UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                    
FORM 10-Q
                    
xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
For the fiscal quarter ended September 30, 2017March 31, 2020
 
oTransition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Commission file number 000-53202
HOMELAND ENERGY SOLUTIONS, LLC
(Exact name of registrant as specified in its charter)
 
Iowa 20-3919356
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer Identification No.)
 
2779 Highway 24, Lawler, Iowa 52154
(Address of principal executive offices) (Zip Code)
 
(563) 238-5555
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
Title of each classTrading Symbol(s)Name of each exchange on which registered
 
Securities registered pursuant to Section 12(g) of the Act: Membership Units

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        x Yes o No

Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filero Accelerated filero
Non-accelerated filerx Smaller Reporting Companyo
(Do not check if a smaller reporting company)Emerging Growth Companyo
     
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 o


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

As of November 14, 2017May 15, 2020, we had 90,44564,560 membership units outstanding. On June 13, 2013,Following the Company entered into an agreementend of our first fiscal quarter of 2020, we closed on the unit repurchase transaction with Steve Retterath the Company's largest equity holder, to repurchase and retire all of the units owned by Mr. Retterath. The Company agreed to repurchase and retire 25,860 membership units ownedpreviously held by Mr. Retterath in exchange for $30 million. Recently, a court ruled that the repurchase agreement was valid and enforceable and ordered Mr. Retterath to close on the transaction. Mr. Retterath is appealing this decision. The Company's position is as of the closing date of the original agreement, Mr. Retterath is no longer the equitable owner of any membership units in the Company. As a result, the Company has recorded a $30 million short-term liability related to the amount the Company agreed to pay Mr. Retterath to repurchase his membership units and has correspondingly reduced members' equity on the balance sheet. The 90,445 membership units outstanding include the contested membership units the Company agreed to repurchase from Mr. Retterath.have been retired.





INDEX
 Page No.
  
       Item 1A. Risk Factors
       Item 6. Exhibits
  
  

PART I.        FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Homeland Energy Solutions, LLC
Balance Sheets
September 30, 2017 December 31, 2016March 31, 2020 December 31, 2019
ASSETS(Unaudited) (Audited)(Unaudited) (Audited)
      
CURRENT ASSETS      
Cash and cash equivalents$36,783,710
 $14,168,643
$17,270,326
 $17,274,703
Trading securities34,879,254
 41,551,151
42,189,476
 42,508,451
Accounts receivable557,378
 6,258,503
2,593,299
 7,159,632
Inventory13,903,739
 11,619,564
16,406,975
 15,311,396
Prepaid and other2,481,843
 2,708,029
3,881,485
 4,119,486
Derivative instruments536,487
 529,185
1,020,904
 799,484
Total current assets89,142,411
 76,835,075
83,362,465
 87,173,152
      
PROPERTY AND EQUIPMENT      
Land and improvements22,539,788
 22,539,788
23,181,342
 23,181,342
Buildings6,344,990
 6,344,990
8,777,302
 8,777,302
Equipment167,836,865
 166,657,213
222,826,042
 222,979,738
Construction in progress30,178,570
 8,270,322
1,171,270
 722,507
226,900,213
 203,812,313
255,955,956
 255,660,889
Less accumulated depreciation95,029,946
 86,005,811
132,909,155
 129,105,903
Total property and equipment131,870,267
 117,806,502
123,046,801
 126,554,986
      
OTHER ASSETS      
Restricted cash2,465,041
 
Utility rights, net of amortization of $1,421,507 and $1,319,217886,522
 988,812
Right of use asset operating leases4,294,978
 4,678,365
Utility rights, net of amortization of $1,762,477 and $1,728,386545,552
 579,643
Other assets3,169,414
 3,154,510
4,185,762
 3,973,846
Total other assets6,520,977
 4,143,322
9,026,292
 9,231,854
      
TOTAL ASSETS$227,533,655
 $198,784,899
$215,435,558
 $222,959,992

See Notes to Unaudited Financial Statements.

Homeland Energy Solutions, LLC
Balance Sheets (continued)
September 30, 2017 December 31, 2016March 31, 2020 December 31, 2019
LIABILITIES AND MEMBERS' EQUITY(Unaudited) (Audited)(Unaudited) (Audited)
      
CURRENT LIABILITIES      
Accounts payable$6,996,059
 $16,051,844
$13,423,524
 $14,834,053
Due to former member30,000,000
 30,000,000
30,000,000
 30,000,000
Accrued expenses1,099,007
 1,372,493
1,021,723
 1,507,195
Current portion long term debt3,000,000
 
6,000,000
 6,000,000
Current portion operating lease liability1,580,195
 1,561,422
Total current liabilities41,095,066
 47,424,337
52,025,442
 53,902,670
      
COMMITMENTS AND CONTINGENCIES
 
COMMITMENTS AND CONTINGENCIES (Note 5)
 
      
LONG-TERM LIABILITIES      
Term note27,000,000
 
11,968,343
 11,964,824
Other liabilities
 123,190
Operating lease liability2,714,783
 3,116,943
Total long-term liabilities27,000,000
 123,190
14,683,126
 15,081,767
      
MEMBERS' EQUITY (64,585 units issued and outstanding)159,438,589
 151,237,372
MEMBERS' EQUITY (64,560 units issued and outstanding)148,726,990
 153,975,555
      
TOTAL LIABILITIES AND MEMBERS' EQUITY$227,533,655
 $198,784,899
$215,435,558
 $222,959,992
      

See Notes to Unaudited Financial Statements.


Homeland Energy Solutions, LLC
Statements of Operations
(Unaudited)
Three Months Ended Three Months Ended Nine Months Ended Nine Months EndedThree Months Ended Three Months Ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016March 31, 2020 March 31, 2019
          
Revenue$59,680,650
 $64,675,851
 $194,342,760
 $196,132,720
$65,037,238
 $82,074,397
          
Costs of goods sold52,152,539
 55,045,329
 174,938,128
 174,855,824
68,964,823
 76,506,526
          
Gross profit7,528,111
 9,630,522
 19,404,632
 21,276,896
Gross profit (loss)(3,927,585) 5,567,871
          
Selling, general and administrative expenses806,772
 1,126,987
 2,833,927
 2,697,754
1,005,013
 1,165,504
          
Operating income6,721,339
 8,503,535
 16,570,705
 18,579,142
Operating income (loss)(4,932,598) 4,402,367
          
Other income (expense)          
Interest (expense)(112,806) 
 (112,806) 
(225,056) (296,107)
Interest income42,358
 3,493
 69,490
 8,270
28,544
 12,400
Other income146,449
 164,336
 651,143
 1,298,558
Total other income76,001
 167,829
 607,827
 1,306,828
Other income (expense)(119,455) 600,395
Total other income (expense)(315,967) 316,688
          
Net income$6,797,340
 $8,671,364
 $17,178,532
 $19,885,970
Net income (loss)$(5,248,565) $4,719,055
          
Basic & diluted net income per capital unit$105.25
 $134.26
 $265.98
 $307.90
Basic & diluted net income (loss) per capital unit$(81.30) $73.10
          
Weighted average number of units outstanding for the calculation of basic & diluted net income per capital unit64,585
 64,585
 64,585
 64,585
64,560
 64,560
          
Distribution per Unit$
 $

See Notes to Unaudited Financial Statements.


Homeland Energy Solutions, LLC
Statements of Cash Flows
(Unaudited)
 Nine Months Ended Nine Months Ended
 September 30, 2017 September 30, 2016
    
CASH FLOWS FROM OPERATING ACTIVITIES   
Net income$17,178,532
 $19,885,970
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization9,131,947
 8,407,810
Unrealized (gain) loss on risk management activities(7,302) (188,856)
Unrealized (gain) on trading securities activities(628,103) (1,078,687)
Change in working capital components:   
Accounts receivable5,701,125
 2,653,973
Inventory(2,284,175) (3,692,056)
Prepaid and other226,186
 (93,019)
Accounts payable and other accrued expenses(3,153,642) (1,065,764)
Net cash provided by operating activities26,164,568
 24,829,371
    
CASH FLOWS FROM INVESTING ACTIVITIES   
Redemptions of trading securities7,300,000
 
Payments for equipment and construction in progress(29,392,241) (11,878,621)
(Increase) decrease in other assets(14,904) 222,159
Net cash (used in) investing activities(22,107,145) (11,656,462)
    
CASH FLOWS FROM FINANCING ACTIVITIES   
Distribution to members(8,977,315) (3,875,100)
Proceeds from long-term borrowings30,000,000
 
Net cash provided by (used in) financing activities21,022,685
 (3,875,100)
    
Net increase in cash and cash equivalents25,080,108
 9,297,809
    
Cash and Cash Equivalents and Restricted Cash - Beginning14,168,643
 20,256,678
Cash and Cash Equivalents and Restricted Cash - Ending$39,248,751
 $29,554,487
    
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES   
Accounts payable related to property and equipment$2,495,574
 $300,812
Cash paid for interest, net of capitalized interest of $261,934 and none, respectively$
 $
 Three Months Ended Three Months Ended
 March 31, 2020 March 31, 2019
    
CASH FLOWS FROM OPERATING ACTIVITIES   
Net income (loss)$(5,248,565) $4,719,055
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Depreciation and amortization4,019,713
 3,927,855
Unrealized gain on risk management activities(221,420) (299,867)
Unrealized (gain) loss on trading securities activities318,975
 (585,399)
     Gain on disposal of property and equipment(3,254) 
Change in working capital components:   
Accounts receivable4,566,333
 (82,664)
Inventory(1,095,579) (441,316)
Prepaid and other238,001
 (156,490)
Accounts payable and other accrued expenses(1,827,854) (1,374,954)
Net cash provided by operating activities746,350
 5,706,220
    
CASH FLOWS FROM INVESTING ACTIVITIES   
Purchase of trading securities
 (15,000,000)
Payments for equipment and construction in progress(570,811) (2,589,410)
Proceeds from sale of equipment32,000
 
Decrease (increase) in other assets(211,916) 218,352
Net cash (used in) investing activities(750,727) (17,371,058)
    
Net decrease in cash and cash equivalents(4,377) (11,664,838)
    
Cash and Cash Equivalents - Beginning17,274,703
 28,751,994
Cash and Cash Equivalents - Ending$17,270,326
 $17,087,156
    
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION   
Cash paid for interest$147,293
 $193,596
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES   
Establishment of lease liability and right-of-use asset$
 $6,320,411
    
Accounts payable issued for property and equipment additions$120,683
 $710,736

See Notes to Unaudited Financial Statements.

Homeland Energy Solutions, LLC
Statements of Changes in Members' Equity


6
 Members' Equity
  
Balance - December 31, 2018$157,094,802
  
Net income for the three-month period ended March 31, 20194,719,055
  
Balance - March 31, 2019$161,813,857
  


 Members' Equity
  
Balance - December 31, 2019$153,975,555
  
Net loss for the three-month period ended March 31, 2020(5,248,565)
  
Balance - March 31, 2020$148,726,990


See Notes to Unaudited Financial Statements.


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Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements


1.Nature of Business and Significant Accounting PoliciesNATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended December 31, 20162019, contained in the Company's annual report on Form 10-K for 20162019.

In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.

Nature of Business
Homeland Energy Solutions, LLC (an Iowa Limited Liability Company) is located near Lawler, Iowa and was organized to pool investors for a 100 million gallon ethanol plant with distribution primarily throughout the United States. The Company has capacity to produce in excess of 160190 million gallons annually and sells distillers dried grains and corn oil as byproducts of ethanol production.

Organization
Homeland Energy Solutions, LLC is organized as an Iowa limited liability company. The members' liability is limited as specified in Homeland Energy Solutions' operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.

Significant Accounting Policies:

Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with United States Generally Accepted Accounting Principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

Cash & Cash Equivalents & Restricted Cash
The Company maintains its accounts primarily at one financial institution. At various times, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced losses in such accounts.

Restricted Also included in cash consistsand equivalents are highly liquid investment that are readily convertible into known amounts of unused proceeds from the term loan. These fundscash, which are heldsubject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a bank controlled account and are made available as the Company submits to the financial institution invoices and lien waivers related to the plant expansion project. As these funds will be used to acquire long-term assets the related restricted cash has been classified as a long-term asset.maturity of three months or less.

Trading Securities
Investments bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are measured at fair value using prices obtained from pricing services. Any interest, dividends, and unrealized or realized gains and losses on the trading securities are recorded as part of other income.

At March 31, 2020, trading securities consisted of short term bond mutual funds with an approximate cost of $42,632,000 and fair value of $42,189,000. At December 31, 2016,2019, trading securities consisted of corporate bonds and short term bond mutual funds with an approximate cost of $41,863,000$42,370,000 and fair value of $41,551,000. At September 30, 2017, trading securities consisted of corporate bonds, short term bond mutual funds and money market funds with an approximate cost of $35,043,000 and fair value of $34,879,000.$42,508,000. For the three and nine months ended September 30, 2017,March 31, 2020, the Company recorded interest, dividend and net realized and unrealized gains and lossesloss from these investments of approximately $165,000 and $628,000, respectively.$319,000 included in other income on the statement of operations. During the same time period of 2016,2019, the Company recorded interest, dividends and net unrealized gains and losses from these investments of approximately $159,000 and $1,079,000 respectively.$585,000.

The Board of Directors voted to set aside up to $30 million in trading securities that will be used by the Company for the repurchase of 25,860 membership units per the terms of an agreement with Mr. Retterath entered into on June 13, 2013 with the Company.


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Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

Receivables
Credit sales are made primarily to two customers and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.

Note Receivable
The Company has a note receivable from an unrelated company. The Company carries the note at the current principal balance included in other assets. The note commenced in July, 2019 with a face value of $350,000 and matures August, 2021.

Investments
The Company has a less than 20% investment interest in Renewable Products Marketing Group, LLC (RPMG)("RPMG"). This investment is being accounted for under the equity method of accounting, as the companyCompany has significant influence, under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. The investment balance is included in other assets and the income recognized as other income. The investment is evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.

Revenue and Cost Recognition
In the first quarter of 2018, the Company adopted Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606). Under the saleASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the Company's productsnature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. The Company generally has a single performance obligation in its arrangements with customers. The Company believes for its contracts with customers, control is recognizedtransferred at thea point in time, title to the goods and all risks of ownership transfertypically upon delivery to the customers. ThisWhen the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. The Company generally occurs upon shipment, loadingexpenses sales commissions when incurred because the amortization period would have been less than one year.

The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or whenservices are transferred to our customers, in an amount that reflects the customer picks upconsideration that we expect to receive in exchange for those goods or services.

sales of ethanol;

sales of distiller grains; and

sales of corn oil;

All revenue recognized in the goods. Interest income statement is recognizedconsidered to be revenue from contracts with customers. The disaggregation of revenue according to product line, along with accounts receivable from contracts with customers, is as earned. disclosed in Note 5.

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. Rail car lease costs incurred by the Company in the sale and shipment of distiller grain products are included in the cost of goods sold.

Inventories
Inventories are generally valued at the lower of cost (first-in, first-out) or net realizable value.  In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.


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Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

Property & Equipment
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset group may not be recoverable. If circumstances require an asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset group to the carrying value of the asset group. If the carrying value of the asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
 
Derivative Instruments
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may 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.
 
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
 
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 revenue in the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presented on the accompanying balance sheet as derivative instruments. All contracts with the same counter party are reported on a net basis.


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Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

Committed Shares to be Redeemed
On June 13, 2013, the Company entered into an agreement with Steve Retterath, the Company's largest member, to repurchase and retire all of the membership units owned by Mr. Retterath. The Company agreed to close on this repurchase on or before August 1, 2013. The Company 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 the scheduled date due to objections by Mr. Retterath. Due to all conditions of the agreement being met prior to, or on, August 1, 2013, and a court ruling which found the agreement to be binding and enforceable, the Company believes that it has a binding agreement with Mr. Retterath; as such the commitment to repurchase and retire the membership units is reflected in the financial statements as a current liability, due to former member, as if the transaction had closed on August 1, 2013. See Note 9 for additional information.

Net Income per Unit
Basic and diluted net income per unit is computed by dividing net income by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net income per unit are the same.

Prior to, or on, August 1, 2013, the Company believes it has a binding agreement with Steve Retterath to repurchase and retire all 25,860 membership units owned by Mr. Retterath. These membership units have thus been excluded in the determination of net income per capital unit as presented in the Statement of Operations. The Company is currently involved in litigation with Mr. Retterath. There is potential that Mr. Retterath will continue as a unit holder upon conclusion of the litigation and said membership units would not be redeemed under the repurchase agreement. If the units are not redeemed, basic and diluted net income per unit, including the 25,860 units, for the three and nine months ended September 30, 2017 would be $72.58 and $187.36, respectively. Net income per unit for the three and nine months ended September 30, 2016 would have been $95.87 and $219.87, respectively.

Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, distiller grains and corn oil to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the ninethree months ended September 30, 2017,March 31, 2020, ethanol sales averaged approximately 81%74% of total revenues, while approximately 14%21% of revenues were generated from the sale of distiller grains. Corn oil sales attributed approximately 5% of revenues during this time period. For the ninethree months ended September 30, 2017,March 31, 2020, corn costs averaged approximately 77%80% of cost of goods sold.

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Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements


The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.

On January 30, 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a “Public Health Emergency of International Concern” and on March 11, 2020, declared COVID-19 a pandemic. The impact of COVID-19 could negatively impact the Company’s operations, suppliers or other vendors, and customer base. Any quarantines, labor shortages or other disruptions to the Company’s operations, or those of their customers, may adversely impact the Company’s revenues, ability to provide its services and operating results. In addition, a significant outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the geographical area in which the Company operates, resulting in an economic downturn that could affect demand for its goods and services. The extent to which the coronavirus impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.

Recent & Pending Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. ASU 2016-18 must be applied using a retrospective transition method with early adoption permitted. The Company adopted this guidance in its financial statements as of January 1, 2017.

In May 2014, theAugust 2018, FASB issued ASU No. 2014-09,"Revenue from Contracts with Customers"2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). The ASU supersedes2018-13 changes some of the revenue recognitiondisclosure requirements in "Accounting Standard Codification 605 - Revenue Recognition"related to fair value measurements related to the Level 1, 2 and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This3 investments. ASU 2018-13 is effective for fiscal years beginning after December 15, 2017,2019, and for interim periods within that fiscal year. Although early application asThe Company is currently evaluating the impact of its pending adoption of the original date is permitted, we expect to adopt ASU No. 2014-09 andnew standard on the related ASUs on January 1, 2018.

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We have evaluated the effect of this standard as well as our existing contracts with customers and we plan to use the modified retrospective method. Under the modified retrospective method, the Company will present revenue under the new method required by ASU No. 2014-09 beginning with first quarter 2018. The impact of this standard, other than disclosures, is expected to be minimal.

financial statement.

2.    INVENTORY

Inventory consisted of the following as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
 September 30, 2017 December 31, 2016 March 31, 2020 December 31, 2019
Raw Materials $9,421,128
 $8,489,218
 $10,236,774
 $10,757,505
Work in Process 2,329,829
 1,900,387
 2,258,551
 2,617,916
Finished Goods 2,152,782
 1,229,959
 3,911,650
 1,935,975
Totals $13,903,739
 $11,619,564
 $16,406,975
 $15,311,396

As of March 31, 2020 and December 31, 2019, the Company recognized a lower of cost or net realizable value adjustment of approximately $1,281,000 and $0, respectively, related to inventory.

3.    DEBT

Master Loan Agreement with Home Federal Savings Bank
On June 29, 2017, the Company amended and restated the Master Loan Agreement with Home Federal Savings Bank ("Home Federal"), amending the term revolving loan to provide funding to operate the plant and establishing a term loan to help fund the Company's $42 million expansion project. In return, the Company entered into agreements providing Home Federal a security interest in substantially all personal property located on Company property, including the current expansion project.property. The Company currently has two loans with Home Federal, a term revolving loan and a term loan.

Term Revolving Loan
Under the terms of the Second Supplement to the Master Loan Agreement, dated June 29, 2017, the Company has a $30 million term revolving loan which has a maturity date of December 31, 2022. Interest on the term revolving loan is due monthly and

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Notes to Unaudited Financial Statements

accrues at a rate equal to the one month LIBOR plus 310Prime Rate less 60 basis points, 4.33%2.65% on September 30, 2017March 31, 2020. There was no balance outstanding on the term revolving loan and $30 million and $20 million available to be drawn as of September 30, 2017March 31, 2020 and December 31, 20162019, respectively.

Term Debt
Under the terms of the Fourth Supplement to the Master Loan Agreement, dated June 29, 2017, the Company has a $30 million term loan which has a maturity date of December 31, 2022. Interest on the term loan is at a fixed rate of 4.79%. The Company is required to make monthly interest payments beginning July 1, 2017 and bi-annual principal payments of $3 million beginning on June 30, 2018. The long-term portion of the outstanding debt is presented net of unamortized debt issuance costs of $31,657 and $35,176 as of March 31, 2020 and December 31, 2019, respectively.

At September 30, 2017,March 31, 2020, the Company had the following debt maturities on the term loan for the twelve month periods ended September 30:March 31:
2018 $3,000,000
2019 6,000,000
2020 6,000,000
2021 6,000,000
2022 6,000,000
Thereafter 3,000,000
         Total principal payments $30,000,000



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Notes to Unaudited Financial Statements
2021 $6,000,000
2022 6,000,000
2023 6,000,000
         Total principal payments $18,000,000

Covenants
During the term of the loans, the Company is subject to certain financial covenants at various times calculated monthly, quarterly or annually, including restriction of the payment of dividends and capital expenditures and maintenance of certain financial ratios including the minimum working capital and a fixed charge ratio as defined by the Master Loan Agreement. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. The Company is in compliance with all debt covenants as of September 30, 2017.March 31, 2020.

4.    RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENT

Due to former member
On June 13, 2013, we entered into an agreement with Steve Retterath, the Company's largest member, to repurchase and retire all of the units owned by Mr. Retterath. The Company agreed to close on this repurchase on or before August 1, 2013. The Company 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 the scheduled date 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 askingasked the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.

Mr. Retterath contendsRetterath's contention was he is not bound by the agreement.  The Company's position is as of the closing date, Mr. Retterath is no longer the equitable owner of any membership units in the Company. As a result, in 2013 the Company recorded a $30 million short-term liability related to the amount the Company agreed to pay Mr. Retterath to repurchase his membership units and correspondingly reduced members' equity on the balance sheet. IfFollowing the Company is ultimately unsuccessful in its lawsuit againstend of our first quarter of 2020, Mr. Retterath agreed to complete the Company will reevaluaterepurchase and the accounting considerations made during the period of time that the lawsuit is pending.units were repurchased and retired.

Other matters
The Company has purchased corn and materials from members of its Board of Directors who own or manage elevators or are local producers of corn. Purchases during the three and nine months ended September 30, 2017March 31, 2020 totaled approximately $1,019,000 and $10,178,000, respectively,$662,000, and during the three and nine months ended September 30, 2016March 31, 2019 totaled approximately $3,480,000 and $7,861,000, respectively.$1,421,000. There were no amountsis nothing due to these members at September 30, 2017March 31, 2020 and December 31, 2016.2019, respectively.

5.    COMMITMENTS, CONTINGENCIES, AND AGREEMENTS

Ethanol, corn oil, and distiller grains marketing agreements and major customers

The Company has entered into a marketing agreement with RPMG to sell all denatured fuel ethanol produced at the plant at a mutually agreed on price, less commission and transportation charges. As of September 30, 2017March 31, 2020, the Company had no commitments

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Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

to sell any of its produced gallons of ethanol at fixed prices and 3536 million of its produced gallons of ethanol at basis price levels indexed against exchanges for delivery through December 31, 2017.June 30, 2020.

The Company has entered into a marketing agreement with RPMG to sell all corn oil produced at the plant at a mutually agreed on price, less marketing fees and transportation charges. As of September 30, 2017March 31, 2020, the Company had commitments to sell approximately 7.26 million pounds of corn oil at various fixed and basis price levels indexed against exchanges for delivery through December 31, 2017.April 30, 2020.

The Company also has an investment in RPMG, included in other assets, totaling approximately $2,345,0002,523,000 and $2,422,000 as of September 30, 2017March 31, 2020. and December 31, 2019, respectively.

The Company has entered into a marketing agreement to sell all distiller grains produced at the plant to CHS, an unrelated party, at a mutually agreed on price, less commission and transportation charges. The agreement was renewed for another one year term on April 1, 2017.2020. The agreement calls for automatic renewal for successive one-year terms unless 90-day prior written notice is given before the current term expires. As of September 30, 2017March 31, 2020, the Company had approximately 54,00043,000 tons of distiller grains sales commitments for delivery through December 2017May 2020 at various fixed prices.

Sales and marketing fees related to the agreements in place for the three months ended March 31, 2020 and 2019 were approximately as follows:
 Three Months Ended Three Months Ended
 March 31, 2020 March 31, 2019
Sales ethanol$47,953,000
 $63,621,000
Sales distiller grains13,643,000
 15,282,000
Sales corn oil3,441,000
 3,172,000
    
Marketing fees ethanol$60,000
 $61,000
Marketing fees distiller grains205,000
 234,000
Marketing fees corn oil29,000
 24,000
    
 As of March 31, 2020 As of December 31, 2019
Amount due (to) from RPMG$(639,000) $4,712,000
Amount due from CHS1,948,000
 2,388,000

At March 31, 2020, the Company had approximately $4,961,000 in outstanding priced corn purchase commitments for bushels at various prices and approximately 1,920,000 bushels of basis contracts through September 2022 accounted for under the normal purchase exclusion. As of March 31, 2020 the Company recognized an impairment on forward purchase contracts of approximately $707,000. This reduced inventory on the balance sheet and increased cost of good sold on the statement of operations. There was no impairment on forward purchase contracts as of December 31, 2019

The Company has commitments for minimum purchases of various utilities such as natural gas and electricity over the next 12 months totaling approximately $9,100,000 accounted for under the normal purchase exclusion.

As of March 31, 2020, the Company had locked in place approximately 2,887,500 decatherms of natural gas at fixed prices through December 31, 2020 accounted for under the normal purchase exclusion. As of March 31, 2019, approximately 3,362,000 decatherms of natural gas was locked into place at fixed prices through December 31, 2019.


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Notes to Unaudited Financial Statements

Sales and marketing fees related to the agreements in place for the three and nine months ended September 30, 2017 and 2016 were approximately as follows:
 Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
 September 30, 2017 September 30, 2017 September 30, 2016 September 30, 2016
Sales ethanol$48,783,000
 $158,311,000
 $49,454,000
 $151,689,000
Sales distiller grains7,869,000
 26,253,000
 12,229,000
 36,262,000
Sales corn oil3,028,000
 9,779,000
 2,994,000
 8,182,000
        
Marketing fees ethanol$61,000
 $184,000
 $42,000
 $126,000
Marketing fees distiller grains124,000
 490,000
 200,000
 595,000
Marketing fees corn oil22,000
 74,000
 28,000
 78,000
        
 As of September 30, 2017 As of December 31, 2016    
Amount due from RPMG$267,000
 $4,717,000
   
Amount due from CHS255,000
 1,329,000
   
6.    LEASE OBLIGATIONS

At September 30, 2017,Effective January 1, 2019, the Company had approximately $9 millionadopted ASU 2016-02, Leases (Topic 842). The Company elected the option to apply the transition provisions at the adoption date instead of the earliest comparative period presented in outstanding priced corn purchase commitmentsthe financial statements. By making this election, the Company has not applied retrospective reporting for bushels at various prices2018. The Company elected the short-term lease exception provided for in the standard and approximately 5,188,000 bushelstherefore only recognized right-of-use assets and lease liabilities for leases with a term greater than one year. The Company elected the package of basispractical expedients to not re-evaluate existing contracts through December 2018 accountedas containing a lease or the lease classification unless it was not previously assessed against the lease criteria. In addition, the Company did not reassess initial direct costs for under the normal purchase exclusion.any existing leases.

A lease exists when a contract conveys to a party the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company has commitments for minimum purchasesrecognized a lease liability at the lease commencement date, as the present value of various utilities such as electricity over the next 2 years, accounted for under the normal purchase exclusion, which are anticipated to approximate the following for the twelve month periods ending September 30:
2018 $3,787,000
2019 1,894,000
Total anticipated commitments $5,681,000

During 2016 and 2017,future lease payments, using an estimated rate of interest that the Company entered into multiple construction agreements as part of an expansion project.would pay to borrow equivalent funds on a collateralized basis. A lease asset is recognized based on the lease liability value and adjusted for any prepaid lease payments, initial direct costs, or lease incentive amounts. The total commitment under these agreementslease term at the commencement date includes any renewal options or termination options when it is $35 million. Thereasonably certain that the Company has incurred costs related to the expansion project totaling approximately $30.4 million and expects the total expansion project to cost approximately $42 million, however no other commitments have been executed.

6.    LEASE OBLIGATIONSwill exercise or not exercise those options, respectively.

The Company leases rail cars and rail moving equipment with original terms up to 57 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the leases. These costs are in addition to regular lease payments and are not included in lease expense. Rent expense incurred for the operating leases during the three and nine months ended September 30, 2017March 31, 2020 was approximately $369,000 and $1,150,000, respectively,$444,000, and for the same period in 20162019 was approximately $418,000 and $1,249,000, respectively.$417,000. The lease agreements have maturity dates ranging from March 2022 to October 2025. The weighted average remaining life of the lease term for these leases was 2.64 years as of March 31, 2020.


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TableThe discount rate used in determining the lease liability for each individual lease was the Company's estimated incremental borrowing rate of Contents
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements
4.79%. The right-of-use asset operating lease, included in other assets, and operating lease liability, included in current and long term liabilities was $4,294,978 as of March 31, 2020.

At September 30, 2017March 31, 2020, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month periodsperiod ended September 30:March 31:
2018 $1,250,000
2019 966,000
2020 966,000
2021 966,000
 $1,752,000
2022 533,000
 1,752,000
2023 752,000
2024 184,000
2025 109,000
Thereafter 63,000
Total lease commitments $4,681,000
 $4,612,000

A reconciliation of the undiscounted future payments in the schedule above and the lease liability recognized in the consolidated balance sheet as of March 31, 2020, is shown below.
Undiscounted future payments $4,612,000
Discount effect (317,022)
  $4,294,978


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Notes to Unaudited Financial Statements

7. DERIVATIVE INSTRUMENTS

The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures and options contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures and options contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of exchange traded futures and options contracts related to corn and natural gas are recorded in costs of goods sold and changes in market prices of contracts related to the sale of ethanol, if applicable, are recorded in revenues.

The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The Company's plant will grind approximately 6365 million bushels of corn per year.  Over the next 12twelve months, the Company has hedged and anticipates hedging between 6%5% and 30%25% of its anticipated annual grind.  At September 30, 2017March 31, 2020, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 8%7% of its anticipated monthly grind over the next twelve months.
  
The following table represents the approximate amount of realized/unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the three and nine months ending September 30, 2017March 31, 2020 and 20162019 and the fair value of derivatives as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
Income Statement Classification Realized Gain  Change In Unrealized Gain (Loss) Total GainIncome Statement Classification Realized Gain  Change In Unrealized Gain (Loss) Total Gain
Derivatives not designated as hedging instruments:              
Commodity contracts for the 

 

 

 

 

 

three months ended September 30, 2017Cost of Goods Sold $2,278,000
 $318,000
 $2,596,000
three months ended March 31, 2020Cost of Goods Sold $2,750,000
 $(153,000) $2,597,000
 

 

 

 

 

 

Commodity contracts for the 

 

 

 

 

 

three months ended September 30, 2016Cost of Goods Sold $4,712,000
 $(2,626,000) $2,086,000
 

 

 

Commodity contracts for the 

 

 

nine months ended September 30, 2017Cost of Goods Sold $2,534,000
 $236,000
 $2,770,000
      
Commodity contracts for the 

 

 

nine months ended September 30, 2016Cost of Goods Sold $4,682,000
 $(269,000) $4,413,000
three months ended March 31, 2019Cost of Goods Sold $823,000
 $459,000
 $1,282,000
 Balance Sheet Classification March 31, 2020 December 31, 2019
Futures contracts     
In gain position  $936,000
 $1,126,000
In loss position  
 (37,000)
Cash (owed to) held by broker  85,000
 (290,000)
 Current Asset $1,021,000
 $799,000


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Notes to Unaudited Financial Statements

 Balance Sheet Classification September 30, 2017 December 31, 2016
Futures contracts through March 2018     
In gain position  $280,000
 $78,000
In loss position  (26,000) (59,000)
Cash held by broker  282,000
 510,000
 Current Asset $536,000
 $529,000

8.    FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below:

Trading securities: Trading securities consisting of corporate bonds and short term bond mutual funds are reported at fair value utilizing Level 1 inputs. Trading securities are measured at fair value using prices obtained from pricing services.

Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets. 


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Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2017March 31, 2020 and December 31, 2016,2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Total Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3
As of September 30, 2017       
As of March 31, 2020       
Trading securities, assets$42,189,000
 $42,189,000
 $
 $
Derivative financial instruments

 

 

 

Assets$936,000
 $936,000
 $
 $
       
As of December 31, 2019       
Trading securities, assets$34,879,000
 $34,879,000
 $
 $
$42,508,000
 $42,508,000
 $
 $
Derivative financial instruments

 

 

 



 

 

 

Assets$280,000
 $280,000
 $
 $
$1,126,000
 $1,126,000
 
 
Liabilities(26,000) (26,000) 
 
(37,000) (37,000) 
 
       
As of December 31, 2016       
Trading securities, assets$41,551,000
 $41,551,000
 $
 $
Derivative financial instruments

 

 

 

Assets$78,000
 $78,000
 
 
Liabilities(59,000) (59,000) 
 

The Company's financial assets and liabilities not recorded at fair value, for which carrying value approximates fair value, consists of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. Additionally, fixed rate term debt, carried at book value of $18,000,000 at March 31, 2020, had an estimated fair value of approximately $18,190,000, determined based on a discounted cash flows model. As of December 31, 2019, carrying value of long term debt carried at book value of $18,000,000 at December 31, 2019, had an estimated fair value of approximately $17,965,000.

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Notes to Unaudited Financial Statements

9.    LITIGATION MATTERS

Retterath

In relation to the repurchase agreement discussed in Note 4, on August 1, 2013 Mr. Retterath filed a lawsuit against the Company along with several directors, the Company's former CEO, former CFO, COO, a former director and the Company's outside legal counsel in Florida state court. In August 2016, this lawsuit was voluntarily dismissed without prejudice by the Retteraths. On August 14, 2013, the Company filed a lawsuit in Iowa state court to enforce the repurchase agreement the Company entered into with Mr. Retterath. No distributions have been paid to Mr. Retterath since the time of the original expected closing date of August 1, 2013. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed various motions with the Iowa Court and was granted a stay regarding his obligation to perform the repurchase agreement while the court considered his post trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling. In February 2020 the Iowa Supreme Court ruled in favor of the Company that the repurchase agreement was valid. In April 2020, the Company closed the repurchase of the membership units held by Mr. Retterath.

GS Cleantech Corporation

On August 9, 2013, GS Cleantech Corporation (GS Cleantech), a subsidiary of Greenshift Corporation, filed a complaint against the Company alleging that the Company's operation of a corn oil extraction process licensed by the Company 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 from the Company. The Company has filed a motion for summary judgment which was granted byan answer and counterclaims claiming invalidity of the Court.patents, noninfringement, and inequitable conduct. Recently the federal appeals court rejected GS Cleantech's appeal. It is unclear if GS Cleantech intends to seek additional appeals. The Company expects GS Cleantech will appeal this decision.is not currently able to predict the outcome of the litigation with any degree of certainty.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report or in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

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. During our fourth quarter of 2017, we completed a plant expansion project. The ethanol plant is now capable of operating at a rate in excess of 160190 million gallons of ethanol per year.

On JuneApril 13, 2013,2020, we entered into an agreement withpaid Steve Retterath our largest member, to repurchase$30,000,000 and retire all of the units owned by Mr. Retterath. We agreed to repurchase and retireRetterath transferred his 25,860 membership units owned byto complete the membership unit repurchase agreement the Company executed with Mr. Retterath in exchange for $30 million, to be paid in two equal installments, payable at closing and on July 1, 2014.2013. 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 termscurrent status of the repurchase agreement. The Company asked the Iowa state court to require Mr. Retterath to complete the repurchase agreement pursuant to its terms.

In January 2017, we went to triallitigation with Mr. Retterath on the first part of the Iowa state court case regarding whether the repurchase agreement is valid and enforceable. On June 15, 2017, the Iowa state court issued its ruling finding the repurchase agreement valid and enforceable and ordering Mr. Retterath to perform his obligations under the repurchase agreement. Following the Iowa state court's decision, Mr. Retterath filed post-trial motions that he was asking the court to reconsider its decision and grant a new trial and requested the court stay its order until these motions are considered. The Iowa state court granted the stay pending resolution of the post-trial motions.

Details of the Company's lawsuit against Mr. Retterath are provided belowdescribed further in the section entitled "PARTPart II, - Item 1. Legal Proceedings."

On December 21, 2016, our board of directors approved a plan to expand our ethanol production facility. We plan to increase our capacity by approximately 35 million gallons of ethanol per year and add additional grain storage capacity. The total capital cost of this project is expected to be approximately $42 million. We plan to finance the expansion using a combination of additional debt financing and cash from operations. We expect that the expansion will be fully operational during the fourth quarter of our 2017 fiscal year. All expectations for the next twelve months include the expected increased annual capacity of 35 million gallons for the nine months January 2018 through September 2018, as the projected completion of the plant expansion is late fourth quarter 2017.

               On June 29, 2017, we entered into a new $30 million term loan (the "Term Loan") and increased and extended our existing revolving loan (the "Revolving Loan") with Home Federal Savings Bank ("Home Federal"). 

In recent years, the ethanol industry in the United States has increased exports of ethanol and distiller grains. In January 2017, the Chinese issued final tariffs on U.S. distiller grains. The Chinese distiller 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 import tariff from 5% to 30% as of January 1, 2017. These tariffs have had a negative impact on market ethanol and distiller grains prices in the United States.

In addition, on August 23, 2017, Brazil imposed a twenty percent import tariff on ethanol imported from the United States. Since, Brazil is a major source of ethanol demand, this tariff could negatively impact market ethanol prices in the United States.

On June 16, 2017, we declared a distribution of $8,977,315 to be paid to 64,585 membership units which equals $139.00 per membership unit. Payment of the distribution was contingent on the Home Federal loan closing. The distribution was paid on July 3, 2017.

Results of Operations

Comparison of Fiscal Quarters Ended September 30, 2017March 31, 2020 and 20162019     

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 statement of operations for the three months ended September 30, 2017March 31, 2020 and 2016:

2019:
 2017 2016 2020 2019
Income Statement Data Amount % Amount % Amount % Amount %
Revenue $59,680,650
 100.0
 $64,675,851
 100.0
 $65,037,238
 100.0
 $82,074,397
 100.0
                
Costs of goods sold 52,152,539
 87.4
 55,045,329
 85.1
 68,964,823
 106.0
 76,506,526
 93.2
                
Gross profit 7,528,111
 12.6
 9,630,522
 14.9
Gross profit (loss) (3,927,585) (6.0) 5,567,871
 6.8
                
Selling, general and administrative expenses 806,772
 1.4
 1,126,987
 1.7
 1,005,013
 1.5
 1,165,504
 1.4
                
Operating income 6,721,339
 11.3
 8,503,535
 13.1
Operating income (loss) (4,932,598) (7.6) 4,402,367
 5.4
                
Other income (expense) 76,001
 0.1
 167,829
 0.3
 (315,967) (0.5) 316,688
 0.4
                
Net income $6,797,340
 11.4
 $8,671,364
 13.4
Net income (loss) $(5,248,565) (8.1) $4,719,055
 5.7

Revenue

Our total revenue for our third quarter of 2017three months ended March 31, 2020 was approximately 8%21% less than our total revenue for our third quarter of 2016. Management attributes this decrease in revenue with decreasedthree months ended March 31, 2019 due primarily to less ethanol and decreased distiller grains revenue, during the 2017 period.partially offset by increased corn oil revenue.


For our third quarter of 2017,three months ended March 31, 2020, our total ethanol revenue was approximately 1%25% less than our third quarter of 2016three months ended March 31, 2019 due to decreased ethanol production partially offset by an increase in the average price we received per gallonless gallons of ethanol sold along with lower average prices we received for our ethanol during the 20172020 period.

The average price per gallon we received for our ethanol during our three months ended March 31, 2020 was approximately 12% less than the average price we received for our ethanol during our third quarter of 2017 was approximately 3% greater than during our third quarter of 2016.three months ended March 31, 2019. Management attributes this increasedecrease in the average price we received for our ethanol with significantly lower gasoline prices early in our first quarter of 2020 along with higher corn pricesdecreased gasoline demand at the end of our first quarter of 2020 due to the COVID-19 pandemic. Management believes that gasoline demand has been reduced in the United States by 50% or more due to the pandemic which has significantly impacted ethanol prices. We have continued to sell ethanol and increasedare working to secure additional markets for our ethanol during this period of low ethanol demand. As a result of the current market conditions in the ethanol industry, many ethanol producers are reducing production or have ceased operating altogether. Management anticipates ethanol pricesthat the impact of the COVID-19 pandemic will be lower duringcontinue for the rest of our fourth quarter of 2017 due to lower corn prices2020 fiscal year and increased ethanol supply.potentially beyond.

We sold approximately 4%14% fewer gallons of ethanol during our third quarter of 2017three months ended March 31, 2020 compared to the same period of 2016. Management attributes this decrease in ethanol sales during our third quarter of 2017 with increased plant downtime related to our fall shutdown and work we performed to tie in parts of our expansion project. Management anticipates future ethanol production to be higher compared to prior years2019 due to market conditions which have impacted demand for ethanol. During times when ethanol prices are low, we are focusing on operating the ethanol plant expansion project.as efficiently as possible in order to maximize the amount of ethanol we can produce per bushel of corn ground.
    
Our total distiller grains revenue was approximately 36%11% less during our third quarter of 2017three months ended March 31, 2020 compared to the same period of 2016,2019, primarily due primarily to decreased market distiller grains prices.production. We sold approximately 10% fewer tons of distiller grains during our three months ended March 31, 2020 compared to the same period of 2019 due to reduced production at the ethanol plant overall along with increased production of corn oil. When we produce more pounds of corn oil, it reduces the volume of distiller grains we have available to sell. The average price we received for our dried distiller grains was approximately 22%1% less during our third quarter of 2017three months ended March 31, 2020 compared to the same period of 2016. We sell nearly all of our distiller grains in the dried form.2019. Management attributes these loweranticipates that distiller grains prices will remain lower during our 2020 fiscal year, especially because reduced demand for corn from ethanol is likely to keep corn prices lower. In addition, difficulties in the meat packing industry may lead to decreased exportanimal feed demand from China due to the anti-dumping and countervailing duty tariffs imposed by the Chinese. Historically, China was the largest export market for distillers grains which has had a significantwould likely impact on distiller grains demand and prices. Distiller grains are typically used as a feed substitute for corn. Recently, distiller grains have been trading at a greater discount compared to a comparable

amount of corn which management believes is indicative of decreased distiller grains demand. Management anticipates distiller grains will continue to trade at a discount to corn due to anticipated strong corn supplies and lower demand due to the loss of the Chinese market. We sold approximately 18% fewer total tons of distiller grains during our third quarter of 2017 compared to the same period of 2016 due to improved corn to ethanol conversion efficiency along with increased plant downtime. As we extract more corn oil from our distiller grains, it reduces the volume of distiller grains we sell. In addition, as our production process becomes more efficient, we use less corn to produce our ethanol which correspondingly decreases our distiller grains production. Management anticipates distiller grains production will increase once our plant expansion project becomes fully operational.

Our total corn oil revenue was approximately 1%8% greater for our third quarter of 2017three months ended March 31, 2020 compared to the same period of 20162019 due to higher averageincreased pounds of corn oil prices.that we sold, partially offset by lower corn oil prices per pound during the 2020 period. We sold approximately 1% fewer16% more pounds of corn oil during our third quarter of 2017three months ended March 31, 2020 compared to the same period of 20162019 primarily because of less ethanol production offset in part by increased efficiency extracting corn oil at the plant. We added additional corn oil extraction equipment which allows us to increaseefficiency during the amount of corn oil we can produce per bushel of corn.2020 period. The average price we received for our corn oil was approximately 2% greater7% less during our third quarter of 2017three months ended March 31, 2020 compared to the same period of 2016. This increase in2019 due to lower commodity prices generally, including lower energy prices. Since a significant user of corn oil is the biodiesel industry, lower energy prices has impacted demand and prices for corn oil. Management anticipates that corn oil prices occurred, in part, due to increased corn oil demand. Management anticipateswill remain lower demand for corn oil from the biodiesel industry since certain proposed volume obligations in the 2018 RFS, which benefit biodiesel, are at lower levels which management believes will negatively impact biodiesel production.rest of our 2020 fiscal year.

Cost of Goods Sold

Our two primary costs of production are corn costs and natural gas costs. Our total cost of goods sold was approximately 5%10% less for our third quarter of 2017three months ended March 31, 2020 compared to the same period of 2016.2019. Our cost of goods sold related to corn, without taking into account derivative instruments, was approximately 8%5% less during our third quarter of 2017three months ended March 31, 2020 compared to our third quarter of 2016three months ended March 31, 2019 due to decreasedusing less bushels of corn, consumption.partially offset by higher corn costs. We used approximately 9% fewer bushels of corn during our three months ended March 31, 2020 compared to the same period of 2019 due to reduced overall production at the ethanol plant along with improved corn to ethanol conversion efficiency. Our average cost per bushel of corn was approximately 2%4% greater during our third quarter of 2017three months ended March 31, 2020 compared to our third quarter of 2016three months ended March 31, 2019 due primarily to higher basis costs needed to purchase corn in our market. Management anticipates that corn costs will remain higher unless current market conditions persist and corn demand is lower due to anticipated lower cornless ethanol production.

We processed approximately 10% fewer bushels of cornexperienced decreased natural gas costs during our third quarter of 2017 compared to our third quarter of 2016 due to our decreased total production at the ethanol plant and improved corn to ethanol conversion efficiency. Management anticipates lower corn prices due to the balance between corn supply and demand. However, we may experience higher corn prices once the expansion is fully operational due to increased corn consumption which may impact prices in our local market.

We experienced increased natural gas prices during our third quarter of 2017three months ended March 31, 2020 compared to the same period of 20162019 primarily due to higherdecreased energy prices generally during the 20172020 period. During our third quarter of 2017, thethree months ended March 31, 2020, our average delivered price we paidcost per MMBtu of natural gas was approximately 9% greater4% less compared to the same period of 2016. We2019. In addition, we used approximately 4%1% fewer MMBtu of natural gas during our third quarter of 2017three months ended March 31, 2020 compared to our third quarter of 2016three months ended March 31, 2019 due to decreased production. Management anticipates continued higher natural gas prices duringproduction at the rest of our 2017 fiscal year with typical natural gas cost increases during the winter months. If a shortage of natural gas were to occur, it could result in significantly higher natural gas prices which could negatively impact our profitability.ethanol plant.

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 third quarter of 2017,three months ended March 31, 2020, we had a realized gain of approximately $2,278,000 and an unrealized gain of approximately $318,000$2.75 million related to our corn and natural gas derivative instruments and an unrealized loss of approximately

$153,000 related to our corn and natural gas derivative instruments. During our third quarter of 2016,three months ended March 31, 2019, we had a realized gain of approximately $4,712,000$823,000 and an unrealized lossgain of approximately $2,626,000$459,000 related to our corn and natural gas 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. Until the expansion is fully implemented, our plant is expected to use approximately 63 million bushels of corn per year. As of September 30, 2017, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 8% of its anticipated monthly grind for the next twelve months, not including our anticipated increased consumption following completion of the expansion project.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were less during our third quarter of 2017 than our third quarter of 2016, due to decreased legal expenses from the Retterath trial during third quarter 2017 and non recurring ethanol promotion expenditures that were incurred during our third quarter of 2016.

Other Income (Expense)

We had more interest income during our third quarter of 2017 compared to the same period of 2016 due to having more cash on hand during the 2017 period. We also had more interest expense during our third quarter of 2017 compared to the same period of 2016 due to increased borrowing on our new term debt.

Comparison of Nine Months Ended September 30, 2017 and 2016

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 statement of operations for the nine months ended September 30, 2017 and 2016:

  2017 2016
Income Statement Data Amount % Amount %
Revenue $194,342,760
 100.0
 $196,132,720
 100.0
         
Costs of goods sold 174,938,128
 90.0
 174,855,824
 89.2
         
Gross profit 19,404,632
 10.0
 21,276,896
 10.8
         
Selling, general and administrative expenses 2,833,927
 1.5
 2,697,754
 1.4
         
Operating income 16,570,705
 8.5
 18,579,142
 9.5
         
Other income (expense) 607,827
 0.3
 1,306,828
 0.7
         
Net income $17,178,532
 8.8
 $19,885,970
 10.1

Revenue

Our total revenue for the nine months ended September 30, 2017 was approximately 1% less than our total revenue for the nine months ended September 30, 2016. Management attributes this decrease in revenue with lower distiller grains revenue during the 2017 period, partially offset by increased ethanol and corn oil revenue.

For the nine months ended September 30, 2017, our total ethanol revenue was approximately 4% greater than the nine months ended September 30, 2016 due to increased gallons of ethanol we sold along with an increase in the average price we received per gallon of ethanol sold during the 2017 period. The average price we received for our ethanol during the nine months ended September 30, 2017 was approximately 2% greater than during the nine months ended September 30, 2016. Management attributes this increase in ethanol prices with increased gasoline prices which have impacted ethanol prices along with increased export demand. Management anticipates lower ethanol prices for the remaining quarter of our 2017 fiscal year.

We sold approximately 2% more gallons of ethanol during the nine months ended September 30, 2017 compared to the same period of 2016, due to increased production during the 2017 period. Management anticipates ethanol production to be higher compared to prior years due to our plant expansion project.
Our total distiller grains revenue was approximately 28% less during the nine months ended September 30, 2017 compared to the same period of 2016, due primarily to decreased distiller grains sales and prices. The average price we received for our dried distiller grains was approximately 21% less during the nine months ended September 30, 2017 compared to the same period of 2016. We sold approximately 8% fewer total tons of distiller grains during the nine months ended September 30, 2017 compared to the same period of 2016 due to improved corn to ethanol conversion efficiency along with increased corn oil production. As we extract more corn oil from our corn, it reduces the volume of distiller grains we sell. In addition, as our production process becomes more efficient, we use less corn to produce our ethanol which correspondingly decreases our distiller grains production.

Our total corn oil revenue was approximately 20% greater for the nine months ended September 30, 2017 compared to the same period of 2016 due to increased corn oil production and higher market corn oil prices during the 2017 period. We sold approximately 17% more pounds of corn oil during the nine months ended September 30, 2017 compared to the same period of 2016 primarily because of increased efficiencies in the extraction process along with increased ethanol production. We added additional corn oil extraction equipment which allows us to increase the amount of corn oil we can produce per bushel of corn. The average price we received for our corn oil was approximately 2% greater during the nine months ended September 30, 2017 compared to the same period of 2016.


Cost of Goods Sold

Our total cost of goods sold was comparable for the nine months ended September 30, 2017 and the same period of 2016. Our cost of goods sold related to corn, without taking into account derivative instruments, was 4% less for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to a favorable supply and demand balance during our 2017 fiscal year. Our average cost per bushel of corn was approximately 3% less during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to ample corn supplies and relatively stable corn demand. We processed approximately 1% fewer bushels of corn during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to improved corn to ethanol conversion efficiency.

We experienced increased natural gas prices during the nine months ended September 30, 2017 compared to the same period of 2016 primarily due to higher energy prices during the 2017 period. During the nine months ended September 30, 2017, the average delivered price we paid per MMBtu of natural gas was approximately 6% greater compared to the same period of 2016. We used 5% more natural gas during the nine months ended September 30, 2017 than the nine months ended September 30, 2016 due to increased production and our electrical energy turbine which runs on steam. The steam turbine has significantly reduced electrical usage, with a year to date savings of $1.3 million compared to what our electrical costs would have been without the steam turbine.

During the nine months ended September 30, 2017, we had a realized gain of approximately $2,534,000 and an unrealized gain of $236,000 related to our corn derivative instruments. During the nine months ended September 30, 2016, we had a realized gain of approximately $4,682,000 and an unrealized loss of approximately $269,000 related to our corn derivative instruments.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were greaterless during the ninethree months ended September 30, 2017 compared to the nineMarch 31, 2020 than during our three months ended September 30, 2016March 31, 2019, primarily due to increased legal expenses relateddecreased bonus accruals pursuant to the Retterath lawsuit.our compensation plans.

Other Income (Expense)

Our other income wasWe had less interest expense during the nineour three months ended September 30, 2017March 31, 2020 compared to the same period of 20162019 due to having less income from our investmentsborrowing during the 2017 period and increased interest expense in 2017 related2020 period. We had less other income during our three months ended March 31, 2020 compared to the term debt.same period of 2019 due to losses we experienced on our equity method investments in the 2020 period which are also involved in the ethanol industry.

Changes in Financial Condition for the NineThree Months Ended September 30, 2017March 31, 2020.

Balance Sheet Data September 30, 2017 December 31, 2016 March 31, 2020 December 31, 2019
Total current assets $89,142,411
 $76,835,075
 $83,362,465
 $87,173,152
Total property and equipment 131,870,267
 117,806,502
 123,046,801
 126,554,986
Total other assets 6,520,977
 4,143,322
 9,026,292
 9,231,854
Total Assets $227,533,655
 $198,784,899
 $215,435,558
 $222,959,992
        
Total current liabilities $41,095,066
 $47,424,337
 $52,025,442
 $53,902,670
Total long-term liabilities 27,000,000
 123,190
 14,683,126
 15,081,767
Total members' equity 159,438,589
 151,237,372
 148,726,990
 153,975,555
Total Liabilities and Members' Equity $227,533,655
 $198,784,899
 $215,435,558
 $222,959,992

We had more cash and cash equivalents and restricted cash as of September 30, 2017less accounts receivable at March 31, 2020 compared to December 31, 2016 due to cash generated from our operations along with $30 million in loan proceeds we received during the 2017 period. We had approximately $2.5 million in restricted cash related to payments we will make in the future for our plant expansion project. As of September 30, 2017, the value of our trading securities was lower compared to the trading securities we had at December 31, 2016 due to bonds which matured and other investments we liquidated during the 2017 period. In order to fund our purchase obligation related to the Retterath repurchase agreement, we have allocated $30 million of our trading securities to the Retterath repurchase. Our accounts receivable was lower at September 30, 2017 compared to December 31, 20162019 due to the timing of our quarter end with respectcompared to shipments of our ethanol and payments we received from our marketer. Wemarketers. As of March 31, 2020 we had more inventory on hand at September 30, 2017 compared to December 31, 2016 due primarily to having more finished goods inventory on hand at

September 30, 2017 as a result of the timing of our quarter end. We had less prepaid expenses at September 30, 2017 compared to December 31, 20162019 due to a decreasemore finished goods on hand on the last day of the month. We had fewer prepaid assets at March 31, 2020 compared to December 31, 2019 due to less prepaid insurance at March 31, 2020. As of March 31, 2020, the value of our derivative instruments was greater compared to December 31, 2019 due to changes in prepaid natural gas transportation fees and other prepaid items.the value of our corn derivative instruments.

Our net property and equipment was greaterlower at September 30, 2017March 31, 2020 compared to December 31, 20162019 due to the net effect of capital expenditures we have been making at the ethanol plant partiallyprojects offset by depreciation. OurThe value of our other assets were greater at September 30, 2017 than at December 31, 2016 as a result of restricted cash from the loan proceeds for the expansion project.

Our current liabilities werewas less at September 30, 2017 compared to DecemberMarch 31, 2016, primarily due to the decreased accounts payable as of September 30, 2017 partially offset by the $3 million increase in the current portion of our term loan related to the expansion. Our accounts payable were less at September 30, 20172020 compared to December 31, 20162019 due to amortization of our right of use asset, partially offset by increased other assets at March 31, 2020 compared to December 31, 2019.

Our accounts payable was less at March 31, 2020 compared to December 31, 2019 due primarily to a large outstanding invoice at December 31, 2016 related to the plant expansion project and having less deferred corn payments as of September 30, 2017at March 31, 2020. Our accrued expenses were less at March 31, 2020 compared to December 31, 2016. Our accrued expenses were lower at September 30, 2017 compared to December 31, 20162019 due to payment of wages and performancedecreased employee bonuses pursuant to employee compensation plans accrued at December 31, 2016.2019.

Our long-term liabilities were greaterless at September 30, 2017March 31, 2020 compared to December 31, 20162019 primarily due to amortization of our new $30 million term loan less the principal payments due within one year which are included in current liabilities.operating lease liability at March 31, 2020.

Liquidity and Capital Resources

Our primary sources of liquidity as of September 30, 2017March 31, 2020 were cash from our operations and our $30 million long-term revolving loan. Our credit facilities are described in greater detail below under "Short-Term and Long-Term Debt Sources." As of September 30, 2017March 31, 2020, we had $30.0 million available pursuant to our revolving loan and approximately $36.8$17.3 million in cash and cash equivalents, as well as approximately $2.5 million of restricted cash that is restricted for future expansion costs.equivalents. We also had $30$42 million at September 30, 2017March 31, 2020 of trading securities, forof which $30 million was set aside related to the Retterath repurchase agreement along with an additional approximately $4.9agreement. We paid this $30 million in trading securities which are not set aside forto Steve Retterath following the Retterath repurchase.end of our first fiscal quarter of our 2020 fiscal year. Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash

from our revolving loan and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity financing for working capital or other purposes.

The following table shows cash flows for the nine monthsthree months ended September 30, 2017March 31, 2020 and 2016:2019:
 2017 2016 2020 2019
Net cash provided by operating activities $26,164,568
 $24,829,371
 $746,350
 $5,706,220
Net cash (used in) investing activities (22,107,145) (11,656,462) (750,727) (17,371,058)
Net cash provided by (used in) financing activities 21,022,685
 (3,875,100)
Cash at beginning of period 14,168,643
 20,256,678
 17,274,703
 28,751,994
Cash and restricted cash at end of period $39,248,751
 $29,554,487
Cash and cash equivalents at end of period $17,270,326
 $17,087,156

Cash Flow From Operations

Our operations provided moreless cash during our first ninethree months of 20172020 compared to the same period of 20162019 due primarily to decreased net income during the 2020 period due to changespoor operating margins in working capital components, including accounts receivable, accounts payable and accrued expenses which increased our cash during the 2017 period, offset by a lower net income in 2017.ethanol industry.

Cash Flow From Investing Activities

We used more cash for investing activities during our first nine months of 2017the 2019 period because we purchased $15 million in trading securities during that time. We also had fewer payments for construction in progress during the 2020 period compared to the first nine months of 2016 due to capital expenditures related to our plant expansion during the 2017 period partially offset by cash we realized on the redemption of trading securities.

Cash Flow From Financing Activities

Our financing activities provided cash during our 2017 fiscal year due to the proceeds we received on our term loan. We did not use or receive any cash from financing activities during our first nine months of 2016.

2019 period.

Short-Term and Long-Term Debt Sources

Master Loan Agreement with Home Federal Savings Bank

On June 29, 2017, we entered into a new $30 million term loan (the "Term Loan") and increased and extended our existing revolving loan (the "Revolving Loan") with Home Federal Savings Bank ("Home Federal"). Each loan is described below.

Term Loan

We have a $30 million term loan with a fixed interest rate of 4.79%.  We will pay interest on the Term Loan monthly with semi-annual principal payments of $3 million commencing on June 30, 2018.  The maturity date of the Term Loan is December 31, 2022.  We have the ability to prepay principal on the Term Loan without penalty or premium by giving Home Federal thirty days advance notice.  If we choose to refinance the Term Loan within the first thirty-six months following the closing, we willmay be required to pay Home Federal a prepayment fee.  In the event we default on the Term Loan, Home Federal can charge a default interest rate 2% in excess of the current interest rate. As of September 30, 2017,March 31, 2020, we had $30approximately $18 million outstanding on the Term Loan. 

Revolving Loan

We have a $30 million term revolving loan which has a maturity date of December 31, 2022. Interest on the Revolving Loan accrues at 310Prime Rate less 60 basis points in excess of the 30-day London Interbank Offered Rate (LIBOR).points. We are required to make monthly payments of interest until the maturity date on December 31, 2022, on which date the unpaid principal balance of the Revolving Loan becomes due. We agreed to pay a fee of 30 basis points on a per annum basis on the unused portion of the Revolving Loan payable on a quarterly basis. As of September 30, 2017,March 31, 2020, we had $0 outstanding on the Revolving Loan and $30 million available to be drawn. Interest accrued on the Revolving Loan as of September 30, 2017March 31, 2020 at a rate of 4.33%2.65% per year.

Covenants

In connection with the Master Loan Agreement, we are required to comply with certain debt covenants and financial ratios. We agreed to a debt service coverage ratio of 1:15 to 1:00 and agreed to increase our minimum working capital covenant from $27.5 million to $30 million once our expansion is complete.  We are permitted to pay distributions to our members up to 100% 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 including compliance with the financial covenants.  Further, our maximum capital expenditure covenant was increased from $5 million to $10 million per year. The maximum capital expenditure covenant was increased to $15 million in 2019.


As of September 30, 2017March 31, 2020, we were in compliance with all of our debt covenants and financial ratios. Management anticipates that we will be in compliance with all of our debt covenants and financial ratios for at least the next 12 months.

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.

Application of Critical Accounting Estimates

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


Derivative Instruments

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.

As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.

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 partycounter-party are presented net on the accompanying balance sheet as derivative instruments net of cash due from/to broker.

Revenue recognitionRecognition

Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownershipcontrol 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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and 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.

As of September 30, 2017March 31, 2020, we had price protection in place for approximately 8%7% of our anticipated corn needs, (based on current usage prior to completion of the expansion), 0%55% of our natural gas needs and 0%none of our ethanol sales for the next 12 months. A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk

related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of September 30, 2017March 31, 2020, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from September 30, 2017March 31, 2020. The results of this analysis, which may differ from actual results, are as follows:
 Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)* Unit of Measure Hypothetical Adverse Change in Price Approximate Adverse Change to income Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) Unit of Measure Hypothetical Adverse Change in Price Approximate Adverse Change to income
Natural Gas 5,300,000
 MMBTU 10% $(1,653,600) 2,313,000
 MMBTU 10% $(439,470)
Ethanol 188,000,000
 Gallons 10% (25,004,000) 186,000
 Gallons 10% (18,600)
Corn 58,000,000
 Bushels 10% (19,894,000) 60,500,000
 Bushels 10% (18,150,000)

For comparison purposes, our sensitivity analysis for our thirdfirst quarter of 20162019 is set forth below.
 Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) Unit of Measure Hypothetical Adverse Change in Price Approximate Adverse Change to income Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) Unit of Measure Hypothetical Adverse Change in Price Approximate Adverse Change to income
Natural Gas 3,705,000
 MMBTU 10% $(1,100,385) 1,800,000
 MMBTU 10% $(540,000)
Ethanol 143,550,000
 Gallons 10% (19,092,150) 200,000,000
 Gallons 10% (24,800,000)
Corn 42,140,000
 Bushels 10% (12,810,560) 60,000,000
 Bushels 10% (20,400,000)

ITEM 4. CONTROLS AND PROCEDURES.

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

Our management, including our President and Chief Executive Officer (the principal executive officer), James Broghammer, along with our Chief Financial Officer, (the principal financial officer), Beth Eiler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017March 31, 2020. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is

recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.

For the fiscal quarter ended September 30, 2017March 31, 2020, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART IIII.

ITEM 1. LEGAL PROCEEDINGS.

Retterath Lawsuit

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 asked the Iowa state court to require Mr. Retterath to perform his obligations under the repurchase agreement pursuant to its terms. Mr. Retterath removed the case to federal court in the Federal District Court for the Southern District of Iowa in December 2013. The Company believed that this removal was improper and as a result the Company moved to remand the case back to the Iowa state court in Polk County which was granted. Mr. Retterath answered the lawsuit in August 2014, denying the validity of the repurchase agreement. In addition, the Iowa state court permitted Jason Retterath and Annie Retterath, the son and daughter-in-law of Steve Retterath, to be added as parties to the Iowa state lawsuit. In February 2015, the

Company filed a motion for summary judgment asking the Iowa state court to enforce the repurchase agreement. The Retteraths also filed motions for summary judgment asking the Iowa state court to find the repurchase agreement invalid. On October 16, 2015, 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.

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 our original claims against Mr. Retterath would proceed to trial in January 2017 as scheduled and that any other issues that remain following that trial would be litigated after a ruling is issued in the January 2017 trial. The trial was held in January 2017. On June 15, 2017, the Iowa Court ruled in favor of Homeland that the repurchase agreement was valid and directed Mr. Retterath to perform his obligations under the repurchase agreement by August 1, 2017. Mr. Retterath subsequently filed motions with the Iowa Court to reconsider its ruling or alternatively award Mr. Retterath a new trial. Mr. Retterath also asked the Iowa Court to stay his obligation to perform the repurchase agreement until these motion are ruled on by the Iowa Court. The Iowa Court granted Mr. Retterath's stay while the court considered his post-trial motions. On May 7, 2018, the Iowa Court denied Mr. Retterath's motions for a new trial and to reconsider the Iowa Court's prior ruling. Mr. Retterath filed an appeal of the Iowa Court's decision. In February 2020, the Iowa Supreme Court ruled that the repurchase agreement is valid and enforceable. In April 2020, we closed the repurchase transaction. Now that the first part of the case is resolved, the additional matters Mr. Retterath added to the case in 2016 will be resolved by the court.

GS Cleantech Patent Litigation

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.  Ifappealed these decisions. The federal appeals court recently rejected GS Cleantech successfully appeals the District Court’s findings of invalidity, damages awarded GS Cleantech may be $1 million or more.Cleantech's appeal.

The only remaining claim in the lawsuit alleges that GS Cleantech inequitably conducted itself before the United States Patent Office when obtaining the patents at issue. A trial in the District Court for the Southern District of Indiana on the single issue of inequitable conduct was held in October 2015.  The MDL Court ruled that GS Cleantech engaged in inequitable conduct. GS Cleantech has asked the court to amend its ruling. The defendants are seeking damages against GS Cleantech and its attorneys as a result of this finding of inequitable conduct.  We anticipate that if the determination of inequitable conduct is not amended, GS Cleantech will appeal this decision along with the summary judgment decision issued earlier.

ITEM 1A. RISK FACTORS.

The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section10-K for the fiscal year ended December 31, 2016, included in our annual report on Form 10-K.2019.

We are subject to global and regional economic downturns and related risks. The Brazilian tariff on U.S. produced ethanol could negatively impact market ethanol priceslevel of demand for our products is affected by global and regional demographic and macroeconomic conditions. Brazil is currentlyA significant downturn in global economic growth, or recessionary conditions in major geographic regions for prolonged periods, may lead to reduced demand for our products, which could have a negative effect on the largest importermarket price of ethanol producedour products in the United States.  However, recentlyIn December 2019, a novel strain of coronavirus surfaced in Wuhan, China (“COVID-19”). In just a few months, the Brazilian government implemented a tariff on ethanol producedspread of COVID-19 has resulted in businesses suspending or terminating global operations and travel, self-imposed or government-mandated quarantines, and an overall slowdown of economic activity in some areas.  Cases have been confirmed worldwide, including in Japan, Italy, Brazil, Canada and the United StatesStates.  To the extent that such economic conditions negatively impact consumer and exportedbusiness confidence, travel and consumption patterns or volumes for our products, our business and results of operations could be significantly and adversely affected.

COVID-19 may negatively impact our ability to Brazil. Due to current ethanol production levels in the United States, the market price of ethanol has been supported by exports of ethanol. Further, additional ethanol capacity is being constructed which may further increase the domestic supply of ethanol. The Brazilian tariff on U.S. ethanol could lead to an oversupply of ethanol in the United Statesoperate our business which could decrease or eliminate the value of our units. COVID-19 has resulted in significant uncertainty in many areas of our business.  We do not know how long these conditions will last.  This uncertainty is expected to negatively impact domestic ethanol prices. Ethanol pricesour operations.  We may decreaseexperience labor shortages if our employees are unable or unwilling to come to work.  In addition, if our suppliers cannot deliver the supplies we need to operate our business, including corn and chemicals for our operations, we may be forced to shutdown operations or reduce production.  In addition, if we are unable to ship our products because of trucking or rail shipping disruptions, it could also result in a level which does not allow usforced shutdown or reduction of production.  If we are unable to operate the ethanol plant profitably.

Many ethanol producers are expanding their productionat capacity, which could lead to an oversupply of ethanol in the United States. Recently, many ethanol producers have commenced projects to expand their ethanol production capacities. These expansions couldit may result in a significant increase inunfavorable operating results, especially since we will continue to pay our fixed costs of maintaining the supplyfacility.  Any shutdown or reduction of ethanol inproduction, especially for an extended period of time, could reduce or eliminate the United States. Currently, ethanol prices are supported

by ethanol exports which may not continue at their current levels. While many in the ethanol industry are working to increase the amountvalue of ethanol that is used domestically, specifically in the form of E15, which contains 15% ethanol as compared to the 10% ethanol which is used in most current blends, adoption of E15 has not been as rapid as most ethanol producers would like. Also, the additional ethanol capacity which is being constructed may exceed current domestic and export demand. If an oversupply of ethanol were to occur, it could negatively impact domestic ethanol prices which could negatively impact our ability to profitably operate the ethanol plant.units.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION.

None.


ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)    The following exhibits are filed as part of this report.

Exhibit No.Exhibit
101
The following financial information from Homeland Energy Solutions, LLC's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of September 30, 2017March 31, 2020 and December 31, 2016,2019, (ii) Statements of Operations for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, (iii) Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, and (iv) the Notes to Unaudited Financial Statements.**

(*) Filed herewith.
(**) Furnished herewith.



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 HOMELAND ENERGY SOLUTIONS, LLC
  
Date:November 14, 2017May 15, 2020   /s/ James Broghammer
 James Broghammer
 
President and Chief Executive Officer
(Principal Executive Officer)
  
Date:November 14, 2017May 15, 2020 /s/ Beth Eiler
 Beth Eiler
 
Chief Financial Officer
(Principal Financial Officer)

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