February ~~2020~~2021, which approximates 75% of its anticipated corn oil sales for that period.

Rail Car Rehabilitation Costs

The Company leases 50 hopper rail cars under a multi-year agreement which ends in May 2027. Under the agreement, the Company is required to pay to rehabilitate each car for “damage” that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease. Prior to the year ending October 31, 2019, the Company believed ongoing repairs resulted in an insignificant future rehabilitation expense. During the year ending October 31, 2019, based on new information, we re-evaluated our assumptions and believe that it is probable that we may be assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars at ~~July~~January 31, ~~2020~~2021 and October 31, ~~2019~~2020, to be approximately $~~585~~608,000 and $~~551~~597,000, respectively. During the ~~three~~quarter ~~and nine months~~ ended ~~July~~January 31, 2021 and 2020, the Company has recorded an expense in cost of goods of approximately $1612,000 and $7011,000, respectively.

1011.MEMBERS’ EQUITY

Heron Lake BioEnergy, LLC is authorized to issue up to 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of Heron Lake BioEnergy, LLC are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by Heron Lake BioEnergy, LLC’s Board of Governors to become members. Members are entitled to one vote for each unit held. Subject to Heron Lake BioEnergy, LLC’s Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

Heron Lake BioEnergy, LLC has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding at January 31, 2021 and October 31, 2020.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~July~~January 31, ~~2020~~2021

~~LLC’s~~On ~~Member~~December ~~Control~~11, ~~Agreement~~2019, ~~all~~HLBE ~~units~~Pipeline ~~share~~Company ~~equally~~acquired in the ~~profits~~remaining ~~and~~non-controlling ~~losses~~interest ~~and~~of ~~distributions~~Agrinatural for a total price of ~~assets~~$2.225 onmillion. aThe ~~per~~change ~~unit~~of ~~basis~~interest is recorded as an equity transaction in accordance with ASC 805.

On December 11, 2019, HLBE Pipeline Company acquired the remaining non-controlling interest of Agrinatural for a total price of $2.225 million. A deposit of $225,000 was paid in October 2019 and recorded within other assets at October 31, 2019, and the remaining amount was paid on December 11, 2019. The change of interest is recorded as an equity transaction in accordance with ASC 805.

11.RELATED PARTY TRANSACTIONS

Granite Falls Energy, LLC

The Company has a management services agreement with Granite Falls Energy, LLC (“GFE”, a related party). Under the terms of the management services agreement, GFE supplies its own personnel to act as part-time officers and managers of the Company for the positions of Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager and the Company pays GFE 50% of the total salary, bonuses, and other expenses and costs incurred by GFE for the three management positions. The management services agreement automatically renews for successive one-year terms unless and until the Company or GFE gives the other party 90-days written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances. Total expenses under this agreement were approximately $~~122~~119,000 and $~~116~~123,000 for the three months ended ~~July~~January 31, ~~2020~~2021 and ~~2019~~2020, respectively, ~~and~~of which approximately $~~380~~50,000 ~~and~~is ~~$337,000~~included ~~for~~in ~~the~~accounts ~~nine~~payable ~~months~~at ~~ended~~January ~~July~~ 31, ~~2020 and 2019, respectively~~2021.

In February 2020, Agrinatural ~~has~~entered into a natural gas local distribution company management agreement with GFE for, among other purposes, the purpose of sharing certain management employees. The agreement automatically renews for successive one-year terms unless and until Agrinatural or GFE gives the other party 30 days’ written notice of termination prior to expiration of the initial term or the start of a renewal term. The agreement may also be terminated by either party for cause under certain circumstances. Under the agreement, GFE supplies its personnel to act as part-time officers of Agrinatural for the positions of chief executive officer and chief financial officer. In return, Agrinatural pays GFE $9,000 per month, excluding fees for third-party services. GFE is responsible for and agreed to directly pay salary, wages, and/or benefits to the persons providing management services under the agreement. Total expenses under this agreement were approximately $27,000 for the three months ended ~~July~~January 31, ~~2020, and $54,000 for the nine months ended July 31, 2020~~2021.

Corn Purchases - Members

The Company purchased corn from board members of approximately $573,~~000 and $2~~742,~~633,~~000 ~~for the three months ended July 31, 2020~~ and ~~2019, respectively, and approximately~~ $5,~~872~~065,000 ~~and $7,219,000~~ for the ~~nine~~three months ended ~~July~~January 31, ~~2020~~2021 and ~~2019~~2020, respectively.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2020

13.BUSINESS SEGMENTS

12.BUSINESS SEGMENTS

The Company groups its operations into the following two business segments:


Ethanol Production	Ethanol and co-product production and sales
Natural gas pipeline	Ownership and operations of natural gas pipeline

Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Segment income or loss does not include any allocation of shared-service costs. Segment assets are those that are directly used in or identified with segment operations. Inter-segment balances and transactions have been eliminated.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2021

The following tables summarize financial information by segment and provide a reconciliation of segment revenue, contribution to operating income (loss), and total assets:



	Three Months Ended
	January 31, 2021		January 31, 2020
Revenue:	(unaudited)		(unaudited)
Ethanol production	$	24,034,209	$	25,991,003
Natural gas pipeline		817,729		1,136,217
Eliminations		(410,869)		(446,940)

Total Revenue	$	24,441,069	$	26,680,280


	Three Months Ended				Nine Months Ended
Operating Income (Loss):	2021		2020
	July 31, 2020		July 31, 2019		July 31, 2020		July 31, 2019
Ethanol production	$	(4,273,277)	$	2,812,778
Revenue:	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Natural gas pipeline		376,992		646,298
Ethanol production	$	14,039,050	$	27,267,156	$	55,398,271	$	77,487,200
Eliminations		(126,074)		182,456
Natural gas pipeline		439,448		541,283		2,182,563		2,398,915
Operating Loss	$	(4,022,359)	$	(2,348,936)
Eliminations		(313,457)		(440,652)		(1,130,544)		(1,326,011)
Total Revenue	$	14,165,041	$	27,367,787	$	56,450,290	$	78,560,104


	~~Three Months Ended~~				~~Nine Months Ended~~
	~~July~~January 31, ~~2020~~2021		~~July~~October 31, ~~2019~~2020		~~July 31, 2020~~		~~July 31, 2019~~
Operating Income (Loss):	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Assets:	(unaudited)
Ethanol production	$	(449,~~033~~733,~~933)~~824	$	~~208~~49,~~535~~613,394	$	~~(13,414,332)~~	$	~~(3,720,809)~~
Natural gas pipeline		~~203~~13,~~565~~354,270		~~322~~13,~~222~~466,787		~~1,102,387~~		~~1,356,744~~
Eliminations		(89,313)		(149,064)		(376,172)		(482,978)
Total Assets	$	63,088,094	$	63,080,181
Operating Income (Loss)	$	(3,919,681)	$	381,693	$	(12,688,117)	$	(2,847,043)



	July 31, 2020		October 31, 2019
Assets:	(unaudited)
Ethanol production	$	42,192,322	$	44,097,379
Natural gas pipeline		12,826,424		12,498,536
Total Assets	$	55,018,746	$	56,595,915

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

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three ~~and nine~~ months ended ~~July~~January 31, ~~2020~~2021 and ~~2019~~2020. This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in PART I - Item 1 of this report and the information contained in the Company’s annual report on Form 10-K for the fiscal year ended October 31, ~~2019~~2020.

Disclosure Regarding Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance, and prospects in this report. All statements that are not historical or current facts are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions.

Forward-looking statements are subject to a number of known and unknown risks, uncertainties, and other factors, many of which may be beyond our control, and may cause actual results, performance, or achievements to differ materially from those projected in, expressed or implied by 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 are described more particularly in the “Risk Factors” section of our annual report on Form 10-K for the year ended October 31, ~~2019~~2020 as supplemented by the risk factors disclosed in Item 1A of this report on Form 10-Q. These risks and uncertainties include, but are not limited to, the following:

●	Management has determined there is substantial doubt that we will be able to continue in business over the next year because we have debts that may come due as a result of our failure to comply with certain loan covenants.

●	Fluctuations in the price of ethanol, which is affected by various factors including: the overall supply and demand for ethanol and corn; the price of gasoline, crude oil and corn, government policies, the price and availability of competing fuels;

●	Fluctuations in the price of crude oil and gasoline and the impact of lower oil and gasoline prices on ethanol prices and demand;

●

Fluctuations in the availability and price of corn, which is affected by various factors including: domestic stocks, demand from corn-consuming industries, such as the ethanol industry, prices for alternative crops, increasing input costs, changes in government policies, shifts in global markets or damaging growing conditions, such as plant disease or adverse weather, including drought;

●	Fluctuations in the availability and price of natural gas, which may be affected by factors such as weather, drilling economics, overall economic conditions, and government regulations;

●	Negative operating margins which may result from lower ethanol and/or high corn prices;

●	Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil, or automobile industries;

●	Overcapacity and oversupply in the ethanol industry;

●	Ethanol may trade at a premium to gasoline at times, resulting in a disincentive for discretionary blending of ethanol beyond the requirements of the RFS and consequently negatively impacting ethanol prices and demand;

●

Changes in federal and/or state laws and environmental regulations including elimination, waiver, or reduction of the corn-based ethanol use requirement in the RFS and legislative acts taken by state governments such as California related to low-carbon fuels, may have an adverse effect on our business;

●	Any impairment of the transportation, storage and blending infrastructure that prevents ethanol from reaching markets;

●	Any effect on prices and demand for our products resulting from actions in international markets, particularly imposition of tariffs;

●	Changes in our business strategy, capital improvements or development plans;

●	Effect of our risk mitigation strategies and hedging activities on our financial performance and cash flows;

●	Competition from alternative fuels and alternative fuel additives;

●	Changes or advances in plant production capacity or technical difficulties in operating the plant;

●	Our reliance on key management personnel; and

● A slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from COVID-19.

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●	A slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from COVID-19.

We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements because of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

Industry and Market Data

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the United States (“U.S.”) ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent sources. Although we believe our third-party sources are reliable, we have not independently verified the information.

Available Information

Our website address is www.heronlakebioenergy.com. Our annual report on Form 10-K, periodic 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, are available, free of charge, on our website under the link “SEC Filings,” 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 report on Form 10-Q.

Overview

Heron Lake BioEnergy, LLC is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota. Our business consists of the production and sale of our ethanol throughout the continental U.S. and sale of its co-products (wet, modified wet and dried distillers’ grains, corn oil, and corn syrup) locally, and throughout the continental U.S. Additionally, through a wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), we are the sole owner of Agrinatural Gas, LLC (“Agrinatural”). ~~Beginning~~Agrinatural asoperates ofa ~~December~~natural ~~11,~~gas ~~2019~~pipeline that provides natural gas to Heron Lake BioEnergy, weLLC’s ~~hold~~ethanol aproduction ~~100%~~facility ~~interest~~and inother ~~Agrinatural~~customers. AtWhen ~~October~~we ~~31,~~use ~~2019,~~the weterms ~~held~~“Heron aLake ~~73%~~BioEnergy,” ~~interest~~“Heron inLake,” ~~Agrinatural.~~or ~~Agrinatural~~“HLBE” ~~operates~~or asimilar ~~natural~~words, ~~gas~~unless ~~pipeline~~the ~~that~~context ~~provides~~otherwise ~~natural~~requires, ~~gas~~we are referring to Heron Lake BioEnergy, LLC’s and our operations at our ethanol production facility ~~and~~located ~~other~~near ~~customers~~Heron Lake, Minnesota. When we use the terms the “Company,” “we,” “us,” “our” or similar words, unless the context otherwise requires, we are referring to Heron Lake BioEnergy and its wholly owned subsidiary, HLBE Pipeline Company, LLC, and its wholly owned subsidiary Agrinatural.

~~When~~We wehave ~~use~~a ~~the~~management ~~terms~~services ~~“Heron~~agreement ~~Lake~~with ~~BioEnergy~~Granite Falls Energy,” ~~“Heron~~LLC, ~~Lake~~a Minnesota limited liability company that operates an ethanol plant located in Granite Falls,” orMinnesota (“~~HLBE~~GFE”). GFE orowns ~~similar~~approximately ~~words,~~50.7% ~~unless~~of our outstanding membership units. Pursuant to the ~~context~~management ~~otherwise~~services ~~requires~~agreement, weGFE ~~are~~provides ~~referring~~its tochief ~~Heron~~executive ~~Lake BioEnergy~~officer, ~~LLC~~chief financial officer, and ~~our~~commodity ~~operations~~risk atmanager ~~our~~to ~~ethanol~~act ~~production~~in ~~facility~~those ~~located~~positions ~~near~~as ~~Heron~~our ~~Lake,~~part-time ~~Minnesota~~officers. ~~When~~Steve weChristensen ~~use~~currently serves as our CEO and general manager, pursuant to the terms of the ~~“Company,”~~management ~~“we,”~~services ~~“us~~agreement. In February 2021,” ~~“our”~~Granite orFalls ~~similar~~Energy ~~words,~~executed ~~unless~~a ~~the~~separation ~~context~~agreement ~~otherwise~~with ~~requires~~Mr. Christensen, wewho ~~are~~intends ~~referring~~ to ~~Heron~~retire ~~Lake~~by ~~BioEnergy~~the ~~and~~end ~~its~~of ~~wholly~~2021. ~~owned~~Mr. ~~subsidiary,~~Christensen ~~HLBE~~is ~~Pipeline~~expected ~~Company,~~to ~~LLC,~~continue in his role until a successor is hired and ~~its~~a ~~wholly~~transition ~~owned~~period ~~subsidiary~~is ~~Agrinatural~~complete.

Reportable Operating Segments

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the nature of the products, services and operations and the expected financial results, we review our operations within the following two separate operating segments: (1) ethanol production; and (2) natural gas pipeline operations. We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol, distillers’ grains, corn oil and natural gas transportation. Refer to Note 12, “Business Segments,” of the notes to the condensed consolidated unaudited financial statements for financial information about our financial reporting segments.

Ethanol Production

Our primary line of business is the Company’s operation of its ethanol plant, including the production and sale of ethanol and its co-products (distillers’ grains, non-edible corn oil and corn syrup). These operations are aggregated into one financial reporting segment.

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Our ethanol plant has a nameplate capacity of 50 million gallons per year. We have received EPA pathway approval and have obtained permits from the Minnesota Pollution Control Authority to increase our production capacity to approximately 72.3 million gallons of undenatured fuel-grade ethanol on a twelve-month rolling sum basis. We are currently operating above our stated nameplate capacity on an annualized basis and intend to continue to do so into the future, dependent on industry conditions and plant profitability.

In July 2020, the Company experienced major issues with its boiler, which negatively impacted production. The Company ~~ordered~~operated awith temporary ~~boiler,~~boilers ~~which~~from ~~allowed operations to continue in~~ August 2020 ~~until~~through ~~repair~~part ~~or replacement~~ of ~~the~~January ~~boiler could be completed~~2021. The Company determined that the purchase and installation of a new boiler would be more economical and efficient than attempted repairs to the failing boiler. ~~The new boiler is expected to be installed in October 2020.~~ On September 2, 2020, the Company received notice of approval of the new boiler from the Minnesota Pollution Control Agency. As a result, the Company abandoned the failing boiler, isat ~~currently~~that ~~operating~~time. ~~with~~The ~~the~~Company ~~temporary~~recorded ~~boiler, and plans to operate with~~ the ~~new~~loss ~~boiler~~on ~~upon~~disposal ~~its~~as ~~completed~~a ~~installation.~~component ~~The~~of ~~Company~~operating ~~will~~expenses ~~record the cost for the abandonment~~ during the fourth fiscal quarter ~~once~~of ~~it has determined~~ the ~~asset~~fiscal ~~value,~~year ~~and~~ended ~~what,~~October ~~if any~~31, of2020 ~~the existing equipment can be salvaged. The Company anticipates a loss~~ of approximately $1.8 million. inThe ~~the~~new ~~fourth~~boiler ~~fiscal~~was ~~quarter~~placed ofin ~~2020~~service ~~due~~in toJanuary ~~the~~2021 ~~abandonment~~at ofan ~~the failing boiler. The~~ estimated cost of ~~the new boiler is~~ approximately $5.23 million.

We have a management services agreement with Granite Falls Energy, LLC, a Minnesota limited liability company that operates an ethanol plant located in Granite Falls, Minnesota (“GFE”). GFE owns approximately 50.7% of our outstanding membership units. Pursuant to the management services agreement, GFE provides its chief executive officer, chief financial officer, and commodity risk manager to act in those positions as our part-time officers. The management services automatically renews for successive one-year terms until either party gives the other party written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

We market and sell our products primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, LLC to market all of our ethanol, Gavilon Ingredients, LLC to market our distillers’ grains, and RPMG, Inc. to market our corn oil. We also occasionally independently market and sell excess corn syrup from the distillation process to local livestock feeders.

Our cost of our goods sold consists primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers’ grains for sale at our ethanol plant. We generally do not have long-term, fixed price contracts for the purchase of corn. Typically, we purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

We have a facilities agreement with Northern Border Pipeline Company, which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from our plant. We have entered into a firm natural gas transportation agreement with Agrinatural, our indirectly wholly owned subsidiary. We also have an agreement with Constellation New Energy—Gas Division, LLC to supply the natural gas necessary to operate our plant.

Natural Gas Pipeline

Through our wholly owned subsidiary, HLBE Pipeline Company, we indirectly own 100% of Agrinatural Gas, LLC, a Delaware limited liability company (“Agrinatural”), a natural gas distribution and sales company located in Heron Lake, Minnesota. On October 18, 2019, HLBE Pipeline Company entered into an agreement to purchase the 27% non-controlling interest in Agrinatural, which became effective on December 11, 2019. Prior to December 11, 2019, Rural Energy Solutions, LLC owned a 27% non-controlling interest in Agrinatural. Agrinatural owns approximately 190 miles of natural gas pipeline and provides natural gas to the Company’s ethanol plant and other commercial, agricultural, and residential customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company. Agrinatural's revenues are generated through natural gas distribution fees and sales. The operations of Agrinatural's natural gas pipeline are aggregated into a separate financial reporting segment.

Agrinatural has a natural gas local distribution company management agreement with GFE pursuant to which GFE’s chief executive officer and chief financial officer also hold those same offices with Agrinatural. The agreement automatically renews for successive one-year terms unless either Agrinatural or GFE gives the other party written notice

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of termination prior to expiration of the then current term. The agreement may also be terminated by either party for cause under certain circumstances.

The Company has two intercompany credit facilities with Agrinatural: a July 2014 credit facility, as amended (the “Original Credit Facility”) and a March 2015 credit facility, as amended (the “Additional Credit Facility”). Under the Original Credit Facility, the Company made a five-year term loan in the principal amount of $3.05 million and pursuant to the Additional Credit Facility, made a four-year term loan in the principal amount of $3.5 million to Agrinatural. Subsequent to the closing of the Company’s indirect acquisition of Agrinatural’s non-controlling interest in December 2019, the parties agreed to forgive the debt related to both the Original Credit Facility and the Additional Credit Facility. Additional details are provided below in the section below entitled “PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources; Indebtedness.”

During the normal course of business, the Company enters into transactions between its two operating segments as a result of HLBE’s firm natural gas transportation agreement with Agrinatural. These intersegment activities are recorded by each segment at prices approximating market and treated as if they are third-party transactions. Consequently, these transactions impact segment performance. However, the revenues and corresponding costs are eliminated in consolidation and do not impact the Company’s unaudited condensed consolidated results.

Plan of Operations for the Next Twelve Months

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of ~~2019~~2020 and so far in ~~2020~~2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels, exacerbated ~~in 2020~~ by the COVID-19 pandemic. These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. WeDue ~~expect~~ to ~~have~~these ~~sufficient~~losses, ~~cash~~the ~~generated~~Company byhas ~~continuing~~failed ~~operations~~to comply with certain debt covenants, and ~~availability~~the onCompany ~~our~~has ~~credit~~forecast ~~facility~~that tois ~~fund~~probably ~~our~~there ~~operations.~~will ~~However,~~be ~~should~~future ~~unfavorable~~instances ~~operating~~of noncompliance with the debt covenants in 2021. These conditions ~~continue~~result in the ~~ethanol~~classification ~~industry~~of ~~that~~all ~~prevent~~debt uswith ~~from~~our ~~profitably~~lender ~~operating~~as ~~our~~current ~~plant~~as of January 31, we2021. ~~may~~The ~~need~~Company tohas ~~seek~~insufficient cash on hand and additional ~~funding~~borrowing orcapacity, ~~further~~and ~~idle~~current ~~ethanol~~forecasts ~~production~~indicate ~~altogether~~insufficient cash flows from operations, to repay the debt if it were to come due as a result of covenant noncompliance. These factors raise substantial doubt about the Company's ability to continue as a going concern.

~~Over~~While the ~~next~~Company ~~twelve~~believes ~~months~~the wereplacement ~~will~~of ~~continue~~the ~~our~~boiler ~~focus~~has onimproved ~~operational~~the ~~improvements~~operating atperformance ~~our~~of the plant~~. These~~, ~~operational~~and ~~improvements~~led ~~include~~to ~~replacing~~lower ~~the~~operating ~~boilers~~costs, ~~exploring~~market ~~methods~~conditions tohave ~~improve~~resulted ~~ethanol~~in ~~yield~~losses. ~~per~~The ~~bushel~~Company ~~and~~intends ~~increasing~~to ~~production~~seek ~~output~~other atcapital ~~our plant~~sources, ~~continued~~which ~~emphasis~~may oninclude ~~safety~~re-negotiating its debt agreements and ~~environmental~~terms. ~~regulation~~At this time, ~~reducing~~there ~~our~~are ~~operating~~no ~~costs,~~commitments to do so and ~~optimizing~~we ~~our~~may ~~margin~~not ~~opportunities~~be ~~through~~successful ~~prudent~~in ~~risk-management~~doing ~~policies~~so.

InOver ~~addition,~~the wenext ~~expect~~twelve tomonths we will continue our focus on operational improvements at our plant. These operational improvements include exploring methods to ~~conduct~~improve ~~routine~~ethanol ~~maintenance~~yield per bushel and ~~repair~~increasing ~~activities~~production output at ~~the~~our ~~ethanol~~ plant, tocontinued ~~maintain~~emphasis ~~current~~on ~~plant~~safety ~~infrastructure,~~and asenvironmental ~~well~~regulation, asreducing ~~small~~our ~~capital~~operating ~~projects~~costs, ~~including~~and ~~the~~optimizing ~~construction~~our ofmargin ~~additional~~opportunities ~~grain~~through ~~storage~~prudent risk-management policies. In addition, we expect to ~~improve~~continue ~~operating~~to ~~efficiency.~~conduct Weroutine ~~anticipate~~maintenance ~~using~~and ~~cash~~repair ~~from~~activities ~~our~~at ~~loans~~the ethanol plant to ~~finance~~maintain ~~these~~current plant ~~upgrade projects~~infrastructure.

Trends and Uncertainties Impacting Our Operations

The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains, and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. Governmental programs designed to create incentives for the use of corn-based ethanol also have a significant impact on market prices for ethanol. Other factors that may affect our future results of operation include those risks discussed below and in “PART II - Item 1A. Risk Factors” of this report, ~~“PART II - Item 1A. Risk Factors” of our quarterly reports on Form 10-Q for the three months ended January 31, 2020~~ and ~~the three months ended April 30, 2020, and~~ “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, ~~2019~~2020.

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The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy, and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer, and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production.

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Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread may be tightly compressed or negative~~. If the corn-ethanol spread is compressed or negative for sustained period~~, itwhich iscan ~~possible~~cause ~~that~~ our operating margins ~~will~~to decline or become negative and our ethanol plant may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our ethanol plant to minimize our variable costs and optimize cash flow.

Management ~~currently~~ believes that ~~our~~the ~~margins~~ethanol ~~will~~outlook ~~remain~~in ~~negative or low during~~ the ~~remainder of the~~ fiscal year ~~2020.~~2021 ~~The~~will ~~negative~~remain ~~market~~relatively ~~effects~~consistent ofwith ~~the~~this ~~COVID-19~~quarter ~~pandemic~~and ~~will~~our ~~likely~~margins ~~continue~~will toremain ~~negatively~~tight ~~impact~~due ~~our profitability. Due~~ to ~~the~~higher ~~market~~corn ~~risks~~prices and ~~uncertainties~~depressed ~~related~~gasoline todemand. ~~the~~While ~~pandemic~~vaccinations and ~~its~~increasing ~~ramifications,~~immunity ~~the~~to ~~Company~~COVID-19, ~~temporarily~~and ~~idled~~business ~~its~~re-openings ~~operations~~have ~~from~~improved onthe oroverall ~~about~~economic ~~March~~outlook 30, ~~2020~~the ~~through~~negative ~~approximately~~market ~~May~~effects ~~31,~~of ~~2020.~~the ~~June~~COVID-19 ~~and~~pandemic ~~July~~will ~~also~~likely ~~saw~~continue ~~lower than normal ethanol production levels, due primarily~~ to ~~issues~~negatively ~~with~~impact our ~~boilers~~profitability. Additionally, continued large corn supplies and ethanol production capacity increases could have a negative impact on the market price of ethanol which could adversely impact our profitability. This negative impact could worsen if domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline. ~~Recent US Energy Information Administration (“EIA”) reports indicate that ethanol stocks remain high since the conclusion of fiscal year 2019.~~ Further, while ethanol production briefly significantly declined during the second fiscal quarter of 2020, ethanol production has mostly rebounded ~~during~~and remained steady in the ~~third~~three ~~fiscal~~months ~~quarter~~ending ofJanuary ~~2020~~31, 2021. In addition, management believes that increased waivers of small refiner renewable volume obligations (“RVOs”) by the U.S. Environmental Protection Agency (“EPA”), as well as uncertainty regarding the Renewable Fuels Standard (“RFS”) reset, ~~will~~could contribute to the projected negative or low margins.

Additionally, while ethanol continues trading at a significant discount to gasoline, which has improved export demand somewhat, increased waivers of small refiner RVOs by the EPA has contributed to management’s expectation regarding margins. ~~The~~Prices ~~impact~~for ofrenewable ~~the~~identification ~~increases~~numbers in(“RINs”) ~~small~~for ~~refiner~~corn-based ~~waivers~~ethanol ~~granted~~increased byslightly in the ~~EPA~~three months ending January 31, 2021. However, previously issued small refiner waivers and the reductions in Chinese imports ~~continues~~continue to have a negative impact on prices ~~for renewable identification numbers (“~~RINs~~”) for corn-based ethanol. As a result~~, ~~RINs~~thereby ~~prices~~diminishing ~~remain lower, removing~~ a blending incentive from the ethanol marketplace.

Changes in the price for crude oil and unleaded gasoline could have a negative impact on the demand for gasoline and impact the market price of ethanol, which could adversely impact our profitability. According to the EIA ~~August~~February ~~2020~~2021 Short Term Energy Outlook, EIA estimates that U.S. gasoline consumption inwill ~~the~~average ~~second quarter of 2020 averaged approximately 7~~8.25 million barrels per day from February to June, compared towith ~~approximately~~an 9estimated 7.58 million barrels per day in ~~the second quarter of 2019~~January. ~~Additionally, EIA estimates that~~ U.S. regular gasoline ~~consumption~~retail inprices ~~the~~averaged ~~third quarter of 2020 will average approximately 8~~$2.833 ~~million~~per ~~barrels~~gallon ~~per~~in ~~day~~January 2021, compared towith ~~approximately~~an ~~9.5~~average ~~million~~of ~~barrels~~$2.20 per ~~day~~gallon in ~~the~~December ~~third~~2020 ~~quarter~~and ~~of 2019~~$2.55 ~~For~~per ~~all~~gallon ofin January 2020,. EIA forecasts ~~that U.S.~~ gasoline ~~consumption~~prices ~~will~~to average ~~approximately 8~~$2.444 ~~million~~gallon ~~barrels~~in ~~per~~2021 ~~day,~~and ~~a decrease of approximately 10% compared with 2019. U.S. gasoline prices averaged~~ $2.1846 ~~per~~ gallon in ~~July~~2022. ~~2020~~In addition, anEIA ~~increase~~forecasts ofrelatively 10stable ~~cents~~prices ~~per~~for ~~gallon~~crude ~~from June 2020~~oil, ~~but~~projecting 56Brent ~~cents~~crude ~~per~~oil ~~gallon lower than June 2019. The EIA forecasts regular gasoline~~ prices to average $~~1.99~~56 per ~~gallon~~barrel in the ~~fourth~~first quarter of ~~2020,~~21 ~~largely~~and ~~due~~$52 toper ~~decreases~~barrel infor ~~travel~~the ~~due~~remainder ~~to COVID-19 and reflective~~ of athe ~~drop~~year. inEIA ~~crude~~expects lower oil prices. ~~The~~later ~~EIA~~in ~~projects~~2021 ~~that~~as ~~U.S.~~a ~~gasoline~~result ~~prices~~of ~~will~~rising ~~average~~oil $2supply.23 ~~per~~Significant ~~gallon~~decreases in ~~2021,~~the ~~compared~~price ~~with~~for ancrude ~~average~~oil ofhave ~~$2.12~~a ~~per~~negative ~~gallon~~impact inon ~~2020~~the demand for ethanol.

In addition, crude oil prices fell sharply in March and April 2020, remaining low in June and July 2020 but rebounding slightly, as a result of market reaction to the COVID-19 pandemic, which caused global demand to decline, and international price wars. Such marked decreases in crude oil prices have had a negative impact on the demand for ethanol, which has also been exacerbated by overall lessened global energy demand as a result of the COVID-19 pandemic.

Continued ethanol production capacity increases could also have a negative impact on the market price of ethanol, which could be further exacerbated if domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline. Throughout 2019 and 2020, some U.S. ethanol plants temporarily suspended production due to negative margins, largely resulting from the COVID-19 pandemic, and stagnant export projections caused by trade barriers and decreased global demand in connection with the COVID-19 pandemic.

~~During~~Corn ~~our~~oil ~~third~~prices ~~fiscal~~increased ~~quarter~~during ofthe ~~2020,~~three ~~distillers’~~months ~~grains~~ending ~~prices~~January ~~fell~~31, ~~due~~2021. toOne afactor ~~combination of decreased seasonal demand as well as an increase~~ in ~~supply,~~higher ascorn ~~many~~oil ~~ethanol~~prices ~~plants~~is ~~resumed~~2019 ~~production~~legislation ~~after~~extending the ~~shutdowns~~$1.00 ~~caused by the COVID~~per-19gallon ~~pandemic.~~biodiesel Inblender ~~addition~~tax tocredit ~~being~~through anDecember ~~animal feed substitute for corn~~31, ~~distillers’ grains are increasingly considered a protein feed substitute for soybean meal~~2022. ~~Management~~However, ~~currently~~corn ~~believes~~oil ~~that~~prices ~~the~~may ~~impact~~decrease ofif ~~the~~biodiesel ~~current~~producers ~~Chinese~~reduce ~~imposition~~production ~~of antidumping~~ and/or ~~countervailing~~demand ~~duties~~for oncorn ~~distillers’~~oil ~~grains~~is ~~produced~~reduced inwithout ~~the~~extension ~~U.S.~~of ~~has been absorbed into~~ the ~~market.~~biodiesel ~~However,~~blenders ~~recent~~tax ~~trade disputes with China, Mexico and Canada could result in the imposition of additional tariffs~~ credit.

2221

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on distillers’ grains produced in the United States, which could lead to an oversupply of distillers’ grains domestically and negatively impact distillers’ grains prices. Additionally, domestic feeding margins in cattle and hogs in particular could have a negative impact on total domestic distillers’ grains demand.

Corn oil prices have been slightly negatively impacted during the three months ended July 31, 2020, which aligns with the recent historic perspective, which has seen corn oil prices over the past few years be impacted by oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil for biodiesel production, in addition to increased corn oil production. The impact of lower soybean oil prices and the market’s increase in corn oil production during the last few years will likely continue to impact corn oil prices.

In December 2019, legislation was signed extending the $1.00 per-gallon biodiesel blender tax credit retroactively to January 1, 2018 through December 31, 2022. However, corn oil prices may decrease if biodiesel producers reduce production and/or demand for corn oil is reduced without extension of the biodiesel blenders tax credit.

Given the inherent volatility in ethanol, distillers’ grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers’ grains, non-food grade corn oil, and grain prices in future periods will be consistent compared to historical periods.

Impact of COVID-19 on the Company

Operations

The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout ~~most~~2020, ofas ~~2019~~the ~~and~~COVID-19 sopandemic ~~far~~greatly inreduced ~~2020~~travel asand athus ~~result~~reduced ofdemand ~~industry-wide~~for ~~record~~fuel, ~~low~~including the ethanol ~~prices~~we ~~due~~produce. toReduced ~~reduced~~ demand and high industry inventory levels. ~~These~~resulted ~~factors,~~in ~~which~~record ~~have~~low ~~been~~ethanol ~~compounded~~prices byin the ~~impact~~spring of ~~COVID-19 in~~ 2020,. ~~resulted~~As ~~and~~a ~~continue to~~ result, inwe experienced negative operating margins, significantly lower cash flow from operations and substantial net losses. In response to these adverse market conditions, the Company idled its ethanol production from on or about March 30, 2020 through approximately May 31, 2020. ~~June~~Fuel ~~and~~prices ~~July~~generally, ~~also~~and ~~saw lower than normal~~ ethanol ~~production~~prices ~~levels~~specifically, ~~due~~stabilized ~~primarily~~in tothe ~~issues~~three ~~with~~months ~~our~~ending ~~boilers.~~January ~~Due~~31, to2021, ~~these~~and ~~idles~~management ~~during~~believes ~~the~~there ~~third~~is ~~quarter,~~potential ~~ethanol~~for ~~production~~fuel ~~levels~~demand ~~were~~to ~~reduced~~increase ~~by approximately 18.6%~~ as ~~compared~~more toindividuals ~~the~~obtain ~~first~~COVID-19 ~~half~~vaccinations ofand ~~2020~~resume ~~production levels~~traveling. ~~Management~~However, ~~believes~~it ~~that this reduction~~ is ~~warranted~~possible ~~due~~that toongoing ~~current~~pandemic ~~negative~~or ~~margins~~other infactors ~~the~~will ~~ethanol~~cause ~~industry~~fuel ~~resulting~~demand ~~in part from a slowdown in global~~ and ~~regional economic activity and decreased~~ ethanol ~~demand~~prices ~~due~~ to ~~the~~remain ~~COVID-19~~flat ~~pandemic.~~or ~~Limiting ethanol production also results in a corresponding~~ decrease, inthus ~~distillers’~~negatively ~~grains~~affecting ~~and~~our ~~corn oil production~~business. The Company continues to monitor COVID-19 developments ~~in order~~ to determine ~~whether~~if ~~further~~ adjustments to production are warranted.

Employees

The Company has enacted appropriate safety measures to protect the health and safety of our employees, customers, partners and suppliers, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

Supply and Demand

Although we continue to regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to produce our products, adversely affecting our operations, even when operating at reduced production levels. Additionally, restrictions or disruptions of transportation, such as reduced availability of truck, rail or air transport, port closures and increased border controls or closures, may result in higher costs and delays, both with respect to obtaining raw materials and shipping finished products to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers. Additionally, the COVID-19 pandemic has significantly increased economic and demand uncertainty. The pandemic has caused a global economic slowdown, and it is possible that it could cause a global recession. In the event of a recession, demand for our products would decline further and our business would be further adversely ~~effected~~affected.

PPP ~~Loan~~Loans

23On April 18, 2020, the Company received $595,693 under the Paycheck Protection Program legislation passed in response to the economic downturn triggered by COVID-19. This note was forgiven in March 2021. The Company received a second Paycheck Protection Program loan in February 2021 in the amount of $595,693. Management expects the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% with principal repayment installments beginning in February 2022 with a final installment in February 2026.

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On April 18, 2020, the Company received $595,693 under the Paycheck Protection Program legislation passed in response to the economic downturn triggered by COVID-19. Management expects that the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% over a period of two years, beginning May 2021 with a final installment in May 2022.

Outlook

~~Although~~The ~~there~~adverse isconditions ~~uncertainty~~created ~~related~~by to the ~~anticipated impact of the~~ COVID-19 pandemic oncaused ~~our~~the ~~future~~Company ~~results,~~to weexperience ~~believe~~negative ~~our~~operating ~~current~~margins, ~~cash~~significantly ~~reserves,~~lower cash ~~generated~~flow from ~~our~~ operations, ~~our Paycheck Protection Program loan~~ and ~~the~~substantial available cash under our revolving term loan leave us well-positioned to manage our business through this crisis as it continues to unfold. However, the impacts of the COVID-19 pandemic are broad-reaching, and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net ~~sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses~~losses. As a result, ~~although~~ we ~~were~~have inexperienced ~~compliance~~instances of noncompliance with ~~our~~certain ~~financial~~loan covenants ~~set~~related ~~forth~~to in our ~~2020~~working ~~Credit~~capital ~~Facility~~and asnet ofworth ~~July 31~~ratio, ~~2020,~~and ~~the~~we ~~impact~~are ~~the~~projected ~~COVID-19~~to ~~pandemic~~experience ~~could~~additional ~~have~~instances anof ~~adverse~~noncompliance ~~impact on our operating results which could result in our inability to comply~~ with ~~certain of~~ these ~~financial~~loan covenants ~~and~~in ~~require~~the ~~our~~next ~~lenders~~twelve tomonths. ~~waive~~These ~~compliance~~factors ~~with,~~raise orsubstantial ~~agree~~doubt toabout ~~amend,~~the ~~any~~Company’s ~~such~~ability ~~covenant~~ to ~~avoid~~continue as a ~~default.~~going concern.

The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, and actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast any effects on our 2020 fiscal year results. However, the challenges posed by the COVID-19 pandemic on the global economy increased significantly as the third fiscal quarter of 2020 progressed, and as of the date of this filing, management does not anticipate material improvement in the macroeconomic environment, and, as a result, our results for the 2020 fiscal year may be significantly affected.22

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While vaccinations and increasing community immunity to COVID-19 have improved the overall economic outlook, the pandemic is ongoing, and its dynamic nature makes it difficult to forecast the long-term effects on our industry as a whole and our Company specifically. New variants of the virus that causes COVID-19 may prolong the pandemic, create additional waves of infections, or impose other challenges. It is possible that even after the pandemic has subsided, there will be permanent changes to social and economic patterns that will reduce demand for ethanol, such as reduced travel due to increased use of video-teleconferencing technology and remote working.

Despite the economic uncertainty resulting from the COVID-19 pandemic, we intend to continue to focus on strategic initiatives designed to improve on our operational efficiencies, which is critical in order to drive positive results in a low-margin environment.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future.

Government Supports and Regulation

The Renewable Fuels Standard

The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the federal Renewable Fuels Standard (“RFS”). The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage. Any adverse ruling on, or legislation affecting, the RFS could have an adverse impact on ethanol prices and our financial performance in the future.

~~Under~~However, ~~the~~President ~~provisions~~Joe ofBiden’s ~~the~~administration, ~~RFS~~which took office in January 2021, ~~the~~has ~~EPA~~indicated ~~must~~support ~~publish~~for anRFS ~~annual~~blending ~~rule~~rules and energy policies that ~~establishes~~could ~~the~~be ~~number~~beneficial ofto ~~gallons~~the ofethanol ~~different~~industry ~~types~~and ofour ~~renewable~~business. ~~fuels~~Specifically, ~~including~~the ~~corn-based~~EPA ~~ethanol,~~under ~~that~~the ~~must~~Biden beadministration ~~blended~~has ~~with~~announced ~~gasoline~~it insupports the interpretation of the RFS’s small-refinery provisions made by U.S. byCourt ~~refineries,~~of ~~blenders~~Appeals for the Tenth Circuit in a 2020 decision. In the case, ~~distributors~~Renewable Fuels Association et al. v. EPA, various agriculture and ~~importers~~biofuel groups challenged the EPA’s grant of waivers to three specific refineries. The waived gallons were not redistributed to obligated parties, ~~which~~and ~~affects~~thus reduced the ~~domestic~~aggregate ~~market~~RVOs ~~for~~under ~~ethanol~~the RFS. In ~~December~~January ~~2019~~2020, the ~~EPA~~court ~~released~~struck down the ~~final~~exemptions ~~2020~~as ~~renewable~~improperly ~~volume~~issued ~~obligations~~by ~~(“RVOs”),~~the ~~which~~EPA. ~~included~~The ancourt ~~overall~~interpreted ~~blending~~the ~~requirement~~RFS ofstatute ~~20.09~~to ~~billion~~require ~~gallons~~that ~~for~~any ~~2020,~~exemption granted to a ~~slight~~small ~~increase~~refinery ~~from~~after ~~2019~~2010 ~~mandates~~must take the form of an “extension.” ~~Conventional~~The ~~corn-based~~U.S. ~~ethanol~~Supreme ~~levels~~Court ~~were~~has ~~left~~agreed atto 15hear the case.0 ~~billion~~In ~~gallons~~February 2021, ~~excluding~~the ~~any~~EPA ~~waivers~~announced ~~granted~~it bysupported the 10th Circuit’s interpretation of the RFS, reversing the position the EPA took under the previous administration. Nonetheless, it is uncertain whether the 10th Circuit’s interpretation will be upheld or whether the Biden administration will continue to ~~small~~support ~~refiners~~energy ~~for~~policies ~~“hardship~~that benefit the ethanol industry and our business.”

UAdditional legal actions related to the RFS are underway.S. ~~ethanol~~These ~~production~~include ~~capacity~~lawsuits ~~exceeded~~challenging fuel volume waivers based on “inadequate domestic supply,” challenging the EPA’s ~~2018~~lower ~~and~~threshold ~~2019~~for ~~RVOs~~granting ~~that~~small ~~could~~refinery beexemptions, ~~satisfied~~seeking bybroader, ~~corn~~forward-~~based~~looking ~~ethanol.~~remedy ~~Under~~to account for the ~~RFS~~collective lost volumes caused by recent small refinery exemptions, ifalleging ~~mandatory~~that ~~renewable~~the ~~fuel~~EPA ~~volumes~~and ~~are~~U.S. ~~reduced~~Department byof atEnergy ~~least~~have ~~20%~~improperly ~~for~~denied ~~two~~access ~~consecutive~~to ~~years~~public records request by RFA, and challenging the ~~EPA~~Final is2019 ~~required~~Rule over the EPA’s failure to ~~modify,~~address orsmall ~~reset,~~refinery ~~statutory~~exemptions ~~volumes~~in ~~through~~the ~~2022~~rulemaking. InIf ~~October~~these ~~2018~~legal actions, ~~the~~which ~~Office~~general ofseek ~~Management~~to ~~and~~require ~~Budget~~the ~~announced~~EPA ~~that~~to enforce the ~~20%~~renewable ~~thresholds~~fuel ~~“have~~blending ~~been~~requirements ~~met~~of orthe RFS, are ~~expected~~unsuccessful, tothere bemay ~~met~~negative inimpacts on the ~~near~~ethanol ~~future.”~~industry Inand ~~May~~our ~~2019,~~financial ~~the~~performance.

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EPA delivered the proposed RFS “reset” rule to the White House Office of Management and Budget for its review. The EPA is expected to propose rules modifying the applicable statutory volume targets for cellulosic biofuel, advanced biofuel, and total renewable fuel for the years 2020-2022. The proposed rules are also expected to include proposed diesel renewable volume obligations for 2021 and 2022. If the statutory RVOs are reduced as a result of reset, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

There is growing availability of E85 for use in flexible fuel vehicles; however, it is limited due to lacking infrastructure. In addition, the industry has been working to introduce E15 to the retail market since the EPA approved its use in vehicles model year 2001 and newer. Widespread adoption of E15 has been hampered by regulatory and infrastructure hurdles in many states, as well as consumer acceptance. Additionally, sales of E15 may have been limited because (i) it is not approved for use in all vehicles, (ii) the EPA requires a label that management believes may discourage consumers from using E15, and (iii) retailers may choose not to sell E15 due to concerns regarding liability. On May 30, 2019, the EPA issued a final rule which allows E15 to be sold year-round. In June 2019, the American Fuel and Petrochemical Manufacturers association filed a lawsuit in the U.S. Court of Appeals for the District of Columbia challenging the final rule. Additionally, in August 2019, the Small Retailers Coalition filed a lawsuit in the U.S. Court of Appeals for the District of Columbia seeking review of the final rule. There is no guarantee that the final rule will be upheld. Legal challenges could create uncertainty for retailers desiring to implement or expand sales of E15. Additionally, although the year-round E15 rule is now final, there is no guarantee that retailers will implement the sale of year-round E15, nor is there a guarantee that the rule will result in an increase of ethanol sales.

The EPA assigns individual refiners, blenders, and importers the RVOs they are obligated to use based on their percentage of total fuel sales. Obligated parties use RINs to show compliance with RVOs. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. On April 15, 2020, governors of five states asked the EPA for a refiner waiver from the RFS, contending that refiners in their respective states face financial burdens due to the COVID-19 economic downturn. In June 2020, attorneys general of seven states joined in such request. The EPA has stated that it is “watching the situation closely, and reviewing the” request.

Under the RFS, small refineries may petition for and be granted temporary exemptions from the RVOs if they can demonstrate that compliance with the RVOs would cause disproportionate economic hardship. The EPA has recently granted a number of these exemptions, whereby such refiners were alleviated of their responsibility to supply RINS for their obligated volumes based upon the grounds of economic hardship. On August 2020, 2020, the EPA released data on the number of waivers filed, which indicated that 28 petitions for waivers for the 2019 compliance year have been received, in addition to three petitions for waivers for the 2020 compliance year. For the 2018 compliance year, 44 petitions have been received. To date, with respect to the 2018 compliance year, the EPA has approved 31 petitions and denied 6 petitions, 5 petitions have been declared ineligible or withdrawn, and 2 petitions are pending. The 31 approved petitions have exempted approximately 1.43 billion RINs, which is approximately 13.42 billion gallons of gasoline and diesel, from meeting the RFS blending targets. The 37 approved petitions for compliance year 2017 exempted approximately 1.82 billion RINs, which is approximately 17.05 billion gallons of gasoline and diesel, from meeting the RFS blending targets. It is expected that additional petitions for waivers for the 2019 and 2020 compliance years will be received by the EPA. It is also expected that the EPA will approve a significant number of these waiver petitions, thereby exempting a substantial number of gallons of gasoline and diesel from meeting the RFS blending targets. These exemptions decrease demand for our products, which negatively impacts ethanol prices and our profitability.

A proposed rule released by the EPA in October 2019 proposed changes intended to project the exempted volume of gasoline and diesel due to small refinery exemptions, regardless of whether such exemptions were actually granted after the annual rulemaking. However, the final rule released by the EPA in December 2019 provides that EPA will project exempt volumes based on a three-year average of the relief recommended by the Department of Energy (“DOE”) for years 2016-2018, rather than based on actual exemptions granted. For the 2016 compliance year, the EPA said the DOE’s recommended relief was approximately 440 million RINs. The EPA, however, actually granted waivers for approximately 790 million RINs. Similarly, the DOE’s 2017 compliance year recommendation was 1.02 billion RINs, as compared to the approximately 1.82 billion RINs granted waivers by the EPA. For the 2018 compliance year, the DOE recommended the EPA approve waivers for 840 million RINs, as compared to the approximately 1.43 billion RINs granted waivers by the EPA. The EPA’s final rule also announced its general policy approach with respect to small refinery waivers on a go-forward basis as consistent with DOE’s recommendations, where appropriate. The final rule fell short of the relief that was

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urged by ethanol producers. As a result, management expects that small refinery exemptions will continue to have a negative effect on demand for our products, ethanol prices, and our profitability.

Legal challenges are underway to the RFS, including the EPA’s recent reductions in the RFS volume requirements, the 2018 final rule, and the denial of petitions to change the RFS point of obligation. If the EPA’s decision to reduce the volume requirements under the RFS is allowed to stand, if the volume requirements are further reduced, or if the RFS point of obligation were changed, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Beginning in January 2016, various ethanol and agricultural industry groups petitioned a federal appeals court to hear a legal challenge to of the EPA’s decision to reduce the total renewable fuel volume requirements for 2014-2016 through use of its “inadequate domestic supply” waiver authority. On July 28, 2017, the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the petitioners, concluding that the EPA erred in its exercise of “inadequate domestic supply” waiver authority by considering demand-side constraints. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016, and remanded to the EPA to address the 2016 total renewable fuels volume requirements. In December 2019, the EPA announced that it is deferring action on this issue until an anticipated date in 2020. While management believes the decision should benefit the ethanol industry overall by clarifying the EPA's waiver analysis is limited to consideration of supply-side factors only, no direct impact on the Company is expected from the decision.

On May 1, 2018, the Advanced Biofuels Association submitted a petition with the U.S. Court of Appeals for the D.C. Circuit challenging EPA’s process for granting exemptions from compliance under the RFS to small refineries. The Advanced Biofuel Association petition asks the court to review the EPA’s decision to modify criteria to lower the threshold by which the agency determines whether to grant small refineries an exemption for the RFS for reasons of disproportionate economic hardship. In May 2019, the U.S. Court of Appeals for the D.C. Circuit denied a motion by the Advanced Biofuels Association seeking a preliminary injunction to prevent the EPA from granting any additional small refinery exemptions under the RFS until its pending lawsuit with the agency is resolved. In August 2019, the U.S. Court of Appeals for the D.C. Circuit denied the petition, upholding the EPA’s decisions.

Additionally, on May 29, 2018, the National Corn Growers Association, National Farmers Union, and the Renewable Fuels Association (“RFA”) filed a petition with the U.S. Court of Appeals for the 10th Circuit challenging the EPA’s grant of waivers to three specific refineries. The petitioners are asking the U.S. Court of Appeals for the 10th Circuit to reject the waivers granted to three refineries located in Wynnewood, Oklahoma, Cheyenne, Wyoming, and Woods Cross, Utah as an abuse of EPA authority. These waived gallons are not redistributed to obligated parties, and in effect, reduce the aggregate RVOs under the RFS. In January 2020, the court struck down the exemptions as improperly issued by the EPA. The court interpreted the RFS statute to require that any exemption granted to a small refinery after 2010 must take the form of an “extension,” which would require a small refinery exemption in prior years to prolong, enlarge or add to. The court approved a 15-day extension of the deadline to file a petition for rehearing, which sets the deadline at March 24, 2020. Three small refiners filed an appeal, but because the Department of Justice did not file an appeal, the agency is set to implement the decision nationwide.

Related to the recent lawsuits, the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy, National Biodiesel Board, National Corn Growers Association, Biotechnology Industry Organization, and National Farmers Union petitioned the EPA on June 4, 2018 to change its regulations to account for lost volumes of renewable fuel resulting from the retroactive small refinery exemptions. This petition to EPA seeks a broader, forward-looking remedy to account for the collective lost volumes caused by the recent increase in retroactive small refinery RVO exemptions. In June 2018, the court issued a stay pending further administrative proceedings. On July 30, 2019, the groups petitioned the court to lift such stay. It is unclear what regulatory changes, if any, will emerge from the petition to the EPA. The EPA has not reallocated volume exemptions in prior years, and continued to approve 31 new requests in 2019. On October 29, 2019, the U.S. House of Representatives Committee on Energy and Commerce met to examine the effects of the small refinery exemptions on biofuels and agriculture since 2016. Companies were seeking the EPA to make available more information on refinery exemptions.

Further, on July 31, 2018, Producers of Renewables United for Integrity Truth and Transparency filed a petition for review in the U.S. Court of Appeals for the D.C. Circuit, petitioning for review of final agency action by the EPA in its decision to allow the generation of RINs by obligated parties under the RFS that do not represent biofuel production in the year the RIN was generated. In May 2019, the court issued an order dismissing a portion of the lawsuit challenging the

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EPA’s timing, due to untimely filing. The order also transferred the RINs issues to the U.S. Court of Appeals for the 10th Circuit.

Also, on August 30, 2018, the RFA and Growth Energy filed a lawsuit in federal district court, alleging that the EPA and U.S. Department of Energy have improperly denied agency records requested by RFA, Growth Energy, and others under the Freedom of Information Act. The requested documents relate to exemptions from Renewable Fuel Standard compliance obligations granted by EPA. Additionally, on February 4, 2019, Growth Energy filed a lawsuit in the Court of Appeals for the District of Columbia against the EPA, challenging the EPA’s “failure” to address small refinery exemptions in its 2019 RVO rulemaking. An administrative stay has been granted to research the contents of the lawsuit.

Biofuels groups have filed a lawsuit in the U.S. Federal District Court for the D.C. Circuit, challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. This is the first RFS rulemaking since the expanded use of the exemptions came to light, however the EPA has refused to cap the number of waivers it grants or how it accounts for the retroactive waivers in its percentage standard calculations. The EPA has a statutory mandate to ensure the volume requirements are met, which are achieved by setting the percentage standards for obligated parties. The EPA’s current approach runs counter to this statutory mandate and undermines Congressional intent. Biofuels groups argue the EPA must therefore adjust its percentage standard calculations to make up for past retroactive waivers and adjust the standards to account for any waivers it reasonably expects to grant in the future.

Although the maintenance of the 15.0 billion gallon threshold for volume requirements that may be met with corn-based ethanol in the 2020 final rule, in addition to the year-round E15 rule, signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal, or otherwise invalidate the RFS. Any such reform could adversely affect the demand and price for ethanol and the Company’s profitability.

COVID-19 Legislation

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020 in an attempt to offset some of the economic damage arising from the COVID-19 pandemic. The CARES Act created and funded multiple programs that have impacted or could impact our industry. The USDA was given additional resources for the Commodity Credit Corporation (CCC), which it is using to provide direct payments to farmers, including corn farmers from whom we purchase most of our feedstock for ethanol production. Similar to the trade aid payments made by the USDA over the past two years, this cash injection for farmers could cause them to delay marketing decisions and increase the price we have to pay to purchase the corn. ~~The USDA did not include any CCC funds for ethanol plants as of this filing.~~

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The CARES Act also provided for the Small Business Administration to assist companies that constitute small business and keep them from laying off workers. The Paycheck Protection Program (the “PPP”) was created and quickly paid out all of the funds appropriated, including some to farmers and to ethanol plants. Although we received our PPP Loan under the CARES Act, as discussed above, the receipt of PPP funds by farmers could, like the CCC funds, incentivize them to delay marketing corn which could increase the price of corn.

~~Results~~On December 27, 2020, the federal government enacted Consolidated Appropriations Act, 2021, a second COVID-19 relief package. Among other things, the legislation authorized additional PPP loans. In February 2021, the Company received a second Paycheck Protection Program loan in the amount of ~~Operations~~$595,693. ~~for~~Management expects the ~~Three~~entire ~~Months~~loan ~~Ended~~will ~~July~~be 31used for payroll, ~~2020~~utilities and ~~2019~~interest; therefore, management anticipates that the loan will be substantially forgiven.

~~The~~Results ~~following table shows summary information from the results~~ of ~~our~~Operations ~~operations~~for ~~and~~ the ~~approximate~~Three ~~percentage~~Months ofEnded ~~revenues,~~January ~~costs of goods sold~~31, ~~operating~~2021 ~~expenses~~ and ~~other items to total revenues in our unaudited~~ 2020

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condensed consolidated statements of operations for the three months ended July 31, 2020 and 2019 (amounts in thousands).


	Three Months Ended July 31,
	2020				2019
		(unaudited)				(unaudited)
Statement of Operations Data			%				%
Revenues	$	14,165	100.0	%	$	27,368	100.0	%
Cost of Goods Sold		17,315	122.2	%		26,120	95.4	%
Gross Profit (Loss)		(3,150)	(22.2)	%		1,248	4.6	%
Operating Expenses		(770)	(5.4)	%		(866)	(3.2)	%
Operating Income (Loss)		(3,920)	(27.7)	%		382	1.4	%
Other Expense, net		(41)	(0.3)	%		(20)	(0.1)	%
Net Income (Loss)		(3,961)	(28.0)	%		362	1.3	%
Less: Net Income Attributable to Non-controlling Interest		—	—	%		(35)	(0.1)	%
Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	(3,961)	(28.0)	%	$	327	1.2	%

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2021 and 2020 (amounts in thousands).


	2021				2020
Statement of Operations Data			%				%
Revenues	$	24,441	100.0	%	$	26,680	100.0	%
Cost of Goods Sold		27,375	112.0	%		28,130	26.3	%
Gross Loss		(2,934)	(3.9)	%		(1,450)	(1.4)	%
Operating Expenses		(1,088)	(1.4)	%		(899)	(0.8)	%
Operating Loss		(4,022)	(16.5)	%		(2,349)	(8.8)	%
Other Income, net		42	0.1	%		—	—	%
Net Loss		(3,980)	(16.3)	%		(2,349)	(8.8)	%
Less: Net Income Attributable to Non-controlling Interest		—	—	%		(68)	(0.1)	%
Net Loss Attributable to Heron Lake BioEnergy, LLC	$	(3,980)	(16.3)	%	$	(2,417)	(9.1)	%

Revenues

Our consolidated revenue is derived principally from revenues from our ethanol production segment, which consists primarily of sales of our three principal products: ethanol, distillers’ grains, and corn oil, as well as incidental sales of corn syrup. Revenues from our ethanol production segment represented approximately 9998.13% of our total revenues for the three months ended ~~July~~January 31, ~~2020~~2021 and approximately 9997.64% of our total revenues for the three months ended ~~July~~January 31, ~~2019~~2020. Our remaining consolidated revenues are attributable to Agrinatural revenues, net of eliminations for distribution fees paid by HLBE to Agrinatural for natural gas transportation services. The revenues attributable to our natural gas pipeline segment represented approximately 01.97 % of our consolidated revenues for the three months ended ~~July~~January 31, ~~2020~~2021 and approximately 02.46% of our consolidated revenues for the three months ended ~~July~~January 31, ~~2019~~2020.

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations the three months ended ~~July~~January 31, ~~2020~~2021:


	Three Months Ended ~~July~~January 31, ~~2020~~2021
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	1118,~~920~~720	8476.26	%
Distillers' grains sales		13,~~646~~699	1115.61	%
Corn oil sales		~~402~~1,389	25.87	%
Corn syrup sales		71226	0.59	%
Agrinatural revenues (net of intercompany eliminations)		~~126~~407	0.9	%
Total Revenues	$	1424,~~165~~441	~~100~~99.02	%

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	Three Months Ended July 31, 2019
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	21,646	79.1	%
Distillers' grains sales		4,371	16.0	%
Corn oil sales		930	3.4	%
Corn syrup sales		320	1.1	%
Agrinatural revenues (net of intercompany eliminations)		101	0.4	%
Total Revenues	$	27,368	100.0	%

Our total consolidated revenues decreased by approximately 48.2% for the three months ended July 31, 2020, as compared to the three months ended July 31, 2019, due to decreases in volumes sold of our ethanol, distillers’ grains and corn oil, coupled with a decrease in the average price received for our ethanol and distillers’ grains. The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended July 31, 2020 and 2019:


	Three Months Ended January 31, 2020
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	20,292	76.1	%
Distillers' grains sales		4,489	16.8	%
Corn oil sales		914	3.4	%
Corn syrup sales		296	1.1	%
Agrinatural revenues (net of intercompany eliminations)		689	2.6	%
Total Revenues	$	26,680	100.0	%


	Three Months Ended July 31, 2020			Three Months Ended July 31, 2019
	Quantity Sold	Avg. Net Price		Quantity Sold	Avg. Net Price
Product	(in thousands)			(in thousands)
Ethanol (gallons)	10,452	$	1.14	15,622	$	1.39
Distillers' grains (tons)	15	$	107.98	36	$	120.65
Corn oil (pounds)	1,623	$	0.24	3,715	$	0.25

Our total consolidated revenues decreased by approximately 8.4% for the three months ended January 31, 2021, as compared to the three months ended January 31, 2020, due to decreases in volumes sold of our ethanol, and decrease in the average price received for distillers’ grains. The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended January 31, 2021 and 2020:


	Three Months Ended January 31, 2021			Three Months Ended January 31, 2020
	Quantity Sold	Avg. Net Price		Quantity Sold	Avg. Net Price
Product	(in thousands)			(in thousands)
Ethanol (gallons)	14,285	$	1.31	15,502	$	1.31
Distillers' grains (tons)	40	$	92.69	33	$	136.76
Corn oil (pounds)	4,361	$	0.32	4,005	$	0.23

Ethanol

Total revenues from sales of ethanol decreased by approximately 447.97% for the three months ended ~~July~~January 31, ~~2020~~2021, compared to the same period of ~~2019~~2020 due to an approximately 187.08% decrease in the ~~average price per gallon we received for our ethanol as compared to the same period in 2019, which was coupled with an approximately 33.1% decrease in the~~ volume of ethanol sold from period to period. The decrease in ~~ethanol~~volume ~~prices~~sold was primarily due to alower ~~decrease in~~ demand for ~~ethanol~~fuel ~~and~~cause ~~significantly~~by ~~lower~~the ~~gasoline~~ongoing ~~prices.~~COVID-19 ~~The~~pandemic ~~decrease~~and indecreased ~~volume~~production ~~sold was primarily~~ due to ~~idling~~the replacement of the ~~plant~~boiler ~~through~~in ~~May~~January ~~2020 and again for a portion of July 2020~~2021.

From time to time, we engage in hedging activities with respect to our ethanol sales. At ~~July~~January 31, ~~2020~~2021, wethe Company had ~~forward~~fixed ~~ethanol~~and ~~sales~~basis contracts ~~valued~~to atsell approximately $614.17 million of ethanol for various delivery periods through ~~September~~March ~~2020~~2021, which approximates 97% of its anticipated ethanol sales for that period. Separately, ethanol derivative instruments resulted in a ~~loss~~gain of approximately $3256,000 for the three months ended ~~July~~January 31, ~~2020~~2021. In comparison, we had a ~~gain~~loss of approximately $3282,000 on ethanol ~~derivative~~derivatves ~~instruments~~ for the three months ended ~~July~~January 31, ~~2019~~2020.

Distillers’ Grains

Total revenues from sales of distillers’ grains decreased by approximately 6217.36% for the three months ended ~~July~~January 31, ~~2020~~2021 compared to the same period of ~~2019~~2020. ~~This~~Our ~~decrease~~revenue ~~was~~decreased due to an approximately 5732.92% decrease in the ~~volumes of distillers’ grains sold in the three months ended July 31, 2020 compared to the same period of 2019, coupled with an approximately 10.5% decrease in the~~ average price per ton we received for our distillers’ grains from period to period~~. We~~, ~~sold~~which ~~fewer~~was ~~tons~~offset by an increase of distillers’ grains insold ~~the~~by ~~three~~21.6% ~~months ended July 31, 2020 as~~ compared to the same period inof ~~2019 due to less production~~2020.

At ~~July~~January 31, ~~2020~~2021, wethe Company had forward ~~distillers’ grains sales~~ contracts ~~valued~~to atsell approximately $~~325,000~~5.5 million of distillers’ grains for delivery through ~~December~~September ~~2020~~2021, which approximates 27% of its anticipated distillers’ grains sales during that period.

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Corn Oil

Total revenues from sales of corn oil ~~decreased~~increased by approximately 5651.89% for the three months ended ~~July~~January 31, ~~2020~~2021 compared to the same period of ~~2019~~2020, due to an approximately 568.39% ~~decrease~~increase in pounds sold from period to period, coupled with an approximately 439.05% ~~decrease~~increase in the average price per pound we received for our corn oil from period to period.

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~~Management~~Although ~~expects~~management believes that corn oil prices will remain relatively steady, inprices ~~the~~may ~~near~~decrease ~~term. However,~~if wethere ~~may~~is ~~experience~~an ~~lower~~oversupply ~~demand~~of ~~for~~ corn oil production resulting from ~~the~~increased ~~biodiesel~~production ~~industry~~rates asat ~~the~~ethanol ~~2020~~plants ~~RVOs~~or ~~for~~if biodiesel ~~were~~producers ~~only~~begin upto ~~slightly~~utilize ~~from~~lower-priced ~~the~~alternatives ~~2019~~such ~~levels,~~as ~~which~~soybean ~~may~~oil ~~result~~or inif ~~lower~~the biodiesel ~~production.~~blenders’ ~~Additionally,~~tax ~~lower~~credit ~~soybean~~is ~~oil~~not ~~prices~~renewed ~~could~~and ~~negatively~~biodiesel ~~impact~~production ~~corn oil prices~~declines.

At ~~July~~January 31, ~~2020~~2021, wethe Company had ~~corn~~forward ~~oil sales~~ contracts ~~valued~~to atsell approximately $~~701~~435,000 of corn oil for delivery through ~~September~~February ~~2020.~~2021, which approximates 75% of its anticipated corn oil sales for that period.

Cost of Goods Sold

Our cost of goods sold decreased by approximately 332.7% for the three months ended ~~July~~January 31, ~~2020~~2021, compared to the three months ended ~~July~~January 31, ~~2019~~2020. However, as a percentage of revenues, our cost of goods sold increased to approximately ~~122~~112.20% for the three months ended ~~July~~January 31, 2020 compared to 95105.4% for the same period ofending ~~2019~~January 31, 2020. Approximately 90% of our total costs of goods sold is attributable to our ethanol production segment. As a result, the cost of goods sold per gallon of ethanol sold for the three months ended ~~July~~January 31, ~~2020~~2021 and ~~2019~~January 31, 2020 was approximately $1.4972 and $1.5063 per gallon, respectively.

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, inventory net realizable value losses, and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended ~~July~~January 31, ~~2020~~2021:


	Three Months Ended ~~July~~January 31, ~~2020~~2021
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	822,~~544~~707	4982.39	%
Natural gas costs		~~695~~1,588	45.08	%
All other components of costs of goods sold		83,~~076~~080	4611.73	%
Total Cost of Goods Sold	$	1727,~~315~~375	100.0	%

The following table shows the costs of corn, natural gas, and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended ~~July~~January 31, ~~2019~~2020:


	Three Months Ended ~~July~~January 31, ~~2019~~2020
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	21,~~772~~569	8376.47	%
Natural gas costs		1,~~389~~818	56.35	%
All other components of costs of goods sold		24,~~959~~743	1116.38	%
Total Cost of Goods Sold	$	2628,~~120~~130	100.0	%

Corn

Our cost of goods sold related to corn was approximately 605.83% ~~less~~greater for the three months ended ~~July~~January 31, ~~2020~~2021 compared to the ~~same~~three ~~period~~months ofended ~~2019~~January 31, 2020. ~~The~~While ~~decrease~~we ~~resulted~~processed ~~from an approximately 58.~~7.9% ~~decrease~~fewer bushels in the ~~number~~three ofmonths ~~bushels~~ending ofJanuary ~~corn~~31, ~~processed~~2021, ~~from~~than ~~period to period due to plant idles~~ in ~~May~~the ~~2020~~same ~~and~~period a ~~period~~year ~~of July 2020~~earlier, ~~coupled~~the ~~with~~price anof ~~approximately~~corn 5increased 14.13% ~~decrease in the average price~~ per bushel ~~paid for corn from~~ period to period., ~~Management~~resulting ~~attributes~~in the ~~decrease~~overall increase in corn ~~prices~~costs ~~primarily~~as toa ~~decreased~~percentage ~~demand.~~of our costs of goods sold.

30The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for the three months ended January 31, 2021 was approximately $0.20 lower than the corn-ethanol price spread we experienced for same period a year earlier.

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At January 31, 2021 we had approximately 4.4 million bushels of cash and basis contracts for forward corn purchase commitments for deliveries through July 2022.

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The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for the three months ended July 31, 2020 was approximately $0.18 lower than the corn-ethanol price spread we experienced for same period of 2019.

~~From~~Our ~~time~~corn toderivative ~~time~~positions weresulted ~~enter~~in ~~into~~a ~~forward~~loss ~~purchase~~of ~~contracts~~approximately ~~for~~$2.94 ~~our~~million ~~commodity~~for ~~purchases~~the ~~and~~three ~~sales.~~months Atended ~~July~~January 31, ~~2020~~2021 weand ~~had~~a loss of approximately 4$81,000 for the three months ended January 31, 2021.6 ~~million~~We ~~bushels~~recognize the gains or losses that result from the changes in the value of ~~cash~~our ~~and~~derivative ~~basis~~instruments ~~contracts~~from ~~for~~corn ~~forward~~in cost of goods sold as the changes occur. As corn ~~purchase~~prices ~~commitments~~fluctuate, ~~for~~the ~~deliveries~~value ~~through~~of ~~March~~our ~~2021~~derivative instruments is impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged..

Our corn derivative positions resulted in a loss of approximately $287,000 for the three months ended July 31, 2020 and a gain of approximately $409,000 for the three months ended July 31, 2019. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Natural Gas

Our cost of goods sold related to natural gas costs decreased approximately 4912.96% for the three months ended ~~July~~January 31, ~~2020~~2021 compared to the same period ofa ~~2019. Management~~year ~~attributes~~earlier, ~~this~~due to a decrease in the per-unit cost of natural gas ~~from~~and ~~period~~a todecrease ~~period~~in tonatural ~~less~~gas ~~ethanol~~consumption ~~production~~due ~~and~~to ~~higher~~a ~~natural~~5.1% ~~gas~~decrease ~~inventories.~~in ethanol production.

Other Components of Costs of Goods Sold

Our costs of goods sold related to all other components ~~increased~~decreased approximately ~~172~~35.91% for the three months ended ~~July~~January 31, ~~2020~~2021 compared to the same period ofa ~~2019.~~year ~~Management~~earlier, ~~attributes~~due ~~this increase~~ primarily to ~~changes~~a decrease in ~~the costs of certain inventories on hand from period to period~~production.

Operating Expenses

Operating expenses include wages, salaries, and benefits of administrative employees at the plant, insurance, professional fees, property taxes, and similar costs. Operating expenses for the three months ended ~~July~~January 31, ~~2020~~2021 ~~decreased~~increased approximately 1121.10% compared to the three months ended ~~July~~January 31, ~~2019~~2020 ~~due~~as ~~primarily~~a toresult ~~the~~of ~~temporary~~increased ~~plant~~insurance ~~idle~~and other professional fees. 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

Our operating loss for the three months ended ~~July~~January 31, ~~2020~~2021 increased by approximately $41.367 million compared to the same period ofa ~~2019~~year earlier. This increase resulted ~~largely~~negative ~~from~~operating ~~decreases~~margins ~~in revenues~~ during the ~~2020~~three-month period ending January 31, 2021.

Other ~~Expense~~Income, Net

We had net other ~~expense~~income of approximately $4142,000 during the three months ended ~~July~~January 31, ~~2020~~2021 compared to net other ~~expense~~income of ~~approximately~~ $~~20,000~~389 for the same period ofa ~~2019~~year earlier. We had more other ~~expense~~income during the three months ended ~~July~~January 31, ~~2020~~2021 compared to the same period ofa ~~2019~~year earlier due primarily to ~~higher~~patronage ~~interest~~dividends ~~expense~~received ~~and less interest income~~ during ~~the 2020 period~~2021.

~~Results~~Changes ofin ~~Operations~~Financial ~~for~~Condition ~~the~~at ~~Nine~~January ~~Months~~31, ~~Ended~~2021 ~~July~~and October 31, 2020 ~~and 2019~~

The following table ~~shows~~highlights ~~summary information from the results of~~ our ~~operations~~financial ~~and~~condition ~~the~~at ~~approximate~~January ~~percentage of revenues~~31, ~~costs~~2021 ~~of goods sold, operating expenses~~ and ~~other~~October ~~items to total revenues in our unaudited condensed consolidated statements of operations for the nine months ended July~~ 31, 2020 ~~and 2019~~ (amounts in thousands).:


	~~Nine~~January ~~Months Ended July~~ 31, 2021		October 31, 2020
	2020				2019
Current Assets	$	14,904	$	13,268
Statement of Operations Data			%			%
Total Assets	$	63,088	$	63,080
Current Liabilities	$	25,585	$	21,116
Long-Term Debt, less current portion	$	149	$	296
Operating Leases, long-term liabilities	$	7,601		7,947
Other Long-Term Liabilities	$	608	$	597
Members' Equity attributable to Heron Lake BioEnergy, LLC	$	29,145	$	33,125

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Revenues	$	56,450	100.0	%	$	78,560	100.0	%
Cost of Goods Sold		66,494	117.8	%		78,765	100.3	%
Gross Loss		(10,044)	(17.8)	%		(205)	(0.3)	%
Operating Expenses		(2,644)	(4.7)	%		(2,642)	(3.4)	%
Operating Loss		(12,688)	(22.5)	%		(2,847)	(3.7)	%
Other Income, net		137	0.2	%		232	0.3	%
Net Loss		(12,551)	(22.3)	%		(2,615)	(3.4)	%
Less: Net Income Attributable to Non-controlling Interest		(68)	(0.1)	%		(197)	(0.3)	%
Net Loss Attributable to Heron Lake BioEnergy, LLC	$	(12,619)	(22.4)	%	$	(2,812)	(3.7)	%

~~Revenues~~The increase in current assets is primarily attributable to an increase in inventory of approximately $1.1 million at January 31, 2021, compared to October 31, 2020. The increase in our current liabilities is primarily due to an increase in current maturities of long-term debt of $6.7 million at January 31, 2021, compared to October 31, 2020.

Revenues from our three primary products: ethanol, distillers’ grains and corn oil, as well as incidental sales of corn syrup, represented approximately 98.1% and 98.6% of our total consolidated revenues for the nine months ended July 31, 2020 and 2019, respectively. Miscellaneous other revenues are attributable to Agrinatural revenues (net of eliminations), which represented 1.9% and 1.4% of our consolidated revenues for the nine months ended July 31, 2020 and 2019, respectively.27


	Nine Months Ended July 31, 2020
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	43,306	76.7	%
Distillers' grains sales		9,482	16.8	%
Corn oil sales		2,051	3.6	%
Corn syrup sales		559	1.0	%
Agrinatural revenues (net of intercompany eliminations)		1,052	1.9	%
Total Revenues	$	56,450	100.0	%


	Nine Months Ended July 31, 2019
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	60,084	76.5	%
Distillers' grains sales		13,939	17.7	%
Corn oil sales		2,620	3.3	%
Corn syrup sales		844	1.1	%
Agrinatural revenues (net of intercompany eliminations)		1,073	1.4	%
Total Revenues	$	78,560	100.0	%

Our total consolidated revenues decreased by approximately 28.1% for the nine months ended July 31, 2020, as compared to the same period of 2019, due to decreases in quantities sold of our ethanol, distillers’ grains and corn oil, which was partially offset by an increase in the average price received for our distillers’ grains. The following table reflects quantities of our three primary products sold and the average net prices received for the nine months ended July 31, 2020 and 2019:


	Nine Months Ended July 31, 2020			Nine Months Ended July 31, 2019
	Quantity Sold	Avg. Selling Price		Quantity Sold	Avg. Selling Price
Product	(in thousands)			(in thousands)
Ethanol (gallons)	36,126	$	1.20	48,640	$	1.24

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Distillers' grains (tons)		72		$	131.60		107		$	130.50
Corn oil (pounds)		8,444		$	0.24		10,522		$	0.25

~~Ethanol~~Members’ equity attributable to Heron Lake BioEnergy, LLC decreased by approximately $4 million at January 31, 2021, compared to October 31, 2020. The decrease was related to the net loss attributable to HLBE during the three months ended January 31, 2021. Members’ equity attributable to Heron Lake BioEnergy, LLC decreased by approximately $12.8 million at January 31, 2021 compared to October 31, 2020. The decrease was related to the net loss attributable to HLBE during the three months ended January 31, 2020.

Total revenues from sales of ethanol decreased by approximately 27.9% for the nine months ended July 31, 2020 compared to the same period of 2019 due to an approximately 25.7% decrease in the volume sold due to decreased production during the 2020 period, which was coupled with an approximately 3.0% decrease in average price per gallon we received for our ethanol from period to period. The decrease is primarily due to a decrease in demand for ethanol and significantly lower gasoline prices. The decrease in volume sold is primarily due to a decrease in volume produced during the 2020 period, which included the plant being idled through May 2020 and experiencing operational issues with the boiler after production resumed.

Our ethanol derivative instruments resulted in a loss of approximately $196,000 for the nine months ended July 31, 2020. In comparison, we had a gain of approximately $32,000 on ethanol derivative instruments for the nine months ended July 31, 2019. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on ethanol inventories, as a component of cost of goods sold, of approximately $155,000 and $581,000 for the nine months ended July 31, 2020 and 2019, respectively.

Distillers' Grains

Total revenues from sales of distillers’ grains decreased by approximately 32.0% for the nine months ended July 31, 2020 compared to the same period of 2019. This decrease is due to an approximately 32.5% decrease in the volume sold, which was partially offset by an approximately 0.8% increase in the average price per ton received for our distillers’ grains from period to period. This increase in the market price of distillers’ grains is due to a decrease in overall distillers’ grains production as well as increases in prices of soybean meal and increased export demand. We produced and sold fewer total tons of distillers’ grains during the nine months ended July 31, 2020 compared to the nine months ended July 31, 2019 due to decreased ethanol production in the 2020 period.

Corn Oil

Total revenues from sales of corn oil decreased by approximately 21.7% for the nine months ended July 31, 2020 compared to the nine months ended July 31, 2019 due primarily to an approximately 19.7% decrease in pounds sold from period to period, coupled with an approximately $2.4% decrease in the average price per pound we received for our corn oil from period to period.

Cost of Goods Sold

Our cost of goods sold decreased by approximately 15.6% for the nine months ended July 31, 2020, as compared to the nine months ended July 31, 2019. As a percentage of revenues, however, our cost of goods sold increased to approximately 117.8% for the nine months ended July 31, 2020, as compared to approximately 100.3% for the same period in 2019 due to the negative margin between the price of ethanol and the price of corn from period to period. The cost of goods sold per gallon of ethanol produced for the nine months ended July 31, 2020 and 2019 was approximately $1.66 and $1.46 per gallon of ethanol, respectively.

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the nine months ended July 31, 2020:


	Nine Months Ended July 31, 2020
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	45,396	68.3	%
Natural gas costs		3,799	5.7	%
All other components of costs of goods sold		17,299	26.0	%
Total Cost of Goods Sold	$	66,494	100.0	%

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	Nine Months Ended July 31, 2019
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	59,605	75.7	%
Natural gas costs		5,390	6.8	%
All other components of costs of goods sold		13,770	17.5	%
Total Cost of Goods Sold	$	78,765	100.0	%

Corn

Our cost of goods sold related to corn was approximately 23.8% less for the nine months ended July 31, 2020 compared to the same period of 2019, due primarily to an approximately 30.4% decrease in the number of bushels of corn processed, which was partially offset by an approximately 9.5% increase in the average price per bushel paid for corn from period to period. For the nine months ended July 31, 2020 and 2019, we processed approximately 11.5 million and 16.6 million bushels of corn, respectively. The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for the nine months ended July 31, 2020, was approximately $0.16 lower than the corn-ethanol price spread we experienced for same period of 2019.

We had a loss related to corn derivative instruments of approximately $804,000 for the nine months ended July 31, 2020, which increased our costs of goods sold. Comparatively, we had a gain related to corn derivative instruments of approximately $639,000 for the nine months ended July 31, 2019, which decreased our cost of goods sold. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on corn inventories, as a component of cost of goods sold, of approximately $184,000 and $21,000 for the nine months ended July 31, 2020 and 2019, respectively. Management has evaluated the outstanding corn forward purchase contracts and its inventories using the lower of cost or net realizable value evaluation, similar to the method used on its inventory, and has determined that an impairment loss existed of approximately $824,000 at July 31, 2020. The impairment expense is recorded as a component of cost of goods sold.

Natural Gas

Natural gas costs decreased by approximately 29.5% for the nine months ended July 31, 2020 as compared to the nine months ended July 31, 2019. The decrease in natural gas costs was primarily due to lower production levels during the 2020 period.

Operating Expenses

Operating expenses for the nine months ended July 31, 2020 increased by approximately 0.1% compared to the nine months ended July 31, 2019.

Operating Loss

Our operating loss for the nine months ended July 31, 2020 was approximately $9.8 million more compared to the same period of 2019. This increased loss resulted largely from increased prices for corn relative to the price of ethanol and negative operating margin.

Other Income, Net

We had net other income of approximately $137,000 and $232,000 during the nine months ended July 31, 2020 and 2019, respectively. We had less other income primarily due to less interest income and more interest expense in the 2020 period as compared to the 2019 period.

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Changes in Financial Condition at July 31, 2020 and October 31, 2019

The following table highlights our financial condition at July 31, 2020 and October 31, 2019 (amounts in thousands):


	July 31, 2020		October 31, 2019
		(unaudited)
Current Assets	$	7,102	$	16,266
Total Assets	$	55,019	$	56,596
Current Liabilities	$	6,227	$	6,144
Long-Term Debt, less current portion	$	5,093	$	300
Operating Leases, long-term liabilities	$	8,289		—
Other Long-Term Liabilities	$	585	$	551
Members' Equity attributable to Heron Lake BioEnergy, LLC	$	34,824	$	47,599
Non-Controlling Interest	$	—	$	2,002

The decrease in current assets is primarily attributable to a decrease in cash of approximately $2.4 million, approximately $4.6 million in accounts receivable, and approximately $2.4 million in inventory at July 31, 2020 compared to October 31, 2019. The decrease in total assets was primarily due to a decrease in total current assets, offset by the recognition of operating lease right of use assets of approximately $9.6 million during the 2020 period.

Our current liabilities increased approximately $83,000 at July 31, 2020 compared to October 31, 2019, due to increases of approximately $907,000 in current maturities of long-term debt, approximately $686,000 in checks drawn in excess of bank balances, approximately $682,000 of accrued expenses, and approximately $1.3 million from the current liabilities related to our operating lease. Offsetting these increases were decreases of approximately $3.6 million of accounts payable.

Members’ equity attributable to Heron Lake BioEnergy, LLC decreased by approximately $12.8 million at July 31, 2020 compared to October 31, 2019. The decrease was related to the net loss attributable to HLBE during the nine months ended July 31, 2020.

Non-controlling interest totaled $0 and approximately $2.0 million at July 31, 2020 and October 31, 2019. This decrease is a result of the acquisition of Agrinatural’s non-controlling interest in December 2019.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash provided by operations, cash, and available borrowings under our ~~credit~~2020 ~~facility~~Credit Facility with Compeer~~. Based~~, onour ~~management’s~~Negotiable ~~financial~~Promissory ~~forecasts~~Note with GFE, weand ~~expect~~our revolving promissory note. Due to ~~have~~recurring ~~sufficient~~operating and cash ~~generated~~flow bylosses ~~continuing~~related ~~operations~~to difficult market conditions and ~~revolving~~operating ~~term~~performance, ~~loan~~the Company has had multiple instances of noncompliance with certain debt covenants requiring the Company to ~~fund~~maintain ~~our~~certain ~~operations~~working capital, debt service coverage ratios, and net worth ratios. The Company has obtained waivers for ~~the~~these ~~next~~instances ~~twelve~~of ~~months~~noncompliance. However, ~~should~~it weis ~~experience~~probable ~~unfavorable~~the ~~operating~~Company ~~conditions~~will inincur future instances of noncompliance within the next 12 months and there is no guarantee the Company’s lender will grant future waivers. As a result, weapproximately ~~may~~$16.8 ~~have~~million toof ~~secure~~long-term debt has been reclassified as current maturities. The Company has insufficient cash on hand and additional borrowing capacity, and current forecasts indicate insufficient cash flows from operations, to repay the debt orif ~~equity~~it ~~sources~~were ~~for~~to ~~working~~come ~~capital~~due oras ~~other~~a ~~purposes~~result of covenant noncompliance. These factors raise substantial doubt about the Company's ability to continue as a going concern.

However, to remain an operating company, we will have to secure additional debt or equity sources to meet our loan covenants or idle ethanol production altogether. There is a risk that CoBank, as the administrative agent for our lender Compeer, may seek to enforce its security interests and take control of our assets. If that were to happen, then we may be be forced to cease operations or seek to reorganize through Chapter 11 bankruptcy proceedings.

Cash Flows

The following table summarizes our sources and uses of cash and restricted cash from our unaudited condensed consolidated statements of cash flows for the periods presented (amounts in thousands):


	~~Nine~~Fiscal Three Months Ended ~~July~~January 31,
	~~2020~~2021		~~2019~~2020
	(unaudited)		(unaudited)
Net cash used in operating activities	$	(5,519)	$	(1,402)
Net cash provided by (used in) operating activities	$	(4,380)	$	422
Net cash used in investing activities	$	(2,148)	$	(208)
Net cash used in investing activities	$	(2,252)	$	(206)
Net cash provided by (used in) financing activities	$	7,467	$	(1,206)
Net cash provided by (used in) financing activities	$	4,385	$	(168)
Net decrease in cash and restricted cash	$	(200)	$	(2,456)
Net increase (decrease) in cash and restricted cash	$	(2,247)	$	48

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Operating Cash Flows

During the ~~nine~~three months ended ~~July~~January 31, ~~2020~~2021, we used more cash in operating activities compared to the same period ofone ~~2019~~year earlier primarily due to an increased net loss during the ~~nine~~three months ended ~~July~~January 31, ~~2020~~2021.

Investing Cash Flows

We used more cash for investing activities for the ~~nine~~three months ended ~~July~~January 31, ~~2020~~2021 compared to the same period ofone ~~2019~~year earlier due to an increase in capital expenditures for ~~general~~our ~~plant~~new ~~improvements and for construction of the grain bin~~boiler.

Financing Cash Flows

During the ~~nine~~three months ended ~~July~~January 31, ~~2020~~2021, we borrowed approximately $56.15 million from long-term debt, net of repayments, ~~borrowed approximately $596,000 in connection with our Paycheck Protection Program loan,~~ and ~~increased~~drew ~~checks drawn~~ in excess of bank balance of approximately $~~686~~960,000. ~~This~~In ~~was~~comparison, ~~partially~~during ~~offset~~the bythree ~~approximately~~months ~~$2.0~~ended ~~million~~January ~~used~~31, to2020, ~~acquire~~the Company had acquisition of non-controlling interest. ~~Comparatively,~~of ~~during~~$2 ~~the~~million ~~same~~and ~~period~~checks ofdrawn ~~2019,~~in weexcess ~~used~~of ~~cash~~bank tobalance ~~make payments~~ of approximately $~~168~~724,000 ~~on our long-term debt~~.

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Indebtedness

We have indebtedness consisting of the following loans and agreements: a Revolving Term Note, a Single Advance Term Note, a Negotiable Promissory Note with GFE, a Short Term Revolving Promissory Note, a SBA Paycheck Protection Program Loan, and certain water treatment agreements. Please refer to PART I - Item 1 - Financial Statements, Note 8 - Debt Facilities for additional details.

We had a revolving term note payable to Compeer Financial, formerly known as AgStar Financial Services, FCLA (“Compeer”) under which we could borrow, repay, and re-borrow in an amount up to the original aggregate principal commitment at any time prior to maturity at March 1, 2022. The original aggregate principal commitment was $28,000,000, which reduced by $3,500,000 annually, starting March 1, 2015 and continuing each anniversary thereafter until maturity. In December 2017, the Company and its lender orally agreed to reduce the aggregate principal commitment of the revolving term loan to $8,000,000. On April 6, 2018, the Company finalized loan agreements with an effective date of March 29, 2018 for an amended credit facility with Compeer (the “2018 Credit Facility”). On January 7, 2020, the Company finalized loan agreements for an amended credit facility with its lender (the “2020 Credit Facility”).

2018 Credit Facility with Compeer

We had a comprehensive credit facility with Compeer for which CoBank, ACP (“CoBank”) served as the administrative agent. This credit facility originally consisted of a revolving term loan with a maturity date of March 1, 2022. However, on April 6, 2018, we entered into an amended credit facility with Compeer (the “2018 Credit Facility”). The 2018 Credit Facility includes an amended and restated revolving term loan with a $4.0 million principal commitment and a revolving seasonal line of credit with a $4.0 million principal commitment. CoBank will continue to act as Compeer's administrative agent with respect to our 2018 Credit Facility and has a participation interest in the loans. The Company agreed to pay CoBank an annual fee of $2,500 for its services as administrative agent.

Under the terms of the amended revolving term loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of $4.0 million. Final payment of amounts borrowed under the amended revolving term loan is due December 1, 2021. Interest on the amended revolving term loan accrues at a variable weekly rate equal to 3.10% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which totaled 3.25% at July 31, 2020.

We agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

The aggregate principal amount available to the Company for borrowing under the revolving term loan at April 2019 was $4.0 million.

Under the terms of the seasonal revolving loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of $4.0 million until its maturing on May 1, 2020. Amounts borrowed under the seasonal revolving loan bear interest at a variable weekly rate equal to 2.85% above the LIBOR Index rate, which was 3.00% at July 31, 2020.

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The Company also agreed to pay an unused commitment fee on the unused portion of the seasonal revolving loan commitment at the rate of 0.250% per annum.

The 2018 Credit Facility is secured by substantially all of our assets, including a subsidiary guarantee.

Under the 2018 Credit Facility, the Company is subject to certain financial and non-financial covenants that limit the Company’s distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio. We agreed to a debt service coverage ratio of 1.15 to 1.0, to maintain minimum working capital $8.0 million through September 30, 2018 and $10.0 million thereafter, and to maintain net worth of $32.0 million. We are permitted to pay distributions to our members up to 75% of our net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and we are in compliance with all of our loan covenants. Further, we agreed not to make loans or advances to Agrinatural that exceed an aggregate principal amount of approximately $6.6 million without the consent of Compeer.

In October 2018, the Company had an event of non-compliance related to the debt service coverage ratio as defined in the 2018 Credit Facility. In December 2018, the Company received a waiver from its lender waiving this event of noncompliance. In October 2019, the Company had an event of non-compliance related to the debt service coverage ratio as defined in the 2018 Credit Facility. In December 2019, the Company received a waiver from its lender waiving this event of noncompliance. If market conditions deteriorate in the future, circumstances may develop which could result in the Company violating the financial covenants or other terms of its 2018 Credit Facility. Should unfavorable market conditions result in our violation of the terms or covenants of the 2018 Credit Facility and we fail to obtain a waiver of any such term or covenant, Compeer could deem the Company in default, impose fees, charges and penalties, terminate any commitment to loan funds and require the Company to immediately repay a significant portion or possibly the entire outstanding balance of the revolving term loan. In the event of a default, Compeer could also elect to proceed with a foreclosure action on our plant.

2020 Credit Facility with Compeer

The 2020 Credit Facility includes an amended and restated revolving term loan with a $8,000,000 principal commitment, which was increased to a $13,000,000 principal commitment in June 2020 pursuant to an Amended and Restated Revolving Term Promissory Note between the Company and Compeer. The loans are secured by substantially all of the Company’s assets, including a subsidiary guarantee. The 2020 Credit Facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. During the second fiscal quarter of 2020, the 2020 Credit Facility was amended to reduce the working capital covenant to $8 million, from the original $10 million working capital covenant, for the period of April 30, 2020 through December 31, 2020, and increasing to $10 million beginning January 1, 2021. Additionally, the current portion of leases will be excluded from the calculation of current liabilities. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties. In May 2020, the Company had an event of non-compliance related to the minimum working capital requirement as defined in the amended credit facility. The Company has obtained a waiver from its lender for this event of non-compliance. The Company was in compliance with all covenants on July 31, 2020. However, the Company anticipates an event of non-compliance with respect to our debt service coverage ratio for the period ended October 31, 2020. The Company intends to obtain a waiver from its lender for this anticipated event of noncompliance.

Under the terms of the amended and restated revolving term loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of $13.0 million. Final payment of amounts borrowed under amended revolving term loan is due December 1, 2022. Interest on the amended and restated revolving term loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which totaled 3.50% at July 31, 2020. We agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

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As part of the 2020 Credit Facility closing, the Company entered into an amended administrative agency agreement with CoBank. As a result, CoBank will continue act as the agent for the lender with respect to the 2020 Credit Facility. The Company agreed to pay CoBank an annual fee of $2,500 for its services as administrative agent.

The aggregate principal amount available to the Company for borrowing under the amended and restated revolving term loan at July 31, 2020 was approximately $10.7 million.

Single Advance Term Note

Other Credit Arrangements

In addition to our primary credit arrangement with Compeer, we have other material credit arrangements and debt obligations.

In October 2003, we entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors, an unrelated company. In consideration of this agreement, we and Minnesota Soybean Processors were allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. On September 30, 2019, we finalized a new industrial water supply development and distribution agreement with the City of Heron Lake, effective as of February 1, 2019. Under this agreement, we pay flow charges and fixed monthly charges to the City of Heron Lake, in addition to certain excess maintenance costs. The term of this agreement expires February 1, 2029.

In May 2006, we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years’ debt service on approximately $3.6 million in water revenue bonds, which will be returned to us if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement.

As of July 31, 2020 and 2019, there was a total of approximately $467,000 and $634,000, respectively, in outstanding water revenue bonds. We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

To fund the purchase of the distribution system and substation for the plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 under a secured promissory note secured by the distribution system and substation for the plant. Under the note we were required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual maintenance fee of 1% beginning on October 10, 2009. We paid the balance of this loan in full in September 2017.

Small Business Administration Paycheck Protection Program Loan

In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 18, 2020, the Company received a loan in the amount of $595,693 through the Paycheck Protection Program. Management expects that the entire loan will be used for payroll, utilities and interest on our one mortgage loan; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% over a period of two years, beginning May 2021 with a final installment in May 2022.

Critical Accounting Estimates

38Management uses 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.

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Management uses 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. We believe that of our significant accounting policies summarized in Note 1 to our condensed consolidated unaudited financial statements included with this periodic report on Form 10-Q.

At ~~July~~January 31, ~~2020~~2021, our critical accounting estimates continue to include those described in our Annual Report on Form 10-K for the fiscal year ended October 31, ~~2019~~2020. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures ~~About Market Risk~~

WeNot ~~are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below~~applicable. We have no exposure to foreign currency risk as all 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, ethanol, 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 pursuant to the requirements of Generally Accepted Accounting Principles (“GAAP”).

~~Interest Rate Risk~~

From time to time, we may be exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our credit facility with Compeer. The specifics of these credit facilities are discussed in greater detail in “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness”.

Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one-year period from July 31, 2020.


Outstanding Variable Rate Debt at	Interest Rate at	Interest Rate Following 10%	Approximate Adverse
July 31, 2020	July 31, 2020	Adverse Change	Change to Income
$2,271,000	3.50%	3.85%		$8,000

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 distillers’ 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 period to period 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, 2020, we had price protection in place for approximately 16% and 16% of our anticipated corn and natural gas needs for the next 12 months, respectively, and approximately 8%, 1%, and 2% of our anticipated ethanol, distillers’ grains, and corn oil sales for the next 12 twelve months, respectively. Through these contracts we hope to minimize risk from future market price fluctuations and basis fluctuations. As input prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on

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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 growth for us.

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 fair value of our corn and natural gas prices and average ethanol price as of July 31, 2020, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from July 31, 2020.

The results of this analysis, which may differ from actual results, are as follows:


	Estimated Volume Requirements		Hypothetical Adverse	Approximate
	for the next 12 months	Unit of	Change in Price as of	Adverse
	(net of forward and futures contracts)	Measure	July 31, 2020	Change to Income
Ethanol	57,500,000	Gallons	10.0%	$	5,980,000
Corn	17,500,000	Bushels	10.0%	$	4,725,000
Natural Gas	1,350,000	MMBTU	10.0%	$	331,000

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

Effectiveness of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer (the principal executive officer), Steve Christensen, along with our Chief Financial Officer (the principal financial officer), Stacie Schuler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as ~~July~~January 31, ~~2020~~2021. Based upon 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 that occurred during the three months ended ~~July~~January 31, ~~2020~~2021, 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

From time to time in the ordinary course of business, the Company may be named as a defendant in legal proceedings related to various issues, including workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.

Item 1A. Risk Factors

40The risk factors below should be read in conjunction with the risk factors previously discussed in Item 1A of our Form 10-K for the fiscal year ended October 31, 2020. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

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The risk factors below should be read in conjunction with the risk factors previously discussed in Item 1A of our Form 10-K for the fiscal year ended October 31, 2019. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

Our business, and our industry as a whole, could be adversely affected by an outbreak of disease, epidemic or pandemic, such as the global COVID-19 pandemic, or similar public threat, or fear of such an event.

~~The~~Our ~~recent~~CEO ~~global outbreak of the COVID-19 pandemic has had a negative impact on our revenues~~ and ~~operating~~General ~~results,~~Manager ~~which~~intends ~~could worsen and/or continue for a significant period of time. This outbreak has resulted in disruptions and damage~~ to ~~our~~retire ~~business,~~before ~~caused by~~ the ~~negative~~end impact to our ability to obtain cost effective raw materials, supplies and component parts necessary to operate our ethanol, distillers’ grains, corn oil, or natural gas business, the negative impact on our ability to operate our facility should COVID-19 spread more broadly within Minnesota or the Midwest, thereby creating an increased risk of ~~exposure to our workforce which cannot operate our facility remotely~~2021, and ~~the~~as ~~negative~~a ~~impact~~result to our ~~ability~~Company tomay ~~market~~face ~~and~~challenges ~~sell our products to markets which have slowed or shut down altogether. It is likely~~ that ~~effect~~arise ~~such~~from asa ~~these~~transition ~~will~~in ~~continue to negatively impact our revenues~~leadership, ~~operating~~which ~~results,~~may ~~and business as a whole. Mitigation efforts have not and will not completely prevent our business from being~~ adversely ~~affected,~~affect ~~and the longer the pandemic impacts supply and demand and the more broadly the pandemic spreads, it is more likely that the impact on~~ our business~~, revenues and operating results will become increasingly negative~~.

Steve Christensen serves as our CEO and general manager pursuant to management services agreement with GFE. Christensen intends to retire at or before the end of 2021 and has executed a separation agreement with GFE. As a result, GFE and our Company will be required to hire a new CEO in 2021. With Christensen’s departure, the Company will lose significant experience and institutional knowledge, which may adversely affect our business.

The election of President Joe Biden and the transition to a new presidential administration may result in new or different regulations and policies that may adversely affect our business.

Joe Biden was elected president in November 2020, defeating President Donald Trump. As of January 31, 2021, Democrats controlled the presidency and held narrow majorities in the U.S. Senate and House of Representatives. The transition to a new presidential administration creates unknowns that may adversely affect the economy as a whole and our industry and business specifically. Single-party control of the federal government may result in new or altered regulations and policies, including those related to agriculture, the environment, energy, transportation, and labor. Under the new administration, the future of policies specifically applicable to our industry and business, including the RFS and small refinery RVOs, also remain unclear. These factors and other political shifts may negatively affect our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

The following exhibits are included in this report:


Exhibit No.	Exhibit	~~Exhibit~~

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*
10.1	Negotiable Promissory Note dated December 1, 2020 between Heron Lake BioEnergy BioEnergy, LLC, as Borrower and Granite Falls Energy, LLC, as Lender.*

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
10.1	Amended and Restated Revolving Term Promissory Note dated June 11, 2020 between Heron Lake

	BioEnergy, LLC, as Borrower, and Compeer Financial, FLCA, as Lender.*
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*
10.2	Single Advance Term Promissory Note dated June 19, 2020 between Heron Lake BioEnergy, LLC, as

	Borrower, and Compeer Financial, FLCA, as Lender.*
101.1	The following materials from Heron Lake BioEnergy’s Quarterly Report on Form 10-Q for the three months ended January 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at January 31, 2021 and October 31, 2020; (ii) the Condensed Consolidated Statements of Operations for the three months ended January 31, 2021 and January 31, 2020; (iii) the Condensed Consolidated Statements of Members’ Equity for the three months ended January 31, 2021 and January 31, 2020; (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2021 and January 31, 2020; and (v) Notes to Condensed Consolidated Unaudited Financial Statements.*

101.1	The following materials from Heron Lake BioEnergy’s Quarterly Report on Form 10-Q for the three and nine months ended July 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at July 31, 2020 and October 31, 2019; (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2020 and 2019; (iii) the Condensed Consolidated Statements of Members’ Equity for the three and nine months ended July 31, 2020 and 2019; (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2020 and 2019; and (v) Notes to Condensed Consolidated Unaudited Financial Statements.*

*Filed electronically herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	HERON LAKE BIOENERGY, LLC

Date: September 14, 2020	/s/ Steve Christensen
Date: March 17, 2021	/s/ Steve Christensen
	Steve Christensen
	Chief Executive Officer

Date: September 14, 2020	/s/ Stacie Schuler
Date: March 17, 2021	/s/ Stacie Schuler
	Stacie Schuler
	Chief Financial Officer

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