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OFFON

HIGHWATER ETHANOL, LLC

(HEOL)
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HIGHWATER ETHANOL LLC : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

01/21/2021 | 03:23pm EDT

Results of Operations for the Fiscal Years Ended October 31, 2020 and 2019


The following table shows the results of our operations and the percentage of
revenues, cost of goods sold, gross loss, operating expenses, operating loss and
other items to total revenues in our statements of operations for the fiscal
years ended October 31, 2020 and 2019:
                                            2020                            

2019

Statements of Operations Data       Amount             %             Amount             %
Revenues                        $ 97,256,146        100.00  %    $ 97,249,109        100.00  %
Cost of Goods Sold                99,813,857        102.63  %     101,759,731        104.64  %
Gross Loss                        (2,557,711)        (2.63) %      (4,510,622)        (4.64) %
Operating Expenses                 3,552,328          3.65  %       3,200,285          3.29  %
Operating Loss                    (6,110,039)        (6.29) %      (7,710,907)        (7.93) %
Other Income (Expense), Net         (256,127)        (0.26) %        (563,329)        (0.58) %
Net Loss                        $ (6,366,166)        (6.55) %    $ (8,274,236)        (8.51) %



The following table shows the sources of our revenues for the fiscal years ended
October 31, 2020 and 2019.
                                                           2020                                                   2019
                                                                 Percentage of                                          Percentage of
Revenue Sources                          Amount                  Total Revenues                 Amount                  Total Revenues
Ethanol Sales                        $ 75,161,967                            77.28  %       $ 75,541,437                            77.68  %
Modified Wet Distillers Grains
Sales                                   4,163,426                             4.28  %          3,874,384                             3.98  %
Dried Distillers Grains Sales          14,123,366                            14.52  %         14,700,718                            15.12  %
Corn Oil Sales                          3,807,387                             3.92  %          3,132,570                             3.22  %
Total Revenues                       $ 97,256,146                           100.00  %       $ 97,249,109                           100.00  %



Revenues

  Ethanol

  Our total revenues were similar for the fiscal year ended October 31, 2020,
compared to the fiscal year ended October 31, 2019. Revenue from ethanol sales
decreased by approximately 0.5% during the fiscal year ended October 31, 2020
compared to the fiscal year ended October 31, 2019 primarily due to lower
ethanol prices during the fiscal year ended October 31, 2020 compared to the
fiscal year end October 31, 2019. The average ethanol sales price per gallon we
received for the fiscal year ended October 31, 2020 was approximately 2.2% lower
than the average price received for the fiscal year ended October 31, 2019.
However, we experienced an increase in the gallons of ethanol sold during the
fiscal year ended October 31, 2020, compared to the fiscal year ended October
31, 2019. The gallons of ethanol we sold during the fiscal year ended
October 31, 2020 increased by 1.7% as compared to the number of gallons of
ethanol sold for the fiscal year ended October 31, 2019.

  Ethanol prices have been negatively affected for an extended period by lower
domestic demand resulting in part from the use by the Environmental Protection
Agency ("EPA") of the small refinery exemption and a decline in ethanol exports
due to trade disputes with foreign governments and the institution of a tariff
by China on ethanol produced in the United States. Ethanol prices further
decreased due to a collapse in both domestic and foreign demand as a result of
restrictions put in place in response to the COVID-19 pandemic. As a result of
poor economic conditions, many ethanol plants curtailed or stopped ethanol
production. The decrease in industry-wide production coupled with a gradual
increase in domestic demand due to the lifting of COVID-19 restrictions in some
areas had a positive effect on ethanol prices towards the end of the period.

Ethanol prices will likely decrease as ethanol plants return to higher ethanol
production levels. In addition, ethanol prices will continue to be negatively
impacted by the COVID-19 pandemic until restrictions in the United States are
lifted and domestic fuel demand fully returns. It is uncertain when this may
occur. Continued declines in ethanol exports due to decreased global fuel
consumption in response to the COVID-19 pandemic and trade disputes with foreign
governments could
                                       23
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also lead to an decrease in ethanol export demand and lower ethanol prices.
Other factors likely to affect ethanol prices in the coming fiscal year include
the results of the 2020 presidential election in the United States, the EPA's
use of the the small refinery exemption, approval of the year-round sale of E15
and changes in domestic corn prices.

The increase in ethanol gallons sold for the fiscal year ended October 31, 2020,
as compared to the number of gallons of ethanol we sold for the fiscal year
ended October 31, 2019, resulted primarily from increased ethanol production
rates due to our receipt of our updated air permit in October 2019. This was
partially offset by reduced ethanol production levels by up to 25% during the
months of March, April, May and June due to unfavorable operating conditions in
the ethanol industry and the COVID-19 pandemic. Our ethanol production levels
are currently at an annual rate of approximately 64 million gallons. Management
anticipates that the amount of ethanol produced will remain relatively
consistent in the future unless economic conditions worsen and we reduce ethanol
production levels.

  In the ordinary course of business, we enter into forward contracts for our
commodity purchases and sales. At October 31, 2020, we had no forward fixed
price ethanol sales contracts. For the fiscal years ended October 31, 2020 and
2019, we recorded losses due to changes in the fair value of our outstanding
ethanol derivative positions of approximately $623,000 and $240,000,
respectively.

Distillers Grains


  Revenue from distillers grains decreased by approximately 1.6% during the
fiscal year ended October 31, 2020 compared to the fiscal year ended October 31,
2019, primarily due to a decrease in tons of dried distillers grains sold during
the fiscal year ended October 31, 2020, compared to same period of 2019. The
tons of dried distillers grains we sold during the fiscal year ended October 31,
2020 decreased by approximately 5.2% as compared to the tons of dried distillers
grains we sold during the fiscal year ended October 31, 2019. The tons of
modified distillers grains we sold during the fiscal year ended October 31,
2020, were similar when compared to the same period for 2019. Overall, the
number of tons of distillers grains sold decreased during our fiscal year ended
October 31, 2020, as compared to the fiscal year ended October 31, 2019 due
primarily to higher corn oil production levels for the period. Management
anticipates that the amount of distillers grains produced will remain relatively
consistent in the future unless economic conditions worsen and we reduce ethanol
production levels which would then have a corresponding effect on distillers
grains.

For the fiscal year ended October 31, 2020, the average price per ton that we
received for our dried distillers grains was approximately 1.3% higher than the
average price we received during the fiscal year ended October 31, 2019, due
primarily to a decrease in supply during our second fiscal quarter resulting
from some ethanol plants reducing or shutting down production and an increase in
corn and soybean prices in the latter part of the period. For the fiscal year
ended October 31, 2020, the average price per ton that we received for our
modified distillers grains was approximately 7.0% higher than during the fiscal
year ended October 31, 2019 due to increased demand and reduced production in
our local area.

  Distillers grains prices typically change in proportion to domestic corn
prices and availability of corn. Domestic demand for distillers grains could
decrease if corn prices decline and end-users switch to lower priced
alternatives. Management anticipates that both domestic and foreign demand for
distillers grains may be negatively affected by the COVID-19 pandemic. Other
factors likely to affect distillers grains prices include the imposition by
China of anti-dumping and anti-subsidy duties on distillers grains produced in
the United States and other trade actions by the United States and foreign
governments.

Corn Oil


Revenue from corn oil sales increased by approximately 21.5% for the fiscal year
ended October 31, 2020, as compared to the fiscal year ended October 31, 2019
primarily due to an increase in pounds of corn oil sold during the fiscal year
ended October 31, 2020, compared to the fiscal year ended October 31, 2019. The
pounds of corn oil we sold during the fiscal year ended October 31, 2020
increased by approximately 22.3% as compared to the pounds of corn oil we sold
for the fiscal year ended October 31, 2019 due to improved efficiencies leading
to increased production for the period.

Management anticipates that the amount of corn oil produced will remain
relatively consistent in the future unless economic conditions worsen and we
reduce ethanol production levels which would then have a corresponding effect on
corn oil.

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The average price per pound of corn oil sold sold during the fiscal year ended
October 31, 2020 was the same when compared to the same period of 2019. Factors
likely to affect corn oil prices include biodiesel demand, the status of the
biodiesel blenders' tax credit and fluctuations in supply resulting from some
ethanol plants changing ethanol production levels in response to economic
conditions.

Cost of Goods Sold


  Our two largest costs of production are corn (68.6% of cost of goods sold for
the fiscal year ended October 31, 2020) and natural gas (4.9% of cost of goods
sold for the fiscal year ended October 31, 2020). Our total cost of goods sold
was approximately 2.2% less during the fiscal year ended October 31, 2020,
compared to the fiscal year ended October 31, 2019.

Corn


  Our average price per bushel of corn for the fiscal year ended October 31,
2020 increased by approximately 1.5% compared to the fiscal year ended
October 31, 2019 primarily due to increased market value for corn. We used
approximately 1.7% more bushels of corn in the fiscal year ended October 31,
2020 as compared to the fiscal year ended October 31, 2019 due to increased
ethanol production.

  Management expects there to be an adequate corn supply available in our area
to operate the ethanol plant. However, corn prices have been volatile and are
likely to remain so in the future depending on weather conditions, supply and
demand, stocks and other factors which could significantly impact our costs of
production.

  At October 31, 2020, we had approximately 881,000 bushels of forward fixed
basis corn purchase contracts and 1,399,000 bushels of forward fixed price corn
purchase contracts valued at approximately $5,254,000 for various delivery
periods through December 2021. We recorded losses due to changes in the fair
value of our outstanding corn derivative positions for the fiscal years ended
October 31, 2020 and 2019 of approximately $845,000 and $835,000, respectively.

Natural Gas


  For the fiscal year ended October 31, 2020, we purchased approximately 1.1%
less natural gas as compared to the same period of 2019. This decrease in
natural gas usage is primarily due to the decrease in dried distillers grains
production.

Our average price per MMBTU of natural gas was approximately 2.1% higher for the
fiscal year ended October 31, 2020 compared to the fiscal year ended October 31,
2019. Natural gas prices were higher due to new interim tariff rates levied by
Northern Natural Gas effective January 1, 2020. Management anticipates that
natural gas prices will continue at current levels unless the natural gas
industry experiences production problems or if there are large increases in
natural gas demand.

At October 31, 2020, we had approximately 2,702,000 MMBTUs of forward natural gas fixed price purchase contracts valued at approximately $6,706,000 for delivery periods through March 2023.


For the fiscal years ended October 31, 2020 and 2019, we recorded gains due to
the change in fair value of our outstanding natural gas derivative positions of
approximately $11,000 and $22,000, respectively.

Operating Expenses

We had operating expenses for the fiscal year ended October 31, 2020 of $3,552,328 compared to operating expenses of $3,200,285 for the fiscal year ended October 31, 2019. Management attributes this increase in operating expenses to an increase in insurance and professional fees. We continue 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.

Other Expense, Net


  We had total other expense for the fiscal year ended October 31, 2020 of
$256,127 compared to other expense of $563,329 for the fiscal year ended
October 31, 2019. Our other expense for the fiscal year ended October 31, 2020,
consisted primarily of interest expense which was offset in part by income from
investments. This decrease in other expense is primarily due to a decrease in
interest expense and an increase in income from investments.


                                       25
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Results of Operations for the Fiscal Years Ended October 31, 2019 and 2018


The following table shows the results of our operations and the percentage of
revenues, cost of goods sold, gross loss, operating expenses, operating loss and
other items to total revenues in our statements of operations for the fiscal
years ended October 31, 2019 and 2018:
                                            2019                            

2018

Statements of Operations Data       Amount             %             Amount             %
Revenues                        $ 97,249,109        100.00  %    $ 94,943,746        100.00  %
Cost of Goods Sold               101,759,731        104.64  %      97,723,069        102.93  %
Gross Loss                        (4,510,622)        (4.64) %      (2,779,323)        (2.93) %
Operating Expenses                 3,200,285          3.29  %       2,891,093          3.05  %
Operating Loss                    (7,710,907)        (7.93) %      (5,670,416)        (5.97) %
Other Income (Expense), Net         (563,329)        (0.58) %        (489,008)        (0.52) %
Net Loss                        $ (8,274,236)        (8.51) %    $ (6,159,424)        (6.49) %



The following table shows the sources of our revenues for the fiscal years ended
October 31, 2019 and 2018.
                                                           2019                                                   2018
                                                                 Percentage of                                          Percentage of
Revenue Sources                          Amount                  Total Revenues                 Amount                  Total Revenues
Ethanol Sales                        $ 75,541,437                            77.68  %       $ 72,664,310                            76.53  %
Modified Wet Distillers Grains
Sales                                   3,874,384                             3.98  %          3,323,857                             3.50  %
Dried Distillers Grains Sales          14,700,718                            15.12  %         15,641,622                            16.48  %
Corn Oil Sales                          3,132,570                             3.22  %          3,313,957                             3.49  %
Total Revenues                       $ 97,249,109                           100.00  %       $ 94,943,746                           100.00  %



Revenues

  Ethanol

  Our total revenues were higher for the fiscal year ended October 31, 2019
compared to the fiscal year ended October 31, 2018. Revenue from ethanol sales
increased by approximately 3.96% during the fiscal year ended October 31, 2019
compared to the fiscal year ended October 31, 2018 primarily due to higher
ethanol prices and an increase in gallons sold during the fiscal year ended
October 31, 2019 compared to the fiscal year end October 31, 2018. The average
ethanol sales price per gallon we received for the fiscal year ended October 31,
2019 was approximately 1.6% higher than the average price received for the
fiscal year ended October 31, 2018. In addition, we experienced an increase in
the gallons of ethanol sold during the fiscal year ended October 31, 2019
compared to the fiscal year ended October 31, 2018. The gallons of ethanol we
sold during the fiscal year ended October 31, 2019 increased by 2.3% as compared
to the number of gallons of ethanol sold for the fiscal year ended October 31,
2018.

  Ethanol prices were negatively affected by record levels of domestic
production coupled with a decline in ethanol exports due to trade disputes with
foreign governments and the institution of a tariff by China on ethanol produced
in the United States. In addition, the EPA's continued use of the small refinery
exemption had a negative impact on ethanol prices

The increase in ethanol gallons sold for the fiscal year ended October 31, 2019,
as compared to the number of gallons of ethanol we sold for the fiscal year
ended October 31, 2018, was mainly due to less gallons in inventory at October
31, 2019.

  In the ordinary course of business, we enter into forward contracts for our
commodity purchases and sales. At October 31, 2019, we had no forward fixed
price ethanol sales contracts. For the fiscal years ended October 31, 2019 and
2018, we recorded losses due to changes in the fair value of our outstanding
ethanol derivative positions of approximately $240,000 and $81,000,
respectively.


                                       26
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Distillers Grains


  Revenue from distillers grains decreased by approximately 2.1% during the
fiscal year ended October 31, 2019 compared to the fiscal year ended October 31,
2018, primarily due to lower distillers grains prices during the fiscal year
ended October 31, 2019 compared to same period of 2018. For the fiscal year
ended October 31, 2019, the average price per ton that we received for our dried
distillers grains was approximately 0.5% lower than the average price we
received during the fiscal year ended October 31, 2018 due to price decreases in
the protein market that correlate to the price of soybean meal and lower export
demand due to the swine flu outbreak in China, Vietnam and other foreign
countries. For the fiscal year ended October 31, 2019, the average price per ton
that we received for our modified distillers grains was approximately 6.3%
higher than during the fiscal year ended October 31, 2018 due to increased
demand and reduced production in our local area.

  The imposition by China of anti-dumping and anti-subsidy duties on distillers
grains produced in the U.S. also had a negative effect on export demand from
China resulting in lower distillers grains prices. In addition, trade actions by
the Trump administration and foreign governments created additional uncertainty
as to future agricultural export demand from China and other countries.

  The tons of dried distillers grains we sold during the fiscal year ended
October 31, 2019 decreased by approximately 5.6% as compared to the tons of
dried distillers grains we sold during the fiscal year ended October 31, 2018.
The tons of modified distillers grains we sold during the fiscal year ended
October 31, 2019, increased by approximately 9.7% as compared to the same period
for 2018 due to an increase in the demand for our product in our area. Overall,
the number of tons of distillers grains sold decreased during our fiscal year
ended October 31, 2019 compared to the fiscal year ended October 31, 2018 due to
increased efficiencies in ethanol production which resulted in our producing
less distillers grains.

  Corn Oil

  Revenue from corn oil sales decreased by approximately 5.5% for the fiscal
year ended October 31, 2019, as compared to the fiscal year ended October 31,
2018, primarily due to a decrease in pounds of corn oil sold during the fiscal
year ended October 31, 2019 compared to the fiscal year ended October 31, 2018.
The pounds of corn oil we sold during the fiscal year ended October 31, 2019
decreased by approximately 11.7% as compared to the pounds of corn oil we sold
for the fiscal year ended October 31, 2018 due to our corn oil extraction
equipment running less efficiently.

  The average price per pound of corn oil sold increased during the fiscal year
ended October 31, 2019 compared to the same period of 2018. For the fiscal year
ended October 31, 2019, the average price per pound of corn oil we received was
approximately 4.3% higher than during the fiscal year ended October 31, 2018 due
to increased demand from the corn oil feed market.

Cost of Goods Sold


  Our two largest costs of production are corn (65.1% of cost of goods sold for
the fiscal year ended October 31, 2019) and natural gas (4.7% of cost of goods
sold for the fiscal year ended October 31, 2019). Our total cost of goods sold
was approximately 4.1% more during the fiscal year ended October 31, 2019
compared to the fiscal year ended October 31, 2018.

Corn


  Our average price per bushel of corn for the fiscal year ended October 31,
2019 increased by approximately 2.2% as compared to the fiscal year ended
October 31, 2018 primarily due to increased market value for corn. We used
approximately 2.1% less bushels of corn in the fiscal year ended October 31,
2019 as compared to the fiscal year ended October 31, 2018 due to improved
efficiencies in ethanol production.

  At October 31, 2019, we had approximately 190,000 bushels of forward fixed
basis corn purchase contracts and 453,000 bushels of forward fixed price corn
purchase contracts valued at approximately $1,725,000 for various delivery
periods through July 2021. We recorded losses due to changes in the fair value
of our outstanding corn derivative positions for the fiscal years ended October
31, 2019 and 2018 of approximately $835,000 and $149,000, respectively.

Natural Gas


  For the fiscal year ended October 31, 2019, we purchased approximately 5.6%
less natural gas as compared to the same period of 2018. This decrease in
natural gas usage is primarily due to the decrease in dried distillers grains
production.
                                       27
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Our average price per MMBTU of natural gas was approximately 4.2% lower for the
fiscal year ended October 31, 2019 compared to the fiscal year ended October 31,
2018.

  Natural gas prices were lower on average for the fiscal year ended October 31,
2019 due to an increased supply and our locking in prices for the majority of
our natural gas requirements.

At October 31, 2019, we had approximately 2,968,000 MMBTUs of forward natural gas fixed price purchase contracts valued at approximately $7,497,000 for delivery periods through March 2021.


For the fiscal years ended October 31, 2019 and 2018, we recorded gains due to
the change in fair value of our outstanding natural gas derivative positions of
approximately $22,000 and $38,000, respectively.

Operating Expenses

We had operating expenses for the fiscal year ended October 31, 2019 of $3,200,285 compared to operating expenses of $2,891,093 for the fiscal year ended October 31, 2018. Management attributes this increase in operating expenses to an increase in licenses and permit fees, payment of a civil penalty to the Environmental Protection Agency and also an increase in IT fees and advertising costs.

Other Income (Expense), Net


  We had total other expense for the fiscal year ended October 31, 2019 of
$563,329 compared to other expense of $489,008 for the fiscal year ended October
31, 2018. Our other expense for the fiscal year ended October 31, 2019,
consisted primarily of interest expense which was offset in part by income from
investments.

Changes in Financial Condition for the Fiscal Years Ended October 31, 2020 and 2019


  The following table highlights the changes in our financial condition for the
fiscal year ended October 31, 2020 from our previous fiscal year ended
October 31, 2019:

                                     October 31, 2020       October 31, 2019
            Current Assets          $      15,705,336      $      12,604,430
            Current Liabilities            12,749,753             

10,794,082

            Long-Term Liabilities          11,417,150              

7,244,124




  Current Assets. The increase in current assets at October 31, 2020 was
primarily the result of increases in accounts receivable and inventories. These
increases were partially offset by decreases in cash and cash equivalents and
derivative instruments.

  Current Liabilities. The increase in current liabilities at October 31, 2020
was primarily the result of increases in accounts payable and current maturities
of long-term debt and adoption of ASC 842.

Long-Term Liabilities. Long-term debt increased at October 31, 2020, as compared to October 31, 2019, primarily due to increased borrowings on our 2020 Term Loan, obtaining a PPP loan and adoption of ASC 842 which resulted in recording lease liabilities.

Liquidity and Capital Resources


The ethanol industry experienced adverse conditions throughout most of 2018 and
2019 as a result of industry-wide record low ethanol prices due to reduced
demand and high industry inventory levels. These adverse conditions continued
into 2020 and were compounded by the COVID-19 pandemic. As a result of these
factors, we have experienced negative operating margins, lower cash flow from
operations and net operating losses. In response, we reduced our ethanol
production levels by up to 25%.  As conditions improved, we began increasing
production levels to an annual rate of approximately 64 million gallons. We
continue to monitor COVID-19 developments and the effect on demand for our
products to make adjustments to production levels as warranted. Based on
financial forecasts prepared by our management, we anticipate that we will have
sufficient cash on hand, cash from our current credit facilities, and cash from
our operations to continue to operate the ethanol plant for the next 12 months.
We do not currently anticipate seeking additional equity or debt financing in
the near term in order
                                       28
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to fund operations. However, if market conditions worsen, we could be forced to
make further reductions in ethanol production levels or even temporarily shut
down ethanol production.

The following table shows cash flows for the fiscal years ended October 31, 2020
and 2019:

                                                      October 31, 2020            October 31, 2019

Net cash provided by (used in) operating
activities                                         $          (247,864)         $       2,957,651
Net cash used in investing activities                       (3,275,201)                (1,709,039)
Net cash provided by (used in) financing
activities                                                   2,551,268                    (40,200)



  Cash Flow From Operations

  We experienced a decrease in our cash provided by (used in) operating
activities for the fiscal year ended October 31, 2020, as compared to the fiscal
year ended October 31, 2019. This decrease was primarily due to changes in
accounts receivables, inventories and accrued expense during the fiscal year
ended October 31, 2020.

Cash Flow From Investing Activities

We used more cash for investing activities during the fiscal year ended October 31, 2020, as compared to the fiscal year ended October 31, 2019. This change was primarily due to an increase in capital expenditures during the fiscal year ended October 31, 2020.

Cash Flow From Financing Activities


  We experienced an increase in our cash for financing activities during the
fiscal year ended October 31, 2020, as compared to the fiscal year ended
October 31, 2019. This increase was primarily a result of increased net
borrowings on long-term debt during the fiscal year ended October 31, 2020, as
compared to the fiscal year ended October 31, 2019.

  The following table shows cash flows for the fiscal years ended October 31,
2019 and 2018:

                                                October 31, 2019       October 31, 2018

Net cash provided by operating activities $ 2,957,651 $

4,393,981

  Net cash used in investing activities               (1,709,039)           

(2,274,830)

  Net cash used in financing activities                  (40,200)           

(2,426,658)

Cash Flow From Operations


  We experienced a decrease in our cash provided by operating activities for the
fiscal year ended October 31, 2019, as compared to the fiscal year ended October
31, 2018. This decrease was primarily due to an increase in our net loss during
the fiscal year ended October 31, 2019.

Cash Flow From Investing Activities


  We used less cash for investing activities during the fiscal year ended
October 31, 2019 as compared to the fiscal year ended October 31, 2018. This
change was primarily due to a decrease in capital expenditures during the fiscal
year ended October 31, 2019.

Cash Flow From Financing Activities


  We used less cash for financing activities during the fiscal year ended
October 31, 2019, as compared to the fiscal year ended October 31, 2018. This
decrease was primarily a result of increased borrowings on long-term debt and a
decrease in the amount we paid towards the principal balance on our loan and
decreased distributions to members during the fiscal year ended October 31,
2019, as compared to the fiscal year ended October 31, 2018.

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Short-Term and Long-Term Debt Sources


  Our loan facility with Compeer Financial f/k/a AgStar Financial Services, PCA
("Compeer") included a $15,000,000 Variable Rate Term Loan and a $20,000,000
Term Revolving Loan. On September 14, 2020, we amended our loan facility to add
a $6,000,000 term loan (the "2020 Term Loan") to be used to fund certain
improvements to the ethanol production facility. We paid $30,000 in commitment
and amendment fees in connection with this loan. Our loan facility with Compeer
is secured by substantially all business assets and also subjects the Company to
various financial and non-financial covenants. Subsequent to our fiscal year
end, on November 25, 2020, Compeer waived our violation at October 31, 2020, of
the minimum debt service coverage ratio in our loan documents.

Variable Rate Term Loan


    The Variable Rate Term Loan was for $15,000,000 with a variable interest
rate based on the 30-day LIBOR rate plus 325 basis points with no minimum
interest rate. The applicable interest rate at October 31, 2020 was 3.40%. We
paid monthly principal payments on the Variable Rate Term Loan of approximately
$250,000 plus accrued interest based upon a five year amortization. Payments of
all amounts outstanding were due on January 22, 2021. At October 31, 2020, the
balance on this note was $0 as we paid off the loan in the current year.

Term Revolving Loan


The Term Revolving Loan is for up to $20,000,000 with a variable interest rate
that is based on the 30-day LIBOR rate plus 325 basis points with no minimum
interest rate. The applicable interest rate at October 31, 2020 was 3.40%. The
Term Revolving Loan may be advanced, repaid and re-borrowed during the term.
Monthly interest payments are due on the Term Revolving Loan with payment of all
amounts outstanding due on January 22, 2023. The outstanding balance on this
note was $5,999,000 at October 31, 2020. We pay interest at a rate of 1.50% on
amounts outstanding for letters of credit which also reduce the amount available
under the Term Revolving Loan. We had no letters of credit outstanding at
October 31, 2020. We are also required to pay unused commitment fees for the
Term Revolving Loan as defined in the loan documents.

2020 Term Loan


The 2020 Term Loan is for up to $6,000,000 with a variable interest rate based
on the Wall Street Journal's Prime Rate plus 45 basis points with no minimum
interest rate. The applicable interest rate at October 31, 2020 was 3.70%.
Beginning January 1, 2021, monthly principal payments will be due on the 2020
Term Loan of approximately $250,000 plus accrued interest with payments of all
amounts outstanding due on September 14, 2022. The outstanding balance on this
note was $6,000,000 at October 31, 2020.

Covenants and other Miscellaneous Financing Agreement Terms


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

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

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

  Presently, we are meeting our liquidity needs and complying with our financial
covenants and the other terms of our loan agreements with Compeer except as to
our violation, at October 31, 2020, of the minimum debt service coverage ratio
requirement of 1.25:1.00 which was waived by Compeer on November 25, 2020. We
will continue to work with Compeer to
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try to ensure that the terms of our loan agreements are met going forward.
However, we cannot provide any assurance that our actions will result in
sustained profitable operations or that we will not be in violation of our loan
covenants or in default on our principal payments in the future. Should
unfavorable market conditions result in our violation of the terms or covenants
of our loan and we fail to obtain a waiver of any such term or covenant, Compeer
could deem us in default of our loans and require us to immediately repay a
significant portion or possibly the entire outstanding balance of our loans. In
the event of a default, Compeer could also elect to proceed with a foreclosure
action on our plant.

PPP Loan

  In March 2020, Congress passed a stimulus bill called the CARES Act to provide
economic relief related to the COVID-19 pandemic. One of the programs
established by the Act is the Paycheck Protection Program ("PPP"), authorizing
loans to small business for use in paying employees that continue to work
throughout the COVID-19 pandemic and for qualifying rent, utilities and interest
on mortgages. Loans obtained through the PPP are administered by the Small
Business Administration and eligible to be forgiven as long as the proceeds are
used for qualifying purposes and other conditions are met. On April 14, 2020, we
were awarded a PPP loan in the amount of $712,200. Management expects that the
entire loan will be used to pay employees and for other qualifying costs and
will be substantially forgiven.  To the extent it is not forgiven, we would be
required to repay that portion at an interest rate of 1% over twelve months
beginning on May 1, 2021.

Capital Expenditures


  On August 26, 2020, we entered into an agreement with Nelson Baker Biotech,
Inc. to install a system which will allow us to produce hydrous USP grade
ethanol for use in the hand sanitizer and sanitizer market. We commenced
construction in November, 2020 and expect to complete the project during the
second quarter of our 2021 fiscal year.

Contractual Cash Obligations

In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following tables provide information regarding our contractual obligations and approximate commitments as of October 31, 2020:


                                                                     Payment Due by Period
                                                         Less than One     

One to Three Three to Five After Five

                                             Total            Year            Years            Years          Years
Long-Term Debt Obligations              $ 12,978,063    $   3,045,828    $   9,932,235    $          -              -
Operating Lease Obligations                  617,760          168,480          336,960         112,320              -
Finance Lease Obligations                  1,609,200          178,800          357,600         357,600        715,200
Purchase Obligations                      16,019,590       13,004,970        3,014,620               -              -
Total Contractual Obligations           $ 31,224,613    $  16,398,078    $  

13,641,415 $ 469,920 $ 715,200

Critical Accounting Estimates


  Management uses various estimates and assumptions in preparing our financial
statements in accordance with generally accepted accounting principles.  These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Accounting estimates that are the most important to the
presentation of our results of operations and financial condition, and which
require the greatest use of judgment by management, are designated as our
critical accounting estimates. We have the following critical accounting
estimates:

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

 Impairment testing for assets requires various estimates and assumptions,
including an allocation of cash flows to those assets and, if required, an
estimate of the fair value of those assets.  Our estimates are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable. These valuations require the use of management's assumptions,
which do not reflect unanticipated events and circumstances that may occur.

Given the

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significant assumptions required and the possibility that actual conditions will
differ, we consider the assessment of carrying value of property and equipment
to be a critical accounting estimate.

Inventory Valuation


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

Derivatives

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

We have entered into ethanol, corn and natural gas derivatives in order to
protect cash flows from fluctuations caused by volatility in commodity prices.
In practice, as markets move, we actively attempt to manage our risk and adjust
hedging strategies as appropriate. We do not use hedge accounting which would
match the gain or loss on our hedge positions to the specific commodity
contracts being hedged. Instead, we use fair value accounting for our hedge
positions, which means that as the current market price of our hedge position
changes, the gains and losses are immediately recognized in our statement of
operations. The immediate recognition of hedging gains and losses under fair
value accounting can cause net income (loss) to be volatile from quarter to
quarter due to the timing of the change in value of the derivative instruments
relative to the cost and use of the commodity being hedged.

  As of October 31, 2020, the fair values of our commodity-based derivative
instruments are a net liability of $890,000. As the prices of the hedged
commodity moves in reaction to market trends and information, our statement of
operations will be affected depending on the impact such market movements have
on the value of our derivative instruments. Depending on market movements, crop
prospects and weather, these price protection positions may cause immediate
adverse effects, but are expected to protect the Company over the term of the
contracts for the hedged amounts.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

© Edgar Online, source Glimpses

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