SOUTHWEST IOWA RENEWABLE ENERGY, LLC - FORM 10-Q - February 10, 2016

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EX-31.1 - EXHIBIT 31.1 SIRE 2015.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-20151231x10qex311.htm
EX-31.2 - EXHIBIT 31.2 SIRE 2015.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-20151231x10qex312.htm
EX-32.1 - EXHIBIT 32.1 SIRE 2015.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-20151231x10qex321.htm
EX-32.2 - EXHIBIT 32.2 SIRE 2015.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-20151231x10qex322.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ending December 31, 2015
 
 
 
 
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number 000-53041

SOUTHWEST IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
 
Iowa
20-2735046
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
10868 189th Street, Council Bluffs, Iowa
51503
(Address of principal executive offices)
(Zip Code)
 
 
Registrant’s telephone number (712) 366-0392
 
 
Securities registered under Section 12(b) of the Exchange Act:
None.
 
 
Title of each class
Name of each exchange on which registered
 
 
Securities registered under Section 12(g) of the Exchange Act:
Series A Membership Units
(Title of class)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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. Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o
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).  Yes o     No x





As of December 31, 2015, the Company had 8,993 Series A, 3,334 Series B and 1,000 Series C Membership Units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE—None



TABLE OF CONTENTS
 



PART I – FINANCIAL STATEMENTS
 
Item 1. Financial Statements
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Balance Sheets
(Dollars in thousands)
ASSETS
December 31, 2015
 
September 30, 2015
 
(Unaudited)
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
2,967

 
$
3,030

Restricted cash
—

 
305

Accounts receivable
512

 
348

Accounts receivable, related party
5,386

 
3,416

Derivative financial instruments
514

 
819

Inventory
12,980

 
14,298

Prepaid expenses and other
890

 
327

Total current assets
23,249

 
22,543

 
 
 
 
Property, Plant and Equipment
 
 
 
Land
2,064

 
2,064

Plant, building and equipment
214,177

 
213,552

Office and other equipment
1,128

 
1,128

 
217,369

 
216,744

Accumulated depreciation
(90,263
)
 
(87,324
)
Net property and equipment
127,106

 
129,420

 
 
 
 
Other Assets
 
 
 
Financing costs, net of accumulated amortization of $107 and  $87, respectively
327

 
347

Other assets
2,148

 
2,166

 
2,475

 
2,513

Total Assets
$
152,830

 
$
154,476

 
 
 
 
Notes to Financial Statements are an integral part of this statement

1


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Balance Sheets
(Dollars in thousands)
LIABILITIES AND MEMBERS' EQUITY
December 31, 2015
 
September 30, 2015
 
(Unaudited)
 
 
Current Liabilities
 
 
 
Accounts payable
$
7,892

 
$
3,910

Accounts payable, related party
179

 
741

Derivative financial instruments
674

 
659

Accrued expenses
5,600

 
6,144

Accrued expenses, related parties
671

 
133

Current maturities of notes payable
6,501

 
6,506

Total current liabilities
21,517

 
18,093

 
 
 
 
Long Term Liabilities
 
 
 
Notes payable, less current maturities
23,076

 
29,227

Other long-term  liabilities
5,815

 
5,840

Total long term liabilities
28,891

 
35,067

 
 
 
 
Members' Equity
 
 
 
Members' capital, 13,327 Units issued and outstanding
87,165

 
87,165

Accumulated earnings
15,257

 
14,151

Total members' equity
102,422

 
101,316

 
 
 
 
Total Liabilities and Members' Equity
$
152,830

 
$
154,476

 
 
 
 
Notes to Financial Statements are an integral part of this statement

2


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Statements of Operations
(Dollars in thousands except for net income per unit)
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
December 31, 2015
 
December 31, 2014
 
 
 
 
Revenues
$
53,199

 
$
72,536

Cost of Goods Sold
 
 
 
Cost of goods sold-non hedging
51,000

 
56,186

Realized & unrealized hedging (gains)
(316
)
 
(283
)
 
50,684

 
55,903

 
 
 
 
Gross Margin
2,515

 
16,633

 
 
 
 
General and administrative expenses
1,205

 
1,385

 
 
 
 
Operating Income
1,310

 
15,248

 
 
 
 
Interest expense and other income, net
204

 
720

Loss from debt extinguishment
—

 
4,700

 
 
 
 
Net Income
$
1,106

 
$
9,828

 
 
 
 
Weighted average units outstanding - basic
13,327

 
13,327

Weighted average units outstanding - diluted
14,127

 
21,415

Income per unit - basic
$
82.99

 
$
737.45

Income per unit - diluted
$
78.29

 
$
477.56

 
 
 
 
Notes to Financial Statements are an integral part of this statement

3


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
December 31, 2015
 
December 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES

 

Net income
$
1,106

 
$
9,828

Adjustments to reconcile to net cash provided by operating activities:

 

Depreciation
2,939

 
2,891

Amortization
18

 
18

Loss from debt extinguishment
—

 
4,700

Loss on investment
20

 
—

(Increase) decrease in current assets:

 

Accounts receivable
(2,134
)
 
1,169

Inventories
1,318

 
1,033

Prepaid expenses and other
(563
)
 
(150
)
Derivative financial instruments
305

 
(445
)
Increase (decrease) in current liabilities:
 
 
 
Accounts payable
3,420

 
(482
)
Derivative financial instruments
15

 
(1,914
)
Accrued expenses
(6
)
 
595

(Decrease) in other long-term liabilities
(25
)
 
(25
)
Net cash provided by operating activities
6,413

 
17,218



 

CASH FLOWS FROM INVESTING ACTIVITIES

 

Purchase of property and equipment
(625
)
 
(319
)
Decrease in restricted cash
305

 
—

Net cash (used in) investing activities
(320
)
 
(319
)


 

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
16,141

 
10,100

Payments on notes payable
(22,297
)
 
(33,127
)
Net cash (used in) financing activities
(6,156
)
 
(23,027
)



 


Net decrease in cash and cash equivalents
(63
)
 
(6,128
)


 

CASH AND CASH EQUIVALENTS
 
 
 
Beginning
3,030

 
9,267

Ending
$
2,967

 
$
3,139



 



 

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
330

 
$
711

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
 
 
 
     Purchase of property and equipment in Accrued expenses
—

 
1,022

     Put option liability
—

 
4,700

 
 
 
 
Notes to Financial Statements are an integral part of this statement


4


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Notes to Financial Statements
Note 1:  Nature of Business
Southwest Iowa Renewable Energy, LLC (the “Company”), located in Council Bluffs, Iowa, was formed in March, 2005 and began producing ethanol in February, 2009.   The Company is permitted to produce up to 125 million gallons of ethanol per year. The Company sells its ethanol, distillers grains, corn syrup, and corn oil in the continental United States, Mexico, and the Pacific Rim.
Note 2:  Summary of Significant Accounting Policies
Basis of Presentation and Other Information
The accompanying financial statements as of and for the three months ended December 31, 2015 and 2014 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the fiscal year ended September 30, 2015 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
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 these estimates.
Revenue Recognition
The Company sells ethanol and related products pursuant to marketing agreements.  Revenues are recognized when the marketing company (the “customer”) has taken title to the product, prices are fixed or determinable and collectability is reasonably assured. 
The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”).  Syrup and distillers grain (co-products) are sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices.  Marketing fees, agency fees, and commissions due to the marketer are paid separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold.  Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold. Corn oil is sold directly by the Company to various customers.
Accounts Receivable
Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Most of the trade accounts are with Bunge. Management determines the allowance for doubtful accounts by regularly evaluating customer receivables and considering customer’s financial condition, credit history and current economic conditions.  As of December 31, 2015 and September 30, 2015, management had determined no allowance was necessary.  Receivables are written off when deemed uncollectable and recoveries of receivables written off are recorded when received.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices.  The Company is subject to market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products.  Exposure to commodity price risk results from the Company’s dependence on corn in the ethanol production process.  In general, rising corn prices might result in lower profit margins and, therefore, represent unfavorable market conditions.  The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol, and distillers grains purchase and sales contracts, over-the-counter and exchange-traded futures and option contracts.  From time to time, when market conditions are appropriate, the Company will

5


enter into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts.  
Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. 
The Company applies the normal sale exemption to forward contracts relating to ethanol, distillers grains, and corn oil and therefore these forward contracts are not marked to market. As of December 31, 2015, the Company was committed to sell 0.4 million gallons of ethanol, 0.1 million tons of distillers grains and 3.2 million pounds of corn oil.
Corn purchase contracts are treated as derivative financial instruments. Changes in market value of forward corn contracts, which are marked to market each period, are included in costs of goods sold.  As of December 31, 2015, the Company was committed to purchasing 1.9 million bushels of corn on a forward contract basis resulting in a total commitment of $7.1 million. In addition the Company was committed to purchase 0.5 million bushels of corn on basis contracts.
The Company also enters into short-term options and futures contracts as a means of managing exposure to changes in commodity prices.  The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations.  The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility.  The Company’s specific goal is to protect itself from large moves in commodity costs.  All derivatives are designated as non-hedge derivatives and the contracts will be accounted for at fair value.  Although the contracts will be effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
Derivatives not designated as hedging instruments along with cash held by brokers at December 31, 2015 and September 30, 2015 at market value are as follows:
 
Balance Sheet Classification
 
December 31, 2015
 
September 30, 2015

 
 
 
in 000's
 
in 000's
Futures and option contracts
 
 
 
 
 
In gain position
 
 
$
627

 
$
572

In loss position 
 
 
(100
)
 
(81
)
Cash held by (due to) broker
 
 
(13
)
 
328

 
Current asset
 
514

 
819



 


 


Forward contracts, corn
Current liability
 
674

 
659



 


 


Net futures, options, and forward contracts

 
$
(160
)
 
$
160


The net realized and unrealized gains and losses on the Company’s derivative contracts for the three months ended December 31, 2015 and 2014 consist of the following:
 
 
 
Three Months Ended
 
Statement of Operations Classification
 
December 31, 2015
 
December 31, 2014
 
 
 
in 000's
 
in 000's
Net realized and unrealized (gains) losses related to:
 
 
 
 
 

 
 
 
 
 
Forward purchase corn contracts
Cost of Goods Sold
 
$
879

 
$
(1,213
)
Futures and option corn contracts
Cost of Goods Sold
 
(1,195
)
 
930


6



Inventory
Inventory is stated at the lower of cost or market value using the average cost method.  
Income Per Unit
Basic income per unit is calculated by dividing net income by the weighted average units outstanding for each period. Diluted income per unit is adjusted for convertible debt, using the treasury stock method and the put option using the reverse treasury stock method. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):
 
Three Months Ended
 
December 31, 2015
 
December 31, 2014
Numerator:
 
 
 
Net income for basic earnings per unit
$
1,106

 
$
9,828

Interest expense on convertible term note
—

 
399

Net income for diluted earnings per unit
$
1,106

 
$
10,227

 
 
 
 
Denominator:
 
 
 
Weighted average units outstanding - basic
13,327

 
13,327

Weighted average units outstanding - diluted
14,127

 
21,415

Income per unit - basic
$
82.99

 
$
737.45

Income per unit - diluted
$
78.29

 
$
477.56


7



Note 3:  Inventory
Inventory is comprised of the following:
 
December 31, 2015
 
September 30, 2015
 
(000's)
 
(000's)
Raw Materials - corn
$
2,399

 
$
3,390

Supplies and Chemicals
3,425

 
3,098

Work in Process
1,476

 
1,496

Finished Goods
5,680

 
6,314

Total
$
12,980

 
$
14,298

 
Note 4:   Revolving Loan/Credit Agreements
FCSA/CoBank
The Company has a credit agreement with Farm Credit Services of America, FLCA (“FCSA”) and CoBank, ACB, as cash management provider and agent (“CoBank”) which provides the Company with a term loan (the “Term Loan”) and a revolving term loan in the original amount of up to $36,000,000 (the “Revolving Term Loan”, together with the Term Loan, the “ FCSA Credit Facility ”). The FCSA Credit Facility is secured by a security interest on all of the Company’s assets.
 
The Term Loan provides for quarterly payments by the Company to FCSA of $1,500,000, with a maturity date of September 20, 2019. The Revolving Term Loan has a maturity date of June 1, 2023 and requires reductions in principal availability in increments of $6,000,000 each June 1 commencing on June 1, 2020. Under the FCSA Credit Facility, the Company has the right to select from the several LIBOR based interest rate options with respect to each of the Term Loan and the Revolving Term Loan.

As of December 31, 2015, there was $33.5 million available under the Revolving Term Loan.

Notes payable

Notes payable consists of the following:
 
December 31, 2015
 
September 30, 2015
 
(000's)
 
(000's)
Term Loan bearing interest at LIBOR plus 3.35% (3.78% at December 31, 2015)
$
22,500

 
$
24,000

Revolving Term Loan bearing interest at LIBOR plus 3.35% (3.78% at December 31, 2015)
2,520

 
6,894

Other debt with interest rates ranging from 3.50% to 4.15% and maturities through 2022
4,557

 
4,839

 
29,577

 
35,733

Less Current Maturities
6,501

 
6,506

Total Long Term Debt
$
23,076

 
$
29,227


The approximate aggregate maturities of notes payable as of December 31, are as follows:

8


2016
$
6,501

 
 
2017
6,522

 
 
2018
6,543

 
 
2019
5,065

 
 
2020
581

 
 
2021 and Thereafter
4,365

 
 
Total
$
29,577

 
Note 5:  Fair Value Measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company used various methods including market, income and cost approaches.  Based on these approaches, the Company often utilized certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 -
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 -
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.
Put Option liability. The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a Monte Carlo Simulation model. Unrealized gains and losses related to the change in fair value of the put option liability are included in other expense on the Statement of Operations. Management estimates that the fair value of the put option did not materially change during the three months ended December 31, 2015.
Derivative financial instruments.  Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“CME”) market.  Ethanol contracts are reported at fair value utilizing Level 2 inputs from third-party pricing services.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.   For these contracts, the Company obtains fair value measurements from local grain terminal values.  The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based on the CME market.

9


The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and September 30, 2015, categorized by the level of the valuation inputs within the fair value hierarchy (in '000s):
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Derivative financial instruments
$
627

 
$
—

 
$
—


 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative financial instruments
100

 
674

 
—

Put option liability
—

 
—

 
5,640

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Derivative financial instruments
$
572

 
$
—

 
$
—

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative financial instruments
81

 
659

 
—

Put option liability
—

 
—

 
5,640



The following table summarizes the assumptions used in computing the fair value of the put options subject to fair value accounting at the date of issue and during the three months ended December 31, 2015 and September 30, 2015

Put option assumptions:
 
Expected dividend yield
—

Risk-free interest rate
0.41
%
Expected volatility
36
%
Expected life (years)
1.25

Exercise price
$10,897
Company unit price
$6,300
 
The following table reflects the activity for liabilities measured at fair value using Level 3 inputs during the three months ended December 31, 2015 and 2014:
 
Three Months Ended
 
December 31, 2015

 
December 31, 2014

Beginning Balance
$5,640
 
$0
Put Option Issued
—

 
4,700

Change in Value
—

 
—

Ending Balance
$5,640
 
$4,700
 

10


Note 6:   Related Party Transactions
Bunge
On December 5, 2014, the Company entered into an Amended and Restated Ethanol Purchase Agreement (the “Ethanol Agreement”) with Bunge. Under the Ethanol Agreement, the Company has agreed to sell Bunge all of the ethanol produced by the Company, and Bunge has agreed to purchase the same.  The Company will pay Bunge a percentage fee for ethanol sold by Bunge, subject to a minimum and maximum annual fee.  The initial term of the Ethanol Agreement expires on December 31, 2019, however it will automatically renew for one five-year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. The Company has incurred ethanol marketing expenses of $410 thousand and  $312 thousand during the three months ended December 31, 2015 and 2014, respectively.
The Company and Bunge also entered into an Amended and Restated Grain Feedstock Agency Agreement on December 5, 2014 (the “ Agency Agreement ”).  The Agency Agreement provides that Bunge will procure corn for the Company, the Company will pay Bunge a per bushel fee, subject to a minimum and maximum annual fee.  The initial term of the Agency Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. Expenses for corn procurement were $142 thousand and $332 thousand for the three months ended December 31, 2015 and 2014, respectively.
Starting with the 2015 crop year, the Company is using corn containing Syngenta Seeds, Inc.’s proprietary Enogen® technology (“ Enogen Corn ”) for a portion of its ethanol production needs.  The Company contracts directly with growers to produce Enogen Corn for sale to the Company.  Consistent with the Agency Agreement, the Company and Bunge entered into a Services Agreement regarding corn purchases (the “ Services Agreement ”).  Under this agreement, the Company will originate all Enogen Corn contracts for its facility and Bunge will assist the Company with certain administrative matters related to Enogen Corn, including facilitating delivery to the facility.  The Company will pay Bunge a per bushel service fee.  The initial term of the Services Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term.
On December 5, 2014, the Company and Bunge entered into an Amended and Restated Distillers Grain Purchase Agreement (the “ DG Purchase Agreement ”).  Under the DG Purchase Agreement, Bunge will purchase all distillers grains produced by the Company, and will receive a fee based on the net sale price of distillers grains, subject to a minimum and maximum annual fee.  The initial term of the DG Purchase Agreement expires on December 31, 2019  and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. The Company has incurred distillers grains marketing expenses of $330 thousand and $305 thousand during the three months ended December 31, 2015 and 2014, respectively.
The Company and Bunge executed a letter agreement (the “ Letter Agreement ”) on December 5, 2015, terminating the Corn Oil Agency Agreement dated as of November 12, 2010 (the "Corn Oil Agency Agreement") by and between the Company and Bunge and the Risk Management Services Agreement by and between the Company and Bunge dated as of December 15, 2008. Expenses under this terminated Corn Oil Agency Agreement were $0 and $67 thousand for the three months ended December 31, 2015 and 2014, respectively.    
On June 26, 2009, the Company executed a Railcar Agreement with Bunge for the lease of 325 ethanol cars and 300 hopper cars which are used for the delivery and marketing of ethanol and distillers grains.  Under the Railcar Agreement, the Company leases railcars for terms lasting 120 months and continuing on a month to month basis thereafter.  The Railcar Agreement will terminate upon the expiration of all railcar leases.  The Company entered into a one year sublease for 147 hoppers with Bunge that will expire September 14, 2015. The Company has subleased another 54 hopper cars to an unrelated third party, which expires March 25, 2019. Expenses under this agreement were $0.8 million for the three months ended December 31, 2015 and December 31, 2014, net of subleases and accretion, respectively. The Company continues to work with Bunge to determine the need for ethanol and hopper cars in light of current market conditions, and the expected conditions in 2016 and beyond.
Note 7: Major Customer
The Company is party to the Ethanol and DG Purchase Agreements with Bunge for the exclusive marketing, selling, and distributing of all the ethanol, distillers grains, and syrup produced by the Company. Until December 5, 2014, the Company was also a party to the Corn Oil Agency Agreement with Bunge providing for the purchase by Bunge of all corn oil produced by the Company. Revenues from Bunge were $51.2 million and $69.8 million for the three months ended December 31, 2015 and 2014, respectively.

11



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
General
The following management discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements and our Annual Report on Form 10-K for the year ended September 30, 2015 including the consolidated financial statements, accompanying notes and the risk factors contained herein.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report on Form 10-Q of Southwest Iowa Renewable Energy, LLC (the "Company," "SIRE," "we," or "us")contains historical information, as well as 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 on 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:
•
Changes in the availability and price of corn, natural gas, and steam;
•
Negative impacts resulting from the reduction in the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency
•
Our inability to comply with our credit agreements required to continue our operations;
•
Negative impacts that our hedging activities may have on our operations;
•
Decreases in the market prices of ethanol and distillers grains;
•
Ethanol supply exceeding demand; and corresponding ethanol price reductions;
•
Changes in the environmental regulations that apply to our plant operations;
•
Changes in plant production capacity or technical difficulties in operating the plant;
•
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
•
Changes in federal mandates relating to the blending of ethanol with gasoline;
•
Changes in other federal or state laws and regulations relating to the production and use of ethanol;
•
Changes and advances in ethanol production technology;
•
Competition from larger producers as well as competition from alternative fuel additives;
•
Changes in interest rates and lending conditions of our loan covenants; and
•
Volatile commodity and financial markets.
 
These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include various assumptions that underlie such statements.  Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in these reports. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the management discussion and analysis, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 under the section entitled “Risk Factors” and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations set forth in the forward-looking statements made in this document or elsewhere by Company or on its behalf.  We undertake no obligation to revise or update any forward-looking statements.  The forward-looking statements contained in this quarterly report on Form 10-Q are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

12


Overview
The Company is an Iowa LLC, located in Council Bluffs, Iowa, formed in March, 2005 to construct and operate a 125 million gallon capacity ethanol plant (the "Facility").  We began producing ethanol in February, 2009 and sell our ethanol, distillers grains, corn oil and corn syrup in the continental United States, Mexico, and the Pacific Rim.

Recent Regulatory Developments

The ethanol industry is dependent on several economic incentives to produce ethanol, including ethanol use mandates. One significant federal ethanol support is the Federal Renewable Fuels Standard (the “RFS”) which has been and will continue to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective.   The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

On February 3, 2010, the EPA implemented new regulations governing the RFS which are referred to as “RFS2.” The RFS2 requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels.  Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations. However, the EPA decided to delay finalizing the rule on the 2014 and 2015 RFS2 standards until after the end of 2014. On May 29, 2015, the EPA released proposed rules for the 2014, 2015 and 2016 renewable volume obligations (“EPA Proposed Rule”) which proposed significant reductions in the total renewable fuel volume requirements from the statutory mandates initially set by Congress. The public comment period on the proposed rules was open through July 27, 2015.

On November 30, 2015, the EPA issued its final rules in response to the public comments received relating to the reductions in its proposed rules (the “EPA Final Rule”). The following chart sets forth the statutory volumes, the EPA Proposed Rule volumes for 2014, 2015 and 2016 (in billion gallons) and the EPA Final Rule volumes for 2014, 2015 and 2016 (in billion gallons) are as follows:
 
 
Total Renewable Fuel Volume Requirement
Portion of Volume Requirement That Can Be Met By Corn-based Ethanol
2014
Statutory
18.15
14.10
EPA Proposed Rule
15.93
13.25
EPA Final Rule
16.28
13.61
2015
Statutory
20.50
15.00
EPA Proposed Rule
16.30
13.40
EPA Final Rule
16.93
14.05
2016
Statutory
22.25
15.00
EPA Proposed Rule
17.40
14.00
EPA Final Rule
18.11
14.50

Although the EPA Final Rule increased the volume requirements over the requirements proposed in the EPA Proposed Rule, the final volume requirements are still below the volume requirements statutorily mandated by Congress. These reduced volume requirements, combined with the potential elimination of such requirements by the exercise of the EPA waiver authority or by Congress, could decrease the market price and demand for ethanol which will negatively impact the Company’s financial performance.

Industry Factors Affecting our Results of Operations
 
In comparing the three months ended December 31, 2015 to the three months ended December 31, 2014, the ethanol industry experienced diminished ethanol margins as a result of a combination of factors.

•
Ethanol prices have decreased substantially during the three months ended December 31, 2015, from the same period in the previous fiscal year. For the three months ended December 31, 2015 compared to the three months ended December 31, 2014, the average price per gallon of ethanol sold decreased 15.8%. This was due to an increased supply of ethanol

13


and reduced prices for crude oil and gasoline prices in the three months ended December 31, 2015 compared to the three months ended December 31, 2014.

However, management currently believes that despite the substantial ethanol price decreases, the ethanol outlook for the second quarter of our fiscal year ending September 30, 2016 ("Fiscal 2016") will be relatively flat due to the following factors.

•
The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the "USDA") estimate the 2015/16 ending corn stocks of 1.8 billion bushels, and forecast a 2015/16 corn supply of 13.6 billion bushels, suggesting stable corn prices through Fiscal 2016.

•
Gasoline demand continues to increase over 2015 levels.

Results of Operations
The following table shows our results of operations, stated as a percentage of revenue for the three months ended December 31, 2015 and 2014.
 
Three Months Ended December 31, 2015
 
Three Months Ended December 31, 2014
 
Amounts
 
% of Revenues
 
Amounts
 
% of Revenues
 
in 000's
 
 
 
in 000's
 
 
Income Statement Data
 
 
 
 
 
 
 
Revenues
$
53,199

 
100.0
%
 
$
72,536

 
100.0
%
Cost of Goods Sold
 
 
 
 
 
 
 
Material Costs
36,119

 
67.9
%
 
38,785

 
53.5
%
Variable Production Expense
7,803

 
14.7
%
 
10,282

 
14.2
%
Fixed Production Expense
6,762

 
12.7
%
 
6,836

 
9.4
%
Gross Margin
2,515

 
4.7
%
 
16,633

 
22.9
%
General and Administrative Expenses
1,205

 
2.3
%
 
1,385

 
1.9
%
Interest Expense and Other Income, net
204

 
0.4
%
 
720

 
1.0
%
Loss from debt extinguishment
—

 
—

 
4,700

 
6.5
%
Net Income
$
1,106

 
2.1
%
 
$
9,828

 
13.5
%
  
Revenues

Our revenue from operations is derived from three primary sources: sales of ethanol, distillers grains, and corn oil.  The following chart displays statistical information regarding our revenues.The decrease in revenue was attributable to the overall decrease in commodity prices for ethanol and distillers grains. The decrease in revenue from the three months ended December 31, 2015 compared to 2014 was due to the average price per gallon of ethanol decreasing by approximately 15.8%, a decrease in the average price per ton of distillers grains of approximately 9.3%, and a 17.2% decrease in gallons of ethanol sold during the three months ended December 31, 2015 over the three months ended December 31, 2014 as a result of a voluntary reduction in production volume during the three months ended December 31, 2015. Corn oil revenue decreased 27.8% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014.     


14


 
Three Months Ended December 31, 2015
 
Three Months Ended December 31, 2014
 
Amounts in 000's
 
% of Revenues
 
Amounts in 000's
 
% of Revenues
Product Revenue Information
 
 
 
 
 
 
 
Denatured and undenatured Ethanol
$
41,582

 
78.2
%
 
$
59,597

 
82.2
%
Distillers Grains
9,389

 
17.6
%
 
10,078

 
13.9
%
Corn Oil
1,895

 
3.6
%
 
2,624

 
3.6
%
Other
333

 
0.6
%
 
237

 
0.3
%
 
Cost of Goods Sold
 
Our cost of goods sold as a percentage of our revenues was 95.3% and 77.1% for the three months ended December 31, 2015 and 2014, respectively.  Our two primary costs of producing ethanol and distillers grains are corn and energy, with steam and natural gas as our primary energy sources.   Cost of goods sold also includes net (gains) or losses from derivatives and hedging relating to corn.   The average price of corn used in ethanol production per bushel increased 6.1% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. The amount of bushels of corn used in ethanol sold decreased by 16.2% in the three months ended December 31, 2015 from 2014 as a result of a voluntary reduction in production volume during the three months ended December 31, 2015. Our average steam and natural gas energy cost decreased 38.7% per MMBTU comparing the three months ended December 31, 2015 to the three months ended December 31, 2014.
Realized and unrealized gains (losses) related to our derivatives and hedging related to corn resulted in an decrease of $316 thousand in our cost of goods sold for the three months ended December 31, 2015, compared to an decrease of $283 thousand in our cost of goods sold for the three months ended December 31, 2014. We recognize the gains or losses that result from the changes in the value of our derivative instruments related to corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.  We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 
Variable production expenses showed a decrease when comparing the three months ended December 31, 2015 to the three months ended December 31, 2014 due to significantly lower energy costs and as a result of a voluntary reduction in production volume during the three months ended December 31, 2015.
General & Administrative Expense
 
General and administrative expenses include salaries and benefits of administrative employees, professional fees and other general administrative costs.  Our general and administrative expenses for the three months ended December 31, 2015 decreased 13.0% compared to the three months ended December 31, 2014, due to higher legal and advisory expenses in 2014 related to the final subdebt payments and negotiation of new contracts with Bunge and ICM.
Other Expense

Our other expenses were approximately $0.2 million and $0.7 million for the three months ended December 31, 2015 and 2014, respectively, and were approximately 0.4% and 1.0% of our revenues for the three months ended December 31, 2015 and 2014, respectively. The reduction in other expenses is largely due to the reduced interest expense resulting from the December 2014 repayment of subdebt.
Loss from debt extinguishment and change in fair value of put option liability

There was no change in fair market value of the Unit Agreement with ICM, entered into during December, 2014, during the three months ended December 31, 2015. This is a non-cash charge, and is re-evaluated quarterly for significant changes in value. The $4.7 million loss from debt extinguishment recognized in December, 2014 related to the computing of the fair value of the put options.
Selected Financial Data

15


Modified EBITDA is defined as net income plus interest expense net of interest income, plus depreciation and amortization, or EBITDA, as adjusted for unrealized hedging losses (gains) and the loss from debt extinguishment.  Modified EBITDA is not required by or presented in accordance with generally accepted accounting principles in the United States of America ("GAAP"), and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.

We present modified EBITDA because we consider it to be an important supplemental measure of our operating performance and it is considered by our management and Board of Directors as an important operating metric in their assessment of our performance.
We believe modified EBITDA allows us to better compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), the amortization of intangibles (affecting relative amortization expense), unrealized hedging losses (gains) and other items that are unrelated to underlying operating performance.  We also present modified EBITDA because we believe it is frequently used by securities analysts and investors as a measure of performance.   There are a number of material limitations to the use of modified EBITDA as an analytical tool, including the following:

•
Modified EBITDA does not reflect our interest expense or the cash requirements to pay our principal and interest.  Because we have borrowed money to finance our operations, interest expense is a necessary element of our costs and our ability to generate profits and cash flows.  Therefore, any measure that excludes interest expense may have limitations.
•
Although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and modified EBITDA does not reflect the cash requirements for such replacement.   Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits.  Therefore, any measure that excludes depreciation and amortization expense may have limitations.
 
We compensate for these limitations by relying heavily on our GAAP financial measures and by using modified EBITDA as supplemental information.  We believe that consideration of modified EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our operations.  Because modified EBITDA is not a measurement determined in accordance with GAAP and is susceptible to varying calculations, modified EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.  The following table provides a reconciliation of modified EBITDA to net income (in thousands except per unit data):
 
 
Three months ended
 
Three months ended
 
December 31, 2015
 
December 31, 2014
 
 
 
 
EBITDA
 
 
 
Net Income
$
1,106

 
$
9,828

Interest Expense, Net
335

 
727

Depreciation
2,939

 
2,891

EBITDA
4,380

 
13,446


 
 
 
Unrealized Hedging (Gain) Loss
(21
)
 
(1,482
)
Loss from debt extinguishment
—

 
4,700

 
 
 
 
Modified EBITDA
$
4,359

 
$
16,664


 
 
 
Modified EBITDA per unit - basic
$
327.08

 
$
1,250.42



16


Liquidity and Capital Resources
In June 2014, the Company announced the completion of a $66.0 million FCSA Credit Facility with FCSA and CoBank. The proceeds were used to refinance senior bank debt previously outstanding and scheduled to mature in August 2014. The FCSA Credit Facility provided the Company with a term loan of $30 million, due in 2019, and a revolving term loan of $36 million, due in 2023. The interest rate on the FCSA Credit Facility is LIBOR plus 3.35%, which is a significantly lower interest rate than under the prior credit facility.
As of December 31, 2015, we had a cash balance of $3.0 million, $33.5 million available under the Revolving Term Loan and working capital of $1.7 million. As of December 31, 2014, we had a cash balance of $3.1 million, $30.8 million available under the Revolving Term Loan and working capital of $8.3 million.

During the second quarter of Fiscal 2016, we estimate that we will require approximately $38.6 million for our primary input of corn and $3.1 million for our energy sources of electricity, steam, and natural gas. 
Management expects to have sufficient cash available to fund operations for the next twelve months generated by cash from our continuing operations and available cash under our Revolving Term Loan. We cannot estimate the availability of funds for hedging in the future.


Commodity Price Risk 
Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them. As a result of price volatility for these commodities, our operating results may fluctuate substantially. The price and availability of corn are subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, weather, governmental programs and foreign purchases. We may experience increasing costs for corn and natural gas and decreasing prices for ethanol and distillers grains which could significantly impact our operating results. Because the market price of ethanol is not directly related to corn prices, ethanol producers are generally not able to compensate for increases in the cost of corn through adjustments in prices for ethanol.  We continue to monitor corn and ethanol prices and manage the "crush margin" to affect our longer-term profitability.

We enter into various derivative contracts with the primary objective of managing our exposure to adverse price movements in the commodities used for, and produced in, our business operations and, to the extent we have working capital available and available market conditions are appropriate, we engage in hedging transactions which involve risks that could harm our business. We measure and review our net commodity positions on a daily basis.  Our daily net agricultural commodity position consists of inventory, forward purchase and sale contracts, over-the-counter and exchange traded derivative instruments.  The effectiveness of our hedging strategies is dependent upon the cost of commodities and our ability to sell sufficient products to use all of the commodities for which we have futures contracts.  Although we actively manage our risk and adjust hedging strategies as appropriate, there is no assurance that our hedging activities will successfully reduce the risk caused by market volatility which may leave us vulnerable to high commodity prices. Alternatively, we may choose not to engage in hedging transactions in the future. As a result, our future results of operations and financial conditions may also be adversely affected during periods in which price changes in corn, ethanol and distillers grain to not work in our favor.
In addition, as described above, hedging transactions expose us to the risk of counterparty non-performance where the counterparty to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold.  We have, from time to time, experienced instances of counterparty non-performance but losses incurred in these situations were not significant.
Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match any gain or loss on our hedge positions to the specific commodity purchase being hedged.  We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in the current period (commonly referred to as the “mark to market” method). The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.  As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.  Depending on market movements, crop prospects and weather, our hedging strategies may cause immediate adverse effects, but are expected to produce long-term positive impact.

17


In the event we do not have sufficient working capital to enter into hedging strategies to manage our commodities price risk, we may be forced to purchase our corn and market our ethanol at spot prices and as a result, we could be further exposed to market volatility and risk. However, during the past year, the spot market has been advantageous.
Credit and Counterparty Risks

Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities.  We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations.  The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts).   We actively monitor credit and counterparty risk through credit analysis (by our marketing agent). 

Impact of Hedging Transactions on Liquidity
Our operations and cash flows are highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative instruments, including forward corn contracts and over-the-counter exchange-traded futures and option contracts. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative instruments. When the value of our open derivative positions decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease or we may require significant liquidity with little advanced notice to meet margin calls. Conversely, when the value of our open derivative positions increase, our brokers may be required to deliver margin deposits to us for a portion of the increase.  We continuously monitor and manage our derivative instruments portfolio and our exposure to margin calls and while we believe we will continue to maintain adequate liquidity to cover such margin calls from operating results and borrowings, we cannot estimate the actual availability of funds from operations or borrowings for hedging transactions in the future.
The effects, positive or negative, on liquidity resulting from our hedging activities tend to be mitigated by offsetting changes in cash prices in our business. For example, in a period of rising corn prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in local corn markets. These offsetting changes do not always occur, however, in the same amounts or in the same period.
We expect that a $1.00 per bushel fluctuation in market prices for corn would impact our cost of goods sold by approximately $45 million, or $0.36 per gallon, assuming our plant operates at 100% of our capacity.  We expect the annual impact to our results of operations due to a $0.50 decrease in ethanol prices will result in approximately a $62 million decrease in revenue.


Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements.

18


Item 3.   Quantitative and Qualitative Disclosures about Market Risk
Not applicable.

Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

SIRE's  management,  under the supervision and with  the  participation  of  SIRE's president and chief executive officer and SIRE's chief financial officer,  have evaluated the  effectiveness of SIRE's disclosure  controls  and  procedures  (as defined in Rule  13a-15(e) under the Securities  Exchange  Act of 1934) as of the end of the  period covered by this quarterly report.  Based on that evaluation,  SIRE's president and chief executive officer and SIRE's chief financial officer have concluded  that, as of the end of the period covered by this quarterly report, SIRE's disclosure controls and procedures have been effective to provide  reasonable  assurance that the information required to be disclosed in the reports SIRE  files or submits under the Securities Exchange  Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to management, including SIRE's principal executive and principal financial officers or persons performing such functions, as appropriate, to allow timely decisions regarding  disclosure.  SIRE believes that a control system, no matter how well designed and operated, cannot provide absolute  assurance that the  objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
No Changes in Internal Control Over Financial Reporting
 
No change in SIRE's internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, SIRE's internal control over financial reporting.

PART II – OTHER INFORMATION
 
Item 1.   Legal Proceedings.
On August 25, 2010, the Company entered into a Tricanter Purchase and Installation Agreement (the “Tricanter Agreement”) with ICM, pursuant to which ICM sold the Company a tricanter corn oil separation system (the “Tricanter Equipment”). Under the Tricanter Agreement, ICM has agreed to indemnify the Company from any and all lawsuit and damages with respect to the Company's installation and use of the Tricanter Equipment.
On August 5, 2013, GS Cleantech Corporation (“GS Cleantech”) filed a suit in United States District Court for the Southern District of Iowa, Western Division (Case No. 2:13-CV-00021-JAJ-CFB) (the "District Court"), naming the Company as a defendant (the “Lawsuit”). The Lawsuit alleges infringement of a patent assigned to GS Cleantech with respect to the corn oil separation technology used in the Tricanter Equipment. The Lawsuit seeks preliminary and permanent injunctions against the Company to prevent future infringement on the patent owned by GS CleanTech and damages in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, plus attorney's fees.
On October 23, 2014, the patents owned by GS CleanTech in the Lawsuit were found to be invalid by the District Court for the Southern District of Indiana (the “SD of Indiana District Court”). On January 15, 2015, the Company received a partial summary judgment finding in the Lawsuit by the SD of Indiana District Court consistent with the October 23, 2014 ruling.
Other parties to the litigation are currently pursuing additional counterclaims and defenses against GS
Cleantech, seeking to prove inequitable conduct on the part of GS Cleantech in connection with the issuance of its
patents, as an additional ground for unenforceability of the patents. A trial on inequitable conduct was held in the first quarter of Fiscal 2016 and a ruling is expected in the second quarter of Fiscal 2016.
The Company is not currently able to predict the final outcome of this Lawsuit with any degree of certainty as GS CleanTech retains the right to appeal summary judgment and there are still defendant cross-claims pending. Under the Tricanter Agreement, ICM is obligated to, and has retained counsel at its expense to defend the Company in this Lawsuit. However, in the event that damages are awarded as a result of this Lawsuit and, if ICM is unable to fully indemnify the Company for any reason, the Company could be liable for such damages.
 
Item 1A.   Risk Factors.

19


There have been no material changes to the risk factors disclosed in Item IA of our Form 10-K for the fiscal year ended September 30, 2015. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

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

Item 3. Defaults Upon Senior Securities.
 
None

Item 4. Mine Safety Disclosures.
 
Not applicable.

Item 5. Other Information.
 
None

Item 6.   Exhibits
31.1
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.
 
 
31.2
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.
 
 
32.1***
Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.
 
 
32.2***
Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.
 
 
101.XML^
XBRL Instance Document
 
 
101.XSD^
XBRL Taxonomy Schema
 
 
101.CAL^
XBRL Taxonomy Calculation Database
 
 
101.LAB^
XBRL Taxonomy Label Linkbase
 
 
101.PRE^
XBRL Taxonomy Presentation Linkbase
 
 
***
This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
^
Furnished, not filed.

20


SIGNATURES
 
In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
 
 
 
Date:
February 10, 2016
/s/ Brian T. Cahill
 
 
Brian T. Cahill, President and Chief Executive Officer
 
 
 
Date:
February 10, 2016
/s/ Brett L. Frevert
 
 
Brett L. Frevert, CFO and Principal Financial Officer

21

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Reports