Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission file number 000-53651

BLACKHAWK BIOFUELS, LLC

(Exact name of registrant as specified in its charter)

210 West Spring Street

Freeport, Illinois 61032

(Address of principal executive offices)

(815) 235-2461

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

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

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

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

Table of Contents

TABLE OF CONTENTS

2

Table of Contents

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements involving future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions.  In many cases, you can identify forward-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 or other similar expressions.  Many of these forward-looking statements are located in this report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but they may appear in other sections as well.

These forward-looking statements are based on assumptions that we believe to be reasonable, beliefs and expectations in reliance on information currently available to management and our estimates regarding future results, trends and uncertainties.  We caution you not to put undue reliance on any forward-looking statements.

You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded.  We cannot provide any assurance with respect to our future performance or results.  Although we believe that our plans and objectives, as reflected in or suggested by the forward-looking statements, are reasonable, we may never achieve our plans or objectives.  Actual results may differ from anticipated or desired results due to many possible unforeseen developments, including developments arising from or relating to the following:

·                  The suitability of our biodiesel plant location, adequacy of required infrastructure and quality of 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 Unit holders;

·                  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 operation of our plant due to inadequate financing, design or material failures, environmental issues, lack of raw materials, transportation blockages, weather and other factors; and

·                  The necessity to modify or upgrade our plant, expand or curtail our operations, obtain additional capital or change our business strategy.

·                  Our ability to negotiate satisfactory revisions to or replacements for our term loan and revolving credit loans.

3

Table of Contents

·                  The successful completion of our pending consolidation with REG and other biodiesel producers.

The forward-looking statements contained in this report speak as of the date of this report and are subject to events and developments occurring after the date of this report.  Except as may be required under the federal securities laws, we do not undertake any obligation to update any forward-looking statements in this report to reflect future events or developments.

We are not under any duty to update the forward-looking statements contained in this report.  We cannot guarantee future results, levels of activity, performance or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

4

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

BLACKHAWK BIOFUELS, LLC

Condensed Balance Sheets

Notes to Financial Statements are an integral part of this Statement.

5

Table of Contents

BLACKHAWK BIOFUELS, LLC

Condensed Statements of Operations

Notes to Financial Statements are an integral part of this Statement.

6

Table of Contents

BLACKHAWK BIOFUELS, LLC

Condensed Statements of Cash Flows

7

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2008, contained in the Company’s annual report on Form 10-K.

In the opinion of management, the interim financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.

Nature of Business

The Company, which anticipated its plant location to be in Stephenson County, Illinois, was organized to fund and construct a 30 million gallon biodiesel production facility.  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 under construction assets of an existing project located in Danville, Illinois (the plant) from an unrelated third party. This existing project was organized by the unrelated party to fund and construct a 45 million gallon biodiesel production facility.  The Company completed the construction of the plant and placed the assets into service in December 2008. The Company was in development stage until January 2009, when the Company commenced operations.  The Company’s animal fat production facility became operational in March 2009.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles in the United States of America.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters; useful life of property, plant and equipment; valuation of derivatives, inventories and property, plant and equipment, share-based compensation, the allocation of construction in process and other contingencies. Actual results may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of any such revisions are reflected in the period in which the revision is made.

8

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Revenue Recognition

Revenues are recognized when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable, and collectability is reasonably assured.

The Company is a registered blender of gasoline, diesel fuel, or kerosene outside the bulk transfer/terminal system pursuant to Internal Revenue Code Section 4101.  The Company blends a portion of its finished biodiesel with .01% diesel fuel prior to sale to its customers, to produce B99.9 biodiesel.  Those sales are eligible for a $1.00 federal tax refund (Federal Blenders Credit).  Since commencement of operations in January 2009, the Company has recognized approximately $49,740 of federal incentive income.  During the three months ended September 30, 2009, due to the terms of the tolling agreement with REG, the Company is no longer is entitled to and is not collecting these federal credits (see Note 7).

Restricted Cash

Restricted cash consists of project funds and debt reserve funds related to the Company’s construction loan and totaled $2,003,413 and $6,844,804 at September 30, 2009 and December 31, 2008, respectively.  The project funds to facilitate the construction of the plant and the animal fat processing facility have been restricted for purposes in accordance with the terms of a loan agreement with a third party lender (See Note 6).  As of September 30, 2009 and December 31, 2008 there are no other bank or legal restrictions on this cash.

Accounts Receivable

Accounts receivable are recorded at their estimated net realizable value.  Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms.  Accounts considered uncollectible are written off.  The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any.  At September 30, 2009 and December 31, 2008, the Company was of the belief that such amounts would be collectible and thus an allowance was not considered necessary.  It is at least reasonably possible this estimate will change in the future.

One related party customer comprised 100% of trade accounts receivable at September 30, 2009.  Among other services, the related party provides management services for the Company.

This related party is also engaged to sell substantially all of the Company’s biodiesel, and its by-products, namely glycerin and fatty acid.  The marketer handles nearly all sales functions including billing, logistics, and sales pricing.  Once biodiesel and glycerin is shipped, the marketer assumes the risk of payment from the consumer and handles all delinquent payment issues.

9

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Long-Lived Assets

Long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

In 2008, the Company completed construction of its biodiesel production facilities, with installed capacity of 45 million gallons per year. The carrying value of these facilities at September 30, 2009 is approximately $63.5 million. In accordance with the Company’s policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facilities based on projected future cash flows from operations over the facilities’ estimated useful lives.  Management has determined that the projected future undiscounted cash flows from operations of these facilities exceed their carrying value at September 30, 2009; therefore, no impairment loss was indicated or recognized.  In determining the projected future undiscounted cash flows, the Company has made significant assumptions concerning the future viability of the biodiesel industry, the future price of feedstocks in relation to the future price of biodiesel and the overall demand in relation to production and supply capacity.  Given the recent completion of the facilities, replacement cost would likely approximate the carrying value of the facilities.  However, there have been recent transactions between independent parties to purchase plants at prices substantially below the carrying value of the facilities.  Some of the facilities have been in bankruptcy and may not be representative of transactions outside of bankruptcy.  Given these circumstances, should management be required to adjust the carrying value of the facilities to fair value at some future point in time, the adjustment could be significant and could significantly impact the Company’s financial position and results of operations.  No adjustment has been made in these financial statements for this uncertainty.

Subsequent Events

The Company has evaluated subsequent events through November 13, 2009, the date which the financial statements were available to be issued.

Fair Value of Financial Instruments

The fair value of the Company’s cash and restricted cash, accounts receivable, accounts payable, and derivative instruments approximate their carrying value.   The Company believes the carrying amount of the line of credit and construction loan payable approximates the fair value due to the variable interest rate.

10

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Net Loss per Unit

Net loss per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period.  Warrants and unit options, representing 801,563 equivalent units, are not considered in the fully diluted calculation since they are anti-dilutive.

Recently Adopted Accounting Pronouncements

In June 2009, the FASB issued Topic 105 — Generally Accepted Accounting Principles Amendments Based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (Accounting Standards Update (ASU) No. 2009-01), which updates the FASB Accounting Standards Codification (ASC or Codification) to state that the Codification is to be the single source of authoritative GAAP, other than the guidance put forth by the SEC.  All other accounting literature not included in the Codification is to be considered non-authoritative.  The updates to the Codification contained in ASU No. 2009-01 were effective for interim and annual periods ending after September 15, 2009.  The Company implemented the guidance set forth by ASU No. 2009-01, recognizing the Codification as the single source of authoritative GAAP, other than the guidance put forth by the SEC, on July 1, 2009. The implementation did not have a material impact on the Company’s financial statements.

2.  MEMBERS’ EQUITY

The Company was capitalized by 108 members contributing a total of $3,500,000 for 3,500,000 Class A Units.  These contributions were pursuant to a private placement memorandum in which the Company offered a maximum of 3,500,000 units at a cost of $1.00 per unit for a maximum of $3,500,000.  Each investor was required to purchase a minimum of 25,000 units for a minimum investment of $25,000 and had the option to purchase additional units in increments of 2,500 units thereafter.  This offering was closed and the units were issued on April 12, 2006.  The total amount raised in the offering and released from escrow as March 14, 2008, the date the Company broke escrow, totaled $25,102,000 for the issuance of 12,551,000 units.  These funds were used to provide financing to complete the Company’s biodiesel facility in Danville, Illinois.

As specified in the Company’s limited liability company agreement, the Company is authorized to issue additional units as needed.  The Company has one class of units, which include certain transfer restrictions as specified in the limited liability company agreement and pursuant to applicable tax and securities laws.  Each unit represents a pro rata ownership interest in the Company’s profits, losses and distributions.

Pursuant to the terms of the subordinated debt agreement with Renewable Energy Group (REG), as of September 30, 2009, the Company has issued a total of 838,509 units to REG as payment of the interest accrued on the subordinated debt (See Note 6) since commencement of the note, which totaled $1,677,023.  During the nine months ended September 30, 2009, the company issued 511,493 units for the payment of accrued interest and interest expense to REG of $1,022,980.  Subsequent to September 30, 2009 the company issued 146,560 units to REG in the amount of $293,121.

11

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

3. INVENTORIES

Inventories consist of the following:

4. DERIVATIVE INSTRUMENTS

From time to time the Company enters into derivative transactions to hedge its exposures to interest rate and commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes.

FASB ASC 815-10-50 requires holders of derivative instruments to provide qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.

The Company adopted this statement effective with the first quarter of 2009.

As of September 30, 2009, the Company has entered into an interest rate swap agreement. FASB ASC 815-10-05 requires that companies record derivative financial instruments as either assets or liabilities at fair value in the statement of financial position.  In the past, the Company has also used commodity derivative instruments but did not have any in place at September 30, 2009.

Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. Furthermore, the Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure.  The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis.  There were no hedge contracts that qualified for this treatment as of September 30, 2009 or December 31, 2008.

Commodity Contracts

The Company may engage in heating oil and soy oil commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices for periods up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on biodiesel sales and soy oil purchase commitments where the prices are set at a future date.  In addition, the Company may hedge anticipated sales of biodiesel to minimize its exposure to the potentially adverse effect of price volatility.  These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value was recorded through earnings in the period of change.

12

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Derivative instruments changes in fair market value were included in cost of goods sold.  As of September 30, 2009, the Company did not have any outstanding soy oil or heating oil futures or options contracts nor did the Company engage in any commodities hedging activity during the quarter ended September 30, 2009.

Interest Rate Contracts

The Company manages its floating rate debt using interest rate swaps. The Company will enter into fixed rate swaps to alter its exposure to the impact of changing interest rates on its results of operations and future cash outflows for interest. Fixed rate swaps are used to reduce the Company’s risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision.

At September 30, 2009, the Company had outstanding approximately a $24.44 million notional amount swap agreement that exchanges a variable interest rate (LIBOR) for fixed rate of interest over the term of the agreement that is not designated as an effective hedge for accounting purposes and the fair market value gains or losses are included in the results of operations and are classified in change in fair value of interest rate swap agreement.  This swap matures November 3, 2011.

The following tables provide details regarding the Company’s derivative financial instruments at September 30, 2009:

13

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

5. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted FASB ASC 820-10-05, as it applies to our financial instruments, and FASB ASC 825-10-10.  FASB ASC 820-10-05 defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. FASB ASC 825-10-10 permits companies to irrevocably choose to measure certain financial instruments and other items at fair value.

FASB ASC 825-10-10 also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities.  Except for those assets and liabilities which are required to be recorded at fair value the Company elected not to record any other assets or liabilities at fair value, as permitted by FASB ASC 825-10-10.

14

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

FASB ASC 820-10-05 defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value.

Level 1 inputs include quoted market prices in an active market or the price of an identical asset or liability. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data. The Company uses valuation techniques in a consistent manner from year-to-year.

The following table provides information on those liabilities measured at fair value on a recurring basis.

The Company determines the fair value of the interest rate swap agreement shown in the table above by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. The analysis reflects the contractual terms of the derivative instrument, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates derived from observable market interest rate curves.

6.  FINANCING

On May 9, 2008 the Company entered into a loan agreement with a third party lender for the purpose of purchasing the assets of the project from the existing owners of the Danville, Illinois project and funding construction and operational requirements for that project.  The agreement provides for a $24,650,000 term loan and a $5,000,000 revolving line of credit.

15

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Interest accrued on the outstanding balance of the term loan at the 30-day LIBOR rate plus 275 basis points until June 30, 2009, at which time the rate was based on the LIBOR rate plus basis points as determined by the Company’s EBITDA.  As of September 30, 2009, the Company’s interest rate totaled 3.07% which included 275 basis points.

Interest accrued on the outstanding balance of the loan at September 30, 2009 and December 31, 2008 at 3.07% and 4.65%, respectively.  The term loan will mature on November 3, 2011; however, as described further below, the loan is currently classified as current.  Fixed principal payments totaling $205,417 plus applicable interest commenced during April 2009.  The Company paid the April payment timely as scheduled.  During the quarter ended June 30, 2009, the Company received a proposed amendment from its bank which defers principal payments and allows for interest only payments through December 2009.  The bank has continued to allow the Company to operate under these terms during the quarter ended September 30, 2009 based on a verbal understanding.  The Board approved the proposed amendment during July 2009; however, no definitive amendment has yet been signed by any party as of November 13, 2009.  All remaining principal and accrued but unpaid interest shall be due and payable on the maturity date.

The Company is subject to certain financial covenants beginning with the fiscal quarter ending June 30, 2009.  As of September 30, 2009 and November 13, 2009, the Company was not in compliance with the June 30, 2009 and September 30, 2009 covenants as stated in the bank loan agreement.  As of November 13, 2009, the Company has not made principal payments on the loan pursuant to a verbal understanding with its bank of which is based on a proposed amendment as received from its bank.  Because the Company has not yet signed a definitive agreement with the bank, the term loan balance has been classified as a current maturity of long-term debt as of September 30, 2009.  However, based on the proposed amendment with its bank, the minimum fixed charge coverage ratio will not commence until the fiscal quarter ending June 30, 2010 and the maximum funded debt to EFITDA ratio will not commence until the fiscal quarter ending December 31, 2010.  The Company estimates that the bank fee related to the loan amendment will total approximately $61,000.  The bank is engaged in working with the Company to reach amended terms on the loan agreement and has not declared the Company in default under the loan agreement at November 13, 2009.

The revolving line of credit will accrue interest at the Company’s choice of the 30-day LIBOR rate plus 300 basis points or the Lender’s prime rate plus 25 basis points and is due in monthly payments.  The Company had a balance of $414,553 at September 30, 2009.  The Company had no outstanding balance on the line of credit as of December 31, 2008.  At September 30, 2009, the Company accrued interest at the 30-day LIBOR plus 300 basis points on the outstanding balance which totaled 3.32%.  The revolving note matured May 8, 2009 and has not yet been renewed.  The Company is currently in negotiations with the third party lender to extend the revolving line of credit to December 31, 2009.

16

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

In addition, the third party lender has proposed an interest rate change to the 30-day LIBOR plus 400 basis points.  The proposed terms have been approved final by the Company however no definitive agreement has been signed with the bank.

The notes are secured by a mortgage and are subject to financial and other reporting covenants.   The Company must meet certain debt covenants per the terms of the agreement with the bank; these covenants are being negotiated under the proposed term sheet with the bank as noted above.

The Company entered into an interest rate swap agreement in relation with the aforementioned bank loan agreement in May 2008.  The swap agreement effectively fixes the Company’s interest rate at 3.67% on a notional amount of $24,445,000 of the Company’s loan through November 2011.  The fair market value of the interest rate swap agreement was a liability of approximately $1,159,000 and $1,413,000 and is recorded as a current liability as of September 30, 2009 and December 31, 2008, respectively.  The interest rate swap agreement is not designated as a cash flow or fair value hedge.

Gains and losses based on the fair value change in the interest rate swap agreement are recognized in the statement of operations as change in fair value of interest rate swap agreement.

On May 9, 2008, in conjunction with the acquisition of the assets related to the biodiesel project in Danville, Illinois, the Company entered into a Subordinated Loan Agreement with REG in the amount of $21,700,000 (subordinated loan) for the purpose of funding construction of the Danville, Illinois project.

The subordinated loan was principally in payment for 1,980,488 shares of common stock of REG and for 127,273 shares of preferred stock of REG issued to an unrelated third party in connection with an oil feedstock supply agreement entered into between the Company and the unrelated third party (See Note 7). The outstanding principal and accrued interest related to the note will be due in full on May 9, 2013.

On May 2, 2008, the Company issued a warrant to purchase 51,563 Class A Units at $.01 per unit to REG as part of the subordinated loan agreement.  The warrant was issued to REG in consideration of providing a guaranty for a portion of the Company’s obligations under its Loan agreement with the unrelated third party lender as aforementioned.

A debt discount of approximately $102,600, which approximated the relative fair value of the warrants, was recognized at the date of issuance and was amortized and capitalized to construction in process during the construction phase.  As completion of the plant was established in December 2008, the discount is being amortized to interest expense over the remaining life of the loan.  As of September 30, 2009, a total of $12,829 of amortization was capitalized to property during the year ended December 31, 2008.  Total amortization expense for the three and nine months periods ending September 30, 2009 totaled $5,175 and $15,356, respectively.

17

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

The note requires the Company to pay interest at the 30 day LIBOR rate plus 500 basis points quarterly beginning July 1, 2008.  The applicable interest rate at September 30, 2009 and December 31, 2008 totaled 5.26% and 6.91%, respectively.  All amounts outstanding under the note, including both principal and interest, shall be convertible at the option of the lender, into units at a price of $2.00 per unit at any time.  The note permits the Company to pay interest in cash or in the form of units valued at $2.00 per unit.  As of September 30, 2009 and December 31, 2008, the Company has issued 838,509 and 327,017, respectively, units to REG (See Note 2). The note is secured by a subordinated mortgage.

Long-term debt, as discussed above and excluding the net debt discount of $74,415, consists of the following at September 30, 2009:

The estimated maturities of long-term debt at September 30, 2009 are as follows:

The long-term debt is net of the debt discount for outstanding warrants available to REG totaling $74,415 as of September 30, 2009.  Debt discount amortization recognized for the three and nine months ended September 30, 2009 totaled $5,175 and $15,356 respectively, which is recorded in interest expense.

7.  COMMITMENTS AND CONTINGENCIES

Plant Construction

On May 12, 2008 the Company entered into an asset purchase agreement with an unrelated third party for the under-construction assets of the plant located in Danville, IL.  The Company provided the sellers cash totaling $5,250,000 and 1,882,927 common shares of REG.

18

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Of that consideration, $250,000 and 97,561 shares of common stock in REG were placed in escrow to satisfy indemnification obligations which the seller may have to the Company under the Purchase Agreement.  This escrow expired and the cash and stock was released on May 12, 2009.  The Company has assumed $24,650,000 of the sellers’ long-term debt by entering into a new loan agreement with the financial institution (See Note 6).

On May 9, 2008, the Company entered into a design-build agreement with REG for the construction of a treatment facility to process animal fats for use as feedstock in the production process. This facility was built within the Danville, IL location. Construction on the animal fat processing plant is complete and the final cost of the plant totaled $11,553,691.  The contract also includes a contingency amount totaling $903,306, which is not included in the aforementioned contract price. Within several days of the Company entering into the purchase agreement as aforementioned, the Company paid 10% of the estimated contract price or $1,085,000, which was applied to the total contract price. A final payment, consisting of the unpaid balance of the contract price, has been billed to the Company, a portion of which is included in construction payable at September 30, 2009 and December 31, 2008.

Oil Feedstock Supply Agreement

On May 9, 2008, the Company entered into an oil feedstock supply agreement with an unrelated third party.  Under the agreement, the Company will purchase up to approximately 30% of the Company’s maximum operating requirements for soybean oil for a term of six years from the date of closing of the asset purchase agreement. The Company has the option to renew the agreement for an additional two-year period by giving written notice no later than 12 months prior to expiration of the initial term. The Company is obligated to pay the third party the futures price plus basis.

A transaction fee totaling the greater of total pounds delivered to the facility during the year multiplied by a flat rate or, if less than 112 million pounds are delivered due to certain circumstances as defined by the agreement, a determined fee as stipulated in the agreement would be owed to the third party provider. The accumulated fee for the three and nine months ended September 30, 2009 totaled $47,300 and $171,070 respectively. Delivery payments are due each week for the total price of oil to be delivered under the applicable weekly estimate.

For any oil not covered by specific orders or by a weekly estimate, the Company shall pay in advance the total price for such oil. Beginning October 1, 2008 and continuing for a six month period thereafter, the Company accepted delivery of and paid the unrelated third party for a minimum of 5.75 million pounds of oil. For all subsequent months during the term of the agreement, the Company must accept delivery of and pay for a minimum of 7 million pounds of oil.

19

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Lease Agreements

On May 9, 2008, the Company entered into a lease agreement with the same unrelated party providing the oil feedstock supply as aforementioned, for certain real property. The base rent is the sum of one dollar ($1.00) per annum, payable on the rent commencement date and on each anniversary during each year.

Upon termination of the oil feedstock supply agreement a base rent of $72,000 per annum is payable in equal monthly installments in advance on the first day of each month throughout the lease term. After the first full calendar year the base rent shall increase by the same percentage as the percentage increase, if any, in the consumer price index.

Service Agreements

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

Consulting Contracts

In May 2006, the Company entered into an agreement with an unrelated party for consultation and contract negotiations.  The contract required payments totaling $35,000.  In February 2007, the Company extended this agreement.  The contract required payments totaling $25,000, and an additional $25,000 in the form of units of the Company at the time construction begins, which the Company paid upon the purchase of the under-construction assets of the Danville plant.  The consultant was paid in the form of Company units for all scheduled payments discussed under the contract above.

Approximately $50,000 of compensation expense relating to the unit issuance was recognized in general and administrative expense on the statement of operations for the year ended December 31, 2008.

On May 9, 2008, the Company issued a warrant for the purchase of an additional 100,000 units to this outside consultant for services related to the project.  The warrant is exercisable at a purchase price of $2.00 per unit at any time from and after the date on which the plant commences operations and will continue for a period of seven years following such date, after which all such rights shall terminate. The related warrant-based compensation expense of $142,972 had been recognized as of December 31, 2008, when the plant commenced operations.

20

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

On May 9, 2008, pursuant to the acquisition of the assets of the Danville, Illinois project, the Company entered into a management and operational services agreement with REG.  The agreement provides for the overall management of the plant, including providing on-site general and operations managers, procurement of feedstocks as necessary for the operation of the plant, performing administrative, sales, and marketing functions, and other as needed services.

The agreement also provides for the extension of trade credit by REG to the Company in connection with the purchase of raw materials and sale of biodiesel by the Company or on the Company’s behalf. The contract requires a monthly fee equal to $.0425 per gallon of biodiesel produced and a flat fee of $75,000 per month however pursuant to entering into a tolling agreement with the Company REG revised this payment.  See the discussion below.  The Company will also pay REG approximately $483,000 for testing and start-up services provided during the development stage. The term of the agreement is five years after the end of the first month in which biodiesel is produced for sale. As of September 30, 2009, the Company has recognized approximately $478,400 related to this agreement.

Occurring each month since March 20, 2009, the Company has entered into toll process agreements with REG for the purpose of providing certain feedstock and other raw materials for production of biodiesel.  Under the agreements REG and an unrelated third party would provide for delivery of the feedstock and, depending on the point in the process, either one of those parties would retain title to the goods at all times throughout the production process.

The Company will receive a set fee per gallon up to 2,500,000 produced and a reduced fee per gallon thereafter.  The agreement also waived the $.0425 per gallon sold payment payable to REG under the terms of the management and services agreement as noted above.  Payment under the terms of the agreements is dependent on the certification and testing of the finished product biodiesel.  The agreements expire after one month at month end.  Each agreement has had substantially similar terms.

8.  TRANSACTIONS WITH RELATED PARTIES

The Company entered into a design build and management and operational services agreement (see Note 7) in May 2008 with REG for the operation of the biodiesel plant, and additionally to perform the sales and marketing functions for the plant.  REG is a member of the Company as of September 30, 2009 and December 31, 2008.

21

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

Transactions and balances with REG are as follows as of:

9. GOING CONCERN AND BIODIESEL UNCERTAINTIES

The biodiesel market has experienced significant declines during the recent year. The decreases have occurred in conjunction with the decline in most other major commodities and world financial markets in response to the current global economic crisis. This decrease has had a significant impact on the Company’s ability to meet working capital needs and run the plant at full capacity.

22

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

As of September 30, 2009, the Company had available capital (cash plus borrowing capacity) of approximately $119,000.  This consisted of approximately $119,000 of cash on hand. The Company had no borrowing capacity available on that date. An additional $2,000,000 in cash is currently held in a restricted debt service fund with the bank which provides the bank the right to draw down any missed or failed payment.

The Company has a $5,000,000 revolving line of credit (See Note 6) with approximately $4,585,000 available, however the terms of the agreement require the Company to recognize a minimum gross margin, to be determined by the lender, realized on each gallon of biodiesel before funding could occur.  In addition, the Company must meet the requirements of the borrowing base limitation which is 50% of qualifying inventories and 75% of qualifying receivables.

Since December 31, 2008, due to market conditions, the plant has operated below its nameplate capacity. As a consequence, revenue during the first nine months of fiscal year 2009 is less than originally projected. This has caused the Company to utilize more cash than anticipated.

Because of these events, as well as the market conditions discussed above, there is an increased level of uncertainty related to its ability to obtain funds from cash flows from operations in fiscal year 2009, or obtain bank financing that is sufficient for the liquidity needed for ongoing operations.

These factors raise significant doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and liabilities in the normal course of business.

Management has implemented the following plan:

·                  Management has selectively entered into purchase commitments where the price inputs are favorable.

·                  Management continues to enter into monthly tolling agreements with REG to provide a margin to the Company for processing feedstock owned and provided by third parties into biodiesel needed by those customers.

·                  Management is currently in negotiations with its lender to amend and extend existing agreements to assist with potential future working capital needs.

·                  Management, with the completion of the animal fat process, has the ability to increase production in the area of the currently lower input costs, soy oil or animal fat.

·                  The Company has negotiated and agreed to a merger agreement with REG which provides for the consolidation of the Company with REG and two other biodiesel producers.  This execution is pending SEC review and member approval.

23

Table of Contents

BLACKHAWK BIOFUELS, LLC

Notes to Condensed Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

10. MERGER AGREEMENT

On May 11, 2009, the Company entered into a definitive agreement and plan of merger with REG, for the consolidation of the Company’s commercial-scale biodiesel production facility with REG and two other biodiesel producers.  A new holding company, which has been incorporated by REG, would own and operate the Company and other acquired companies.  The holding company will be owned by current REG investors and the current members of the Company as well as the members of the two other consolidating companies.

Per the terms of the agreement, the Company’s existing units will be converted to shares of the new company (Newco) and the Company’s unitholders will receive .4479 of a share of Newco common stock and .0088 of a share of Newco preferred stock for each Class A unit of the Company.   In addition, all outstanding company warrants are will be assumed by Newco and converted into warrants for the purchase of common stock of Newco based on the same exchange ratio as is applicable to outstanding Class A units of the Company as mentioned above.  The exercise date of these warrants will be extended by the number of days in the period between December 19, 2009 and the first anniversary date of the closing date of the merger transaction with REG and Newco.  The transaction is not final and is subject to approvals by the members or shareholders of the consolidating companies as well as the Company’s ability to secure additional working capital financing to fund operations of the plant and its ability to obtain an amended agreement on existing debt with its senior third party lender, amongst other conditions as stated in the agreement.

The holding company initially filed a registration statement on Form S-4 with the Securities and Exchange Commission on August 10, 2009.  In response to comments received by the SEC, the holding company filed Amendment No’s 1, 2 and 3 to Form S-4 on October 5, 2009, October 26, 2009 and November 12, 2009, respectively.   The document is currently in review with the SEC.

24

Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

This report contains forward-looking statements that involve significant risks and uncertainties.  The following discussion, which focuses on our 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 differ materially from those indicated or anticipated, as discussed in the section entitled “Forward Looking Statements.”  The following discussion of our results of operations and financial condition should also be read in conjunction with our financial statements and notes to financial statements contained in this report.

Introduction

Blackhawk Biofuels, LLC (referred to herein as “we,” “us,” the “company,” “Blackhawk” or “Blackhawk Biofuels, LLC”) is a limited liability company organized under the laws of the State of Delaware on April 28, 2005.  We own and operate a biodiesel production plant in Danville, Illinois.  Until the end of 2008, we were a development stage company with no revenues from operations.  Our plant commenced operations in December 2008 and we received our first revenues from operations in January 2009.

Our plant has a design capacity to produce 45 million gallons of biodiesel per year (“mmgy”).  In addition, at full capacity the plant will produce approximately 16,800 tons of glycerin each year.  The plant consists principally of a materials handling and storage area, a transesterification reactor in which the biodiesel is produced, a storage and loading area for biodiesel and glycerin, truck scales and an administrative office.

With the completion of our animal fat pretreatment facilities in March 2009, our plant has the ability to utilize multiple feedstocks, including soybean oil, other vegetable oils, animal fats and used cooking oil.  The primary product of our plant is fuel grade biodiesel meeting ASTM D6751 standards.

Our plant is presently processing feedstocks, principally animal fats and used cooking oil, into biodiesel under month-to-month toll processing agreements.  These agreements have allowed us to operate our plant, generate some cash flow and meet most of our current obligations other than principal payments on debt and expenses incurred in connection with our proposed combination transaction with REG and two other biodiesel producers.

Merger Agreement to Combine Operations with Renewable Energy Group, Inc. and other Biodiesel Producers

On May 11, 2009 we executed an Agreement and Plan of Merger (the “Merger Agreement”) with Renewable Energy Group, Inc., a Delaware corporation (“REG”), a new Delaware holding company incorporated by REG (“Newco”) and a new Delaware limited liability company wholly owned by Newco.  Newco was created by REG for the purpose of acquiring REG, Blackhawk and two other biodiesel production companies in related transactions through four wholly-owned subsidiaries of Newco.  REG provides biodiesel management, feedstock procurement and product marketing services to the biodiesel market.  The two other companies are Central Iowa Energy, LLC, which owns a 30 mmgy biodiesel production plant in Newton, Iowa, and Western Iowa Energy, LLC, which owns a 30 mmgy biodiesel plant in Wall Lake, Iowa.  On August 7, 2009 we executed an Amended and Restated Agreement and Plan of Merger (the “Amended Merger Agreement”) that amended the terms of the Merger Agreement and was entered into in conjunction with amendments to merger or asset purchase agreements with the other companies.

Ownership of the operations of all four companies will be consolidated in the new holding company, which will be renamed Renewable Energy Group, Inc. following completion of the transaction.  The consolidated company will be owned by current REG stockholders and the current members of the three biodiesel production companies, including Blackhawk.  Under the terms of the Merger Agreement, Unitholders of Blackhawk, other than REG and its affililates, will receive 0.4479 of a share of Newco common stock and 0.0088 of a share of Newco preferred stock for each Class A Unit of Blackhawk held by them.  On that basis, Unitholders of Blackhawk will receive an aggregate of 6,753,100 shares of common stock and 132,679 shares of preferred stock of Newco, subject to

25

Table of Contents

rounding up for fractional shares.  Assuming that all of the related transactions are approved and close concurrently, Blackhawk unitholders will receive approximately 18.2% of the common stock and approximately 1.0% of the preferred stock of Newco to be issued and outstanding upon closing. These percentages are subject to increase if the transaction is not completed with either or both of the Iowa production companies but is completed with Blackhawk and REG.  Restrictions on the transfer of the Newco stock will be in effect until December 31, 2010 or until 180 days after the effective date of a registration statement for a qualifying initial public offering by Newco.  The Amended Merger Agreement provides that upon the closing of the transaction Ronald L. Mapes, the Chair of Blackhawk, will be appointed to serve as a director of Newco until the transfer restrictions on the Newco stock lapse.

The transaction is subject to approval by the stockholders or members of each of the four companies involved, satisfactory arrangements with lenders and other conditions, including customary regulatory approvals and closing conditions.  However, closing of the transaction among REG, Newco and Blackhawk is not conditioned on approval and closing with the other parties to the transaction.  The parties have agreed to cooperate in preparing a registration statement on Form S-4 to register with the Securities and Exchange Commission the Newco common stock and preferred stock to be issued in the transaction. A registration statement on Form S-4 was initially filed with the Securities and Exchange Commission on August 10, 2009 and the document is currently in review.  The registration statement contains a joint proxy statement/prospectus which will be provided to the members and stockholders of each of the parties for consideration in connection with meetings to be held to consider approval of the transaction.   It is presently anticipated that a meeting of the members of Blackhawk and closing of the transaction will occur in December 2009.  Meanwhile, Blackhawk is required to operate its business in the ordinary course and has agreed not to seek an alternative business combination transaction.  The Amended Merger Agreement may be terminated by Blackhawk, REG or Newco if the Closing does not occur by December 31, 2009, subject to limitations or extensions provided in the agreement or by mutual agreement of the parties.

A copy of the Amended Merger Agreement was filed as an exhibit to our Current Report on Form 8-K dated August 7, 2009 and is incorporated herein by reference.  The foregoing description of the Amended Merger Agreement is qualified in its entirety by reference to the full text of the Amended Merger Agreement.

We have several pre-existing relationships with REG.  REG purchased 1,000,000 of our Series A Units in our public offering which closed in March 2008.  In May 2008, REG supplied $21,700,000 in financing to us under a Subordinated Loan Agreement dated May 9, 2008 and a Convertible Subordinated Note.  We have issued 985,069 additional Class A Units to REG in lieu of cash interest otherwise due under the Convertible Subordinated Note.  The Convertible Subordinated Note is convertible into our Class A Units upon maturity of the note, prepayment of the note, the closing of an initial public offering by REG, a change of control of REG or three years after the date of the note at a conversion price of $2.00 per Unit.  REG also holds a warrant for the purchase of 51,563 Class A Units of the Company at an exercise price of $.01 per Unit.  We have a Management and Operational Services Agreement (“MOSA”) dated May 9, 2008 under which two REG affiliates, REG Services Group, LLC (“REG Services”) and REG Marketing & Logistics Group, LLC (“REG Marketing”) have responsibility for the overall management of our plant, procurement of feedstocks, marketing of our production, and performance of administrative, sales and marketing functions for us.  The MOSA also provides for the extension of trade credit by REG Services and REG Marketing to the Company in connection with the purchase of raw materials and sale of biodiesel by the Company and provides that REG Services is entitled to appoint one member to our board of managers.  We have also entered into toll processing agreements with REG Marketing which provide for us to process feedstock into biodiesel for the account of REG Marketing during each of the monthly periods from May 2009 through November 2009.  The foregoing agreements have previously been filed as exhibits to reports filed by us with the Securities and Exchange Commission.  The foregoing description of those agreements is qualified in its entirety by reference to the full text of those agreements.  For purposes of this report, references hereafter to REG shall be deemed to include REG Services and REG Marketing.

26

Table of Contents

Fiscal Three Months Results of Operations

During the three months ended September 30, 2009, we have been processing feedstocks, principally animal fats and used cooking oil, into biodiesel under month-to-month toll processing agreements.  These operations have allowed us to generate revenues sufficient to meet current cash operating expenses excluding principal payments on debt and expenses incurred in connection with our proposed combination transaction with REG and two other biodiesel producers.  Because we were in the development stage through December 31, 2008, we had no revenues from operations during the three months ended September 30, 2008.  The following table summarizes information from our financial statements and you should read these tables in conjunction with our financial statements and the notes thereto contained in this report.

Revenues

Our revenues for the three months ended September 30, 2009 consisted of $2,638,575 in sales to REG and we had no sales of biodiesel to parties other than REG during the period.  The sales to REG consisted entirely of payments received under monthly toll processing agreements for the production of biodiesel.  Revenues from our toll processing agreements with REG are based on a per gallon production fee which varies based on the quantity produced.  Because we were in the development stage through December 31, 2008, we had no revenues from operations during the three months ended September 30, 2008.  Consequently, there is no comparison in revenues that can be made between the 2009 and 2008 periods.

The major challenge that we and others in the biodiesel industry face is the low price for biodiesel in the market.  Biodiesel prices generally correlate with the price of diesel fuel.  With energy prices generally, the price of diesel fuel has declined in the past year and has remained lower than the price of biodiesel.  This factor, combined with the cost of biodiesel production, has resulted in an adverse biodiesel market, excess capacity in the industry relative to demand, curtailment of production and decreased biodiesel revenues for us and others in the industry.

Cost of Goods Sold

Our cost of goods sold in the three month period ended September 30, 2009 was $2,604,363.  Normally, the principal component of the cost of goods sold in the production of biodiesel is the soybean oil and animal fats feedstock that may account for approximately 80% of the cost of operations of a biodiesel plant.  Other cost components normally include methanol and other chemicals used in the production process, natural gas and electricity to power the plant, labor and depreciation on plant and equipment.  Cost of goods sold would also reflect gain or loss in the fair value of commodities derivative instruments utilized to protect against variations in the feedstock and biodiesel markets.  We are currently operating pursuant to toll processing agreements under which we produce biodiesel for REG and other third parties using feedstock supplied by REG and the third parties.  Under the toll processing agreements, because we do not purchase feedstocks and sell biodiesel for our own account, the current principal components of our cost of goods sold are processing chemicals, utilities and depreciation.

27

Table of Contents

Cost of goods sold was approximately 99% of our revenues during the period ended September 30, 2009.  This is principally a result of our less than optimal plant utilization during the period and high depreciation relative to our level of operations.  Our plant utilization during the three month period was approximately 58% of our plant capacity.

The market price for soybean oil relative to the market price for biodiesel has made it difficult for our plant and others in the industry to operate profitably.  Our pretreatment facility for animal fats was completed in March 2009.  Our ability to utilize animal fats and used cooking oil, which have historically been less costly than soybean oil, has improved our ability to operate on a cash breakeven basis.  However, this development has not improved our financial position sufficiently to allow us to operate successfully as an independent producer and we have found it necessary to enter into toll processing agreements with REG in order to operate at a level that is marginally sustainable from a current operating standpoint.  We have been operating under toll processing agreements using animal fat and used cooking oil feedstocks.  Greater demand for animal fats and used cooking oil in the biodiesel industry could increase the price of those feedstocks and reduce the favorable impact that animal fats and used cooking oil have on our results even in a toll processing mode of operation.

Operating Expenses

For the three months ended September 30, 2009, our operating expenses increased $581,824 or 154% from $378,635 to $960,459 as compared to the three months ended September 30, 2008.  The increase was due to a $291,913 increase in general and administrative expense and a $289,911 increase in professional fees.  The increase in general and administrative expense is principally due to the payment of monthly fees to REG under the MOSA and rail load out fees paid to Bunge North America, Inc. at our Danville plant site.  A significant portion of the professional fees during the three months ended September 30, 2009 were incurred in connection with our proposed combination transaction with REG and two other biodiesel producers.

Other Income (Expense)

Other income (expense) for the three months ended September 30, 2009 was ($746,669) compared to other income (expense) of ($192,417) in the three months ended September 30, 2008, an increase of $554,252 or 288%.  The result in the September 30, 2009 period was principally attributable to interest expense on financing for our plant and operations, which totaled $731,598.  By contrast, during the three months ended September 30, 2008, other income (expense) principally reflected a $264,598 loss on commodity derivative instruments, which was partially offset by interest income of $51,165 and a change in the fair value of an interest rate swap agreement of $21,016.  The interest income during the three months ended September 30, 2008 was the result of the investment of the proceeds of our public offering of Units during that period.  The interest expense in the three months ended September 30, 2009 is a direct consequence of the investment of the proceeds of our offering and debt financing proceeds in the construction and commencement of operations of our plant.  The $781,133 difference between interest income in the prior period and interest expense in the three months ended September 30, 2008 is the principal factor impacting the change in other income (expense) between the periods.

Net Loss

Our net loss for the three months ended September 30, 2009 was $1,672,916 which was principally a consequence of our loss from operations and interest expense.  In the three months ended September 30, 2008, we had a net loss of $571,052, which was primarily the result of operating expenses and the loss on commodity derivative instruments during that period.  The increase in net loss between the periods was $1,101,864 or 193%.

28

Table of Contents

Fiscal Nine Months Results of Operations

Following the completion of our plant and commencement of plant operations to process biodiesel from soybean oil feedstock, we received our first revenues from operations and transitioned from the development stage to the operations stage at the beginning of 2009.  Construction of a preliminary treatment facility to process animal fats at our plant was substantially completed on March 23, 2009. Beginning in March 2009, we have been processing feedstocks, principally animal fats and used cooking oil, into biodiesel under month-to-month toll processing agreements, which has allowed us to generate revenues sufficient to meet current cash operating expenses excluding principal payments on debt and expenses incurred in connection with our proposed combination transaction with REG and two other biodiesel producers.   Because we were in the development stage through December 31, 2008, we had no revenues from operations during the nine months ended September 30, 2008.  The following table summarizes information from our financial statements and you should read these tables in conjunction with our financial statements and the notes thereto contained in this report.