HERON LAKE BIOENERGY, LLC General
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 fiscal year ended
OverviewHeron Lake BioEnergy, LLC is aMinnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant nearHeron Lake, Minnesota .
Our revenues are derived from the sale and distribution of our ethanol
throughout the continental
Based on the criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes: (1) production of ethanol and related distillers' grains, corn oil and syrup collectively referred to as ethanol production; and (2) natural gas pipeline distribution and services from the Company's majority owned subsidiary, Agrinatural. Before intercompany eliminations, revenues from our natural gas pipeline segment represented 3.8% and 3.0% of our total consolidated revenues in the years endedOctober 31, 2020 and 2019, respectively. After accounting for intercompany eliminations for fees paid by the Company for natural gas transportation services pursuant to our natural gas transportation agreement with Agrinatural, Agrinatural's revenues represented 1.9% and 1.3% of our consolidated revenues for the fiscal years endedOctober 31, 2020 and 2019, respectively, and have little to no impact on the overall performance of the Company.
Plan of Operations For the Next Twelve Months
The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2019 and 2020 as a result of industry-wide record low ethanol prices due to reduced demand, high industry inventory levels and other effects of the COVID-19 pandemic. These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. As a result of these losses, we have realized two adverse consequences. First, as corn prices increased inJanuary 2021 , we received margin calls on our corn futures positions on theChicago Board of Trade . Because we did not have the cash to pay those margin calls, we exited those futures positions and have become unprotected against future price increases. Second, our available working capital and net worth have decreased. As such, we have fallen out of compliance with our loan covenants which requires us to maintain a minimum level of working capital and local net worth. As a result of this loan covenant violation we have reclassified the long-term portion of our bank term debt as a current liability since the bank would retain the right to take adverse action as a result of those violations. If we continue to experience unfavorable operating conditions in the future, we may either have to secure additional debt or equity sources from other sources or idle ethanol production altogether. If CoBank, as the administrative agent for our lender Compeer, seeks to enforce its security interests we may be faced with the prospects of either ceasing operations or seeking Chapter 11 "reorganization" bankruptcy protection. If we can satisfy our creditors and remain operating, then 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, as well as small capital projects, to improve operating efficiency. 38
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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 well as governmental programs designed to create incentives for the use of corn-based ethanol. Other factors that may affect our future results of operation include those risks and factors discussed in this report at "PART I - ITEM 1. BUSINESS" and "PART I - ITEM 1A. RISK FACTORS". 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. We expect our ethanol plant to produce approximately 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. 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 (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will 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 in order to minimize our variable costs and optimize cash flow. For the fiscal year endedOctober 31, 2020 compared to fiscal year endedOctober 31, 2019 , our average price per gallon of ethanol sold decreased approximately 4.0%. Ethanol prices were lower during the fiscal year endedOctober 31, 2020 due primarily to effects of the COVID-19 pandemic, which resulted in reduced demand and high inventory levels. Additionally, the increase in approved economic hardship exemptions has effectively lowered the RVOs by a significant number of gallons of domestic demand. If this trend continues, it may continue to negatively impact theU.S. ethanol market. Management believes that the ethanol outlook moving into fiscal year 2021 will remain relatively flat and our margins will remain tight due to higher corn prices and depressed gasoline demand. In recent years, including fiscal year 2020 over fiscal year 2019, exports of ethanol have increased. Export demand for ethanol is less consistent compared to domestic demand which can lead to ethanol price volatility. During 2017,Brazil andChina adopted import quotas and/or tariffs on the importation of ethanol, which are expected to continue to negatively impactU.S. exports.China , the number three importer ofU.S. ethanol in 2016, has imported negligible volumes since imposing a 70% tariff in 2018 untilJanuary 2021 . OnSeptember 1, 2017 ,Brazil's Chamber of Foreign Trade imposed a 20% tariff onU.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons, per quarter. The tariff was renewed inSeptember 2019 , but the import quota was raised to 187.5 million liters, or 49.5 million gallons, per quarter. InDecember 2020 , the import quota expired, thereby subjecting all Brazilian imports ofU.S. ethanol to a 20% tariff. These tariffs have had and will likely continue to have a negative impact on the export market demand and prices for ethanol produced inthe United States . Any decrease inU.S. ethanol exports could adversely impact the market price of ethanol unless domestic demand increases or additional foreign markets are developed. Corn prices were slightly higher during our 2020 fiscal year compared to our 2019 fiscal year, due primarily to strong export demand during the 2020 period compared to the 2019 period. The latest estimates of supply and demand provided by theU.S. Department of Agriculture ("USDA") estimate the 2019-2020 ending corn stocks at approximately 1.9 billion bushels, and project the 2020-2021 corn supply at approximately 16.5 billion bushels, which is more than the 2019-2020 supply, with corn consumption for ethanol and co-products slightly higher at approximately 5.1 billion bushels, suggesting higher corn prices into fiscal 2021. Beginning inDecember 2020 , and carrying through January and intoFebruary 2021 ,China substantially increased its purchase ofU.S. corn reducingU.S. inventories and increasing prices. Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can 39
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contribute to volatility in corn prices. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers' grains outpaces rising corn prices.
Distillers' grains prices decreased in 2020 over 2019 due to decreased supply as a result of decreased production. Top export markets includeMexico ,Vietnam ,Korea ,Indonesia ,Turkey ,Thailand , and theEuropean Union andUnited Kingdom . Of note, however, is that export demand fromChina , historically one of the largest importers ofU.S. produced distillers grains, has significantly declined. In 2017,China imposed significant anti-dumping and anti-subsidy tariffs on distillers' grains imported from theU.S. , which resulted in significant declines in exports ofU.S. distillers' grains toChina . The anti-dumping tariffs range from 42.2% to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%. The imposition of these duties has resulted in a significant decline in demand from this top importer requiringU.S. producers to seek out alternative markets. While exports toChina increased during fiscal year 2020 compared to fiscal year 2019, exports toChina remain substantially below the pre-tariff export levels. There is no guarantee that distillers' grains exports toChina will return to pre-tariff levels. OnJanuary 15, 2020 ,President Trump signed a "phase one" trade agreement withChina . The agreement includes a commitment byChina to purchase agricultural products over the next two years, including distillers' grains. The agreement will also provideU.S. manufacturers of DDGS with a streamlined process for registration and licensing in order to facilitateU.S. exports toChina . While this agreement appears positive for the industry, there is no guarantee that the agreement will be fully implemented, nor is there a guarantee that exports toChina return to pre-tariff levels. Additionally, exports ofU.S. distillers' grains toVietnam had halted completely due toVietnam's imposition of stricter regulations inDecember 2016 . In a statement issuedSeptember 1, 2017 , theU.S. Grains Council announced thatVietnam is lifting its suspension ofU.S. distillers' grains imports and easing fumigation requirements. While exports toVietnam have resumed, they remain substantially below the pre-2016 levels. There is no guarantee that distillers' grains exports toVietnam will return to such levels. Management anticipates distillers' grains prices will remain steady during our 2021 fiscal year, unless additional domestic demand, increased corn prices or other foreign markets develop. Domestic demand for distillers' grains could be negatively affected if corn prices decline and end-users switch to lower priced alternatives. Corn oil prices as a whole have been adversely impacted during the last few years by oversupply of corn oil due to the substantial increase in corn oil production. Additionally, corn oil prices have been impacted by the oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil for biodiesel production. InDecember 2019 , legislation was signed extending the$1.00 per-gallon biodiesel blender tax credit retroactively toJanuary 1, 2018 , and throughDecember 31, 2022 . Given the inherent volatility in ethanol, distillers' grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers' grains, non-food grade corn oil and grain prices in future periods will be consistent compared to historical periods. 40
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Results of Operations for the Fiscal Years Ended
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our audited consolidated statements of operations for the fiscal years endedOctober 31, 2020 and 2019 (amounts in thousands): 2020 2019 Statement of Operations Data % % Revenues$ 76,030 100.0 %$ 106,827 100.0 % Cost of Goods Sold 84,998 111.8 % 108,812 101.9 % Gross Loss (8,968) (11.8) % (1,985) (1.9) % Operating Expenses (5,402) (7.1) % (3,398) (3.2) % Operating Loss (14,370) (18.9) % (5,383) (5.1) % Other Income, net 119 0.2 % 205 0.2 % Net Loss (14,251) (18.7) % (5,178) (4.9) % Less: Net Income Attributable to Non-controlling Interest (68) (0.1) % (278) (0.3) % Net Loss Attributable toHeron Lake BioEnergy, LLC$ (14,319) (18.8) %$ (5,456) (5.2) % Revenues Our consolidated revenue is derived principally from revenues from our ethanol production segment, which consists of sales of our three primary products: ethanol, distillers' grains and corn oil. Our remaining consolidated revenues are attributable to incidental sales of corn syrup and Agrinatural revenues, net of eliminations for distribution fees paid by the Company to Agrinatural for natural gas transportation services. The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our audited consolidated statements of operations for the fiscal year endedOctober 31, 2020 : Year Ended October 31, 2020 Sales Revenue % of Total Revenues (in thousands) Ethanol sales$ 58,326 76.7 % Distillers' grains sales 12,693 16.7 % Corn oil sales 2,926 3.8 % Corn syrup sales 678 0.9 % Agrinatural revenues (net of intercompany eliminations) 1,407 1.9 % Total Revenues$ 76,030 100.0 % The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our consolidated statements of operations for the fiscal year endedOctober 31, 2019 : Year Ended October 31, 2019 Sales Revenue % of Total Revenues (in thousands) Ethanol sales$ 82,544 77.3 % Distillers' grains sales 18,214 17.1 % Corn oil sales 3,514 3.3 % Corn syrup sales 1,123 1.0 % Agrinatural revenues (net of intercompany eliminations) 1,432 1.3 % Total Revenues$ 106,827 100.0 % Our total consolidated revenues decreased by approximately 28.8% for the fiscal year endedOctober 31, 2020 , as compared to the fiscal year 2019 due to decreases in quantities sold of our ethanol, distillers' grains and corn oil, in addition to decreases in the average net prices received for our ethanol, distillers' grains and corn oil. The following 41
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table reflects quantities of our three primary products sold and the average net
prices received for the fiscal years ended
Year Ended October 31, 2020 Year Ended October 31, 2019
Avg. Selling
Quantity Sold Price Quantity Sold Avg. Selling Price
Product (in thousands) (in thousands)
Ethanol (gallons) 48,239 $ 1.21 65,512 $ 1.26
Distillers' grains
(tons) 111 $ 113.99 143 $ 127.32
Corn oil (pounds) 12,178 $ 0.24 14,251 $ 0.25
Ethanol
Total revenues from sales of ethanol decreased by approximately 29.3% for fiscal
year 2020 compared to the fiscal year 2019 due primarily to an approximately
26.4% decrease in the volumes sold from period to period, coupled with an
approximately 4.0% decrease in the average price per gallon we received for our
ethanol. The decrease in price is primarily due to a decrease in demand for
ethanol and significantly lower gasoline prices. The decrease in volume sold is
primarily due to a decrease in volume produced during the 2020 period, which
included the plant being idled from March 2020 through May 2020 due to effects
of the COVID-19 pandemic and experiencing operational issues with our boiler
after production resumed. Management anticipates higher ethanol production and
sales during our 2021 fiscal year, as compared to our 2020 fiscal year.
We occasionally engage in hedging activities with respect to our ethanol sales.
We recognize the gains or losses that result from the changes in the value of
these derivative instruments in revenues as the changes occur. At October 31,
2020 , we had fixed and basis contracts for forward ethanol sales for various
delivery periods through December 2020 valued at approximately $12.4 million .
Separately, ethanol derivative instruments resulted in a loss of approximately
$131,000 for the fiscal year ended October 31, 2020 , as compared to a gain of
approximately $25,000 for the fiscal year ended October 31, 2019 .
Distillers' Grains
Total revenues from sales of distillers' grains for our 2020 fiscal year
decreased approximately 30.3% compared to fiscal year 2019. The decrease in
distillers' grains revenues is primarily attributable to an approximately 22.4%
decrease in the tons of distillers' grains sold from period to period, coupled
with an approximately 10.5% decrease in the average price per ton we received
for our distillers' grains sold during fiscal year 2020 compared to fiscal year
2019.
The decrease in the market price of distillers' grains is primarily due to decreased demand. Management anticipates that distillers' grains prices will remain steady during our 2021 fiscal year unless export markets continue to shrink or production increases.
We produced and sold fewer tons of distillers' grains during fiscal year 2020 as compared to 2019 due primarily to decreased ethanol production at the plant in the 2020 period, which included the plant being idled fromMarch 2020 throughMay 2020 due to effects of the COVID-19 pandemic and experiencing operational issues with our boiler after production resumed. Management anticipates higher distillers' grains production during our 2021 fiscal year, as compared to our 2020 fiscal year.
At
Corn Oil
Separating the corn oil from our distillers' grains decreases the total tons of
distillers' grains that we sell; however, our corn oil has a higher per ton
value than our distillers' grains. Total revenues from sales of corn oil
decreased by approximately 16.7% for fiscal year 2020 compared to the fiscal
year 2019. This decrease is attributable to an approximately 14.5% decrease in
the number of pounds of corn oil sold from period to period, coupled with an
approximately 4.0% decrease in the average price we received per pound of corn
oil sold during fiscal year 2020 compared to fiscal year 2019.
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Management attributes the decrease in corn oil sales during fiscal year 2020 as
compared to 2019 primarily to decreased production at the plant in the 2020
period, which included the plant being idled from March 2020 through May 2020
due to effects of the COVID-19 pandemic and experiencing operational issues with
our boiler after production resumed. Management anticipates higher corn oil
production during our 2021 fiscal year, as compared to our 2020 fiscal year.
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.
At
Cost of Goods Sold Our cost of goods sold decreased by approximately 21.9% for the fiscal year endedOctober 31, 2020 , as compared to the fiscal year endedOctober 31, 2019 . However, cost of goods sold, as a percentage of revenues, increased to approximately 111.8% for the fiscal year endedOctober 31, 2020 , as compared to approximately 101.9% for the 2019 fiscal year due to the negative margin between the price of ethanol and the price of corn from period to period. Approximately 90% of our total costs of goods sold is attributable to ethanol production. As a result, the cost of goods sold per gallon of ethanol produced for the fiscal year endedOctober 31, 2020 was approximately$1.59 per gallon of ethanol sold compared to approximately$1.49 per gallon of ethanol produced for the fiscal year endedOctober 31, 2019 . The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, depreciation expense, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year endedOctober 31, 2020 : Year Ended October 31, 2020 Amount % of Cost of Goods (in thousands) Sold Corn costs$ 60,497 71.2 % Natural gas costs 4,826 5.7 % All other components of costs of goods sold 19,675 23.1 % Total Cost of Goods Sold$ 84,998 100.0 %
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 audited consolidated
statements of operations for the fiscal year ended
Year Ended October 31, 2019
Amount % of
Cost of Goods
(in thousands) Sold
Corn costs $ 80,504 74.0 %
Natural gas costs 6,818 6.3 %
All other components of costs of goods sold 21,490 19.7 %
Total Cost of Goods Sold $ 108,812 100.0 %
Corn Costs
Our cost of goods sold related to corn decreased approximately 24.9% for our
2020 fiscal year compared to our 2019 fiscal year, due to an approximately 25.5%
decrease in the number of bushels of corn processed from period to period, which
was partially offset by an approximately 0.8% increase in the average price per
bushel paid for corn from period to period. The corn-ethanol price spread (the
difference between the price per gallon of ethanol and the price per
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bushel of grain divided by 2.8) for our 2020 fiscal year was approximately
For our fiscal years endedOctober 31, 2020 and 2019, we processed approximately 16.3 million and 21.9 million bushels of corn, respectively. This decrease is due largely to the plant being idled fromMarch 2020 throughMay 2020 due to effects of the COVID-19 pandemic and experiencing operational issues with our boiler after production resumed. Our corn conversion efficiency decreased slightly during our 2020 fiscal year compared to 2019. Management anticipates a slight increase in corn consumption during our 2021 fiscal year provided that we can achieve operating margins that allow us to continue to operate the ethanol plant at similar levels.
The increase in our cost per bushel of corn was due primarily to strong export demand during the 2020 period compared to the 2019 period. Due to projected increased corn stocks and projected slightly increased demand, management anticipates that corn prices will remain higher during our 2021 fiscal year.
From time to time we enter into forward purchase contracts for our corn
purchases. At
Our corn derivative positions resulted in a loss of approximately$1.1 million for the fiscal year endedOctober 31, 2020 , which increased cost of goods sold, and a gain of approximately$351,000 for the fiscal year endedOctober 31, 2019 , which decreased cost of goods sold. 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 are 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. InJanuary 2021 , we sold out of all of derivative instruments which had helped hedge our future price risk in corn due to our limited working capital resulting from operating and investment losses accruing in 2020. Natural Gas Costs For our 2020 fiscal year, we experienced a decrease of approximately 29.2% in our overall natural gas costs compared to our 2019 fiscal year. This decrease is due largely to the plant being idled fromMarch 2020 throughMay 2020 due to effects of the COVID-19 pandemic and experiencing operational issues with our boiler after production resumed. In recent years, there has been an increase in cost of natural gas, primarily as a result of an increase in the average price per MMBTU of natural gas due to increased domestic and export demand. Management also anticipates higher natural gas prices as we move through the winter months due to the typical seasonal natural gas cost increases experienced during the winter months. Operating Expense Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees, property taxes and similar costs. Operating expenses as a percentage of revenues rose to 7.1% of revenues for our fiscal year endedOctober 31, 2020 , compared to 3.2% of revenues for our fiscal year endedOctober 31, 2019 . This increase is due primarily to lower revenues and the recognition of an approximately$1.8 million loss on the disposal of assets in the 2020 period. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady into and throughout our 2021 fiscal year. Operating Loss For our fiscal year endedOctober 31, 2020 , we reported operating loss of approximately$14.4 million , compared to operating loss of approximately$5.4 million for our fiscal year endedOctober 31, 2019 . This increase in operating loss resulted largely from increased prices for corn relative to the price of ethanol and negative operating margin, largely due to losses on disposal of assets of approximately$1.8 million and change in fair value of commodity 44 -------------------------------------------------------------------------------- derivative instruments of approximately$1.2 million , and losses resulting from the plant being idled fromMarch 2020 throughMay 2020 due to effects of the COVID-19 pandemic and experiencing operational issues with our boiler after production resumed. Other Income, Net
We had net other income of approximately
Changes in Financial Condition at
The following table highlights the changes in our financial condition from our
audited consolidated balance sheet for the periods presented (amounts in
thousands):
October 31, 2020 October 31, 2019
Current Assets $ 13,268 $ 16,266
Total Assets $ 63,080 $ 56,596
Current Liabilities $ 21,116 $ 6,144
Long-Term Debt, less current portion $ 296 $ 300
Operating Leases, long-term liabilities $ 7,947 -
Other Long-Term Liabilities $ 597 $ 551
Members' Equity attributable to Heron Lake
BioEnergy, LLC $ 33,125 $ 47,599
Non-Controlling Interest $ - $ 2,002
The approximate $6.5 million increase in total assets was primarily driven by
the recognition of operating lease right of use asset of approximately $9.3
million and an increase in property and equipment of approximately $780,000 ,
which was partially offset by the decrease of current assets of approximately
$3.0 million and other long-term assets of approximately $589,000 . The decrease
in current assets was primarily driven by a decrease in our cash of
approximately $1.3 million and accounts receivable of approximately $3.3
million , partially offset by an increase in restricted cash of approximately
$461,000 and inventory of approximately $788,000 .
Current liabilities at October 31, 2020 increased by approximately $15.0 million
compared to October 31, 2019 . This increase includes increases of current
maturities of long-term debt by approximately $11.2 million , checks drawn in
excess of bank balance by approximately $693,000 , accounts payable by
approximately $1.5 million , and the recognition of short-term operating lease
liabilities of approximately $1.3 million at October 31, 2020 compared to
October 31, 2019 . The increase in current maturities was primarily due to the
aforementioned reclassification as further described in Note 2 of our financial
statements.
Our other long-term liabilities increased by approximately
Members' equity attributable toHeron Lake BioEnergy, LLC decreased approximately$14.5 million atOctober 31, 2020 compared toOctober 31, 2019 . This decrease was due primarily to approximately$14.3 million in net loss attributable to HLBE. Non-controlling interest decreased approximately$2.0 million due to acquisition of the non-controlling interest in fiscal year 2020, which was directly related to recognition of the then-27.0% non-controlling interest inAgrinatural, LLC .
Liquidity and Capital Resources
Our working capital is significantly impaired. Losses arising in fiscal 2020 and
continuing into fiscal 2021 have reduced our available cash and utilized much of
our available operating credit. Our principal sources of liquidity consist of
cash provided by operations, cash on hand, and available borrowings under our
credit facility with Compeer. Our principal uses of cash are to pay operating
expenses of the plant, to make debt service payments on our long-term debt, and
to make distribution payments to our members. Ordinarily, we would expect to use
cash generated by continuing operations, our revolving term loan, and our loan
with GFE to fund our operations for the next twelve
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months. However, to remain an operating company, we will have to secure
additional debt or equity sources to meet our loan covenants or idle ethanol
production altogether. There is a risk that CoBank, as the administrative agent
for our lender Compeer, may seek to enforce its security interests and take
control of our assets. If that were to happen, then we may be faced with the
prospects of either ceasing operations or seeking Chapter 11 "reorganization"
bankruptcy protection.
We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next twelve months. For our 2021 fiscal year, we anticipate completion of several small capital projects and to maintain current plant infrastructure and improve operating efficiency.
Management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require additional capital to supplement cash generated from operations and available for borrowing under our revolving term loan.
Year Ended
The following table summarizes cash flows for the fiscal years presented
(amounts in thousands):
Fiscal Year Ended October 31,
2020 2019
Net cash used in operating activities $ (4,824) $ (420)
Net cash used in investing activities $ (5,826) $ (432)
Net cash provided by (used in) financing activities $ 9,846 $ (550)
Net decrease in cash and restricted cash $ (803) $ (1,402)
Operating Cash Flows
During the fiscal year ended October 31, 2020 , net cash used in operating
activities increased by approximately $4.4 million compared to the fiscal year
ended October 31, 2019 . The increase resulted largely from an approximately $9.1
million increase in our net loss in the current year, offset by non-cash charge
in fiscal year 2020 for loss on disposal of assets of approximately $1.8
million , and mitigated by increases of approximately $1.3 million from period to
period in various working capital items. Net loss increased for fiscal year 2020
due to decreased revenues and higher costs of goods sold as a percentage of
revenues.
Investing Cash Flows
During the fiscal year ended October 31, 2020 , net cash used in investing
activities increased by approximately $5.4 million due primarily to increased
capital expenditures for grain storage of approximately $3.0 million and the new
boiler of approximately $2.8 million compared to the fiscal year ended
October 31, 2019 . In addition, approximately $2.1 million of accounts payable at
October 31, 2020 includes payables for capital expenditures incurred during the
fiscal year ended October 31, 2020 .
Financing Cash Flows
Our financing activities provided us with approximately $9.8 million for the
fiscal year ended October 31, 2020 , compared to the approximately $550,000 we
used for financing activities for the fiscal year ended October 31, 2019 . During
the fiscal year ended October 31, 2020 , we had net proceeds from long-term debt
of approximately $10.3 million . These increases were offset by the $2.0 million
we used to acquire non-controlling interest in fiscal year 2020. For the same
period of 2019, we used cash to make payments of approximately $325,000 on our
long-term debt and $225,000 to acquire non-controlling interest. Additionally,
in fiscal year 2020, we received proceeds from our Paycheck Protection Program
loan of approximately $596,000 .
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Credit Arrangements Revolving Term Note We had a revolving term note payable to Compeer Financial, formerly known asAgStar Financial Services , FCLA ("Compeer") under which we could borrow, repay, and re-borrow in an amount up to the original aggregate principal commitment at any time prior to maturity atMarch 1, 2022 . The original aggregate principal commitment was$28,000,000 , which reduced by$3,500,000 annually, startingMarch 1, 2015 and continuing each anniversary thereafter until maturity. InDecember 2017 , the Company and its lender orally agreed to reduce the aggregate principal commitment of the revolving term loan to$8,000,000 . OnApril 6, 2018 , the Company finalized loan agreements with an effective date ofMarch 29, 2018 for an amended credit facility with Compeer (the "2018 Credit Facility"). OnJanuary 7, 2020 , the Company finalized loan agreements for an amended credit facility with its lender (the "2020 Credit Facility").
2018 Credit Facility with Compeer
We had a comprehensive credit facility with Compeer for which CoBank, ACP
("CoBank") served as the administrative agent. This credit facility originally
consisted of a revolving term loan with a maturity date of March 1, 2022 .
However, on April 6, 2018 , we entered into an amended credit facility with
Compeer (the "2018 Credit Facility"). The 2018 Credit Facility includes an
amended and restated revolving term loan with a $4.0 million principal
commitment and a revolving seasonal line of credit with a $4.0 million principal
commitment. CoBank will continue to act as Compeer's administrative agent with
respect to our 2018 Credit Facility and has a participation interest in the
loans. The Company agreed to pay CoBank an annual fee of $2,500 for its services
as administrative agent.
Under the terms of the amended revolving term loan, the Company may borrow,
repay, and reborrow up to the aggregate principal commitment amount of $4.0
million . Final payment of amounts borrowed under our amended revolving term loan
was due December 1, 2021 . Interest on the amended revolving term loan accrues at
a variable weekly rate equal to 3.10% above the One-Month London Interbank
Offered Rate ("LIBOR") Index rate, which was 3.24% at October 31, 2020 .
We agreed to pay an unused commitment fee on the unused available portion of the
amended revolving term loan commitment at the rate of 0.500% per annum, payable
monthly in arrears.
The aggregate principal amount available to the Company for borrowing under the
revolving term loan at
Under the terms of the seasonal revolving loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of$4.0 million until its maturing. Amounts borrowed under the seasonal revolving loan bear interest at a variable weekly rate equal to 2.85% above the LIBOR Index rate, which was 2.99% atOctober 31, 2020 .
The Company also agreed to pay an unused commitment fee on the unused portion of the seasonal revolving loan commitment at the rate of 0.250% per annum.
The aggregate principal amount available to the Company for borrowing under the
seasonal revolving loan at
The 2018 Credit Facility is secured by substantially all of our assets, including a subsidiary guarantee.
Under the 2018 Credit Facility, the Company is subject to certain financial and non-financial covenants that limit the Company's distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio. We agreed to a debt service coverage ratio of 1.15 to 1.0, to maintain minimum working capital$8.0 million throughSeptember 30, 2018 and$10.0 million thereafter, and to maintain net worth of$32.0 million . We are permitted to pay distributions to our members up to 75% of our net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and we are in compliance with all of our loan covenants. Further, we agreed not to make loans or advances to Agrinatural that exceed an aggregate principal amount of approximately$6.6 million without the consent of Compeer. 47 -------------------------------------------------------------------------------- InOctober 2019 , the Company had an event of non-compliance related to the debt service coverage ratio as defined in the 2018 Credit Facility. InDecember 2019 , the Company received a waiver from its lender waiving this event of noncompliance. Subsequent toOctober 31, 2020 , HLBE had further events of non-compliance and has forecasted that it is probable that there will be future instances of noncompliance with debt covenants within the next 12 months.
2020 Credit Facility with Compeer
The 2020 Credit Facility includes an amended and restated revolving term loan with an$8,000,000 principal commitment, which was increased to a$13,000,000 principal commitment inJune 2020 . The loans are secured by substantially all of the Company's assets, including a subsidiary guarantee. The 2020 Credit Facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. During the second fiscal quarter of 2020, the 2020 Credit Facility was amended to reduce the working capital covenant to$8 million , from the original$10 million working capital covenant, for the period ofApril 30, 2020 throughDecember 31, 2020 , and increasing to$10 million beginningJanuary 1, 2021 . Additionally, the current portion of leases are excluded from the calculation of current liabilities. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties. InMay 2020 , HLBE had an event of non-compliance related to the minimum working capital requirement as defined in the 2020 Credit Facility. The Company has obtained a waiver from its lender for this event of non-compliance. As of and for the fiscal year endedOctober 31, 2020 , HLBE had events of non-compliance with respect to our working capital covenant our debt service coverage ratio. HLBE has obtained a waiver from its lender for the non-compliance events. Subsequent toOctober 31, 2020 , HLBE had further events of non-compliance and has forecasted that it is probable that there will be future instances of noncompliance with debt covenants within the next 12 months. As part of the 2020 Credit Facility closing, the Company entered into an amended administrative agency agreement with CoBank. As a result, CoBank will continue act as the agent for the lender with respect to the 2020 Credit Facility. The Company agreed to pay CoBank an annual fee of$2,500 for its services as administrative agent. Under the terms of the amended and restated revolving term loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of$13,000,000 . Final payment of amounts borrowed under amended revolving term loan is dueDecember 1, 2022 . Interest on the amended and restated revolving term loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month LIBOR Index rate, which was 3.51% atOctober 31, 2020 . We agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.
The aggregate principal amount available to the Company for borrowing under the
revolving term loan at
Single Advance Term Note InJune 2020 , we 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 onDecember 20, 2020 and the last installment due onJune 20, 2025 . The note is secured as provided in the 2020 Credit Facility.
Short Term Revolving Promissory Note
InFebruary 2021 , HLBE entered into a revolving promissory note with its lender in order to finance the operating needs of HLBE. Under the terms, HLBE may borrow, repay and reborrow up to the aggregate principal commitment amount of$5,000,000 . Final payment of amounts borrowed under the revolving promissory note isJune 1, 2021 . Interest of the loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate ("LIBOR") Index rate and is payable monthly in arrears. In addition, HLBE agreed to 48 -------------------------------------------------------------------------------- pay an unused commitment fee on the unused available portion of the loan at the rate of 0.50% per annum payable monthly in arrears. The revolving promissory note is subject to the 2020 Credit Facility.
SBA Paycheck Protection Program Loan
InMarch 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. OnApril 18, 2020 , HLBE received a loan in the amount of$595,693 through the Paycheck Protection Program. Management expects that the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, HLBE would be required to repay that portion at an interest rate of 1% over a period of two years, with principal repayment installments inMay 2021 with a final installment inMay 2022 . Negotiable Promissory Note InDecember 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%. The note is 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. InJanuary 2021 , we borrowed the$5,000,000 on the promissory note. InFebruary 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 untilMarch 2023 . However, should there be future violations of the Compeer loan covenants, those violations would also be considered a default on this promissory note. Other Credit Arrangements
In addition to our primary credit arrangement with Compeer, we have other material credit arrangements and debt obligations.
InOctober 2003 , we entered into an industrial water supply development and distribution agreement with theCity of Heron Lake ,Jackson County , andMinnesota Soybean Processors , an unrelated company. In consideration of this agreement, we andMinnesota Soybean Processors were allocated equally the debt service on$735,000 in water revenue bonds that were issued by the City to support this project that mature inFebruary 2019 . OnSeptember 30, 2019 , we finalized a new industrial water supply development and distribution agreement with theCity of Heron Lake , effective as ofFebruary 1, 2019 . Under this agreement, we pay flow charges and fixed monthly charges to theCity of Heron Lake , in addition to certain excess maintenance costs. The term of this agreement expiresFebruary 1, 2029 . InMay 2006 , we entered into an industrial water supply treatment agreement with theCity of Heron Lake andJackson County . Under this agreement, we pay monthly installments over 24 months startingJanuary 1, 2007 equal to one years' debt service on approximately$3.6 million in water revenue bonds, which will be returned to us if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. As ofOctober 31, 2020 and 2019, there was a total of approximately$301,000 and$634,000 in outstanding water revenue bonds, respectively. We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%. Final payment on the water revenue bonds is dueOctober 2021 . 49
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Loans to Agrinatural
Original Agrinatural Credit Facility
OnJuly 29, 2014 , HLBE entered into an intercompany loan agreement and related loan documents with Agrinatural (the "Original Agrinatural Credit Facility"). Under the Original Agrinatural Credit Facility, HLBE agreed to make a five-year term loan in the principal amount of$3.05 million to Agrinatural for use by Agrinatural to repay approximately$1.4 million of its outstanding debt and provide approximately$1.6 million of working capital to Agrinatural. The Original Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size. OnMarch 30, 2015 , HLBE entered into an allonge (the "Allonge") to theJuly 29, 2014 note with Agrinatural. Under the terms of the Allonge, HLBE and Agrinatural agreed to increase the principal amount of the Original Agrinatural Credit Facility to approximately$3.06 million , defer commencement of repayment of principal untilMay 1, 2015 , decrease the monthly principal payment to$36,000 per month and shorten maturity of the Original Agrinatural Credit Facility toMay 1, 2019 . Interest on the Original Agrinatural Credit Facility was not amended and accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Accrued interest is due and payable on a monthly basis. Except as otherwise provided in the Allonge, all of the terms and conditions contained in the Original Agrinatural Credit Facility remain in full force and effect. In exchange for the Loan Agreement, the Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning HLBE all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, RES, the former minority owner of Agrinatural, executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to HLBE. Upon the passage of theMay 1, 2019 maturity date, Agrinatural went into default on the Original Agrinatural Credit Facility. As noted, we have a security interest in all of Agrinatural's assets. No interruption in the service of natural gas to our ethanol production facility occurred as a result of the default. The balance of this loan was approximately$1.1 million atOctober 31, 2019 . Subsequent to the closing of HLBE's indirect acquisition of Agrinatural's non-controlling interest inDecember 2019 , the parties agreed to forgive the debt related to the Original Agrinatural Credit Facility.
Additional Agrinatural Credit Facility
OnMarch 30, 2015 , HLBE entered into a second intercompany loan agreement and related loan documents (the "Additional Agrinatural Credit Facility") with Agrinatural. Under the Additional Agrinatural Credit Facility, HLBE agreed to make a four-year term loan in the principal amount of$3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital. The Additional Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size. Interest on the additional term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Prior toMay 1, 2015 , Agrinatural is required to pay only monthly interest on the term loan. CommencingMay 1, 2015 , Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan was due and payable in full onMay 1, 2019 . OnMay 19, 2016 , HLBE and Agrinatural amended the Additional Agrinatural Credit Facility, entering into amendment to the loan agreement datedMarch 30, 2015 (the "Amendment"). Additionally, HLBE and Agrinatural entered into an allonge to the negotiable promissory note datedMarch 30, 2015 issued by Agrinatural to HLBE (the "Additional Allonge") to increase the amount of the capital expenditures allowed by Agrinatural during the term of the facility and deferred a portion of the principal payments required for 2016.
The Amendment provides that the portion of principal payments deferred in calendar year 2016 to continue to accrue interest at the rate set forth in the Note and become a part of the balloon payment due at maturity. Additionally,
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for calendar years, 2017, 2018 and 2019, the Amendment provides that Agrinatural
may, without consent of HLBE, proceed with and pay for capital expenditures in
an amount up to $100,000 plus the amount of contributions in aid of construction
received by Agrinatural from customers for capital improvements ("CIAC"), less a
reserve for distribution to the Agrinatural members to cover the income or other
taxes imposed as a result of receipt of CIAC in an amount equal to 40% of CIAC.
Prior to the Amendment, Agrinatural's capital expenditures were restricted to
$100,000 per year.
In exchange for the Additional Agrinatural Credit Facility, Agrinatural executed
a security agreement granting HLBE a first lien security interest in all of
Agrinatural's equipment and assets and a collateral assignment assigning HLBE
all of Agrinatural's interests in its contracts, leases, easements and other
agreements. In addition, RES executed a guarantee under which RES guaranteed
full payment and performance of 27% of Agrinatural's obligations to HLBE under
the Additional Agrinatural Credit Facility.
Upon the passage of the May 1, 2019 maturity date, Agrinatural went into default
on the Additional Agrinatural Credit Facility. As noted, we have a security
interest in all of Agrinatural's assets. No interruption in the service of
natural gas to our ethanol production facility occurred as a result of the
default. The balance of this loan was approximately $1.5 million at October 31,
2019 . Subsequent to the closing of HLBE's indirect acquisition of Agrinatural's
non-controlling interest in December 2019 , the parties agreed to forgive the
debt related to the Additional Agrinatural Credit Facility.
Off Balance-Sheet Arrangements
We have no off balance-sheet arrangements.
Critical Accounting Estimates Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require management to use estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management's current judgment. We use our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We believe that of our significant accounting policies, the following are most noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations: 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 is fixed or determinable based on current observable market prices at theChicago 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.
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.
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 in the balance sheets at fair value.
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
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-------------------------------------------------------------------------------- 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 consolidated 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 7 to our consolidated
financial statements.
Inventory
We value our inventory at the lower of cost or net realizable value using the
first in first out method or net realized value. Our estimates are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable. These valuations require the use of management's assumptions
which do not reflect unanticipated events and circumstances that may occur. In
our analysis, we consider future corn costs and ethanol prices, break-even
points for our plant and our risk management strategies in place through our use
of derivative instruments. Given the significant assumptions required and the
possibility that actual conditions will differ, we consider the valuation of the
lower of cost or net realized value on inventory to be a critical accounting
estimate.
Property and Equipment
Management's estimate of the depreciable lives of property and equipment is
based on the estimated useful lives. We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the related carrying
amounts may not be recoverable. Impairment testing for assets requires various
estimates and assumptions, including an allocation of cash flows to those assets
and, if required, an estimate of the fair value of those assets. The Company
tests for impairment at the asset group level, which is the lowest level for
which identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities.
Our estimates are based upon assumptions believed to be reasonable, but which
are inherently uncertain and unpredictable. These valuations require the use of
management's assumptions, which do not reflect unanticipated events and
circumstances that may occur. In our analysis, we consider future corn costs and
ethanol prices, break-even points for our plant and our risk management
strategies in place through our derivative instruments and forward contracts.
Given the significant assumptions required and the possibility that actual
conditions will differ, we consider the assessment of impairment of our
long-lived assets to be a critical accounting estimate.
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Rail Car Rehabilitation Costs
The Company leases 50 hopper rail cars under a multi-year agreement which ends inMay 2027 . Under the agreement, the Company is required to pay to rehabilitate each car for "damage" that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease. Prior to the year endingOctober 31, 2019 , the Company believed ongoing repairs resulted in an insignificant future rehabilitation expense. During the year endingOctober 31, 2019 , based on new information, we re-evaluated our assumptions and believe that it is probable that we may be assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars atOctober 31, 2020 and 2019 to be approximately$597,000 and$551,000 , respectively. During the years endedOctober 31, 2020 and 2019, the Company has recorded an expense in cost of goods totaling approximately$85,000 and$551,000 , respectively. The Company accrues the estimated cost of railcar damages over the term of the lease as the damages are incurred. 53
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