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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

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| **x**      | **Annual report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**                                                  |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                            |
| ** ** | **For  the fiscal year ended December 31, 2008**                                                                                                 |
| ** ** | ** **                                                                                                                                            |
| o          | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**                                              |
|       | ** **                                                                                                                                            |
| ** ** | **For  the transition period from                      to** |

 

**Commission file number 333-136353**

 

**BLACKHAWKBIOFUELS, LLC**

(Exact name ofregistrant as specified in its charter)

** **

 
| **Delaware**                              | **20-2760722**                        |
|-------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of          | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)           |                                  |
|                                      |                                  |
| **210 W.  Spring Street**                 |                                  |
| **Freeport,  Illinois**                   | **61032**                             |
| (Address of  principal executive offices) | (Zip Code)                            |

 

**(815)235-2461**

(Registrant’stelephone number, including area code)

 

Securitiesregistered pursuant to Section l2(g) of the Act:

**None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  o Yes xNo

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  o Yes xNo

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or l5(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  xYes  oNo

 

Indicate by check mark ifdisclosure of delinquent filers in response to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check markwhether the registrant is a large accredited filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act).

 
| Large  accelerated filer o |   | Accelerated filer o          |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller reporting  company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  o Yes  xNo

 

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter.  $27,219,500

 

As of March 31, 2009the registrant had 16,619,474 Class A Units outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

None

 

 

 

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**TABLE OF CONTENTS**

** **
| **PART I**                       | ** **                                                                                                            | ** ** |
|---------------------------------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| **Item 1.**                           | **Business**                                                                                                          | **1**      |
| **Item 1A.**                          | ** Risk Factors**                                                                                                | **15**     |
| **Item 1B.**                          | ** Unresolved Staff  Comments**                                                                                  | **28**     |
| **Item 2.**                           | **Properties**                                                                                                        | **28**     |
| **Item 3.**                           | **Legal Proceedings**                                                                                                 | **28**     |
| **Item  4.**                          | **Submission  of Matters to a Vote of Security Holders**                                                              | **29**     |
| **PART II.**                     | ** **                                                                                                            | ** ** |
| **Item 5.**                           | **Market for Registrant’s Common  Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities** | **29**     |
| **Item 6.**                           | **Selected  Financial Data**                                                                                          | **31**     |
| **Item 7.**                           | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations**                       | **31**     |
| **Item  7A.**                         | ** Quantitative and Qualitative Disclosures  About Market Risk**                                                 | **36**     |
| **Item  8.**                          | **Financial  Statements and Supplementary Data**                                                                      | **36**     |
| **Item  9.**                          | **Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure**                             | **60**     |
| **Item 9A.**                          | ** Controls and Procedures**                                                                                     | **60**     |
| **Item 9B.**                          | ** Other Information**                                                                                           | **60**     |
| **PART III.**                    | ** **                                                                                                            | ** ** |
| **Item  10.**                         | **Directors,  Executive Officers and Corporate Governance**                                                           | **61**     |
| **Item 11.**                          | **Executive  Compensation**                                                                                           | **65**     |
| **Item  12.**                         | **Security  Ownership of Certain Beneficial Owners and Management and Related Unitholder  Matters**                   | **66**     |
| **Item  13.**                         | **Certain  Relationships and Related Transactions, and Manager Independence**                                         | **67**     |
| **Item  14.**                         | **Principal  Accounting Fees and Services**                                                                           | **69**     |
| **PART IV**                      | ** **                                                                                                            | ** ** |
| **Item  15.**                         | **Exhibits;  Financial Statement Schedules**                                                                          | **70**     |
| ** **                            | ** **                                                                                                            | ** ** |
| **SIGNATURES**                        | **73**                                                                                                                |
|                                  | ** **                                                                                                            | ** ** |
| **SUPPLEMENTAL INFORMATION**          | **75**                                                                                                                |
| ** **                            | ** **                                                                                                            | ** ** |
| **EXHIBIT INDEX**                     | **75**                                                                                                                |
| ** **                            | ** **                                                                                                            | ** ** |
| **EXHIBITS FILED  WITH THIS REPORT:** | ** **                                                                                                            |
|                                       |                                                                                                                       |            |  |

 
| 10.20 | Agreement between the  Registrant and Ebenezer Mgmt, LLC dated April 22, 2008. |
|-------|-------------------------------------------------------------------------------------|
| 10.21 | Warrant issued to  Ebenezer Mgmt, LLC dated May 2, 2008.                       |
| 31.1  | Certificate pursuant to 17  CFR 240 15d-14(a).                                      |
| 31.2  | Certificate pursuant to 17  CFR 240 15d-14(a).                                      |
| 32.1  | Certificate pursuant to 18  U.S.C. Section 1350.                               |
| 32.2  | Certificate pursuant to 18  U.S.C. Section 1350.                               |

 

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**FORWARD LOOKINGSTATEMENTS**

** **

This report contains forward-looking statements involving futureevents, future business, industry and other conditions, our future performance,and our plans and expectations for future operations and actions.  In many cases, you can identifyforward-looking statements by the use of words such as “believe,” “expect,” “anticipate,”“intend,” “plan,” “estimate,” “predict,” “hope,” “should,” “could,” “may,” “future,”“continue,” “potential,” or other forms or the negatives of these terms orother similar expressions.  Many of theseforward-looking statements are located in this report under the headings “Descriptionof Business,” “Risk Factors,” “Description of Property” and “Management’sDiscussion and Analysis or Plan of Operations,” but they may appear in othersections as well.

 

These forward-looking statements are based on assumptions that webelieve to be reasonable, beliefs and expectations in reliance on informationcurrently available to management and our estimates regarding future results,trends and uncertainties.  Importantfactors that could significantly affect our assumptions, plans, anticipatedactions and future financial and other results include, among others, thosematters set forth in the section of this report entitled “Risk Factors.”  You are urged to consider all of those riskfactors when evaluating any forward-looking statement, and we caution you notto put undue reliance on any forward-looking statements.

 

You should read this report thoroughly with the understanding that ouractual results may differ materially from those set forth in theforward-looking statements for many reasons, including events beyond ourcontrol and assumptions that prove to be inaccurate or unfounded.  We cannot provide any assurance with respectto our future performance or results. Although we believe that our plans and objectives, as reflected in orsuggested by the forward-looking statements, are reasonable, we may neverachieve our plans or objectives.  Actualresults may differ from anticipated or desired results due to many possibleunforeseen developments, including developments arising from or relating to thefollowing:

 
| · | The suitability of our  biodiesel plant site, availability of required infrastructure and  construction of our plant;                                                                                                                |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                 |
| · | Competition and  technological developments in the biodiesel industry and the energy market  generally;                                                                                                                              |
|   |                                                                                                                                                                                                                                 |
| · | Economic, competitive  and business conditions in our local and regional markets and in the national  and international marketplace;                                                                                                 |
|   |                                                                                                                                                                                                                                 |
| · | The availability and  continuance of environmental and other permits, licenses and incentives;                                                                                                                                       |
|   |                                                                                                                                                                                                                                 |
| · | The impact of or  changes in laws or regulations relating to the biodiesel or energy industry,  environmental matters and taxation;                                                                                                  |
|   |                                                                                                                                                                                                                                 |
| · | Our ability to generate  cash flow to meet our operating needs, repay indebtedness and make  distributions to our unitholders;                                                                                                       |
|   |                                                                                                                                                                                                                                 |
| · | The performance of our  consultants, contractors and suppliers;                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                 |
| · | The actions of  national, state and local legislative, regulatory and judicial bodies and  authorities;                                                                                                                              |
|   |                                                                                                                                                                                                                                 |
| · | Delays or interruptions  in the construction or operation of our plant due to inadequate financing,  design or material failures, environmental issues, lack of raw materials,  transportation blockages, weather and other factors; |
|   |                                                                                                                                                                                                                                 |
| · | The necessity to modify  or upgrade our plant, expand or curtail our operations, obtain additional  capital or change our business strategy; and                                                                                     |
|   |                                                                                                                                                                                                                                 |
| · | Other risks discussed  elsewhere in this report.                                                                                                                                                                                     |

 

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The forward-looking statements contained in this report speak as of thedate of this report and are subject to events and developments occurring afterthe date of this report.  Except as maybe required under the federal securities laws, we do not undertake anyobligation to update any forward-looking statements in this report to reflectfuture events or developments.

 

We are not under any duty to update the forward-looking statementscontained in this report.  We cannotguarantee future results, levels of activity, performance or achievements.  We caution you not to put undue reliance onany forward -looking statements, which speak only as of the date of thisreport.  You should read this report andthe documents that we reference in this report and have filed as exhibitscompletely and with the understanding that our actual future results may bematerially different from what we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

 

**AVAILABLEINFORMATION**

 

We are required to file periodic reports with the SEC pursuant to Section 15of the Securities Exchange Act of 1934. Our quarterly reports are made on Form 10-Q and our annual reportsare made on Form 10-K.  We will alsofile current reports on Form 8-K. Upon the effectiveness of our Registration Statement on Form 8-Aunder the Securities Exchange Act of 1934, which is expected to occur on orshortly after April 30, 2009, we will be required to provide annualreports to security holders and expect to solicit proxies pursuant to proxystatements filed with the SEC on Form 14A. Filings we make with the SEC will be available to the public forinspection and copying at the SEC’s public reference facility and at its website or can be obtained by calling the SEC at 1-800-SEC-0330.

 

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**PART I**

 

**Item 1.  BUSINESS**

 

**Business Development**

 

Blackhawk Biofuels, LLC (referred to herein as “we,” “us,” the “company”or “Blackhawk Biofuels, LLC”) is a limited liability company organized underthe laws of the State of Delaware on April 28, 2005.

 

We recently completed construction of a 45 million gallon biodieselproduction plant in Danville, Illinois and have conducted operations of theplant at less than full capacity.  Duringthe period of construction of our plant in 2008, we had no revenues fromoperations.  The plant was commissionedto operate on soybean oil feedstock on December 20, 2008 and facilitieswhich permit the plant to operate on animal fat feedstock reached substantialcompletion on March 23, 2009.

 

On December 15, 2007 we completed a public offering of Class AUnits under a registration statement filed with the Securities and ExchangeCommission.  We sold a total of12,551,000 units in the offering, raising a total of $25,102,000.  On March 14, 2008 we broke escrow on theoffering.  These funds have been used tofinance completion of our biodiesel plant.

 

Our original intentionwas to construct our plant in Freeport, Illinois.  However, in February 2008 ouranticipated lenders withdrew their non-binding commitment to provide financingfor that plant.  As we looked forreplacement financing, we found the opportunity to assume responsibility tocomplete construction of the Danville plant with available debt financing.

 

On March 14, 2008 we entered into an Asset Purchase Agreement (the“Purchase Agreement”) with Biofuels Company of America, LLC (“BCA”) to acquirethe under-construction assets of a biodiesel plant in Danville, Illinois.  Construction of the plant was underway underthe ownership of BCA.  Other parties tothe Purchase Agreement were Renewable Energy Group, Inc. (“REG”), whichalso provided financing for the transaction, and Biodiesel Investment Group,LLC and Bunge North America, Inc. (“Bunge”), which were the owners ofBCA.  The transaction closed on May 12,2008.

 

Under the terms of the Purchase Agreement, we acquired specified assetsof BCA and assumed certain liabilities of BCA. The consideration payable to BCA was in the form of $5,250,000 in cashand 1,980,488 shares of common stock of REG. Of that consideration, $250,000 and 97,561 shares of common stock of REGwere placed in escrow to satisfy indemnification obligations which BCA may haveto us under the Purchase Agreement. Pursuant to a loan agreement entered into with REG Ventures, LLC, awholly-owned subsidiary of REG (“REG Ventures”), we issued to REG Ventures aconvertible promissory note in the principal amount of $21,700,000 as paymentfor the REG common stock delivered to BCA and for an additional 127,273 sharesof series B preferred stock of REG issued to Bunge North America, Inc. (“Bunge”)in consideration for Bunge’s agreement to enter into an Oil Feedstock SupplyAgreement with us.  We also entered intoa new loan agreement with Fifth Third Bank to replace $24,650,000 in debtfinancing which had originally been provided to the facility by Fifth ThirdBank.

 

The Purchase Agreement was filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended March 31, 2008.  The foregoing description of the Agreement isqualified in its entirety by reference to the full text of the Agreement.

 

**Financing, Construction and Operating Agreements**

 

We have entered into several other agreements related to the financing,construction and operations of our plant. Most of these agreements were dated May 9, 2008 and were filed asexhibits to our Quarterly Report on Form 10-Q for the quarter ended March 31,2008.  The descriptions of theseagreements are qualified in their entirety by reference to the full text of theagreements.

 

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**Loan Agreement with Fifth Third Bank**

 

We have a Loan Agreement with Fifth Third Bank dated May 9, 2008which has provided $24,650,000 in construction/term debt financing for ourplant.  In addition, Fifth Third Bank hasagreed to provide an additional $5,000,000 revolving line of credit.  The construction/term loan bears interest ata fluctuating rate based on a range of rates above 30-day LIBOR and will matureon November 3, 2011.  Revolvingcredit loans will be available based on our eligible accounts receivable andinventories and will be available until May 8, 2009.  Interest on revolving credit loans willfluctuate based on 30-day LIBOR or Fifth Third Bank’s prime rate plus 25 basispoints.  Our obligations are secured bysubstantially all of our assets.

 

**Subordinated Loan Agreement with REG Ventures**

 

We also have a Subordinated Loan Agreement dated May 9, 2008 withREG Ventures (the “REG Loan Agreement”) and have issued to REG Ventures aconvertible promissory note in the amount of $21,700,000.  This note was principally in payment for the1,980,488 shares of common stock of REG delivered to BCA under the terms of thePurchase Agreement.  It also reimbursedREG for 127,273 shares of preferred stock of REG issued to Bunge in connectionwith an oil feedstock supply agreement entered into between Bunge and us describedbelow.  Interest is based on 30-day LIBORplus 5% due in quarterly installments and the note is due May 9,2013.  We may, if we wish, pay interestdue in our Class A Units at a rate of $2.00 per unit.  Through March 31, 2009, we have issued542,224 units to REG Ventures in lieu of interest in cash.  Our obligations to REG Ventures are securedon a subordinated basis by substantially all of our assets.  The note is convertible into our Class AUnits at a conversion price of $2.00 per unit upon maturity of the note,prepayment of the note, the closing of an initial public offering by REG, achange of control of REG or three years after the date of the note.  In addition, the REG Loan Agreement providesthat in the event of an initial public offering by or change of control of REG,we are required to submit to our members a proposal for the acquisition by REGof substantially all of our business and assets.

 

**Ground Lease from Bunge Milling, Inc.**

 

By a First Amendment, Assignment and Assumption and Consent toAssignment of Ground Lease and Conveyance of Leasehold Improvements dated May 9,2008, we assumed from BCA a ground lease dated November 3, 2006 (asamended, the “Ground Lease”) from Bunge Milling, Inc. for the site onwhich our Danville biodiesel plant is located. The Ground Lease covers approximately 6 acres of land adjacent to asoybean crushing plant operated by Bunge. The term of the Ground Lease will expire on November 3, 2036,subject to our right to extend the term for four additional five yearperiods.  The rent under the Ground Leasewill be $1.00 per year during the term of the oil feedstock supply agreementbetween Bunge and us described below (May 9, 2014 or, if extended, May 9,2016).  Thereafter, base rent willcommence under the Ground Lease at $72,000 per year subject to a consumer priceindex escalator in future years.

 

**Design-Build Agreement with REG Construction**

 

Construction of a preliminary treatment facility to process animal fatsfor use as feedstock at our plant has been performed by or under thesupervision of REG Construction & Technology Group, LLC, a subsidiaryof REG (“REG Construction”), under a Design-Build Agreement dated May 9,2008 (the “Design-Build Agreement”). This facility was substantially completed as of March 23, 2009 at atotal cost of $11,747,633.

 

**Oil Feedstock Supply Agreement with Bunge**

 

We entered into an Oil Feedstock Supply Agreement with Bunge dated May 9,2008 (the “Oil Feedstock Supply Agreement”) which provides that we will acquireits soybean oil from Bunge and assures us that Bunge will make available atleast 30% of our maximum operating requirements for soybean oil.  If we do not use soybean oil to producebiodiesel, we will pay standby fees to Bunge for making oil available to us.   The purchase price for soybean oil under theagreement will fluctuate based on market prices.  The Oil Feedstock Supply Agreement willexpire on May 9, 2014, subject to extension by us for an additional twoyear period.

 

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**Services Agreement with Bunge**

 

We have also entered into a Services Agreement with Bunge dated May 9,2008 (the “Bunge Services Agreement”) which provides that Bunge will assist usprincipally with respect to rail loadout at Bunge’s rail staging area and willassure us of easements for access and natural gas, oil and biodieselpipelines.  Fees will vary based on theservices performed.  The Bunge Services Agreementwill expire on May 9, 2014, subject to extension for additional two yearperiods unless one of the parties elects to terminate the agreement.

 

**Management and Operating Services Agreement withRenewable Energy Group, Inc.**

 

To provide for the operating management of our plant, we have enteredinto a Management and Operational Services Agreement (the “REG ServicesAgreement”) dated May 9, 2008 with two REG subsidiaries, REG ServicesGroup, LLC (“REG Services”) and REG Marketing & Logistics Group, LLC (“REGMarketing”).   Under the REG Services Agreement,REG Services and REG Marketing have responsibility for the overall managementof our plant, placement of a general manager and an operations manager at theplant, procurement of feedstocks necessary for the operation of the facility,marketing of our production of biodiesel and glycerin when our plant commencesproduction and performance of administrative, sales and marketing functions forus.

 

REG Services has the responsibility under the REG Services Agreement tomanage the supply of soybean oil, other vegetable oils and animal fatfeedstocks for our use.  Feedstockprocurement will include consideration of ways to assure the supply and priceof feedstocks, which might include supply or purchase agreements and hedginginstruments and accounts.

 

The REG Services Agreement also provides for REG Marketing to marketthe biodiesel and glycerin produced by us. We expect that the biodiesel produced by our plant will be marketedunder REG’s Soypower trade name.  Productmarketing may also involve the use of extended term contracts and hedgingfacilities.

 

The REG Services Agreement provides for compensation to REG Services inan amount of $75,000 per month plus $.0425 per gallon of biodiesel produced, ineach case subject to a consumer price index escalator, plus a bonus of 6% ofour net income.  In addition, we arepaying additional compensation to REG Services for testing and start-upservices in the amount of $483,000 and will pay for any additional servicesprovided by REG Services beyond the scope of the Services Agreement.

 

 In addition, the REG ServicesAgreement provides for the extension of trade credit by REG Marketing to us inconnection with the sale of biodiesel by us or on our behalf.  The trade credit will be secured by ourreceivables.

 

The REG Services Agreement also provides that REG Services is entitledto appoint one member to our board of managers.

 

The REG Services Agreement will remain in force for five years afterour plant first produces biodiesel for sale and will continue thereafter unlessone of the parties gives 24 months notice to terminate the agreement.

 

**Unit Purchase Warrant to REG Ventures**

 

We also issued a Unit Purchase Warrant dated May 9, 2008 to REGVentures for the purchase of 51,563 of our Class A Units at an exerciseprice of $.01 per unit.  The warrant wasissued in consideration of REG providing a guaranty for a portion of ourobligations under our Loan Agreement with Fifth Third Bank.  The warrant is exercisable upon issuance tothe extent of 20% of the units covered thereby and is exercisable for anadditional 20% of the units on the first four anniversaries of the date ofissuance of the warrant.

 

**Plant Construction**

 

Our plant has been constructed principally by Fagen, Inc. (“Fagen”)of Granite Falls, Minnesota using technology supplied by De Smet BallestraNorth America, Inc. (“De Smet”). Fagen is a prominent construction company in the alternative fuelsindustry.  Among other activities, Fagenhas built plants accounting for over half of the total ethanol production inthe United States.  De Smet is asubsidiary of the De Smet Ballestra Group which is 

 

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based in Belgium. Its technology has been used in a significantpercentage of the total biodiesel production capacity in Europe.

 

REG has assumed overall responsibility for the construction of theanimal fat pre-treatment facilities for our plant under the Design-BuildAgreement discussed above.

 

**Business Strategy**

** **

Our biodiesel plant has been designed to produce 45 million gallons ofbiodiesel per year (“mmgy”).  Inaddition, at full capacity, the plant will produce approximately 16,800 tons ofglycerin each year.  The plant consistsprincipally of a materials handling and storage area, a transesterificationreactor in which the biodiesel is produced, a storage and loading area forbiodiesel and glycerin, truck scales and an administrative office.

 

Our business strategy revolves around two main goals: utilization oflow-cost feedstocks and production of a high quality biodiesel product.  To reach our goal of using the lowest costfeedstocks, we have incorporated feedstock pretreatment capabilities in ourfacility.  The plant has the ability toutilize multiple feedstocks, including soybean oil, other vegetable oils andanimal fats.  Our primary product is fuelgrade biodiesel meeting ASTM D6751 standards. Our goal to provide high quality biodiesel led us to enter into the REGServices Agreement with REG Services and REG Marketing.

 

**Overview of the Biodiesel Industry**

 

***Biodiesel Market Characteristics***

 

Biodiesel is an engine fuel produced from vegetable oils and animalfats which has favorable environmental and lubrication characteristics whenused as a blend with or alternative for petroleum based diesel fuel.  Federal and state environmental requirementsand incentives, particularly the federal renewable fuels program, haveencouraged the production and use of biodiesel in recent years.

 

Rudolph Diesel designed the diesel engine in 1894 to run on peanutoil.  Until recently, however, vegetableoils (biodiesel) have not been a significant source of energy for the dieselengine.  Instead, petroleum baseddistillate fuels became the primary energy source for a variety of heating,diesel fuel and electric power generation uses. According to the Energy Information Administration, the United Statesconsumed a total of 63 billion gallons of distillate fuel in 2007.  Diesel fuel makes up approximately two-thirdsof the distillate fuel use and fuel oil approximately one-third.  The major distillate market segments include:“on-highway” with approximately 63% of the market, “residential” with 9%,and  “railroad,” “farm,” “commercial,” “off-highway”and “industrial” with 4% to 6% each.

 

The biggest change in the diesel fuel market in the past decade hasbeen the requirement to decrease regulated emissions, principally in the “on-highway”portion of the market.  This has requireddiesel fuel refineries to produce fuel with lower sulfur content.  Effective June 2006, all diesel fuel wasrequired to have a sulfur content of less than 15 parts per million (“ultra lowsulfur diesel or “ULSD”).  A problemencountered with ULSD is decreased lubricity of the fuel.  With better emissions and lubricitycharacteristics, biodiesel has emerged as an attractive alternative fuel orblending source.  Lubricity of ULSD canbe improved with as little as 1% biodiesel. Subject to the adaptability of the engine or use, biodiesel can beblended or used in any ratio, ranging from 1% (B1) to 100% (B100).

 

***Biodiesel Supply Trends***

 

Supported by government incentives, the biodiesel industry has expandedsignificantly in recent years, but it remains only approximately one percent ofthe combined distillate fuel/biodiesel market. The National Biodiesel Board estimates that biodiesel production tripledfrom about 25 million gallons in 2004 to approximately 700 million gallons in2008.  As of September 29, 2008, theNational Biodiesel Board reported that 176 plants nationally have the capacityto produce 2.61 billion gallons of biodiesel per year.  However, the National Biodiesel Board reportsthat due to current economic conditions, the capacity utilization of manyplants is extremely low.

 

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***Biodiesel Price Trends***

 

The selling price of biodiesel is directly related to the price ofdiesel fuel.  However, the capitalrequired to establish biodiesel production facilities, the cost of producingbiodiesel and the cost of biodiesel feedstocks have resulted in biodiesel beingpriced higher than diesel fuel.  Highpetroleum prices, the biodiesel tax credit and special incentive programs instates such as Illinois and Minnesota have offset this price differential to asignificant extent. However, in recent months, as petroleum prices have fallen,it has been very difficult for biodiesel to remain competitive in themarket.  Because biodiesel is such asmall part of the currently estimated 63 billion gallon distillate market, theexpanding biodiesel supply has a limited impact on biodiesel prices.

 

**Products**

 

Our  biodiesel plant producesthree products: biodiesel, glycerin and a small amount of fatty acid residues.

 

***Biodiesel***

 

Our primary product is fuel grade biodiesel, which is produced in aquantity of about 98% of the amount of input feedstock.  We intend to qualify our plant to meetAmerican Society of Testing and Materials (“ASTM”) D6751 standards for ourproduct.  Fuel grade biodiesel must beproduced in strict compliance with specifications set forth in ASTM D6751 toinsure proper performance in diesel engines. Biodiesel that meets ASTM D6751 requirements is a legal motor fuel thatmay be sold and distributed in the United States.

 

Biodiesel is an engine fuel produced from vegetable oils and animalfats which has favorable environmental and lubrication characteristics whenused as a blend with or alternative for petroleum based diesel fuel.  Biodiesel mixes easily with diesel fuel atrates between 2% and 100%.  Biodieselimproves the lubricity of petroleum based diesel fuel significantly at levelsas low as 2%, and therefore is a substitute for sulfur, currently found in allpetroleum diesel and legislated to be removed in the next decade.

 

In June 2000, biodiesel became the first and only alternative fuelto successfully complete the Tier I and Tier II Health Effects testingrequirements of the Clean Air Act Amendments of 1990.  The Tier I testing involved a detailedanalysis of biodiesel emissions.  TheTier II testing involved a 90-day subchronic inhalation study of biodieselexhaust with specific health assessments. The results of the tests concluded that biodiesel is non-toxic,biodegradable and poses no known threat to human health.

 

***Glycerin***

 

Our plant will also produce glycerin, which is the principal co-productof the biodiesel production process, produced in a quantity of about 10% of theamount of input feedstock.  Glycerin hascombination of physical and chemical properties that are utilized in a widevariety of products, including many applications as an ingredient or processingaid in cosmetics, toiletries, personal care, pharmaceuticals and foodproducts.  Operating at full capacity, weexpect that our plant will produce approximately 16,800 tons of crude glycerinannually.  Glycerin sales are forecast torepresent less than 1.0% of our gross sales.

 

***Fatty Acid***

 

We will also produce a small amount of fatty acid which is typicallysold for use in the animal feed industry.

 

**Oil and Fat Feedstock Supplies**

 

Our plant has pretreatment capabilities that enable it to use a widerange of vegetable oil and animal fat feedstocks, including crude soybean oiland virtually any fat or grease.  Weanticipate that our primary feedstocks will be refined soybean oil, crudedegummed soybean oil and rendered fats such as lard and beef tallow.  We do not own or have control of our ownfeedstock supplies.  We have twoagreements that deal with our feedstock requirements: the REG ServicesAgreement that gives REG Services the responsibility for feedstock procurement 

 

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for our plant and the Oil Feedstock Supply Agreement with Bunge thatprovides for supplies of soybean oil for the plant.

 

Operating at its 45 mmgy design capacity, our plant will needapproximately 178,000 tons per year of mixed feedstocks to supply ourproduction.  Our Oil Feedstock SupplyAgreement with Bunge, commodity prices in the market and other factors willdetermine our usage of the different feedstocks in the future.

 

The predominant feedstock used for biodiesel production in the U.S. issoybean oil because of its abundance and availability (approximately 80% of thevegetable oil produced in the U.S. is soybean oil).  The majority of plants, including most of thelargest biodiesel producers, continue to utilize soybean oil.  This is changing, however, as more recentlybuilt plants have been designed to process a variety of vegetable oil andanimal fat feedstocks and older plants are adding facilities to provideflexible feedstock capability.

 

Soybean oil is extracted from soybeans at commercial crushingfacilities.  Practically any other newlyproduced vegetable oil can be used for biodiesel, but soybean oil is generallypriced marginally lower than competing oils. We also have the capability to utilize liquid animal fats, which yieldbiodiesel with slightly different characteristics than vegetable oil basedbiodiesel.  These animal fats arerendered from a variety of liquid and solid materials, such as tallow and wasteproducts from slaughterhouses.  Recycledvegetable oils such as cooking oils from restaurants, often known as “yellowgrease,” can also be used to produce biodiesel. However, due to contaminants and particulate matter typically present inyellow grease, we do not intend to use yellow grease as a feedstock.  All of the foregoing types of feedstocks areavailable in the northern Illinois market.

 

The cost of the feedstock used in biodiesel accounts for 75% to 85% ofthe overall cost of producing biodiesel. Consequently, feedstock cost is a critical factor in the profitabilityof any biodiesel plant, plants may succeed or fail based on feedstocksavailable and the ability to process different feedstocks will enable plants toadapt to variable feedstock market prices and conditions.   Recently elevated prices for soybean oilhave made other vegetable oils and animal fats attractive feedstocks.

 

The various feedstock oils have different supply and demandcharacteristics, but their price ranges are generally correlated because oftheir substitutability.  Through 2006,the twenty-year average value of soybean oil was approximately $.21 perpound.  During that period, the principalcompeting oils, such as corn, palm, canola and cottonseed oils, have generallysold at a  $.02 to $.05 per pound premiumover soybean oil.  Rendered oil andanimal fats, of the quality that would go into a biodiesel facility, hastypically cost $.03 to $.08 per pound less than crude soybean oil.

 

Beginning in 2006, the market price of soybean oil began to risedramatically in response to increased demand from the biodiesel industry andpressure on soybean acreage from corn dedicated to ethanol production.  As a consequence, the price of crude soybeanoil in Decatur, Illinois increased from an average of $.23 per pound in theyear ended October 31, 2006, to $.31 in the year ended October 31,2007, and to $.52 in the year ended October 31, 2008.  The most recent forecast by the United StatesDepartment of Agriculture for soybean oil prices in the year beginning October 31,2009 show a moderation in prices, in the range of $.28 to $.32 per pound.

 

The principal positive and negative attributes that animal oils andfats provide biodiesel arise from the higher level of saturated fats containedin them compared to vegetable oils which have a high content of unsaturatedfatty acids.  The increased amount ofsaturated fatty acid yields greater oxidation stability and substantiallyenhanced lubricity, resulting in better diesel engine efficiencies and reducedexhaust emissions, particularly at higher operating temperatures.  On the other hand, at cold temperature, thesaturated fatty acids have a tendency to solidify, decreasing engineefficiencies and generating concerns about engine damage among users.  Blenders will consider and utilize thesecharacteristics to make significant improvements in the lubricity rating innormal operating conditions while reducing or avoiding blends that may lead tooperating problems in cold temperatures.

 

Crude soybean oil and all animal fats need to be pretreated beforebeing processed into biodiesel. Pretreatment removes the impurities and prepares the feedstock for thebiodiesel production process.  Somefeedstocks require more treatment than others. The cost of the process is driven by the structure of the feedstock andthe impurities in the feedstock.

 

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The rapid expansion of the biodiesel market has put pressure on the oilfeedstock markets since 2006.  Because ofthe seasonality of the soybean crop, significant seasonal supply variations canalso occur.  One of the most significantrisks to feedstock oil prices is the possibility of a short soybean crop in anyyear. The domestic market for oils for use in consumer goods tends force priceshigher in tight markets.  Theinternational market and exports of vegetable oils from the U.S. also affectsoybean oil prices.  Any increase in theaverage price the biodiesel industry is required to pay for feedstocks makesbiodiesel less competitive against petroleum-based diesel fuel.

 

As with other agricultural commodities, the market supply and price ofvegetable oil feedstocks can be affected by risks to crops and yields,including weather and disease.  Reducedsoybean supplies or increased costs to avoid disease could cause the price ofsoybeans to rise and increase the cost of soybean oil as a feedstock to thebiodiesel industry.

 

The use of animal fats in biodiesel provides the product with a higherdegree of lubricity than vegetable oils. This is a consequence of the chemical composition of the triglyceridefound in animal fats.  Designing ourplant to be able to process animal fats as well as vegetable oils gives us aproduct which functions at optimum levels in a wider range of operatingconditions than biodiesel based solely on vegetable oils.

 

Somewhat greater care in handling and use is necessary for animal fatsdue to the greater risk of spoilage, contamination and diseasetransmission.  Some very durable fats maynot be usable in biodiesel plants. Nevertheless, we believe that the benefit that animal fats can bring toour biodiesel product make it an important feedstock source for us.

 

Animal fats, including declining supplies of animal fat based cookingoils, have typically been sold to rendering companies by slaughterhouses andthe restaurant and commercial cooking industries.  Within a 200 mile radius of our site thereare a number of rendering plants and beef and hog processing plants thatprovide a source for animal fat and oil feedstock.  Most, if not all, of those processing plantsrender their oil on site and sell the bulk either in their integratedproduction and processing system or sell to local feed mills.  We have no agreements with any renderingcompanies, slaughterhouses or other sources for animal fats, but will considersuch agreements in the future.

 

**Biodiesel and Glycerin Markets**

 

Over the past several years, biodiesel prices have tended to correlatewith wholesale diesel fuel prices.  Atthe same time, price charts for biodiesel and prices for feedstocks such assoybean oil show that biodiesel prices do not move with vegetable oilprices.  The lack of correlation betweensoybean oil prices (approximately 75% to 85% of our estimated cost ofproduction) and biodiesel prices (approximately 98% of our estimated revenue)is a significant risk inherent in our business.

 

We expect that our plant will produce approximately 16,800 tons ofcrude glycerin annually.  Due toovercapacity in the glycerin market, caused in large part by expansion of thebiodiesel industry, crude glycerin prices in recent years have declinedsignificantly and have been reported at between $0.00 (no value) to $0.08 perpound.    We do not intend to refine ourglycerin because the return on refined glycerin cannot justify the expense ofproduction.  Because we intend to processanimal fat, the glycerin we produce will be non-kosher.  Glycerin is forecast to represent less than1.0% of our gross sales.

 

We expect to sell all of the biodiesel and glycerin that weproduce.  The REG Services Agreementprovides that REG Marketing will sell our production in regional or nationalmarkets on our behalf.

 

***BiodieselProduction***

 

Our plant produces biodiesel and glycerin from vegetable oils andanimal fats using a chemical process known as the base transesterification ofoil with methanol.  We have thecapability to receive our oils and fats feedstock principally by tanker truckand rail.  The feedstock will is measuredby weight or volume and stored in receiving tanks.  Thereafter, the feedstock is transported to achemical reactor where it is mixed with methanol and a catalyst and heated withsteam, which results in the production of biodiesel and glycerin.  The biodiesel and glycerin are 

 

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separated, cleaned, cooled and pumped into storage tanks to awaitshipment.  Shipment from our plant ismainly by tanker truck, but rail may also be utilized.

 

The plant operates on a continuous process system rather than on abatch basis.  100 pounds of oil or fatfeedstock, charged with 10 pounds of methanol together with a sodium hydroxideor similar catalyst, yield almost 100 pounds of biodiesel and 10 pounds of glycerin.  In a normal 24 hour production day, our plantcan process approximately 1,080,000 pounds of feedstock and 108,000 pounds ofmethanol into approximately 1,080,000 pounds of biodiesel and 108,000 pounds ofglycerin.  A small amount of fatty acidis also be produced as a by-product.

 

**Transportation and Delivery**

 

In cooperation with Bunge under the Bunge Services Agreement, wereceive oil and fat feedstocks by truck, rail and pipeline from Bunge and loadbiodiesel and glycerin onto trucks and rail cars.  Because we receive our soybean oil feedstockby pipeline from adjacent Bunge production and storage facilities, we requirelittle storage capacity for soybean oil. We have the capacity to store at least six days’ requirements of animalfats and oils operating at 50% of capacity on animal fats and oils.  We expect that most of our animal fats willbe obtained in the regional market and will arrive by tanker truck.  We anticipate that most of our biodiesel willbe sold in the regional market, particularly in metropolitan Chicago.  Thus, our biodiesel is also likely to beshipped in tanker trucks.

 

Danville is served by Interstate Highway 74 which serves Indianapolisto the east, has connecting interstate and other routes to the Chicagometropolitan area and interstate connections to St. Louis.   Other interstate and U.S. highways allow ourplant efficient highway access to any feedstock or product market.

 

Rail transportation is provided by the Norfolk Southern Railway whichhas connections to Chicago and other urban markets throughout the eastern U.S.and serves feedstock source areas not efficiently served by truck.

 

**Utilities**

 

The production of biodiesel is an energy intensive process that usessignificant amounts of natural gas, electricity and water.

 

We use natural gas principally to fire our boiler to provide steam forour biodiesel production process. Natural gas is a critical resource for us and we will requireapproximately 154 million cubic feet of natural gas each year if our plant isoperating at full capacity.  Natural gasprices have risen significantly in the past, have exhibited considerablevolatility within calendar years, and from season to season, and can beexpected to continue to be a significant component of our cost structure.  Our natural gas is currently supplied byProLiance Energy through a nearby Illinois Power pipeline.

 

We also require a continuous supply of electricity, approximately 8.2million kilowatts of electricity annually at full capacity.  The price of electricity, like any commodity,can fluctuate and increase significantly as it has in the past.  Electricity to our plant is supplied byAmeren.

 

We also use a significant supply of fresh water to maintain consistentoperations at our plant.  Our watersupplies are obtained from the City of Danville.

 

Wastewater from our plant is treated on our site and then pumped to theCity of Danville’s wastewater treatment plant.

 

**Risk Management**

** **

The REG Services Agreement provides for REG Services to manage thescheduling and purchase of feedstock supplies for our plant and for REGMarketing to market the biodiesel and glycerin that we produce.  REG Services is required to assure theconsistent scheduling of feedstock deliveries and schedule product sales anddeliveries.  We expect that REG Serviceswill utilize forward contracting and hedging strategies, including strategiesutilizing 

 

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futures and option contracts, to manage our commodity risk exposure andoptimize finished product pricing on our behalf.  The Oil Feedstock Supply Agreement with Bungeassures us of a significant portion of our potential soybean oilrequirements.  REG Services mayfacilitate the negotiation of additional long-term supply agreements intendedto lock in favorable quantities, quality and pricing of additional feedstocksand other supplies for us.

 

Hedging is a means of protecting the price at which we buy feedstocks andthe price at which we will sell our products in the future.  The effectiveness of hedging activities willdepend on, among other things, the cost of feedstocks and our ability to sellenough biodiesel and glycerin to use all of the feedstocks subject to futuresand option contracts that we purchase as part of our hedging strategy.  Although we will attempt to link hedgingactivities to sales plans and pricing activities, hedging activities themselvescan result in costs because price movements in commodity contracts are highlyvolatile and are influenced by many factors that are beyond our control.  We may incur these costs and these costs maybe significant.

 

Our largest expenditure, oil feedstocks, and our biggest revenuesource, biodiesel, are in relatively volatile markets.  As a biodiesel producer, we are exposed toprice risk as a by-product of our core business and that trading commoditiescan be a risky endeavor if not managed properly.  Currently we have a risk management policyand, working with REG, expect to develop and employ a risk management plan.

 

**Competition**

 

We are in direct competition with numerous other biodiesel plants andcompanies that produce the same products that we do, several of which havesignificantly greater resources than we have. Existing and additional biodieselplants, particularly those in close proximity to our proposed plant, increasethe supply of biodiesel in our regional market and may cause lower biodieseland glycerin prices and higher costs for supplies of feedstocks.

 

The National Biodiesel Board estimates that as of September 29,2008 there were approximately 176 operational biodiesel production plants inthe United States with combined capacity of over 2.61 billion gallons peryear.  Although many of these plants arecurrently not operating, or are operating at very low capacity, their presencewill impact our operations regardless of the health of the biodiesel industrygenerally.  There are also a sizablenumber of additional plants that have suspended construction or discontinuedplanning pending improvements in the industry. These plants, if completed, would increase the competition for variousfeedstocks, and increase price competition in the national and regional marketsfor biodiesel.

 

Within a 150 mile radius of our Danville, Illinois plant site, StephanCompany has a 22 mmgy plant in Millsdale, Illinois; Incobrasa Industries, Ltd.has a 31 mmgy plant in Gilman, Illinois; Louis Dreyfus Agricultural Industries(“Dreyfus”)  has an 80 mmgy plant inClaypool, Indiana; e-biofuels, LLC has a 25 mmgy plant in Middletown, Indiana;Integrity Biofuels has a 10 mmgy plant in Morristown, Indiana; and EvergreenRenewables has a 5 mmgy plant in Hammond, Indiana.  All of these plants presently use soybean oilas their principal feedstock except the e-biofuels plant which hasmulti-feedstock capability.  There areother operating biodiesel plants in Illinois and Indiana which are beyond the150 mile radius from Danville or are insignificant in capacity.

 

Archer Daniels Midland Company, Cargill, Inc. and Dreyfus aremajor international agribusiness corporations and biodiesel producers with thefinancial, sourcing and marketing resources to become formidable competitors inthe biodiesel industry, without geographical, funding or feedstockrestraints.  ADM has its headquarters andmajor ethanol and other operations in Decatur, Illinois and may considerplacing a biodiesel plant in that location.

 

The biodiesel industry generally is in competition with the petroleumindustry and particularly the diesel fuel portion of the petroleumindustry.  The biodiesel industry isinsignificant compared to the size of the diesel fuel industry and is able tocompete principally as a consequence of government environmental regulationsand incentives, assisted by currently high petroleum and diesel fuel prices.

 

The capital and operating costs of producing biodiesel make itprohibitive to compete with diesel fuel based on price.  If the diesel fuel industry is able toproduce diesel fuel with acceptable environmental characteristics, or ifgovernment regulations change in favor of diesel fuel, biodiesel producerswould find it extremely difficult to compete. Petroleum refiners are continually attempting to develop diesel fuelswith low sulfur and other clean 

 

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burning attributes, together with lubricity and other characteristicsnecessary for the diesel engines in the marketplace.  It is not possible to predict what successthe petroleum industry may experience in making diesel fuel more acceptable orthe impact these efforts may have on the biodiesel industry.

 

**Government Incentives**

 

Recognizing the need for a cleaner source of energy and appreciatingthat biodiesel is renewable and can be produced in the United States, thefederal government and various state governments have created incentiveprograms to encourage biodiesel production. The federal incentive programs include direct payments to eligibleproducers for increased biodiesel production. State incentive programs include income tax credits and sales or excisetax exemptions.  These programs, however,are not without controversy.  Suchcontroversy is due, in part, to the cost of such programs.  Increases in the use of biodiesel willincrease the amount of excise tax credits available to blenders, whichtranslates into lower federal tax revenues. The direct payment program is a significant expenditure and Congress maychoose not to fully fund the program in any given fiscal year.  These federal programs may be affected by thepassage of energy legislation in the future.

 

***Federal Programs***

 

*Tax Credits*

 

The federal government began encouraging biodiesel production in2000.  The 2002 Energy Bill providedproducers of biodiesel a tax credit of eighty cents per gallon, and mandatedall federal, state and local governments with diesel powered vehicles anddiesel powered equipment use a mixture of 2% biodiesel, growing to 10% in 2010.

 

The  Energy Policy Act of 2005(the “Energy Policy Act”) provided for a volumetric excise tax credit forbiodiesel through December 31, 2008. The Emergency Economic Stabilization Act (the “Stabilization Act”),signed on October 3, 2008, extended this credit for an additional year,through December 31, 2009.  Thiscredit is allowed to the first blender and is reflected as a higher value forthe B100 (100% biodiesel) that is blended into pure diesel fuel.  This credit is available for blenders toreceive a total income tax credit or federal excise fuel tax credit in theaggregate amount of $1.00 per gallon of agri-biodiesel for blending B100 in adiesel fuel mixture at the minimum of one tenth of 1% of B100.  Most B100 producers include the economicbenefit of the credit in the price of their B100 and give blenders the right toclaim the credit.

 

Another tax credit established in the Energy Policy Act is a $0.10 pergallon income tax credit for biodiesel made from soybean oil up to 15 milliongallons of production annually.  Thiscredit was also extended by the Stabilization Act through December 31,2009.

 

*Renewable Fuels Standard*

* *

The Energy Policy Act established a national renewable fuel standard (“RFS”)that sets a national minimum usage requirement for renewable fuels thatincreases from 4 billion gallons per year in 2006 to 7.5 billion gallons peryear by the year 2012.  The EnergyIndependence and Security Act of 2007 (“EISA”) amended the Energy Policy Act torequire an increase in the usage of renewable fuels to 36 billion gallons by 2022.  Beginning in 2016, cellulosic and otheradvanced biofuels such as biomass-based diesel must account for all increases in the RFS andwill increase from 5.5 billion gallons in 2015 to 21 billion gallons of the 36billion gallons renewable fuels total by 2022. Although it is anticipated that ethanol will account for the largestshare of renewable fuel produced and used under the RFS, biodiesel will sharein this incentive.

 

***StateIncentives***

 

We benefit from certain tax incentives through the Enterprise ZoneProgram created pursuant to the Illinois Enterprise Act.  The Enterprise Zone Program, which isadministered by the Illinois Department of Commerce and Economic Opportunity(the “DCEO”), is a program designed to stimulate economic activity andneighborhood revitalization in areas designated as “enterprise zones” byproviding state and local tax incentives, regulatory relief 

 

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and improved governmental services. Our plant in Danville, Illinois is in an enterprise zone which providesrelief from certain real estate taxes.

 

***SignificantIndustry and Market Factors and Initiatives***

 

***American Society of Testing and Materials Standards***

 

The American Society of Testing and Materials (“ASTM”) is the premierstandard-setting organization for fuels and additives in the UnitedStates.  In December 2001, the ASTMissued a specification for biodiesel fuel designated as ASTM D6751.  This development is deemed crucial instandardizing fuel quality for biodiesel in the United States market andincreasing the confidence of consumers and engine makers.

 

To assist in assuring that biodiesel is produced and maintained at theASTM D6751 industry standard, the National Biodiesel Board created the NationalBiodiesel Accreditation Commission to certify producers of biodiesel blends ofB2 or greater that successfully meet the accreditation criteria as an “AccreditedProducer.”  Accreditation is awardedfollowing a successful formal review and audit of the capacity and commitmentof the applicant to produce or market biodiesel fuel that meets the ASTM D6751specification for Biodiesel Fuel (B100) Blend Stock for Distillate Fuels.  The accreditation process is comprehensiveand includes a detailed review of the applicant’s quality system documentation,followed by a formal audit of the applicant’s conformance to its system.  We intend to apply for Accredited Producerstatus in 2009.

 

***BQ-9000 Certification***

 

As a result of concerns regarding product quality of biodieselproduced, the industry is encouraging producers to adhere to BQ-9000certification for production standards. The National Biodiesel Board has demanded that the industry meet theirstandards for BQ-9000 certification. Plants that do not have this certification are likely to find it moredifficult to market their production.  Webelieve that BQ-9000 certification is needed to support the future confidencefor the petroleum industry to purchase and blend biodiesel and intend to applyfor BQ-9000 certification in 2009.

 

***Engine Manufacturer Guidelines***

 

Most major engine manufacturers have established guidelines for biodieseluse in their engines.  The NationalBiodiesel Board maintains a list of manufacturer statements regarding biodieselusage.  These statements outline theacceptable quantity and quality of biodiesel that each manufacturer will allowin engines manufactured by it without voiding applicable warranties.** **Mostof these manufacturers state that the use of blends up to B20 (20% biodiesel)will not void their parts and workmanship warranties.

 

***Fleet Usage***

 

Biodiesel is one of the fastest growing alternative fuels in thecountry.  In January 1999, therewere only a few fleets buying and using biodiesel.  According to the National Biodiesel Board, byJanuary 2002, there were well over 100 major fleets that implementedbiodiesel programs across the country, including federal fleets such as the USPostal Service, the US Air Force, the US Army, the US Department of Energy andNASA; state fleets in Ohio, Iowa, Virginia, Missouri, Delaware and New Jersey;city buses such as Cincinnati Metro in Cincinnati, Ohio and the Bi-State in St.Louis, Missouri; and major public utility fleets such as Commonwealth Edison,Florida Power and Light, Duke Energy, Georgia Power, Alabama Power andothers.  According to the NationalBiodiesel Board, this growth is spurred in part by three principal factors:standards established by the American Society of Testing and Materials (“ASTM”),health effects testing criteria by the federal Environmental ProtectionAdministration (“EPA”) and the necessity to comply with standards establishedunder the Energy Policy Act of 1992 (“Energy Policy Act”).

 

***Ultra LowSulfur Diesel***

* *

In January 2001, the EPA finalized a rule requiring sulfurlevels in diesel fuel to be reduced from 500 ppm at the pump to 15 ppm by 2006and 10 ppm by 2011.  The EPA, the petroleumindustry and equipment manufacturers 

 

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all recognized during the rulemaking process that the refinery changesnecessary to meet this requirement would also dramatically reduce lubricity ofdiesel fuel.  Lubricity is thecharacteristic in diesel fuel necessary to keep diesel fuel systems properlylubricated.  Fuel that lacks lubricitycan cause premature wear or malfunction to the vehicle and equipment.  We believe that biodiesel is uniquelypositioned to address ultra low-sulfur diesel fuel because biodiesel hasextremely low sulfur (2-3 ppm) and currently meets the 2006 standard.  Moreover, biodiesel offers superior lubricityeven in very low blends.  According tothe National Biodiesel Board, tests show that a 2% blend of biodiesel canimprove lubricity by as much as 65%.

 

***Low BlendDevelopment***

 

Low blends of biodiesel (5% and lower) have become increasingly popular.  The fuel’s excellent lubricity offers aperformance benefit.  Low blends are alsopopular with farmers, and an increasing number of diesel distributors aremaking low blends available for farm use. Iowa alone has approximately 80 locations making biodieselavailable.  Additionally, since 1997, atleast eight companies released premium additive packages containing biodieselas a lubricity additive.  The success ofthese products demonstrates biodiesel’s effectiveness as a lubricity additive.

 

***TechnologicalDevelopments***

 

Research in the basic technologies of biodiesel production may resultin changes in the industry.  On January 31,2006, President Bush announced the Advanced Energy Initiative to fundadditional research in biodiesel technology. New technologies may develop that would become viable means of biodieselproduction in the future.  For instance,Iowa State University is developing nanotechnology that results in fasterchemical conversion to biodiesel, with a catalyst that can be recycled andelimination of the wash step in the production process.  This nanotechnology can also be used with acatalyst to efficiently convert animal fats into biodiesel by creating a mixedoxide catalyst that has both acidic and basic catalytic sites.  Acidic catalysts on the particle can convertthe free fatty acids to biodiesel while catalysts can convert the oils intofuel.  Other new technologies underdevelopment include biodiesel production using algae feedstock and esterificationprocesses in the production reactors.

 

***FutureMarket Dynamics***

 

As the EPA and fuel and equipment industry groups move to improveperformance and emissions of diesel technology, diesel fuel is likely tocontinue to be the preferred platform for heavy-duty applications for theforeseeable future.  Furthermore, globalwarming and greenhouse gases will continue to gain attention.  Because biodiesel is compatible andcomplimentary to these goals and future technology, biodiesel is positioned toprovide benefits in all these areas, which we believe will further increase thefuel’s economic competitiveness.

 

***Politicaland Public Support***

 

Biodiesel is now included in major state and nationwide legislativeefforts, which are providing a mechanism to quantify the benefits of the fueland make biodiesel a cost-competitive option for achieving many national andstatewide goals.  The future demand forbiodiesel will depend in part on whether federal and state governmentincentives and mandates are maintained and expanded and on the demand for dieselfuel in general.

 

**Environmental Regulation**

 

The operations our plant are subject to laws and regulationsadministered by the United States Environmental Protection Agency (“EPA”) andIllinois EPA (“IEPA”).  We are subject toextensive air, water and other environmental regulations.  An air emission source construction permitand national pollution discharge elimination system permit were obtained priorto commencement of construction of our plant and a stormwater pollutionprevention plan has been prepared.  Otherpermits and compliance plans have been obtained or are required based oninformation obtained in our initial operations. The EPA and IEPA will have continuing oversight authority with respectto our operations.  The air permitcontains ongoing emission limits and monitoring and recordkeepingrequirements.  EPA and IEPA rules andregulations are subject to change, and any changes can be maderetroactively.  Consequently, even if wehave the proper permits at the present time, we may be required to invest or 

 

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spend considerable resources to comply with future environmentalregulations or new or modified interpretations of those regulations to thedetriment of our financial performance.

 

***Air Pollutant Emissions***

 

Operation of ourplant is allowed only if we can demonstrate that it is in continuous compliancewith all applicable regulatory requirements under the Clean Air Act.  The production of biodiesel results in airemissions produced by the combustion process used to generate steam.  Our plant generates steam using a natural gasfired boiler.  Natural gas combustionproduces emissions of various air contaminants that are regulated by the EPAand IEPA.  These pollutants includecarbon monoxide, nitrogen oxides, particulate matter, sulfur dioxide, volatileorganic compounds, lead, sulfuric acid mist, mercury, and trace amounts ofmetals and organic and inorganic compounds. The regulated pollutants are controlled through the combined use offinely tuned combustion processes and control technologies that meet federaland state requirements.

 

The distillationprocesses used as part of our biodiesel production produce various types ofvolatile organic compounds that will be reduced through pollution controlequipment to meet limits established by the EPA and IEPA.

 

We have obtained an operating air permit for our plant based on theplant being categorized as a minor source of regulated air pollutants inaccordance with federal and state definitions. As a minor source, the plant is not subject to the EPA’s Prevention ofSignificant Deterioration (“PSD”) regulations under the Clean Air Act.  However, if the EPA should ever consider usto be a major source of air emissions, the plant would be subject to the PSDrequirements, which are more stringent and cumbersome that those for minorsources of air emissions, and we may be required to invest substantialresources or reduce operations to comply with the PSD requirements.

 

Our air permit has terms and conditions that include strict emissionlimits that must be maintained.  Wemonitor our systems to prevent any hazardous material (largely methanol) fromescaping into the atmosphere and will vent any excess gases to a flare todestroy potential emissions.  We are subject torecordkeeping and reporting requirements as well as periodic on-siteinspections.  If our plant violates anyprovision of its permit, the plant and we could receive a notice of violationand may be subject to enforcement actions, which can result in substantialfines and possible closure of our plant.

 

***Carbon Dioxide Emissions***

 

Carbon dioxide is also emitted in the combustion of natural gas toproduce steam.  Because biodiesel itselfcontains carbon, it will also produce carbon dioxide when it is consumed invehicles or in other uses.  Carbondioxide is not presently considered a criteria pollutant by the EPA and thereis no established health impact from the release of these emissions.  Consequently, there is no current federal orstate requirement to control carbon dioxide emissions.

 

The scientific community contends that carbon dioxide and otherheat-trapping emissions are responsible for global climate change.  Designation of carbon dioxide as a criteriapollutant would enable the EPA to regulate U.S. emissions of carbon dioxide toconform to a domestic standard or to an international treaty restricting thoseemissions, such as the Kyoto Protocol. The Kyoto Protocol would require that the United States reduce itsgreenhouse gas emissions by 7% to 93% of 1990 levels by 2010.  However, the EPA has determined that it doesnot have authority to regulate carbon dioxide and has not proposed to do so,and the U.S. Senate rejected the Kyoto Protocol.  Twelve states and several environmentalactivists sued the EPA over its decision but the U.S. Court of Appeals ruled infavor of the EPA in July 2005.  On June 26,2006, the United States Supreme Court agreed to hear the case on appeal and thecase was argued before the court on November 29, 2006.  On April 2, 2007, the U.S. Supreme Courtoverturned the Court of Appeals decision and ruled that the EPA does have theauthority to regulate emissions of carbon dioxide and other greenhouse gasses.

 

In July 2004, eight states and the city of New York sued five ofthe largest carbon dioxide emitters.  Thelawsuit sought to require the companies to reduce the amount of carbon dioxidepollution and did not seek monetary damages. In September 2005, a federal judge dismissed the lawsuit, statingthat the president and Congress, not the 

 

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judiciary, should consider such a broad environmental policy.  The case was argued on appeal before theUnited States Court of Appeals in June 2006.  Thereafter, the parties requested the courtto consider the case in the light of the decision of the Supreme Court in theEPA case.  No decision has been made bythe Court of Appeals.

 

In July 2008the EPA released an Advanced Notice of Proposed Rulemaking which requestedpublic comments on possible EPA regulation of greenhouse gas emissions.  Comments received are being considered by theEPA.

 

We cannot predictthe effect of the foregoing cases or of future regulations or legislationrelating to carbon dioxide emissions as they may relate to our plant or itsoperations.  It is possible thatfuture requirements could emerge that would require control or mitigation ofsome or all of the carbon dioxide emissions from our plant or impact the use ofbiodiesel as a fuel.

 

***Water and Water Related Issues***

 

We use water to cool the closed circuit systems in our plant.  Although the water in our cooling system isre-circulated to decrease plant water demands, water is replaced to maintainwater quality and some blowdown water is discharged.  At full capacity operations, we estimate thatwe will discharge up to 60,000 gallons of blowdown and other wastewater per dayfrom our plant.  We intend to dischargeour wastewater into the city of Danville’s wastewater system and have currentlybudgeted $130,000 per year to discharge the wastewater and comply with the city’sregulations.  We have a NationalPollutant Discharge Elimination System (NPDES) permit from the State ofIllinois.

 

** **Wehave received a General Permit No. 1 storm water discharge permit from theIEPA and have a Stormwater Pollution Prevention Plan in place that outlinesvarious measures we plan to implement to prevent storm water pollution.  We maintain surface water control devices tosatisfy the Illinois storm water runoff requirement to minimize any surfacewater runoff that could potentially contaminate state waters

 

We have implemented a Spill Prevention Control and Countermeasureplan.  This plan addresses oil pollutionprevention regulations and must be reviewed, updated and certified by aprofessional engineer every three years.

 

***Risk Management Plan***

 

Under the Clean Air Act, stationary sources with processes that containmore than a threshold quantity of a regulated substance are required to prepareand implement a Risk Management Plan.  Wehave established a plan to prevent spills or leaks of any regulated substanceand an emergency response program in the event of spills, leaks, explosions orother events that may lead to the release of a regulated substance into thesurrounding area.  We closely monitor allwastewater to assure that no contaminated water reaches any fresh watersupplies.  We will need to conduct ahazardous assessment and prepare models to assess the impact of any release ofa regulated substance.

 

***Nuisance***

 

Biodiesel production has been known to produce an odor to whichsurrounding residents could object.  Ourplant may also increase dust in the area due to operations and thetransportation of feedstocks to the plant and products from the plant.  These activities may subject us to nuisance,trespass or similar claims by employees, property owners or residents in thevicinity of the plant.  Any claims orincreased costs to address complaints may have a material adverse effect on usand on our operations, cash flow and financial performance.

 

***Costs of Environmental Compliance***

 

Ongoing compliance with federal and state environmental laws andregulations may result in significant costs to us.  The two regulations with the biggest impacton potential cost are the Clean Air Act and the Clean Water Act.

 

Much of the cost of compliance with federal and state environmentallaws and regulations, including permit application procedures, was included inthe construction cost of our plant.  Ourcurrent estimate of the cost of complying with environmental regulations during2009, including wastewater discharge costs, is $250,000.  

 

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However, we have not yet prepared an estimate of environmentalcompliance costs during normal operations, and these costs could besignificant.

 

Any failure to comply with environmental permits and requirements couldresult in a notice of violation and penalties which could include fines andeven a requirement to cease plant operations until the violation is remedied.

 

**Employees**

 

We presently have no employees. Our plant is being operated by REG Services under the REG ServicesAgreement.  That agreement provides thatREG Services will operate our plant utilizing its own full-time employees,including a general manager and plant manager. Our plans to hire a chief executive officer and a chief financialofficer as our employees with overall responsibilities for the administrationof our company have been deferred until our ability to operate profitably hasbeen established.  We do not offer anemployee benefits package and expect that any benefits for personnel providedby REG Services will be made available through REG plans.

 

The following table lists the positions which have been filled byfull-time REG Services employees at our plant:

 
| **Position**                           | ** ** | **Number of  Full-Time Personnel** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|
| General Manager                        |       | 1                                            |       |
| Operations  Manager                    |       | 1                                            |       |
| Office/Administration                  |       | 1                                            |       |
| Environment/Health/Safety              |       | 1                                            |       |
| Maintenance/Plant  Engineering Manager |       | 1                                            |       |
| Electrical/Control  Maintenance        |       | 1                                            |       |
| Facility  Maintenance Mechanical       |       | 1                                            |       |
| Lab/Quality  Assurance Manager         |       | 1                                            |       |
| Lab Technician                         |       | 1                                            |       |
| Biodiesel/Pretreatment  Leadman        |       | 4                                            |       |
| Operations  Specialist                 |       | 11                                           |       |
| Load/Receive  Specialist               |       | 4                                            |       |
| **Total**                              | ** ** | **28**                                       | ** ** |

 

The positions, titles, job responsibilities and number allocated toeach position may change as we and REG Services gain experience in operatingour plant.

 

Our success depends, in part, on our ability and the ability of REGServices to attract and retain qualified personnel at competitive wage andbenefit levels.  Our plant requiresqualified managers, accounting, human resources and other personnel.  There is no assurance that we and REGServices will have continuing success in attracting and retaining qualifiedpersonnel at a wage and benefit structure required for the profitable operationof our plant.

 

**Item 1A.  RISK FACTORS**

 

***An investment inour units involves substantial risks and is suitable only for persons who canassume the financial risks of an investment for an indefinite period of timeand who can afford to lose their entire investment.  The Risk Factors below set forth those risksthat management believes are presently applicable to us and our business.  There may be additional risks anduncertainties that may occur and may adversely affect our business andfinancial condition and the value of our units.***

 

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**Risks Related to us as a Company Moving from theDevelopment Stage to the Operating Stage**

** **

***Weare a recently formed company, have no operating history or experienceoperating a biodiesel plant and may have difficulties successfully operatingthe plant.***

 

We are a recently organized company with no operating history andlimited resources.  We are subject to allof the risks typically encountered by development stage companies moving intothe operating stage.  Our lack of anoperating history and inexperience may make it difficult for us to successfullyoperate our biodiesel plant.  If we donot manage the operations of our plant successfully, our ability to generateoperating income, meet our debt obligations and make distributions on our unitscould be adversely affected.

 

***Ourmanagers and officers have very limited experience in the biodiesel industryand in managing a public company, which increases the risk that we will beunable to manage our company and operate successfully.***

 

We are highly dependent on our managers and officers to operate ourplant and manage our business.  Ourmanagers and officers have substantial business experience but have little orno experience in the biodiesel industry, operating a biodiesel plant or managing a public company.  Our managers and officers have other businesscommitments that will continue to require most of their time andattention.  Although we have entered intoa management and operational services agreement with subsidiaries of REG toassist us with respect to all aspects of our operations, there is no assurancethat our relationship with REG will be successful or that we will be able tohire employees or sign agreements satisfactory to us to sustain our operationsin the future.  If our managers andofficers are unable or find it difficult to manage our development andoperations successfully, our potential to succeed as a business will beadversely affected.

 

***Wedepend on key service providers for assistance and expertise in our operationsand any failure or loss of these relationships could delay our operations,increase our expenses and hinder our success.***

 

We must establish and maintain relationships with several providers forcontracting, consulting and other services. In particular, REG subsidiaries will provide services relating tocontracting for feedstock supplies and marketing our biodiesel andglycerin.  If we should lose ourrelationship with any key providers or if any providers should fail to perform,we would be forced to locate and retain alternative providers.  As a consequence, our business could besignificantly damaged.

 

***Thereare several agreements and relationships that have a critical impact on ouroperations, expenses and profitability.***

 

We have several agreements, documents and relationships relating to oursupply of feedstocks, natural gas, electricity, rail service, water and wasteremoval, and other contracts to sell our production and with consultants forvarious purposes.  The terms of theseagreements and relationships could vary from time to time.  If we are unable to maintain satisfactoryagreements or relationships, or if revisions or amendments to existing termsbecome necessary, our operations could be impacted, our expenses could beincreased and our profitability could be adversely affected.

 

***Wehave incurred losses since we were organized and may never operate profitably.***

 

During the period from April 28, 2005, when we were organized as aDelaware limited liability company, to December 31, 2008, we incurred anet loss from operations of $6,876,290. We will continue to incur significant losses until we are able tooperate our plant on a consistent basis and sell our productionprofitably.  Expenses, competition andother factors may make it impossible for us to operate profitably.  In that case, the value of our company andbusiness could be small.

 

**Risks Related to Our Financial Plan**

 

***We have limited working capitaland if we are unable to fund our operations we may find it necessary to curtailour operations or sell or liquidate our company.***

 

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We have very limited working capital to support ouroperations.  Due to market conditions,our plant has operated only sporadically. As a consequence, we have generated only a small amount of revenues andhave not replenished working capital used to fund fixed and variable costsincurred.  In addition, we will use cashresources to make payments on our term loan from Fifth Third Bank.

 

Our ability to manage a very restricted workingcapital scenario depends on the availability of revolving credit from FifthThird Bank, trade credit from REG Marketing, other financing for feedstock andinputs from vendors and advances or immediate payment from customers, none of whichadequately respond to our requirements. The relationship of feedstock prices, principally the price of soybeanoil, and the price of biodiesel in the market typically results in a very smallmargin of profit or even operating losses, with little or no positive effect onworking capital.  Efforts to generateworking capital by selectively entering into purchase orders or tollingagreements may not be successful in resolving our working capital difficulties.  If we find that it is impossible to operateprofitably and either reduce the working capital that we require, generateenough working capital to continue to operate or locate additional debt orequity financing to fulfill our needs, we may find it necessary to curtailoperations of our plant and attempt to sell or liquidate our company.

 

***Our ability to secure additional debt or equityfinancing necessary to operate our plant is quite limited.***

 

The availability of debt or equity financing tosupport our operations is very limited in present circumstances.  If we are unable to attract additionalfinancing to provide the working capital required by our operations, we may beforced to cease operations and sell or liquidate.   The terms of any available financing may beon terms unfavorable to us and our existing unitholders.  The ownership interest of our unitholders inus could be substantially diluted by new financing, distributions made by uscould be greatly reduced, we may be forced to sell our entire company or businessat an unfavorable price and the value of our units would very likely declinesignificantly or be lost entirely.

 

The terms of any supplemental debt or equity financingmay require us to issue warrants to the lender or investor.  If we issue warrants to purchase additionalunits, the equity interest of our unitholders in us would be diluted and thevalue of our units could be reduced.

 

***If we are unable to make timely payments on our debtobligations, we could be subject to remedial actions by our lenders, whichcould result in foreclosure or bankruptcy.***

 

We need to make timely principal and interest paymentson our term loan from Fifth Third Bank and our subordinated loan from REGVentures.  Any failure on our part tomake a payment to our lenders would constitute a default and could lead toaction on the part of our lenders to collect payment, accelerate the maturityof the loans, foreclose on our plant as collateral and place us intobankruptcy.  Our inability to operatesuccessfully could lead to one or more of these consequences.  In addition, our loan agreements containfinancial and other covenants that we may fail to meet in the foreseeablefuture which, if not met, could also lead to the same consequences.  Remedial actions by our lenders could resultin failure of our company and render our units valueless.

 

***Our debt financing agreements contain restrictivecovenants that will limit distributions and impose restrictions on our use ofworking capital, which may hinder our operations and reduce the value of ourunits.***

 

Our debt financing agreements contain financial,maintenance, organizational, operational and other restrictive covenants.  These covenants may make it more difficultfor us to operate because they will have significant impacts on our operations,such as:

 

·                  Reducingfunds available for operations and distributions because a substantial portionof our cash flow must be used to service the debt;

·                  Limitingour ability to obtain additional debt financing, enter into lease financingarrangements or place liens on our assets;

·                  Makingus vulnerable to increases in prevailing interest rates;

·                  Placingus at a competitive disadvantage because we may be substantially more leveragedthan some of our competitors;

·                  Limitingour ability to make capital expenditures or investments in excess of prescribedamounts;

 

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·                  Subjectingall or substantially all of our assets to liens, with the result that there maybe virtually no assets left for unitholders in the event of a liquidation;

·                  Limitingour ability to adjust to changing market conditions, which could make us morevulnerable to a downturn in the general economic conditions of our business;

·                  Limitingour ability to make distributions to our unitholders, even for the purpose ofcovering tax liabilities, or to redeem or repurchase units; and

·                  Restrictingour freedom to merge or consolidate with or to sell our assets to anothercompany or entity.

 

If we fail to satisfy these covenants, our lenders mayforeclose on our debt and we may be forced to liquidate and sell our plant andother assets for an amount less than the outstanding debt.  If that occurs, our units could be worthlittle or nothing.

 

**Risks Related toOur Operations and Market**

 

***Our business is not diversified because we areprimarily dependent upon one product.  Asa consequence, we may not be able to adapt to changing market conditions orendure any decline in the biodiesel industry.***

 

Our business consists solely of biodiesel and glycerinproduction and sales.  We do not have anyother lines of business or other sources of revenue to rely upon if we areunable to produce and sell biodiesel and glycerin, or when the markets forthose products decline.  Our plant doesnot have the ability to produce any other products.  Our lack of diversification means that we maynot be able to adapt to changing market conditions or to withstand anysignificant decline in the biodiesel industry.

 

***Our financial results greatly depend on prices for ourfeedstock supplies and market prices for the biodiesel and glycerin that weproduce, and the value of our units will be impacted by changes in thoseprices.***

 

The cost that we incur for our supplies of soybean andother vegetable oils and rendered animal fats and the market prices for thebiodiesel and glycerin that we produce and sell have a major impact on ourfinancial results and profitability.  Soybeanoil and other input feedstocks, which comprise a major portion of our operatingexpenses, do not have a direct price relationship to the price of biodiesel inthe marketplace.  For an operatingbiodiesel plant, falling biodiesel prices, coupled with a rise in feedstockprices, will result in significant reductions in cash flow.  These prices change based on availablesupplies, the supply and market prices for alternative products and many othermarket factors.  For instance, increasedsupplies of biodiesel may lead to lower prices for both biodiesel and glycerin,regardless of the price of feedstocks. In addition, increased production of biodiesel could result in increaseddemand for soybean oil and other feedstocks, resulting in higher operating costsand lower profits for us.  There can beno assurance as to the price of these commodities in the future, and anyincrease in feedstock prices or decrease in the price of biodiesel and glycerinwould very likely result in less profitability for us and a reduction in thevalue of our units.

 

***Our operating costs could be higher than we expect,and this could reduce our income and any distributions we may make.***

 

In addition to general economic conditions, marketfluctuations and commodity prices, significant operating cost increases couldadversely affect us due to numerous factors, many of which are beyond ourcontrol.  These increases could arise forseveral reasons, such as:

 

·                  Higherprices for feedstocks of soybean oil, animal fats and other biodieselresources;

·                  Highernatural gas prices, due to rising energy prices in general or increased demandson available supplies of natural gas;

·                  Increasedcosts for electricity, water and other utilities;

·                  Highertransportation costs for required feedstocks and for our biodiesel and glycerinproducts due to rising fuel costs and greater demands on truck and railtransportation services; and

·                  Risinglabor costs, particularly if any labor shortage should occur.

 

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Operating our plant also subjects us to ongoingcompliance with applicable governmental regulations, such as those governingpollution control, occupational safety and other matters.  We may have difficulty complying with theseregulations and our compliance costs could increase significantly.  Increases in operating costs would have a negativeimpact on our operating income, and could result in substantially decreasedearnings or a loss from our operations, little or no distributions to ourunitholders and substantially decreased value of our units.

 

***The market price of biodiesel has followed the priceof petroleum fuels, such as diesel fuel, and decreases in the price ofpetroleum-based fuels would very likely decrease the price of biodiesel,resulting in reductions in our revenues, profits, distributions and unitvalues.***

 

Historically, biodiesel prices have generallyparalleled movements in petroleum prices. Petroleum prices in the international market have been difficult toforecast due to the impact of wars and other political factors, economicuncertainties, exchange rates and natural disasters.  Just as a small reduction in the real oranticipated supply of crude oil can have a significant upward impact on theprice of petroleum-based fuels, a perceived reduction of such threats canresult in a significant reduction in petroleum fuel prices.  Because biodiesel costs of production arerelatively high compared to petroleum production and refining costs, areduction in petroleum-based fuel prices can have a significantly adverseeffect on biodiesel revenues and profits, which would reduce our distributionsand the value of our units.

 

***The biodiesel and biofuels industry is verycompetitive.***

 

Competition in the biodiesel industry is strong andhas grown more intense as more production facilities have been built and theindustry has expanded.  Our businessfaces competitive challenges from larger facilities that can produce a widerrange and larger quantity of products than we can, and from other plantssimilar to our proposed plant.  Thebiodiesel industry has been characterized by companies with established plantsranging from very low capacity to 30 mmgy in the localities of their ownership,feedstocks and markets.  In Illinois andadjacent areas of  Indiana, Iowa andWisconsin, there are several plants in operation and others in the constructionor planning stages.  All of these plantscompete with us for feedstocks and customers in our regional market.  We expect that additional biodiesel producerswill enter the market if the regulatory environment remains favorable and thedemand for biodiesel increases.

 

The construction of plants by Archer Daniels MidlandCompany (“ADM”), Cargill, Inc. (“Cargill”) and Louis Dreyfus AgriculturalIndustries (“Dreyfus”) bring significant additional competitors into thebiodiesel industry.  ADM and Cargill aremajor international agribusiness corporations with the financial, sourcing andmarketing resources to become formidable competitors in the industry, withoutgeographical, funding or feedstock restraints. ADM has its headquarters and major ethanol and other operations inDecatur, Illinois and may consider placing a biodiesel plant in thatlocation.  We must expect that ADM,Cargill and Dreyfus, and perhaps other large corporations, will be significantcompetitors in the biodiesel industry in the future.  Nationally, the biodiesel industry generallyis likely to become more competitive given the substantial initial constructionand expansion that has occurred and may continue in the industry.  Competition for feedstocks and customers havea direct impact on our profitability and value of an investment in us.

 

***If more biodiesel plants are built, biodieselproduction will increase and, if demand does not sufficiently increase, thiscould result in lower prices for biodiesel and glycerin, which will decreasethe amount of revenue we may generate.***

 

Plans are in place for the construction or completionof a significant number of additional biodiesel plants in the UnitedStates.  Any new plants will increasebiodiesel production.  The demand forbiodiesel is dependent upon numerous factors such as governmental regulations,governmental incentives, whether existing incentives for the production and useof biodiesel continues and the development of other technologies or productsthat may compete with biodiesel.  If thedemand for biodiesel does not sufficiently increase, then increased biodieselproduction or available capacity may lead to lower biodiesel prices.  In addition, because biodiesel productionproduces glycerin as a co-product, increased biodiesel production will alsolead to increased supplies of glycerin. Demand for glycerin depends upon various factors, the most significantof which is oversupply.  A furtherincrease in the supply of glycerin, without offsetting increases in demand,could continue the trend to lower prices in the glycerin market.  

 

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Decreases in the market price of biodiesel andglycerin will result in lower revenues for us, would decrease ourprofitability, could result in operating losses and would reduce the value ofour units.

 

***Technological advances and changes in productionmethods in the biodiesel industry could render our plant obsolete and adverselyaffect our ability to compete.***

 

Technological advances could significantly decreasethe cost of producing biodiesel.  If weare unable to adopt or incorporate technological advances into our operations,our plant could become uncompetitive or obsolete.  We expect that technological advances inbiodiesel production methods will continue to occur.  If improved technologies become available toour competitors, they may be able to produce biodiesel at a lower cost than ourplant.  If that occurs, we may berequired to acquire new technology and retrofit our plant so that we remaincompetitive.  There is no assurance thatthird-party licenses for any new technologies would be available oncommercially reasonable terms or that any new technologies could beincorporated into our plant.  The costsof upgrading our technology and plant could be substantial.  If we are unable to obtain, implement orfinance new technologies, our plant could be uncompetitive and our operatingincome, funds available for distribution and the value of our units could besubstantially reduced.

 

Research in the basic technologies of biodieselproduction may result in even greater changes in the industry.  New technologies may develop that wouldbecome viable means of biodiesel production in the future.  Because we may be unable to incorporate theseadvances into our operations, our cost of producing biodiesel could besignificantly higher than new competitors, which could make our plant obsoleteand cause our units to decrease in value or become worthless.

 

***The development of alternative fuels and energysources may reduce the demand for biodiesel, resulting in a reduction in ourprofitability and the value of our units.***

 

Alternative fuels, including a variety of energyalternatives to biodiesel, are continually under development.  Petroleum based fuels and other energysources that can compete with biodiesel in the marketplace are already in useand more acceptable alternatives may be developed in the future, which maydecrease the demand for biodiesel or the type of biodiesel that we expect toproduce.  Technological advances inengine and exhaust system design and performance could reduce the use ofbiofuels, which would reduce the demand for biodiesel.  Further advances in power generationtechnologies, based on cleaner hydrocarbon based fuels, fuel cells and hydrogenare actively being researched and developed. If these technological advances and alternatives prove to beeconomically feasible, environmentally superior and accepted in themarketplace, the market for biodiesel could be significantly diminished orreplaced, which could substantially reduce our revenues and profitability andthe value of our units.

 

***Consumerperceptions of biodiesel and other fuels may have a negative impact on theacceptability of biodiesel in the market, reducing our revenues and the valueof our units.***

 

There is a prevalent understanding that usingbiodiesel in cold weather can cause vehicle engines to operate lessefficiently, become clogged with biodiesel residues and suffer damage.  Some expect that biodiesel, particularly ifuse is mandated, will result in higher fuel prices.  These and similar perceptions could negativelyimpact the acceptability and price of biodiesel in the marketplace, reducing market volumes and prices, andresulting in greater competition, lower revenues for us and less value for ourunits.

 

***Because the glycerin market generally is characterizedby oversupply, the price at which we sell our glycerin in the market may bequite low and unrelated to the cost of production, with the result thatrevenues and earnings from our glycerin production could be minimal or couldnegatively affect our financial results.***

 

Glycerin is produced as a co-product or by-product ofseveral manufacturing processes and can be produced as a primary product.  Notwithstanding the number of uses forglycerin, the market for glycerin has been characterized by oversupply and lowprices.  Expected increases in biodieselproduction are likely to result in further downward pressure on the price ofglycerin.  Decreases in the market priceof glycerin will result in our generating less revenue from glycerin and theproduction of glycerin could become unprofitable, resulting in a reduction inour earnings and a negative impact on our distributions and unit values.

 

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***Our feedstock prices will fluctuate and could increasesignificantly in the future, which will increase our operating costs andadversely affect our operating results.***

 

We require significant amounts of soybean oil, othervegetable oils and rendered animal fats to produce biodiesel.  The availability and price of thesefeedstocks significantly influence our financial performance.  The price of soybean oil and other vegetableoils, as with most other crops, is affected by weather, disease, changes ingovernment incentives, demand and other factors.  A significant reduction in the supply ofsoybean oil and other vegetable oils because of weather or disease, orincreases in the demand for vegetable oils because of increased biodieselproduction or other factors, could result in higher vegetable oil prices.  The supplies and prices of rendered animalfats have also fluctuated greatly in the marketplace.  Because there is little correlation betweenthe prices of these feedstocks and the price of biodiesel (which tends to trackwith petroleum prices), increases in feedstock prices generally produce lowerprofit margins for biodiesel producers. The prices of vegetable oils and rendered animal fats have fluctuatedsignificantly in the past and may fluctuate significantly in the future.  If feedstock prices increase, our productioncosts will increase and our profit margins will likely decrease because we maynot be able to pass any of the increased costs on to our customers.

 

***We do not have marketing agreements with our membersto assure us a source for soybean and other vegetable oils and feedstocks whichwould protect us from price fluctuations in our feedstock supplies.***

 

Many producers of alternative energy products havegrain delivery programs which require their members or stockholders to deliverspecified quantities of feedstocks to the producer at established, formula ormarket prices.  These agreements mayprotect producers from supply and price fluctuations.  We do not have any feedstock deliveryagreements and are required to acquire substantial quantities of soybean andother vegetable oils and feedstocks in the marketplace based upon prevailingmarket prices.  If the supplies of oilsand other feedstocks in the vicinity of our plant are not adequate, we may notbe able to procure adequate supplies at reasonable prices.  This could result in a utilization of lessthan the full capacity of our plant, reduced revenues, higher operating costs,reduced income or losses, and a reduction in the value of our units.

 

***Hedging transactions could significantly increase ouroperating costs if we incorrectly estimate our oil and other feedstockrequirements and are not able to utilize all of the feedstocks subject to ourfutures contracts.***

 

We attempt to minimize the effects of fluctuations inthe price of soybean and other vegetable oils and alternative feedstocks on ouroperations by taking hedging positions in the futures markets.  Hedging is a means of protecting the price atwhich we will buy feedstocks in the future. In a hedging transaction, we purchase futures contracts that lock in theamount and price of oil or other feedstock that we will purchase at a futuredate.  There is no assurance that ourhedging activities will successfully reduce the risk caused by market pricefluctuations.  Whether our hedgingactivities are successful will depend upon, among other things, the cost ofeach feedstock and our ability to sell sufficient amounts of biodiesel toutilize all of the feedstock subject to the futures contracts.  Although we attempt to link hedgingactivities to sales plans and pricing activities, hedging activities can resultin significant costs, especially if we cannot use all of the feedstocks subjectto our futures contracts.

 

***Our operations depend on the availability of naturalgas at acceptable prices; any interruption in the supply of natural gas mayforce us to halt operations and may harm our business.***

 

We require a consistent supply of natural gas tooperate our plant.  Although natural gasis available to us at our plant, the supply and price of natural gas couldsubject our operations to risks.  Theprice of natural gas has increased significantly in the past and may continueto increase, both in real terms and in relation to other sources of energy.  As the demand for natural gas increases inthe national and regional markets, interruptions in supplies, particularly forindustrial use, may occur.  Natural gassupply agreements may provide for interruptible service or, at higher prices,priority service.  Any significantincrease in the price of natural gas will result in lower profit margins for usif we are unable to pass the higher costs on to our customers.  Because natural gas will be the only thermalheating source for our plant, if there is any interruption in our natural gassupply, we would have to halt operations. Interruptions of a frequent or ongoing nature could substantially harmour business and the value of our units. Alternative energy sources may not be available to us.  Even if an alternative energy source isavailable, costly engineering and design changes to our plant may be requiredto meet energy production, biodiesel processing and 

 

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environmental requirements.  The costs and interruptions in our operationsand cost of installing new energy systems would reduce our ability to operateprofitably and cause our units to lose value.

 

***We require electricity, water and other utilities forour operations, and costs of these resources will affect our profitability.***

 

We require a consistent supply of electricity andplentiful supplies of water for our operations. Although we have suppliers of electricity, water and other resources inplace at our plant, the continued availability of these resources will beessential to our operations and the associated costs will impact ourprofitability.

 

***If we are unable to obtain the services of third-partymarketers, or we subsequently lose those services, we may not be able to sellthe biodiesel and glycerin that we produce.***

 

We do not intend to hire a sales staff to market ourbiodiesel and glycerin.  We have enteredinto the REG Services Agreement which delegates to REG Marketing theresponsibility to market and sell our biodiesel and glycerin.  If REG Marketing does not performsatisfactorily, we may need to select an alternative marketing company.  The cost of utilizing independent marketerscould place us at a competitive disadvantage. If we are unable to secure the services of third-party marketers or ifany of the marketers that we contract with breaches or terminates our agreementor is unable to provide any of the services contracted for, we may not have anyreadily available means to sell our biodiesel and glycerin.  Further, these third-party marketers, such asREG Marketing, customarily have relationships and agreements with otherbiodiesel producers.  It is possible thata marketer’s ability or willingness to market and sell our products could beimpaired by agreements that the marketer has with other entities not related tous.  Consequently, we may not obtain thebest possible prices for our products. We will depend upon the financial health and performance of themarketers with whom we contract and our failure to sell all of our biodieseland glycerin may result in less income from sales, reduced distributions to ourunitholders and reduction in the value of our units.

 

***Competition for qualified personnel in the biodieselindustry is intense and we may not be able to hire and retain qualifiedmanagers, engineers and operators to operate our plant efficiently.***

 

We have entered into the REG Services Agreement whichprovides that REG Services will assume responsibility for the dad-to-dayoperation of our plant.  REG Serviceswill need a significant number of employees to operate the plant and, if ourarrangement with REG Services is terminated, the responsibility to attract andhire competent employees will be ours. These employees include qualified managers, engineers and accounting,human resources, operations and other personnel.  Competition for employees in the biodieselindustry is intense.  If REG Services orwe are unable to hire, train and retain qualified and productive personnel, wemay not be able to operate the plant efficiently and the amount of biodiesel weproduce and market may decrease.

 

***Defects in the construction or performance of ourplant could result in a reduction in our revenues and profitability and in thevalue of our units.***

 

The contracts for construction of our biodiesel plantcontain warranties with respect to materials and workmanship and assurancesthat the plant will operate at design capacity. However, defects in the construction or performance of the plant couldoccur and there is no assurance that the responsible contractors could correctany problem that occurs.  If our plantdoes not perform at or above design specifications, we will find it difficultto compete in a competitive marketplace. If defects delay the construction or hinder the operations of the plant,our operations, revenues, profitability and the value of our units could bematerially adversely affected.  Ifdefects require a lengthy or permanent discontinuance of production, our unitscould have very little or no value.

 

****There is a possibility of aleak, fire or explosion at the plant, which would significantly increase ourcosts and decrease the value of our units.****

 

Because biodiesel is a combustible product, a leak,fire or explosion may occur at the plant which could result in damage to theplant and nearby properties, injury to employees and others, and interruptionof our operations.  If such an eventoccurs, we may incur significant additional costs including, among otherthings, clean-up, liability for 

 

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damages or injuries, legal, and reconstructionexpenses.  Any significant increase inour expenses will impact our profitability and decrease the value of our units.

 

**Risks Related toRegulation and Governmental Action**

 

***Loss of favorable tax benefits for biodieselproduction could hinder our ability to operate at a profit and reduce the valueof our units.***

 

The biodiesel industry has been aided by federal taxincentives.  These incentives havesupported a market for biodiesel that might disappear without theincentives.  The federal tax incentiveswere scheduled to expire December 31, 2006.  However, pursuant to legislation signed in August 2005,Congress has extended the incentives to December 31, 2008.  These tax incentives may not continue beyondtheir scheduled expiration date or, if they continue, the incentives may not beat the same level.  The elimination orreduction of tax incentives to the biodiesel industry could reduce the marketfor biodiesel, which could reduce prices and our revenues by making it morecostly or difficult for us to produce and sell biodiesel.  If the government eliminates or sharplycurtails these tax incentives, we believe that a decreased demand for biodieselcould result, which could result in the failure of less efficient or highlyleveraged plants and the potential loss to our unitholders.

 

***The reduction or termination of favorableenvironmental regulations that favor the use of biofuels in motor fuel blendswould adversely affect the market for our biodiesel product and reduce thevalue of an investment in us.***

 

The biofuels industry in the United States currentlydepends on the existence of federal environmental regulations which favor theuse of blended fuels, including biodiesel. The cost of production of biofuels, including biodiesel, hashistorically been higher than the cost of producing and refining petroleumbased fuels.  Federal governmentincentives have the effect of mitigating the impact of higher biodieselproduction costs.  Thus, the repeal orsubstantial modification of these environmental regulations could have amaterially detrimental effect on the biodiesel industry and on our operationsand financial results.

 

***Our business is subject to extensive and potentiallycostly environmental regulations that could change and significantly increaseour operating costs.***

 

We are subject to environmental regulations of the UnitedStates Environmental Protection Agency (“EPA”) and the Illinois EnvironmentProtection Agency (“IEPA”).  Compliancewith these regulations may require a significant investment of resources,including both financial resources and personnel time and expertise.  The EPA or the IEPA may seek to implementadditional regulations or implement stricter interpretations of existingregulations.  The nature and scope offuture legislation, regulations and programs cannot be predicted.  The EPA cautioned biodiesel producers that itis prepared to sue companies whose plants do not comply with applicable lawsand regulations.  In a test of certainbiodiesel plants, the EPA expressed concerns over the discovery of certain “volatileorganic compounds,” some of which may be carcinogenic.  While our plant has technology designed tolimit the amount of emissions, there is still a risk that the environmentallaws and regulations may change with respect to emissions by our plant.  Changes in environmental laws or regulationsor stricter interpretation of existing regulations may require significantadditional capital expenditures, increase our operating costs or even force usto curtail our operations.

 

Our plant could also be subject to environmentalnuisance or related claims by employees, property owners or residents near theplant arising from air or water discharges. Such environmental and public nuisance claims, or tort claims based onemissions, could also increase our operating costs.

 

***We will be subject to Federal and State laws andregulations regarding occupational safety; these regulations will increase ouroperating costs.***

 

Compliance with federal and state occupational lawsand regulations, such as the federal Occupational Safety and HealthAdministration (“OSHA”) regulations, will increase our operating costs.  The most significant OSHA issue is processsafety management, a 14 point analysis system to minimize releases of hazardouschemicals.  Other OSHA standards dealwith the management of contractors, ongoing training procedures and anemergency action 

 

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plan.  Thepossible adoption of stricter regulations and standards in this area couldfurther increase our costs and adversely impact our operating results.

 

**Risks Related toour Units**

 

***Our units have no public market and no public marketis expected to develop.***

 

There is no established public trading market for ourunits, and we do not expect one to develop in the foreseeable future.  To maintain our partnership tax status, we donot intend to list the units on any stock exchange or automatic quotationsystem such as The NASDAQ Stock MarketTM. As a result, our units will not be readily marketable and unitholdersmay be required to hold their units indefinitely.

 

***There are significant restrictions on the transfer ofour units.***

 

To protect our status as a partnership for taxpurposes and to assure that no public trading market in our units develops, ourunits are subject to significant restrictions on transfer and transfers aresubject to approval by our board of managers. All transfers of units must comply with the transfer provisions of ourAmended and Restated Limited Liability Company Agreement and a unit transferpolicy adopted by our board of managers. Our board of managers will not approve transfers that could cause us tolose our tax status or violate federal or state securities laws.  As a result, unitholders may not be able tocomplete a transfer that they wish to make and may be required to assume therisks of an investment in us for an indefinite period of time.

 

***There is no assurance that we will be able to makedistributions to our unitholders.***

 

Distributions of our net cash flow may be made at thesole discretion of our board of managers, subject to the provisions of theDelaware Limited Liability Company Act, our Amended and Restated LimitedLiability Company Agreement and restrictions imposed by our creditors.  There is no assurance that we will generateany distributable cash from operations. Although our intention is to make cash distributions sufficient todischarge our members’ anticipated tax liabilities arising from any taxableincome generated, our board may elect to retain cash for operating purposes,debt retirement, plant improvements or expansion.  Consequently, unitholders may receive littleor no return on their investment.

 

***We may authorize and issue units of new classes whichcould be superior to or adversely affect holders of Class A Units.***

 

Our board of managers has the power to authorize andissue units of classes which have voting powers, designations, preferences,limitations and special rights, including preferred distribution rights,conversion rights, redemption rights and liquidation rights, different from orsuperior to those of the Class A Units. These units may be issued at a price and on terms determined by ourboard of managers.  The terms of theunits and the terms of issuance of the units could dilute the financialinterest in us of our existing unitholders or otherwise have an adverse impacton the rights of holders of our Class A Units.

 

***Our units represent both financial and membershiprights, and loss of status as a member would result in the loss of voting andother rights and would allow us to redeem the units held by a unitholder whohas lost member status.***

 

Holders of our units are normally entitled to certainfinancial rights, such as the right to any distributions, and to membershiprights, such as the right to vote as a member. A unitholder that does not qualify as a member or if the member statusof a unitholder is terminated, would result in the loss of certain rights, suchas voting rights, and permit us to redeem the unitholder who as lost status asa member.  The minimum number of Class AUnits required for membership is 12,500 Class A Units.  In addition, a member may lose member statusor may be terminated as a member if the member dies or ceases to exist,violates our Amended and Restated Limited Liability Company Agreement or takesactions contrary to our interests, and for other reasons.

 

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Although our Amended and Restated Limited LiabilityCompany Agreement does not define what actions might be contrary to our interests,and our board of managers has not adopted a policy on the subject, such actionsmight include providing confidential information about us to a competitor,taking a board or management position with a competitor or taking action whichresults in significant financial harm to us in the marketplace. Our board ofmanagers does not presently intend to amend our Amended and Restated LimitedLiability Company Agreement or adopt a further policy to clarify the policy asstated in the language contained in our Amended and Restated Limited LiabilityCompany Agreement.

 

 If a memberloses member status or member status is terminated (other than upon death,dissolution or a complete transfer), our board of managers will have the right,but not the obligation, to redeem the former member’s  units at 80% of the average sale price forunits, as determined by our board of managers, in the six months immediatelyprior to the board’s decision to redeem the units.  We may exercise our right to redeem a formermember’s units at any time following loss or termination of member status.  Our Amended and Restated Limited LiabilityCompany Agreement does not contain any provision for advance notification withrespect to termination of membership or redemption or any formal procedure toaddress or oppose such termination or redemption with our board ofmanagers.  A member who wishes to contesttermination or redemption would be required to demonstrate in a courtproceeding that our board of managers had insufficient grounds to terminate themember or that the redemption was improper.

 

***Our board of managers has the primary power andresponsibility to govern and direct the management of our business and affairs.***

 

Our members have the right to participate in theelection of managers and have the power to propose and approve amendments toour Amended and Restated Limited Liability Company Agreement or to cause us todissolve.  Without approval or consent byour members, our board of managers is authorized to issue additional units of anyauthorized class, admit additional persons as members, add managers to ourboard of managers, adopt and amend a unit transfer policy regulating thetransfer of units, and amend provisions of our Amended and Restated LimitedLiability Company Agreement relating to allocations of profit and loss,distributions and tax matters.  As aconsequence, our board of managers has the primary power and responsibility togovern and direct the management of our business and affairs.  Our members have no significant role in ourgovernance or management beyond their right to participate in the election ofmanagers and to vote on amendments to our Amended and Restated LimitedLiability Company Agreement, to dissolve and on other matters that our boardsubmits to the vote of our members.

 

***Voting rights of members are not necessarily equal andare subject to certain limitations.***

 

Members who are holders of Class A Units areentitled to one vote for each Class A Unit held.  Cumulative voting for managers is notallowed, which makes it substantially less likely that a minority of memberscould elect a member to the board of managers. However, we may agree to give members or lenders who supply significantamounts of equity or debt capital to us the right to designate managers toserve on our board of managers.  If unitsof any other class are issued in the future, holders of units of that otherclass will have the voting rights that are established for that class by theboard of managers without the approval of our members.  Members do not have dissenter’s rights.  This means that they will not have the rightto dissent and seek payment for their units in the event we merge, consolidate,exchange or otherwise dispose of all or substantially all of our property.  Holders of units who are not members have novoting rights.  These provisions maylimit the ability of members to change the governance and policies of ourcompany.

 

***The presence of members holding as little as 10% ofour outstanding units will constitute a quorum at meetings of our members, anda majority vote of the units represented may generally take action on matterspresented.***

 

A quorum of members holding 10% or more of theoutstanding units represented in person, or 20% if the board of managers hasauthorized the use of mail ballots or proxies, is required at meetings of ourmembers.  Unless a higher percentage isrequired by our Amended and Restated Limited Liability Company Agreement orDelaware law, members take action by a majority vote of the units represented andentitled to vote.  This means that theholders of a small minority of outstanding units could take an action whichwould not necessarily be in the best interests of all unitholders.  The quorum requirement also means that wemust secure the presence of members 

 

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holding at least 10%, or 20% if mail ballots or proxies are authorized,of the outstanding units in order to take actions which may be in the bestinterests of our company.

 

***We will have substantial indebtedness and our unitsare subordinate to all of our debts and liabilities, which increases the riskthat our unitholders could lose their entire investment.***

 

Our units are equity interests which will besubordinate to all of our current and future indebtedness with respect toclaims on our assets.  In anyliquidation, all of our debts and liabilities must be paid before any paymentis made to the holders of our units.  Wehave incurred substantial indebtedness to finance the construction of our plantand commencement of operations.  Theamount of that financing, plus possible additional borrowings and operatingliabilities, creates a substantial risk that in the event of our bankruptcy,liquidation or reorganization, we may have no assets remaining for distributionto our unitholders after payment of our debts.

 

**Risks Related toTax Issues**

 

***Internal Revenue Service classification of us as acorporation rather than as a partnership would result in higher taxation andreduced profits, which could reduce the value of our units.***

 

We are a Delaware limited liability company and expectto be taxed as a partnership for federal and state income tax purposes, withincome, gain, loss, deduction and credit passed through to the holders of theunits.  This means that we will pay nofederal or state income tax and unitholders will pay tax on their allocatedshares of our net income.  Treasuryregulations classify a limited liability company as a partnership for taxpurposes unless the entity affirmatively elects to be taxed as a corporation orthe entity is considered a publicly traded partnership because of the manner inwhich its units are transferred.  We willnot elect to be taxed as a corporation and will endeavor to avoidclassification as a publicly traded partnership.

 

However, if for any reason the IRS would successfullydetermine that we should be taxed as a corporation rather than as apartnership, we would be taxed on our net income at rates of up to 35% forfederal income tax purposes, and all items of our income, gain, loss, deductionand credit would be reflected only on our tax returns and would not be passedthrough to the holders of the units.  Ifwe were to be taxed as a corporation for any reason, distributions we make tounitholders will be treated as ordinary dividend income to the extent of ourearnings and profits, and the payment of dividends would not be deductible byus, thus resulting in double taxation of our earnings and profits.  If we pay taxes as a corporation, we willhave less cash to distribute to our unitholders.

 

***Unitholders may not be able to fully deduct theirshare of our losses or investment interest expense.***

 

It is likely that an investment in us will be treatedas a “passive activity” for federal income tax purposes.  In the case of unitholders who are individualsor personal services corporations, this means that a unitholder’s share of anyloss incurred by us will be deductible only against the holder’s income orgains from other passive activities, e.g., S corporations and partnerships thatconduct a business in which the holder is not a material participant.  Some closely held C corporations have morefavorable passive loss limitations. Passive activity losses that are disallowed in any taxable year aresuspended and may be carried forward and used as an offset against passiveactivity income in future years.  Upondisposition of a taxpayer’s entire interest in a passive activity to anunrelated person in a taxable transaction, suspended losses with respect tothat activity may then be deducted.

 

Interest paid on any borrowings incurred to purchaseunits may not be deductible in whole or in part because the interest must beaggregated with other items of income and loss that the unitholder hasindependently experienced from passive activities and subjected to limitationson passive activity losses.

 

***A unitholder’s tax liability from a share of ourtaxable income may exceed any cash distributions received by the unitholder,which means that the unitholder may have to satisfy this tax liability usingpersonal funds.***

 

Because we expect to be treated as a partnership forfederal income tax purposes, we do not expect to pay any federal tax, and allof our profits and losses will “pass through” to our unitholders.  Unitholders must pay tax on their allocatedshares of our taxable income every year. Unitgholders may not receive cash distributions from us

 

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sufficient to satisfy these tax liabilities.  This may occur because of various factors,including accounting methodology, lending covenants that restrict our abilityto pay cash distributions, or if we decide to retain cash generated by thebusiness to fund our activities or other obligations.  Accordingly, unitholders may be required tosatisfy these tax liabilities out of personal funds.

 

***Unitholdersmay be subject to federal alternative minimum tax in the early years of ouroperations.***

*** ***

If we adopt accelerated methods of depreciation, we anticipate that inthe early years of our operation taxable income for alternative minimum taxpurposes will exceed regular taxable income passed through to ourunitholders.  Such excess alternativeminimum taxable income passed through to unitholders may subject unitholders tothe federal alternative minimum tax. Unitholders should consult with their individual tax advisors to analyzeand determine the effect of any alternative minimum taxable income that may bereceived.

 

***Anyaudit of our tax returns resulting in adjustments could cause the InternalRevenue Service to audit the tax returns of unitholders, which could result inadditional tax liability and expense to unitholders.***

*** ***

The IRS may audit our tax returns and may disagree with the taxpositions we take on our returns.  The rules regardingpartnership taxation are complex.  Ifchallenged by the IRS, the courts may not sustain the position taken by us onour tax returns.  An audit of our taxreturns could lead to separate audits of the tax returns of our unitholders,especially if adjustments are required. This could result in adjustments on unitholder tax returns and in additionaltax liabilities, penalties, interest and expense to unitholders.

 

**Risks Related to Conflicts of Interest**

** **

***Thereare conflicts of interest in our business because we have relationships withand may enter into additional transactions with our officers, managers andaffiliates, which could impair an interested officer’s or manager’s ability toact in our best interest.***

*** ***

Conflicts of interest exist and may arise in the future because of therelationships between and among our officers, managers, their affiliates andus, and the fact that we may from time to time enter into transactions with ourofficers, managers and their affiliates. Conflicts of interest could cause our managers and officers to put theirpersonal interests ahead of the best interests of our company and ourunitholders.

 

Conflicts of interest could result in transactions with related partieshaving terms less favorable to us than those that could have been obtained inan arm’s-length transaction.  Conflictsof interest could also result in related parties receiving more favorabletreatment in the event of a dispute than an unaffiliated third party wouldreceive.

 

Our managers and officers, and certain of their affiliates, are ownersof Class A Units.  They may acquireadditional units in the future, including in connection with our compensationarrangements.  If our managers, officersand affiliates individually or collectively own a significant percentage of ourunits, their voting power could increase the likelihood of conflicts of interestand reduce the ability of members to replace them as managers and officers.

 

Our Amended and Restated Limited Liability Company Agreement providesthat a transaction involving a conflict of interest with a manager or a manager’saffiliates is not void or voidable if the facts of the conflict are disclosedand the transaction is approved by a two-thirds vote of disinterestedmanagers.  We have not established anyadditional formal procedures to evaluate or resolve conflicts of interest.  Although we intend to examine all conflictsof interest that may arise from time to time, any conflicts of interest thatoccur could harm our business and reduce the value of our units.

 

***Ourmanagers and officers have other business interests that may receive a greatershare of their time and attention than they will devote to us.***

*** ***

Our managers and officers have other business interests andresponsibilities that may be given priority over the time and attention thatthey are willing to devote to us. Although they are committed to dedicate the time necessary 

 

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to make us successful, they have significantresponsibilities in their primary occupations, principally farming, andconsequently have limited time to devote to us. This could result in errors ofmanagement and governance that could adversely affect our operations, financialresults and the value of our units.

 

***Ourconsultants and contractors may have financial and other interests whichconflict with our interests, and they may place their interests ahead of ours.***

*** ***

Entities and individuals who are engaged or may in the future beengaged by us as consultants and contractors will have financial interestswhich may conflict with our interests and the interests of ourunitholders.  Each of our consultants andcontractors is likely to be a creditor of ours, which could affect their adviceand commitment of time and resources to us. In addition, some of our consultants and contractors, or theiraffiliates, are or may become owners of units, in which case they may be in aposition to influence our decisions and actions in favor of their owninterests.

 

In particular, REG and its affiliates have roles of major importance inthe development, construction, commencement of operations and management of ourplant and business.  REG’srecommendations and actions have been and will continue to be critical to our success and, if it places its owninterests ahead of ours, we could be harmed as a result.  REG and its affiliates have interests inother biodiesel plants, as owners, creditors and in other capacities.  REG is involved in constructing or managingother plants, may conduct such activities with plants in our geographic areaand may have substantial financial interests in those plants.  As a result, REG may have conflicts ofinterest as it allocates personnel, materials and other resources to our plantand others.

 

**Unitholders and others must notconstrue this report as constituting investment, legal, tax or otherprofessional advice.  Anyone whoconsiders acquiring units should consult with his or her own investment, legal,tax and other professional advisors.**

 

**Item 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**Item 2.  PROPERTIES**

 

Our plant site is located in the city of Danville, Illinois and isapproximately 6 acres in size.  We usethe site under a ground lease from Bunge Milling, Inc.  The site is adjacent to a Bunge soybeanoilseed crushing facility which provides easy access to soybean oil feedstockfor our plant.  We also have access toNorfolk Southern Railway loading and unloading facilities on the Bungeproperty.

 

The Ground Lease will expire on November 3, 2036, subject to our rightto extend the term for four additional five year periods.  The rent under the Ground Lease will be $1.00per year during the term of the Oil Feedstock Supply Agreement between Bungeand us (May 9, 2014 or, if extended, May 9, 2016).  Thereafter, base rent will commence under theGround Lease at $72,000 per year subject to a consumer price index escalator infuture years.

 

Our leasehold interest on the site and plant serve as collateral fordebt financing provided by Fifth Third Bank and REG Ventures.

 

**Item 3.  LEGAL PROCEEDINGS**

 

We are not involved in any legal proceedings and are not aware of anyproceeding that a governmental authority is contemplating with respect tous.  In the ordinary course of ourbusiness, we may be named as a defendant in legal 

 

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proceedings related to various matters, including tortclaims and contractual disputes and, if we have employees, worker’scompensation claims.  In addition, theoperation of our plant could give rise to litigation or administrativeproceedings relating to nuisance, environmental matters and the like.  We carry insurance to provide what weconsider reasonable protection against some types and amounts of claims that wemight encounter.

 

**Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

We did not submit any matter to a vote of our unitholders through thesolicitation of proxies or otherwise during the fourth fiscal quarter of 2008.

 

**PART II**

 

**Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

At March 31, 2009 we had 16,619,474 Series A Unitsoutstanding and 647 unitholders of record.

 

There is no public trading market for our units, and we do not expectone to develop in the foreseeable future. To maintain our partnership tax status, we do not intend to list theunits on any stock exchange or automatic quotation system such as The NASDAQ StockMarketTM.  As a result, our units are notreadily marketable and unitholders may be required to hold their unitsindefinitely.

 

To protect our status as a partnership for tax purposes and to assurethat no public trading market in our units develops, our units are subject tosignificant restrictions on transfer and transfers are subject to approval byour board of managers.  All transfers ofunits must comply with the transfer provisions of our Amended and RestatedLimited Liability Company Agreement and a unit transfer policy adopted by ourboard of managers.  Our board of managerswill not approve transfers which could cause us to lose our tax status orviolate federal or state securities laws. As a result, unitholders may not be able to complete transfers that theywish to make and may be required to assume the risks of an investment in us foran indefinite period of time.

 

After our biodiesel plant is operating at designed production capacity,we may locate or implement a “qualified matching service” to provide amechanism for our unitholders to transfer limited quantities of our units.  A qualified matching service typicallyinvolves the use of a computerized or printed listing that lists customers’ bidand/or ask prices to match unitholders who wish to dispose of their units withpersons who wish to purchase such units.

 

Any qualified matching service must comply with applicable tax laws andregulations and applicable federal and state securities laws andregulations.  The tax laws andregulations impose limits on the quantities of units that may be sold and themethod of sale.  We will not allow orbecome involved in any activities which might jeopardize our partnership taxstatus or endanger our ability to pass any profits we may generate directly toour unitholders before taxation.  Thesecurities laws and regulations would require registration or exemptions fromregistration of the units to be sold and registration or exemption fromregistration of the person or entity deemed to be conducting the service.  We will not undertake any action that may beallowed by the tax laws and regulations that would require registration of ourunits for purposes of sale or registration of us as a broker-dealer underapplicable securities laws and regulations. In general, the matching service would allow interested buyers andsellers to contact each other but would not permit us to participate in thematching process.  We do not intend toregister as a broker-dealer or to take any action that may require us to registeras a broker-dealer.

 

We have not declared or paid any distributions on our units.  The amount of earnings we have generatedsince our plant commenced operations as been minimal and it will be necessaryfor our plant to operate on a consistent basis before earnings are generatedthat would justify distributions.  Wecannot predict the amount of cash, if any, 

 

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that we may generate from operations.  Distributions are payable at times and inaggregate amounts determined by our board of managers in its sole discretion,subject to loan covenants or restrictions imposed by our lenders.  Subject to the availability of cash, theboard’s discretion and lenders’ limitations, we intend to make cashdistributions of “net cash flow” sufficient to discharge our members’anticipated combined federal, state and local income tax liabilities (based onthe board’s estimate of anticipated federal and Illinois statutory rates)arising from allocations to them of taxable income by us.  Our board of managers may also declarefurther distributions from time to time. However, in the exercise of its discretion, our board of managers may electto retain cash to finance operations, retire debt, improve our plant or expandour business.

 

The terms of our committed debt financing from Fifth Third Bank and REGVentures limit our ability to make distributions.  No distributions may be made until 24 monthsafter our plant has commenced production, if our fixed charge coverage ratiowould be less than 1.50 to 1.00, if we report a net loss, or if there exists orthe distribution would cause any default or event of default.  Distributions may not exceed 50% of our netincome in any year.  Subject to theforegoing limitations, we may make distributions for the pass-through taxliabilities of our members.

 

Distributions to holders of Class A Units will be made inproportion to the units that each unitholder holds relative to the total numberof Class A Units outstanding.  Ifunits of any other class are issued in the future, each unit of that otherclass will have the distribution rights that are established for that class bythe board of managers without member approval. “Net cash flow” means the gross cash proceeds of our operations less theportion thereof used to pay or establish reserves for all of our expenses,debts, obligations and liabilities, including capital improvements,replacements and contingencies, as reasonably determined by our board ofmanagers.  Net cash flow is not reducedby depreciation, amortization, cost recovery deductions or similar allowances,but is increased by any reductions of reserves previously established.  The definition of net cash flow may beamended by the affirmative vote of a majority of our board of managers, withouta vote of our members.

 

On December 15, 2006, a registration statement (No. 333-136353)for a an offering of a minimum of 10,000,000 and a maximum of 17,500,000 of ourClass A Units was declared effective. The offering commenced on December 22, 2006.  On December 15, 2007 we completed theoffering having sold a total of 12,551,000 units and raising a total of$25,102,000.  On March 14, 2008 webroke escrow on the offering.  Theproceeds of the offering have been used to complete construction of ourbiodiesel facility in Danville, Illinois and related activities.  As of December 31, 2008 all proceeds ofthe offering had been spent or deposited with Fifth Third Bank for disbursementupon submission of verified expenses by contractors.  As of that date, $656,411 in offeringexpenses had been incurred by us, of which approximately $500,000 had been paidfrom resources other than proceeds of the offering.  No underwriting or finder fees or expenseswere incurred in the offering.  Through December 31,2008, the offering proceeds have been expended approximately as follows:

 

**USE OFOFFERING PROCEEDS**

 

| Offering  Proceeds                       |   | $         | 25,102,000 |   |
|------------------------------------------|--------|-----------|------------|--------|
| Offering  Expenses paid from Proceeds    |   | 156,000   |       |
| Net Offering  Proceeds                   |   | $         | 24,946,000 |   |
| Use of Funds  from Net Proceeds:         |   |      |       |
| Purchase of  Plant Construction Assets   |   | $         | 4,986,000  |   |
| Plant  Construction and Related Expenses |   | 8,155,000 |       |
| Debt Service  Reserve Account            |   | 2,000,000 |       |
| Legal and  Financing Expenses            |   | 1,021,000 |       |
| Interest                                 |   | 134,000   |       |
| Start-Up and  Operating Expenses         |   | 4,895,000 |       |
| Total Use of  Funds from Net Proceeds    |   | $         | 21,191,000 |   |
| Net Proceeds  Remaining                  |   | $         | 3,755,000  |   |

 

Of the foregoing expenditures, approximately $8,155,000 in plantconstruction and related expenses was paid to REG Construction in its capacityas general contractor for construction of our animal fat processing facilityunder 

 

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the Design-Build Agreement and approximately $229,500in start up and operating expenses was paid to REG Services under the REGServices Agreement.  Except for a smallamount of out-of-pocket expenses reimbursed to our officers and managers, noother payments have been made from the proceeds of the offering to officers,managers, holders of more than 10% of our equity securities or our affiliates.

 

On June 30, 2006, each member of our board of managers at the timewas granted warrants for the purchase of 50,000 of our Class A Units,amounting to an aggregate of 650,000 units. The warrants are exercisable at an exercise price of $1.00 perunit.  These warrants became exercisableupon the commencement of operations of our plant on December 20, 2008 andwill remain exercisable for a period of one year.  On May 9, 2008, we issued a warrant toan unrelated party consultant for the purchase of 100,000 of our Class AUnits at an exercise price of $2.00 per unit. This warrant has a term of seven years and was issued in partial paymentfor services under a consulting agreement.

 

**EquityCompensation Plan Information**

** **
| **Plan Category**                                      | ** ** | **Number of units to be issued  upon exercise of outstanding  warrants** | ** ** | **Weighted- average exercise  price of outstanding  warrants** | ** ** | **Number of units remaining  available for future  issuance under equity  compensation plans  (excluding units reflected  in column (a)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                          | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                                                                               | ** ** |
| Equity  compensation plans not approved by security holders |       | 750,000                                                                                                          |       | $1.13                                                                              |       | 0                                                                                                                                                                                                     |       |

 

**Item 6.  SELECTED FINANCIAL DATA**

 

Not applicable.

 

**Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND****        RESULTSOF OPERATIONS**

 

**This report contains forward-lookingstatements that involve significant risks and uncertainties.  The following discussion, which focuses onour plan of operation through the commencement of operations of our plant,consists almost entirely of forward-looking information and statements.  Actual events or results may differmaterially from those indicated or anticipated, as discussed in the sectionentitled “Forward Looking Statements.” The following discussion of our financial condition and plan ofoperation should also be read in conjunction with our financial statements andnotes to financial statements contained in this report.**

 

**Introduction**

 

Blackhawk Biofuels, LLC (referred to herein as “we,” “us,” the “company”or “Blackhawk Biofuels, LLC”) is a limited liability company organized underthe laws of the State of Delaware on April 28, 2005.  We are presently in the process of completingconstruction and commencing operations of a biodiesel production plant inDanville, Illinois (the “plant”).  Untilearly 2009 we were a development stage company with no revenues fromoperations.  As we transition from thedevelopment stage to the operational stage, we are generating a minimal amountof revenues from operations.  During ourdevelopment stage, our efforts were devoted principally to planning for ourproject and operations, obtaining financing for our project, executingagreements related to the acquisition of assets for and construction of ourplant, constructing and testing our plant and related activities.  We will not generate significant revenuesuntil our ability to operate profitably has been established.

 

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The plant has a design capacity to produce 45 million gallons ofbiodiesel per year (“mmgy”).  Operatingat full capacity, we expect the plant will also produce approximately 16,800tons of glycerin each year.  The plantconsists principally of a materials handling and storage area, atransesterification reactor in which the biodiesel is produced, a storage andloading area for biodiesel and glycerin, truck scales and an administrativeoffice.

 

With the completion of our animal fat pretreatment facilities, ourplant has the ability to utilize multiple feedstocks, including soybean oil,other vegetable oils and animal fats. The primary product of the plant will be fuel grade biodiesel meetingASTM D6751 standards.

 

***FiscalYear Financial Results***

*** ***

The following tables summarize information from our financialstatements.  Based on the completion ofour plant and commencement of plant operations to process biodiesel fromsoybean oil feedstock, we transitioned from the development stage to theoperations stage in the first quarter of 2009. As we were in the development stage through December 31, 2008, wehad no revenues from operations during the fiscal year ended December 31,2008.  You should read these tables inconjunction with our financial statements and the notes thereto contained inthis report.

 
| **Statement of Operations Data:** | ** ** | **Year Ended  December 31, 2008** | ** ** | **Year Ended  December 31, 2007** | ** ** | **From Inception  (April 28, 2005)  to  December 31, 2008** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| Revenues                                         |       | $                                                | 0          |                                             | $          | 0                                                                                    |       | $ | 0 |   |
| Other Income  (Expense)                          |       | (531,826                                         | )          | 5,635                                            |       | (402,790                                                                             | )          |
| Operating  Expenses                              |       | (2,473,252                                       | )          | (3,594,235                                       | )          | (6,473,500                                                                           | )          |
| Net Loss                                         |       | $                                                | (3,005,078 | )                                                | $          | (3,588,600                                                                           | )          | $ | (6,876,290 | ) |

 
| **Balance Sheet Data:**           | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Assets:                                     |       |                            |       |                            |       |
| Current Assets                              |       | $                               | 9,266,530  |                            | $          | 72,952 |   |
| Property, Plant  and Equipment, net         |       | 63,896,817                      |       | 2,215                           |       |
| Other Assets                                |       | 368,431                         |       | 618,229                         |       |
| Total Assets                                |       | $                               | 73,531,778 |                            | $          | 693,396 |   |
|                                        |       |                            |       |                            |       |
| Liabilities and  Members’ Equity:      |       |                            |       |                            |       |
| Current  Liabilities                        |       | $                               | 6,371,911  |                            | $          | 562,775 |   |
| Long-Term Debt                              |       | 44,411,476                      |       | —                          |       |
| Total Members’  Equity                 |       | 22,748,391                      |       | 130,621                         |       |
| Total  Liabilities and Members’ Equity |       | $                               | 73,531,778 |                            | $          | 693,396 |   |

 

Our revenues from operations in the future will be derived principallyfrom sales of biodiesel.

 

***OperatingExpenses***

*** ***

From the commencement of our operations as a development stage companyon April 28, 2005 through December 31, 2008, we have incurred anaccumulated loss of $6,876,290.  Thisloss was funded principally by the proceeds of our seed equity financing,interest income, the proceeds of our public offering of units and borrowingsunder our term loan.  The expenses resultingin the loss included $931,772 in professional fees and $2,624,417 in generaland administrative expenses.  We alsoincurred $2,917,311 in expense associated with the impairment of long-livedassets, reflecting the write-off of assets at our original Freeport, Illinoisplant site.

 

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For the year ended December 31, 2008, operating expenses decreased$1,120,983, or 31.2% from $3,594,235 to $2,473,252, as compared to the yearended December 31, 2007.  However,excluding the expense associated with the impairment of long-lived assets inthe year ended December 31, 2007, operating expenses in the year ended December 31,2008 increased $1,796,328, or 265.3% from $676,924 to $2,473,252, as comparedto the year ended December 31, 2007. This increase was due to a $1,480,553 increase in general andadministrative expense and a $315,775 increase in professional fees.  These amounts increased principally due tocosts associated with the acquisition of plant assets, financing, constructionand testing of our plant and start-up of plant operations.

 

As our biodiesel plant commences operations, our operating expenses areincreasing, including expenditures for supplies, utilities and payments forsupervisory and production personnel.  Weare also incurring significant expenses relating to financing and interest.  We have allocated funds in our capitalstructure for these expenses, however we do not believe that the fundsallocated will be sufficient to cover these expenses without cash fromoperations or additional debt or equity financing.  Accordingly, we may need additional fundingto cover our expenses.

 

**Other Income (Expense)**

 

We received interest income for the year ended December 31, 2008in the amount of $919,312 as compared to $5,635 for the year ended December 31,2007.  The large increase in the yearended December 31, 2008 is a result of interest earned on the investmentof a substantial amount of the proceeds of our offering of Class A Units.

 

During the year ended December 31, 2008, we realized a net gain onderivative instruments in the amount of $279,739 arising from hedging contractsbased on the price of soybean oil and the price of heating oil in the commoditymarkets.  We had no derivativeinstruments in the year ended December 31, 2007.

 

We incurred interest expense for the year ended December 31, 2008in the amount of $336,617.  Approximately$1,767,000 in interest costs were capitalized as property, plant and equipmentto complete the construction of our plant. Interest expense reflected utilization of financing proceeds to acquireassets under construction and to complete construction of our plant.  Also included in other expense is a loss inthe amount of $1,413,037 related to the change in the fair value of an interestrate swap agreement.  We had no debtoutstanding in 2007 and, consequently, no interest expense in the year ended December 31,2007.  We entered into the interest rateswap agreement in fiscal year 2008 and therefore we did not have the agreementin effect at December 31, 2007.

 

Other income in the amount of $18,777 was received in the year ended December 31,2008, principally from the proceeds of product generated in testing of theplant prior to substantial completion and operations.  We had no other income in the year ended December 31,2007.

 

***Liquidityand Capital Resources***

*** ***

Funding for our project planning and development activities was originallyprovided by a $3,500,000 seed capital financing and grants from the UnitedStates Department of Agriculture (“USDA”) and the Illinois Soybean Board in theaggregate amount of $102,500.  Thecompletion of our public offering of units, which provided $25,102,000 inequity financing, our $24,650,000 construction/term debt financing with FifthThird Bank, our $5,000,000 revolving line of credit from Fifth Third Bank andour $21,700,000 subordinated debt financing with REG Ventures have provided uswith the capital necessary to acquire the under-construction assets of ourplant, complete construction of our plant and commence operations.

 

At December 31, 2008, we had cash and restricted cash totaling$7,575,038, inventories of $1,322,856, net property, plant and equipment of$63,896,817 and total assets of $73,531,778. As of December 31, 2008, we had current liabilities of $6,371,911and long-term debt of $44,411,476. Included in current liabilities were current maturities of long-termdebt of $1,848,753, construction payable of $2,109,985 and an interest rateswap liability at fair value of $1,413,037.

 

Since our organization on April 28, 2005 through December 31,2008, we generated no revenues from operations. Operating expenses during that period were $6,473,500.  That included $3,556,189 in start-up businessexpenses and $2,917,311 in expense associated with the impairment of long-livedassets, reflecting the write-off of

 

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assets at our original Freeport, Illinois plant site.Other income (expense) included interest income of $945,848, gain on derivativeinstruments of $279,739 and other income items which were offset by interestexpense of $336,617 and an expense related to the change in the fair value ofthe interest rate swap in the amount of $1,413,037.  Operating expenses and other income (expense)combined resulted in an accumulated loss of $6,876,290 at December 31,2008.  Total members’ equity as of December 31,2008 was $22,748,391.

 

At December 31, 2008, the capital available to completeconstruction of the animal fat pre-treatment facility at our plant and tocommence operations of our plant was approximately $7,500,000.  These resources consisted principally ofproceeds of our offering of Class A Units and restricted cash under ourloan from Fifth Third Bank.  At December 31,2008 our estimate of the amount required to complete the plant was approximately$2,100,000 and our estimate of the amount required to complete testing of theplant was approximately $200,000.  Basedon those estimates, the balance of our resources available as initial workingcapital for operations of our plant was approximately $2,000,000.  In addition, at December 31, 2008 we hada commitment from Fifth Third Bank to provide $5,000,000 in revolving creditand the REG Services Agreement also provides for the extension of trade creditupon the sale of our biodiesel production.

 

Since December 31, 2008, construction of the animal fatpre-treatment facility has been completed and operation of that facilitycommenced in late March 2009. However, due to market conditions, since December 31, 2008 theplant as a whole has operated only sporadically.  As a consequence, we have generated onlyapproximately $1,650,000 in revenues in the first quarter of 2009 and have notreplenished working capital used to fund fixed and variable costs incurred duringthe quarter.  In addition, we will findit necessary to use cash resources to make our first principal payment,together with accrued interest, on our term loan from Fifth Third Bank on April 1,2009.  That payment will be in the amountof approximately $335,000.  Followingthat payment, we expect that our cash resources available for working capitalwill be reduced to less than $500,000.

 

Our ability to manage a very restricted working capital scenariodepends on a number of factors.  First,our commitment from Fifth Third Bank to provide $5,000,000 in revolving creditremains in place which will provide working capital to the extent that wegenerate inventories and receivables that qualify for drawings by us.  However, our ability to qualify for those drawingsdepends on our ability to finance the inventories and receivables, which itselfdepends on the availability of working capital. And, the credit is available only the extent of 50% of qualifyinginventories and 75% of qualifying receivables. The revolving credit commitment expires on May 8, 2009 and we arenot assured that it will be renewed at the full $5,000,000 level or for anyother amount.  Consequently, therevolving credit is not an immediate solution to our working capital needs.  Second, the extension of credit by REGMarketing under the REG Services Agreement, which provides for the extension oftrade credit upon the sale of our biodiesel production, is also limited anddoes not respond adequately to our current working capital needs.  Third, in current market conditions, it is difficultto obtain any financing for feedstock and other production inputs from vendorsor other sources of feedstock and inputs. Most importantly, our Oil Feedstock Supply Agreement with Bunge does notprovide for any deferred payment of financing that would, in effect, reduce ordefer working capital needs.  Fourth, itis also very difficult to obtain advance or immediate payment from biodieselcustomers for product ordered and delivered. Again, this is a characteristic of the condition of the biodieselindustry today.  Finally, therelationship of feedstock prices, principally the price of soybean oil, and theprice of biodiesel in the market typically results in a very small margin ofprofit on biodiesel production and sales, and frequently results in operatinglosses when prices are matched for any given day or period.

 

We have attempted to address both the working capital and profit andloss issues by selectively entering into purchase orders with customers incircumstances where the price of inputs and product yield an operating profitand positive cash flow.  While thisapproach is not a solution to our working capital needs, it provides a means toslow the working capital drain that we and others in the biodiesel industry areexperiencing.  We will continue to makeevery effort to expand sales of this type. We will also enter into tolling agreements that provide a margin to usfor processing feedstock owned and provided to us by third parties intobiodiesel needed by the third parties. Because we do not take title to either the feedstock or product, ourworking capital requirements are substantially reduced in tollingarrangements.  Such tolling agreementsmay be quite short term, amounting to little more than a limited quantitypurchase order, or could be of a longer duration, such as several months oreven one or two years.  Unless a tollingagreement relates to substantially our entire capacity, we could combinetolling with the processing of biodiesel under purchase orders to maximizeutilization of our plant.  If the tollingarrangement requires only a small portion of our capacity, however, we couldfind ourselves in a position of incurring more in fixed and variable costs 

 

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than the tolling arrangement would cover, which couldresult in a drain on working capital rather than a benefit to us.

 

Because we are attempting to address our working capital needs in amarket where it is impossible to predict the feedstock and biodiesel prices orthe success of any operating strategy, we cannot predict whether our strategieswill be successful in the short or long term. If we find that it is impossible to operate profitably and either reducethe working capital that we require, generate enough working capital tocontinue to operate or locate additional debt or equity financing to fulfillour needs, we may find it necessary to curtail operations of our plant.  If that occurs, the time and expense requiredto recommence operations may be significant and may itself be a significantbarrier to continued operations.

 

A significant challenge to us will be our ability to make timelypayments on our term loan from Fifth Third Bank.  As stated above, our first principal paymenton the loan, in the amount of $335,000 including interest, is due on April 1,2009.  Although we expect to have theresources required to make that payment, with the negative impact on our cashresources that implies, we will have similar payments to Fifth Third Bank duemonthly in 2009 and thereafter.  Underour term loan agreement, we have deposited $2,000,000 in a debt service accountwith Fifth Third Bank which can be drawn on by the bank in the event of anyfailure on our part to make a payment when due, but that does not replace anyobligation to pay by us.  Any failure onour part to make a payment to Fifth Third Bank would constitute a default underthe term loan agreement and could lead to action on the part of Fifth ThirdBank to collect payment, accelerate the maturity of the loan, foreclose on ourplant as collateral for its loan and place us into bankruptcy.  Although we will take any action possible toforestall these eventualities, our inability to operate successfully could leadto one or more of these consequences.  Inaddition, the term loan agreement contains a number of covenants that we mayfail to meet in the foreseeable future which, if not met, could also lead tothe same consequences.  Although we wouldseek deferrals, waivers of amendments of any covenant that we breach orthreaten to breach, there is no assurance that Fifth Third Bank would agree toany action that would reduce the effectiveness of any covenant.

 

Our subordinated debt financing with REG Ventures does not provide forimmediate principal payments and allows interest payments to be made in theform of our Class A Units instead of cash, at our election.  Through the year ended December 31, 2008and the first quarter of fiscal year 2009, we have made all interest paymentsto REG Ventures in the form of units, amounting to 327,017 units in the yearended December 31, 2008 and 215,207 units in the first quarter of2009.  However, the agreement with REGVentures also contains covenants similar to the covenants contained in the termloan agreement with Fifth Third Bank and it is possible that REG Ventures mightexercise its rights if we fail to satisfy those covenants even if Fifth ThirdBank does not take remedial action.

 

The foregoing circumstances and uncertainties raise substantial doubtabout our ability to continue as a going concern, as discussed in Note 11 toour financial statements for the year ended December 31, 2008.  If we find that it is impossible to operate profitably,reduce the working capital that we require, generate enough working capital tocontinue to operate, locate additional debt or equity financing to fulfill ourneeds, comply with covenants on our loans or make debt payments when due, wemay find it necessary to curtail operations of our plant, attempt to enter intoa merger, acquisition or roll-up transaction with a stronger partner, considerreorganization in bankruptcy or liquidate our company.

 

***Off-Balance Sheet Arrangements***

*** ***

We do not have any off-balance sheet arrangements.

 

**Critical AccountingEstimates**

** **

In accordance with United States generally accepted accountingprinciples, we use estimates and assumptions in preparing our financialstatements.  These estimates andassumptions may have an impact on the amounts of revenues, expenses, assets andliabilities reported in our financial statements, particularly with referenceto the valuation of derivatives, inventory and unit-based compensation.  We believe that the estimates and assumptionswe have used with respect to the financial statements included in this reportare reasonable.

 

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Our financial statements have been prepared assuming that we willcontinue as a going concern.  Asdiscussed in Note 11 to our financial statements for the year ended December 31,2008, our significant operating losses, economic state of the biodieselindustry and volatile commodities prices raise substantial doubt about ourability to continue as a going concern. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

Weaccount forequity-basedcompensation in accordance with SFAS No. 123R. Under the provisions ofSFAS No. 123R,equity-based compensation cost is estimated at the grant date based onthe award’s fair value as calculated by the Black-Scholes-Merton (“BSM”)option-pricing model and is recognized as expense ratably over the requisiteservice period. The BSM model requires various highlyjudgmental assumptions includingvolatility, forfeiture rates, and expected option life. If any of theassumptions used in the BSM model change significantly,equity-based compensation expense maydiffer materially in the future from that recorded in the current period.

 

Significantestimates also include the fair value of warrants issued to members of ourBoard of Managers and to a consultant to our company.  It is at least reasonably possible that theseestimates may change in the near term.

 

**Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Notapplicable.

 

**Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

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****

 

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

Boardof Managers

BlackhawkBiofuels, LLC

Freeport,Illinois

 

Wehave audited the accompanying balance sheet of Blackhawk Biofuels, LLC (adevelopment stage company) as of December 31, 2008 and 2007, and therelated statements of operations, changes in stockholders’ equity, and cashflows for the years then ended and from inception (April 28, 2005) to December 31,2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purposes of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.   An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Blackhawk Biofuels, LLC (adevelopment stage company) as of December 31, 2008 and 2007, and theresults of its operations and its cash flows for the years then ended and frominception (April 28, 2005) to December 31, 2008 in conformity withU.S. generally accepted accounting principles.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdiscussed in Note 11 to the financial statements, the Company’s significantoperating losses, economic state of the biodiesel industry and volatile commoditiesprices as of the date of this report raise substantial doubt about its abilityto continue as a going concern.  Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

 

 
|   | Certified  Public Accountants                 |
|--------|-----------------------------------------------|
|   |                                          |
|   | /s/  Boulay, Heutmaker, Zibell & Co. PLLP |

 

Minneapolis,Minnesota

April 6,2009

 

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**BLACKHAWK BIOFUELS, LLC**

(A Development Stage Company)

 

Balance Sheets

 
| ** **                                                                                                                                                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                           | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Current Assets**                                                                                                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** |
| Cash                                                                                                                                                                                 |       | $                     | 730,234    |                  | $          | 7,042 |   |
| Restricted cash                                                                                                                                                                      |       | 6,844,804             |       | —                |       |
| Other receivables                                                                                                                                                                    |       | 200,000               |       | 50,000                |       |
| Inventories                                                                                                                                                                          |       | 1,322,856             |       | —                |       |
| Prepaid expenses                                                                                                                                                                     |       | 168,636               |       | 15,910                |       |
| Total current assets                                                                                                                                                                 |       | 9,266,530             |       | 72,952                |       |
|                                                                                                                                                                                 |       |                  |       |                  |       |
| **Property, Plant and Equipment**                                                                                                                                                    | ** ** | ** **            | ** ** | ** **            | ** ** |
| Buildings                                                                                                                                                                            |       | 11,553,691            |       | —                |       |
| Computers and office equipment                                                                                                                                                       |       | 161,665               |       | 2,892                 |       |
| Plant and process equipment                                                                                                                                                          |       | 36,809,408            |       | —                |       |
| Site improvements                                                                                                                                                                    |       | 5,457,677             |       | —                |       |
| Construction in process                                                                                                                                                              |       | 10,119,296            |       | —                |       |
| Total property, plant and equipment                                                                                                                                                  |       | 64,101,737            |       | 2,892                 |       |
| Less accumulated depreciation                                                                                                                                                        |       | 204,920               |       | 677                   |       |
| Net property, plant and equipment                                                                                                                                                    |       | 63,896,817            |       | 2,215                 |       |
|                                                                                                                                                                                 |       |                  |       |                  |       |
| **Other Assets**                                                                                                                                                                     | ** ** | ** **            | ** ** | ** **            | ** ** |
| Deferred offering costs                                                                                                                                                              |       | —                |       | 618,229               |       |
| Debt issuance costs, net of amortization                                                                                                                                             |       | 368,431               |       | —                |       |
| Total other assets                                                                                                                                                                   |       | 368,431               |       | 618,229               |       |
|                                                                                                                                                                                 |       |                  |       |                  |       |
| **Total Assets**                                                                                                                                                                     |       | $                     | 73,531,778 |                  | $          | 693,396 |   |
|                                                                                                                                                                                 |       |                  |       |                  |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                           | ** ** | ** **            | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                           | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Current Liabilities**                                                                                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current maturities of long-term debt                                                                                                                                                 |       | $                     | 1,848,753  |                  | $          | — |   |
| Accounts payable                                                                                                                                                                     |       | 278,309               |       | 204,755               |       |
| Construction payable                                                                                                                                                                 |       | 2,109,985             |       | 358,020               |       |
| Commodities derivative instruments, at fair value                                                                                                                                    |       | 95,712                |       | —                |       |
| Interest rate swap, at fair value                                                                                                                                                    |       | 1,413,037             |       | —                |       |
| Accrued purchases                                                                                                                                                                    |       | 58,216                |       | —                |       |
| Accrued interest                                                                                                                                                                     |       | 567,899               |       | —                |       |
| Total current liabilities                                                                                                                                                            |       | 6,371,911             |       | 562,775               |       |
|                                                                                                                                                                                 |       |                  |       |                  |       |
| **Long-Term Debt, net of unamortized debt discount  of $89,771**                                                                                                                     |       | 44,411,476            |       | —                |       |
|                                                                                                                                                                                 |       |                  |       |                  |       |
| **Members’ Equity**                                                                                                                                                             | ** ** | ** **            | ** ** | ** **            | ** ** |
| Member contributions, net of costs related to capital contributions, 16,404,267  and 3,500,000 units outstanding at December 31, 2008 and  December 31, 2007, respectively |       | 28,634,557            |       | 3,482,433             |       |
| Additional paid in capital                                                                                                                                                           |       | 990,124               |       | 519,400               |       |
| Deficit accumulated during development stage                                                                                                                                         |       | (6,876,290            | )          | (3,871,212            | )          |
| Total members’ equity                                                                                                                                                           |       | 22,748,391            |       | 130,621               |       |
|                                                                                                                                                                                 |       |                  |       |                  |       |
| **Total Liabilities and Members’ Equity**                                                                                                                                       |       | $                     | 73,531,778 |                  | $          | 693,396 |   |

 

Notesto Financial Statements are an integral part of this Statement.

 

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**BLACKHAWK BIOFUELS, LLC**

(A Development Stage Company)

 

Statements of Operations

 
| ** **                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Inception**                | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** | **(April 28, 2005) to** | ** ** |
| ** **                                                 | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** | **December 31, 2008**   | ** ** |
|                                                       |       |                       |       |                       |       |                         |       |
| **Revenues**                                               |       | $                          | —     |                       | $          | —                       |       | $ | — |   |
|                                                       |       |                       |       |                       |       |                         |       |
| **Operating Expenses**                                     | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| Professional fees                                          |       | 532,853                    |       | 217,078                    |       | 931,772                      |       |
| Impairment of long-lived assets                            |       | —                     |       | 2,917,311                  |       | 2,917,311                    |       |
| General and administrative                                 |       | 1,940,399                  |       | 459,846                    |       | 2,624,417                    |       |
| Total                                                      |       | 2,473,252                  |       | 3,594,235                  |       | 6,473,500                    |       |
| ** **                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| **Operating Loss**                                         |       | (2,473,252                 | )          | (3,594,235                 | )          | (6,473,500                   | )          |
|                                                       |       |                       |       |                       |       |                         |       |
| **Other Income (Expense)**                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| Other income                                               |       | 18,777                     |       | —                     |       | 18,777                       |       |
| Grant revenue                                              |       | —                     |       | —                     |       | 102,500                      |       |
| Interest income                                            |       | 919,312                    |       | 5,635                      |       | 945,848                      |       |
| Gain on derivative instruments                             |       | 279,739                    |       | —                     |       | 279,739                      |       |
| Change in fair value of interest rate swap                 |       | (1,413,037                 | )          |                       |       | (1,413,037                   | )          |
| Interest expense                                           |       | (336,617                   | )          | —                     |       | (336,617                     | )          |
| Total                                                      |       | (531,826                   | )          | 5,635                      |       | (402,790                     | )          |
|                                                       |       |                       |       |                       |       |                         |       |
| **Net Loss**                                               |       | $                          | (3,005,078 | )                          | $          | (3,588,600                   | )          | $ | (6,876,290 | ) |
| ** **                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| **Weighted Average Units Outstanding- Basic and  Diluted** |       | 13,647,916                 |       | 3,500,000                  |       | 5,358,108                    |       |
| ** **                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| **Net Loss Per Unit - Basic and Diluted**                  |       | $                          | (0.22      | )                          | $          | (1.03                        | )          | $ | (1.28 | ) |

 

Notesto Financial Statements are an integral part of this Statement.

 

39

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**BLACKHAWK BIOFUELS, LLC**

(A Development Stage Company)

 

Statement of Changes in Members’ Equity

 
| ** **                                                                         | ** ** | ** **        | ** ** | **Additional** | ** ** | **Deficit Accumulated** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-------------------------|------------|
| ** **                                                                         | ** ** | **Member**        | ** ** | **Paid in**    | ** ** | **During**              | ** ** |
| ** **                                                                         | ** ** | **Contributions** | ** ** | **Capital**    | ** ** | **Development Stage**   | ** ** |
|                                                                               |       |              |       |           |       |                    |       |
| **Balance - Inception, April 28, 2005**                                       |       | $                 | —     |           | $          | —                  |       | $ | — |   |
|                                                                               |       |              |       |           |       |                    |       |
| Net loss                                                                           |       | —            |       | —         |       | (2,145                  | )          |
|                                                                               |       |              |       |           |       |                    |       |
| **Balance - December 31, 2005**                                               |       | —            |       | —         |       | (2,145                  | )          |
|                                                                               |       |              |       |           |       |                    |       |
| Capital contributions - sale of 1,770,000 units, $1.00 per unit,  March 2006  |       | 1,770,000         |       | —         |       | —                  |       |
| Less units subscribed receivable                                                   |       | (630,000          | )          |           |       |                    |       |
|                                                                               |       |              |       |           |       |                    |       |
| Capital contributions - sale of 1,730,000 units, $1.00 per unit,  April 2006  |       | 1,730,000         |       | —         |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Collection of units subscribed receivable - April 2006                        |       | 630,000           |       | —         |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Cost of raising capital                                                            |       | (17,567           | )          | —         |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Compensation recognized from warrant issuance                                      |       | —            |       | 185,500        |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Net loss for the year ending December 31, 2006                                |       | —            |       | —         |       | (280,467                | )          |
|                                                                               |       |              |       |           |       |                    |       |
| **Balance - December 31, 2006**                                               |       | 3,482,433         |       | 185,500        |       | (282,612                | )          |
|                                                                               |       |              |       |           |       |                    |       |
| Compensation recognized from unit option issuance                                  |       | —            |       | 333,900        |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Net loss for the year ending December 31, 2007                                |       | —            |       | —         |       | (3,588,600              | )          |
|                                                                               |       |              |       |           |       |                    |       |
| **Balance - December 31, 2007**                                               |       | 3,482,433         |       | 519,400        |       | (3,871,212              | )          |
|                                                                               |       |              |       |           |       |                    |       |
| Capital contributions - sale of 12,551,000 units, $2.00 per unit,  March 2008 |       | 25,102,000        |       | —         |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Costs of raising capital                                                           |       | (656,411          | )          |           |       |                    |       |
|                                                                               |       |              |       |           |       |                    |       |
| Compensation recognized from unit option issuance                                  |       | —            |       | 365,572        |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Forfeited equity deposit                                                           |       | —            |       | 2,500          |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Debt discount recognized from warrant issuance                                     |       | —            |       | 102,652        |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Units issued for services rendered - 26,250 units, June 2008                  |       | 52,500            |       | —         |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Units issued for loan interest to REG, 119,937 units,  August 2008            |       | 239,875           |       | —         |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Units issued for loan interest to REG, 207,080 units, October 2008            |       | 414,160           |       | —         |       | —                  |       |
|                                                                               |       |              |       |           |       |                    |       |
| Net loss for the period ending December 31, 2008                              |       | —            |       | —         |       | (3,005,078              | )          |
|                                                                               |       |              |       |           |       |                    |       |
| **Balance - December 31, 2008**                                               |       | $                 | 28,634,557 |           | $          | 990,124                 |       | $ | (6,876,290 | ) |

 

Notesto Financial Statements are an integral part of this Statement.

 

40

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**BLACKHAWK BIOFUELS, LLC**

(A Development Stage Company)

 

Statements of Cash Flows

 
| ** **                                                                 | ** ** | **Year**                   | ** ** | **Year**                   | ** ** | **From Inception**            | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                                 | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | **(April 28, 2005)**     | ** ** |
| ** **                                                                 | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** | **to December 31, 2008** | ** ** |
|                                                                       |       |                       |       |                       |       |                          |       |
| **Cash Flows from Operating Activities**                                   | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Net loss                                                                   |       | $                          | (3,005,078 | )                          | $          | (3,588,600                    | )          | $ | (6,876,290 | ) |
| Adjustments to reconcile net loss to net cash from operations:             | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Construction costs impaired                                                |       | —                     |       | 2,917,311                  |       | —                        |       |
| Compensation recognized from unit option issuance                          |       | 365,572                    |       | 333,900                    |       | 884,972                       |       |
| Units issued as payment for interest incurred                              |       | 654,035                    |       | —                     |       | 654,035                       |       |
| Units issued in exchange for services                                      |       | 52,500                     |       | —                     |       | 52,500                        |       |
| Depreciation                                                               |       | 295,660                    |       | 578                        |       | 296,337                       |       |
| Realized gain on commodities derivative instruments                        |       | (375,450                   | )          |                       |       | (375,450                      | )          |
| Unrealized loss on commodities derivative instruments                      |       | 471,162                    |       | —                     |       | 471,162                       |       |
| Change in fair value of interest rate swap                                 |       | 1,592,813                  |       | —                     |       | 1,592,813                     |       |
| Change in assets and liabilities:                                          | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Other receivables                                                          |       | (150,000                   | )          | —                     |       | (200,000                      | )          |
| Inventory                                                                  |       | (1,264,640                 | )          | —                     |       | (1,264,640                    | )          |
| Prepaid expenses                                                           |       | (152,726                   | )          | (1,432                     | )          | (168,636                      | )          |
| Accounts payable                                                           |       | 121,989                    |       | 96,205                     |       | 278,309                       |       |
| Accrued expenses                                                           |       | 567,899                    |       | —                     |       | 567,899                       |       |
| Net settlements on derivative instruments                                  |       | (179,776                   | )          | —                     |       | (179,776                      | )          |
| Net cash used in operating activities                                      |       | (1,006,040                 | )          | (242,038                   | )          | (4,266,765                    | )          |
| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Cash Flows from Investing Activities**                                   | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Capital expenditures                                                       |       | (32,600,122                | )          | (13,500                    | )          | (32,244,993                   | )          |
| Construction in process                                                    |       | (8,046,759                 | )          | (16,286                    | )          | (8,046,759                    | )          |
| Net cash used in investing activities                                      |       | (40,646,881                | )          | (29,786                    | )          | (40,291,752                   | )          |
| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Cash Flows from Financing Activities**                                   | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Change in restricted cash                                                  |       | (6,844,804                 | )          | —                     |       | (6,844,804                    | )          |
| Payments for debt issuance costs                                           |       | (446,967                   | )          | —                     |       | (446,967                      | )          |
| Member contributions received                                              |       | 25,102,000                 |       | —                     |       | 28,602,000                    |       |
| Proceeds from construction loan                                            |       | 24,650,000                 |       | —                     |       | 24,650,000                    |       |
| Payments for deferred offerings costs                                      |       | (86,617                    | )          | (259,782                   | )          | (673,978                      | )          |
| Forfeited equity deposit                                                   |       | 2,500                      |       | —                     |       | 2,500                         |       |
| Net cash provided by (used in) financing activities                        |       | 42,376,112                 |       | (259,782                   | )          | 45,288,751                    |       |
| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Net Increase (Decrease) in Cash**                                        |       | 723,192                    |       | (531,606                   | )          | 730,234                       |       |
| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Cash – Beginning of Period**                                        |       | 7,042                      |       | 538,648                    |       | —                        |       |
| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Cash – End of Period**                                              |       | $                          | 730,234    |                       | $          | 7,042                         |       | $ | 730,234 |   |
| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Supplemental Disclosure of Cash Flow Information**                       |       |                       |       |                       |       |                          |       |
| Cash paid during the period for:                                           |       |                       |       |                       |       |                          |       |
| Capitalized interest                                                       |       | $                          | 1,767,153  |                       | $          | —                        |       | $ | 1,767,153 |   |
| Interest expense                                                           |       | $                          | 336,706    |                       | $          | —                        |       | $ | 337,447 |   |
|                                                                       |       |                       |       |                       |       |                          |       |
| **Supplemental Disclosure of Noncash Investing and  Financing Activities** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Non-operating assets exchanged for debt                                    |       | $                          | 21,700,000 |                       | $          | —                        |       | $ | 21,700,000 |   |
| Deferred offering costs included in accounts payable                       |       | $                          | —     |                       | $          | 48,435                        |       | $ | — |   |
| Construction deposit capitalized as construction in process                |       | $                          | —     |                       | $          | 179,664                       |       | $ | — |   |
| Construction costs included in construction payable                        |       | $                          | 2,109,985  |                       | $          | 358,020                       |       | $ | 2,109,985 |   |
| Deferred offering cost offset against equity                               |       | $                          | 656,411    |                       | $          | —                        |       | $ | 673,978 |   |
| Debt discounted from issuance of warrants                                  |       | $                          | 102,652    |                       | $          | —                        |       | $ | 102,652 |   |
| Accrued inventory purchases                                                |       | $                          | 58,216     |                       | $          | —                        |       | $ | 58,216 |   |

 

Notesto Financial Statements are an integral part of this Statement.

 

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**BLACKHAWKBIOFUELS, LLC**

(A DevelopmentStage Company)

 

Notes to FinancialStatements

 

December 31,2008 and 2007

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature ofBusiness*

 

The Company, whichanticipated its plant location to be in Stephenson County, Illinois, wasorganized to fund and construct a 30 million gallon biodiesel productionfacility.  The Company was formed on April 28,2005 to have an indefinite life.

 

As of March 14,2008, the Company abandoned the aforementioned project and purchased the underconstruction assets of an existing project located in Danville, Illinois (theplant) from an unrelated third party. This existing project was organized by the unrelatedparty to fund and construct a 45 million gallon biodiesel productionfacility.  The Company completed theconstruction of the plant and placed the assets into service in December 2008,however the Company continues to operate in the development stage with itsefforts principally devoted to operational testing.  The Company began producing revenues fromoperations in January 2009 and will no longer be reported as a developmentstage company in 2009.

 

## *Accounting Estimates*

## * *

Management uses estimates and assumptions in preparing these financialstatements in accordance with generally accepted accounting principles in theUnited States of America. Those estimates and assumptions affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities, and the reported revenues and expenses. The Company uses estimatesand assumptions in accounting for the following significant matters; usefullife of property and equipment; valuation of derivatives, inventory and propertyand equipment, share-based compensation, the allocation of construction inprocess and other contingencies. Actual results may differ from previouslyestimated amounts, and such differences may be material to the financialstatements. The Company periodically reviews estimates and assumptions, and theeffects of any such revisions are reflected in the period in which the revisionis made.

 

## *Cash*

## * *

The Company maintains itsaccounts at one financial institution. At times throughout the year, the Company’s cash balances may exceedamounts insured by the Federal Deposit Insurance Corporation.

 

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*Restricted Cash*

 

Restricted cashconsists of project funds and debt reserve funds related to the Company’sconstruction loan and totaled approximately $6,845,000 and $0 at December 31,2008 and 2007, respectively.  The projectfunds to facilitate the construction of the plant and the animal fat processingfacility have been restricted for purposes in accordance with the terms of aloan agreement with a third party lender (See Note 6).  As of December 31, 2008 or 2007 thereare no other bank or legal restrictions regarding cash.

 

*CapitalizedInterest*

 

The Company’spolicy is to capitalize interest incurred on debt during the construction ofthe plant exceeding one year as guided by SFAS 34, Capitalization of InterestCosts.  As of December 31, 2008,approximately $1,767,000 of incurred interest cost was capitalized asconstruction in process.

 

*Inventories*

 

Inventories are valued at the lower of cost or market using thefirst-in, first-out (FIFO) method.

 

*EnvironmentalLiabilities*

 

The Companyoperations are subject to environmental laws and regulations adopted by variousgovernmental entities in the jurisdiction in which it operates. These lawsrequire the Company to investigate and remediate the effects of the release ordisposal of materials at its location. Accordingly, the Company has adoptedpolicies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damages, and to limit thefinancial liability, which could result from such events. Environmentalliabilities are recorded when the liability is probable and the costs can bereasonably estimated.  The Company has noenvironmental contingencies outstanding as of December 31, 2008 or 2007.

 

*Property,Plant and Equipment*

 

Property, plantand equipment are stated at cost. Depreciation is provided over an estimated useful life by use of thestraight line depreciation method. Maintenance and repairs are expensed asincurred; major improvements and betterments are capitalized. The Companycommenced operations in December 2008 and began depreciating capitalassets at that time. Depreciation expense for the years ended December 31,2008 and 2007 were approximately $204,242 and $600, respectively.

 

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Depreciationis computed using the straight-line method over the estimated useful lives asfollows:

 

| Land improvements            |   | 20 years   |   |
|------------------------------|--------|------------|--------|
| Office building              |   | 20 years   |   |
| Office equipment             |   | 5 years    |   |
| Plant and  process equipment |   | 7-20 years |   |

 

Long-lived assets, such as property, plant, andequipment, and purchased intangible assets subject to amortization, arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. If circumstancesrequire a long-lived asset be tested for possible impairment, the Company firstcompares undiscounted cash flows expected to be generated by an asset to thecarrying value of the asset. If the carrying value of the long-lived asset isnot recoverable on an undiscounted cash flow basis, impairment is recognized tothe extent that the carrying value exceeds its fair value. Fair value isdetermined through various valuation techniques including, but not limited to,discounted cash flow models, quoted market values and third-party independentappraisals.

 

Asset impairment chargesare recorded for long-lived assets subject to depreciation when events andcircumstances indicate that such assets may be impaired and the undiscountednet cash flows estimated to be generated by those assets are less than theircarrying value.  On March 14, 2008the Company entered into a purchase agreement to acquire the assets of anunder-construction plant located in Danville, Illinois and have thereforeconsidered the construction costs related to the Freeport, Illinois siteimpaired.  The Company had incurredsubstantial consulting, permitting, purchases of construction equipment, andother pre-construction services related to building its plant facilities, whichwere capitalized as construction in process. Asset impairment charges of $2,917,311 were recorded for the year ended December 31,2007 related to the change in location. The impairment was recorded in the 2007 financial statements as thedecision to move the Plant was known before the release of the 2007 financialstatements.

 

*DeferredOffering Costs*

 

The Company defersthe costs incurred to raise equity financing until that financing occurs.  On March 14, 2008, the issuance of newequity occurred and approximately $656,000 was netted against the proceedsreceived.

 

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*Debt Issuance Costs*

 

Debt issuancecosts are being amortized over the term of the related debt of $21,700,000 byuse of the effective interest method. The Company has amortized approximately $79,000 for the year ended December 31,2008, respectively, and is included in construction in progress.

 

*Grants*

 

The Companyrecognizes grant proceeds as other income for reimbursement of expensesincurred upon complying with the conditions of the grant.  For reimbursements of incremental expenses(expenses the Company otherwise would not have incurred had it not been for thegrant), the grant proceeds are recognized as a reduction of the relatedexpense.  For reimbursements of capitalexpenditures, the grants are recognized as a reduction of the basis of theasset upon complying with the conditions of the grant.

 

*Stock-Based Compensation*

 

TheCompany accounts for unit-based compensation under Statement of FinancialAccounting Standard No. 123 (revised 2004) (“SFAS No. 123R”), *Share-Based Payment*, which addresses theaccounting for unit-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterpriseor (b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. SFAS No. 123R eliminates the ability to account forunit-based compensation transactions using the intrinsic value method underAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and instead generally requires that such transactions be accounted for using afair-value-based method.  The Companyuses the Black-Scholes-Merton (“BSM”) option-pricing model to determine thefair-value of stock-based awards.

 

TheCompany accounts for unit-based instruments granted to nonemployees under thefair value method of EITF 96-18, *Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services* and EITF 00-18, *Accounting Recognition for Certain Transactions Involving EquityInstruments Granted to Other Than Employees*. Under EITF 96-18and EITF 00-18, unit-based instruments usually are recorded at theirunderlying fair value. In certain instances the fair value of the goods orservices is used to determine the value of the equity instrument as it is abetter measure of fair value.

 

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*Loss PerUnit*

 

Loss per unit iscalculated on a basic and fully diluted basis using the weighted average unitsoutstanding during the period.  Warrantsand unit options, representing 801,563 equivalent units, are not considered inthe fully diluted calculation since they are anti-dilutive.

 

*Derivative Instruments*

 

TheCompany accounts for derivative instruments in accordance with Statement ofFinancial Accounting Standards No. 133 (“SFAS 133”), *Accountingfor Derivative Instruments and Hedging Activities*.  SFAS 133 requires the recognition ofderivatives in the balance sheet and the measurement of these instruments atfair value.

 

Inorder for a derivative to qualify as a hedge, specific criteria must be met andappropriate documentation maintained. Gains and losses from derivatives that donot qualify as hedges, or are undesignated, must be recognized immediately inearnings. If the derivative does qualify as a hedge, depending on the nature ofthe hedge, changes in the fair value of the derivative will be either offsetagainst the change in fair value of the hedged assets, liabilities, or firmcommitments through earnings or recognized in other comprehensive income untilthe hedged item is recognized in earnings. As of December 31, 2008 and2007, the Company has no derivative instruments that meet this criterion. As ofDecember 31, 2008, the Company has a recognized liability of approximately$1,413,000 related to an interest rate swap agreement and a liability ofapproximately $96,000 related to commodities derivative instruments.  At December 31, 2008, the Company hadapproximately $776,000 of cash held in the commodities derivatives hedgeaccount for the year ending December 31, 2008.

 

TheCompany recognized a corresponding loss related to the fair value of theinterest rate swap agreement of approximately $1,413,000 and is included ininterest expense and a net gain of approximately $279,000 related to thecommodities derivative instruments which is included in gain on derivativeinstruments in the statement of operations for the year ending December 31,2008.

 

*IncomeTaxes*

 

The Company is treated asa partnership for federal and state income tax purposes and generally does notincur income taxes.  Instead, itsearnings and losses are included in the income tax returns of the members.  Therefore, no provision or liability forfederal or state income taxes has been included in these financial statements.

 

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In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes — anInterpretation of SFAS No. 109* (“FIN 48”). The Interpretationcreates a single model to address accounting for uncertainty in tax positions.Specifically, the pronouncement prescribes a recognition threshold and ameasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. TheInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition of certain tax positions. Primarily due to the Company’s tax status as a limited liabilitycorporation, the adoption of FIN 48 on January 1, 2007, had no materialeffect on the Company’s financial condition or results of operations for theyears ended December 31, 2008 or 2007.

 

*New Accounting Pronouncement*

 

In March 2008, the FASBissued Statement of Financial Accounting Standard No. 161 (“SFAS 161”), *Disclosures about Derivative Instruments and Hedging Activities*,an amendment of Statement of Financial Accounting Standard No. 133 (“SFAS133”).  SFAS 161 applies to allderivative instruments and non-derivative instruments that are designated andqualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133 andrelated hedged items accounted for under SFAS 133.  SFAS 161 requires entities to provide greatertransparency through additional disclosures about how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for under SFAS 133 and its related interpretations, and howderivative instruments and related hedged items affect an entity’s financialposition, results of operations, and cash flows.  SFAS 161 is effective as of the beginning ofan entity’s first interim period that begins after November 15, 2008.  No determination has yet been made regardingthe potential impact of this standard on the Company’s financial statements.

 

**2.  MEMBERS’ EQUITY**

 

The Company wascapitalized by 108 members contributing a total of $3,500,000 for 3,500,000units.  These contributions were pursuantto a private placement memorandum in which the Company offered a maximum of3,500,000 units at a cost of $1.00 per unit for a maximum of $3,500,000.  Each investor was required to purchase aminimum of 25,000 units for a minimum investment of $25,000 and had the optionto purchase additional units in increments of 2,500 units thereafter.  This offering was closed and the units wereissued on April 12, 2006.

 

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As specified inthe Company’s limited liability company agreement, the Company is authorized toissue additional units as needed.  TheCompany has one class of units, which include certain transfer restrictions asspecified in the limited liability company agreement and pursuant to applicabletax and securities laws.  Each unitrepresents a pro rata ownership interest in the Company’s profits, losses anddistributions.

 

As of March 14,2008, the Company agreed to purchase for approximately $50,000,000 (see Note 9)the under-construction assets of an existing project in Danville, Illinois forthe construction of a 45 million gallon biodiesel plant, including the assumptionof the existing debt financing of $24,650,000, a commitment letter with theintent to enter into a $20,300,000 convertible secured subordinated note andpayment $5,250,000 in cash which allowed the Company to break escrow based onthe requirements of the escrow agreement.

 

The total amountraised in the offering and released from escrow as of that date totaled$25,102,000 for the issuance of 12,551,000 units.  These funds were used to provide financing tocomplete the Company’s biodiesel facility in Danville, Illinois.

 

On August 13,2008, the Company issued 119,937 units to REG as payment of the interestaccrued on the Subordinated Debt (See Note 6) through June 30, 2008, whichtotaled approximately $239,900.  On October 8,2008, the Company issued 207,080 units to REG as payment for the interestaccrued July through September 30, 2008, which totaled approximately$414,200. The Company is anticipating the issuance of 215,207 units to REG forthe interest accrued October 1, 2008 through December 31, 2008approximating $430,400.

 

**3. INVENTORIES**

 

Inventoriesconsist of the following as of December 31, 2008:

** **

| Raw materials  |   | $      | 1,248,549 |   |
|----------------|--------|--------|-----------|--------|
| Finished goods |   | 74,307 |      |
|           |   |   |      |
| Total          |   | $      | 1,322,856 |   |

 

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**4. FAIR VALUE MEASUREMENTS**

 

Effective January 1,2008, the Company adopted Statement of Financial Accounting Standard No. 157,*Fair Value Measurements* (SFAS 157), asit applies to our financial instruments, and Statement of Financial AccountingStandard No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115* (SFAS 159). SFAS 157 defines fair value,outlines a framework for measuring fair value, and details the requireddisclosures about fair value measurements. SFAS 159 permits companies toirrevocably choose to measure certain financial instruments and other items atfair value. SFAS 159 also establishes presentation and disclosure requirementsdesigned to facilitate comparison between entities that choose differentmeasurement attributes for similar types of assets and liabilities.

 

SFAS157 defines fair value, outlines a framework for measuring fair value, anddetails the required disclosures about fair value measurements. The adoption ofSFAS 157 for financial instruments did not have a material effect on theCompany’s financial position, results of operations or cash flows for thefiscal year ended December 31, 2008.

 

SFAS159 permits the Company to irrevocably choose to measure certain financialinstruments and other items at fair value. Except for those assets andliabilities which are required to be recorded at fair value the Company electednot to record any other assets or liabilities at fair value, as permitted bySFAS 159.

 

Fairvalue is defined as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date in the principal or most advantageous market. TheCompany uses a fair value hierarchy that has three levels of inputs, bothobservable and unobservable, with use of the lowest possible level of input todetermine fair value. Level 1 inputs include quoted market prices in an activemarket or the price of an identical asset or liability. Level 2 inputs aremarket data, other than Level 1, that are observable either directly orindirectly. Level 2 inputs include quoted market prices for similar assets orliabilities, quoted market prices in an inactive market, and other observableinformation that can be corroborated by market data. Level 3 inputs areunobservable and corroborated by little or no market data. The Company usesvaluation techniques in a consistent manner from year-to-year.

 

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Thefollowing table provides information on those assets measured at fair value ona recurring basis.

 
| ** **                          | ** ** | **Carrying Amount as**        | ** ** | **Fair Value as of** | ** ** | **Fair Value Measurement Using** | ** ** |
|-------------------------------------|------------|-------------------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | **of December 31, 2008** | ** ** | **December 31, 2008**     | ** ** | **Level 1**                                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                |       |                          |       |                                |       |                                            |       |   |   |   |   |
| Interest rate  swap                 |       | $                             | (1,413,037 | )                                   | $          | (1,413,037                                      | )          | $ | — |   | $ | (1,413,037 | ) | $ | — |   |
| Commodities  derivative instruments |       | $                             | (95,712    | )                                   | $          | (95,712                                         | )          | $ | (95,712 | ) | $ | — |   | $ | — |   |

 

The Company determines the fair value of the interest rate instrumentsshown in the table above by using widely accepted valuation techniquesincluding discounted cash flow analysis on the expected cash flows of eachinstrument. The analysis reflects the contractual terms of the derivatives,including the period to maturity and uses observable market-based inputs anduses the market standard methodology of netting the discounted future fixedcash receipts and the discounted expected variable cash payments. The variablecash payments are based on an expectation of future interest rates derived fromobservable market interest rate curves. The fair value of the commodities relatedderivative instruments are based on quoted market prices in an active market.

 

**5.  INCOME TAXES**

 

The differencesbetween financial statement basis and tax basis of assets are as follows:

 
| ** **                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| Financial statement  basis of total assets                                   |       | $                     | 73,531,778 |                  | $          | 693,396 |   |
|                                                                         |       |                  |       |                  |       |
| Start up and  organizational costs expensed for financial reporting purposes |       | 4,741,493             |       | 3,638,930             |       |
|                                                                         |       |                  |       |                  |       |
| Taxable income  tax basis of total assets                                    |       | $                     | 78,273,271 |                  | $          | 4,332,326 |   |

 

There were no differencesbetween the financial statement basis and tax basis of the Company’sliabilities.

 

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**6.  FINANCING**

 

On May 9,2008 the Company entered into a Loan agreement with a third party lender forthe purpose of purchasing the assets of the project from the existing owners ofthe Danville, Illinois project and funding construction and operationalrequirements for that project.  Theagreement provides for a $24,650,000 term loan and a $5,000,000 revolving lineof credit. Interest will accrue on the outstanding balance of the term loan atthe 30-day LIBOR rate plus 275 basis points until June 30, 2009 at whichtime the rate will float based on the LIBOR rate plus basis points asdetermined by the Company’s EBITA. Interest accrued on the outstanding balance of the loan at December 31,2008 totaled 4.65%.  The term note willmature on November 3, 2011. Fixed principal payments totaling $205,417plus applicable interest will commence during April 2009.  All remaining principal and accrued butunpaid interest shall be due and payable on the maturity date.  The Company is subject to certain financialcovenants beginning June 30, 2009.

 

The revolving lineof credit will accrue interest at the Company’s choice of the 30-day LIBOR rateplus 300 basis points or the Lender’s prime rate plus 25 basis points and isdue in monthly payments.  The revolvingnote will mature May 9, 2009.  Thenotes are secured by a mortgage and are subject to financial and otherreporting covenants.   The Company mustmeet certain debt covenants per the terms of the agreement with the bank;however these covenants are not applicable to the Company until the period end June 30,2009.

 

The Companyentered into an interest rate swap agreement in relation with theaforementioned Loan agreement in May 2008. The swap agreement effectively fixes the Company’s interest rate at3.67% on a notional amount of $24,650,000 of the Company’s Loan agreementthrough November 2011.  The fairmarket value of the interest rate swap agreement was approximately $1,413,037and is recorded as a liability as of December 31, 2008.  The interest rate swap agreement is notdesignated as a cash flow or fair value hedge. Gains and losses based on thefair value change in the interest rate swap agreement are recognized in thestatement of operations as interest expense.

 

On May 9,2008, in conjunction with the acquisition of the assets related to thebiodiesel project in Danville, Illinois, the Company entered into aSubordinated Loan Agreement with REG in the amount of $21,700,000 (subordinatedloan) for the purpose of funding construction of the Danville, Illinoisproject. The subordinated loan was principally in payment for 1,980,488 sharesof common stock of REG and for 127,273 shares of preferred stock of REG issuedto an unrelated third party in connection with an oil feedstock supplyagreement entered into between the Company and the unrelated third party (SeeNote 9). The outstanding principal and interest accrued related to the notewill be due in full on May 9, 2013. On May 2, 2008, the Company issued a warrant to purchase 51,563 Class AUnits at $.01 per unit to a related party as part of the subordinated loanagreement.  The warrant was issued to REGin consideration of providing a guaranty for apportion of the Company’sobligations under its Loan agreement with the unrelated third party lender asaforementioned.

 

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A debt discount ofapproximately $102,600, which approximated the relative fair value of thewarrants, was recognized at the date of issuance and was amortized andcapitalized to construction in process during the construction phase.  As completion of the plant was established inDecember 2008, the discount will be amortized to interest expense over theremaining life of the loan.  Thecapitalized amortization was approximately $12,881 and $0 for the year ending December 31,2008 and 2007, respectively.

 

The note requiresthe Company to pay interest at the 30 day LIBOR rate plus 500 basis pointsquarterly beginning July 1, 2008.  Theapplicable interest rate at December 31, 2008 totaled 6.91%.  All amounts outstanding under the note,including both principal and interest, shall be convertible at the option ofthe lender, into units at a price of $2.00 per unit at any time.  The note permits the Company to pay interestin cash or in the form of units valued at $2.00 per unit.  As of December 31, 2008, the Company hasissued 327,017 units to REG and has approved the issuance of an additional215,207 units to REG for payment of the interest amounts owed (See Note2).  The note is secured with asubordinated mortgage security.

 

Long-term debt, asdiscussed above, consists of the following at December 31, 2008:

** **

| Construction  note                |   | $          | 24,650,000 |   |
|-----------------------------------|--------|------------|------------|--------|
| Subordinated  debt                |   | 21,700,000 |       |
| Totals                            |   | 46,350,000 |       |
| Less amounts due  within one year |   | 1,848,753  |       |
|                              |   |       |       |
| Net long-term  debt               |   | $          | 44,501,247 |   |

 

The estimated maturities of long-term debt at December 31,2008 are as follows:

 

| 2009                  |   | $          | 1,848,753  |   |
|-----------------------|--------|------------|------------|--------|
| 2010                  |   | 2,465,004  |       |
| 2011                  |   | 20,336,243 |       |
| 2012                  |   | —     |       |
| 2013                  |   | 21,700,000 |       |
|                  |   |       |       |
| Total long-term  debt |   | $          | 46,350,000 |   |

 

The long-term debtis net of the debt discount for outstanding warrant options available to REGtotaling $89,771 as of December 31, 2008. Debt discount amortization recognized for the year ending December 31,2008 totaled $12,881, which was capitalized in construction in process.

 

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**7.  EQUITY-BASED COMPENSATION**

 

The Company has an equity-based compensation plan (thePlan) which provides for the issuance of warrant to purchase an aggregate of650,000 units of the Company to members of the board of managers, for thepurpose of providing services to facilitate the construction and planned futureoperations of the plant. Warrants to purchase the entire 650,000 units wereissued on June 30, 2006.  Thewarrants are exercisable at a purchase price of $1.00 per unit at any time fromand after the date on which the plant commences operations (vesting date) andwill continue for a period of one year following such date, after which allsuch rights shall terminate.  During December 2008,the plant commenced operations and at that time the unit options were fullyvested.

 

On May 9, 2008, the Company issued a warrant forthe purchase of an additional 100,000 units to an outside consultant forservices related to the project.  Thiswarrant is exercisable at a purchase price of $2.00 per unit at any time fromand after the date on which the plant commences operations and will continuefor a period of seven years following such date, after which all such rightsshall terminate.

 

The following tablepresents the weighted average assumptions used to estimate the fair values ofthe units underlying the warrants granted to members of the board of managersand consultant in the periods presented, using the BSM option-pricing formula:The risk-free interest rate for periods within the contractual life of thewarrant is based on the U.S. Treasury yield curve in effect at the time ofgrant.

 

| ** **                                                      | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|
| Risk-free  interest rate                                        |       | 4.85                            | %          |
| Expected  volatility                                            |       | 25                              | %          |
| Expected life                                                   |       | 3 years                         |       |
| Expected  dividend yield                                        |       | —                          |       |
| Weighted average  fair value of options granted during the year |       | $1.00                           |       |

 

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The followingtable summarizes the activity for outstanding warrants to directors of theCompany:

 
| ** **                                                | ** ** | **Warrants Outstanding** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **Number of   warrants** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining   Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic Value  (1)** | ** ** |
|                                                      |       |                     |       |   |   |   |   |   |   |
| Balance at  December 31, 2006                        |       | 650,000                  |       | $ | 1.00 |   |   |   |   |   |
| Granted                                                   |       | —                   |       | — |   |   |   |   |   |
| Exercised                                                 |       | —                   |       | — |   |   |   |   |   |
| Canceled/forfeited/expired                                |       | —                   |       | — |   |   |   |   |   |
| Balance at  December 31, 2007                        |       | 650,000                  |       | 1.00 |   |   |   |   |   |
| Granted                                                   |       | —                   |       | — |   | — |   | — |   |
| Exercised                                                 |       | —                   |       | — |   |   |   |   |   |
| Canceled/forfeited/expired                                |       | —                   |       | — |   |   |   |   |   |
| Balance at  December 31, 2008                        |       | 650,000                  |       | $ | 1.00 |   | — |   | $ | 650,000 |   |
| Vested and  exercisable as of December 31, 2008      |       | —                   |       | $ | — |   |   |   | $ | — |   |
| Vested and  expected to vest as of December 31, 2008 |       | 650,000                  |       | $ | 1.00 |   | — |   | $ | 650,000 |   |

----

(1)          The aggregate intrinsic value is calculated asapproximately the difference between the weighted average exercise price of theunderlying awards and the Company’s estimated current fair market value of$2.00 per unit at December 31, 2008.

 

The Company recognized unit-based compensation expenseto employees of the company of approximately $222,600 and $334,000 for the yearended December 31, 2008 and 2007, respectively, which is included ingeneral and administrative expense on the statement of operations.

 

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**8.  GRANTS**

 

On March 14,2008 the Company entered into an agreement to purchase the under-constructionassets of an existing project located in Danville, Illinois. Prior to theCompany entering into the agreement, the original Danville project had beenawarded $4,000,000 from the Renewable Fuels Development program and had alreadyreceived $3,800,000 before the Company had entered into the purchaseagreement.  The Company should beeligible to receive the remaining $200,000 upon completion of the plant.

 

**9.  COMMITMENTS AND CONTINGENCIES**

 

*PlantConstruction*

 

On May 12,2008 the Company entered into an asset purchase agreement with an unrelatedthird party for the under-construction assets of the plant located in Danville,IL.  The Company provided the sellerscash totaling $5,250,000 and 1,882,927 common shares of REG.  Of that consideration, $250,000 and 97,561shares of common stock in REG were placed in escrow to satisfy indemnificationobligations which the seller may have to the Company under the PurchaseAgreement.  The Company has assumed$24,650,000 of the sellers’ long-term debt by entering into a new loanagreement with the financial institution (see Note 6).

 

On May 9,2008, the Company entered into a design-build agreement with REG for theconstruction of a treatment facility to process animal fats for use asfeedstock in the production process. This facility is being built within theDanville, IL location. The estimated contract price is $10,844,327, which issubject to an increase due to certain circumstances, as defined in theagreement, up to a maximum of $11,747,633. The contract also includes acontingency amount totaling $903,306, which is not included in theaforementioned contract price. Within several days of the Company entering intothe purchase agreement as aforementioned, the Company paid 10% of the estimatedcontract price or $1,084,432, which was applied to the total contract price. Afinal payment, consisting of the unpaid balance of the contract price, shall bedue and payable in early fiscal 2009.

 

*OilFeedstock Supply Agreement*

 

On May 9,2008, the Company entered into an oil feedstock supply agreement with anunrelated third party.  Under theagreement, the Company will purchase up to approximately 30% of the Company’smaximum operating requirements for soybean oil for a term of six years from thedate of closing of the asset purchase agreement.

 

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The Company hasthe option to renew the agreement for an additional two-year period by givingwritten notice no later than 12 months prior to expiration of the initialterms. The Company is obligated to pay the third party the futures price plusbasis.

 

A transaction feetotaling the greater of total pounds delivered to the facility during the yearmultiplied by a flat rate or, if less than 112 million pounds are delivered dueto certain circumstances as defined by the agreement, a determined fee asstipulated in the agreement would be owed to the third party provider. Oncedelivery of the feedstock commences, payments are due each week for the totalprice of oil to be delivered under the applicable weekly estimate. For any oilnot covered by specific orders or by a weekly estimate, the Company shall payin advance the total price for such oil. Beginning October 1, 2008 and continuing for a six month periodthereafter, the Company must accept delivery of and pay the unrelated thirdparty for a minimum of 5.75 million pounds of oil.  For all subsequent months during the term ofthe agreement, the Company must accept delivery of and pay for a minimum of 7million pounds of oil.

 

*LeaseAgreement*

 

On May 9,2008, the Company entered into a lease agreement with the same unrelated partyproviding the oil feedstock supply as aforementioned, for certain realproperty. The base rent is the sum of one dollar ($1.00) per annum, payable onthe rent commencement date and on each anniversary during each year.  Upon termination of the oil feedstock supplyagreement a base rent of $72,000 per annum is payable in equal monthlyinstallments in advance on the first day of each month throughout the leaseterm. After the first full calendar year the base rent shall increase by thesame percentage as the percentage increase, if any, in the consumer priceindex.

 

*ServiceAgreement*

 

On May 9, 2008, theCompany entered into an agreement with an unrelated party to provide assistancewith rail loadout services and provide the Company easements for access andnatural gas, oil, and biodiesel pipelines. The Company will pay monthlyestimated per car cost for all railcars loaded during a month. At the end ofeach quarter the Company will be notified the actual per car cost for thatquarter. If actual is greater than estimated, the Company will be required topay the difference times the number of railcars loaded during such quarter,payment must be made within five days. The Company shall also pay thepre-effective service fee of $240,000 in monthly payments of $13,333 beginning November 2008.

 

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*ConsultingContracts*

 

In May 2006, the Company entered into an agreementwith an unrelated party for consultation and contract negotiations.  The contract required payments totaling$35,000.  In February 2007, theCompany extended this agreement for the purpose of consultation.  The contract required payments totaling $25,000,and an additional $25,000 in the form of units of the Company at the timeconstruction begins, of which the Company paid upon the purchase of theunder-construction assets of the Danville plant.  Approximately $50,000 of compensation expenserelating to the unit issuance was recognized in general and administrativeexpense on the statement of operations for the year ending December 31,2008.

 

In March of 2008, the Company abandoned theproject at the Freeport site, therefore construction did not begin. During March 2008board meetings, the Board discussed compensation for the consultant and decidedon a payment of $5,000 when escrow was broken, $34,000 upon state grantapproval, $30,000 when escrow was broken for compensation from August 2008through March 2008, and an additional cash payment of $6,000 for addedtime. In April of 2008, the Company extended this agreement for thepurpose of consultation. The contract requires payments of $1,000 weekly.  Either party may terminate this contract uponfourteen days written advance notice. Fees paid for services provided as of December 31, 2008 and 2007totaled approximately $75,000 and $25,000, respectively.

 

On May 9, 2008, the Company issued a warrant forthe purchase of an additional 100,000 units to this outside consultant forservices related to the project.  Thewarrant is exercisable at a purchase price of $2.00 per unit at any time fromand after the date on which the plant commences operations and will continuefor a period of seven years following such date, after which all such rightsshall terminate.  The Company recognizedwarrant-based compensation expense of $142,972 as of December 31, 2008,which is included in general and administrative expense on the statement ofoperations.

 

On May 9, 2008, pursuant to the acquisition ofthe assets of the Danville, Illinois project, the Company entered into amanagement and operational services agreement with REG.  The agreement provides for the overallmanagement of the plant, including providing on-site general and operationsmanagers, procurement of feedstocks as necessary for the operation of theplant, performing administrative, sales, and marketing functions, and other asneeded services.  The agreement alsoprovides for the extension of trade credit by REG to the Company in connectionwith the purchase of raw materials and sale of biodiesel by the Company or onthe Company’s behalf. The contract requires a monthly fee equal to $.0425 pergallon of biodiesel produced and a flat fee of $75,000 per month.  The Company will also pay an annual netincome bonus of 6% of the net income of the Company.

 

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The Company will also pay REG approximately $483,000for testing and start-up services provided during the development stage.  The term of the agreement is five years afterthe end of the first month in which biodiesel is produced for sale.  During the year ended December 31, 2008,the Company paid and expensed $241,500   related to this agreement.

 

**10.TRANSACTIONS WITH RELATED PARTIES**

 

The Companyentered into a design build and management and operational services agreement(Note 9) in May 2008 with REG for the operation of the biodiesel plant,and additionally to perform the sales and marketing functions for theplant.  REG is a member of the Company asof December 31, 2008.

 

Transactions andbalances with REG are as follows as of December 31:

 
| ** **                                      | ** ** | **2008**  | ** ** | **2007** | ** ** |
|-------------------------------------------------|------------|-----------|------------|----------|------------|
| Accounts payable                                |       | $         | 2,072,538  |     | $          | — |   |
| Purchases of  finished product biodiesel        |       | 58,216    |       | —   |       |
| Purchases  related to construction of the plant |       | 9,094,988 |       | —   |       |
|                                                 |            |           |            |          |            |  |  |

 

**11.  GOING CONCERN AND BIODIESEL UNCERTAINTIES**

 

The biodiesel market hasexperienced significant declines during 2008 as compared to prior year.  The decreases have occurred in conjunctionwith the decline in most other major commodities and world financial markets inresponse to the current global economic crisis. This decrease has had a significant impact on the Company’s ability tomeet working capital needs and run the plant at full capacity.

 

As of December 31,2008, the Company had available capital (cash plus borrowing capacity) ofapproximately $2,700,000.  This includedapproximately $700,000 of cash on hand, and $2,000,000 is currently held in arestricted debt service fund with the bank which provides the bank the right todraw down any missed or failed payment. Additional reserve cash totaling $4,844,804 at December 31, 2008 isheld with the bank and is for the completion of construction of the plant.  The Company has a $5,000,000 revolving lineof credit available with the bank, however the terms of the agreement requirethe Company to have certain working capital requirements before funding couldoccur.

 

Since December 31,2008, due to market conditions, the plant has operated only sporadically.  As a consequence, revenue in the firstquarter is less than originally projected. This has caused the Company to utilize more cash than anticipated.

 

Becauseof these events, as well as the market conditions discussed above, there is anincreased level of uncertainty related to their ability in 2009 to obtain fundsfrom cash flows from operations, or bank financing that are sufficient for theliquidity needed for ongoing operations.

 

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Thesefactors raise significantdoubt about the Company’s ability to continue as a going concern.  Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  Thisbasis of accounting contemplates the recovery of the Company’s assets andliabilities in the normal course of business.

 

Managementhas implemented the following plan:

 

·                  Management hasselectively entered into purchase commitments where the price inputs arefavorable.

 

·                  Management isconsidering entering into tolling agreements that would provide a margin forprocessing feedstock owned and provided by third parties in biodiesel needed bythose customers.

 

·                  Management iscurrently in negotiations with its lender to extend an additional debt facilityin 2009 to assist with potential future working capital needs, as may benecessary.

 

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**Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**Item 9A.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

Based on management’s evaluation, with theparticipation of Ronald L. Mapes, our Chair (principal executive officer) andRonald Fluegel, our Treasurer (principal financial officer), as of December 31,2008, Mr. Mapes and Mr. Fluegel have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-l5(e) under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)), are effective to providereasonable assurance that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in rules and forms ofthe Securities and Exchange Commission, and is accumulated and communicated tomanagement, including our principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Management’s Report on Internal Control overFinancial Reporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act).  Under Section 404of the Sarbanes-Oxley Act of 2002, our management is required to evaluate theeffectiveness of our internal control over financial reporting as of the end ofeach fiscal year and report, based on that evaluation, whether our internalcontrol over financial reporting was effective.

 

Our management, including Mr. Mapes and Mr. Fluegel,have evaluated the effectiveness of our internal control over financialreporting as of December 31, 2008. In making this assessment, our management used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO) ininternal Control — Integrated Framework. These criteria cover the areas ofcontrol environment, risk assessment, control activities, information andcommunication, and monitoring.  Ourmanagement’s evaluation included documenting, evaluating and testing the designand operating effectiveness of our internal control over financialreporting.  Based upon this evaluation,our management has concluded that, as of December 31, 2008, our internalcontrol over financial reporting was effective.

 

This annual report does notinclude an attestation report of our registered public accounting firmregarding internal control over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

Our internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes of accounting principles generally accepted in the United States.  Internal control over financial reporting, nomatter how well designed, has inherent limitations. Therefore, internal controlover financial reporting determined to be effective can provide only reasonableassurance with respect to financial statement preparation and may not preventor detect all misstatements. Moreover, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

**Changes in Internal Controlover Financial Reporting**

 

Our management, including ourprincipal executive officer and principal financial officer, has reviewed andevaluated any changes in our internal control over financial reporting thatoccurred during the quarter ended December 31, 2008 and there has been nochange that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Item 9B.  OTHER INFORMATION**

 

None.

 

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**PART III**

 

**Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

 

**Identification ofDirectors, Executive Officers and Significant Employees**

** **

Our board of managers has the principal power andresponsibility to govern our business and affairs.  Our chief executive officer and otherofficers, who are elected or appointed by the board of managers, manage ouroperations.  Subject to limited powers toapprove amendments to our Amended and Restated Limited Liability CompanyAgreement proposed by our board of managers or to cause us to dissolve, ourmembers have virtually no role in our management.

 

We have a board of managers consisting of not lessthan nine managers to be elected by the members.  The number of managers is subject todetermination from time to time by the board of managers.  There is no maximum number of managersspecified by our Amended and Restated Limited Liability Company Agreement.  Managers are elected by the respectiveclasses of units which are outstanding at any time.  There is no cumulative voting formanagers.  Currently, our board ofmanagers has 13 managers who represent the Class A Units, the only classof units outstanding.

 

Eleven of our present managers were elected asmanagers in March 2006 and were reelected in January 2008 forthree-year staggered terms.  Two of ourmanagers were appointed as managers by our board to newly created seats in May,2008.  One of those appointed managers,Daniel J. Oh, was appointed in accordance with the terms of our ServicesAgreement with REG Services and REG Marketing which provides that REG Servicesis entitled to appoint one member to our board of managers.  The other appointed manager, William Garth, wasappointed upon the invitation of the board. Mr. Garth is an officer of Indeck Energy, Inc., which owns1,000,000 of our units, but we have no agreement with Indeck with respect toboard representation.  We may agree togive other members or lenders who supply significant amounts of equity or debtcapital to us the right to designate managers to serve on our board ofmanagers.

 

Our managers have other business commitments that willcontinue to require most of their time and attention.  REG assisted us in constructing our plant andthe REG Services Agreement provides that REG will continue to assist us withrespect to all aspects of our operations. Consequently, the responsibilities of our managers for our operationshas been reduced and is limited to overall direction and policies and executiveoversight.  We expect that thoseresponsibilities will require one or two days per month during normaloperations and that our managers will have adequate time for that purpose.

 

**Board of Managers**

** **

The names, addresses, ages, positions with our companyand terms of our managers are as follows:

 
| **Name  and Address**                                           | ** ** | **Age** | ** ** | **Position**        | ** ** | **Term  Expires** |
|-----------------------------------------------------------------|------------|---------|------------|---------------------|------------|-------------------|
|                                                            |       |    |       |                |       |              |
| Ronald L. Mapes   9184 E. Binkley Rd.   Stockton, IL 61085      |       | 68      |       | Manager, Chair      |       | 2010              |
|                                                            |       |    |       |                |       |              |
| Jon Rosenstiel   73 Route 73 South   Pearl City, IL 61062       |       | 45      |       | Manager, Vice Chair |       | 2011              |
|                                                            |       |    |       |                |       |              |
| Ronald Fluegel   2398 N. Crossroads Road   Lena, IL 61048       |       | 49      |       | Manager, Treasurer  |       | 2011              |
|                                                            |       |    |       |                |       |              |
| Quentin H. Davis  13779 W. White Oak Road   Forreston, IL 61030 |       | 56      |       | Manager, Secretary  |       | 2010              |

 

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| **Name  and Address**                                                                  | ** ** | **Age** | ** ** | **Position**                                                       | ** ** | **Term  Expires** |
|----------------------------------------------------------------------------------------|------------|---------|------------|--------------------------------------------------------------------|------------|-------------------|
|                                                                                   |       |    |       |                                                               |       |              |
| Gary J. Bocker   10662 Illinois Route 64 W.   Polo, IL 61064                           |       | 64      |       | Manager                                                            |       | 2010              |
|                                                                                   |       |    |       |                                                               |       |              |
| Criss Davis   17092 Blackhawk Road   Shullsburg, WI 53586                              |       | 49      |       | Manager and Vice  President, Government and Organizational Affairs |       | 2009              |
|                                                                                   |       |    |       |                                                               |       |              |
| William R. Garth   600 N. Buffalo Grove Road, Suite 300   Buffalo Grove, IL 50089 |       | 41      |       | Manager                                                            |       | 2011              |
|                                                                                   |       |    |       |                                                               |       |              |
| Karl Lawfer   4874 S. Willow Road   Kent, IL 61044                                     |       | 43      |       | Manager and Vice  President Industry Relations                     |       | 2010              |
|                                                                                   |       |    |       |                                                               |       |              |
| Daniel J. Oh   416 S. Bell Avenue   Ames, IA 50010                                     |       | 44      |       | Manager                                                            |       | 2009              |
|                                                                                   |       |    |       |                                                               |       |              |
| David D. Shockey   6408 E. Shockey Road   Ridott, IL 61067                             |       | 51      |       | Manager                                                            |       | 2009              |
|                                                                                   |       |    |       |                                                               |       |              |
| Brad Smith   2946 Otter Creek Road   Milledgeville, IL 61051                           |       | 36      |       | Manager and Vice  President, Operations                            |       | 2009              |
|                                                                                   |       |    |       |                                                               |       |              |
| Dennis C. Wilke   11745 Freeport Road   Durand, IL 61024                               |       | 56      |       | Manager and Vice  President, Transportation and Logistics          |       | 2011              |
|                                                                                   |       |    |       |                                                               |       |              |
| Marvin Wurster   139 W. Maple Avenue   Stockton, IL 61085                              |       | 64      |       | Manager and Vice  President, Market Development                    |       | 2011              |

 

***Ronald L. Mapes*** — Ron farms in a family grain and beefcattle operation near Stockton, Illinois. Ron is also a partner in Northwest Grain Inc. and attended theUniversity of Wisconsin.  Ron serves onthe Jo Daviess County Board (chair of the Economic Development Committee), is atrustee for Stockton Township, and serves on the Mt. Carroll Mutual InsuranceCompany board.  A member of the Jo DaviessCounty Farm Bureau and Illinois Beef Association, Ron previously served on theIllinois Soybean Promotion Board, United Soybean Board, and U.S. MeatFederation Board and Executive Committee. He is also past president of the Jo Daviess County Fair.

 

***Jon Rosenstiel*** — Jon operates a diversified grain andbeef cattle operation near Pearl City, Illinois.  He is a graduate of Illinois State Universitywith a BS in Ag Business.  A member ofthe Stephenson County Farm Bureau Board of Directors (chairing the EducationTask Force and serving on the Government & Local Affairs Task Force),Jon is a board member of the Conservation & Ag Partners (CAP)Foundation.  He previously served as aboard member and chairman of the Stephenson County SWCD and is an active memberand treasurer of the Pearl City Lions Club.

 

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***Ronald Fluegel*** — Ron operates a grain and livestockfarm near Lena, Illinois.  A graduate ofHighland Community College, Ron has participated in numerous leadershipdevelopment programs including the Northwestern University Kellogg MastersMarketing Program, the Illinois Ag Leadership Program, and the Young Dairy LeadersInstitute.  Ron currently serves on theboard of the Adkins Energy Cooperative and remains active in the local andstate Holstein Associations, where he once served as county president and statecommittee member.  He is a past chairmanof the Stephenson County Extension Council, a former board member and officerof the Stephenson County Farm Bureau, and a past member and president of theLe-Win Jaycees.  Ron is active in theLena United Methodist Church, Lena Lions Club, and is a licensed IHSA basketballofficial.  He also maintains a Mycogenseed dealership and represents Bio Vet Animal Products.

 

***Quentin H. Davis*** — A graduate of the University ofColorado with a BS in Civil/Environmental Engineering, Quentin is retired after29 years as a registered Professional Engineer in Illinois, first as a projectengineer followed by ownership and management of a local firm.  He currently is serving in a part-timecapacity as Projects Administrator for the non-profit Freeport DowntownDevelopment Foundation after previously serving on its board.  He is also a member of the board of theFreeport Area Economic Development Foundation.  Quentin is involved at Park Hills Evangelical Free Church, having servedon the trustee board and building committee. A United Way volunteer and a graduate of the Highland Community CollegeLeadership Institute, Quentin served as co-chair for the Forestville ValleySchool District Citizens Advisory Building Committee.

 

***Gary J. Bocker*** — Gary started Bocker Grain Inc. in 1971and currently operates the grain business, a 7-unit trucking operation, acustom farming enterprise, an excavating firm, and a 4,000 acre family farmingoperation near Polo, Illinois.  Garystarted farming at age 18 and built all of the grain storage systems in hisbusiness.  He served for many years onthe board of trustees of Forreston Grove Church and on the business council ofCrossroads Community Church in Freeport, where he is assisting in efforts todevelop a satellite church in Polo.  Garyhas also been very active with the Rockford Rescue Mission and the Lions Clubwhere he served as District Governor in 1999 & 2000 and currently is aLions’ Foundation trustee.

 

***Criss Davis*** — Criss resides near Shullsburg,Wisconsin where he maintains farming operations in Wisconsin and Illinois,including general partnerships in Swigart & Davis Farms and MonticelloPork LLC.  Criss attended the Universityof Wisconsin-Platteville and Westfield State College in Massachusetts.  A past director of the Wisconsin Corn GrowersAssociation and the National Corn Growers Association, Criss also served aspast chairman of the United Soybean Board where he was a founding director ofthe Qualisoy Board.  He is also a memberof the Wisconsin Farm Bureau Federation.

 

***William R. Garth*** — Bill serves as director of finance forIndeck Energy Services, Inc. located in Buffalo Grove, Illinois.  Indeck is a privately held developer, ownerand operator of renewable and conventional energy projects.  Bill has more than 14 years of experience inthe energy industry and has been employed by Indeck since 1994.  He oversees Indeck’s financial analysis,modeling, and budgeting efforts, and he has a successful track record in allaspects of energy project development, including business development, projectfinance, acquisitions, contract restructuring and asset management.  Prior to joining Indeck, Bill was employedfrom 1991 to 1994 as a mechanical design engineer for the Superconducting SuperCollider and from 1989 to 1991 as an industrial engineer for GeneralDynamics.  He holds an MBA from theUniversity of Dallas and a BSIE from Purdue University.

 

***Karl Lawfer*** — Karl operates a grain and livestockfarming enterprise near Kent, Illinois. A graduate of the University of Illinois with a BS in Animal Science,Karl has been involved in numerous civic activities and organizations includinghis local school board and township boards. He currently serves as District 1 Director on the Illinois SoybeanAssociation Board of Directors, and he was previously honored as an IllinoisOutstanding Young Farmer, Jo Daviess County Outstanding Conservation Farmer,and Midwest Dairymen’s Milk Quality Award recipient.  He is also a graduate of the prestigiousIllinois Ag Leadership Foundation leadership development program.

 

***Daniel J. Oh*** — Dan is president and chief operatingofficer of REG and is an officer of a number of subsidiaries and affiliates ofREG.  He has served as the chiefoperating officer of REG since 2007 and served as chief financial officer from2006 to 2007.  From 2004 to 2006 he wasemployed by ABG, Inc., an agribusiness consulting firm, including asassociate director and vice president. Prior to joining ABG, beginning in 2001 he held several differentpositions with Eli Lilly and Company, a global pharmaceutical company.  From 2000 to 2001 he 

 

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served as a consultant with McKinsey &Company.  From 1987 to 1998 Dan was anofficer in the U.S. Army, earning the rank of major. He is a graduate of theUnited States Military Academy at West Point and has an MBA degree from theUniversity of Chicago.

 

***David D. Shockey*** — David is a partner and attorney withthe firm of Shockey & Cox LLC based in Freeport, Illinois, where hispractice deals principally with real estate, estate planning, and businessplanning.  He has practiced in Freeportsince 1983 and was associated with Schmelzle & Kroeger Law Officesuntil 2002 when Shockey & Cox was formed.  Dave earned his B.S. in Agriculture and J.D.of Law from the University of Illinois in Champaign/Urbana.  He currently serves on the Highland CommunityCollege Board of Trustees, is a member of the board of the Freeport Area EconomicDevelopment Foundation and is involved in numerous civic organizationsincluding Rotary, Freeport Art Museum, Jane Addamsland Park Foundation, DakotaOpportunities in Education Foundation and First Baptist Church.

 

***Brad Smith*** — Brad resides near Milledgeville,Illinois.  He is a partner in SmithFarming Corporation with his parents, where they raise corn and soybeans,finish feeder cattle and operate a Dekalb & Asgrow seeddealership.  A 1994 graduate of theUniversity of Illinois with a BS in Agriculture, Brad is also a 2004 graduateof the Illinois Ag Leadership Program. He currently serves as president of Blackhawk Farm Business FarmManagement (FBFM) Association and also serves on the Carroll County Farm Bureauboard of directors.  Brad and his wifeSara were recognized as winners of the Illinois Farm Bureau Young LeaderAchievement Award in 2004.

 

***Dennis C. Wilke*** — Dennis lives near Durand, Illinois,where he operates a cash grain farming operation and trucking business.  A graduate of Durand HS, Dennis is supervisorfor Harrison Township after serving as trustee for two years, and he alsoserves as a director of Durand State Bank. He was a board member for Durand School District #322 from 1985-93 and1997-2001, serving as president from 1991-93. Dennis also served on the Winnebago County Farm Bureau board ofdirectors from 1980-86 where he was president from 1983-86.  Dennis is a 1981 graduate of the IllinoisFarm Bureau Agricultural Leaders of Tomorrow (ALOT) leadership developmentprogram.

 

***Marvin Wurster*** — Owner and operator of M&W FeedService Ltd. and M&W Grain Ltd., Marv also operates a seed dealership athis enterprise in Elizabeth, Illinois. He resides in Stockton, Illinois. Marv received his BS from the University of Wisconsin-Platteville andhis MS and PhD from South Dakota State University in Brookings.  He served as a nutritionist with RalstonPurina in St. Louis from 1969 until 1975, when he started M&W Feed Service.  He later expanded his services by openingM&W Grain in 1994.  A member of theCouncil for Agriculture Science & Technology, Marv is a formerpresident of the Stockton School Board.

 

**Committees of theBoard of Managers**

** **

Our board of managers has established two separatestanding committees: an executive committee and an audit committee.  Copies of the charters of these committeesare available upon request to us.   Thecomposition and function of the committees are set forth below.

 

Our executive committee exercises delegatedresponsibilities of the board of managers between regular meetings of the boardof managers and as otherwise directed by the board.  Ronald L. Mapes (Chair), Jon Rosenstiel,Ronald Fluegel, Quentin H. Davis and Criss Davis are presently serving as themembers of our executive committee.

 

The audit committee selects our independent auditors,reviews the scope of audit and other services by the independent auditors,reviews our accounting principles and auditing practices and procedures to beused for our financial statements and reviews the results of those audits.  Ronald Fluegel (Chair) and Dennis C. Wilkeare presently serving as the members of the audit committee.

 

Our board of managers has determined that we do nothave an audit committee financial expert serving on our audit committee.   We were organized and the development of ourcompany has been led by our current managers who did not include an individualwho would qualify as audit committee financial expert.  Our board of managers did not deem itappropriate to make any change in our board of managers during our developmentand financing phase.  Our board ofmanagers has determined to defer consideration of whether it is appropriate toadd an audit 

 

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committee financial expert to our board of managersand audit committee until after we have commenced commercial operations.  Our next election of managers is expected totake place at our annual meeting in April 2009.

 

We may establish additional committees in thefuture.  Additional committees mayinclude a compensation committee, a nominating committee and other committeesin the discretion of the board of managers.

 

At the present time, our board of managers has notestablished a nominating committee or specific criteria by which to considerpotential nominees for the board.  Theboard has deferred appointment of a nominating committee until after we havecommenced commercial operations.  Untilthen, the board has considered it appropriate for all board members toparticipate in the nomination of managers to serve on the board.   In general, the board has considered thebusiness and agricultural background of potential board members, their skillsand expertise in the light of the diversity of experience needed by the board,and their willingness to serve and devote the time necessary to lead ourcompany during the period of its development. We have not engaged a third-party search firm to assist us in identifyingpotential manager candidates, but we may choose to do so in the future.

 

**Executive Officers and PlantManagement**

 

We have not hired a chief executive officer or chieffinancial officer but may do so in the future. We have signed an agreement with REG Services to provide generalmanagement for our plant and operations. REG Services has provided a general manager, plant manager and otherqualified operations personnel for our plant. REG Services also assists with our financial affairs and reporting.  Our board of managers has continued to beresponsible for the overall administration of our company and oversight ofplant management provided by REG Services. The board is assisted by our project manager, Ebenezer Management, LLC,which works in conjunction with REG Services in overseeing our financialaffairs and monitoring the completion and operation of our plant.

 

**Code of Ethics**

 

Our board of managers has adopted a code of ethicsthat applies to persons including our principal executive officer, our principalfinancial officer, our principal accounting officer or controller, and personsperforming similar functions.  A copy ofour code of ethics has been filed with the Securities and Exchange Commissionand there has been no change since the date of filing.

 

**Item 11.   EXECUTIVE COMPENSATION**

 

Our executive officers who are also members of ourboard of managers serve on a part-time basis as required by theirresponsibilities to us.  We presentlyhave no other executive officers.  Nocash compensation has been paid by us to the persons serving as our executiveofficers, in their capacity as executive officers or as managers.  Warrants for the purchase of Class AUnits have been  issued to our executiveofficers in their capacity as managers during the year ended December 31,2006.

 

The followingtable set forth all compensation paid or payable by us during the last threeyears to our Chair who  presently servesas our principal executive officer and to our Treasurer who presently serves asour principal financial officer.

 

**SummaryCompensation Table**

 
| ** **                                       | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | **Long Term Compensation**    | ** ** |
|--------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Awards** | ** ** | **Payouts**                             | ** ** |
| **Name & Principal Position** | ** ** | **Year**   | ** ** | **Salary**                   | ** ** | **Bonus**  | ** ** | **Units Underlying Warrants** | ** ** | **LTIP Payouts** | ** ** |
| Ronald L. Mapes,  Chair                          |       | 2006       |       | $                            | 0          |       | $          | 0                                       |       | $ | 50,000 |   | $ | 0 |   |
| (principal  executive officer)                   |       | 2005       |       | $                            | 0          |       | $          | 0                                       |       | $ | 0 |   | $ | 0 |   |
|                                             |       | 2004       |       | $                            | 0          |       | $          | 0                                       |       | $ | 0 |   | $ | 0 |   |
|                                             |       |       |       |                         |       |       |       |                                    |       |   |   |
| Ronald Fluegel,  Treasurer                       |       | 2006       |       | $                            | 0          |       | $          | 0                                       |       | $ | 50,000 |   | $ | 0 |   |
| (principal  financial officer)                   |       | 2005       |       | $                            | 0          |       | $          | 0                                       |       | $ | 0 |   | $ | 0 |   |
|                                             |       | 2004       |       | $                            | 0          |       | $          | 0                                       |       | $ | 0 |   | $ | 0 |   |

 

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Other than for per diem and expense reimbursement, wedo not pay our managers any cash compensation for acting in their capacity asmanagers, although we may do so in the future. Managers may be reimbursed for reasonable expenses incurred in carryingout their duties as managers, including mileage reimbursement for travel tomeetings.

 

On June 30, 2006, each member of our board ofmanagers was granted warrants for the purchase of 50,000 of our Class AUnits, amounting to an aggregate of 650,000 units.  The warrants are exercisable at an exerciseprice of $1.00 per unit.  The warrants becameexercisable upon the commencement of operations of our plant on December 20,2008 and will remain exercisable until December 20, 2009.  We may in the future issue Class A Unitsor units of another class, or options or additional warrants to purchase suchunits, to managers as compensation.  Wehave not adopted any plan or policy for such compensation.  We may compensate our managers for servicesprovided in a capacity other than as a manager, provided that the disinterestedmanagers on our board shall establish this compensation.

 

**OutstandingEquity Awards at December 31, 2008**

** **
| ** **      | ** ** | **Warrants**                                                                 | ** ** |
|-----------------|------------|------------------------------------------------------------------------------|------------|
| ** **      | ** ** | **Number of Units Underlying Unexercised Warrants** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Name**        | ** ** | **Exercisable**                                                              | ** ** | **Unexercisable** | ** ** | **Percent of  Total** | ** ** | **Exercise Price  Per Unit** | ** ** | **Warrant  Expiration Date** | ** ** |
| Ronald L. Mapes |       | 0                                                                            |       | 50,000 |   | 7.7 | % | $ | 1.00 |   |   | (1) |
| Ronald Fluegel  |       | 0                                                                            |       | 50,000 |   | 7.7 | % | $ | 1.00 |   |   | (1) |

 

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(1)                                  The warrantsbecame exercisable upon the commencement of operations of our plant on December 20,2008 and will remain exercisable until December 20, 2009.

 

The board of managers has deferred the establishmentof a compensation committee until executive management is hired.  Compensation decisions with respect tomembers of the board of managers in their manager or officer roles are made bythe board as a whole.

 
| **Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  UNITHOLDER MATTERS** |
|--------------------------------------------------------------------------------------------------------------------------|

 

The following table sets forth certain information asof March 31, 2009 with respect to the beneficial ownership of our  Class A Units by each of our managersand executive officers, all of our managers and executive officers as a group,and each person or entity known by us to be the beneficial owner of more than5% of our issued and outstanding units.

 
| **Name and Address of Beneficial Owner** | ** ** | **Amount and Nature of  Beneficial Ownership (1) (2)** | ** ** | **Percentage of  Outstanding Units (2)** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                                                           | ** ** | ** **                                              | ** ** |
| **Managers and Executive Officers:**               | ** ** | ** **                                                                           | ** ** | ** **                                              | ** ** |
|                                                              |       |                                                                                 |       |                                                    |       |
| Ronald L.  Mapes(3) (4)                                      |       | 90,000                                                                               |       | *                                                       |       |
| Jon  Rosenstiel(3)                                                |       | 75,000                                                                               |       | *                                                       |       |
| Ronald  Fluegel(3) (4)                                       |       | 100,000                                                                              |       | *                                                       |       |
| Quentin H.  Davis(3) (5)                                     |       | 80,000                                                                               |       | *                                                       |       |
| Gary J.  Bocker(3) (5)                                       |       | 150,000                                                                              |       | *                                                       |       |
| Criss  Davis(3) (6)                                          |       | 100,000                                                                              |       | *                                                       |       |
| William Garth(7)                                                  |       | 1,012,500                                                                            |       | 6.1                                                     | %          |
| Karl Lawfer(3)                                                    |       | 75,000                                                                               |       | *                                                       |       |
| Daniel J. Oh(8)                                                   |       | 1,562,850                                                                            |       | 9.4                                                     | %          |
| David D.  Shockey(3)                                              |       | 75,000                                                                               |       | *                                                       |       |

 

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| **Name and Address of Beneficial Owner** | ** ** | **Amount and Nature of  Beneficial Ownership (1) (2)** | ** ** | **Percentage of  Outstanding Units (2)** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                                                           | ** ** | ** **                                              | ** ** |
| Brad Smith(3)                                                     |       | 80,000                                                                               |       | *                                                       |       |
| Dennis C.  Wilke(3) (4)                                      |       | 80,000                                                                               |       | *                                                       |       |
| Marvin  Wurster(3) (4)                                       |       | 100,000                                                                              |       | *                                                       |       |
|                                                              |       |                                                                                 |       |                                                    |       |
| All managers and  executive officers as a group(9)                |       | 3.580,350                                                                            |       | 20.8                                                    | %          |
|                                                              |       |                                                                                 |       |                                                    |       |
| **Beneficial  Owners of more than 5% of Units:**                  |       |                                                                                 |       |                                                    |       |
|                                                              |       |                                                                                 |       |                                                    |       |
| Indeck  Energy, Inc.                                         |       | 1,000,000                                                                            |       | 6.0                                                     | %          |
|                                                              |       |                                                                                 |       |                                                    |       |
| REG Ventures,  LLC (10)                                           |       | 1,562,850                                                                            |       | 9.4                                                     | %          |

 

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*  Less than 1%.

 

(1)          Unless otherwise noted, eachperson or group identified possesses sole voting and investment power withrespect to the units.

 

(2)          Units not outstanding butdeemed beneficially owned by virtue of the right of a person to acquire themwithin 60 days are treated as outstanding only when determining the amount andpercent owned by such person.

 

(3)          Includes units issuable uponthe exercise of warrants for the purchase of 50,000 units at $1.00 per unit.

 

(4)          Includes units owned in jointtenancy with spouse.

 

(5)          Includes units owned by atrust over which he exercises sole voting and investment control.

 

(6)          Includes units owned by atrust over which he exercises shared voting and investment control with hisspouse.

 

(7)          Includes 12,500 units ownedindividually by Mr. Garth and 1,000,000 units owned by Indeck Energy, Inc.,for which Mr. Garth serves as director of finance.

 

(8)          Mr. Oh is an officer ofRenewable Energy Group, Inc. which is the indirect beneficial owner of theunits listed.

 

(9)          Includes units issuable uponthe exercise of warrants for the purchase of 550,000 units at $1.00 per unit.

 

(10)    Includes units issuable uponthe exercise of warrants for the purchase of 20,626 units at $0.01 perunit.  Units and warrants are owned byREG Ventures, LLC, which is a wholly-owned subsidiary of Renewable Energy Group, Inc.

 

**Item 13.   CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND MANAGER INDEPENDENCE**

 

Conflicts of interest exist and may arise in thefuture because of the relationships between and among our officers, managers,their affiliates and us, and the fact that we may from time to time enter intotransactions with our officers, managers and their affiliates.  Conflicts of interest could cause ourofficers and managers to put their own personal interests ahead of ours.  We cannot assure you that transactions we enterinto with related parties will be on terms as favorable to us as those thatcould have been obtained in an arm’s-length transaction.  Disputes may arise concerning transactions weenter into with related parties, and it is possible that our officers andmanagers may receive more favorable treatment than an unaffiliated third partywould receive.

 

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Although we intend to examine all conflicts that mayarise from time to time, we cannot assure you that conflicts of interest willnot harm our business or reduce the value of our units.  We currently have not established any formalprocedures to evaluate or resolve any conflicts of interest.

 

Except as stated below, there have been no transactionsduring the past two years, and there are no proposed transactions, to which wewere or are to be a party and the amount involved exceeds $120,000, in whichany manager, executive officer, nominee to be a manager, holder of 5% or moreof our outstanding units or member of the immediate family of any of theforegoing had or is to have a direct or indirect material interest.

 

** **On June 30, 2006 our board ofmanagers approved execution of an option agreement with the Freeport AreaEconomic Development Foundation, an Illinois not-for-profit corporation, givingus the option to purchase a proposed plant site in the Mill Race IndustrialPark in Freeport, Illinois.  The optionallowed us to acquire that site at a purchase price of $347,100. The option wassigned on June 20, 2006 and provided for option payments of $825 per monthcommencing August 1, 2006.  Three ofour managers at the time, Quentin Davis, Dennis Hamilton and David Shockey,were also members of the board of directors of the Foundation.  As a consequence of that relationship, on October 27,2006, our board of managers ratified the execution of the option agreementfollowing disclosure by the three managers of their relationship with theFoundation and a finding by the remaining members of our board that the termsof the transaction were fair and reasonable to us.  The three conflicted managers abstained fromvoting on the ratification motion and the ratification was approved by aunanimous vote of the remaining members of our board of managers.  Thereafter, on six occasions, including fiveoccasions in 2007, our board of managers approved amendments to the optionagreement extending the expiration date of the option.  In each case, the three conflicted managers abstainedfrom voting on the motions to approve the amendments and the amendments wereapproved by a unanimous vote of the remaining members of our board of managersvoting on the motion.  Messrs Davis,Hamilton and Shockey had no personal financial interest in the Foundation orthe transaction.  Because we did notlocate our plant at the site covered by the option, we allowed the option tolapse.

 

Renewable Energy Group, Inc. acquired 1,000,000of our Class A Units in our offering of units which closed on February 14,2008.  We have also issued an additional542,224 units to REG Ventures, LLC, a wholly-owned subsidiary of REG in lieu ofpayment of interest in cash under a subordinated loan agreement dated May 9,2008 (the “REG Loan Agreement”) with REG Ventures.  Based on units outstanding on March 31,2009, REG is the beneficial owner of an aggregate of 1,542,224 of our Class AUnits which represents 9.3% of our outstanding Class A Units.  In addition, under a management andoperational services agreement (the “REG Services Agreement”) dated May 9,2008 between Blackhawk and two REG subsidiaries, REG Services Group, LLC (“REGServices”) and REG Marketing & Logistics Group, LLC (“REG Marketing”),REG Services is entitled to appoint one member to our board of managers.  Although these and related agreements wereintegral to the establishment of a related party relationship with REG and itsaffiliates, the effect of all agreements with REG and its affiliates issummarized below.

 

On March 14, 2008 we entered into a PurchaseAgreement (the “Purchase Agreement”) with Biofuels Company of America, LLC (“BCA”)to acquire the under-construction assets of our biodiesel plant in Danville,Illinois.  REG was a party to thePurchase Agreement and the transaction which closed on May 12, 2008.  The consideration paid to BCA in thetransaction included 1,980,488 shares of common stock of REG.  Pursuant to a the REG loan agreement, weissued to REG Ventures a convertible promissory note in the principal amount of$21,700,000 as payment for the REG common stock delivered to BCA and for anadditional 127,273 shares of series B preferred stock of REG issued to BungeNorth America, Inc. (“Bunge”) in consideration for Bunge’s agreement toenter into an Oil Feedstock Supply Agreement with us. Interest under the REGLoan Agreement is based on LIBOR plus 5% and the note is due May 9,2013.  We may, if we wish, pay interestdue in our Class A Units at a rate of $2.00 per unit.  Our obligations to REG  Ventures are secured on a subordinated basisby substantially all of our assets.  Thenote is convertible into our Class A Units at a conversion price of $2.00per unit upon maturity of the note, prepayment of the note, the closing of aninitial public offering by REG, a change of control of REG or three years afterthe date of the note.

 

We also entered into a a Design-Build Agreement dated May 9,2008 (the “Design-Build Agreement”).with REG Construction & TechnologyGroup, LLC, another subsidiary of REG, for further construction on the Danvilleplant.  This construction was completedon March 23, 2009 at a total cost $11,747,633.

 

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To provide for management of our Danville plant, weentered into a Management and Operational Services Agreement (the “REG ServicesAgreement”) dated May 9, 2008 with two other REG suibsidiaries, REGServices Group, LLC (“REG Services”) and REG Marketing & LogisticsGroup, LLC (“REG Marketing”).   Under theREG Services Agreement, REG Services and REG Marketing have responsibility forthe overall management of our plant, placement of a general manager and anoperations manager at the plant, procurement of feedstocks necessary for theoperation of the facility, marketing of our production of biodiesel andglycerin and performance of administrative, sales and marketing functions forus.  REG Services has the responsibilityunder the REG Services Agreement to manage the supply of soybean oil, othervegetable oils and animal fat feedstocks for our use.  Feedstock procurement will includeconsideration of ways to assure the supply and price of feedstocks, which mightinclude supply or purchase agreements and hedging instruments and accounts.  The REG Services Agreement also provides forREG Marketing to market the biodiesel and glycerin produced by us, which may bemarketed under REG’s Soypower trade name. The REG Services Agreement provides for compensation to REG Services inan amount of $75,000 per month plus $.0425 per gallon of biodiesel produced, ineach case subject to a consumer price index escalator, plus a bonus of 6% ofour net income.  In addition, we arepaying additional compensation to REG Services for testing and start-upservices in the amount of $483,000 and will pay for any additional servicesprovided by REG Services beyond the scope of the Services Agreement.  In addition, the REG Services Agreementprovides for the extension of trade credit by REG Marketing to us in connectionwith the sale of biodiesel by us or on our behalf.  The trade credit is secured by ourreceivables.  The REG Services Agreementalso provides that REG Services is entitled to appoint one member to our boardof managers.  The REG Services Agreementwill remain in force for five years after our plant first produces biodieselfor sale and will continue thereafter unless one of the parties gives 24 monthsnotice to terminate the agreement.

 

We also issued a Unit Purchase Warrant dated May 9,2008 to REG Ventures, LLC, for the purchase of 51,563 of our Class A Unitsat an exercise price of $.01 per unit. The warrant was issued in consideration of REG providing a guaranty fora portion of our obligations under our long-term Loan Agreement with FifthThird Bank.  The warrant is exercisableupon issuance to the extent of 20% of the units covered thereby and isexercisable for an additional 20% of the units on the first four anniversariesof the date of issuance of the warrant.

 

Copies of the foregoing agreements with REG and itsaffiliates were filed with the Securities and Exchange Commission as exhibitsto our Quarterly Report on Form 10-Q for the quarter ended March 31,2008.  The descriptions of theseagreements are qualified in their entirety by reference to the full text of theagreements.

 

The charter of our Audit Committee provides that theAudit Committee is responsible for reviewing and approving the terms andconditions of all of transactions we enter into in which an officer, manager orany member holding greater than 5% or any affiliate of these persons has adirect or indirect material interest. Our Code of Business Conduct and Ethics, which is applicable to all ofour employees and managers, also prohibits our employees, including our executiveofficers, and our managers from engaging in conflict of interesttransactions.  Requests for waivers byour executive officers and managers from the provisions of, or requests forconsents by our executive officers and managers under, our Code of BusinessConduct and Ethics must be made to the Audit Committee.

 

The occupations of our managers and officers may giverise to transactions involving a conflict of interest.  Although it is unlikely that any of ourcurrent managers or officers, or their affiliates, would supply feedstock toour biodiesel plant or purchase biodiesel or glycerin from us, we may find itdesirable in the future to have representatives of our suppliers, customers orother key contractors serve on our board of managers.  In addition, members of our board of managersmay provide supplies or services to us on terms similar to those available fromdisinterested providers.

 

We have not determined that any of our managers areindependent by reference to NASDAQ Rule 4200(a)(15) or would beindependent by reference to NASDAQ audit committee standards.

 

**Item 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The aggregate feesbilled by Boulay, Heutmaker, Zibell & Co. P.L.L.P., as our independentregistered public accountants for the year ended December 31, 2008 andyear ended December 31, 2007, are as follows:

 

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| **Category**             | ** ** | **Fiscal Year** | ** ** | **Fees** | ** ** |
|--------------------------|------------|----------------------|------------|----------|------------|
|                     |       |                 |       |     |       |
| Audit Fees(1)            |       | 2008                 |       | $        | 65,452     |   |
|                     |       | 2007                 |       | $        | 70,695     |   |
|                     |       |                 |       |     |       |
| Audit Related  Fees(2)   |       | 2008                 |       | $        | 7,100      |   |
|                     |       | 2007                 |       | —   |       |
|                     |       |                 |       |     |       |
| Tax Related  Services(3) |       | 2008                 |       | $        | 410        |   |
|                     |       | 2007                 |       | —   |       |
|                     |       |                 |       |     |       |
| Total Fees               |       | 2008                 |       | $        | 72,962     |   |
|                     |       | 2007                 |       | $        | 70,695     |   |

 

----

(1) Audit fees include an audit of our financial statements,reviews of our quarterly financial statements, reviews of our registration statementfiled on Form SB-2 and related amendments, other services related to SECmatters, and discussions with our management and audit committee.

 

(2) Audit related fees relate to assurance and related consultingservices that are reasonably related to the performance of the audit of ourfinancial statements that are not included in audit fees.  Review of and consulting regardingSarbanes-Oxley testing is also included in this total.

 

(3) Tax related services include professional services rendered inconnection with tax planning and compliance.

 

Prior to engagement of the principal independent registered publicaccountants to perform audit services for us, the principal accountant waspre-approved by our audit committee pursuant to our policy requiring suchapproval.

 

**PART IV**

 

**Item 15.   EXHIBITS; FINANCIAL STATEMENT SCHEDULES**

 

**Exhibits**

 

The following exhibits are filed as part of, or are incorporated byreference into, this report:

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| 3.1                  |       |            | Certificate of Formation. (Incorporated  by reference to Exhibit No. 3.1 to our Registration Statement on  Form SB-2, File No. 333-136353.) |
|                 |       |            |   |
| 3.2                  |       |            | Amended and Restated  Limited Liability Company Agreement. (Incorporated by reference to  Exhibit No. 3.2 to our Registration Statement on Form SB-2,  File No. 333-136353.) |
|                 |       |            |   |
| 10.1                 |       |            | Asset Purchase Agreement among the Registrant,  Renewable Energy Group, Inc., Biofuels Company of America, LLC,  Biodiesel Investment Group, LLC and Bunge North America, Inc., dated  March 14, 2008 (1) |
|                 |       |            |   |
| 10.2                 |       |            | First Amendment to Asset Purchase Agreement among  the Registrant, Renewable Energy Group, Inc., Biofuels Company of  America, LLC, Biodiesel Investment Group, LLC and Bunge North  America, Inc., dated May 1, 2008 (1) |
|                 |       |            |   |
| 10.3                 |       |            | Loan Agreement between the Registrant and Fifth  Third Bank dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.4                 |       |            | Construction/Term Loan Note of the Registrant to  Fifth Third Bank dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.5                 |       |            | Revolving Credit Loan Note of the Registrant to  Fifth Third Bank dated May 9, 2008 (1) |

 

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| 10.6   |   |   | Security Agreement between the Registrant and Fifth  Third Bank dated May 9, 2008 (1)                                                                                                                                                        |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                              |
| 10.7   |   |   | Mortgage of Leasehold, Security Agreement,  Assignment of Rents and Leases and Fixture Filing between the Registrant and  Fifth Third Bank dated May 9, 2008 (1)                                                                             |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.8   |   |   | Subordinated Loan Agreement between the Registrant  and REG Ventures, LLC dated May 9, 2008 (1)                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.9   |   |   | Convertible Secured Subordinated Note of the  Registrant to REG Ventures, LLC dated May 9, 2008 (1)                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.10  |   |   | Security Agreement between the Registrant and REG  Ventures, LLC dated May 9, 2008 (1)                                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.11  |   |   | Subordinated Mortgage of Leasehold, Security  Agreement, Assignment of Rents and Leases and Fixture Filing between the  Registrant and REG Ventures, LLC dated May 9, 2008 (1)                                                               |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.12  |   |   | Warrant from the Registrant to REG Ventures, LLC  dated May 9, 2008 (1)                                                                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.13  |   |   | Amended and Restated Ground Lease Agreement between  Biofuels Company of America, LLC and Bunge Milling, Inc. dated  November 3, 2006 (1)                                                                                               |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.14  |   |   | First Amendment, Assignment and Assumption and  Consent to Assignment of Ground Lease and Conveyance of Leasehold Improvements  among the Registrant, Bunge Milling, Inc. and Biofuels Company of  America, LLC dated May 9, 2008 (1)   |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.15  |   |   | Standard Form of Design-Build Agreement and  General Conditions between Owner and Contractor between the Registrant and  REG Construction and Technology Group, LLC (1)                                                                      |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.16  |   |   | Oil Feedstock Supply Agreement among the Registrant,  Renewable Energy Group, Inc. and Bunge North America, Inc. dated  May 9, 2008 (1)(2)                                                                                         |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.17  |   |   | Services Agreement between the Registrant and Bunge  North America, Inc. dated May 9, 2008 (1)(2)                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.18  |   |   | Management and Operational Services Agreement  between the Registrant and REG Services Group, LLC and REG Marketing and  Logistics Group, LLC dated May 9, 2008 (1)                                                                          |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.19  |   |   | Form of Warrant  issued to members of the board of managers and executive officers of the  Registrant. (Incorporated by reference to Exhibit No. 10.6 to our  Registration Statement on Form SB-2, File No. 333-136353.) |
|   |   |   |                                                                                                                                                                                                                                              |
| *10.20 |   |   | Agreement between the  Registrant and Ebenezer Mgmt, LLC dated April 22, 2008.                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                              |
| *10.21 |   |   | Warrant issued to  Ebenezer Mgmt, LLC dated May 2, 2008.                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                              |
| 14.1   |   |   | Code of Ethics and  Business Conduct. (Incorporated by reference to Exhibit No. 14.1 to  the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended  December 31, 2006.)                                    |
|   |   |   |                                                                                                                                                                                                                                              |
| *31.1  |   |   | Certification pursuant to  17 CFR 240 15d-14(a).                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                              |
| *31.2  |   |   | Certification pursuant to  17 CFR 240 15d-14(a).                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                              |
| *32.1  |   |   | Certification pursuant to  18 U.S.C. Section 1350.                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                              |
| *32.2  |   |   | Certification pursuant to  18 U.S.C. Section 1350.                                                                                                                                                                                           |

 

----

*   Filedor amended herewith

 

(1)    Incorporated by reference to an exhibit of the same number filedwith our Quarterly Report on Form 10-Q for the quarter ended March 31,2008.

 

(2)  Certain material has been omitted from this exhibit inaccordance with a request for confidential treatment, which has been granted,pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.  The omitted material has been filedseparately with the Commission.

 

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**Financial Statement Schedules**

 

None.

 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|                     |   | BLACKHAWK BIOFUELS, LLC                                             |
|--------------------------|--------|---------------------------------------------------------------------|
|                     |   |                                                                |
|                     |   |                                                                |
| Date: April 6, 2009 |   | /s/ RONALD L. MAPES                                                 |
|                     |   | Ronald L. Mapes                                                     |
|                     |   | Chair and Manager                                                   |
|                     |   | (Principal Executive  Officer)                                      |
|                     |   |                                                                |
|                     |   |                                                                |
| Date: April 6, 2009 |   | /s/ RONALD FLUEGEL                                                  |
|                     |   | Ronald Fluegel                                                      |
|                     |   | Treasurer and Manager  (Principal Financial and Accounting Officer) |

 

**POWER OF ATTORNEY**

 

Each person whose signature appears below hereby constitutes andappoints Ronald L. Mapes, Jon Rosenstiel and Quentin H. Davis, and each ofthem, such person’s true and lawful attorney-in-fact and agent, with full powerof substitution and resubstitution, for such person and in such person’s name,place and stead, in any and all capacities, to sign this Annual Report on Form 10-Kof Blackhawk Biofuels, LLC and any and all amendments thereto, and to file thesame, with all exhibits thereto and other documents in connection therewith,with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them and their substitute orsubstitutes, full power and authority to do and perform each and every act andthing requisite and necessary to be done in connection therewith, as fully toall intents and purposes as such person might or could do in person, herebyratifying and confirming all that said attorneys-in-fact and agents, and eachof them and their substitute or substitutes, may lawfully do or cause to bedone by virtue hereof.

 

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 

 
| Date: April 6, 2009 |   | /s/ RONALD L. MAPES                                                 |
|--------------------------|--------|---------------------------------------------------------------------|
|                     |   | Ronald L. Mapes                                                     |
|                     |   | Chair and Manager                                                   |
|                     |   | (Principal Executive  Officer)                                      |
|                     |   |                                                                |
|                     |   |                                                                |
| Date: April 6, 2009 |   | /s/ RONALD FLUEGEL                                                  |
|                     |   | Ronald Fluegel                                                      |
|                     |   | Treasurer and Manager  (Principal Financial and Accounting Officer) |
|                     |   |                                                                |
|                     |   |                                                                |
| Date: April 6, 2009 |   | /s/ JON ROSENSTIEL                                                  |
|                     |   | Jon Rosenstiel                                                      |
|                     |   | Manager                                                             |

 

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| Date: April 6, 2009 |   | /s/ QUENTIN H. DAVIS |
|--------------------------|--------|----------------------|
|                     |   | Quentin H. Davis     |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ GARY J. BOCKER   |
|                     |   | Gary J. Bocker       |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ CRISS DAVIS      |
|                     |   | Criss Davis          |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ WILLIAM R. GARTH |
|                     |   | William R. Garth     |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ KARL LAWFER      |
|                     |   | Karl Lawfer          |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ DANIEL J. OH     |
|                     |   | Daniel J. Oh         |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ DAVID D. SHOCKEY |
|                     |   | David D. Shockey     |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ BRAD SMITH       |
|                     |   | Brad Smith           |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ DENNIS C. WILKE  |
|                     |   | Dennis C. Wilke      |
|                     |   | Manager              |
|                     |   |                 |
|                     |   |                 |
| Date: April 6, 2009 |   | /s/ MARVIN WURSTER   |
|                     |   | Marvin Wurster       |
|                     |   | Manager              |

 

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**Supplemental information to beFurnished With Reports Filed Pursuant to Section 15(d) of theExchange Act by Non-Reporting Issuers**

 

The registrant expects to send an annual report and proxy material toits security holders shortly after the filing of this annual report with theCommission.  Copies of such annual reportand proxy material will be furnished to the Commission promptly upon mailing tosecurity holders.

 

**EXHIBITINDEX**

 

The following exhibits are filed as part of, or are incorporated byreference into, this report:

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| 3.1                  |       |            | Certificate of Formation. (Incorporated  by reference to Exhibit No. 3.1 to our Registration Statement on  Form SB-2, File No. 333-136353.) |
|                 |       |            |   |
| 3.2                  |       |            | Amended and Restated  Limited Liability Company Agreement. (Incorporated by reference to  Exhibit No. 3.2 to our Registration Statement on Form SB-2,  File No. 333-136353.) |
|                 |       |            |   |
| 10.1                 |       |            | Asset Purchase Agreement among the Registrant,  Renewable Energy Group, Inc., Biofuels Company of America, LLC,  Biodiesel Investment Group, LLC and Bunge North America, Inc., dated  March 14, 2008 (1) |
|                 |       |            |   |
| 10.2                 |       |            | First Amendment to Asset Purchase Agreement among  the Registrant, Renewable Energy Group, Inc., Biofuels Company of  America, LLC, Biodiesel Investment Group, LLC and Bunge North  America, Inc., dated May 1, 2008 (1) |
|                 |       |            |   |
| 10.3                 |       |            | Loan Agreement between the Registrant and Fifth  Third Bank dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.4                 |       |            | Construction/Term Loan Note of the Registrant to  Fifth Third Bank dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.5                 |       |            | Revolving Credit Loan Note of the Registrant to  Fifth Third Bank dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.6                 |       |            | Security Agreement between the Registrant and Fifth  Third Bank dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.7                 |       |            | Mortgage of Leasehold, Security Agreement,  Assignment of Rents and Leases and Fixture Filing between the Registrant and  Fifth Third Bank dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.8                 |       |            | Subordinated Loan Agreement between the Registrant  and REG Ventures, LLC dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.9                 |       |            | Convertible Secured Subordinated Note of the  Registrant to REG Ventures, LLC dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.10                |       |            | Security Agreement between the Registrant and REG  Ventures, LLC dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.11                |       |            | Subordinated Mortgage of Leasehold, Security  Agreement, Assignment of Rents and Leases and Fixture Filing between the  Registrant and REG Ventures, LLC dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.12                |       |            | Warrant from the Registrant to REG Ventures, LLC  dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.13                |       |            | Amended and Restated Ground Lease Agreement between  Biofuels Company of America, LLC and Bunge Milling, Inc. dated  November 3, 2006 (1) |
|                 |       |            |   |
| 10.14                |       |            | First Amendment, Assignment and Assumption and  Consent to Assignment of Ground Lease and Conveyance of Leasehold  Improvements among the Registrant, Bunge Milling, Inc. and Biofuels  Company of America, LLC dated May 9, 2008 (1) |
|                 |       |            |   |
| 10.15                |       |            | Standard Form of Design-Build Agreement and General  Conditions between Owner and Contractor between the Registrant and REG  Construction and Technology Group, LLC (1) |

 

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| 10.16  |   |   | Oil Feedstock Supply Agreement among the Registrant,  Renewable Energy Group, Inc. and Bunge North America, Inc. dated  May 9, 2008 (1)(2)                                                                                         |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                              |
| 10.17  |   |   | Services Agreement between the Registrant and Bunge  North America, Inc. dated May 9, 2008 (1)(2)                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.18  |   |   | Management and Operational Services Agreement  between the Registrant and REG Services Group, LLC and REG Marketing and  Logistics Group, LLC dated May 9, 2008 (1)                                                                          |
|   |   |   |                                                                                                                                                                                                                                              |
| 10.19  |   |   | Form of Warrant  issued to members of the board of managers and executive officers of the  Registrant. (Incorporated by reference to Exhibit No. 10.6 to our  Registration Statement on Form SB-2, File No. 333-136353.) |
|   |   |   |                                                                                                                                                                                                                                              |
| *10.20 |   |   | Agreement between the  Registrant and Ebenezer Mgmt, LLC dated April 22, 2008.                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                              |
| *10.21 |   |   | Warrant issued to  Ebenezer Mgmt, LLC dated May 2, 2008.                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                              |
| 14.1   |   |   | Code of Ethics and  Business Conduct. (Incorporated by reference to Exhibit No. 14.1 to  the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended  December 31, 2006.)                                    |
|   |   |   |                                                                                                                                                                                                                                              |
| *31.1  |   |   | Certification pursuant to  17 CFR 240 15d-14(a).                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                              |
| *31.2  |   |   | Certification pursuant to  17 CFR 240 15d-14(a).                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                              |
| *32.1  |   |   | Certification pursuant to  18 U.S.C. Section 1350.                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                              |
| *32.2  |   |   | Certification pursuant to  18 U.S.C. Section 1350.                                                                                                                                                                                           |

 

----

*   Filedor amended herewith

 

(1)    Incorporated by reference to an exhibit of the same number filedwith our Quarterly Report on Form 10-Q for the quarter ended March 31,2008.

 

(2)  Certain material has been omitted from this exhibit inaccordance with a request for confidential treatment, which has been granted,pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.  The omitted material has been filedseparately with the Commission.

 

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