Homeland Energy Solutions, LLC (referred to herein as "we," "us," the "Company," or "Homeland") is an Iowa limited liability company. Homeland was formed on December 7, 2005 for the purpose of pooling investors for the development, construction and operation of a 100 million gallon per year ethanol plant located near Lawler, Iowa. We began producing ethanol and distiller grains at the plant in April 2009. We completed installation of corn oil extraction equipment and commenced selling corn oil during our fourth quarter of 2011. The ethanol plant is capable of operating at a rate in excess of 145 million gallons of ethanol per year.

On June 13, 2013, we entered into an agreement with Steve Retterath, our largest member, to repurchase and retire all of the units owned by Mr. Retterath. We agreed to repurchase and retire 25,860 membership units owned by Mr. Retterath in exchange for $30 million, to be paid in two equal installments, payable at closing and on July 1, 2014. The transaction failed to close by August 1, 2013 due to objections by Mr. Retterath. The Company believes that it has a binding agreement with Mr. Retterath. On August 14, 2013, the Company filed a lawsuit against Mr. Retterath in Iowa state court to enforce the terms of the repurchase agreement. The Company is asking the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.

Mr. Retterath contends he is not bound by the agreement.  The Company'sOur position is that, as of the closing date, Mr. Retterath is no longer the equitable owner of any membership units in the Company. As a result, we have recorded a $30 million short-term liability related to the amount we agreed to pay Mr. Retterath to repurchase his membership units and have correspondingly reduced members' equity on our balance sheet. If we are ultimately unsuccessful in our lawsuit against Mr. Retterath, the Company will reevaluate the accounting considerations made during the period of time that the lawsuit is pending.

On February 18, 2015, we filed a motion for summary judgment asking the Iowa state court to rule that the repurchase agreement was valid and enforceable and ordering Mr. Retterath to perform his obligations pursuant to the repurchase agreement. Mr. Retterath along with his son and daughter-in-law filed motions for summary judgment asking the Iowa state court to rule that the repurchase agreement was invalid. The Iowa state court entered a ruling granting Homeland's motion for summary judgment and determined no membership vote was required as Mr. Retterath has contended. The Iowa state court also denied the summary judgment motions filed by Mr. Retterath and his son and daughter-in-law. Recently,

In January 2017, we went to trial with Mr. Retterath and his son and daughter-in-law filed a motion to add a significant number of additional parties toon the Iowa lawsuit along with additional claims against the Company. We have filed a resistance to Mr. Retterath's attempts to expand the scopefirst part of the Iowa lawsuit. In November 2016,state court case regarding whether the repurchase agreement is valid and enforceable. Once the Iowa Court ruled that Homeland's original claims against Mr. Retterathstate court renders its decision, a second part of the lawsuit will proceedgo to trial in January 2017 as scheduledregarding the tax treatment associated with the repurchase between the time when the agreement was signed and that any other issues that remain following that trial will be litigated after a ruling is issued in the January 2017 trial.decision regarding the enforceability of the repurchase agreement.

On September 23, 2016,In recent years, the Chinese government instituted a 33.8% anti-dumping duty on all distillers grains producedethanol industry in the United States has increased exports of ethanol and exported to China.distiller grains. In January 2017, the Chinese issued final tariffs on U.S. distiller grains. The Chinese claimed thatdistiller grains anti-dumping tariffs range from 42.2% to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%. In addition, the Chinese government increased its ethanol producers in the United States were unfairly benefitingimport tariff from subsidies which artificially lowered the price5% to 30% as of distillers grains. China historically has been the world's top buyer of dried distillers grains and nearly all of the distillers grains China purchases come from the United States. This trade dispute has resulted in fewer exports of distillers grains to China which hasJanuary 1, 2017. These tariffs have had a negative impact on market distillersethanol and distiller grains prices received by ethanol producers in the United States. Further,

In Brazil, UNICA, the Chinese dutyBrazilian sugarcane industry, is preliminary and itlobbying the Brazilian government to institute a 16% tariff on imported ethanol. Ethanol producers in Brazil are seeking a 20% tariff. To date, this tariff has not been implemented. However, Brazil is possible that the final duty could be higher, further impacting distillers grainsa major source of ethanol demand, and prices. Management believes that this trade dispute hasa tariff could negatively impacted our profitability which could continue.

    

We engage in risk management activities that are intended to fix the purchase price of the corn and natural gas we require to produce ethanol, distiller grains and corn oil. During our thirdfirst quarter of 2017, we had a realized gain of approximately $35,000 and an unrealized loss of approximately $93,000 related to our corn derivative instruments. During our first quarter of 2016, we had a realized gain of approximately $4,712,000 and an unrealized loss of approximately $2,626,000 related to our corn derivative instruments. During our third quarter of 2015, we had a realized loss of approximately $884,000$516,000 and an unrealized gain of approximately $2,702,000$506,000 related to our corn derivative instruments. We recognize the gains or losses that result from changes in the value of our corn and natural gas derivative instruments in cost of goods sold as the changes occur. Our plant is expected to use approximately 4955 million bushels of corn per year. As of September 30, 2016,March 31, 2017, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 14%6% of its anticipated monthly grind for the next twelve months.

On November 30, 2007, we entered into a Master Loan Agreement with Home Federal Savings Bank (Home Federal) establishing a senior credit facility with Home Federal. In return, we executed a mortgage and a security agreement in favor of Home Federal creating a senior lien on substantially all of our assets. We currently have a $20 million term revolving loan with Home Federal. As part of the expansion project, we anticipate entering into a new credit facility with Home Federal.

If we fail to make a payment of principal or interest on our loan within 10 days of the due date, there will be a late charge equal to 5% of the amount of the payment.

Failure to comply with the loan covenants or to maintain the required financial ratios may cause acceleration of any future outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. Any acceleration of the debt financing or imposition of the fees, charges or penalties may restrict or limit our access to the capital resources necessary to continue plant operations.

Should we default on any of our obligations pursuant to the Home Federal loans, Home Federal may terminate its commitment to provide us funds and declare any future unpaid principal balance of the loans, plus accrued interest, immediately due and payable. Events of default include the failure to make payments when due, our insolvency, any material adverse change in our financial condition or the breach of any of the covenants, representations or warranties we have made in the loan agreements.

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles.  These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:

The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative my be exempted from derivative accounting 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 the accounting and reporting requirements of derivative accounting.

The Company enters into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of ethanol for the plant and managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of all contracts with the same counter party are presented net on the accompanying balance sheet as derivative instruments net of cash due from/to broker.

Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Interest income is recognized as earned. Shipping costs incurred by the Company in the sale of ethanol and distiller grains are not specifically identifiable and as a result, revenue from the sale of ethanol and distiller grains is recorded based on the net selling price reported to the Company from the marketer.

We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars and we have no amounts outstanding on variable interest rate debt. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from 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.

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

On August 14, 2013, the Company filed a lawsuit against Steve Retterath in the Iowa state court located in Polk County, Iowa. The purpose of the lawsuit is to enforce the terms of the repurchase agreement the Company executed with Mr. Retterath on June 13, 2013. The Company is asking the Iowa state court to require Mr. Retterath to perform his obligations under the

Recently, Mr. Retterath and his son and daughter-in-law filed a motion to add a significant number of additional parties to the Iowa lawsuit along with additional claims against the Company. We filed a resistance to Mr. Retterath's attempts to expand the scope of the Iowa lawsuit. In November 2016, the Iowa Court ruled that Homeland'sour original claims against Mr. Retterath willwould proceed to trial in January 2017 as scheduled and that any other issues that remain following that trial willwould be litigated after a ruling is issued in the January 2017 trial. The trial was held in January 2017 and we are awaiting a ruling from the Iowa state court.

On August 9, 2013, GS Cleantech Corporation ("GS Cleantech"), a subsidiary of Greenshift Corporation, filed a complaint in the United States District for the Northern District of Iowa against the Company. The Company is one of more than twenty ethanol manufacturers that were sued by GS Cleantech. The complaint alleges that the Company's operation of a corn oil extraction process infringes patent rights claimed by GS Cleantech. GS Cleantech seeks royalties, damages and potentially triple damages associated with the alleged infringement, as well as attorney's fees. The complaint was transferred to the United States District Court for the Southern District of Indiana due to a finding that the action involves questions of fact common to several other lawsuits which were joined in a multi-district litigation ("MDL"). The MDL Court developed two tracks of defendants in this litigation. The first track includes defendants which were originally sued by GS Cleantech in 2010 and a second track of defendants sued in 2013 which includes the Company. On October 23, 2014, the MDL Court granted summary judgment in favor of the first track defendants and found that the GS Cleantech patents which the Company is alleged to have infringed are invalid. Further, in a January 16, 2015 decision, the MDL ruled in favor of a stipulated motion for partial summary judgment finding that all of the GS Cleantech patents in the suit were invalid and, therefore, not infringed.  GS Cleantech has said it will appeal this decision when the remaining claim in the suit has been decided.  If GS Cleantech successfully appeals the District Court’s findings of invalidity, damages awarded GS Cleantech may be $1 million or more.