Iowa Renewable Energy, LLC - FORM 10-Q - August 10, 2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the quarterly period ended June 30, 2012
 
 
 
OR
 
 
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 000-52428
 
IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
Iowa
 
20-3386000
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1701 East 7th Street, Washington, Iowa 52353
(Address of principal executive offices)
 
(319) 653-2890
(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 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o
Accelerated Filer  o
Non-Accelerated Filer o
Smaller Reporting Company x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 

As of August 10, 2012, there were 26,331 membership units outstanding.

1

INDEX



2

PART I.        FINANCIAL INFORMATION

Item 1.    Financial Statements

IOWA RENEWABLE ENERGY, LLC
UNAUDITED BALANCE SHEETS
 ASSETS
June 30, 2012
 
September 30, 2011
Current Assets
 
 
 
Cash and cash equivalents
$
316,620

 
$
210,533

Cash, restricted by loan agreement
—

 
929,520

Accounts receivable, net allowance for doubtful accounts of $37,682 and none
330,865

 
2,461,379

Inventory
4,919,997

 
7,081,589

Prepaid and other assets
191,287

 
468,506

 
5,758,769

 
11,151,527

 
 
 
 
Property and Equipment
 
 
 
Land
420,000

 
420,000

Plant and processing equipment
40,743,394

 
40,719,594

Office building, furniture and fixtures
627,916

 
627,916

Equipment and vehicles
240,216

 
240,216

 
42,031,526

 
42,007,726

Accumulated depreciation
(13,220,031
)
 
(11,244,671
)
 
28,811,495

 
30,763,055

 
 
 
 
Other Assets
 
 
 
Cash, restricted by loan agreement
—

 
816

Financing costs, net
37,500

 
—

 
37,500

 
816

 
 
 
 
Total Assets
$
34,607,764

 
$
41,915,398

 
 
 
 
LIABILITIES AND MEMBERS' EQUITY

 

Current Liabilities

 

Deferred revenue
$
569,680

 
$
—

Current maturities of long-term debt
23,984,718

 
2,883,595

Revolving line of credit
—

 
5,974,473

Accounts payable and accrued expenses
5,600,417

 
5,438,864

Total current liabilities
30,154,815

 
14,296,932



 

Long-Term Debt
—

 
24,537,769



 

Commitments
—

 
—



 

Members' Equity

 

Members' contributions, net of issuance costs, units outstanding June 30, 2012 and September 30, 2011 26,331
23,165,422

 
23,165,422

Accumulated (deficit)
(18,712,473
)
 
(20,084,725
)
Total members' equity
4,452,949

 
3,080,697

 
 
 
 
Total Liabilities and Members' Equity
$
34,607,764

 
$
41,915,398

 
 
 
 

See Notes to Unaudited Financial Statements
IOWA RENEWABLE ENERGY, LLC
UNAUDITED STATEMENTS OF OPERATIONS

Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended

June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011


 

 

 

Revenues:


 


 

 

Sales
$
25,563,070

 
$
14,401,278

 
$
77,586,201

 
$
14,530,080

Federal and state incentives
138,926

 
1,261,824

 
1,783,600

 
1,261,824


25,701,996

 
15,663,102

 
79,369,801

 
15,791,904



 


 

 

Cost of Sales
24,154,746

 
15,560,543

 
75,541,906

 
17,610,531



 

 

 

Gross Profit (Loss)
1,547,250

 
102,559

 
3,827,895

 
(1,818,627
)


 

 

 

Operating Expenses

 

 

 

General and administrative
312,114

 
216,285

 
1,013,504

 
483,382

Depreciation
10,459

 
10,459

 
31,379

 
31,379


322,573

 
226,744

 
1,044,883

 
514,761



 

 

 

Income (loss) before other income (expense)
1,224,677

 
(124,185
)
 
2,783,012

 
(2,333,388
)


 

 

 

Other Income (Expense)

 

 

 

Other income
42,867

 
148

 
88,560

 
96,808

Interest expense
(406,843
)
 
(641,091
)
 
(1,499,320
)
 
(1,823,180
)

(363,976
)
 
(640,943
)
 
(1,410,760
)
 
(1,726,372
)
 
 
 
 
 
 
 
 
Net Income (loss)
$
860,701

 
$
(765,128
)
 
$
1,372,252

 
$
(4,059,760
)


 

 

 

Weight Average Units Outstanding
26,331

 
26,331

 
26,331

 
26,331



 

 

 

Net Income (loss) Per Unit - basic and diluted
$
32.69

 
$
(29.06
)
 
$
52.12

 
$
(154.18
)
 
 
 
 
 
 
 
 

See Notes to Unaudited Financial Statements




IOWA RENEWABLE ENERGY ,LLC
UNAUDITED STATEMENTS OF CASH FLOWS

 Nine Months Ended
 
Nine Months Ended

June 30, 2012
 
June 30, 2011
Cash Flows from Operating Activities

 

Net income (loss)
$
1,372,252

 
$
(4,059,760
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

Depreciation
1,975,360

 
1,971,763

Amortization
37,500

 
281,806

Change in working capital components:

 

Decrease in due from broker
—

 
310,390

(Increase) decrease in accounts receivable
2,130,514

 
(1,946,992
)
(Increase) decrease in inventory
2,161,592

 
(3,910,616
)
(Increase) decrease in prepaids and other assets
277,219

 
(36,380
)
Increase in deferred revenue
569,680

 
—

Increase in accounts payable and accrued expenses
161,553

 
868,377

Net cash provided by (used in) operating activities
8,685,670

 
(6,521,412
)


 

Cash Flows from Investing Activities

 

Purchase of property and equipment
(23,800
)
 
(16,078
)
Decrease in restricted cash
930,336

 
729,300

   Net cash provided by investing activities
906,536

 
713,222



 

Cash Flows from Financing Activity
 
 
 
Payment of loan origination fees
(75,000
)

—

(Payment) proceeds on revolving line of credit
(5,974,473
)
 
5,400,521

(Payment) on long-term borrowings
(3,436,646
)
 
(36,365
)
Net cash provided by (used in) financing activities
(9,486,119
)
 
5,364,156

 
 
 
 
Net increase (decrease) in cash and cash equivalents
106,087

 
(444,034
)


 

Cash and cash equivalents:

 

Beginning
210,533

 
479,309

Ending
$
316,620

 
$
35,275



 

Supplemental Disclosure of Cash Flow Information

 

Cash payments for interest
$
1,461,820

 
$
1,425,365


See Notes to Unaudited Financial Statements.

Note 1.        Nature of Business and Significant Accounting Policies

Nature of business:

Iowa Renewable Energy, LLC (the Company), located in Washington, Iowa, was formed in April 2005 to pool investors to build a biodiesel manufacturing plant with an annual capacity of between 25 million and 30 million gallons, depending on feedstock used. The Company was in the development stage until July 2007, when it commenced operations. See Note 5 for discussion of management's plans for current operations.

Basis of presentation:

The accompanying unaudited condensed interim 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 September 30, 2011 included in the Company's Annual Report on Form 10-K. In the opinion of management, the condensed interim financial statements reflect all adjustments (consisting of normal recurring accruals) that we consider necessary to present fairly the Company's results of operations, financial position and cash flows. The results reported in these condensed interim financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.

Significant accounting policies:

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations of credit risk: The Company's cash balances are maintained in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Cash and cash equivalents: The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Restricted cash: Included deposits to custodial accounts held by our lender. Previous loan agreements required a debt service reserve and a capital improvement reserve. As part of the term loan addendum agreement dated January 11, 2012, the Debt Service and Capital Improvement reserve requirements have been waived and the accounts were closed, therefore there was no restricted cash as of June 30, 2012.

As part of the September 2010 Line of Credit agreement, proceeds from the line of credit and collections on accounts receivables were required to be deposited into a cash collateral account which was included in current assets. The Company periodically, but not more than once each week, requested the bank to transfer funds from the cash collateral account to the general operating account. The September 2010 Line of Credit agreement was paid in full in January 2012, thus the lenders released the lien against the cash collateral account. The restricted cash balances of none and $929,520 are shown as of June 30, 2012 and September 30, 2011, respectively.

Accounts receivable: Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on historical experience and current economic conditions. Allowance for doubtful accounts had balances of $37,682 and none as of June 30, 2012 and September 30, 2011, respectively.
 
The Company's policy is to charge simple interest on trade receivables past due balances; accrual of interest is discontinued when management believes collection is doubtful. Receivables are considered past due based upon payment terms set forth at the date of the related sale. The Company had no receivables accruing interest at June 30, 2012 or September 30, 2011.

Inventory: Inventory is valued at the lower of cost or market using the first-in, first out (FIFO) method. Inventory consists of the following as of June 30, 2012 and September 30, 2011:

 
June 30, 2012
 
September 30, 2011
Raw material
$
2,812,376

 
$
1,585,750

Finished goods
2,107,621

 
5,495,839

 
$
4,919,997

 
$
7,081,589


Property and equipment: Property and equipment is stated at cost. Depreciation of such amounts commenced when the plant began operations. Depreciation is computed using the straight-line method over the following estimated useful lives:

 
Minimum Years
Maximum Years
 
 
 
Plant and process equipment
10
20
Office building
10
20
Office equipment
3
7
Other equipment
3
7

Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized.

The Company reviews its property and equipment annually for impairment or whenever events indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recorded if the sum of the future undiscounted cash flows is less than the carrying amount of the asset. The amount of the loss would be determined by comparing the fair market values of the asset to the carrying amount of the asset. No loss has been recorded during the three or nine months ended June 30, 2012 or 2011.

Revenue recognition and deferred revenue: Revenue from the production of biodiesel and related products is recorded upon transfer of the risks and rewards of ownership and delivery to customers. Interest income is recognized as earned. Cash received in advance of providing product is recorded as deferred revenue.

Federal incentive payments: Revenue from federal incentive programs is recorded when the Company has sold blended biodiesel and satisfied the reporting requirements under the applicable program. When it is uncertain that the Company will receive full allocation and payment due under the federal incentive program, it derives an estimate of the incentive revenue for the relevant period based on various factors including the most recently used payment factor applied to the program. The estimate is subject to change as management becomes aware of increases or decreases in the amount of funding available under the incentive programs or other factors that affect funding or allocation of funds under such programs. The Federal Blenders credit expired on December 31, 2009 and only in December 2010 was it extended for 2011 and made retroactive for 2010. The Federal Blenders Credit once again expired on December 31, 2011, and to date has not been renewed.

State incentive payments: Revenue from state incentive programs is recorded when the Company has produced biodiesel and satisfied the reporting requirements under the applicable program. The state production incentive runs from 2012 through 2014 and is based on the first 25 million gallons produced during a calendar year; the annual rate is based on a declining scale during the three year period.

Cost of sales: The primary components of cost of sales from the production of biodiesel products are raw materials (soybean oil, animal fats, hydrochloric acid, methanol, sodium methylate, and chemicals), energy (natural gas and electricity), and labor. Cost of sales detail for the three and nine month periods ended June 30, 2012 and 2011 is as follows:


 
Three Months ended 6/30/12
 
Three Months ended 6/30/11
 
Nine Months Ended 6/30/12
 
Nine Months Ended 6/30/11
Cost of Revenue/Sales
Dollars
Percentage
 
Dollars
Percentage
 
Dollars
Percentage
 
Dollars
Percentage
 
 
 
 
 
 
 
 
 
 
 
 
Input costs (soybean oil, animal fats, chemicals, etc.)
$
22,279,255

92.23
%
 
$
13,909,776

89.39
%
 
$
70,042,791

92.72
%
 
$
14,063,802

79.86
%
Plant wages and salaries
212,798

0.88

 
207,718

1.33

 
649,792

0.86

 
443,717

2.52

Utilities and waste disposal
506,763

2.10

 
241,180

1.55

 
1,346,221

1.78

 
401,392

2.28

Fees-procurement, operation mgmt
132,000

0.55

 
253,791

1.63

 
497,740

0.66

 
253,791

1.44

Depreciation
649,095

2.69

 
647,112

4.16

 
1,943,981

2.57

 
1,940,384

11.02

Maintenance, supplies and other expenses
374,835

1.55

 
300,966

1.93

 
1,061,381

1.41

 
507,445

2.88

Total cost of revenue/sales
$
24,154,746

100.00
%
 
$
15,560,543

100.00
%
 
$
75,541,906

100.00
%
 
$
17,610,531

100.00
%

Shipping and handling costs: Shipping and handling costs are expensed as incurred and are included in the cost of sales.

Income taxes: The Company is organized as a limited liability company which is accounted for like a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, the Company's earnings and losses are included in the income tax returns of its members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

Income (Loss) per unit: Income (Loss) per unit has been computed on the basis of the weighted average number of units outstanding during each period presented.
 
Note 2.        Major Customer

On January 29, 2010, the Company and WMG Services LLC (WMG) entered into a Management Services Agreement (Agreement). The Agreement provides that WMG will provide certain facility administration services; accounting services; and marketing, sales, feedstock sourcing and logistic services for the Company in exchange for a monthly asset utilization fee and a monthly performance fee. These fees are determined on a sliding fee scale tied to production and profitability. The Agreement commenced June 30, 2010 (Effective Date). The Agreement shall continue for a term of twenty-four (24) months from the Effective Date. Thereafter, the Agreement shall automatically renew for additional successive terms of twelve (12) months, unless either party gives ninety (90) days notice of its desire not to renew. The Agreement may also be terminated for a failure to cure a material breach of the Agreement thirty (30) days after receipt of notice of the breach, or for a change of control. On March 1, 2012 the Company sent notification to WMG of its intent to not renew the Management Services Agreement beyond the 24 month term.

Sales to WMG for the three and nine months ended June 30, 2012 were approximately none and $6,151,000, respectively. There were accounts receivable from WMG of approximately $135,000 and $100,000 recorded as of June 30, 2012 and September 30, 2011, respectively. The total fees expensed under this agreement for the three and nine month periods ended June 30, 2012 and 2011 were $132,000 and $497,740, and $254,000 and $254,000 respectively, of which $36,000 was payable as of June 30, 2012.

On January 13, 2012, the Company entered into an agreement with Gavilon, LLC (Gavilon) pursuant to which the Company will purchase from Gavilon all of the feedstock that is required to produce biodiesel during calendar year 2012 and that the Company will sell all of the biodiesel produced to Gavilon. This is an exclusive relationship where the Company has agreed not to purchase feedstock from any other supplier and not to produce biodiesel for any other customers during calendar year 2012. The Agreement commenced January 1, 2012 (Effective Date) and shall continue for a term of twelve (12) months from the effective date. Thereafter, the Agreement shall automatically renew for additional successive terms of twelve (12) months, unless either party gives ninety (90) days notice of its desire not to renew.

Sales to Gavilon for the three and nine months ended June 30, 2012 were approximately $25,248,000 and $56,855,000, respectively. There was deferred revenue recorded from Gavilon of approximately $570,000 as of June 30, 2012 and accounts receivable from Gavilon of approximately $1,732,000 as of September 30, 2011. Accounts payable to Gavilon as of June 30, 2012 were approximately $4,357,000.

One other customer represented a significant portion of the Company's biodiesel sales prior to the Gavilon contract. That customer had sales of $10,959,000 for the nine months ended June 30, 2012, all of which were in the quarter ended December 31, 2011.

Note 3.        Long-Term Debt and Line of Credit

Long-term debt consists of the following as of June 30, 2012:

Note payable to MLIC Asset Holdings, LLC (A) (MLIC)
$
23,788,364

Note payable to the Iowa Department of Economic Development (B)
—

Note payable to the Iowa Department of Transportation (C)
196,354

 
$
23,984,718


(A)    On October 26, 2006, the Company entered into a $34,715,000 construction-term loan agreement with MLIC Asset Holdings, LLC which was used to complete the biodiesel project. The loan consisted of two phases: a “construction phase” where the Company made periodic requests for fund advances to meet construction obligations and at the completion of construction, the loan converted to a “senior debt instrument.” Previously, the note bore interest at prime plus .25% and was due in monthly principal and interest payments of $373,000. The Company violated the debt covenants; however, MLIC has waived these violations and has entered into a new amendment on January 11, 2012 which extends the maturity date to January 5, 2013. This new amendment bears interest at 6% plus the one month LIBOR rate (currently 6.25%) and requires monthly principal and interest payments of $350,000 plus additional principal payments if monthly earnings before taxes, depreciation and amortization exceed $300,000. This new amendment includes revised covenants including, the requirement to maintain tangible net worth of at least $2,000,000 through June 30, 2012 and at least $2,250,000 from July 1, 2012 until the maturity date of the loans on January 5, 2013. The Company is also required to maintain a cash flow coverage ratio (monthly EBITDA divided by monthly principal and interest payments) of 1:1 starting in February 2012. The loan is secured by substantially all assets of the Company.

The Company's plans with respect to its term loan are discussed in greater detail below in Note 5.

(B)    The Company has a $300,000 loan agreement with the Iowa Department of Economic Development. The loan is noninterest-bearing and due in monthly payments of $5,000 beginning December 2006 for a term of 60 months with a balance as of June 30, 2012 and September 30, 2011 of none and $55,000, respectively. Borrowings under this agreement are collateralized by substantially all of the Company's assets and will be subordinate to the $34,715,000 financial institution debt. On November 18, 2010, the Company requested from the IDED a deferral of payments for the period January 1, 2011 through June 30, 2011. On December 16, 2010 the IDED board approved the IRE deferral request with the requirement of a 6.0% interest accrual on the loan for that period. Additionally, in March 2011 the IDED board approved an extension of this agreement through May 2012. This loan was repaid in full in May 2012, however, the Company is obligated to meet certain job retention obligations through 2014.

(C)    The Company has a $132,000 loan agreement and a $168,000 forgivable grant agreement with the Iowa Department of Transportation. The loan bears interest at 3.67% beginning June 2008 and is due in semi-annual payments of $14,569 beginning December 2008 for a term of 60 months. The balance at June 30, 2012 and September 30, 2011 was $28,354 and $55,696, respectively. Borrowings under this agreement are collateralized by substantially all of the Company's assets and are not subordinate to the $34,715,000 financial instrument debt. The grant is forgivable upon completion of the loan agreement.

Maturities of long-term debt are as follows:
Year ending June 30:
 
 
2013
 
$
23,816,718

2014
 
168,000

 
 
$
23,984,718



On September 2, 2010 the Company entered into a short-term line of credit where MLIC Asset Holdings, LLC, Federation Bank, and Washington State Bank will provide up to a $6,000,000 revolving line of credit to be used for the purchase of raw materials. This line of credit matured on January 2, 2012 and therefore no amount is outstanding on this line of credit at June 30, 2012. The balance on this line of credit on September 30, 2011 was $5,974,473.

On January 11, 2012, the Company entered into a new short-term line of credit with Washington State Bank and Federation Bank to provide up to a $1,000,000 revolving line of credit to be used for operations. The line of credit will mature on January 5, 2013 at which time all principal and interest must be paid. Interest on this line of credit is at 6%. At June 30, 2012, no amount is outstanding on this line of credit. The full amount of the line of credit is currently available.

Note 4.        Lease Commitment and Other Contingencies

The Company leases a copier under a long-term operating lease that will expire in January 2016. The lease requires payments of $237 per month plus applicable taxes. The Company leases 25 railcars under long-term operating leases that will expire through 2017. The leases require payments of $14,070 per month once all cars are placed. Rental expense was $47,000 and $159,800 for the three and nine months ended June 30, 2012, respectively. Minimum lease payments under these operating leases for future years are as follows:

Year ending September 30:
 
2012
$
42,891

2013
171,564

2014
171,564

2015
159,069

2016
155,388

2017
35,220

 
$
735,696


The European Union is currently leveling tariffs on biofuels exported from the United States due to subsidies paid on biofuels. These tariffs went into effect March 13, 2009. In July 2009, the European Commission decided to extend these tariffs beyond their initial July 2009 expiration date until 2014. The Company will likely face increased competition for sales of its biodiesel and international demand for its product will likely decrease as a result of these tariffs. If any governmental supports are modified or permanently removed and decreased demand for the Company's biodiesel results, its profitability will be reduced. Because biodiesel has historically been more expensive to produce than diesel fuel, the biodiesel industry has depended on governmental incentives that have effectively brought the price of biodiesel more in line with the price of diesel fuel to the end user. These incentives have supported a market for biodiesel that might not exist without the incentives. The most significant of these incentives for biodiesel is the blenders' tax credit which provides a $1.00 tax credit per gallon of pure biodiesel, or B100, to the first blender of biodiesel with petroleum based diesel fuel. The blenders' tax credit expired on December 31, 2011. However, many in the biodiesel industry believe that due to the biodiesel use requirements in RFS2, demand for biodiesel will continue during 2012, despite the loss of the biodiesel blenders' credit. This results from the fact that certain obligated parties under the RFS2 program are required to use a certain amount of biomass based diesel.

In order to track compliance with RFS2, the EPA created a numbering system called the renewable identification number (RIN). Biodiesel producers who are registered with the EPA are required to generate RINs for each gallon of biodiesel produced. These RINs are typically sold along with the biodiesel so that certain fuel blenders who are required to use renewable fuels under RFS2 can redeem these RINs in order to comply with RFS2. However, it is possible to separate the RINs from the biodiesel that is produced and sell the RINs separately. The RINs have value to fuel blenders who use less renewable fuels than they are required to use under the RFS2. These fuel blenders can purchase RINs to meet their requirements under the RFS2 without actually using renewable fuels. This may occur in regions of the United States where it is impossible or impractical to use renewable fuels directly. The value of RINs typically changes in relation to the difference between the market price of biodiesel and the cost of petroleum based diesel which creates a market for biodiesel, regardless of whether it is more expensive than petroleum based diesel.

Note 5.        Going Concern and Management's Plans

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Through June 30, 2012, the Company has generated accumulated losses of $18,712,473, has experienced significant volatility in its input costs and undertaken significant borrowings to finance the construction of the biodiesel plant. The loan agreements with the Company's lender contained covenants which the Company was not in compliance with as of December 31, 2011. However, on January 11, 2012 the Company's lender waived these violations and entered into a new amendment which extends the maturity date of the debt through January 5, 2013. See Note 4 for details of new amendment terms. This new amendment includes revised covenants including, the requirement to maintain tangible net worth of at least $2,000,000 through June 30, 2012 and at least $2,250,000 from July 1, 2012 until the maturity date of the loans on January 5, 2013. The Company is also required to maintain a cash flow coverage ratio (monthly EBITDA divided by monthly principal and interest payments) of 1:1 starting in February 2012.

Since the Company's credit agreements mature on January 5, 2013 and management does not expect that the Company will have sufficient cash to repay the entire amounts due at the maturity date, management is in the process of evaluating its options with respect to refinancing its long-term debt. Management has been in discussions with various lenders regarding potential refinancing options for the Company's long-term debt. No agreements have been reached with respect to any such refinancing.

Also on January 13, 2012, the Company entered into an agreement with Gavilon, LLC (Gavilon) that the Company will purchase from Gavilon all of the feedstock that is required to produce biodiesel during calendar year 2012 and that the Company will sell all of the biodiesel produced to Gavilon. This is an exclusive relationship where the Company has agreed not to purchase feedstock from any other supplier and not to produce biodiesel for any other customers during calendar year 2012. In exchange for this exclusive relationship, Gavilon has agreed to purchase a minimum amount of biodiesel from the Company during calendar year 2012 which equals approximately 50% to 70% of the Company's total production capacity, depending on which feedstock is used. In the event Gavilon does not purchase the minimum amount of biodiesel during any month, Gavilon has agreed to make a minimum cash payment. This agreement renews annually unless either Party provides the other Party with written notice of nonrenewal no less than 90 days prior to the end of the initial or then-current renewal period. Management anticipates that this agreement with Gavilon will allow the Company to operate profitably during the term of the agreement and to recommence making payments on our long-term loan with our primary lender and to remain in compliance with our loan covenants during our fiscal year 2012, although there can be no assurances.




3

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

Iowa Renewable Energy, LLC (referred to in this report as "the Company," "we," "us," or "IRE") prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended June 30, 2012 and 2011. This discussion should be read in conjunction with the financial statements and notes and the information contained in our annual report on Form 10-K for the fiscal year ended September 30, 2011.

Forward Looking Statements

This report contains forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," or "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

•
Failure to comply with loan covenants contained in our financing agreements;
•
Our ability to continue to export our biodiesel;
•
The continued imposition of tariffs or other duties on biodiesel imported into Europe;
•
Decreases in the demand for biodiesel;
•
Actual biodiesel and glycerin production varying from expectations;
•
Economic consequences of the domestic and global economic downturn;
•
Availability and cost of products and raw materials, particularly soybean oil, animal fats, natural gas and methanol;
•
Changes in the price and market for biodiesel and its co-products, such as glycerin;
•
Our ability to market and our reliance on third parties to market our products;
•
Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as:
◦
national, state or local energy policy;
◦
federal and state biodiesel tax incentives;
◦
the RFS or other legislation mandating the use of biodiesel or other lubricity additives; or
◦
environmental laws and regulations that apply to our plant operations and their enforcement;
•
Total U.S. consumption of diesel fuel;
•
Fluctuations in petroleum and diesel prices;
•
Changes in plant production capacity or technical difficulties in operating the plant;
•
Changes in our business strategy, capital improvements or development plans;
•
Results of our hedging strategies;
•
Competition with other manufacturers in the biodiesel industry;
•
Our ability to generate free cash flow to invest in our business and service our debt (and the flexibility of our lender in regards to our debt);
•
Our ability to retain key employees and maintain labor relations;
•
Changes and advances in biodiesel production technology;
•
Competition from alternative fuels and alternative fuel additives;
•
Our ability to generate profits; and
•
Other factors described elsewhere in this report.

We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, 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 completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

Overview

During our quarter ended June 30, 2012, we have been producing biodiesel pursuant to an agreement with Gavilon, LLC ("Gavilon"). Our agreement with Gavilon provides that we will purchase from Gavilon all of the feedstock that we require to produce biodiesel during calendar year 2012 and that we will sell all of the biodiesel we produce to Gavilon. This is an exclusive relationship where we have agreed not to produce biodiesel for any other customers during calendar year 2012. In exchange for

4

this exclusive relationship, Gavilon has agreed to purchase a minimum amount of biodiesel from us during calendar year 2012 which equals approximately 50% to 70% of our total production capacity, depending on the feedstock used. In the event Gavilon does not purchase the minimum amount of biodiesel from us during any month, Gavilon has agreed to make a minimum cash payment to us. Our agreement with Gavilon has allowed us to recommence making payments on our long-term loan with our primary lender. We are allowed to sell the co-products of the biodiesel production process outside of the Gavilon agreement which provides us with additional revenue.

During our quarter ended March 31, 2012, we amended and extended our credit agreements with our primary lender, MLIC Asset Holdings, LLC ("MLIC"). We extended the maturity date of our term loan with MLIC from January 2, 2012 until January 5, 2013. Further, we secured a $1 million line of credit with Washington State Bank and Federation Bank and repaid the balance of our prior line of credit with MLIC. Pursuant to our agreement with MLIC, we will pay a variable interest rate on our term loan at a rate of 6% above the one month London Interbank Offered Rate (LIBOR), adjusted monthly and we will pay 6% interest on our $1 million line of credit. Prior to the end of our quarter ended March 31, 2012, it came to MLIC's attention that our amended credit agreements which were executed in early January 2012 failed to waive certain loan defaults which occurred prior to the time when we amended our loan agreements with MLIC. In order to remedy this situation, we entered into a Fourth Amendment Construction-Term Loan Agreement on May 15, 2012 which waives this prior non-compliance.

During 2011, the biodiesel industry was benefited by a tax incentive called the Volumetric Ethanol Excise Tax Credit ("VEETC"). This tax incentive is commonly referred to as the biodiesel blenders' credit. The biodiesel blenders' credit provided a $1 credit to fuel blenders for each gallon of biodiesel that they blended with petroleum based diesel. The biodiesel blenders' credit expired on December 31, 2011. However, management believes that so long as the biodiesel use requirements of the Federal Renewable Fuels Standard (RFS) continue, including the requirement specifically for biomass-based diesel, there will be demand for biodiesel and the price of biodiesel will remain at levels that will allow us to operate the biodiesel production facility, despite the expiration of the biodiesel blenders' credit. Further, due to our agreement with Gavilon, we anticipate being able to profitably operate the biodiesel plant during the rest of our 2012 fiscal year.

Results of Operations for the Three Months Ended June 30, 2012 and 2011
 
The following table shows the results of our operations and the percentage of revenues, cost of sales, operating expenses and other items to total revenues in our unaudited statement of operations for the three months ended June 30, 2012 and 2011:

 
Three Months Ended
 
Three Months Ended
 
June 30, 2012
 
June 30, 2011
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenue
$
25,701,996

 
100.00
 %
 
$
15,663,102

 
100.00
 %
Cost of Sales
24,154,746

 
93.98
 %
 
15,560,543

 
99.35
 %
Gross Profit (Loss)
1,547,250

 
6.02
 %
 
102,559

 
0.65
 %
Operating Expenses
322,573

 
1.26
 %
 
226,744

 
1.45
 %
Operating Income (Loss)
1,224,677

 
4.76
 %
 
(124,185
)
 
(0.79
)%
Other Income
42,867

 
0.17
 %
 
148

 
—
 %
Interest Expense
(406,843
)
 
(1.58
)%
 
(641,091
)
 
(4.09
)%
Net Income (Loss)
$
860,701

 
3.35
 %
 
$
(765,128
)
 
(4.88
)%

Revenues

Our revenues from operations are primarily derived from biodiesel sales, glycerin sales and fatty acid and soapstock sales. All of our biodiesel sales are pursuant to our agreement with Gavilon which provides for a minimum amount of biodiesel production or a minimum cash payment by Gavilon. We also received revenue from federal and state biodiesel production incentives. The following table shows the sources of our revenues for the three months ended June 30, 2012 and 2011.


5

 
Three Months Ended
 
Three Months Ended
 
June 30, 2012
 
June 30, 2011
Revenue Source
Amount
 
% of Revenues
 
Amount
 
% of Revenues
Biodiesel sales
$
24,642,595

 
95.88
%
 
$
11,802,026

 
75.35
%
Co-product sales
920,475

 
3.58
%
 
291,012

 
1.86
%
Federal and state incentives
138,926

 
0.54
%
 
1,261,824

 
8.06
%
RIN Revenue
—

 
—
%
 
2,305,973

 
14.72
%
Other revenue
—

 
—
%
 
2,267

 
0.01
%
Total sales revenue
$
25,701,996

 
100.00
%
 
$
15,663,102

 
100.00
%

Our revenue increased significantly during the three months ended June 30, 2012 compared to the same period of 2011, primarily due to increased biodiesel and co-product sales. Throughout our third quarter of 2012, we were operating the biodiesel production facility and producing biodiesel and co-products. During the comparable period of 2011, we were just restarting operations at the biodiesel production facility and we were not operating at full capacity. We produced approximately 91% more biodiesel during our third quarter of 2012 compared to the same period of 2011. Management anticipates that we will continue to operate the biodiesel production facility for the remaining quarter of our 2012 fiscal year and the first quarter of our 2013 fiscal year. Further, management is in the process of securing another contract similar to the current Gavilon agreement for calendar year 2013. If we are able to secure such a contract, we anticipate being able to continue to operate the biodiesel production facility during our 2013 fiscal year.

We had significantly more incentive revenue during our third quarter of 2011 compared to the same period of 2012 due to the fact that the federal biodiesel blenders' credit was still in existence in 2011. We received only state based biodiesel incentive revenue during our third quarter of 2012 because the federal blenders' credit expired on December 31, 2011. We had revenue from RIN sales during our third quarter of 2011 related to biodiesel we purchased in the market in order to fulfill certain biodiesel sales contracts which could not be fulfilled in 2011. RINs are Renewable Identification Numbers (RINs) that are used to track production of renewable fuels under the federal Federal Renewable Fuels Standard ("RFS"). Certain fuel blenders purchase RINs in order to satisfy their renewable fuels use obligations under the RFS. We experienced delays in restarting operations during our 2011 fiscal year which delayed our ability to produce biodiesel to fulfill contracts we had in place during that time. Since we purchased these gallons of biodiesel in the market, we were able to separately sell the RINs which provided additional revenue during our third quarter of 2011.

During calendar year 2012, we agreed to only produce and sell biodiesel to Gavilon. Our agreements with Gavilon provide for a guaranteed minimum amount of production which equals approximately 50% to 70% of our production capacity depending on which types of feedstock we use. During our third quarter of 2012, we produced more biodiesel than the minimum guaranteed amount of production provided by our agreements with Gavilon. In the event Gavilon does not purchase sufficient biodiesel from us to meet this minimum level of production, Gavilon has agreed to make a minimum cash payment to us. As a result of the Gavilon agreements, we anticipate that we will be able to continue our operations and make payments on our MLIC loan throughout our 2012 fiscal year.

The biodiesel industry is benefited by the RFS. The RFS required the use of 800 million gallons of biodiesel in 2011 increasing to 1 billion gallons in 2012. Further, the RFS is reported to increase to 1.28 billion gallons in 2013, however, this increase in the RFS is still pending final approval. In addition to the specific requirement for use of biomass-based diesel under the RFS, biodiesel can be used to meet other categories of renewable fuels under the RFS, specifically advanced biofuels. This may lead to an additional 500 million gallons of biodiesel demand during 2012. Due to these biodiesel use requirements, management anticipates being able to continue to operate the biodiesel production facility for the rest of 2012 and beyond, provided these biodiesel use requirements remain in effect.

Cost of Sales

Our cost of sales for our quarter ended June 30, 2012 was significantly higher than during the comparable period of 2011 because we were producing more biodiesel during 2012. Our primary cost of producing biodiesel is feedstock, which we purchase from Gavilon pursuant to our exclusive agreements discussed above. We did not have any derivative instruments in place for either our quarter ended June 30, 2012 or September 30, 2011. Therefore, we had no gains or losses during either period related to derivative instruments.

    

6

Operating Expenses

Our operating expenses were higher for the three months ended June 30, 2012 compared to the same period in 2011, primarily due to increased office staff that we hired at the end of our 2011 fiscal year in order to manage our operations. We anticipate that our operating expenses will remain relatively stable during the remaining quarters of our 2012 fiscal year as we anticipate continuing to operate the biodiesel plant and have hired all the additional staff necessary to continue our operations.

Other Income (Expenses)

We had interest expense for the three months ended June 30, 2012 of $406,843, compared to $641,091 of interest expense for the three months ended June 30, 2011. The decrease in interest expense during the 2012 period was primarily the result of lower interest rates on our credit facilities along with having less funds outstanding on our loans. We had no amount outstanding on our line of credit during the 2012 period which resulted in significantly less interest expense.

Results of Operations for the Nine Months Ended June 30, 2012 and 2011

The following table shows the results of our operations and the approximate percentage of revenues, costs of sales, operating expenses and other items to total revenues in our unaudited statements of operations for the nine months ended June 30, 2012 and June 30, 2011:

 
Nine Months Ended
 
Nine Months Ended
 
June 30, 2012
 
June 30, 2011
Statement of Operations Data
Amount
 
Percent
 
Amount
 
Percent
Revenues
$
79,369,801

 
100.00
 %
 
$
15,791,904

 
100.00
 %
Cost of Sales
75,541,906

 
95.18
 %
 
17,610,531

 
111.52
 %
Gross Income (Loss)
3,827,895

 
4.82
 %
 
(1,818,627
)
 
(11.52
)%
Operating Expenses
1,044,883

 
1.32
 %
 
514,761

 
3.26
 %
Operating Income (Loss)
2,783,012

 
3.51
 %
 
(2,333,388
)
 
(14.78
)%
Other Income
88,560

 
0.11
 %
 
96,808

 
0.61
 %
Interest Expense
(1,499,320
)
 
(1.89
)%
 
(1,823,180
)
 
(11.55
)%
Net Income (Loss)
$
1,372,252

 
1.73
 %
 
$
(4,059,760
)
 
(25.71
)%

Revenues

The following table shows the sources of our revenue for the nine months ended June 30, 2012 and June 30, 2011.
 
Nine Months Ended
 
Nine Months Ended
 
June 30, 2012
 
June 30, 2011
Revenue Source
Amount
 
% of Revenues
 
Amount
 
% of Revenues
Biodiesel sales
$
75,601,288

 
95.25
%
 
$
11,860,240

 
75.10
%
Co-product sales
1,982,175

 
2.50
%
 
361,600

 
2.29
%
Federal and state incentives
1,783,600

 
2.25
%
 
1,261,824

 
7.99
%
RIN Revenue
—

 
—
%
 
2,305,973

 
14.60
%
Other revenue
2,138

 
—
%
 
2,267

 
0.01
%
Total sales revenue
$
79,369,201

 
100.00
%
 
$
15,791,904

 
100.00
%

Revenues from operations for the nine months ended June 30, 2012 totaled $79,369,801 compared to $15,791,904 for the same period in 2011. The increase in revenue from period to period is primarily due to the fact that we have been operating the biodiesel plant during all three quarters of our 2012 fiscal year and we only had approximately one quarter of operations during our 2011 fiscal year. Further, we had more federal and state incentive revenue during the 2012 period due to our increased biodiesel production, somewhat offset by the loss of the federal blenders' credit on December 31, 2011. Since the biodiesel blenders' credit expired at the end of our first fiscal quarter of 2012, most of our incentive revenue related to biodiesel production occurred during our first quarter. Going forward, we anticipate that we will have less incentive revenue since we will only be receiving state biodiesel production incentives which are significantly less than the now expired federal blenders' credit.

7

Cost of Sales

Our cost of sales was significantly higher for the nine months ended June 30, 2012 compared to the same nine month period of 2011 due to increased raw material costs. Our total raw material costs were higher due to the fact that we were operating the biodiesel plant during the entire nine months ended June 30, 2012 and we only had operations for approximately one quarter during the comparable period of 2011.
    
Operating Expense

Our operating expenses were higher for the nine months ended June 30, 2012 compared to the same period of 2011 due to the fact that we were operating the biodiesel plant during the 2012 period and we hired additional office staff at the end of our 2011 fiscal year in order to manage the operation of the biodiesel plant. We expect that going forward our operating expenses will remain fairly consistent as we seek to minimize unnecessary expenses.

Interest Expense

Interest expense decreased to $1,499,320 for the nine months ended June 30, 2012 compared to $1,823,180 during the same period in 2011. Our interest expense decreased due to having less amounts outstanding on our loans and lower interest rates during the 2012 period compared the 2011 period. This decrease was primarily due to having significantly less borrowing on our line of credit during the 2012 period which resulted in less interest expense.

Changes in Financial Condition for the Nine Months Ended June 30, 2012

The following table highlights the changes in our financial condition for the nine month period ended June 30, 2012:

 
 
June 30, 2012
 
September 30, 2011
Current Assets
 
$
5,758,769

 
$
11,151,527

Total Assets
 
34,607,764

 
41,915,398

Current Liabilities
 
30,154,815

 
14,296,932

Members' Equity
 
4,452,949

 
3,080,697


Assets

Our current assets were lower at June 30, 2012 compared to September 30, 2011 primarily related to the fact that we no longer have any amounts in a restricted cash account with our lender and we had less accounts receivable at June 30, 2012 compared to September 30, 2011 due to our relationship with Gavilon which provides for quicker payment than in previous biodiesel sales agreements. We also had less inventory at June 30, 2012 compared to September 30, 2011 due to timing issues related to the Gavilon agreement. Our property and equipment was lower at June 30, 2012 compared to September 30, 2011 because of depreciation.

Liabilities

Our current liabilities were higher at June 30, 2012 compared to September 30, 2011 due to the fact that our term loan with MLIC is considered a current liability because it matures in January 2013. However, we had no amount outstanding on our revolving line of credit as of June 30, 2012 compared to approximately $6 million outstanding as of September 30, 2011. Our long-term debt was lower at June 30, 2012 compared to September 30, 2011 due to the fact that our term loan with MLIC was included as a current liability as of June 30, 2012 and due to payments we have been making on our long-term debt. We have paid more than $3.4 million in long-term debt during our 2012 fiscal year.

Liquidity and Capital Resources

Liquidity and Capital Resources

We have very limited access to liquid assets that we can use to purchase raw materials and operate our plant. Our only sources of liquidity are cash from our operations, including payments we expect to receive from Gavilon pursuant to our biodiesel production agreement, and our $1 million line of credit with Washington State Bank and Federation Bank. Provided that we maintain the Gavilon agreement throughout calendar year 2012, we anticipate that we will have sufficient liquid assets to operate

8

the biodiesel plant at capacity. However, if the Gavilon agreement were to be terminated and we are unable to secure another comparable agreement, we do not anticipate having sufficient liquid assets to operate the biodiesel plant at capacity for the next 12 months. In order to preserve our liquidity, we may be required to reduce plant operations or cease operating altogether at times when we do not have sufficient liquid assets to continue to operate the biodiesel plant. Management continues to work to maximize the amount of our liquid assets so we can continue to operate the biodiesel plant. We do not anticipate making any significant capital expenditures in the near term that are not necessary to continue operating the biodiesel plant.

Cash Flow from Operating Activities

Our operating activities provided us approximately $8,686,000 in cash for the nine month period ended June 30, 2012. During the comparable period of 2011, our operating activities used approximately $6,521,000 in cash. The primary difference between the two periods was that we were operating during the entire period of 2012 and therefore we had positive net income along with positive changes in our accounts receivable and inventory which impacted our cash flow.

Cash Flow from Investing Activities

Net cash flow provided by investing activities for the nine month period ended June 30, 2012 totaled approximately $907,000, which was primarily related to decreases in our restricted cash account. During the comparable period of 2011, we received less cash from our restricted cash account which resulted in less cash being generated by our investing activities during the 2011 period.

Cash Flow from Financing Activities

Our financing activities used a significant amount of cash during the nine month period ended June 30, 2012 due to payments we made on our term loan and revolving lines of credit. During the nine month period ended June 30, 2011, our financing activities provided cash due to funds we received from our line of credit.

Short-Term and Long-Term Debt Sources
    
On January 11, 2012, we entered into a amended credit agreement with MLIC which extended the maturity date of our term loan to January 5, 2013. Our amended and extended credit agreement with MLIC provided for new financial covenants which management believes we will satisfy for the rest of our 2012 fiscal year. In addition to the MLIC loan, we executed a new $1 million line of credit with Washington State Bank and Federation Bank and we repaid the $6 million MLIC revolving line of credit.

The term loan was used to finance the construction and start-up operations of our biodiesel plant. Currently, the maturity date of the term loan is January 5, 2013. Interest accrues pursuant to the term loan at a variable rate of 6% above the one month London Interbank Offered Rate (LIBOR). We were required to commence making monthly principal and interest payments of $350,000 on the term loan starting in February 2012 and continuing until maturity. The term loan will also be subject to an additional principal payment based on our earnings before taxes, depreciation and amortization in excess of $300,000 per month. As of June 30, 2012, the outstanding balance of the term loan was approximately $23.8 million and the term loan accrued interest at a rate of 6.25% per year.

Until January 2012, we had a $6 million revolving line of credit loan. This revolving line of credit was used to finance raw material purchases. Interest accrued on the revolving line of credit at a variable rate of 12% above the one month LIBOR. This line of credit was repaid in early January 2012. As a result, as of June 30, 2012, we had no amount outstanding on this $6 million line of credit.

On January 11, 2012, we entered into a new $1 million revolving line of credit. The maturity date of the $1 million revolving line of credit is January 5, 2013. Interest accrues on the line of credit at a fixed rate of 6% per year. As of June 30, 2012, we had no amount outstanding and $1 million available to be drawn on this revolving line of credit.

Management is in the process of evaluating its options with respect to refinancing our long-term debt. Management does not anticipate that we will have sufficient cash to repay all of our outstanding term debt when it matures on January 5, 2013. As a result, management has been meeting with various lenders, including MLIC, to determine the terms on which we could refinance our existing debt when it matures. No agreements have been reached with respect to any potential refinancing.

Covenants

Our loan agreements with MLIC contain various covenants and financial ratios. During various times throughout our

9

last several fiscal years, we were out of compliance with each of our financial covenants and ratios due to our financial condition and the fact that we had not been operating the biodiesel plant at full capacity. Pursuant to various agreements we executed with MLIC, it agreed to forbear from exercising its remedies under the loan agreements until January 2, 2012. We subsequently agreed to restructure our credit agreements with MLIC in order to address the expiring forbearance.

Management attributes our previous inability to satisfy our financial covenants and ratios with unfavorable operating conditions in the biodiesel industry. Due to our restructured credit agreements with MLIC, we have new financial ratios and covenants that we must satisfy. Starting on January 11, 2012, we are required to maintain tangible net worth of at least $2 million through June 30, 2012 and at least $2.25 million from July 1, 2012 until the maturity date of the loans on January 5, 2013. We are also required to maintain a cash flow coverage ratio, as defined in our restructured credit agreement, on a monthly basis of 1.00 to 1.00 starting in February 2012. Management anticipates that we will be in compliance with our financial covenants for the rest of our 2012 fiscal year as a result of our restructured credit agreements and our agreement with Gavilon, although there can be no assurances. As of June 30, 2012, we were in compliance with all of our loan covenants.

Grants and Government Programs

We entered into a loan with the Iowa Department of Economic Development for $400,000. This loan is part of the Iowa Department of Economic Development's Value Added Program. One hundred thousand dollars of the loan is forgivable (and has been forgiven). We requested and were granted a six-month waiver on payments pursuant to this loan which began in January 2011. In order to receive this waiver, we agreed to pay interest at an annual rate of 6.0% on the outstanding balance of the loan. We repaid this loan prior to our quarter end on June 30, 2012.

On May 14, 2007, we entered into a Railroad Revolving Loan and Grant Program Agreement with the Iowa Department of Transportation for an amount of up to $168,000 (or 13.3% of the cost for the railroad project, whichever is less) and a loan amount of up to $132,000 (or 10.5% of the cost for the railroad project, whichever is less).  Interest on the loan amount accrues at a rate of 3.67% per year for five (5) years. We made our first payment under this loan in December 2008.  The balance at June 30, 2012 was $196,354.

Distribution to Unit Holders

As of June 30, 2012, the board of directors of the Company had not declared or paid any distributions.

Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses.

Revenue Recognition
    
Revenue from the production of biodiesel and glycerin is recorded when title transfers to customers. Biodiesel and glycerin are generally shipped FOB from the plant.

Impairment of Long-Lived Assets

We review long-lived assets, including property and equipment for impairment in accordance with ASC Topic 360-10, "Property, Plant, and Equipment." Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with our policy we have estimated that the future undiscounted cash flows from operations of this facility exceed its carrying value at September 30, 2011, therefore no impairment loss was recognized.

The estimate of cash flows that are used in the impairment analysis requires judgment regarding what we would expect to recover from the future use of the asset. Changes in judgment that could significantly alter the calculation of the recoverable amount of the asset may result from, but are not limited to, significant changes in the regulatory environment, the business climate, management's plans, legal factors, the future price of feedstock inputs in relation to the future price of biodiesel and the overall pricing and demand for biodiesel. Changes in the assumptions used within the analysis can have a significant effect on the determination of impairment given the sensitivity of the analysis and the projected long life of the asset.

    

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Recently, the biodiesel blenders' credit expired at the end of 2011. Recently, the Senate Finance Committee passed legislation regarding a possible extension of the biodiesel blenders' credit making it retroactive to the end of 2011 and extending it through 2013. It is uncertain if this legislation will pass. However, due to certain biodiesel use requirements in RFS2 and state requirements, along with the fact that the value of RINs generated by biodiesel production has offset the difference between the market price of biodiesel and the market prices of petroleum based diesel, management anticipates continued demand for biodiesel. In 2012, RFS2 requires the use of 1 billion gallons of biomass-based diesel, which primarily will be satisfied using biodiesel. Further, for 2013 the biodiesel use requirement under RFS2 will increase to 1.28 billion gallons. Our projections are based upon the anticipated demand that will be created by RFS2 along with our agreement with Gavilon. RFS2 requires that the biomass-based diesel requirement of the RFS2 will not be less than 1.0 billion per year through 2022. After 2022, future rulemaking by the EPA will set the minimum levels of biodiesel. Further, biodiesel is an advanced biofuel by designation and the minimum requirement under RFS2 by 2022 of advanced biofuel is 21.0 billion gallons per year. Biodiesel can be used to meet that obligation. As a result of the plant being able to utilize multiple feedstock sources, we believe that we are positioned nicely on the supply curve and will be one of the earlier plants to meet capacity requirements when the market opens. If we fail to see these economic improvements and feedstock prices continue to display intense volatility that are not recoverable in the pricing structure, then there could be significant adjustments to our projections which could lead to a future impairment charge.

Off-balance Sheet Arrangements
    
We have no off-balance sheet arrangements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

The Company is not required to include this information due to its status as a smaller reporting company.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company's management, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as of June 30, 2012 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting during our third quarter of 2012, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.     OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The Company is not required to include this information due to its status as a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
None.


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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits.

(a)
The following exhibits are filed as part of this report.
Exhibit No.
 
Exhibit
31.1

 
Certificate Pursuant to 17 CFR 240.13a-14(a) *
31.2

 
Certificate Pursuant to 17 CFR 240.13a-14(a) *
32.1

 
Certificate Pursuant to 18 U.S.C. Section 1350 *
32.2

 
Certificate Pursuant to 18 U.S.C. Section 1350 *
101

 
The following financial information from Iowa Renewable Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of June 30, 2012 and September 30, 2011, (ii) Statements of Operations for the three and nine months ended June 30, 2012 and 2011, (iii) Statements of Cash Flows for the nine months ended June 30, 2012 and 2011, and (iv) the Notes to Financial Statements.**

* Filed herewith.
** Furnished herewith.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
IOWA RENEWABLE ENERGY, LLC
 
 
 
 
Date:
August 10, 2012
 
/s/ Larry Rippey
 
 
 
Larry Rippey
 
 
 
Chairman and President
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 10, 2012
 
/s/ Ronald Lutovsky, Jr.
 
 
 
Ronald Lutovsky, Jr.
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
    

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Iowa Renewable Energy, LLC Reports