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

For the quarterly period ended ~~April~~July 3031, 2021


◻	Transition report under Section 13 or 15(d) of the Exchange Act.
☐	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 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 ~~June~~September 14, 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	1918
Item 3. Quantitative and Qualitative Disclosures About Market Risk	36
Item 4. Controls and Procedures	36
PART II. OTHER INFORMATION	36
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	3637
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3. Defaults Upon Senior Securities	37
Item 4. Mine Safety Disclosures	37
Item 5. Other Information	37
Item 6. Exhibits	3837
SIGNATURES	38

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


	~~April~~July 3031, 2021		`	October 31, 2020
	(unaudited)			~~October 31, 2020~~
ASSETS
Current Assets
Cash	$	43,~~502~~337,~~637~~000		$	3,276,301
Restricted cash		~~646~~336,~~857~~516			514,050
Accounts receivable		23,~~575~~414,~~584~~059			1,616,489
Inventory		9,~~309~~355,~~913~~763			7,063,675
Commodity derivative instruments		~~325,238~~—			15,150
Prepaid expenses and other current assets		1937,~~250,906~~183			782,280
Total current assets		1817,~~611~~380,~~135~~521			13,267,945

Property and Equipment, net		3736,~~986~~474,~~739~~903			40,187,733

Operating lease right of use asset, net		8,~~627~~289,~~286~~206			9,291,249
		—			—

Other Assets		333,254			333,254

Total Assets	$	6562,~~558~~477,~~414~~884		$	63,080,181

LIABILITIES AND MEMBERS' EQUITY

Current Liabilities
Current maturities of long-term debt	$	1852,~~023,039~~699		$	11,492,059
Checks drawn in excess of bank balance		1816,~~040,874~~600			692,984
Accounts payable		47,~~165~~352,~~548~~061			6,916,045
Commodity derivative instruments		—28,831			173,928
Accrued expenses		~~476~~365,~~515~~631			496,513
Operating lease, current liabilities		1,~~377~~394,~~324~~161			1,344,258
Total current liabilities		810,~~083~~809,~~300~~983			21,115,787

Long-Term Debt, less current portion		177,~~584~~279,~~725~~205			295,611

Operating leases, long-term liabilities		76,~~249~~895,~~962~~045			7,946,991

Other Long-Term Liabilities		~~619~~631,~~886~~367			596,924

Commitments and Contingencies

Members' Equity
Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units issued and outstanding at both April 30, 2021 and October 31, 2020.		32,020,541			33,124,868
Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units issued and outstanding at both July 31, 2021 and October 31, 2020.		36,862,284			33,124,868
Total Liabilities and Members' Equity	$	65,558,414		$	63,080,181

Total Liabilities and Members' Equity	$	62,477,884		$	63,080,181

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 Ended ~~April~~July 3031,				~~Six~~Nine Months Ended ~~April~~July 3031,
	2021		2020		2021		2020
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Revenues	$	3749,~~033~~980,~~102~~729	$	1514,~~604~~165,~~969~~041	$	61111,~~474~~454,~~171~~900	$	4256,~~285~~450,~~249~~290

Cost of Goods Sold		3344,~~630~~095,~~280~~464		2117,~~049~~314,~~520~~863		61105,~~005~~101,~~817~~281		4966,~~179~~494,~~291~~154

Gross Profit (Loss)		3,402,822		(5,444,551)		468,354		(6,894,042)
Gross Income (Loss)		5,885,265		(3,149,822)		6,353,619		(10,043,864)

Operating Expenses		(1936,~~032,838~~418)		(~~974~~769,~~949~~859)		(23,~~120~~057,~~729~~147)		(12,~~874~~644,~~394~~253)

Operating Income (Loss)		24,~~369~~948,~~984~~847		(63,~~419~~919,~~500~~681)		(13,~~652~~296,~~375)~~472		(812,~~768~~688,~~436~~117)

Other Income (Expense)
Interest income		1,~~116~~153		~~826~~740		13,~~995~~148		1213,~~407~~147
Interest expense		(~~130~~171,~~490~~649)		(3074,~~074~~737)		(~~232~~404,~~902~~551)		(41116,~~605~~342)
Other income, net		~~635~~63,~~082~~392		~~206~~33,~~499~~105		~~778~~842,~~955~~347		~~206~~239,~~838~~943
Total other income, net		505,708		177,251		548,048		177,640
Total other income (expense), net		(107,104)		(40,892)		440,944		136,748

Net Income (Loss)		24,~~875~~841,~~692~~743		(63,~~242~~960,~~249~~573)		(13,~~104~~737,~~327)~~416		(812,~~590~~551,~~796~~369)

Less: Net Income Attributable to Non-controlling Interest		—		—		—		(67,827)

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	24,~~875~~841,~~692~~743	$	(63,~~242~~960,~~249~~573)	$	(13,~~104~~737,~~327)~~416	$	(812,~~658~~619,~~623~~196)

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

Net Income (Loss) Per Unit Attributable to Heron Lake BioEnergy, LLC- Basic and Diluted (Class A and B)	$	0.0406	$	(0.0805)	$	(0.~~01)~~05	$	(0.1116)

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of 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, 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

Net income attributable to Heron Lake BioEnergy, LLC	—	—		2,875,692		—		2,875,692

Balance—April 30, 2021	62,932,107	15,000,000	$	32,020,541	$	—	$	32,020,541

Net income attributable to Heron Lake BioEnergy, LLC	—	—		4,841,743		—		4,841,743

Balance—July 31, 2021	62,932,107	15,000,000	$	36,862,284	$	—	$	36,862,284

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

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows


	~~Six~~Nine ~~months~~Months ~~ended~~Ended July 31,		~~Six months ended~~
	~~April 30,~~ 2021		~~April 30,~~ 2020
	(Unaudited)		(Unaudited)
Cash Flow From Operating Activities
Net loss	$	(1,104,327)	$	(8,590,796)
Net Income (Loss)	$	3,737,416	$	(12,551,369)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		24,~~706~~220,~~675~~030		23,~~638~~936,~~652~~813
Paycheck Protection Program loan forgiveness income		(595,693)		—
Loss on disposal of asset		21,728		—
(Gain) loss on disposal of assets		21,728		(2,000)
Change in fair value of commodity derivative instruments		2,~~709~~978,~~178~~588		~~679~~999,~~921~~167
Change in operating assets and liabilities:
Accounts receivable		(~~959~~1,~~095~~797,570)		4,~~765~~618,~~677~~187
Inventory		(2,~~246~~292,~~238~~088)		(12,~~109~~408,~~603)~~839
Commodity derivative instruments		(3,~~193~~108,~~194~~535)		(~~342~~900,~~448~~010)
Prepaid expenses and other current assets		(~~468~~154,~~626~~903)		(~~347~~177,~~376~~693)
Accounts payable		~~(609~~2,~~872)~~576,641		(43,~~247~~428,~~450~~588)
Accrued expenses		(19130,~~998~~882)		~~102~~682,~~192~~346
Accrued railcar rehabilitation costs		2234,~~962~~443		2234,~~962~~443
Net cash used in operating activities		(3,736,500)		(6,428,269)
Net cash provided by (used in) operating activities		5,489,175		(4,379,865)

Cash Flows from Investing Activities
Capital expenditures		(2,~~668~~669,~~034~~553)		(~~613~~2,~~867~~252,359)
Net cash used in investing activities		(2,~~668~~669,~~034~~553)		(~~613~~2,~~867~~252,359)

Cash Flows from Financing Activities
Checks drawn in excess of bank balance		~~347~~123,~~890~~616		~~807~~685,~~756~~724
Proceeds from Paycheck Protection Program loans		595,693		595,693
Proceeds from long-term debt		2,650,719		1722,~~786~~070,~~740~~984
Payments on long-term debt		(~~830~~11,~~625~~306,485)		(1116,~~655~~966,~~660~~880)
Proceeds from related party debt		5,000,000		—
Acquisition of non-controlling interest		—		(2,000,000)
Net cash provided by financing activities		7,763,677		5,534,529
Net cash provided by (used in) financing activities		(2,936,457)		4,385,521

Net increase (decrease) in cash and restricted cash		1,359,143		(1,507,607)
Net decrease in cash and restricted cash		(116,835)		(2,246,703)

Cash and Restricted Cash - Beginning of period		3,790,351		4,593,811

Cash and Restricted Cash - End of period	$	53,~~149~~673,~~494~~516	$	32,~~086~~347,~~204~~108

Reconciliation of Cash and Restricted Cash
Cash - Balance Sheet	$	43,~~502~~337,~~637~~000	$	2,~~735~~119,~~136~~603
Restricted Cash - Balance Sheet		~~646~~336,~~857~~516		~~351~~227,~~068~~505
Cash and Restricted Cash	$	53,~~149~~673,~~494~~516	$	32,~~086~~347,~~204~~108

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest expense	$	~~233~~420,~~305~~839	$	41116,~~605~~342

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Capital expenditures included in accounts payable	$	—	$	131,~~487~~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

~~April~~July 3031, 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.

Basis of Presentation and Principles of Consolidation

The condensed consolidated unaudited financial statements as of ~~April~~July 3031, 2021 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively, the “Company”). As of December 11, 2019, the Company acquired the 27% interest in Agrinatural that was not previously in its control. As such, results prior to December 11, 2019 reflect earnings attributable to the non-controlling interest separately in the condensed consolidated statement of operations during fiscal year 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, 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, 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.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

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

~~April~~July 3031, 2021

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 5.

Reportable Operating Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting”, establishes the standards for reporting information about segments in financial statements. 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 related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

●

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.

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

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 further significant adverse 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 2020 and into 2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels, which were compounded by the impact of the novel coronavirus ("COVID-19"). These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. As a result, as of the three months ended January 30, 2021 and the fiscal year ended October 31, 2020, the Company was not in compliance with its working capital and net worth covenant requirements related to its Revolving Term Note, for which awaivers ~~waiver~~were ~~was~~ obtained. The Company was in compliance with its working capital and net worth covenant requirements as of ~~April~~July 3031, 2021 and ~~expects~~currently forecasts future compliance during the next twelve months. Fuel prices generally, and ethanol prices specifically, have rebounded since the spring of 2020 and remained steady during the three and nine months ended July 31, 2021. As a result, the Company has experienced positive operating and net income in the three and nine months ended July 31, 2021.

While the Company believes the replacement of the boiler has improved the operating performance of the plant, and led to lower operating costs, and improved net income for the three months ended April 30, 2021, market conditions have resulted in losses for the six months ended April 30, 2021.

The Company believes its operating cash flows, cash on hand, and available debt from its lender will provide sufficient liquidity to meet 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.

The Company is ~~working~~moving ~~toward~~forward with a plan to engage in a merger with Granite Falls Energy, LLC (“GFE”), the Company’s majority owner. Pursuant to a Merger Agreement, GFE would acquire the minority ownership interest of the Company for $14 million, or approximately $0.36405 per unit, and the Company would become a wholly owned subsidiary of GFE. The Company believes the merger would provide the Company with additional financial resources to assist the Company’s continued operations. The Merger is subject to approval by the minority interest unitholders of HLBE. A special meeting ofwhere ~~the~~HLBE members ofwill ~~HLBE~~vote on the proposed merger is ~~expected~~scheduled tofor be1 ~~held~~p.m. inSeptember ~~summer~~23, 2021, toat ~~vote~~the onHeron ~~the~~Lake ~~proposed~~Community ~~merger~~Center, 312 10th St., Heron Lake, Minnesota 56137. If approved by the minority unitholders, the merger is expected to close following the special meeting. Additional information regarding the proposed merger is available in the section captioned Part 1 - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operation — Plan of Operations for the Next Twelve Months.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

3.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 ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020:


	Three Months Ended ~~April~~July 3031, 2021
	(unaudited)
	Ethanol Production		Natural Gas Pipeline		Total
Ethanol	$	2939,~~320~~647,~~871~~617	$	—	$	2939,~~320~~647,~~871~~617
Distillers’ Grains		57,~~227~~221,~~309~~342		—		57,~~227~~221,~~309~~342
Corn Oil		12,~~857~~581,~~402~~949		—		12,~~857~~581,~~402~~949
Other		~~303~~410,~~513~~734		—		~~303~~410,~~513~~734
Natural Gas		—		~~324~~119,~~007~~087		~~324~~119,~~007~~087
Total Revenues	$	3649,~~709~~861,~~095~~642	$	~~324~~119,~~007~~087	$	3749,~~033~~980,~~102~~729

	~~Three Months Ended April 30, 2020~~
	Three Months Ended July 31, 2020
	(unaudited)
	Ethanol Production		Natural Gas Pipeline		Total
Ethanol	$	11,~~094~~920,~~276~~049	$	—	$	11,~~094~~920,~~276~~049
Distillers’ Grains		31,~~347~~645,~~108~~859		—		31,~~347~~645,~~108~~859
Corn Oil		~~735~~401,~~028~~623		—		~~735~~401,~~028~~623
Other		~~191~~71,~~806~~519		—		~~191~~71,~~806~~519
Natural Gas		—		~~236~~125,~~751~~991		~~236~~125,~~751~~991
Total Revenues	$	1514,~~368~~039,~~218~~050	$	~~236~~125,~~751~~991	$	1514,~~604~~165,~~969~~041
	~~Six Months Ended April 30, 2021~~

	Nine Months Ended July 31, 2021
	(unaudited)
		Ethanol Production		Natural Gas Pipeline		Total
Ethanol	$	4887,~~041~~688,~~220~~837	$	—	$	4887,~~041~~688,~~220~~837
Distillers’ Grains		816,~~926~~147,~~345~~687		—		816,~~926~~147,~~345~~687
Corn Oil		35,~~246~~828,~~480~~429		—		35,~~246~~828,~~480~~429
Other		~~529~~939,~~259~~993		—		~~529~~939,~~259~~993
Natural Gas		—		~~730~~849,~~867~~954		~~730~~849,~~867~~954
Total Revenues	$	60110,~~743~~604,~~304~~946	$	~~730~~849,~~867~~954	$	61111,~~474~~454,~~171~~900

	~~Six Months Ended April 30, 2020~~
	Nine Months Ended July 31, 2020
	(unaudited)
		Ethanol Production		Natural Gas Pipeline		Total
Ethanol	$	3143,~~386~~306,~~160~~209	$	—	$	3143,~~386~~306,~~160~~209
Distillers’ Grains		79,~~835~~481,~~912~~770		—		79,~~835~~481,~~912~~770
Corn Oil		12,~~649~~051,~~426~~049		—		12,~~649~~051,~~426~~049
Other		~~487~~559,~~723~~242		—		~~487~~559,~~723~~242
Natural Gas		—		~~926~~1,~~028~~052,020		~~926~~1,~~028~~052,020
Total Revenues	$	4155,~~359~~398,~~221~~270	$	~~926~~1,~~028~~052,020	$	4256,~~285~~450,~~249~~290

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

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.

4.INVENTORY

Inventory consisted of the following:


	~~April~~July 3031, 2021		October 31, 2020
	(unaudited)
Raw materials	$	23,~~096~~577,~~668~~292	$	2,440,997
Work in process		~~937~~1,~~241~~091,479		713,037
Finished goods		43,~~955~~387,~~285~~051		2,677,095
Supplies		1,~~320~~299,~~719~~941		1,232,546
Totals	$	9,~~309~~355,~~913~~763	$	7,063,675

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 $~~0 and $745~~121,000 ~~for the three months ended April 30, 2021~~ and ~~2020, respectively, and approximately~~ $~~0 and $1~~155,~~622,~~000 for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, 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 $0 and $48184,000 for the ~~three~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively~~, and approximately $0 and $174,000 for the six months ended April 30, 2021 and 2020, respectively~~.

5.DERIVATIVE INSTRUMENTS

As of ~~April~~July 3031, 2021, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 2655,~~100,~~000 bushels, comprised of ~~long corn futures positions on 800,000 bushels that were entered into to hedge forecasted ethanol sales through July 2021, and~~ short corn futures positions ~~on 1,300,000 bushels~~ that were entered into to hedge forecasted corn purchases through July 2022. Additionally, there are corn options positions of 5575,~~120,~~000 bushels through ~~September~~December 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 ~~April~~July 3031, 2021, the Company had approximately $~~647~~337,000 of cash collateral (restricted cash) related to derivatives held by a broker.

The following table provides detail regarding the Company’s derivative instruments at ~~April~~July 3031, 2021, none of which are designated as hedging instruments:


	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	~~325,238~~—	$	—28,831
Totals		$	~~325,238~~—	$	—28,831

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

As of October 31, 2020, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 2,095,000 bushels, comprised of long corn futures positions on 325,000 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 1,380,000 bushels through March 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 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

The 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:


	Consolidated Statement of	Three Months Ended ~~April~~July 3031,					~~Six~~Nine Months Ended ~~April~~July 3031,
	Operations Location	2021		2020		2021		2020
Corn contracts	Cost of goods sold	$	~~105~~(269,~~235~~410)	$	(~~435~~287,~~563~~301)	$	(23,~~819~~088,~~419~~829)	$	(~~516~~803,~~331~~632)
Ethanol contracts	Revenues		~~53,763~~—		(8131,~~738~~945)		110,241		(~~163~~195,~~590~~535)
Total gain (loss)		$	158,998	$	(517,301)	$	(2,709,178)	$	(679,921)
Total loss		$	(269,410)	$	(319,246)	$	(2,978,588)	$	(999,167)

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2021

6.FAIR VALUE

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at ~~April~~July 3031, 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)
	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	325,238	$	325,238	$	325,238	$	—	$	—

Financial Liabilities:
Accounts Payable (1)	$	69,506	$	69,506	$	—	$	69,506	$	—
Commodity Derivative instruments - Corn	$	28,831	$	28,831	$	28,831	$	—	$	—
Accounts Payable (1)	$	99,349	$	99,349	$	—	$	99,349	$	—

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 31, 2020:


					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 are 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.11

We determine 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 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.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

7.DEBT FACILITIES

Long-term debt consists of the following:


	~~April~~July 3031, 2021		October 31, 2020
	(unaudited)
Amended revolving term note payable to lending institution, see terms below.	$	~~10,005,520~~—	$	7,891,426
Single advance term note payable to lending institution, see terms below.		2,~~700~~400,000		3,000,000
Short term revolving note, see notes below		6,000		—
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~~130,~~551~~211		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		188,~~607~~131,~~764~~904		11,787,670
Less amounts due within one year		1852,~~023,039~~699		11,492,059
Net long-term debt	$	177,~~584~~279,~~725~~205	$	295,611

Revolving Term Note

The 2020 Credit Facility includes an amended and restated revolving term loan with a $13 million principal commitment. 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. As of the three months ended January 30, 2021 and the fiscal year ended October 31, 2020, the Company was not in compliance with its working capital and net worth covenant requirements, for which a waiver was obtained. The Company was in compliance with its debt covenants on ~~April~~July 3031, 2021. However, failure to comply with the protective loan covenants or maintain the required financial ratios in the future may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties.

During February 2021, the 2020 Credit Facility was amended to reduce the working capital covenant to $8 million through May 31, 2021 and increasing to $10 million beginning June 30, 2021. The 2020 Credit Facility was also amended to decrease the net worth requirement from $32 million to $28 million.

As part of the 2020 Credit Facility closing, the Company entered into an amended administrative agency agreement with CoBank, ACP (“CoBank”). As a result, CoBank will continue to 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.

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 3.47% at April 30, 2021.12

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

~~April~~July 3031, 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.

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~~The ~~payment~~short ofterm ~~amounts borrowed under the~~ revolving promissory note ~~was~~expired ~~June~~on ~~1, 2021, which was extended to~~ August 1, 2021 ~~in May 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. The rate totaled 3.47% at April 30, 2021. In addition,~~ the ~~Company~~remaining ~~agreed~~balance towas ~~pay~~paid anoff ~~unused commitment fee on the unused available portion of the loan~~ at ~~the~~that ~~rate of 0~~time.~~50%~~ ~~per annum payable monthly in arrears.~~

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. The loan was forgiven in full during March 2021. Forgiveness income is recorded as a component of other income on the statement of operations.

In February 2021, the Company received a second Paycheck Protection Program loan in the amount of $595,693. ~~Management~~The ~~expects the entire~~ loan ~~will~~was ~~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~~full ~~2022~~during ~~with~~August ~~a final installment in February 2026~~2021.

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 3.4744% at ~~April~~July 3031, 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 was 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

~~April~~July 3031, 2021

Estimated annual maturities of long-term debt at ~~April~~July 3031, 2021 are as follows based on the most recent debt agreements:


2022	$	1852,~~023,039~~699
2023		155,~~723~~717,~~442~~922
2024		719,107
2025		720,303
2026		~~421~~121,873
Total debt	$	188,~~607~~131,~~764~~904

8.LEASES

The Company leases rail cars for its facility to transport ethanol and dried distillers’ grains to its end customers. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the ~~three~~nine ~~and six~~ months ended ~~April~~July 3031, 2021, the Company’s weighted average discount rate was 4.87%. Operating lease expense is recognized on a straight-line basis over the lease 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 ~~six~~nine months ended ~~April~~July 3031, 2021, the weighted average remaining lease term was four years.

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.

The following table summarizes the remaining maturities of the Company’s operating lease liabilities as of ~~April~~July 3031, 2021:


Twelve Months Ended April 30,
Twelve Months Ended July 31,
2022	$	1,767,000
2023		1,767,000
2024		1,~~728~~698,~~000~~750
2025		1,650,000
2026		1,650,000
Thereafter		1925,~~412,500~~000
Totals		9,~~974~~457,~~500~~750
Less: Amount representing interest		1,~~347~~168,~~214~~544
Lease liabilities	$	8,~~627~~289,~~286~~206

For the three and ~~six~~nine months ended ~~April~~July 3031, 2021, HLBE recorded operating lease costs for these leases of approximately $~~644~~688,000 and $1,~~255~~943,000, respectively, in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the periods. For the three and ~~six~~nine months ended ~~April~~July 3031, 2020, HLBE recorded operating lease costs for these leases of approximately $~~490~~591,000 and $1,~~021~~731,000, respectively, in cost of goods sold in the Company’s statement of operations, which approximates the cash paid for the periods.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2021

9.COMMITMENTS AND CONTINGENCIES

Corn Forward Contracts

At ~~April~~July 3031, 2021, the Company had cash and basis contracts for forward corn purchase commitments for approximately 4,~~689~~026,000 bushels for deliveries through ~~March~~October 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 no impairment loss existed at April 30, 2021, and approximately $47,000 at October 31, 2020.14

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

July 31, 2021

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 no impairment loss existed at July 31, 2021, and approximately $47,000 at October 31, 2020.

Ethanol Forward Contracts

At ~~April~~July 3031, 2021, the Company had fixed and basis contracts to sell approximately $2122,~~460~~621,000 of ethanol for various delivery periods through ~~June~~December 2021, which approximates 9042% of its anticipated ethanol sales for that period.

Distillers’ Grains Forward Contracts

At ~~April~~July 3031, 2021, the Company had forward contracts to sell approximately $21,~~500~~262,000 of distillers’ ~~grains~~grain for various delivery periods through September 2021, which approximates 1646% of its anticipated distillers'’ ~~grains~~grain sales ~~during~~for that period.

Corn Oil Forward Contracts

At ~~April~~July 3031, 2021, the Company had forward contracts to sell approximately $~~597~~900,000 of corn oil for delivery through ~~May~~August 2021, which approximates 4084% of its anticipated corn oil sales for that period.

Rail Car Rehabilitation Costs

HLBE leases 50 hopper rail cars under a multi-year agreement which ends in May 2027. Under the agreement, HLBE 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. HLBE believes that it is probable that we may be assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars at ~~April~~July 3031, 2021 and October 31, 2020 to be approximately $~~620~~631,000 and $597,000, respectively. HLBE accrues the estimated cost of railcar damages over the term of the lease as the cost of damages are incurred. During the three~~-month~~ ~~periods~~and nine months ended ~~April~~July 3031, 2021 ~~and 2020~~, the Company has recorded an expense for the recognition of damages and actual repairs in cost of goods of approximately $4327,000 and $1282,000, respectively. During the ~~six-month~~three ~~periods~~and nine months ended ~~April~~July 3031, ~~2021 and~~ 2020, the Company has recorded an expense ~~for recognition of damages and actual repairs~~ in cost of goods of approximately $5516,000 and $2370,000, respectively.

10.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 ~~April~~July 3031, 2021 and October 31, 2020.

16On December 11, 2019, HLBE Pipeline Company acquired the remaining non-controlling interest of Agrinatural for a total price of $2.225 million. The change of interest is recorded as an equity transaction in accordance with ASC 805.

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

On December 11, 2019, HLBE Pipeline Company acquired the remaining non-controlling interest of Agrinatural for a total price of $2.225 million. 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 $~~124~~133,000 and $~~135~~122,000 for the three months ended ~~April~~July 3031, 2021 and 2020, respectively. Total expenses under this agreement were approximately $~~243~~376,000 and $~~258~~380,000 for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively, of which approximately $7369,000 is included in accounts payable at ~~April~~July 3031, 2021.

In February 2020, Agrinatural 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 and $5481,000 for the three and ~~six~~nine months ended ~~April~~July 3031, 2021, respectively. Total expenses under this agreement were approximately $27,000 and $54,000 for the three and nine months ended July 31, 2020, respectively.

Corn Purchases - Members

HLBE purchased corn from board members of approximately $46,~~934~~727,000 and $~~750~~57,000 for the three months ended ~~April~~July 3031, 2021 and 2020, respectively, and approximately $815,~~676~~403,000 and $5,~~815~~872,000 for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively.

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

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Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

~~April~~July 3031, 2021

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.

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				Six Months Ended
	April 30, 2021		April 30, 2020		April 30, 2021		April 30, 2020
Revenue:	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Ethanol production	$	36,709,095	$	15,368,218	$	60,743,304	$	41,359,221
Natural gas pipeline		745,754		606,898		1,563,483		1,743,115
Eliminations		(421,747)		(370,147)		(832,616)		(817,087)
Total Revenue	$	37,033,102	$	15,604,969	$	61,474,171	$	42,285,249

Three Months Ended

~~Six~~Nine Months Ended

~~April~~July 3031, 2021

~~April~~July 3031, 2020

~~April~~July 3031, 2021

~~April~~July 3031, 2020

Operating Income (Loss):

(unaudited)

Revenue:

(unaudited)

Ethanol production

249,~~082~~861,~~922~~642

(614,~~567~~039,~~621)~~050

(2110,~~190~~604,~~355)~~946

(955,~~380~~398,~~399)~~271

Natural gas pipeline

~~447~~540,~~483~~808

~~252~~439,~~523~~448

~~824~~2,~~475~~104,291

~~898~~2,~~821~~182,563

Eliminations

(~~160,~~421,721)

(~~104~~313,~~402~~457)

(~~286~~1,~~495~~254,337)

(~~286~~1,~~858~~130,544)

Operating Income (Loss):

2,369,984

(6,419,500)

(1,652,375)

(8,768,436)

Total Revenue

49,980,729

14,165,041

111,454,900

56,450,290


	Three Months Ended				Nine Months Ended
	~~April~~July 3031, 2021		~~October~~July 31, 2020		July 31, 2021		July 31, 2020
Assets:	(unaudited)
Operating Income (Loss):	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Ethanol production	$	514,~~642~~761,~~711~~263	$	49(4,~~613~~033,~~394~~933)	$	2,570,908	$	(13,414,332)
Natural gas pipeline		13333,~~915,703~~587		13203,~~466,787~~565		1,158,062		1,102,387
Total Assets	$	65,558,414	$	63,080,181
Eliminations		(146,003)		(89,313)		(432,498)		(376,172)
Operating Income (Loss):	$	4,948,847	$	(3,919,681)	$	3,296,472	$	(12,688,117)



	July 31, 2021		October 31, 2020
Assets:	(unaudited)
Ethanol production	$	48,698,549	$	49,613,394
Natural gas pipeline		13,779,335		13,466,787
Total Assets	$	62,477,884	$	63,080,181

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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 ~~six~~nine months ended ~~April~~July 3031, 2021 and 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, 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, 2020, and on ~~Form~~Forms 10-Q for the three months ended January 31, 2021 and April 30, 2021, 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:

●	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 Renewable Fuel Standard ~~(“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~~Renewable Fuel Standard 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;

●	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.

1918

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●	Our CEO and General Manager retired effective May 26, 2021, and as a result our Company may face challenges that arise from a transition in leadership, which may adversely affect our business; and

●	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.

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”). Agrinatural operates a natural gas pipeline that provides natural gas to Heron Lake BioEnergy, LLC’s ethanol production facility and other customers. When we use the terms “Heron Lake BioEnergy,” “Heron Lake,” or “HLBE” or similar words, unless the context otherwise requires, we are referring to Heron Lake BioEnergy, LLC and our operations at our ethanol production facility located near 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.

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 Agreement”).

Effective May 26, 2021, Jeffrey Oestmann became Chief Executive Officer (“CEO”) of the Company. GFE appointed Oestmann CEO pursuant to a letter of employment (the “Employment Agreement”) dated May 20, 2021. Pursuant to the Management Services Agreement, GFE’s executive officers also serve as executive officers of the Company. Thus, Oestmann serves as the CEO of both the Company and GFE. Oestmann replaces Steve Christensen, who had served as CEO of the Company and GFE since 2012, and who resigned as CEO effective May 26, 2021, pursuant to a separation agreement between Christensen and GFE (the “Separation Agreement”). The Employment Agreement is available on the Company’s Form 8-K filed with the SEC May 25, 2021, and is hereby incorporated by reference. The

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Management Services Agreement and Separation Agreement are available on the Company’s Form 8-K filed with the SEC February 22, 2021, and are incorporated herein by reference.

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.

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 response to repeated malfunctions with our boiler, we installed a new boiler at our plant in January 2021 at a cost of approximately $5.3 million, which has improved the efficiency and profitability of ethanol production at the plant.

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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 response to repeated malfunctions with our boiler, we installed a new boiler at our plant in January 2021 at a cost of approximately $5.3 million, which has improved the efficiency and profitability of ethanol production at the plant.

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.

Plan of Operations for the Next Twelve Months

Over the next twelve months we will continue our focus on operational improvements at our plant. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plant, continued emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies. In addition, we expect to continue to conduct routine maintenance and repair activities at the ethanol plant to maintain current plant infrastructure.

While the ~~Company~~improve ~~believes~~operating ~~the~~efficiency ~~replacement~~provided ofby the new boiler ~~has~~and ~~improved~~strong ~~the~~demand ~~operating~~for ~~performance~~transportation offuel during the ~~plant,~~spring and ~~led~~summer topeak ~~lower~~driving ~~operating~~months ~~costs~~resulted in net income during the three months ended July 31, ~~market~~2021, ~~conditions~~the ~~have~~Company ~~resulted~~believes demand for fuel may decrease in ~~tight~~the ~~margins~~coming months and as a result the Company may ~~resulted~~experience intight ~~future~~or ~~losses~~negative operating margins.

Proposed Merger with Granite Falls Energy, LLC

During the three months ended ~~April~~July 3031, 2021, the Company ~~developed~~moved forward with plans to engage in a merger with GFE, its majority owner. ~~Specifically, on March 24, 2021, the Company and GFE, executed a Merger Agreement~~ (the “Merger ~~Agreement~~”),. ~~pursuant~~A tospecial ~~which~~meeting, ~~GFE~~where ~~will~~members ~~acquire~~of the ~~minority~~Company ~~interest~~will ofvote ~~HLBE~~on (the ~~“Merger”).~~merger ~~The~~proposal ~~structure~~is ofscheduled ~~the~~for ~~proposed~~1 ~~transaction~~p.m. isThursday aSeptember ~~merger~~23, in2021, ~~which~~at ~~Granite~~the Heron ~~Merger~~Lake ~~Sub~~Community Center, ~~LLC~~312 10th Street, Heron Lake, Minnesota 56137 (the “~~Merger~~Special ~~Sub~~Meeting”). aA ~~wholly~~complete ~~owned~~description ~~subsidiary~~ of ~~GFE,~~the ~~will~~Merger ~~merge~~and ~~with~~the ~~and~~Special ~~into~~Meeting is available in the Company,’s definitive proxy statement filed with the ~~Company~~SEC ~~surviving~~on ~~the~~August ~~transaction~~19, as2021, aand ~~wholly~~is ~~owned~~incorporated ~~subsidiary~~herein ofby ~~GFE~~reference.

~~GFE~~Negotiations ~~currently~~regarding ~~owns~~the ~~approximately~~Merger 50began in early 2021.7% ofOn March 24, 2021, the Company’s ~~units.~~and ~~Pursuant~~GFE, toexecuted a Merger Agreement (the “Merger Agreement”), pursuant to which GFE will acquire the ~~remainder~~minority interest of ~~the units (the “Minority Ownership Interest”)~~HLBE. The ~~purchase~~structure ~~price~~of ~~for~~ the ~~entire~~proposed ~~Minority~~transaction ~~Ownership Interest~~ is ~~$14,000,000~~a merger in ~~cash~~which ~~payable~~Granite atHeron ~~the~~Merger ~~closing~~Sub, ofLLC, ~~the~~ (“Merger. ~~Each~~Sub”) ~~issued~~a ~~and~~wholly ~~outstanding~~owned ~~unit~~subsidiary of ~~the~~GFE, ~~Minority Ownership Interest~~ will bemerge ~~canceled~~with and ~~converted~~ into the ~~right~~Company, towith ~~receive~~the ~~$0.36405~~Company ~~per~~surviving ~~Unit. (~~the ~~“Merger~~transaction ~~Consideration”).~~as ~~Upon~~a ~~the~~wholly ~~completion~~owned subsidiary of GFE. Copies of the ~~merger~~Merger Agreement, ~~Minority~~a ~~Ownership~~Plan ~~Interest~~of ~~unitholders~~Merger ~~will~~and noassociated ~~longer~~voting ~~own~~agreements ~~any~~were ~~units~~published ofwith ~~the~~our ~~Company~~Form ~~and~~8-K ~~will~~filed nowith ~~longer~~SEC ~~have~~on ~~any~~March ~~rights~~25, as2021 aand ~~member~~are orincorporated ~~owner~~herein ofby ~~the Company~~reference.

The units of Company held by GFE immediately prior closing of Merger shall be cancelled with no consideration issued to GFE. GFE will emerge from the transaction as the sole owner of the Company. At the time the Merger becomes effective, 100 percent of the membership interest in the Merger Sub shall be converted into and become 100 percent of the membership interests in the Company, as the surviving company in the Merger.20

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~~The~~GFE ~~Merger~~currently isowns ~~subject~~approximately to50.7% ~~approval~~of by the ~~Minority~~Company’s ~~Ownership Interest~~units. WeThe ~~intend~~remaining toapproximately ~~convene~~49.3% ~~a special meeting~~ of the ~~members of the~~ Company’s tounits ~~vote~~are onowned ~~the~~by ~~proposed~~approximately ~~Merger~~1,200 investors (the “~~Special~~Minority ~~Meeting~~Ownership Interest”). Pursuant into the ~~summer~~Merger ofAgreement, ~~2021.~~GFE ~~The~~will ~~Merger~~acquire isthe ~~also~~Minority ~~conditioned~~Ownership onInterest ~~regulatory~~for ~~approval,~~$14 ~~the~~million ~~consent~~in cash payable at the ~~Company’s~~closing ~~lender,~~of ~~and~~the ~~GFE’s~~Merger. ~~ability~~Each toissued ~~obtain~~and ~~financing~~outstanding ~~for~~unit of the ~~transaction.~~Minority IfOwnership ~~such~~Interest ~~approvals~~will ~~and~~be ~~consents~~canceled ~~are~~and ~~obtained,~~converted into the ~~Merger~~right isto ~~expected~~receive to$0.36405 ~~close~~per ~~following~~Unit. (the ~~Special~~“Merger ~~Meeting~~Consideration”).

~~Upon~~The ~~closing~~Merger ofis ~~the~~subject ~~Merger,~~to approval by the ~~Company~~Minority ~~intends~~Ownership toInterest ~~file~~at athe ~~Certification~~Special ~~and~~Meeting. ~~Notice~~The ofMerger ~~Termination~~is ofalso ~~Registration~~conditioned ~~with~~on ~~the~~regulatory ~~SEC~~approval, ~~which~~the ~~will~~consent ~~allow~~ the Company’s tolender, ~~operate~~and ~~without~~GFE’s ~~being~~ability ~~registered~~to ~~with~~obtain financing for the ~~SEC~~transaction. ~~Upon~~If ~~termination~~such ofapprovals and consents are obtained, the Merger is expected to close following the Special Meeting.

Effect of the Merger

Upon the terms and subject to the conditions of the Merger Agreement, if the Merger is completed, Minority Ownership Interest unitholders will obtain the right to receive cash compensation for their units and will cease to be owners of the Company.

The Minority Ownership Interest comprises 38,456,283 units. If the Merger is completed, each issued and outstanding unit of the Minority Ownership Interest will be canceled and converted into the right to receive $0.36405 per unit. Upon the completion of the Merger, Minority Ownership Interest unitholders will no longer own any units of the Company and will no longer have any rights as a member of the Company. The units of Company held by GFE immediately prior closing of Merger shall be cancelled with no consideration issued to GFE. GFE will emerge from the transaction as the sole owner of the Company. At the time the Merger becomes effective, 100 percent of the membership interest in the Merger Sub shall be converted into and become 100 percent of the membership interests in the Company, as the surviving company in the Merger.

The Company has identified an exchange agent to administer the distribution of Merger Consideration to Minority Ownership Interest unitholders. If the Merger is completed, information will be distributed to unitholders regarding the process for exchanging their unit certificates for Merger Consideration. A process will be made available for unitholders who cannot locate their unit certificates to verify their ownership interest and receive Merger Consideration. Additional information regarding the Exchange Agent is available in our definitive proxy statement filed with the SEC on August 19, 2021, and is incorporated herein by reference.

As a result of the Merger, members of the Minority Ownership Interest would not have the ability to participate in any possible value appreciation experienced by the Company above the pro rata share of the $14 million sales price. Comparatively, by ceasing to be owners or members of the Company, members of the Minority Ownership Interest would not face any potential future risk regarding their investment in the Company upon completion of the Merger. Also upon consummation of the Merger, by ceasing to be owners or members of the Company, members of the Minority Ownership Interest would not face the prospect of participating in any decrease in value of their respective ownership below the pro rata share of the $14 million sales price.

Upon completion of the Merger, the Company is expected to continue operating its ethanol production plant in Heron Lake, Minnesota. No significant changes are expected in the operation of the Company’s ethanol plant. Upon consummation of the Merger, the Company would combine its assets with GFE for potentially more advantageous leverage terms with lenders.

The Company, which is currently managed by GFE’s executive officers pursuant to the Management Services Agreement, would continue to be managed by GFE’s executive officers if the Merger is completed. Upon consummation of the Merger, the Company’s Board of Governors would cease to exist, and GFE’s Board of Governors would assume managerial and oversight control over the Company in conjunction with GFE’s executive officers. Upon completion of the Merger, and the subsequent elimination of the Company’s Board of Governors, the Company would lose the insight of Governors engaged in the local production of corn. As a result, the Company may have less insight about the local corn market. Comparatively, the elimination of the Company’s Board of Governors would result in more efficient management of the Company provided the centralized nature of management and oversight duties that GFE’s Board of Governors and GFE’s executive officers would impart. By eliminating the Company’s Board of Governors and centralizing management and oversight duties with GFE’s Board of Governors and executive officers, the Company would save approximately $165,000 in annual Governor compensation pursuant to the information set forth in the Company’s Definitive Proxy

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~~Company’s~~Statement ~~SEC~~dated ~~registration,~~February ~~the Company will no longer be required to file quarterly and annual reports with the SEC. GFE~~26, ~~which~~2021 ~~will~~under ~~become~~ the ~~Company’s~~Caption ~~sole~~“Required ~~owner~~Information ~~upon~~— ~~closing~~Governor ~~of the Merger~~Compensation,” ~~will~~which ~~continue~~is toincorporated beherein ~~registered~~by ~~with the SEC and will continue to file required SEC reports after completion of the Merger~~reference.

AAdditionally, ~~complete~~upon ~~description~~completion of the Merger, ~~and~~ the ~~Merger~~Company ~~Agreement~~intends isto ~~available~~file infor de-registration with the ~~Company’s~~SEC ~~preliminary~~by ~~proxy~~duly ~~statement~~filing ~~filed~~a Form 15 with the SEC. onIf ~~May~~the 21Company is allowed to de-register, ~~2021~~it would no longer be required to file annual, quarterly, and iscertain ~~hereby~~other ~~incorporated~~reports bywith ~~reference~~the SEC. ~~Copies~~By ofde-registering with the ~~Merger~~SEC ~~Agreement,~~and ano ~~Plan~~longer ofbeing ~~Merger~~subject ~~and~~to ~~associated~~the ~~voting~~various ~~agreements~~reporting ~~were~~requirements ~~published~~of ~~with~~the ~~our~~Securities ~~Form~~Exchange ~~8-K~~Act ~~filed~~of ~~with~~1934, ~~SEC~~management onestimates ~~March~~the 25Company would save approximately $300,000 ~~2021~~in ~~and~~filing ~~are~~fees ~~herein~~on ~~incorporated~~an byannual ~~reference~~basis.

~~Effect~~Pursuant ifto the Merger isAgreement, ~~Not~~GFE ~~Completed~~ and HLBE would release, acquit, and discharge each other and all related parties from all claims, including, all liabilities, obligations, claims, litigation, actions, causes of action, suits, proceedings, executions, judgments, demands, damages, losses, duties, debts, dues, accounts, fees, costs, expenses and penalties, and agree not to initiate, maintain, prosecute or continue to maintain or prosecute any action, suit or proceeding, or seek to enforce any right or claim against the other or its related parties.

IfUpon completion of the Merger, isProject ~~not~~Viking, ~~completed~~as the holding entity of the Company, would remain an approximately 50.7% owner of the Company’s ~~unitholders~~with ~~will~~GFE ~~not~~holding ~~receive~~the remaining approximately 49.3% interest, rather than the ~~Merger~~members ~~Consideration~~of orthe ~~any~~Minority ~~other~~Ownership ~~payment~~Interest. ~~for~~Provided ~~their~~that ~~units~~the members of the Minority Ownership Interest would no longer possess ownership rights in the Company. ~~Instead~~upon consummation of the merger, this would result in more efficient management of the Company ~~will~~given ~~remain~~that amembers ~~majority-owned~~of ~~subsidiary~~the Minority Ownership Interest would cease to be involved in future member meetings of ~~GFE.~~the Company.

~~Further,~~Upon ~~the~~completion ~~Company~~of ~~has experienced significant net losses due to several factors, including elevated corn prices,~~ the ~~breakdown of our ethanol plant’s boiler~~Merger, ~~and~~Merger ~~reduced~~Sub ~~demand~~would ~~for~~solely ~~ethanol~~serve ~~due~~ to ~~several~~effectuate ~~factors, including~~ the ~~COVID-19~~Merger ~~pandemic. Due to these net losses, the Company has violated certain loan covenants during the past fiscal year related to working capital~~ and ~~net worth ratio, for which the Company has obtained waivers from its lender. The Company was in compliance with its debt covenants on April 30, 2021. However, future violations of these loan covenants~~ would ~~allow~~cease ~~the Company’s lender~~ to ~~accelerate~~exist ~~certain~~by ~~loans~~operation ~~and~~of ~~designate~~law aonce ~~substantial portion of~~ the ~~Company’s~~Merger ~~debt~~is ~~due and payable~~complete. If the ~~Company’s~~Merger ~~loans~~is ~~became due and payable~~completed, ~~there~~100% isof ~~a substantial risk~~ the ~~Company~~membership ~~would~~interest ~~lack~~in ~~the~~Merger ~~cash~~Sub onwould ~~hand,~~be ~~borrowing~~converted ~~capacity,~~into and ~~cash~~become ~~flows~~100% toof ~~repay~~ the ~~debt,~~membership ~~and~~interest ifin ~~this were to occur~~GFE, as the ~~Company~~surviving ~~could~~company bein ~~forced~~the ~~to cease operations or seek bankruptcy protection~~Merger.

~~While~~Effect ~~the~~if ~~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. If the~~ Merger is ~~not~~Not completed, 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.Completed

~~Appointment~~If the Merger and the transactions contemplated thereby are not completed, the Company’s members will not receive the Merger Consideration or any other payment for their units of ~~Jeffrey~~the ~~Oestmann~~Company. Instead, asthe ~~CEO~~Company will remain a majority-owned subsidiary of GFE, with GFE controlling approximately 50.7% of the Company’s units and the Minority Ownership Interest controlling the remaining units.

~~GFE~~Further, ~~appointed~~the ~~Jeffrey~~Company ~~Oestmann~~believes asthat ~~Chief~~if ~~Executive~~the ~~Officer~~Merger ~~(“CEO”)~~is ~~effective~~not ~~May~~completed ~~26,~~there ~~2021,~~is ~~pursuant~~risk tothe aCompany ~~letter~~could ofdefault ~~employment~~on ~~(the~~its ~~“Employment~~loans ~~Agreement”)~~and ~~dated~~be ~~May~~forced ~~20,~~to ~~2021.~~cease ~~Pursuant~~operations toor ~~the~~seek ~~Management~~bankruptcy ~~Services~~protection. ~~Agreement,~~Prior ~~GFE’s~~to ~~executive~~the ~~officers~~three-month ~~also~~period ~~serve~~ended asJuly ~~executive~~31, ~~officers~~2021, of the Company. ~~Thus,~~experienced ~~Oestmann~~significant ~~began~~net ~~serving~~losses asdue ~~CEO~~to ofseveral ~~the~~factors, ~~Company~~including ~~effective~~elevated ~~May~~corn 26prices, ~~2021.~~the ~~Oestmann~~breakdown ~~replaces~~of ~~Steve~~our ~~Christensen~~ethanol plant’s boiler, ~~who~~and ~~had~~reduced ~~served~~demand asfor ~~CEO~~ethanol ofdue to the ~~Company~~COVID-19 ~~and~~pandemic. Due ~~GFE~~to ~~since~~these ~~2012~~net losses, ~~and~~the ~~who~~Company ~~resigned~~violated ascertain ~~CEO~~loan ~~effective~~covenants ~~May~~related ~~26,~~to ~~2021,~~working ~~pursuant~~capital toand anet ~~separation~~worth, ~~agreement~~for ~~between~~which ~~Christensen~~the ~~and~~Company ~~GFE~~obtained ~~(the~~waivers ~~“Separation~~from ~~Agreement”)~~its lender. The ~~Employment~~Company ~~Agreement~~was isin ~~available~~violation onof ~~the~~such ~~Company’s~~loan ~~Form~~covenants ~~8-K~~as ~~filed~~of ~~with~~October ~~the~~31, ~~SEC~~2020, ~~May~~and 25January 31, 2021,. ~~and~~As isa ~~hereby~~result ~~incorporated~~of bythese ~~reference.~~loan ~~The~~covenant ~~Management~~violations, ~~Services~~the ~~Agreement~~Company ~~and~~reported ~~Separation~~that ~~Agreement~~as ~~are~~of ~~available~~January on31, ~~the~~2021, ~~Company’s~~there ~~Form~~was ~~8-K~~substantial ~~filed~~doubt ~~with~~about the ~~SEC~~Company’s ~~February~~ability ~~22,~~to ~~2021,~~continue ~~and~~operating ~~are~~as ~~hereby~~a ~~incorporated~~going ~~by reference~~concern.

~~Trends~~Due to improved market conditions and ~~Uncertainties~~operating ~~Impacting~~efficiency, ~~Our~~the ~~Operations~~Company was in compliance with its debt covenants on April 30, 2021 and as of July 31, 2021. However, management believes it is possible market conditions to will worsen in the near future due to various factors including decreased demand for transportation fuel in the winter months. Accordingly, it possible that the Company will incur future instances of loan covenant violations for which the Company’s lender will not provide a waiver. Future violations of these loan covenants would allow the Company’s lender to accelerate certain loans and designate a substantial portion of the Company’s debt due and payable. If the Company’s loans became due and payable, there is a substantial risk the Company would lack the cash on hand, borrowing capacity, and cash flows to repay the debt, and if this were to occur, the Company could be forced to cease operations or seek bankruptcy protection. If this were to occur, our members could lose a substantial portion of their investment in the Company.

The ~~principal~~Company ~~factors~~believes ~~affecting~~the ~~our~~Merger ~~results~~will ofreduce ~~operations and financial conditions are~~ the ~~market~~risk ~~prices~~of ~~for corn, ethanol, distillers’ grains, and natural gas. As a result, our operating results can fluctuate substantially due to volatility in~~ these ~~commodity~~potential ~~markets. Governmental~~adverse ~~programs~~consequences ~~designed~~because toas ~~create incentives for the use of corn-based ethanol also have~~ a ~~significant~~wholly ~~impact~~owned onsubsidiary ~~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~~GFE, ~~“PART~~the IICompany -is ~~Item~~expected ~~1A.~~to ~~Risk~~have ~~Factors”~~adequate ofworking ~~our~~capital ~~quarterly report on Form 10-Q for the three months ended January 31, 2021,~~ and ~~“PART~~net Iworth -to ~~Item~~avoid ~~1A.~~loan ~~Risk~~covenant ~~Factors” of our annual report on Form 10-K for the fiscal year ended October 31, 2020~~violations.

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

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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.

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 report on Form 10-Q for the three months ended January 31, 2021, “PART II - Item 1A. Risk Factors” of our quarterly report on Form 10-Q for the three months ended April 30, 2021, and “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, 2020, which are incorporated herein by reference.

Our operations are highly dependent on commodity prices, especially 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. 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.

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, which can cause our operating margins 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 believes that the ethanol outlook in the fiscal year 2021 will remain relatively consistent with this quarter. The widespread distribution of COVID-19 vaccines and the subsequent reopening of many business have improved the overall economic outlook and the demand for fuel, including the ethanol we produce. However, lingering effects of the COVID-19 pandemic and other factors could continue to negatively affect our profitability. Additionally, continued large corn supplies and increases in ethanol production capacity could negatively affect our profitability. This negative impact could worsen if domestic ethanol inventories increase, or if U.S. exports of ethanol decline.

~~Ethanol~~Management ~~production~~believes ~~largely~~that ~~rebounded~~the ~~and~~ethanol ~~remained~~outlook ~~steady~~for ~~in late 2020 after briefly and significantly declining during~~ the ~~second~~remainder ~~fiscal quarter~~ of ~~2020~~fiscal atyear ~~the~~2021 ~~onset~~will ofremain ~~the~~steady ~~COVID-19~~or ~~pandemic.~~worsen Incompared to the three months ended ~~April~~July 3031, 2021, ~~ethanol production briefly and significantly declined again~~ due to ~~the~~various ~~severe~~factors ~~weather~~including ~~incidents.~~seasonal ~~Unusually~~decreases ~~cold weather affecting much of the United States~~ in ~~February 2021 disrupted~~ the ~~supply~~demand offor ~~natural~~transportation ~~gas~~fuel and asthe aongoing ~~result~~effects ~~natural~~of ~~gas~~the ~~spot prices approached record~~COVID-~~high~~19 ~~levels~~pandemic. ~~Many~~The ~~ethanol~~spread ~~production~~of ~~facilities,~~the ~~including~~coronavirus ~~our~~Delta ~~plant,~~variant ~~rely~~could onlead ~~natural gas~~ to ~~process~~increased ~~corn~~COVID-19 ~~into ethanol. As a result~~infections, inwhich ~~February~~could ~~2021~~reduce ~~many~~demand ~~fuel~~for ~~ethanol~~travel ~~producers reduced production rates~~ and ~~estimated~~thereby ~~fuel~~reduce ~~ethanol~~for ~~margins~~transportation ~~fell to negative levels. U.S. weekly~~ fuel ~~ethanol production fell to an average of 658~~,~~000~~ ~~barrels~~including ~~per day (b/d) during~~ the ~~week~~ethanol ofwe ~~February 21~~produce. Additionally, ~~2021,~~continued ~~which~~large ~~was~~corn ~~the~~supplies ~~lowest weekly production level since May 11, 2020,~~ and ~~38%~~increases ~~lower~~in ~~than~~ethanol atproduction ~~the~~capacity ~~same~~could ~~time~~negatively ~~last~~affect ~~year,~~our ~~according to the U~~profitability.S. ~~Energy~~This ~~Information~~negative ~~Administration~~impact ~~(“EIA”).~~could ~~Production~~worsen ~~rates~~if ~~have~~domestic ~~since returned to average levels, but fuel~~ ethanol inventories ~~remain~~increase, ~~lower~~or ~~than~~if ~~their typical seasonal averages heading into the summer driving season~~U.S. ~~While~~exports ~~the~~of ~~reduction in~~ ethanol inventory may result in higher prices for ethanol and higher operating margins for the Company, management expects ethanol production and inventories to rebound industrywide and margins for our Company to remain tightdecline.

During the three months ended July 31, 2021, domestic ethanol production rebounded to pre-pandemic levels, with U.S. ethanol plants producing more than 1 million barrels of fuel ethanol per day for the first time since March 2020, according to the U.S. Energy Information Administration (“EIA”). The weekly averages of domestic fuel ethanol production ranged from 979,000 barrels per day to 1.067 million barrels per day during the three months ended July 31, 2021, according to the EIA.

In previous quarters, ethanol production had been suppressed due to the effects of the COVID-19 pandemic, as well as severe whether events. In 2020, some U.S. ethanol plants, including ours, temporarily suspended production due to negative margins caused by low demand for fuel due to the effects of the COVID-19 pandemic. Additionally, unusually cold weather affecting much of the United States in February 2021 disrupted the supply of natural gas and as a result natural gas spot prices approached record-high levels. Many ethanol production facilities, including our plant, rely on natural gas to process corn into ethanol. As a result, in February 2021 many fuel ethanol producers reduced production rates and estimated fuel ethanol margins fell to negative levels. U.S. weekly fuel ethanol production fell to an average of 658,000 barrels per day during the week of February 21, 2021, which was the lowest weekly production level since May 11, 2020, according to the EIA.

Ethanol production is projected to remain steady in 2021 and increase slightly in 2022. The EIA projects fuel ethanol production will average 970,000 barrels per day in 2021, up from 910,000 barrels per day in 2020. Further, EIA

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projects fuel ethanol production will average 1.01 million barrels per day in 2021. Continued ethanol production capacity increases could also have a negative impact on the market price of ethanol, which could negatively affect our profitability.

Additionally, a decrease in exports could reduce demand for biofuel including the ethanol we produce. Annual U.S. fuel ethanol exports decreased by 9% in 2020, marking the second consecutive annual drop in U.S. fuel ethanol experts and the lowest level for such exports since 2015, according to the EIA. Exports of U.S. fuel ethanol to Brazil, the world’s second largest consumer of fuel ethanol, decreased significantly in 2020. All U.S. fuel ethanol exports to Brazil now face a 20% Brazilian tariff since a tariff-free fuel ethanol quote expired in December 2020. The new tariff will likely lower U.S. fuel ethanol export volumes to Brazil in the near term, according to the EIA. As a result, demand for biofuel, including our ethanol, could decrease.

Further, management believes that waivers of small refiner renewable volume obligations (“RVOs”) by the U.S. Environmental Protection Agency (“EPA”), as well as uncertainty regarding enforcement of the RFS , could contribute to negative or low margins.

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 ~~May~~August 2021 Short Term Energy Outlook, ~~EIA estimates that~~ U.S. gasoline consumption ~~will~~is forecast to average 98.06 million barrels per day ~~this~~in ~~summer (April through September)~~2021, up from 7.8.0 million barrels per day ~~during~~in ~~the~~2020. ~~summer~~Further, ofEIA ~~2021~~forecasts ~~but~~U.S. ~~down~~gasoline ~~from~~consumption 0to average 9.60 million barrels per day ~~from~~in ~~summer 2019~~2022. U.S. Inregular ~~addition,~~gasoline ~~EIA~~retail ~~forecasts~~prices ~~relatively~~averaged ~~stable~~$3.14 ~~prices~~per ~~for~~gallon in ~~crude oil~~July, ~~projecting~~the ~~Brent~~highest ~~crude~~monthly ~~oil~~average ~~prices~~price since October 2014, according to ~~average~~the ~~$65~~EIA, ~~per~~which ~~barrel~~noted inthat ~~the~~recent ~~second~~gasoline ~~quarter~~price ofincreases ~~2021,~~reflect ~~$61~~rising ~~per~~crude ~~barrel~~oil ~~for~~prices ~~the~~and ~~remainder~~rising ofwholesale ~~the~~gasoline ~~year~~margins, ~~and~~amid ~~$61~~relatively ~~per~~low ~~barrel~~gasoline ininventories. ~~2022~~EIA projects that U.S. ~~Decreases~~regular ingasoline ~~the~~prices ~~price~~will ~~for~~average ~~crude~~$3.12 ~~oil~~per ~~generally~~gallon ~~have~~in aAugust ~~negative~~before ~~impact~~falling onto $2.82 per gallon in the ~~demand~~fourth ~~for~~quarter ~~ethanol~~of 2021.

~~Continued~~In ~~ethanol~~addition, ~~production~~EIA ~~capacity~~forecasts ~~increases~~moderate ~~could~~declines ~~also~~in ~~have~~the aprices ~~negative~~for ~~impact~~crude onoil, ~~the~~projecting ~~market~~Brent ~~price~~crude ofoil ~~ethanol,~~prices ~~which~~to ~~could~~decline befrom ~~further~~an ~~exacerbated~~average ifof ~~domestic~~$75 ~~ethanol~~a ~~inventories~~barrel ~~remain~~in ~~high~~July orto ~~grow,~~an oraverage ifof ~~U.S.~~$72 ~~exports~~per ofbarrel ~~ethanol~~in ~~decline.~~August ~~Throughout~~through ~~2019~~November. ~~and~~In ~~2020~~2022, ~~some~~EIA ~~U.S.~~projects ~~ethanol~~Brent ~~plants~~crude ~~temporarily~~prices ~~suspended~~to ~~production~~decrease to an average of $66 per barrel, due to ~~negative~~supply ~~margins,~~growth ~~largely~~as ~~resulting~~a ~~from~~result ~~the~~of ~~COVID-19~~increased ~~pandemic,~~international and ~~stagnant~~domestic ~~export~~production. ~~projections~~Decreases ~~caused~~in bythe ~~trade~~price ~~barriers~~for ~~and~~crude ~~decreased~~oil ~~global~~generally ~~demand~~have ina ~~connection~~negative ~~with~~impact on the ~~COVID-19~~demand ~~pandemic~~for ethanol.

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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 2020, and into 2021 as the COVID-19 pandemic greatly reduced travel and ~~thus~~thereby reduced demand for fuel, including the ethanol we produce. Reduced demand and high industry inventory levels resulted in record low ethanol prices in the spring of 2020. As a result, we 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. Fuel prices generally, and ethanol prices specifically, have rebounded since the spring of 2020 and remained steady during the three and nine months ended ~~April~~July 3031, 2021. However, ~~and~~the ~~management~~spread ~~believes~~of ~~there~~new iscoronavirus ~~potential~~variants ~~for~~may ~~fuel~~result ~~demand~~in tonew ~~increase~~waves as COVID-19~~-related~~ ~~restrictions~~infections, ~~are~~which ~~lifted~~may ~~and~~lead ~~travel~~to ~~increases.~~reduced ~~However,~~travel itand isthereby ~~possible~~reduce ~~that unforeseen consequences of~~ the ~~pandemic~~demand orfor ~~other~~transportation ~~factors will cause~~ fuel, ~~demand~~including ~~and~~the ethanol ~~prices~~we ~~to remain flat or decrease, thus negatively affecting our business~~produce. The Company continues to monitor COVID-19 developments to determine if 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.

Management believes that various factors, including unemployment benefits offered in response to the COVID-19 pandemic, have ~~exacerbated~~contributed anto ~~ongoing~~ labor ~~shortage~~shortages. While we currently have sufficient employees to operate our production facility, it is possible that the current shortage of qualified, available workers could result in higher labor costs and could negatively affect our ability to efficiently operate our production facility.

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facility, it is possible that the current shortage of qualified, available workers could result in higher labor costs and could negatively affect our ability to efficiently operate our production facility.

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. Various factors, including disruptions caused by the COVID-19 pandemic, have resulted in significant increases in the costs of raw materials, including the corn and natural gas we rely on to produce ethanol. 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 affected.

PPP Loans

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. This note was forgiven in full 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~~which ~~and~~was ~~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~~full ~~2022 with a final installment~~ in ~~February~~August ~~2026~~2021.

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Outlook

~~The~~During ~~adverse~~the ~~conditions~~three ~~created~~months byended ~~the~~July ~~COVID-19~~31, ~~pandemic~~2021, ~~caused~~ the Company toexperienced ~~experience~~improved ~~negative~~market ~~operating~~conditions ~~margins,~~as ~~significantly~~the ~~lower~~adverse ~~cash~~effects ~~flow~~of ~~from~~the ~~operations~~COVID-19 ~~and~~pandemic ~~substantial net losses~~subsided. As a result, wethe ~~have~~Company experienced ~~instances~~improved ofprofitability ~~noncompliance~~in ~~with~~the ~~certain~~recent ~~loan~~three-month ~~covenants~~period. ~~related~~However, tothe ~~our~~pandemic ~~working~~is ~~capital~~ongoing and ~~net~~various ~~worth~~dynamic ~~ratio~~factors, ~~for~~including ~~which~~ the ~~Company~~spread ~~has received waivers from its lender. We were in compliance with our financial covenants as~~ of ~~April~~new 30coronavirus variants, ~~2021.~~make ~~However,~~it ~~failure~~difficult to ~~comply~~forecast ~~with~~ the ~~protective~~long-term ~~loan~~effects ~~covenants or maintain the required financial ratios in the future may cause acceleration~~ of the ~~outstanding~~pandemic ~~principal balances~~ on ~~the~~our ~~revolving~~industry ~~term~~as ~~loan~~a whole and~~/or~~ ~~the~~our ~~imposition~~Company ~~of fees, charges, or penalties~~specifically.

~~While the~~ ~~lifting~~It ofis ~~restrictions~~possible ~~related~~that toeven ~~COVID-19~~after ~~has improved~~ the ~~overall economic outlook, the~~ pandemic ~~is ongoing~~subsides, ~~and~~there ~~its~~will ~~dynamic~~be ~~nature~~permanent ~~makes~~changes ~~it difficult~~ to ~~forecast~~social ~~the~~and ~~long-term~~economic ~~effects~~patterns onthat ~~our~~will ~~industry~~reduce asdemand afor ~~whole~~ethanol. ~~and~~For ~~our~~example, ~~Company~~increased ~~specifically.~~adoption Itof is“work ~~possible~~from ~~that~~home” ~~even~~policies asor ~~the pandemic subsides~~tele-commuting, ~~there~~and ~~will~~the beuse ~~permanent~~virtual ~~changes~~meetings toin ~~social~~place ~~and~~of ~~economic~~in-person ~~patterns~~meetings, ~~that~~may ~~will~~permanently reduce ~~demand~~business ~~for~~travel ~~ethanol,~~and ~~such~~thereby asreduce ~~reduced~~the ~~travel~~demand ~~due~~for totransportation anfuel, ~~increase~~including inthe ~~remote~~ethanol ~~working~~we produce.

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 Fuel 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.

~~However,~~ ~~President~~The ~~Joe~~EPA ~~Biden’s~~enforces ~~administration,~~the ~~which~~RFS ~~took~~by ~~office~~establishing inrenewable ~~January~~volume ~~2021~~obligations (“RVOs”), ~~has~~which ~~indicated~~require ~~support~~a ~~for~~certain ~~RFS~~number ~~blending~~gallons ~~rules~~of ~~and~~different ~~energy~~types ~~policies~~of ~~that~~renewable ~~could~~fuels, beincluding ~~beneficial~~corn-based ~~to the~~ ethanol ~~industry and our business. Specifically~~, ~~the~~to ~~EPA~~be ~~under~~blended ~~the~~with ~~Biden~~gasoline ~~administration~~in ~~has announced it supports~~ the ~~interpretation of the RFS’s small-refinery provisions made by~~ U.S. ~~Court~~by ofrefineries, ~~Appeals for the Tenth Circuit in a 2020 decision. In the case~~blenders, ~~Renewable Fuels Association et al. v. EPA~~distributors, ~~various agriculture~~ and ~~biofuel groups challenged the EPA’s grant of waivers to three specific refineries~~importers. ~~The~~Changes ~~waived gallons were not redistributed~~ to ~~obligated parties, and thus reduced~~ the ~~aggregate~~RVO ~~RVOs~~levels ~~under~~have ~~the~~a ~~RFS. In~~significant ~~January~~impact ~~2020,~~on the ~~court~~demand ~~struck~~for ~~down the exemptions as improperly issued by the EPA~~ethanol. As ~~The court interpreted the RFS statute to require that any exemption granted to a small refinery after 2010 must take the form~~ of anAugust ~~“extension.” In February~~ 2021, the EPA ~~announced~~had itnot ~~supported~~yet ~~the~~released ~~10th~~RVO ~~Circuit’s~~requirements ~~interpretation~~for 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 support energy policies that benefit the ethanol industry and our business. The case was appealed to the U.S. Supreme Court, which heard arguments in the case in April 2021. ~~The~~Industry ~~Supreme~~observers ~~Court’s~~have ~~decision~~reported ~~in the case is expected in the summer of 2021.~~

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that the EPA is expected to propose a decrease in RVO levels in 2021, compared to the previous year, and a slight increase in 2022 RVO levels. A decrease in RVO levels is generally correlated with a decrease in demand for renewable fuels, including the ethanol we produce.

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 small refinery exemptions, whereby such refiners were alleviated of their responsibility to supply RINS for their obligated volumes based upon the grounds of economic hardship. Such exemptions decrease the amount of renewable fuel that must be blended into gasoline supplies and thereby reduce demand for renewable fuel, including the ethanol we produce.

On June 25, 2021, the U.S. Supreme Court provided a significant setback for the ethanol industry, issuing a ruling that will make it easier for small refineries to secure exemptions from the RVOs. The case was brought by a coalition of farm and ethanol groups, which challenged the hardship exemptions claimed by certain small refineries. In its decision, the U.S. Supreme Court ruled against the farm and ethanol coalition, holding that small refineries could apply for an extension to their hardship exemptions from the RFS’ blending requirements, even if such refineries’ exemptions had previously lapsed. The ruling overturned a 2020 decision from the United States Court of Appeals for the Tenth Circuit. The Supreme Court’s decision is expected to lead to more small refinery exemptions in the near future and thereby decrease demand for renewable fuels, including the ethanol we produce.

Additional legal actions related to the RFS are underway. These include lawsuits challenging fuel volume waivers based on “inadequate domestic supply,” challenging the EPA’s lower threshold for granting small refinery exemptions, seeking broader, forward-looking remedy to account for the collective lost volumes caused by recent small refinery exemptions, alleging that the EPA and U.S. Department of Energy have improperly denied access to public records request by RFA, and challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. If these legal actions, which generally seek to require the EPA to enforce the renewable fuel blending requirements of the RFS, are unsuccessful, there may negative impacts on the ethanol industry and our financial performance.

25Refineries and other entities subject to the RFS use renewable identification numbers (“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 and influences the purchasing decisions by obligated parties.

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The prices of renewable identification number (“RIN”) credits — the compliance mechanisms for the RFS program administered by the U.S. Environmental Protection Agency (“EPA”) — increased during the three months ended April 30, 2021, briefly approaching their highest nominal levels in the history of the program. The corn ethanol (D6) RIN price reached more than $1.00 per gallon (gal) in late January and early February 2021, the highest price since 2013, when the D6 RIN price reached an all-time high. The price of RIN credits reflects compliance and trading activity related to the RFS and can either be used to comply with the RFS or traded in the secondary market to buyers seeking to comply with the RFS. Increases in RIN prices can encourage increased biofuel consumption, according to the EIA.

During the three month period ended July 31, 2021, the prices of RIN credits — the compliance mechanisms for the RFS — sharply increased, rising to the highest levels ever in the 13-year history of the RFS program. As of May 28, 2021, corn fuel ethanol D6 RIN prices had increased by 129% since the beginning of the year, according to the EIA. Increases in RIN prices can encourage increased biofuel consumption. The increase in RIN prices was due, in part, to elevated prices of agricultural feedstocks, such as corn, which are used as an input in biofuels, including the ethanol we produce. In August 2021, RIN prices decreased dramatically following the publication of reports indicating the EPA would lower the 2021 RVO blending mandates below the 2021 levels. Further decreases in the prices of RINs may result in reduced demand for renewable fuels, including the ethanol we produce.

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 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 first 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.

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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 $595,693~~. Management expects the entire loan will be used for payroll~~, ~~utilities~~which ~~and~~was ~~interest;~~forgiven ~~therefore,~~in ~~management~~full ~~anticipates~~in ~~that~~August ~~the loan will be substantially forgiven~~2021.

On March 11, 2021, the federal government enacted the American Rescue Plan Act of 2021, which provided $1.9 trillion in economic stimulus through various programs intended to accelerate the nation’s recovery from the COVID-19 pandemic. The American Rescue Plan primarily provided additional funding for programs created in previous COVID-19 legislation, such as increased unemployment benefits, direct payments to households, expanded paid sick leave, increased food stamp benefits, rental assistance, and small business grants. Management believes the legislation could contribute to inflation, including increases in the costs of labor and the raw materials we require to produce ethanol, and thus could negatively affect our operating margins.

Infrastructure Legislation

~~Results~~On August 10, 2021, the U.S. Senate passed a $1 trillion infrastructure bill, which includes funding for various transportation and utility projects. The infrastructure legislation includes various aspects that could affect the ethanol industry as a whole and our Company specifically. The legislation, if enacted, would provide funding for roads, bridges, and other transportation infrastructure, which could increase demand for travel, and thereby increase demand for transportation fuel, including the ethanol we produce. However, the infrastructure bill also includes funding for electric vehicle charging stations, which could increase the adoption of ~~Operations~~electric vehicles and thereby reduce demand for transportation fuel, including the ~~Three~~ethanol ~~Months~~we ~~Ended~~produce. ~~April~~Moreover, 30the infrastructure bill has been criticized by ethanol industry leaders for failing to provide supports for the ethanol industry. For example, ~~2021~~the bill does not provide incentives for retailers to sell E15 and ~~2020~~E85 gasoline; nor does it provide incentives for automakers to produce flexible fuel vehicles. Additionally, Management believes the legislation could contribute to inflation, including increases in the costs of labor and the raw materials we require to produce ethanol, and thus could negatively affect our operating margins.

~~The~~Results ~~following table shows summary information from the results~~ of ~~our~~Operations ~~operations~~for ~~and~~ the ~~approximate~~Three ~~percentage~~Months ofEnded ~~revenues,~~July ~~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 April 30, 2021 and 2020 (amounts in thousands).


	Three Months Ended April 30,
	2021				2020
		(unaudited)				(unaudited)
Statement of Operations Data			%				%
Revenues	$	37,033	100.0	%	$	15,605	100.0	%
Cost of Goods Sold		33,630	90.8	%		21,049	134.9	%
Gross Profit (Loss)		3,403	9.2	%		(5,444)	(34.9)	%
Operating Expenses		(1,033)	(2.8)	%		(975)	(6.2)	%
Operating Income (Loss)		2,370	6.4	%		(6,419)	(41.1)	%
Other Income, net		506	1.4	%		177	0.1	%
Net Income (Loss)	$	2,876	7.8	%	$	(6,242)	(40.0)	%

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 July 31, 2021 and 2020 (amounts in thousands).


	Three Months Ended July 31,
	2021				2020
		(unaudited)				(unaudited)
Statement of Operations Data			%				%
Revenues	$	49,981	100.0	%	$	14,165	100.0	%
Cost of Goods Sold		44,095	88.2	%		17,315	122.2	%
Gross Profit (Loss)		5,886	11.8	%		(3,150)	(22.2)	%
Operating Expenses		(937)	(1.9)	%		(770)	(5.4)	%
Operating Income (Loss)		4,949	9.9	%		(3,920)	(27.7)	%
Other Expense, net		(107)	(0.2)	%		(41)	(0.3)	%
Net Income (Loss)	$	4,842	9.7	%	$	(3,961)	(28.0)	%

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 99.18% of our total revenues for the three months ended ~~April~~July 3031, 2021 and approximately 9899.51% of our total revenues for the three months ended ~~April~~July 3031, 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 0.92% of our consolidated revenues for the three months ended ~~April~~July 3031, 2021 and approximately 10.69% of our consolidated revenues for the three months ended ~~April~~July 3031, 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 April 30, 2021:27

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	Three Months Ended ~~April~~July 3031, 2021
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	2939,~~321~~648	79.23	%
Distillers' grains sales		57,~~227~~221	14.14	%
Corn oil sales		12,~~857~~582	5.02	%
Corn syrup sales		~~304~~411	0.89	%
Agrinatural revenues (net of intercompany eliminations)		~~324~~119	0.92	%
Total Revenues	$	3749,~~033~~981	100.0	%


	Three Months Ended ~~April~~July 3031, 2020
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	11,~~094~~920	7184.12	%
Distillers' grains sales		31,~~347~~646	2111.46	%
Corn oil sales		~~735~~402	42.78	%
Corn syrup sales		~~192~~71	10.25	%
Agrinatural revenues (net of intercompany eliminations)		~~237~~126	10.69	%
Total Revenues	$	1514,~~605~~165	100.0	%

Our total consolidated revenues increased approximately ~~137~~252.38% for the three months ended ~~April~~July 3031, 2021, as compared to the three months ended ~~April~~July 3031, 2020, due to increases in the ~~volume~~prices ~~produced~~received for and quantities sold of each of our principal products: ethanol, distillers’ grains, and corn oil. Notably, we idled our plant during a portion of the ~~price~~three months ended July 31, 2020, due to the brief and severe economic downturn caused by the onset of the COVID-19 pandemic, which caused a decrease in the production of our principal products. The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended July 31, 2021 and 2020:

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ethanol, distillers’ grains, and corn oil. The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended April 30, 2021 and 2020:


	Three Months Ended ~~April~~July 3031, 2021			Three Months Ended ~~April~~July 3031, 2020
	Quantity Sold	Avg. Net Price		Quantity Sold	Avg. Net Price
Product	(in thousands)			(in thousands)
Ethanol (gallons)	1716,~~280~~000	$	12.7048	10,~~171~~452	$	1.0914
Distillers' grains (tons)	3437	$	~~151~~192.6564	2415	$	~~139~~107.5498
Corn oil (pounds)	4,~~079~~854	$	0.4653	21,~~816~~623	$	0.2624

Ethanol

Total revenues from sales of ethanol increased by approximately ~~164~~232.36% for the three months ended ~~April~~July 3031, 2021, compared to the same period of 2020 due to an approximately 6953.91% increase in the volume of ethanol sold from period to period and an approximately 56117.03% increase in the average price received for ethanol. The increase in volume was due to the fact that the Company’s plant was idled for part of three months ended ~~April~~July 3031, 2020, in response the brief and severe decrease in fuel consumption during the onset of the COVID-19 pandemic. Additionally, during the three months ended ~~April~~July 3031, 2021, ~~the~~was ~~Company began~~ operating its new boiler, which has improved production efficiency. The increase in the average price received was attributable to increased demand for fuel in 2021 as the economy improved following the COVID-19 pandemic.

From time to time, we engage in hedging activities with respect to our ethanol sales. At ~~April~~July 3031, 2021, the Company had fixed and basis contracts to sell approximately $2122,~~460~~621,000 of ethanol for various delivery periods through ~~June~~December 2021, which approximates 9042% of its anticipated ethanol sales for that period. ~~Separately,~~We ~~ethanol~~had ~~derivative~~no ~~instruments resulted in a~~ gain ofor ~~approximately $54,000 for the three months ended April 30, 2021. In comparison, we had a~~ loss offrom ~~approximately $82,000 on ethanol derivatives for the three months ended April 30, 2020.~~

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ethanol derivative instruments for the three months ended July 31, 2021 in comparison to a loss of approximately $32,000 on ethanol derivatives for the three months ended July 31, 2020.

Distillers’ Grains

Total revenues from sales of distillers’ grains increased by approximately 56338.28% for the three months ended ~~April~~July 3031, 2021 compared to the same period of 2020. Our revenue increased due to an approximately 43145.79% increase in the volume of distillers’ grains sold along with an approximately 878.74% increase in the average price per ton we received for our distillers’ grains from period to period.

At ~~April~~July 3031, 2021, the Company had forward contracts to sell approximately $21,~~500~~262,000 of distillers’ grains for delivery through September 2021, which approximates 1646% of its anticipated distillers' grains sales during that period.

Corn Oil

Total revenues from sales of corn oil increased by approximately ~~152~~542.79% for the three months ended ~~April~~July 3031, 2021 compared to the same period of 2020, due to an approximately 44199.90% increase in pounds sold from period to period, coupled with an approximately ~~74.4~~115% increase in the average price per pound we received for our corn oil from period to period.

Although management believes that corn oil prices will remain relatively steady, prices may decrease if there is an oversupply of corn oil production resulting from increased production rates at ethanol plants or if biodiesel producers begin to utilize lower-priced alternatives such as soybean oil or if the biodiesel blenders’ tax credit is not renewed and biodiesel production declines.

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Cost of Goods Sold

Our cost of goods sold increased by approximately 59154.87% for the three months ended ~~April~~July 3031, 2021, compared to the three months ended ~~April~~July 3031, 2020. As a percentage of revenues, our cost of goods sold decreased from ~~134~~122.92% for the three months ended ~~April~~July 3031, 2020 to approximately 9088.82% for the three months ended ~~April~~July 3031, 2021. 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 ~~April~~July 3031, 2021 and ~~April 30,~~ 2020 was approximately $12.7548 and $1.8649 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 ~~April~~July 3031, 2021:


	Three Months Ended ~~April~~July 3031, 2021
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	2735,~~157~~105	8079.86	%
Natural gas costs		1,~~708~~595	53.16	%
All other components of costs of goods sold		47,~~765~~395	1416.18	%
Total Cost of Goods Sold	$	3344,~~630~~095	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 April 30, 2020: 29

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	Three Months Ended ~~April~~July 3031, 2020
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	158,~~283~~544	7249.63	%
Natural gas costs		~~1,286~~695	64.10	%
All other components of costs of goods sold		48,~~480~~076	2146.37	%
Total Cost of Goods Sold	$	2117,~~049~~315	100.0	%

Corn

Our cost of goods sold related to corn was approximately 77310.79% greater for the three months ended ~~April~~July 3031, 2021 compared to the three months ended ~~April~~July 3031, 2020. This increase was due to an increase of approximately 48146.30% in the number of bushels we processed and an increase of approximately 1967.90% in the price of corn per bushel in the three months ended ~~April~~July 3031, 2021, compared with the same period a year earlier.

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) improved during the three months ended ~~April~~July 3031, 2021 ~~but remained negative.~~ The corn-ethanol price spread was approximately -$0.0730 in the three months ended ~~April~~July 3031, 2021, ancompared ~~increase~~with ofapproximately -$0.3116 ~~from~~during the same period a year earlier, ~~when~~an ~~the~~increase ~~corn-ethanol~~of ~~spread was~~ approximately -$0.3846.

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At ~~April~~July 3031, 2021, the Company had cash and basis contracts for forward corn purchase commitments for approximately 4,~~689~~026,000 bushels for deliveries through ~~March~~October 2022.

Our corn derivative positions resulted in a ~~gain~~loss of approximately $~~105~~269,000 for the three months ended ~~April~~July 3031, 2021 and a loss of approximately $~~436~~287,000 for the three months ended ~~April~~July 3031, 2020. 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.

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Natural Gas

Our cost of goods sold related to natural gas costs increased ~~approximately 32~~129.94% for the three months ended ~~April~~July 3031, 2021 compared to the same period a year earlier. ~~Management~~due ~~attributes~~to ~~this~~an increase in ~~cost of natural gas from period to period to increased ethanol~~ production., ~~Natural~~as ~~gas~~our ~~prices~~plant ~~increased~~was ~~briefly~~idled ~~in early February due to disruptions caused by severe weather events but decreased thereafter and remained relatively flat~~ for ~~the~~a ~~remainder~~portion of the three-month ~~months~~period ended ~~April~~July 3031, ~~2021~~2020.

Other Components of Costs of Goods Sold

Our costs of goods sold related to all other components ~~increased~~decreased approximately 68.4% for the three months ended ~~April~~July 3031, 2021 compared to the same period a year earlier. Management attributes the ~~increase~~decrease in costs of goods sold related to all other components to ~~increased~~projects ~~production~~and inrepairs ~~the~~conducted ~~three~~while ~~months~~the ~~ended~~plant ~~April~~was ~~30,~~idled ~~2021.~~in 2020.

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 ~~April~~July 3031, 2021 increased approximately 521.96% compared to the three months ended ~~April~~July 3031, 2020. Operating expenses were lower in the 2020 period due because less wages were paid when the plant was idled. 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.

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Operating Income (Loss)

We experienced operating income of approximately $25.40 million for the three months ended ~~April~~July 3031, 2021, compared with an operating loss of approximately $63.49 million in the three months ended ~~April~~July 3031, 2020. The increase in operating income is attributable to various factors including the increased price per gallon of ethanol and increased production due to the fact that we idled our plant for a portion of the three months ended ~~April~~July 3031, 2020, in response to the COVID-19 pandemic.

Other ~~Income~~Expense, Net

We had net other ~~income~~expense of approximately $~~506~~107,000 during the three months ended ~~April~~July 3031, 2021 compared to net other ~~income~~expense of approximately $~~177~~41,000 for the same period a year earlier. WeThe ~~had~~increase ~~more~~was ~~other income during the three months ended April 30, 2021 compared to the same period a year earlier~~ due primarily to ~~patronage~~increased ~~dividends~~interest ~~received~~expenses during the 2021 ~~and forgiveness of a Payment Protection Program loan totaling approximately $596,000~~period.

30Results of Operations for the Nine Months Ended July 31, 2021 and 2020

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Results of Operations for the Six Months Ended April 30, 2021 and 2020

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 ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020 (amounts in thousands).


	~~Six~~Nine Months Ended ~~April~~July 3031,
	2021				2020
Statement of Operations Data	(unaudited)		%		(unaudited)		%
Revenues	$	61111,~~474~~455	100.0	%	$	4256,~~285~~450	100.0	%
Cost of Goods Sold		61105,~~006~~101	9994.23	%		4966,~~179~~494	~~116~~117.38	%
Gross Profit (Loss)		~~468~~6,354	05.87	%		(610,~~894~~044)	(1617.38)	%
Operating Expenses		(23,~~120~~058)	(32.57)	%		(12,~~874~~644)	(4.47)	%
Operating Loss		(1,652)	(2.7)	%		(8,768)	(20.7)	%
Operating Income (Loss)		3,296	3.0	%		(12,688)	(22.5)	%
Other Income, net		~~548~~441	0.94	%		~~177~~137	0.42	%
Net Loss		(1,104)	(1.8)	%		(8,591)	(20.3)	%
Net Income (Loss)		3,737	3.4	%		(12,551)	(22.3)	%
Less: Net Income Attributable to Non-controlling Interest		—	—	%		(68)	(0.21)	%
Net Loss Attributable to Heron Lake BioEnergy, LLC	$	(1,104)	(1.8)	%	$	(8,659)	(20.5)	%
Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	3,737	3.4	%	$	(12,619)	(22.4)	%

Revenues

Revenues from our three primary products: ethanol, distillers’ grains and corn oil, as well as incidental sales of corn syrup, represented approximately 9899.82% and 9798.81% of our total consolidated revenues for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively. Miscellaneous other revenues are attributable to Agrinatural revenues (net of eliminations), which represented 10.28% and 21.29% of our consolidated revenues for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively.


	~~Six~~Nine Months Ended ~~April~~July 3031, 2021
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	4887,~~041~~689	78.17	%
Distillers' grains sales		816,~~926~~148	14.5	%
Corn oil sales		35,~~246~~828	5.32	%
Corn syrup sales		~~530~~940	0.98	%
Agrinatural revenues (net of intercompany eliminations)		~~731~~850	10.28	%
Total Revenues	$	61111,~~474~~455	100.0	%

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	~~Six~~Nine Months Ended ~~April~~July 3031, 2020
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	3143,~~386~~306	7476.27	%
Distillers' grains sales		79,~~836~~482	1816.58	%
Corn oil sales		12,~~649~~051	3.96	%
Corn syrup sales		~~488~~559	1.20	%
Agrinatural revenues (net of intercompany eliminations)		~~926~~1,052	21.29	%
Total Revenues	$	4256,~~285~~450	100.0	%

Our total consolidated revenues increased by approximately 97.4% for the nine months ended July 31, 2021, as compared to the same period of 2020, due to increases in the quantities produced of and prices received for our three primary products: ethanol, distillers’ grains and corn oil. The following table reflects quantities of our three primary products sold and the average net prices received for the nine months ended July 31, 2021 and 2020:

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Our total consolidated revenues increased by approximately 45.4% for the six months ended April 30, 2021, as compared to the same period of 2020, due to increases in the quantities produced of our three primary products — ethanol, distillers’ grains and corn oil — as well as increases in the prices received for ethanol and corn oil, offset by a decrease in the price received for distillers grains. The following table reflects quantities of our three primary products sold and the average net prices received for the six months ended April 30, 2021 and 2020:


	~~Six~~Nine Months Ended ~~April~~July 3031, 2021			~~Six~~Nine ~~months~~Months Ended ~~April~~July 3031, 2020
	Quantity Sold	Avg. Selling Price		Quantity Sold	Avg. Selling Price
Product	(in thousands)			(in thousands)
Ethanol (gallons)	3147,566	$	1.5284	2536,~~674~~126	$	1.2220
Distillers' grains (tons)	74112	$	~~121~~144.0135	5772	$	~~137~~131.9460
Corn oil (pounds)	813,~~440~~294	$	0.3844	68,~~821~~444	$	0.24

Ethanol

Total revenues from sales of ethanol increased by approximately 53102.15% for the ~~six~~nine months ended ~~April~~July 3031, 2021 compared to the same period of 2020 due to an approximately 2231.97% increase in the volume sold due to increased production during the 2021 period, coupled with a 2453.58% increase in the average price per gallon we received for our ethanol from period to period. The increase in ethanol prices resulted principally from increased demand for ethanol in 2021 due to the easing of COVID-19-related restrictions and the subsequent increase fuel consumption.

Our ethanol derivative instruments resulted in a gain of approximately $110,000 for the ~~six~~nine months ended ~~April~~July 3031, 2021. In comparison, our ethanol derivative instruments resulted in a loss of approximately $~~164~~196,000 for the ~~six~~nine months ended ~~April~~July 3031, 2020. 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 $~~274~~121,000 and $1155,~~622,~~000 for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively.

Distillers' Grains

Total revenues from sales of distillers’ grains increased by approximately 1370.93% for the ~~six~~nine months ended ~~April~~July 3031, 2021 compared to the same period of 2020. This increase is due to an approximately 3055.93% increase in the volume sold, ~~which~~coupled ~~was~~with ~~partially~~an ~~offset~~approximately ~~by a 13~~9.07% ~~decrease~~increase in the average price per ton received for our distillers’ grains from period to period. The increase in revenue from sales of distillers’ grains is due to increased production, while the ~~decrease~~increase in the price received was due to aincreased ~~weaker~~demand ~~domestic~~for ~~market~~livestock feed.

Corn Oil

Total revenues from sales of corn oil increased by approximately 96184.82% for the ~~six~~nine months ended ~~April~~July 3031, 2021 compared to the ~~six~~nine months ended ~~April~~July 3031, 2020 due primarily to an approximately 5957.14% increase in ~~the~~pounds ~~average~~sold ~~price per pound we received for our corn oil~~ from period to period, coupled with an approximately 2380.75% increase in ~~pounds~~the ~~sold~~average price per pound we received for our corn oil.

Cost of Goods Sold

Our cost of goods sold increased by approximately 24.0% for the six months ended April 30, 2021, as compared to the six months ended April 30, 2020. As a percentage of revenues, our cost of goods sold decreased to approximately 99.2% for the six months ended April 30, 2021, as compared to approximately 116.3% for the same period in 2020 due to a greater increase price of ethanol than the increase in the price of corn from period to period. The cost of goods sold per gallon of ethanol sold for the six months ended April 30, 2021 and 2020 was approximately $1.74 and $1.72 per gallon of ethanol, respectively.

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~~salaries~~Cost ~~and benefits~~ of ~~production~~Goods 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 six months ended April 30, 2021:Sold

Our cost of goods sold increased by approximately 58.1% for the nine months ended July 31, 2021, as compared to the nine months ended July 31, 2020. As a percentage of revenues, our cost of goods sold decreased from approximately 117.8% for the nine months ended July 31, 2020 to approximately 94.3% for the nine months ended July 31, 2021, due to a greater increase in revenue from ethanol produced than the increase in the cost of corn from period to period. The cost of goods sold per gallon of ethanol sold for the nine months ended July 31, 2021 and 2020 was approximately $1.99 and $1.66 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 30, 2021:


	~~Six~~Nine Months Ended ~~April~~July 3031, 2021
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	4984,~~864~~969	8180.78	%
Natural gas costs		34,~~296~~891	5.4.7	%
All other components of costs of goods sold		715,~~846~~241	1214.95	%
Total Cost of Goods Sold	$	61105,~~006~~101	100.0	%


	~~Six~~Nine Months Ended ~~April~~July 3031, 2020
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	3645,~~852~~396	7468.93	%
Natural gas costs		3,~~103~~799	65.37	%
All other components of costs of goods sold		917,~~224~~299	1826.80	%
Total Cost of Goods Sold	$	4966,~~179~~494	100.0	%

Corn

Our cost of goods sold related to corn was approximately 3587.2% greater for the ~~six~~nine months ended ~~April~~July 3031, 2021 compared to the same period of 2020. The increase resulted from an approximately 1441.85% increase in the number of bushels of corn processed from period to period, coupled with an approximately 1732.93% increase in the average price per bushel paid for corn from period to period. The increase in bushels processed was due to increased production, as we idled the plant for a portion of the ~~six~~nine months ended ~~April~~July 3031, 2020, and operated at full capacity during the recent nine-month period. Management attributes the increase in corn prices to weather conditions and increased demand. Management anticipates that corn prices will remain higher.

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) improved during the ~~six~~nine months ended ~~April~~July 3031, 2021. The corn ethanol spread was approximately -($0.1702) for the ~~six~~nine months ended ~~April~~July 3031, 2021, which was approximately $0.0419 more profitable than the same period of 2020, when the corn-ethanol spread was approximately -($0.21).

We had a loss related to corn derivative instruments of approximately $23.81 million ~~for~~and ~~the six months ended April 30, 2021, which increased our costs of goods sold. Comparatively, we had a loss related to corn derivative instruments of approximately~~ $~~516~~804,000 for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively, which ~~also~~ increased ~~out~~our ~~cost~~costs 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 $0 and $~~174~~184,000 for the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively.

Natural Gas

Our cost of goods sold related to natural gas costs increased approximately 6.2% for the six months ended April 30, 2021 compared to the same period of 2020. Management attributes this increase in cost of natural gas from period to period to increased ethanol production. Natural gas prices increased briefly in early February due to disruptions caused by severe weather events but decreased thereafter and remained relatively flat for the remainder of the six months ended April 30, 2021.

Other Components of Costs of Goods Sold

Our costs of goods sold related to all other components decreased approximately 14.9% for the six months ended April 30, 2021 compared to the same period of 2020. Management attributes the greater in costs of goods sold related to all other components in the previous year to projects and repairs conducted while the plant was idled in 2020.

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Natural Gas

Our cost of goods sold related to natural gas costs increased approximately 28.8% for the nine months ended July 31, 2021 compared to the same period of 2020. Management attributes this increase in cost of natural gas from period to period to increased ethanol production during the recent nine-month period, as our plant was temporarily idled during the nine months ended July 31, 2020.

Other Components of Costs of Goods Sold

Our costs of goods sold related to all other components decreased approximately 11.9% for the nine months ended July 31, 2021 compared to the same period of 2020. Management attributes the greater in costs of goods sold related to all other components in the previous year to projects and repairs conducted while the plant was idled in 2020.

Operating Expenses

Operating expenses for the ~~six~~nine months ended ~~April~~July 3031, 2021 increased by approximately 1315.26% compared to the ~~six~~nine months ended ~~April~~July 3031, 2020 due primarily to increases in insurance costs, and professional fees.

Operating Income (Loss)

~~Our~~We experienced operating ~~loss~~income ~~for~~of approximately $3.3 million in the ~~six~~nine months ended ~~April~~July 3031, 2021, ~~was~~compared with operating loss of approximately $712.17 million ~~less~~in ~~compared~~the tonine ~~the~~months ~~same~~ended ~~period~~July of31, 2020,. ~~decreasing~~The increase of approximately ~~81.2~~126% ~~from~~was ~~period~~due to ~~period. This~~an ~~decreased~~increase ~~loss~~in ~~resulted~~ethanol ~~largely~~prices, ~~from~~increase ~~the~~in ~~increased~~production, ~~price of ethanol~~ and improved operating efficiency.

Other Income, Net

We had net other income of approximately $~~548~~441,000 and $~~177~~137,000 during the ~~six~~nine months ended ~~April~~July 3031, 2021 and 2020, respectively. We had ~~more~~greater other income primarily due to the loan forgiveness income recorded in the ~~six~~nine months ended ~~April~~July 3031, 2021 pursuant to the Paycheck Protection Program.

Changes in Financial Condition at ~~April~~July 3031, 2021 and October 31, 2020

The following table highlights our financial condition at ~~April~~July 3031, 2021 and October 31, 2020 (amounts in thousands):


	~~April~~July 3031, 2021		October 31, 2020
Current Assets	$	18,611	$	13,268
		(unaudited)
Total Assets	$	65,558	$	63,080
Current Assets	$	17,381	$	13,268
Current Liabilities	$	8,083	$	21,116
Total Assets	$	62,478	$	63,080
Long-Term Debt, less current portion	$	17,585	$	296
Current Liabilities	$	10,810	$	21,116
Operating Leases, long-term liabilities	$	7,250		7,947
Long-Term Debt, less current portion	$	7,279	$	296
Other Long-Term Liabilities	$	620	$	597
Operating Leases, long-term liabilities	$	6,895		7,947
Members' Equity attributable to Heron Lake BioEnergy, LLC	$	32,021	$	33,125
Other Long-Term Liabilities	$	631	$	597
Members' Equity attributable to Heron Lake BioEnergy, LLC	$	36,862	$	33,125

The increase in current assets is primarily attributable to an increase in inventory of approximately $2.23 million, ~~an increase in cash~~ and ~~restricted cash of approximately $1.4 million, and~~ an increase in accounts receivable of approximately $~~959,000~~1.8 million at ~~April~~July 3031, 2021, compared to October 31, 2020. The decrease in our current liabilities is primarily due to an approximately $10.56 million decrease in current maturities of long-term debt ~~and an approximately $2.8 million decrease in accounts payable~~ at ~~April~~July 3031, 2021, compared to October 31, 2020.

Long-term debt, less current portion was approximately $177.63 million at ~~April~~July 3031, 2021, an increase of approximately $177.30 million from approximately $296,000 at October 31, 2020. The increase in ~~Long~~long-term debt, less current portion, was due to the classification of all long-term debt at October 31, 2020 as current due to loan covenant violations, in addition to the execution of a negotiable promissory note with GFE with a $5 million principal commitment, and an amendment to the 2020 Credit Facility to reduce the amount due within one year.

Members’ equity attributable to Heron Lake BioEnergy, LLC decreased by approximately $1.1 million at April 30, 2021, compared to October 31, 2020. The decrease was attributable to the net loss recorded during the six months ended April 30, 2021, which totaled approximately $1.1 million.34

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Members’ equity attributable to Heron Lake BioEnergy, LLC increased by approximately $3.7 million from October 31, 2020 to July 31, 2021. The increase was attributable to net income of approximately $3.7 million during the nine-month period ended July 31, 2021.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash provided by operations, cash, and available borrowings under our 2020 Credit Facility with Compeer, our Negotiable Promissory Note with GFE, and our revolving promissory note. ~~The~~In ~~Company~~early ~~has~~fiscal year, Company suffered recurring operating and cash flow losses related to difficult market conditions and operating performance, which resulted in the violation of certain debt covenants as of January 31, 2021, for which the Company obtained a waiver from its lender. The Company was in compliance with its debt covenants on ~~April~~July 3031, 2021. However, failure to comply with the protective loan covenants or maintain the required financial ratios in the future may cause acceleration of ~~the~~any outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties.

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~~While~~Improved ~~the~~market ~~Company~~conditions ~~believes~~and the replacement of the boiler, which has improved the operating performance of the plant, and led to lower operating costs, ~~and~~have ~~improved~~resulted in net income for the three ~~months~~and ~~ended~~nine ~~April 30, 2021, market conditions have resulted in losses for the six~~ months ended ~~April~~July 3031, 2021. The Company believes its operating cash flows, cash on hand, and available debt from its lender will provide sufficient liquidity to meet 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 of if we are unable to transport ethanol, we may be forced to further idle ethanol production altogether.~~

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):


	~~Six~~Nine Months Ended ~~April~~July 3031,
	2021		2020
	(unaudited)		(unaudited)
Net cash used in operating activities	$	(3,737)	$	(6,428)
Net cash provided by (used in) operating activities	$	5,489	$	(4,380)
Net cash used in investing activities	$	(2,~~668~~670)	$	(~~614~~2,252)
Net cash provided by financing activities	$	7,764	$	5,534
Net cash provided by (used in) financing activities	$	(2,936)	$	4,385
Net increase (decrease) in cash and restricted cash	$	1,359	$	(1,508)
Net decrease in cash and restricted cash	$	(117)	$	(2,247)

Operating Cash Flows

During the ~~six~~nine months ended ~~April~~July 3031, 2021, weoperating ~~used~~activities provided approximately $29.79 million ~~less~~more ~~cash~~ in ~~operating~~cash ~~activities~~than ~~compared~~the toduring the same nine-month period ~~one~~a year ~~earlier~~earlies. ~~due~~The toincrease ~~decreased~~was ~~net~~due ~~losses~~to asprimarily ato ~~result~~an ofincrease ~~improved~~in ~~operating~~net ~~efficiency~~income ~~and~~due anto ~~increased~~improved inmarket ~~the~~conditions ~~price~~and ~~for~~operating ~~ethanol~~efficiency.

Investing Cash Flows

We used approximately $418,000 more cash for investing activities for the ~~six~~nine months ended ~~April~~July 3031, 2021 compared to the same period one year earlier due to an increase in capital expenditures for our new boiler.

Financing Cash Flows

During the ~~six~~nine months ended ~~April~~July 3031, 2021, we ~~received~~used approximately $27.23 million more cash ~~from~~in financing activities than ~~we received~~ during the ~~three~~same ~~months~~nine-month ~~ended~~period ~~April~~a ~~30,~~year ~~2020~~earlier. During the ~~six~~nine months ended ~~April~~July 3031, 2021, we borrowed approximately $8.2 million from long-term and related party debt and ~~drew approximately $300,000 in excess of bank balances, as well as~~ made ~~payment~~payments on long-term debt totaling approximately $~~800,000~~11.3 million. In comparison, during the ~~six~~nine months ended ~~April~~July 3031, 2020, we ~~had~~borrowed ~~net borrowing of~~ approximately $622.7 million from long-term and $2related ~~million~~party ofdebt ~~acquisition~~and ofmade ~~non~~payment on long-~~controlling~~term ~~interest~~debt ~~and~~totaling ~~checks~~approximately ~~drawn~~$17.0 million in ~~excess~~addition ofto ~~bank~~$2.0 ~~balances~~million for the acquisition of ~~approximately~~non-controlling ~~$800,000~~interest.

Indebtedness

WeAs ~~have~~of July 31, 2021, we had 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 7 - Debt Facilities for additional details.

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Critical Accounting Estimates

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.

At ~~April~~July 3031, 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, 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.

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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

Not applicable.

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), Jeffrey Oestmann, 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 ~~April~~of 30July 31, 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 ~~April~~July 3031, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Following the most recently completed reporting period, GFE hired a new CEO, Jeffrey Oestmann, to replace Steve Christensen. Oestmann will also serve as the CEO of our Company pursuant to the management services agreement. As our principal executive officer, Oestmann, along with our principal financial officer, Stacie Schuler, will oversee our internal controls and financial reporting moving forward. The Company does not expect any immediate changes to our internal controls over financial reporting.

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.

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Item 1A. Risk Factors

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, 2020, and in Item 1A of our Form 10-Q for the three months ended January 31, 2021 and April 30, 2021. 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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currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

IfThe ~~the~~spread ~~Merger~~of ~~with~~coronavirus ~~Granite~~variants ~~Falls~~and ~~Energy,~~the ~~LLC,~~continued isprevalence ~~not~~of ~~completed,~~COVID-19 ~~there~~infections ismay ~~risk~~result ~~the~~in ~~Company~~decreased ~~could~~demand befor ~~forced~~our toethanol ~~cease~~and ~~operations~~could ornegatively ~~seek~~affect ~~bankruptcy~~our ~~protection~~profitability.

OnWhile ~~March 24, 2021,~~ the ~~Company~~COVID-19 ~~and~~infections ~~GFE,~~generally ~~executed~~decreased aduring ~~Merger Agreement, pursuant to which GFE will acquire~~ the ~~minority~~first ~~interest~~half of ~~HLBE.~~2021, ~~The~~new ~~structure~~variants of the ~~proposed~~coronavirus ~~transaction~~that iscauses ~~a merger in which Granite Heron Merger Sub~~COVID-19, ~~LLC,~~including ~~a wholly owned subsidiary of GFE, will merge with and into~~ the ~~Company,~~Delta ~~with the Company surviving the transaction as a wholly owned subsidiary of GFE. If the Merger is completed~~variant, ~~the Company’s Minority Ownership Interest unitholders will receive $0.36405 per unit and will cease to~~ have ~~any~~resulted ~~ownership interest~~ in ~~the~~increased ~~Company~~infections. ~~Accordingly,~~The ~~such~~rise ~~current~~in ~~unitholders~~COVID-19 ~~will~~infections ~~not~~and ~~benefit from profits realized by~~ the ~~Company~~spread ~~following~~of ~~the~~new ~~Merger.~~variants ~~Alternatively,~~may ifresult ~~the Merger is not completed, there is doubt about the Company’s ability to operate as a going concern. Due to substantial losses~~ in ~~2020,~~government ~~the~~policies ~~Company was in violation of certain loan covenants as of as of the three months ended January 30, 2021~~ and ~~the~~consumer ~~fiscal~~behaviors ~~year~~that ~~ended~~reduce ~~October~~demand ~~31,~~for ~~2020.~~travel ~~Due to improved market~~ and ~~operating~~thereby ~~conditions,~~reduce the ~~Company~~demand ~~was~~for intransportation ~~compliance with these loan covenants on April 30~~fuel, ~~2021.~~including ~~However, future violations of these loan covenants would allow~~ the ~~Company’s~~ethanol ~~lender~~we ~~to accelerate certain loans and designate a substantial portion of the Company’s debt due and payable~~produce. If ~~the~~demand ~~Company’s~~for ~~loans~~transportation ~~became~~fuel ~~due and payable~~decreases, ~~there is a substantial risk~~ the Company ~~would~~expects ~~lack~~ the ~~cash~~price onof ~~hand,~~ethanol ~~borrowing~~we ~~capacity,~~sell ~~and cash flows~~ to ~~repay the debt~~decrease, ~~and~~which ~~if this were to occur, the Company~~ could beresult ~~forced~~in totight ~~cease operations~~ or ~~seek~~negative ~~bankruptcy~~operating ~~protection~~margins. ~~If the Company were forced to cease operations or seek bankruptcy protection, unitholders’ investment in the Company would be at substantial risk.~~

The Merger is subject to approval by the Minority Ownership Interest and the Company’s lenders and there is no guarantee such approvals will be obtained.

GFE currently owns approximately 50.7% of the Company’s units. The remainder of the Company’s units are held by the Minority Ownership Interest. The Merger is subject to approval by the Minority Ownership Interest. A special meeting of the members of the Company is expected to be held in summer 2021, at which Minority Ownership Interest unitholders will vote on the approval and adoption of the Merger Agreement. The Merger is also subject to approval by the lender of GFE and the Company. The transaction is expected to close shortly after such approvals are obtained. There is, however, no guarantee the Minority Ownership Interest unitholders will vote in favor of the Merger and there is no guarantee the Company’s lender will approve of the Merger.

The Company has hired a new CEO and the change in leadership could result in unforeseen challenges.

Jeffrey Oestmann became CEO of the Company on May 26, 2021, replacing Steve Christensen. Oestmann was hired by GFE and concurrently serves as CEO of our Company pursuant to a management services agreement, which provides that GFE and our Company shall share executive officers. Christensen, who had served as CEO of the Company and GFE since April 2012, provided significant institutional and industry knowledge that was valuable to the Company. Oestmann has considerable experience in the ethanol industry, however the loss of certain institutional knowledge could create challenges for the Company.

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

2.1		Plan of Merger between Granite Heron Merger Sub, LLC, and Heron Lake BioEnergy, LLC, dated March 24, 2021
10.1		Letter of Employment between Jeffrey Oestmann and Granite Falls Energy, LLC, dated May 20, 2021*

10.1		Separation Agreement dated February 17, 2021
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.**

10.2		Merger Agreement between Granite Falls Energy, LLC, and Heron Lake BioEnergy, LLC, dated March 24, 2021
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.**

10.3		Voting Agreement between Granite Falls Energy, LLC, and Heron Lake BioEnergy, LLC, dated March 24, 2021
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.**

10.4		Voting Agreement between Granite Falls Energy, LLC, and certain governors of Heron Lake BioEnergy, LLC, dated March 24, 2021
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.**

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*
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, 2021, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at July 31, 2021 and October 31, 2020; (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2021 and 2020; (iii) the Condensed Consolidated Statements of Members’ Equity for the three and nine months ended July 31, 2021 and 2020; (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2021 and 2020; and (v) Notes to Condensed Consolidated Unaudited Financial Statements.**

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*
104		Cover Page Interactive Data File (formatted in Inline XBRL and included as Exhibit 101).**

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*

101.1		The following materials from Heron Lake BioEnergy’s Quarterly Report on Form 10-Q for the three and six months ended April 30, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at April 30, 2021 and October 31, 2020; (ii) the Condensed Consolidated Statements of Operations for the three and six months ended April 30, 2021 and 2020; (iii) the Condensed Consolidated Statements of Members’ Equity for the three and six months ended April 30, 2021, and 2020; (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended April 30, 2021, and 2020; and (v) Notes to Condensed Consolidated Unaudited Financial Statements.*

*~~Filed~~ ~~electronically~~Incorporated ~~herewith~~by reference to the Company’s Form 8-K filed with the SEC May 25, 2021.

**Filed electronically herewith.

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SIGNATURES

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


	HERON LAKE BIOENERGY, LLC

Date: June 14, 2021	/s/ Jeffrey Oestmann
Date: September 14, 2021	/s/ Jeffrey Oestmann
	Jeffrey Oestmann
	Chief Executive Officer

Date: June 14, 2021	/s/ Stacie Schuler
Date: September 14, 2021	/s/ Stacie Schuler
	Stacie Schuler
	Chief Financial Officer

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