Granite Falls Energy, LLC

The Company is working toward a merger with HLBE, the Company’s majority owned subsidiary. Pursuant to a Merger Agreement, the Company would acquire the minority ownership interest of HLBE for $14 million, or approximately $0.36405 per unit, and the Company would become the sole owner of HLBE. Management believes the merger would provide HLBE with additional financial resources to assist HLBE’s continued operations and would thereby protect the Company’s investment in HLBE. The Merger is subject to approval by the minority interest unitholders of HLBE. A special meeting of the members of HLBE is expected to be held in summer 2021 to vote on the proposed merger. If approved by the minority unitholders, the merger is expected to close following the special meeting.

Our CEO is Jeffrey Oestmann. We hired Oestmann effective May 26, 2021, pursuant to a letter of employment dated May 20, 2021 (the “Employment Agreement”). Oestmann replaced Steve Christensen, who had served as CEO of the Company since 2014 and who resigned pursuant to a separation agreement between Christensen and the Company (the “Separation Agreement”). Oestmann also serves as the CEO of HLBE pursuant to a management services agreement between the Company and HLBE (the “Management Services Agreement”). The Employment Agreement is available on the Company’s Form 8-K filed with the SEC May 25, 2021 and is hereby incorporated by reference. The Management Services Agreement and Separation Agreement are available on the Company’s Form 8-K filed with the SEC February 22, 2021 and are hereby incorporated by reference.

Ethanol production largely rebounded and remained steady in late 2020 after briefly and significantly declining during the second fiscal quarter of 2020 at the onset of the COVID-19 pandemic. In the three months ended April 30, 2021, ethanol production briefly and significantly declined again due to severe weather incidents. Unusually cold weather affecting much of the United States in February 2021 disrupted the supply of natural gas and as a result natural gas spot prices approached record-high levels. Many ethanol production facilities, including our plants, rely on natural gas to process corn into ethanol. In February 2021, estimated fuel ethanol margins fell to negative levels due in part to the elevated natural gas prices and as a result many fuel ethanol producers reduced production rates. U.S. weekly fuel ethanol production fell to an average of 658,000 barrels per day (b/d) during the week of February 21, 2021, which was the lowest weekly production level since May 11, 2020, and 38% lower than at the same time last year, according to the U.S. Energy Information Administration (“EIA”). Production rates have since returned to average levels, but fuel ethanol inventories remain lower than their typical seasonal averages heading into the summer driving season. While the reduction in ethanol inventory may result in higher prices for ethanol and higher operating margins for the Company, management expects ethanol production and inventories to rebound industrywide and margins for our Company to remain tight.

On March 24, 2021, the Company and HLBE, executed a Merger Agreement, pursuant to which the Company will acquire the minority interest of HLBE. The structure of the proposed transaction is a merger in which Granite Heron Merger Sub, LLC, a wholly owned subsidiary of GFE, will merge with and into HLBE, with HLBE surviving the transaction as a wholly owned subsidiary of GFE. If the Merger is completed, HLBE’s Minority Ownership Interest unitholders will receive $0.36405 per unit and will cease to have any ownership interest in HLBE. If the Merger is not completed, there is doubt about HLBE’s ability to operate as a going concern. Due to substantial losses in 2020, HLBE was in violation of certain loan covenants as of as of the three months ended January 30, 2021 and the fiscal year ended October 31, 2020. Due to improved market and operating conditions, HLBE was in compliance with these loan covenants on April 30, 2021. However, future violations of these loan covenants would allow HLBE’s lender to accelerate certain loans and designate a substantial portion of HLBE’s debt due and payable. If HLBE’s loans became due and payable, there is a substantial risk HLBE would lack the cash on hand, borrowing capacity, and cash flows to repay the debt, and if this were to occur, HLBE could be forced to cease operations or seek bankruptcy protection. If HLBE was forced to cease operations or seek bankruptcy protection, the Company’s investment in HLBE would be at substantial risk.

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

The Merger is subject to approval by the Minority Ownership Interest of HLBE. A special meeting of the members of HLBE is expected to be held in summer 2021, when the Minority Ownership Interest unitholders of HLBE will vote on the approval and adoption of the Merger Agreement. The Merger is also subject to approval by the lender of HLBE and the Company. The transaction is expected to close shortly after such approvals are obtained. There is, however, no guarantee the Minority Ownership Interest unitholders will vote in favor of the Merger and there is no guarantee the Company’s lender will approve of the Merger. If such approvals are not obtained and the Company and HLBE cannot execute the Merger, HLBE could be forced to cease operations or seek bankruptcy protection. If this were to occur, the Company’s investment in HLBE would be substantially at risk.