UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

o		Transition report under Section 13 or 15(d) of the Exchange Act.

Commission file number 000-53036

CARDINAL ETHANOL, LLC

(Name of small business issuer in its charter)

Indiana		20-2327916
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
1554 N. County Road 600 E., Union City, IN		47390
(Address of principal executive offices)		(Zip Code)

(765) 964-3137
(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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. þ 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). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

As of March 31, 2010, the aggregate market value of the membership units held by non-affiliates (computed by reference to the most recent offering price of such membership units) was $55,335,000.

As of December 15, 2010, there were 14,606 membership units outstanding.

The information required in Part III of this Annual Report is incorporated herein by reference to the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended September 30, 2010.

 

 

Table of Contents

PART I			4
ITEM 1. BUSINESS			4
ITEM 1A. RISK FACTORS			14
ITEM 2. PROPERTIES			20
ITEM 3. LEGAL PROCEEDINGS			20
ITEM 4. REMOVED AND RESERVED			20
PART II			20
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			20
ITEM 6. SELECTED FINANCIAL DATA			23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			36
ITEM 9A. CONTROLS AND PROCEDURES			36
ITEM 9B. OTHER INFORMATION			37
PART III			37
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE			37
ITEM 11. EXECUTIVE COMPENSATION			37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS			37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE			37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			38
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			38
SIGNATURES			41
Exhibit 10.30
Exhibit 10.31
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This annual report 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 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:

•		Changes in the availability and price of corn and natural gas;
•		Our inability to secure credit we may require to continue our operations;
•		Negative impacts that our hedging activities may have on our operations;
•		Decreases in the market prices of ethanol and distiller’s grains;
•		Ethanol supply exceeding demand; and corresponding ethanol price reductions;
•		Changes in the environmental regulations that apply to our plant operations;
•		Changes in our business strategy, capital improvements or development plans;
•		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;
•		Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;
•		Changes in federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);
•		Changes and advances in ethanol production technology;
•		Additional ethanol plants built in close proximity to our ethanol facility;
•		Competition from alternative fuel additives;
•		Changes in interest rates and lending conditions;
•		Our ability to generate free cash flow to invest in our business and service our debt;
•		Our ability to retain key employees and maintain labor relations;
•		Volatile commodity and financial markets;
•		Changes in legislation including the Renewable Fuels Standard and VEETC;
•		Our ability to satisfy the financial covenants contained in our credit agreements with our lender; and
•		The reduction or expiration of VEETC and reduction or elimination of the tariff on foreign ethanol.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. 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 and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

AVAILABLE INFORMATION

Information about us is also available at our website at www.cardinalethanol.com, under “SEC Filings” which includes links to the reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.

PART I

ITEM 1.		BUSINESS.

Business Development

Cardinal Ethanol, LLC is an Indiana limited liability company organized on February 7, 2005, for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant in east central Indiana near Union City, Indiana. References to “we,” “us,” “our,” “Cardinal” and the “Company” refer to Cardinal Ethanol, LLC. Since November 1, 2008, we have been engaged in the production of ethanol, distiller’s grains and corn oil at the plant.

In August 2010, we obtained a new Title V air permit allowing us to increase our ethanol production to 140 million gallons compared to 110 million gallons under our previous permit. Since obtaining the new permit, we have been steadily increasing production to a level between 112 million gallons and 118 million gallons. We expect we will continue to produce at this level through the end of the calendar year.

Financial Information

Please refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information about our revenue, profit and loss measurements and total assets and liabilities and “Item 8 — Financial Statements and Supplementary Data” for our financial statements and supplementary data.

Principal Products and Markets

The principal products we are producing at the plant are fuel-grade ethanol and distillers grains. In addition, we are extracting corn oil for sale. Raw carbon dioxide gas is another co-product of the ethanol production process. We have entered into an agreement with EPCO Carbon Dioxide Products to capture the raw carbon dioxide we produce at the plant.

Ethanol

Our primary product is ethanol. Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains. According to the Renewable Fuels Association, approximately 85 percent of ethanol in the United States today is produced from corn, and approximately 90 percent of ethanol is produced from a corn and other input mix. The ethanol we produce is manufactured from corn. Although the ethanol industry continues to explore production technologies employing various feedstocks, such as biomass, corn-based production technologies remain the most practical and provide the lowest operating risks. Corn produces large quantities of carbohydrates, which convert into glucose more easily than most other kinds of biomass. The Renewable Fuels Association estimates current domestic ethanol production at approximately 13.2 billion gallons as of November 11, 2010.

An ethanol plant is essentially a fermentation plant. Ground corn and water are mixed with enzymes and yeast to produce a substance called “beer,” which contains about 10% alcohol and 90% water. The “beer” is boiled to separate the water, resulting in ethyl alcohol, which is then dehydrated to increase the alcohol content. This product is then mixed with a certified denaturant to make the product unfit for human consumption and commercially saleable.

Ethanol can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide emissions; and (iii) a non-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form for blending with unleaded gasoline and other fuel products. Used as a fuel oxygenate, ethanol provides a means to control carbon monoxide emissions in large metropolitan areas. The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender. The principal markets for our ethanol are petroleum terminals in the northeastern United States.

Approximately 85% of our revenue was derived from the sale of ethanol during our fiscal year ended September 30, 2010.

Distillers Grains

The principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy, beef, poultry and swine industries. Distillers grains contain by-pass protein that is superior to other protein supplements such as cottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generating greater lactation in milk cows and greater weight gain in beef cattle. Dry mill ethanol processing creates three forms of distiller grains: Distillers Wet Grains with Solubles (“DWS”), Distillers Modified Wet Grains with Solubles (“DMWS”) and Distillers Dried Grains with Solubles (“DDGS”). DWS is processed corn mash that contains approximately 70% moisture. DWS has a shelf life of approximately three days and can be sold only to farms within the immediate vicinity of an ethanol plant. DMWS is DWS that has been dried to approximately 50% moisture. DMWS have a slightly longer shelf life of approximately ten days and are often sold to nearby markets. DDGS is DWS that has been dried to 10% to 12% moisture. DDGS has an almost indefinite shelf life and may be sold and shipped to any market regardless of its vicinity to an ethanol plant.

Approximately 14% of our revenue was derived from the sale of distiller’s grains during our fiscal year ended September 30, 2010.

Corn Oil

In November 2008, we began separating some of the corn oil contained in our distiller’s grains for sale. Corn oil sales represented less than 1% of our revenues for our 2010 fiscal year. We anticipate continuing to fine tune the operation of our corn oil extraction equipment and we expect that it will operate more efficiently in the future. The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption without further refining. However, corn oil can be used as the feedstock to produce biodiesel and has other industrial uses.

Carbon Dioxide

We entered into an Agreement with EPCO Carbon Dioxide Products, Inc. (“EPCO”) under which EPCO purchases the carbon dioxide gas produced at our plant. In addition, we entered into a Site Lease Agreement with EPCO under which EPCO leases a portion of our property, on which it is operating a carbon dioxide liquefaction plant. We supply to EPCO, at the liquefaction plant, carbon dioxide gas meeting certain specifications and at a rate sufficient for EPCO to produce 6.25 tons of liquid carbon dioxide per hour. EPCO pays Cardinal a contractual price per ton of liquid carbon dioxide shipped out of the liquefaction plant by EPCO. The contract rate varies based on volume thresholds.

Ethanol and Distillers Grains Markets

As described below in “Distribution of Principal Products,” we market and distribute our ethanol and distillers grains through third parties. Our ethanol and distillers grains marketers make all decisions, in consultation with management, with regard to where our products are marketed. Our ethanol and distillers grains are predominately sold in the domestic market. Specifically, we ship a substantial portion of the ethanol we produce to the New York harbor. However, as domestic production of ethanol, distillers grains and corn oil continue to expand, we anticipate increased international sales of our products. Currently, the United States ethanol industry exports a significant amount of distillers grains to Mexico, Canada and China. Management anticipates that demand for distillers grains in the Asian market may continue to increase in the future as distillers grains are used in animal feeding operations in China. During our fourth quarter of 2010, the ethanol industry experienced increased ethanol exports to Europe. These ethanol exports benefited ethanol prices in the United States. We anticipate that ethanol exports will remain steady.

We expect our ethanol and distillers grains marketers to explore all markets for our products, including export markets. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.

Distribution of Principal Products

Our ethanol plant is located near Union City, Indiana in Randolph County. We selected the site because of its location to existing ethanol consumption and accessibility to road and rail transportation. Our site is in close proximity to rail and major highways that connect to major population centers such as Indianapolis, Cincinnati, Columbus, Cleveland, Toledo, Detroit, New York and Chicago.

Ethanol Distribution

We entered into an Ethanol Purchase and Sale Agreement with Murex, N.A., Ltd. (“Murex”) for the purpose of marketing and distributing all of the ethanol we produce at the plant. The initial term of the agreement is five years commencing on the date of first delivery of ethanol with automatic renewal for one year terms thereafter unless otherwise terminated by either party. During fiscal year 2009, we extended our Agreement with Murex to include an additional three years and the commission was increased from 0.90% to 1.10% of the purchase price, net of all resale costs, in exchange for reducing the payment terms from 20 days to 7 days after shipment. The amended agreement allowed us to revert back to the original payment terms and commission amount. We elected to revert back to the original terms during fiscal year 2010. The agreement may be terminated due to the insolvency or intentional misconduct of either party or upon the default of one of the parties as set forth in the agreement. Under the terms of the agreement, Murex markets all of our ethanol unless we choose to sell a portion at a retail fueling station owned by us or one of our affiliates. Murex pays to us the purchase price invoiced to the third-party purchaser less all resale costs, taxes paid by Murex and Murex’s commission. Murex has agreed to purchase on its own account and at market price any ethanol which it is unable to sell to a third party purchaser. Murex has promised to use its best efforts to obtain the best purchase price available for our ethanol. In addition, Murex has agreed to promptly notify us of any and all price arbitrage opportunities. Under the agreement, Murex is responsible for all transportation arrangements for the distribution of our ethanol.

Distillers Grains Distribution

We have entered into an agreement with CHS, Inc. to market all our distillers grains we produce at the plant. CHS, Inc. is a diversified energy, grains and foods company owned by farmers, ranchers and cooperatives. CHS, Inc. provides products and services ranging from grain marketing to food processing to meet the needs of its customers around the world. We receive a percentage of the selling price actually received by CHS, Inc. in marketing our distillers grains to its customers. The initial term of our agreement with CHS, Inc. was for one year commencing as of November 1, 2008. Thereafter, the agreement will remain in effect unless otherwise terminated by either party with 120 days notice. Under the agreement, CHS, Inc. will be responsible for all transportation arrangements for the distribution of our distillers grains.

New Products and Services

As discussed above, we have entered into an Agreement with EPCO Carbon Dioxide Products, Inc. (“EPCO”) under which EPCO purchases the carbon dioxide gas produced at our plant. We supply to EPCO, carbon dioxide gas meeting certain specifications and at a rate sufficient for EPCO to produce 6.25 tons of liquid carbon dioxide per hour. EPCO pays us per ton of liquid carbon dioxide shipped out of the liquefaction plant by EPCO.

Federal Ethanol Supports and Governmental Regulation

Federal Ethanol Supports

The ethanol industry is dependent on several economic incentives to produce ethanol, including federal tax incentives and ethanol use mandates. One significant federal ethanol support is the Federal Renewable Fuels Standard (the “RFS”). 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 RFS requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

The RFS for 2010 was approximately 13 billion gallons, of which corn based ethanol could be used to satisfy approximately 12 billion gallons. The RFS for 2011 is approximately 14 billion gallons, of which corn based ethanol can be used to satisfy approximately 12.6 billion gallons. Current ethanol production capacity exceeds the 2011 RFS requirement which can be satisfied by corn based ethanol.

In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of green house gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in green house gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% green house gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these green house gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% green house gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle green house gas requirement and is not required to prove compliance with the lifecycle green house gas reductions. Many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.

Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the United States is approximately 135 billion gallons per year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per year. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends such as E85 used in flex fuel vehicles. Many in the ethanol industry believe that we will reach this blending wall in 2011, since the RFS requirement for 2011 is 14 billion gallons, much of which will come from ethanol. The RFS requires that 36 billion gallons of renewable fuels must be used each year by 2022, which equates to approximately 27% renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand demand for ethanol, management believes higher percentage blends of ethanol must be utilized in standard vehicles.

Recently, the United States Environmental Protection Agency allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2007 and later. The EPA is expected to make a ruling on allowing E15 for use in vehicles produced in model year 2001 and later by the end of 2010. However, management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15. As a result, the approval of E15 may not significantly increase demand for ethanol. Two lawsuits were filed on November 9, 2010 by representatives of the food industry and the petroleum industry challenging the EPA’s approval of E15. It is unclear what effect these lawsuits will have on the implementation of E15 in the United States retail gasoline market.

In addition to the RFS, the ethanol industry depends on the Volumetric Ethanol Excise Tax Credit (“VEETC”). VEETC provides a volumetric ethanol excise tax credit of 4.5 cents per gallon of gasoline that contains at least 10% ethanol (total credit of 45 cents per gallon of ethanol blended which is 4.5 divided by the 10% blend). VEETC was scheduled to expire on December 31, 2010. However, on December 20, 2010, VEETC was extended through the end of 2011. If this tax credit is not renewed past the 2011 calendar year, it likely would have a negative impact on the price of ethanol and demand for ethanol in the market. Further, elimination of VEETC may lead to less discretionary blending of ethanol where gasoline blenders use ethanol to reduce the cost of blended gasoline. However, due to the RFS, we anticipate that demand for ethanol will continue to mirror the RFS requirement, even without the VEETC. If the RFS is reduced or eliminated, the decrease in demand for ethanol related to the elimination of VEETC may be more substantial.

The USDA announced that it will provide financial assistance to help implement more “blender pumps” in the United States in order to increase demand for ethanol and to help offset the cost of introducing mid-level ethanol blends into the United States retail gasoline market. A blender pump is a gasoline pump that can dispense a variety of different ethanol/gasoline blends. Blender pumps typically can dispense E10, E20, E30, E40, E50 and E85. These blender pump accomplish these different ethanol/gasoline blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations. Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers with flex-fuel vehicles to purchase more ethanol through these mid-level blends. However, blender pumps cost approximately $25,000 each, so it may take time before they become widely available in the retail gasoline market.

United States ethanol production is currently benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States. However, the 54 cent per gallon tariff is set to expire at the end of the 2011 calendar year. Elimination of the tariff could lead to the importation of ethanol produced in other countries, especially in areas of the United States that are easily accessible by international shipping ports. Ethanol imported from other countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.

Effect of Governmental Regulation

The government’s regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct, expand and operate the plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding the required oxygen content of automobile emissions could have an adverse effect on the ethanol industry. Plant operations are governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of operating the plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.

We have obtained all of the necessary permits to operate the plant. In the fiscal year ended September 30, 2010, we incurred costs and expenses of approximately $91,000 complying with environmental laws, including the cost of obtaining permits. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.

In late 2009, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in green house gases which is measured using a lifecycle analysis, similar to RFS2. Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly harms corn based ethanol. Management believes that these new regulations will preclude corn based ethanol from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Currently, several lawsuits have been filed challenging the California LCFS.

Competition

We are in direct competition with numerous ethanol producers, many of whom have greater resources than we do. Following the significant growth during 2005 and 2006, the ethanol industry has grown at a much slower pace. As of November 11, 2010, the Renewable Fuels Association estimates that there are 204 ethanol production facilities in the U.S. with capacity to produce approximately 13.8 billion gallons of ethanol and another 9 plants under expansion or construction with capacity to produce an additional 840 million gallons. However, the Renewable Fuels Association estimates that approximately 4.7% of the ethanol production capacity in the United States is currently idled. This is down from 2009 when the idled capacity may have been as high as 20%. Since ethanol is a commodity product, competition in the industry is predominantly based on price. Larger ethanol producers may be able to realize economies of scale that we are unable to realize. This could put us at a competitive disadvantage to other ethanol producers. The ethanol industry is continuing to consolidate where a few larger ethanol producers are increasing their production capacities and are controlling a larger portion of the United States ethanol production. The largest ethanol producers include Archer Daniels Midland, Green Plains Renewable Energy, POET and Valero Renewable Fuels each of which are capable of producing significantly more ethanol than we produce.

The following table identifies the majority of the largest ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL PRODUCTION CAPACITY
BY TOP PRODUCERS
Producers of Approximately 400
million gallons per year (mmgy) or more

						Under Construction/
		Current Capacity				Expansions
Company		(mmgy)				(mmgy)
POET Biorefining			1,629.0				5.0
Archer Daniels Midland			1,450.0				275
Valero Renewable Fuels			1,130.0
Green Plains Renewable Energy			657.0

Updated: November 11, 2010

We also anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock that is being explored is cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice, straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. Currently, cellulosic ethanol production technology is not sufficiently advanced to produce cellulosic ethanol on a commercial scale, however, due to these new government incentives, we anticipate that commercially viable cellulosic ethanol technology will be developed in the near future. Several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol, especially if corn prices remain high. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

At the end of 2008, VeraSun Energy filed for Chapter 11 Bankruptcy following significant losses it experienced on raw material derivative positions it had in place. VeraSun’s ethanol plants were auctioned during the Chapter 11 Bankruptcy process and a significant number of these plants were purchased by Valero Energy Corporation which is a major gasoline refining company. The purchase by Valero Energy represents the first major oil company that has taken a stake in ethanol production infrastructure. Further, now Valero Energy controls its own supply of ethanol that can be used to blend at its gasoline refineries. Should other oil companies become involved in the ethanol industry, it may be increasingly difficult for us to compete. While we believe that we are a low cost producer of ethanol, increased competition in the ethanol industry may make it more difficult to operate the ethanol plant profitably.

Ethanol production is also expanding internationally. Ethanol produced or processed in certain countries in Central America and the Caribbean region is eligible for tariff reduction or elimination on importation to the United States under a program known as the Caribbean Basin Initiative. Some ethanol producers, including Cargill, have started taking advantage of this situation by building dehydration plants in participating Caribbean Basin countries, which convert ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean Basin countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably. Further, despite the fact that there is a significant amount of ethanol produced in the United States, ethanol produced abroad and shipped by sea may be a more favorable alternative to supply coastal cities that are located on international shipping ports.

Our ethanol plant also competes with producers of other gasoline additives having similar octane and oxygenate values as ethanol. Alternative fuels, gasoline oxygenates and alternative ethanol production methods are also continually under development. The major oil companies have significantly greater resources than we have to market other additives, to develop alternative products, and to influence legislation and public perception of ethanol. These companies also have sufficient resources to begin production of ethanol should they choose to do so.

A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technological option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell industry continues to expand and gain broad acceptance and becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, which would negatively impact our profitability.

Distillers Grains Competition

Ethanol plants in the Midwest produce the majority of distillers grains and primarily compete with other ethanol producers in the production and sales of distillers grains. According to the Renewable Fuels Association’s Ethanol Industry Outlook 2010, ethanol plants produced more than 25 million metric tons of distillers grains in 2008/2009 and will produce an estimated 29 million metric tons in 2009/2010. The amount of distillers grains produced is expected to increase as ethanol production increases.

The primary consumers of distillers grains are dairy and beef cattle, according to the Renewable Fuels Association’s Ethanol Industry Outlook 2010. In recent years, an increasing amount of distillers grains have been used in the swine and poultry markets. Numerous feeding trials show advantages in milk production, growth, rumen health, and palatability over other dairy cattle feeds. With the advancement of research into the feeding rations of poultry and swine, we expect these markets to expand and create additional demand for distillers grains; however, no assurance can be given that these markets will in fact expand, or if they do, that we will benefit from it. The market for distillers grains is generally confined to locations where freight costs allow it to be competitively priced against other feed ingredients. Distillers grains compete with three other feed formulations: corn gluten feed, dry brewers grain and mill feeds. The primary value of these products as animal feed is their protein content. Dry brewers grain and distillers grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower protein contents.

Sources and Availability of Raw Materials

Corn Feedstock Supply

The major raw material required for our ethanol plant to produce ethanol and distillers grain is corn. To produce 100 million gallons of ethanol per year, our ethanol plant needs approximately 36 million bushels of corn per year, or approximately 100,000 bushels per day, as the feedstock for its dry milling process. We primarily purchase the corn supply for our plant from local markets, but may be required to purchase some of the corn we need from other markets and transport it to our plant via truck or rail in the future. Traditionally, corn grown in the area of the plant site has been fed locally to livestock or exported for feeding or processing and/or overseas export sales.

We have entered into a Corn Feedstock Supply Agency Agreement with Bunge North America, Inc. (Bunge). The purpose of the agreement is to set out the terms upon which Bunge has agreed to serve as our exclusive third-party agent to procure corn to be used as feedstock at our ethanol production facility. Pursuant to the agreement, Bunge provides two grain originators to work at the facility to negotiate and execute contracts on our behalf and arrange the shipping and delivery of the corn required for ethanol production. In return for providing these services, Bunge receives an agency fee which is equal to a set monthly amount for the first two years. In the following years, the agency fee shall be equal to an amount per bushel of corn delivered subject to an annual minimum amount. We may also directly procure corn to be used for our feedstock. The initial term of the agreement is for five years to automatically renew for successive three-year periods unless properly terminated by one of the parties. The parties also each have the right to terminate the agreement in certain circumstances, including, but not limited to, material breach by, bankruptcy and insolvency of, or change in control of, the other party.

We are significantly dependent on the availability and price of corn. The price at which we purchase corn will depend on prevailing market prices. There is no assurance that a shortage will not develop, particularly if there are other ethanol plants competing for corn or an extended drought or other production problem. We anticipate that corn prices will continue to be extremely volatile.

We may need to truck or rail in some of our corn feedstock, which additional transporation costs may reduce our profit margins.

On December 10, 2010, the United States Department of Agriculture (“USDA”) released its Crop Production report, which estimated the 2010 grain corn crop at 12.54 billion bushels. The December 10, 2010 estimate of the 2010 corn crop is approximately 5% lower than the record set in 2009 of 13.2 billion bushels. Corn prices rose dramatically in July through September. The current outlook for corn prices shows rising corn prices over the next few months. We expect continued volatility in the price of corn, which could significantly impact our costs of goods sold.

The price and availability of corn are subject to significant fluctuations depending upon a number of factors affecting grain commodity prices in general, including crop conditions, weather, governmental programs and foreign purchases. Because the market price of ethanol is not directly related to grain prices, ethanol producers are generally not able to compensate for increases in the cost of grain feedstock through adjustments in prices charged for their ethanol. We therefore anticipate that our plant’s profitability will be negatively impacted during periods of high grain prices.

In an attempt to minimize the effects of the volatility of corn costs on operating profits, we take hedging positions in corn futures markets. Hedging means protecting the price at which we buy corn and the price at which we will sell our products in the future. It is a way to attempt to reduce the risk caused by price fluctuation. The effectiveness of hedging activities is dependent upon, among other things, the cost of corn and our ability to sell sufficient amounts of ethanol and distillers grains to utilize all of the corn subject to the futures contracts. Hedging activities can result in costs to us because price movements in grain contracts are highly volatile and are influenced by many factors beyond our control. These costs may be significant.

Risk Management Services

We entered into a Risk Management Agreement with John Stewart & Associates (“JS&A”) under which JS&A provides risk management and related services pertaining to grain hedging, grain pricing information, aid in purchase of grain, and assistance in risk management as it pertains to ethanol and our co-products. In exchange for JS&A’s risk management services, we pay JS&A a fee of $1,500 per month. The term of the agreement is for one year and will continue on a month to month basis thereafter. The agreement may be terminated by either party at any time upon written notice.

We have also entered into an agreement with Advance Trading to assist us with hedging corn, ethanol and natural gas. We pay them a fee of $1,000 per month for these services. The term of the agreement is a month to month agreement, and may be terminated by either party at any time upon proper notice.

Utilities

We engaged U.S. Energy Services, Inc. to assist us in negotiating our utilities contracts and provide us with on-going energy management services. U.S. Energy manages the procurement and delivery of energy to their clients’ locations. U.S. Energy Services is an independent, employee-owned company, with their main office in Minneapolis, Minnesota and branch offices in Kansas City, Kansas and Omaha, Nebraska. U.S. Energy Services manages energy costs through obtaining, organizing and tracking cost information. Their major services include supply management, price risk management and plant site development. Their goal is to develop, implement, and maintain a dynamic strategic plan to manage and reduce their clients’ energy costs. A large percentage of U.S. Energy Services’ clients are ethanol plants and other renewable energy plants. We pay U.S. Energy Services, Inc. a monthly fee of $3,500 plus pre-approved travel expenses. The monthly fee will increase 4% per year on the anniversary date of the agreement. The agreement continued twelve (12) months after the plant’s completion date of November 2008. The agreement is year to year thereafter.

Natural Gas. Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage for our fiscal year ended September 30, 2010 was approximately 3,127,000 MMBTU, constituting approximately 7.9% of our total costs of goods sold. We are using natural gas to produce process steam and to dry our distillers grain products to a moisture content at which they can be stored for long periods of time, and can be transported greater distances, so that we can market the product to broader livestock markets, including poultry and swine markets in the continental United States.

On March 20, 2007, we entered into a Long-Term Transportation Service Contract for Redelivery of Natural Gas with Ohio Valley. Under the contract, Ohio Valley receives, transports and redelivers natural gas to us for all of our natural gas requirements up to a maximum of 100,000 therms per purchase gas day and our estimated annual natural gas requirements of 34,000,000 therms. For all gas received for and redelivered to us by Ohio Valley, we pay a throughput rate in the amount of $0.0138 per therm for the first five years of the contract term, and $0.0138 increased by the compounded inflation rate as established and determined by the U.S. Consumer Price Index — All Urban Consumers for Transportation for the following five years. In addition, we pay a service charge for all gas received for and redelivered to us by Ohio Valley in the amount of $750 per delivery meter per billing cycle per month for the first five years of the contract term and $750 increased by the compounded inflation rate over the initial rate as established and determined by the U.S. Consumer Price Index — All Urban Consumers for Transportation for the following five years. The initial term of the contract is ten years. Provided neither party terminates the contract, the contract will automatically renew for a series of not more than three consecutive one year periods.

Electricity. We require a significant amount of electrical power to operate the plant. On May 2, 2007, we entered into an agreement with Indiana Michigan Power Company to furnish our electric energy. The initial term of the contract is 30 months from the time service is commenced and continues thereafter unless terminated by either party with 12 months written notice. We pay Indiana Michigan Power Company monthly pursuant to their standard rates.

Water. We require a significant supply of water. Engineering specifications show our plant’s water requirements to be approximately 774 gallons per minute, 1.1 million gallons per day, depending on the quality of water. We have assessed our water needs and available supply. Union City Water Works is supplying the water necessary to operate our plant.

Much of the water used in our ethanol plant is recycled back into the process. There are, however, certain areas of production where fresh water is needed. Those areas include boiler makeup water and cooling tower water. Boiler makeup water is treated on-site to minimize all elements that will harm the boiler and recycled water cannot be used for this process. Cooling tower water is deemed non-contact water because it does not come in contact with the mash, and, therefore, can be regenerated back into the cooling tower process. The makeup water requirements for the cooling tower are primarily a result of evaporation. Much of the water can be recycled back into the process, which minimizes the discharge water. This will have the long-term effect of lowering wastewater treatment costs. Many new plants today are zero or near zero effluent discharge facilities. Our plant design incorporates the ICM/Phoenix Bio-Methanator wastewater treatment process resulting in a zero discharge of plant process water.

Employees

We currently have 48 full-time employees.

Research and Development

We do not conduct any research and development activities associated with the development of new technologies for use in producing ethanol and distillers grains.

Patents, Trademarks, Licenses, Franchises and Concessions

We do not currently hold any patents, trademarks, franchises or concessions. We were granted a license by ICM to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM was included in the amount we paid to Fagen to design and built our ethanol plant and expansion.

Seasonality of Ethanol Sales

We experience some seasonality of demand for ethanol. Since ethanol is predominantly blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand.

Working Capital

We primarily use our working capital for purchases of raw materials necessary to operate the ethanol plant. Our primary source of working capital is our operations along with our short-term revolving line of credit with our primary lender First National Bank of Omaha. At November 30, 2010, we have approximately $10,000,000 available to draw on the short-term revolving line of credit. We currently have no outstanding borrowings under our short-term revolving line of credit.

Dependence on One or a Few Major Customers

As discussed above, we have entered into a marketing agreement with Murex for the purpose of marketing and distributing our ethanol and have engaged CHS, Inc. for the purpose of marketing and distributing our distillers grains. We rely on Murex for the sale and distribution of our ethanol and CHS, Inc. for the sale and distribution of our distillers grains. Therefore, although there are other marketers in the industry, we are highly dependent on Murex and CHS, Inc. for the successful marketing of our products. Any loss of Murex or CHS, Inc. as our marketing agent for our ethanol and distillers grains respectively could have a significant negative impact on our revenues.

Financial Information about Geographic Areas

All of our operations are domiciled in the United States. All of the products sold to our customers for fiscal years 2010, 2009 and 2008 were produced in the United States and all of our long-lived assets are domiciled in the United States. We have engaged third-party professional marketers who decide where our products are marketed and we have no control over the marketing decisions made by our third-party professional marketers. These third-party marketers may decide to sell our products in countries other than the United States. Currently, a significant amount of distillers grains are exported to Mexico, Canada and China and the United States ethanol industry has recently experienced increased exports of ethanol to Europe. However, we anticipate that our products will still primarily be marketed and sold in the United States.

ITEM 1A.		RISK FACTORS.

You should carefully read and consider the risks and uncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.

Risks Relating to Our Business

If the Federal Volumetric Ethanol Excise Tax Credit (“VEETC”) expires on December 31, 2011, it could negatively impact our profitability. The ethanol industry is benefited by VEETC which is a federal excise tax credit of 4.5 cents per gallon of ethanol blended with gasoline at a rate of at least 10%. This excise tax credit is now set to expire on December 31, 2011. We believe that VEETC positively impacts the price of ethanol. On December 31, 2009, the biodiesel blenders’ credit that benefits the biodiesel industry was allowed to expire. This resulted in the biodiesel industry significantly decreasing biodiesel production because the price of biodiesel without the tax credit was uncompetitive with the cost of petroleum based diesel. If VEETC is allowed to expire, it could negatively impact the price we receive for our ethanol and could negatively impact our profitability.

We have a significant amount of debt, and our existing debt financing agreements contain, and our future debt financing agreements may contain, restrictive covenants that limit distributions and impose restrictions on the operation of our business. The use of debt financing makes it more difficult for us to operate because we must make principal and interest payments on the indebtedness and abide by covenants contained in our debt financing agreements. The level of our debt may have important implications on our operations, including, among other things: (a) limiting our ability to obtain additional debt or equity financing; (b) placing us at a competitive disadvantage because we may be more leveraged than some of our competitors; (c) subjecting all or substantially all of our assets to liens, which means that there may be no assets left for unit holders in the event of a liquidation; and (d) limiting our ability to make business and operational decisions regarding our business, including, among other things, limiting our ability to pay dividends to our unit holders, make capital improvements, sell or purchase assets or engage in transactions we deem to be appropriate and in our best interest.

Increases in the price of corn or natural gas would reduce our profitability. Our primary source of revenue is from the sale of ethanol, distiller’s grains and corn oil. Our results of operations and financial condition are significantly affected by the cost and supply of corn and natural gas. Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control including weather and general economic factors.

Ethanol production requires substantial amounts of corn. Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to operate profitably because of the higher cost of operating our plant. We may not be able to offset any increase in the price of corn by increasing the price of our products. If we cannot offset increases in the price of corn, our financial performance may be negatively affected.

The prices for and availability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond our control such as higher prices as a result of colder than average weather conditions or natural disasters, overall economic conditions and foreign and domestic governmental regulations and relations. Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and more significantly, distiller’s grains for our customers. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments. However, these hedging transactions also involve risks to our business. See “Risks Relating to Our Business — We engage in hedging transactions which involve risks that could harm our business.” If we were to experience relatively higher corn and natural gas costs compared to the selling prices of our products for an extended period of time, the value of our units may be reduced.

Declines in the price of ethanol or distiller’s grain would significantly reduce our revenues. The sales prices of ethanol and distiller’s grains can be volatile as a result of a number of factors such as overall supply and demand, the price of gasoline and corn, levels of government support, and the availability and price of competing products. We are dependent on a favorable spread between the price we receive for our ethanol and distiller’s grains and the price we pay for corn and natural gas. Any lowering of ethanol and distiller’s grains prices, especially if it is associated with increases in corn and natural gas prices, may affect our ability to operate profitably. We anticipate the price of ethanol and distiller’s grains to continue to be volatile in our 2011 fiscal year as a result of the net effect of changes in the price of gasoline and corn and increased ethanol supply offset by increased ethanol demand. Declines in the prices we receive for our ethanol and distiller’s grains will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably for an extended period of time which could decrease the value of our units.

We may violate the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans. We are currently in compliance with all our financial covenants. Current management projections indicate that we will be in compliance with our loan covenants. However, unforeseen circumstances may develop which could result in us violating our loan covenants. If we violate the terms of our credit agreement, our primary lender could deem us in default of our loans and require us to immediately repay the entire outstanding balance of our loans. If we do not have the funds available to repay the loans or we cannot find another source of financing, we may fail which could decrease or eliminate the value of our units.

Our inability to secure credit facilities we may require in the future may negatively impact our liquidity. Due to current conditions in the credit markets, it has been difficult for businesses to secure financing. While we do not currently require more financing than we have, in the future we may need additional financing. If we require financing in the future and we are unable to secure such financing, or we are unable to secure the financing we require on reasonable terms, it may have a negative impact on our liquidity. This could negatively impact the value of our units.

The ethanol industry is an industry that is changing rapidly which can result in unexpected developments that could negatively impact our operations and the value of our units. The ethanol industry has grown significantly in the last decade. According to the Renewable Fuels Association, the ethanol industry has grown from approximately 1.5 billion gallons of production per year in 1999 to approximately 13 billion gallons in 2010. This rapid growth has resulted in significant shifts in supply and demand of ethanol over a very short period of time. As a result, past performance by the ethanol plant or the ethanol industry generally might not be indicative f future performance. We may experience a rapid shift in the economic conditions in the ethanol industry which may make it difficult to operate the ethanol plant profitably. If changes occur in the ethanol industry that make it difficult for us to operate the ethanol plant profitably, it could result in the reduction in the value of our units.

We engage in hedging transactions which involve risks that could harm our business. We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments. The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts. Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices. Alternatively, we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn and/or natural gas prices increase. Utilizing cash for margin calls has an impact on the cash we have available for our operations which could result in liquidity problems during times when corn prices rise or fall significantly.

Price movements in corn, natural gas and ethanol contracts are highly volatile and are influenced by many factors that are beyond our control. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price. We may incur such costs and they may be significant which could impact our ability to profitably operate the plant and may reduce the value of our units.

Our business is not diversified. Our success depends largely on our ability to profitably operate our ethanol plant. We do not have any other lines of business or other sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol, distiller’s grains and corn oil. If economic or political factors adversely affect the market for ethanol, distiller’s grains or corn oil, we have no other line of business to fall back on. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.

We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their employment with us, they may choose to seek other employment. Any loss of these officers and key employees may prevent us from operating the ethanol plant profitably and could decrease the value of our units.

Changes and advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably. Advances and changes in the technology of ethanol production are expected to occur. Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete. These advances could also allow our competitors to produce ethanol at a lower cost than we are able. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete. If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.

We are subject to litigation involving our corn oil extraction technology. We have been sued by GS CleanTech Corporation for asserting its intellectual property rights to certain corn oil extraction processes we obtained from ICM, Inc. in August 2008. GS CleanTech is seeking to enforce its patent rights against ICM and the Company. According to information available through the U.S. Patent and Trademark Office, certain patents have been issued and other patents will be issued to GS CleanTech. If GS CleanTech is successful in its infringement action against the Company, we may be force to pay damages to GS CleanTech as a result of our use of such technology.

Risks Related to Ethanol Industry

Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for conventional automobiles. Currently, ethanol is blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. Many in the ethanol industry believe that the ethanol industry will reach this blending wall in 2010. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol have recently become a contentious issue. Automobile manufacturers and environmental groups have fought against higher percentage ethanol blends. Recently the EPA approved the use of E15 for standard vehicles produced in the model year 2007 and later. The EPA is expected to make a decisions soon regarding the use of E15 in vehicles produced in model year 2001 and later. However, the EPA is also expected to introduce E15 labeling requirements which cause consumers to avoid using E15. The fact that E15 has not been approved for use in all vehicles and the anticipated labeling requirements may lead to gasoline retailers refusing to carry E15. Without an increase in the allowable percentage blends of ethanol that can be used in all vehicles, demand for ethanol may not continue to increase which could decrease the selling price of ethanol and could result in our inability to operate the ethanol plant profitably. This could reduce or eliminate the value of our units.

The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability. Recently, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which are measured using a lifecycle analysis. Management believes that these new regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Any decrease in ethanol demand could negatively impact ethanol prices which could reduce our revenues and negatively impact our ability to profitably operate the ethanol plant.

Technology advances in the commercialization of cellulosic ethanol may decrease demand for corn based ethanol which may negatively affect our profitability. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn. The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer a very strong incentive to develop commercial scale cellulosic ethanol. The RFS requires that 16 billion gallons per year of advanced bio-fuels be consumed in the United States by 2022. Additionally, state and federal grants have been awarded to several companies who are seeking to develop commercial-scale cellulosic ethanol plants. We expect this will encourage innovation that may lead to commercially viable cellulosic ethanol plants in the near future. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and our financial condition will be negatively impacted.

New plants under construction or decreases in the demand for ethanol may result in excess production capacity in our industry. The supply of domestically produced ethanol is at an all-time high. According to the Renewable Fuels Association, as of November 11, 2010, there are 204 ethanol plants in the United States with capacity to produce more than 13.7 billion gallons of ethanol per year. In addition, there are 7 new ethanol plants under construction and 4 plant expansions underway which together are estimated to increase total ethanol production capacity to more than 14.6 billion gallons per year. Excess ethanol production capacity may have an adverse impact on our results of operations, cash flows and general financial condition. According to the Renewable Fuels Association, approximately 4.7% of the ethanol production capacity in the United States was idled as of November 11, 2010, the most recent available data. During the early part of 2009 when the ethanol industry was experiencing unfavorable operating conditions, as much as 20% of the ethanol production in the United States may have been idled. Further, demand for ethanol may not increase past approximately 13 billion gallons of ethanol due to the blending wall unless higher percentage blends of ethanol are approved by the EPA. If the demand for ethanol does not grow at the same pace as increases in supply, we expect the selling price of ethanol to decline. If excess capacity in the ethanol industry continues to occur, the market price of ethanol may decline to a level that is inadequate to generate sufficient cash flow to cover our costs. This could negatively affect our profitability.

Decreasing gasoline prices may negatively impact the selling price of ethanol which could reduce our ability to operate profitably. The price of ethanol tends to change in relation to the price of gasoline. Recently, as a result of a number of factors including the current world economy, the price of gasoline has decreased. In correlation to the decrease in the price of gasoline, the price of ethanol has also decreased. Decreases in the price of ethanol reduce our revenue. Our profitability depends on a favorable spread between our corn and natural gas costs and the price we receive for our ethanol. If ethanol prices fall during times when corn and/or natural gas prices are high, we may not be able to operate our ethanol plant profitably.

Growth in the ethanol industry is dependent on growth in the fuel blending infrastructure to accommodate ethanol, which may be slow and could result in decreased demand for ethanol. The ethanol industry depends on the fuel blending industry to blend the ethanol that is produced with gasoline so it may be sold to the end consumer. In many parts of the country, the blending infrastructure cannot accommodate ethanol so no ethanol is used in those markets. Substantial investments are required to expand this blending infrastructure and the fuel blending industry may choose not to expand the blending infrastructure to accommodate ethanol. Should the ability to blend ethanol not expand at the same rate as increases in ethanol supply, it may decrease the demand for ethanol which may lead to a decrease in the selling price of ethanol which could impact our ability to operate profitably.

We operate in an intensely competitive industry and compete with larger, better financed entities which could impact our ability to operate profitably. There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United States. We also face competition from outside of the United States. The passage of the Energy Policy Act of 2005 included a renewable fuels mandate. The RFS was increased in December 2007 to 36 billion gallons by 2022. Further, some states have passed renewable fuel mandates. All of these increases in ethanol demand have encouraged companies to enter the ethanol industry. The largest ethanol producers include Archer Daniels Midland, Green Plains Renewable Energy, Hawkeye Renewable, POET, and Valero Renewable Fuels, all of which are each capable of producing significantly more ethanol than we produce. Further, many believe that there will be consolidation occurring in the ethanol industry in the near future which will likely lead to a few companies who control a significant portion of the ethanol production market. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could affect our financial performance.

Competition from the advancement of alternative fuels may lessen the demand for ethanol. Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.

Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines and/or takes more energy to produce than it contributes may affect the demand for ethanol. Certain individuals believe that use of ethanol will have a negative impact on gasoline prices at the pump. Many also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. These consumer beliefs could potentially be wide-spread and may be increasing as a result of recent efforts to increase the allowable percentage of ethanol that may be blended for use in conventional automobiles. If consumers choose not to buy ethanol based on these beliefs, it would affect the demand for the ethanol we produce which could negatively affect our profitability and financial condition.

Risks Related to Regulation and Governmental Action

Government incentives for ethanol production, including federal tax incentives, may be eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal ethanol production and tax incentives, including the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive; as such, waiver of RFS minimum levels of renewable fuels required in gasoline could negatively impact our results of operations.

In addition, the elimination or reduction of tax incentives to the ethanol industry, such as the VEETC available to gasoline refiners and blenders, could also reduce the market demand for ethanol, which could reduce prices and our revenues by making it more costly or difficult for us to produce and sell ethanol. If the federal tax incentives are eliminated or sharply curtailed, we believe that decreased demand for ethanol will result, which could negatively impact our ability to operate profitably.

Also, elimination of the tariffs that protect the United States ethanol industry could lead to the importation of ethanol produced in other countries, especially in areas of the United States that are easily accessible by international shipping ports. The tariff that protects the United States ethanol industry expires at the end of 2011 which could lead to increase of ethanol supplies and decreased ethanol prices.

Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability. We are subject to extensive air, water and other environmental laws and regulations. In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns. In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.

Carbon dioxide may be regulated in the future by the EPA as an air pollutant requiring us to obtain additional permits and install additional environmental mitigation equipment, which could adversely affect our financial performance. In 2007, the Supreme Court decided a case in which it ruled that carbon dioxide is an air pollutant under the Clean Air Act for the purposes of motor vehicle emissions. The Supreme Court directed the EPA to regulate carbon dioxide from vehicle emissions as a pollutant under the Clean Air Act. Similar lawsuits have been filed seeking to require the EPA to regulate carbon dioxide emissions from stationary sources such as our ethanol plant under the Clean Air Act. Our plant produces a significant amount of carbon dioxide. While there are currently no regulations applicable to us concerning carbon dioxide, if the EPA or the State of Indiana were to regulate carbon dioxide emissions by plants such as ours, we may have to apply for additional permits or we may be required to install carbon dioxide mitigation equipment or take other as yet unknown steps to comply with these potential regulations. Compliance with any future regulation of carbon dioxide, if it occurs, could be costly and may prevent us from operating the ethanol plant profitably which could decrease or eliminate the value of our units.

ITEM 2.		PROPERTIES.

Our plant site is made up of two adjacent parcels which together total approximately 295 acres in east central Indiana near Union City, Indiana. The address of our plant is 1554 N. County Road 600 E., Union City, Indiana 47390. In November 2008, the plant was substantially completed and plant operations commenced. The plant consists of the following buildings:

	•		A grains area, fermentation area, distillation — evaporation area;
	•		A dryer/energy center area;
	•		A tank farm;
	•		An auxiliary area; and
	•		An administration building.

Our plant is in excellent condition and is capable of functioning at over 100% of its production capacity.

All of our tangible and intangible property, real and personal, serves as the collateral for the debt financing with First National Bank of Omaha, which is described below under “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 3.		LEGAL PROCEEDINGS.

On June 27, 2008, we entered into a Tricanter Purchase and Installation Agreement with ICM, Inc. for the construction and installation of a Tricanter Oil Separation System. On February 12, 2010, GS CleanTech Corporation filed a lawsuit in the United States District Court for the Southern District of Indiana, claiming that the Company’s operation of the oil recovery system manufactured and installed by ICM, Inc. infringes a patent claimed by GS CleanTech Corporation. GS CleanTech Corporation seeks a preliminary injunction, royalties, damages associated with the alleged infringement, as well as attorney’s fees from the Company. On February 16, 2010, ICM, Inc. agreed to indemnify, at ICM’s expense, the Company from and against all claims, demands, liabilities, actions, litigations, losses, damages, costs and expenses, including reasonable attorney’s fees arising out of any claim of infringement of patents, copyrights or other intellectual property rights by reason of the Company’s purchase and use of the oil recovery system.

GS CleanTech Corporation subsequently filed actions against at least fourteen other ethanol producing companies for infringement of its patent rights. Several of the other defendants also use equipment and processes provided by ICM, Inc. GS CleanTech Corporation then petitioned for the cases to be joined in a multi-district litigation (“MDL”). This petition was granted and the MDL was assigned to the United States District Court for the Southern District of Indiana (Case No. 1:10-ml-02181). The Company has since answered and counterclaimed that the patent claims at issue are invalid. The Company anticipates that once the issues common to all of the defendants have been determined in the MDL, the cases will proceed in the respective districts in which they were originally filed.

The Company is not currently able to predict the outcome of this litigation with any degree of certainty. ICM, Inc. has, and the Company expects it will continue, to vigorously defend itself and the Company in these lawsuits. The Company estimates that damages sought in this litigation would be based on a reasonable royalty to, or lost profits of, GS CleanTech Corporation. If the court deems the case exceptional, attorney’s fees may be awarded and are likely to be $1,000,0000 or more. ICM, Inc. has also agreed to indemnify the Company. However, in the event that damages are awarded, if ICM, Inc. is unable to fully indemnify the Company for any reason, the Company could be liable. In addition, the Company may need to cease use of its current oil separation process and seek out a replacement or cease oil production altogether.

ITEM 4.		REMOVED AND RESERVED.

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

As of September 30, 2010 we had approximately 14,606 membership units outstanding and approximately 1,197 unit holders of record. There is no public trading market for our units.

However, we have established through Alerus Securities a Unit Trading Bulletin Board, a private online matching service, in order to facilitate trading among our members. The Unit Trading Bulletin Board has been designed to comply with federal tax laws and IRS regulations establishing an “alternative trading service,” as well as state and federal securities laws. Our Unit Trading Bulletin Board consists of an electronic bulletin board that provides a list of interested buyers with a list of interested sellers, along with their non-firm price quotes. The Unit Trading Bulletin Board does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached. We do not become involved in any purchase or sale negotiations arising from our Unit Trading Bulletin Board and have no role in effecting the transactions beyond approval, as required under our operating agreement, and the issuance of new certificates. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the Unit Trading Bulletin Board. We do not receive any compensation for creating or maintaining the Unit Trading Bulletin Board. In advertising our alternative trading service, we do not characterize Cardinal Ethanol as being a broker or dealer or an exchange. We do not use the Unit Trading Bulletin Board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements.

There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units. All transactions must comply with the Unit Trading Bulletin Board Rules, our operating agreement, and are subject to approval by our board of directors.

As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause the Company to be deemed a publicly traded partnership.

The following table contains historical information by fiscal quarter for the past two fiscal years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe this most accurately represents the current trading value of the Company’s units. The information was compiled by reviewing the completed unit transfers that occurred on our qualified matching service bulletin board during the quarters indicated.

														# of
Quarter		Low Price				High Price				Average Price				Units Traded
2009 1st		$	4,000			$	4,000			$	4,000.00				5
2009 2nd		$	3,000			$	3,275			$	3,052.50				10
2009 3rd		$	2,950			$	3,000			$	2,985.00				20
2009 4th		$	2,850			$	2,850			$	2,850.00				5
2010 1st		$	2,250			$	2,700			$	2,557.29				24
2010 2nd		$	2,650			$	3,400			$	2,817.50				80
2010 3rd		$	3,100			$	3,400			$	3,217.25				20
2010 4th		$	3,400			$	3,500			$	3,416.13				62

The following table contains the bid and asked prices that were posted on the Company’s alternative trading service bulletin board and includes some transactions that were not completed. The Company believes the table above more accurately describes the trading value of its units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the Company’s alternative trading service bulletin board.

														# of
Sellers Quarter		Low Price				High Price				Average Price				Units Listed
2009 1st		$	5,000			$	5,000			$	5,000.00				16
2009 2nd		$	3,500			$	4,000			$	4,107.14				28
2009 3rd		$	3,000			$	3,000			$	3,000.00				3
2009 4th		$	2,800			$	2,800			$	2,800.00				1
2010 1st		$	2,250			$	2,700			$	2,557.29				24
2010 2nd		$	2,650			$	3,800			$	2,841.46				82
2010 3rd		$	3,100			$	3,400			$	3,217.25				20
2010 4th		$	3,400			$	3,500			$	3,558.54				82

Our board of directors approved an estimated tax distribution of $60 per unit net of non-resident withholding taxes for out of state members, for a total distribution of $842,000, which was made in March 2010.

Except for restrictions imposed in our loan agreement our board of directors has complete discretion over the timing and amount of distributions to our unit holders. Provided that we are not in default on loan covenants, and with the prior approval of our lender, which may not be unreasonably withheld, our loan agreement allows us to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability in a timely fashion. Our expectations with respect to our ability to make future distributions are discussed in greater detail in “Item 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”

Performance Graph

The following graph shows a comparison of cumulative total member return since October 31, 2006, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the “NASDAQ”) and an index of other companies that have the same SIC code as the Company (the “Industry Index”). The graph assumes $100 was invested in each of our units, the NASDAQ, and the Industry Index on October 31, 2006. Data points on the graph are annual. Note that historic stock price performance is not necessarily indicative of future unit price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cardinal Ethanol, LLC, the NASDAQ Composite Index
and the NASDAQ Clean Edge Green Energy Index

Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

ITEM 6.		SELECTED FINANCIAL DATA

The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected consolidated balance sheet financial data as of September 30, 2008, 2007 and 2006 and the selected consolidated income statement data and other financial data for the years ended September 30, 2007 and 2006 have been derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected consolidated balance sheet financial data as of September 30, 2010 and 2009 and the selected consolidated income statement data and other financial data for each of the years in the three year period ended September 30, 2010 have been derived from the audited Consolidated Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with “Item 7- Management Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following consolidated financial data.

Statement of Operations Data:		2010				2009				2008				2007				2006
Revenues		$	224,807,338			$	167,738,057			$	—			$	—			$	—
Cost Goods Sold			195,880,762				160,674,617				—				—				—
Gross Profit			28,926,576				7,063,440				—				—				—
Operating Expenses			3,735,530				3,726,051				1,266,368				875,080				589,722
Impairment Loss			—				—				—				—				—
Operating Income (Loss)			25,191,046				3,337,389				(1,266,368	)			(875,080	)			(589,722	)
Other Income (Expense)			(4,740,467	)			(4,288,574	)			258,114				3,130,461				151,999
Net Income		$	20,450,579			$	(951,185	)		$	(1,008,254	)		$	2,255,381			$	(437,723	)
Weighted Average Units Outstanding			14,606				14,606				14,606				12,026				477
Net Income (Loss) Per Unit		$	1,400.15			$	(65.12	)		$	(69.03	)		$	187.54			$	(917.66	)
Cash Distributions Per Unit		$	60.00			$	—			$	—			$	—			$	—

Balance Sheet Data:		2010				2009				2008				2007				2006
Current Assets		$	29,289,713			$	22,049,914			$	741,508			$	21,285,458			$	357,321
Net Property and Equipment			132,780,346				137,209,571				140,285,656				63,371,362				15,078
Other Assets			851,732				1,068,767				2,397,795				1,427,895				626,977
Total Assets			162,921,791				160,328,252				143,424,959				86,084,715				999,376
Current Liabilities			17,952,961				13,036,275				11,682,082				13,621,236				145,637
Long-Term Debt			56,188,380				77,427,000				61,818,344				—				—
Members’ Equity			85,650,048				66,594,997				69,924,533				72,463,479				853,739

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions 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. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Cardinal Ethanol, LLC was formed on February 7, 2005 with the name of Indiana Ethanol, LLC. On September 27, 2005, we changed our name to Cardinal Ethanol, LLC. We were formed for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol and distillers grains at the plant in November 2008.

Results of Operations

Comparison of Fiscal Year Ended September 30, 2010 and September 30, 2009

The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended September 30, 2010 and 2009.

		Fiscal Year Ended								Fiscal Year Ended
		September 30, 2010								September 30, 2009
		(Audited)								(Audited)
Income Statement Data		Amount				Percent				Amount				Percent
Revenues		$	224,807,338				100.00	%		$	167,738,057				100.00	%
Cost of Goods Sold			195,880,762				87.13	%			160,674,617				95.79	%
Gross Profit			28,926,576				12.87	%			7,063,440				4.21	%
Operating Expenses			3,735,530				1.65	%			3,726,051				2.22	%
Operating Income			25,191,046				11.22	%			3,337,389				1.99	%
Other (Expense)			(4,740,467	)			(2.11	)%			(4,288,574	)			(2.56	)%
Net Income (Loss)		$	20,450,579				9.11	%		$	(951,185	)			(0.57	)%

The following table shows additional data regarding production and price levels for our primary inputs and our primary products for the fiscal years ended September 30, 2010 and 2009.

		Fiscal Year ended				Fiscal Year ended
		September 30, 2010				September 30, 2009
Production:
Ethanol sold (gallons)			109,986,252				87,645,515
Distillers grains sold (tons)			321,087				267,699
Revenues:
Ethanol average price per gallon		$	1.739			$	1.58
Distillers grains average price per ton		$	97.390			$	103.53
Primary Inputs:
Corn ground (bushels)			39,408,254				32,293,302
Natural gas purchased (MMBTU)			3,126,888				2,760,264
Costs of Primary Inputs:
Corn average price per bushel ground		$	3.851			$	4.04
Natural gas average price per MMBTU		$	5.009			$	4.907
Other Costs:
Chemical and additive costs per gallon of ethanol sold		$	0.062			$	0.066
Denaturant cost per gallon of ethanol sold		$	0.042			$	0.036
Electricity cost per gallon of ethanol sold		$	0.031			$	0.033
Direct Labor cost per gallon of ethanol sold		$	0.018			$	0.022

Revenues

Our revenues are derived from the sale of our ethanol, distillers grains and corn oil. For the fiscal year ended September 30, 2010, we received approximately 85% of our revenue from the sale of fuel ethanol and approximately 14% of our revenue from the sale of distillers grains. Sales of corn oil represented less than 1% of our total sales. Comparatively, for the fiscal year ended September 30, 2009, we received approximately 83% of our revenue from the sale of fuel ethanol and approximately 17% of our revenue from the sale of distillers grains, and less than 1% of total sales from corn oil.

Ethanol

Our revenues from ethanol increased for our fiscal year ended September 30, 2010 as compared to our fiscal year ended September 30, 2009. Our increase in revenues for our 2010 fiscal year as compared to our 2009 fiscal year was the result of an increase in our ethanol production in 2010 and higher ethanol prices in 2010 on average per gallon as compared to 2009. We are currently operating at 118% of our name plate capacity.

During the fiscal year ended September 30, 2010, the market price of ethanol varied between approximately $1.57 per gallon and approximately $2.43 per gallon. Our average price per gallon of ethanol sold was approximately $1.74 for our 2010 fiscal year. During the fiscal year ended September 30, 2009, the market price of ethanol varied between approximately $1.36 per gallon and approximately $1.72 per gallon. Our average price per gallon of ethanol sold was approximately $1.58. During the fiscal year ended September 30, 2010, we sold approximately 109,986,000 gallons of ethanol as compared to our sale of 87,646,000 gallons of ethanol in 2009.

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. Management anticipates that ethanol prices will remain steady during our 2011 fiscal year given the VEETC blenders’ credit has been renewed. The ethanol industry relies on the VEETC to reduce the cost of ethanol to fuel blenders. This results in increased demand for ethanol related to what is called discretionary blending. Discretionary blending is where fuel blenders use ethanol to increase octane in the fuels that are produced as well as reduce the price of gasoline. However, when the price of ethanol increases relative the price of gasoline, after taking into account the VEETC, the amount of discretionary blending by fuel blenders decreases thereby decreasing ethanol demand. Management anticipates ethanol production will be comparable during our 2011 fiscal year provided the ethanol industry can maintain current ethanol prices. However, in the event ethanol prices decrease significantly, we may be forced to reduce ethanol production during times when our operating margins are unfavorable. Further, our operating margins also depend on corn prices which can affect the spread between the price we receive for our ethanol and our raw material costs. In times when this spread decreases or becomes negative, we may reduce or terminate ethanol production until these spreads become more favorable.

A debate continues with respect to changes in the allowable percentage of ethanol blended with gasoline for use in standard (non-flex fuel) vehicles. Currently, ethanol is blended with conventional gasoline for use in standard vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year. However, gasoline demand may be shrinking in the United States as a result of the global economic slowdown. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per year. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends such as E85 used in flex fuel vehicles. Many in the ethanol industry believe that we will reach this blending wall in 2009 or 2010. The RFS mandate requires that 36 billion gallons of renewable fuels be used each year by 2022 which equates to approximately 27% renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand demand for ethanol, management believes higher percentage blends of ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol have continued to be a contentious issue. Automobile manufacturers and environmental groups are lobbying against higher percentage ethanol blends. State and federal regulations prohibit the use of higher percentage ethanol blends in conventional automobiles and vehicle manufacturers have indicated that using higher percentage blends of ethanol in conventional automobiles would void the manufacturer’s warranty. Without increases in the allowable percentage blends of ethanol, demand for ethanol may not continue to increase. Our financial condition may be negatively affected by decreases in the selling price of ethanol resulting from ethanol supply exceeding demand.

Distillers Grains

Our revenues from distillers grains increased in fiscal year ended September 30, 2010 as compared to the same period in 2009. This increase was primarily the result of increased distillers grains sales in 2010 as compared to 2009 partially offset by a decrease in the average price per ton we received from our distillers grains in the fiscal year ended September 30, 2010 as compared to the fiscal year ended September 30, 2009.

During the fiscal year ended September 30, 2010, the market price of distillers grains varied between approximately $93 per ton and approximately $140 per ton. Our average price per ton of distillers grains sold was approximately $97.39. During the fiscal year ended September 30, 2009, the market price of distillers grains varied between approximately $76.64 per ton and approximately $148.15 per ton. Our average price per ton of distillers grains sold was approximately $103.53. We sold approximately 53,000 more tons of distiller grains during our 2010 fiscal year as compared to our 2009 fiscal year. During our fiscal year ended September 30, 2010, we sold approximately 321,000 tons of distillers grains compared to approximately 268,000 tons during our fiscal year ended September 30, 2009. Management attributes this increase in distillers grains sales with increased production of ethanol during the 2010 fiscal year. As we produce more ethanol, the total tons of distillers grains that we produce also increases. Offsetting the increase in distillers grains sales was a decrease in the average price we received per ton of distillers grains sold during our 2010 fiscal year compared to our 2009 fiscal year. During our 2009 fiscal year, uncertainty existed regarding the supply of distillers grains in the market due to the fact that many ethanol producers were reducing production during late 2008 and early 2009. Management believes this resulted in higher distillers grains prices due to increasing demand and lower supplies. Therefore, we experienced higher distillers grains prices during our 2009 fiscal year. Further management believes that distillers grains prices lag behind corn prices. As a result, distillers grains prices during our 2010 fiscal year may not have fully benefited from the recent increases in corn prices that we experienced in the second half of our 2010 fiscal year.

Management believes that the market prices for distiller’s grains change in relation to the prices of other animal feeds, such as corn and soybean meal. We primarily sell dried distillers grains nationally through our marketer. Given the recent increase in corn prices, we have experienced higher than normal distiller grains prices.

Corn Oil

Management anticipates continuing to increase our corn oil production during our 2011 fiscal year as we continue to refine the operation of our corn oil extraction equipment.

Cost of Goods Sold

Our cost of goods sold as a percentage of revenues was 87.13% for the fiscal year ended September 30, 2010 and 95.79% for the fiscal year ended September 30, 2009. Our two primary costs of producing ethanol and distillers grains are corn costs and natural gas costs.

Corn Costs

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn costs. During the fiscal year ended September 30, 2010 our corn costs increased as compared to our fiscal year ended September 30, 2009. This increase was the result of an increase in the amount of corn used by our plant in 2010 as compared to 2009 partially offset by a lower average price per bushel of ground corn in 2010 as compared to 2009.

During our fiscal year ended September 30, 2010, we used approximately 39,408,000 bushels of corn to produce our ethanol, distillers grain and corn oil as compared to approximately 32, 293,000 during our fiscal year ended September 30, 2009. Management attributes this increase in bushels of corn for our 2010 fiscal year to an increase in production of ethanol and distillers grains. During the fiscal year ended September 30, 2010, the market price of corn varied between approximately $3.40 per bushel and approximately $4.81 per bushel. Our average price per bushel of corn ground was approximately $3.85, without considering the effects of our risk management/hedging. During the fiscal year ended September 30, 2009, the market price of corn varied between approximately $3.41 per bushel and approximately $4.63 per bushel. Our average price per bushel of corn ground was approximately $4.04, without considering the effects of our risk management/hedging. Our corn costs associated with the beginning of our 2010 fiscal year were lower than normal. However, beginning in July corn prices increased as a result of uncertainty regarding weather factors that resulted in decreased corn yields in some parts of the United States. This led to fears regarding an imbalance between corn supply and demand which had a negative impact on corn prices. Management expects that corn prices will remain high through the first part of our 2011 fiscal year.

In the ordinary course of business, we entered into forward purchase contracts for our commodity purchases for various delivery periods through July 2012 for a total commitment of approximately $7,761,000. Approximately $1,638,000 of the forward corn purchases were with a related party. As of September 30, 2010 we also have open short positions for 5,425,000 bushels of corn on the Chicago Board of Trade and 3,570,000 gallons of ethanol on the New York Mercantile Exchange to hedge our forward corn contracts and corn inventory. Our corn and ethanol positions are forecasted to settle for various delivery periods through March 2012 and November 2010, respectively. For the fiscal year ended September 30, 2010, we recorded net losses on our corn and ethanol contracts of approximately $2,424,000. These losses were recorded against our cost of goods sold in the statement of operations. We expect continued volatility in the price of corn, which could significantly impact our cost of goods sold.

Natural Gas Costs

Our natural gas costs were higher during our fiscal year ended September 30l, 2010 as compared to our fiscal year ended September 30, 2009. This increase in cost of natural gas for our 2010 fiscal year as compared to our 2009 fiscal year was primarily the result of an increase in the amount of natural gas that we used at our plant and an increase in the average price per MMBTU of our natural gas.

During our fiscal year ended September 30, 2010 we purchased approximately 367,000 more MMBTU’s of natural gas than we purchased in our fiscal year ended September 30, 2009. During our fiscal year ended September 30, 2010 we purchased approximately 3,127,000 MMBTU’s of natural gas as compared to approximately 2,760,000 MMBTU’s during our fiscal year ended September 30, 2009. Management attributes this increase in natural gas to an increase in production. During the fiscal year ended September 30, 2010, the market price of natural gas varied between approximately $3.70 per MMBTU and approximately $6.10 per MMBTU. Our average price per MMBTU of natural gas was approximately $5.01. During the fiscal year ended September 30, 2009, the market price of natural gas varied between approximately $3.31 per MMBTU and approximately $8.028 per MMBTU. Our average price per MMBTU of natural gas was approximately $4.91.

Natural gas prices hit near historic lows during July through September 2010 based on high inventories nationwide. Management anticipates that natural gas prices will remain steady during our 2011 fiscal year unless demand significantly increases due to improved global economic conditions. Management anticipates that natural gas prices may rise slightly during the winter heating months.

Operating Expense

Our operating expenses as a percentage of revenues were 1.66% for the fiscal year ended September 30, 2010 and 2.22% for the same period in 2009. Our operating expenses have remained relatively steady for the fiscal year ended September 30, 2010 compared to the same periods of 2009. We had a decrease in professional fees expense offset by an increase in general and administrative costs. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady.

Operating Income

Our income from operations for the fiscal year ended September 30, 2010 was approximately 11.21% compared to 1.99% of our revenues for the same period ended 2009. Our operating income for the fiscal year ended September 30, 2010 has increased due to increased revenues as a result of better operating margins. For the fiscal year ended September 30, 2010 operating income was primarily the net result of our revenues exceeding our costs of goods sold and our operating expenses.

Other Expense

Our other expense for the fiscal year ended September 30, 2010 was approximately 2.11% of our revenues, compared to 2.56% for the fiscal year ended September 30, 2009. Our other expense for the fiscal year ended September 30, 2010 and 2009 consisted primarily of interest expense.

Changes in Financial Condition for the Fiscal Year Ended September 30, 2010 and 2009

We experienced an increase in our current assets of approximately $7,240,000 at September 30, 2010 compared to September 30, 2009. We experienced an increase of approximately $7,317,000 in trade accounts receivable and an increase of $2,542,000 in inventory at September 30, 2010 compared to September 30, 2009. We also had cash of approximately $3,318,000 at September 30, 2010, compared to cash of approximately $7,265,000 at September 30, 2009 and prepaid and other current assets of approximately $965,000 at September 30, 2010, compared to approximately $847,000 at September 30, 2009.

We experienced an increase in our total current liabilities on September 30, 2010 compared to September 30, 2009. We experienced a decrease of approximately $1,992,000 in the current portion of our long term debt and capital lease obligations at September 30, 2010 compared to September 30, 2009. We experienced a decrease of approximately $269,000 for accrued expenses at September 30, 2010 compared to September 30, 2009; and an increase of approximately $1,710,000 in our accounts payable for corn purchases at September 30, 2010 compared to September 30, 2009. Such increase in our liabilities related to the current portion of our derivative instruments of approximately $1,520,000 at September 30, 2010 compared to $862,000 at September 30, 2009; and an increase in our non-corn accounts payable of approximately $2,154,000 at September 30, 2010 compared to $1,330,000 at September 30, 2009.

We experienced a decrease in our long-term liabilities as of September 30, 2010 compared to September 30, 2009. At September 30, 2010, we had approximately $56,188,000 outstanding in the form of long-term loans, compared to approximately $77,427,000 at September 30, 2009. This decrease is due to paying down our long term debt.

Comparison of Fiscal Years Ended September 30, 2009 and 2008

Because our plant was not operational until November 2008, subsequent to our 2008 fiscal year end, we do not include comparative information for the fiscal year ending September 30, 2008.

Critical Accounting Estimates

Management uses various 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. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:

We enter into derivative instruments to hedge the variability of expected future cash flows related to interest rates. We do not typically enter into derivative instruments other than for hedging purposes. All derivative instruments are recognized on the September 30, 2010 balance sheet at their fair market value. Changes in the fair value of a derivative instrument that is designated as and meets all of the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged items affect earnings.

At September 30, 2010, we had an interest rate swap with a fair value of $4,650,717 recorded as derivative instruments in the current and long-term liabilities section of the balance sheet and as a deferred loss in accumulated other comprehensive loss. We have an interest rate swap with a fair value of $4,131,549 for the same period ended in 2009. The interest rate swap is designated as a cash flow hedge.

As of September 30, 2010, we have open short positions for 5,425,000 bushels of corn and no long positions for corn on the Chicago Board of Trade and 3,570,000 gallons of ethanol on the New York Mercantile Exchange to hedge our forward corn contracts and corn inventory. These derivatives have not been designated as an effective hedge for accounting purposes. Corn and ethanol positions are forecasted to settle through March 2012 and November 2010, respectively. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of the useful lives of property and equipment to be a critical accounting estimate.

We value our inventory at the lower of cost or market. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or market on inventory to be a critical accounting estimate.

We enter forward contracts for corn purchases to supply the plant. These contracts represent firm purchase commitments which must be evaluated for potential losses. We have estimated a loss on these firm purchase commitments related to corn contracts in place at September 30, 2010 where the price of corn exceeds the market price and upon being used in the manufacturing process and eventual sale of products we anticipate losses. Our estimates include various assumptions including the future prices of ethanol, distillers grains and corn.

Liquidity and Capital Resources

Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not anticipate seeking additional equity or debt financing during our 2011 fiscal year. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.

As a result of current conditions in the ethanol market that have presented favorable operating conditions, we were able to reduce our reliance on our revolving line of credit. This has allowed us greater liquidity and has increased the amount of funds that are available to us on our revolving line of credit. However, should we once again experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity.

The following table shows cash flows for the fiscal years ended September 30, 2010 and 2009:

		Year ended September 30,
		2010				2009
Net cash provided by (used in) operating activities		$	19,940,794			$	(2,244,876	)
Net cash used in investing activities			(3,765,300	)			(13,931,689	)
Net cash provided by (used in) financing activities			(20,122,799	)			22,980,155

Cash Flow From Operating Activities

We experienced an increase in net cash from operating activities for the fiscal year ended September 30, 2010 as compared to the same period in 2009. Overall net cash from operating activities increased due to the Company having net income of approximately $20,451,000 for the fiscal year ended September 30, 2010 as compared to a net loss of $951,000 for the same period in 2009.

Cash Flow Used in Investing Activities

We experienced a significant decrease in cash used in investing activities for our fiscal year ended September 30, 2010 as compared to 2009. This decrease was primarily a result of the cash used for construction activities which occurred during our fiscal year ended September 30, 2009.

Cash Flow Used For Financing Activities

We experienced a significant increase in cash used for financing activities in our fiscal year ended September 30, 2010 as compared to the same period in 2009. This is primarily a result of paying down our debt. We received no proceeds from our long term debt and made payments of approximately $19,239,000 for the fiscal year ended September 30, 2010. For the fiscal year ended September 30, 2009 we received proceeds from our long-term debt of approximately $24,807,000 and made payments of approximately $1,795,000.

The following table shows cash flows for the fiscal years ended September 30, 2009 and 2008:

		Year ended September 30,
		2009				2008
Net cash used in operating activities		$	(2,244,876	)		$	(1,894,355	)
Net cash used in investing activities			(13,931,689	)			(59,289,152	)
Net cash provided by financing activities			22,980,155				61,005,541

Cash Flow Used in Operating Activities

We experienced an increase in net cash used in operating activities for the fiscal year ended September 30, 2009 as compared to the same period in 2008. Overall net cash used in operating activities increased due to the Company having accounts receivable and inventory as the plant became operational, miscellaneous receivables related to railroad refunds, and increased in prepaid expenses primarily related to insurance and natural gas purchases. The impact of these changes increased cash used for operations by approximately $11.9 million. This increase in cash used for operating activities, was offset by cash provided by operating activities of approximately $4.3 million from changes in accounts payable, accounts payable — corn, deposits on corn and accrued expenses. In addition, the Company began depreciating assets when they were placed in service during the first quarter of fiscal 2009, which resulted in an add back of approximately $8.1 million of cash provided by operating activities. During our 2009 fiscal year, our capital needs were being adequately met through cash from our operating activities and our credit facilities.

Cash Flow Used in Investing Activities

We experienced a significant decrease in cash used in investing activities for our fiscal year ended September 30, 2009 as compared to 2008. This decrease was primarily a result of the completion of our ethanol plant during the first quarter of our 2009 fiscal year. Our plant was nearly complete by the end of our fiscal year ending September 30, 2008, accordingly most of the cash used for construction activities occurred during our fiscal year ended September 30, 2008.

Cash Flow Provided by Financing Activities

We experienced a significant reduction in cash provided by financing activities in our fiscal year ended September 30, 2009 as compared to the same period in 2008 primarily as a result of the completion of plant construction in 2008.

Short Term and Long Term Debt Source

On December 19, 2006, we entered into a loan agreement with First National Bank of Omaha establishing a senior credit facility for the construction of our plant. The credit facility was in the amount of $96,000,000, consisting of an $83,000,000 construction note, a $10,000,000 revolving line of credit and a $3,000,000 letter of credit. We also entered into an interest rate swap agreement for $41,500,000 of the construction term loan in order to achieve a fixed rate on a portion of this loan.

In April 2009, the construction loan was converted into multiple term loans one of which was a $41,500,000 Fixed Rate Note, which will be applicable to the interest rate swap agreement, a $31,500,000 Variable Rate Note, and a $10,000,000 Long Term Revolving Note. The term loans have a maturity of five years with a ten-year amortization.

Line of Credit

In February 2010, we extended and amended the $10,000,000 revolving line of credit to expire in February 2011 and changed the interest rate charged on the short-term revolving line of credit to the greater of the three month LIBOR rate plus 400 basis points or 5%. The spread on the three month LIBOR rate will adjust down based on the Company meeting certain debt to net worth ratios, measured quarterly. Prior to this amendment, interest on the revolving line of credit was charged at the greater of the 1-month LIBOR rate plus 300 basis points or 5%. At September 30, 2010 and September 30, 2009, there were no outstanding borrowings on the revolving line of credit.

Fixed Rate Note

As indicated above, we have an interest rate swap agreement in connection with the Fixed Rate Note payable to our senior lender. This interest rate swap helps protect our exposure to increases in interest rates and the swap effectively fixes the rate on the loan at 8.11% until April 2014. As of September 30, 2010 and September 30, 2009 we had an interest rate swap with a fair value of approximately $4,651,000 and $4,132,000, respectively, recorded in current and long term liabilities.

The Fixed Rate Note will accrue interest at a rate equal to the three month LIBOR rate plus 300 basis points. We began repaying principal on the Fixed Rate Note beginning in July 2009. The outstanding balance on this note was approximately $37,996,000 and $40,817,000 at September 30, 2010 and September 30, 2009, respectively, and is included in current liabilities and long-term debt.

Variable Rate Note and Long Term Revolving Note

We are required to make quarterly payments of approximately $1,546,000 to be applied first to accrued interest on the long term revolving note, then to accrued interest on the variable rate note and finally to principal on the variable rate note. These payments began in July 2009 and continue through April 2014. In regards to the amendment in February 2010, the Company made mandatory excess cash flow payments of $1,000,000 in February 2010 and June 2010 that were applied to the principal of the variable rate note. The maximum availability on the long term revolving note is reduced by $250,000 each quarter. Interest on the variable rate note accrues at the greater of the three month LIBOR rate plus 300 basis points or 5%. At June 30, 2010, the interest rate was 5%. The spread over the three month LIBOR rate shall adjust down based on the Company meeting certain debt to net worth ratios, measured quarterly. Interest on the long term revolving note accrues at the greater of the three month LIBOR rate plus 300 basis points or 5%. At June 30, 2010, the interest rate was 5%. The spread over the three month LIBOR rate shall adjust down based on our compliance with certain debt to net worth ratios, measured quarterly. At September 30, 2010 and September 30, 2009, the balance on the variable rate note was approximately $24,420,000 and $30,728,000, respectively. At September 30, 2009 the balance on the long term revolving loan was $9,750,000. At September 30, 2010 there were no outstanding borrowings on the long term revolving note, as we repaid the long term revolving note in full. The maximum availability on the long term revolving note at September 30, 2010 was $8,750,000.

Corn Oil Extraction Note

Effective July 31, 2008, we amended our construction loan agreement to include a new loan up to the maximum amount of $3,600,000 for the purchase and installation of a corn oil extraction system and related equipment. On April 8, 2009, the corn oil extraction note converted into a Corn Oil Extraction Term Note, which accrues interest at a rate equal to 3-month LIBOR plus 300 basis points, or 5%, whichever is greater. The principal amount of the Corn Oil Extraction Term Note is payable in equal quarterly installments of $90,000, plus accrued interest, which we began paying in July 2009. As of September 30, 2010, we had $3,150,000 outstanding on our corn oil extraction loan. At September 30, 2009, we had $3,510,000 outstanding on the corn oil extraction loan.

Letter of Credit

We had one letter of credit outstanding as of June 30, 2010 and September 30, 2009 for $450,000, which was issued in August 2009 to replace our electrical services security deposit.

Covenants

The loans are secured by our assets and material contracts. In addition, during the term of the loans, we will be subject to certain financial covenants consisting of a minimum fixed charge coverage ratio, minimum net worth, and minimum working capital. We are required to maintain a fixed charge coverage ratio of no less than 1.25:1.0 for all periods after April 8, 2009. For the first fiscal quarter after April 8, 2009 our fixed charge coverage ratio is measured on a rolling one quarter basis, for the second fiscal quarter after April 8, 2009 our fixed charge coverage ratio is measured on a rolling two quarter basis, and for the third fiscal quarter after April 8, 2009 our fixed charge coverage ratio is measured on a rolling three quarter basis. Thereafter, our fixed charge coverage ratio will be measured on a rolling four quarter basis. Our fixed charge coverage ratio is calculated by comparing our “adjusted” EBITDA, meaning EBITDA less taxes, capital expenditures and allowable distributions, to our scheduled payments of the principal and interest on our obligations to our lender, other than principal repaid on our revolving loan and long term revolving note.

We are also required to maintain a minimum net worth of $65,000,000, measured annually at the end of each fiscal year. In subsequent years, our minimum net worth requirement will increase by the greater of $500,000 or the amount of undistributed earnings accumulated during the prior fiscal year.

We are also required to maintain a minimum amount of working capital, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities. Beginning August 1, 2009 through November 30, 2009, our minimum working capital had to be $4,000,000. Beginning December 1, 2009 through April 30, 2010, our minimum working capital had to be $7,000,000. After May 1, 2010, our minimum working capital must be $10,000,000.

Our loan agreement requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures in an aggregate amount exceeding $1,000,000 in any single fiscal year. In connection with the amendment done in February 2010, the bank increased the fiscal 2010 capital expenditure limit to $4,523,800. For fiscal year 2011, the capital expenditure amount will go back to $1,000,000. We may make distributions to our members to cover their respective tax liabilities. In addition, we may also distribute up to 70% of net income provided we maintain certain leverage ratios and are in compliance with all financial ratio requirements and loan covenants before and after any such distributions are made to our members.

We were in compliance with all covenants at September 30, 2010 and we anticipate that we will continue to meet these covenants through October 1, 2011.

We have working capital of approximately $11,337,000, excluding additional amounts available under our long term revolving note at September 30, 2010. Working Capital as defined by our loan agreement was approximately $21,607,000 at September 30, 2010. This includes the additional amounts available under our long term revolving note and the current portion of the interest rate swap. We anticipate that our current margins will be sufficient to generate enough cash flow to maintain operations, service our debt and comply with our financial covenants in our loan agreements. However, significant uncertainties in the market continue to exist. Due to current commodity markets, we may produce at negative margins and therefore, we will continue to evaluate our liquidity needs for the upcoming months.

We will continue to work with our lenders to try to ensure that the agreements and terms of the loan agreements are met going forward. However, we cannot provide any assurance that our actions will result in sustained profitable operations or that we will not be in violation of our loan covenants or in default on our principal payments. Presently, we are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements. Should market conditions change radically, and we violate the terms or covenants of our loan or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. Our lender could also elect to proceed with a foreclosure action on our plant.

Tax Abatement

In October 2006, the real estate that our plant was constructed on was determined to be an economic revitalization area, which qualified us for tax abatement. The abatement period is for a ten year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. We must apply annually and meet specified criteria to qualify for the abatement program.

Contractual Cash Obligations

In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following tables provide information regarding our consolidated contractual obligations and approximate commitments as of September 30, 2010:

		Payment Due By Period
										One to				Three to
						Less than				Three				Five				After Five
Contractual Cash Obligations		Total				One Year				Years				Years				Years
Long-Term Debt Obligations		$	65,583,421			$	9,395,041			$	56,188,380			$	—			$	—
Operating Lease Obligations			3,328,194				1,084,800				2,243,394				—				—
Purchase Obligations			36,111,691				33,365,354				2,746,337				—				—
Total Contractual Cash Obligations		$	105,023,306			$	43,845,195			$	61,178,111			$	—			$	—

The long-term debt obligations in the table above include both principal and interest payments, excluding interest payments on the line of credit, at the interest rates applicable to the obligations as of September 30, 2010.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes. We used derivative financial instruments to alter our exposure to interest rate risk. We entered into an interest rate swap agreement that we designated as a cash flow hedge.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a revolving line of credit and a term loan which bear variable interest rates. Specifically, we have approximately $28,000,000 outstanding in variable rate, long-term debt as of September 30, 2010. Our interest rate on our variable rate, long-term debt has a minimum interest rate of 5%. Currently, our interest rate on our variable rate, long-term debt is at 5%.

Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one year period.

Outstanding Approximate
Variable Rate Debt at				Interest Rate at				Adverse 10% change in				Annual Adverse change to
September 30, 2010				September 30, 2010				Interest Rates				Income
$	28,000,000				5.0	%			0.5	%		$	140,000

In addition, we hold a revolving line of credit which bears a variable interest rate. At September 30, 2010, we have no outstanding borrowings on our revolving line of credit. However, we may borrow on this line of credit at any time which would expose us to interest rate market risk. The specifics of each note are discussed in greater detail in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources.”

We manage our floating rate debt using an interest rate swap. We entered into a fixed rate swap to alter our exposure to the impact of changing interest rates on our results of operations and future cash outflows for interest. We use interest rate swap contracts to separate interest rate risk management from the debt funding decision. The interest rate swaps held by us as of September 30, 2010 qualified as a cash flow hedge. For this qualifying hedge, the effective portion of the change in fair value is recognized through earnings when the underlying transaction being hedged affects earnings, allowing a derivative’s gains and losses to offset related results from the hedged item on the income statement. As of September 30, 2010 our interest rate swap had a fair value of approximately $4,651,000.

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller’s grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. 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 the 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 our cost of goods sold or as an offset to revenues. 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, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us. As of September 30, 2010, we had price protection in place for approximately 18.5% of our anticipated corn needs for the next 12 months. In addition, we had price protection in place for approximately 4% of our natural gas needs for the next 12 months.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of September 30, 2010, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from September 30, 2010. The results of this analysis, which may differ from actual results, are approximately as follows:

										Hypothetical
		Estimated Volume								Adverse Change in
		Requirements for the next 12								Price as of				Approximate
		months (net of forward and								September 30,				Adverse Change to
		futures contracts)				Unit of Measure				2010				Income
Natural Gas			3,162,500			MMBTU					10	%		$	1,160,000
Ethanol			115,000,000			Gallons					10	%		$	24,380,000
Corn			42,000,000			Bushels					10	%		$	19,572,000

Liability Risk

We participate in a captive reinsurance company (the “Captive”). The Captive reinsures losses related to worker’s compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. The Captive reinsures catastrophic losses in excess of a predetermined amount. Our premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed in excess of the amount in the collateral fund.

ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Members of Cardinal Ethanol, LLC

We have audited the accompanying balance sheets of Cardinal Ethanol, LLC as of September 30, 2010 and 2009, and the related statements of operations, members’ equity, and cash flows for each of the fiscal years in the three year period ended September 30, 2010. Cardinal Ethanol, LLC’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Ethanol, LLC as of September 30, 2010 and 2009, and the results of its operations and its cash flows for each of the fiscal years in the three year period ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America.

Minneapolis, Minnesota
December 23, 2010

CARDINAL ETHANOL, LLC

Balance Sheet

		September 30, 2010				September 30, 2009
ASSETS
Current Assets
Cash		$	3,317,820			$	7,265,125
Trade accounts receivable			13,262,640				5,945,146
Miscellaneous receivables			1,030,197				1,021,479
Inventories			8,333,140				5,791,302
Deposits			409,940				1,045,079
Prepaid and other current assets			965,099				846,771
Derivative instruments			1,970,877				135,012
Total current assets			29,289,713				22,049,914
Property and Equipment
Land and land improvements			21,082,869				20,978,132
Plant and equipment			117,122,818				116,888,805
Building			6,991,721				6,991,721
Office equipment			316,219				307,494
Vehicles			31,928				31,928
Construction in process			3,480,322				—
			149,025,877				145,198,080
Less accumulated depreciation			(16,245,531	)			(7,988,509	)
Net property and equipment			132,780,346				137,209,571
Other Assets
Deposits			80,000				368,808
Investment			266,583				—
Financing costs, net of amortization			505,149				699,959
Total other assets			851,732				1,068,767
Total Assets		$	162,921,791			$	160,328,252
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable		$	2,154,370			$	1,329,785
Accounts payable- corn			3,266,780				1,556,398
Construction retainage payable			351,700				351,700
Accrued expenses			1,264,755				1,533,963
Derivative instruments			1,520,315				861,569
Current maturities of long-term debt and capital lease obligations			9,395,041				7,402,860
Total current liabilities			17,952,961				13,036,275
Long-Term Debt and Capital Lease Obligations			56,188,380				77,427,000
Derivative Instruments			3,130,402				3,269,980
Commitments and Contingencies
Members’ Equity
Members’ contributions, net of cost of raising capital,14,606 units issued and outstanding			70,912,213				70,912,213
Accumulated other comprehensive loss			(4,650,717	)			(4,131,549	)
Retained earnings (deficit)			19,388,552				(185,667	)
Total members’ equity			85,650,049				66,594,997
Total Liabilities and Members’ Equity		$	162,921,791			$	160,328,252

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

CARDINAL ETHANOL, LLC

Condensed Statements of Operations

		Fiscal Year Ended				Fiscal Year Ended				Fiscal Year Ended
		September 30, 2010				September 30, 2009				September 30, 2008
Revenues		$	224,807,338			$	167,738,057			$	—
Cost of Goods Sold
Cost of goods sold		$	195,880,762			$	159,079,141			$	—
Lower of cost or market adjustment			—				1,595,476				—
Total			195,880,762				160,674,617				—
Gross Profit (Loss)			28,926,576				7,063,440				—
Operating Expenses
Professional fees			612,115				757,950				363,758
General and administrative			3,123,415				2,968,101				902,600
Total			3,735,530				3,726,051				1,266,368
Operating Income (Loss)			25,191,046				3,337,389				(1,266,368	)
Other Income (Expense)
Grant income			—				24,702				143,862
Interest and dividend income			2,792				2,654				108,440
Interest expense			(4,797,649	)			(4,345,390	)			—
Miscellaneous income			54,390				29,460				5,812
Total			(4,740,467	)			(4,288,574	)			258,114
Net Income (Loss)		$	20,450,579			$	(951,185	)		$	(1,008,254	)
Weighted Average Units Outstanding — basic and diluted			14,606				14,606				14,606
Net Income (Loss) Per Unit — basic and diluted		$	1,400.15			$	(65.12	)		$	(69.03	)
Distributions Per Unit		$	60.00			$	—			$	—

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

CARDINAL ETHANOL, LLC

Statements of Cash Flows

		Fiscal Year Ended				Fiscal Year Ended				Fiscal Year Ended
		September 30, 2010				September 30, 2009				September 30, 2008
Cash Flows from Operating Activities
Net income (loss)		$	20,450,579			$	(951,185	)		$	(1,008,254	)
Adjustments to reconcile net income (loss) to net cash from operations:
Depreciation and amortization			8,451,832				8,099,316				33,077
Change in fair value of derivative instruments			2,424,135				(3,072,937	)			—
Loss on sale of fixed asset			—				—				1,472
Dividend income			(266,583	)			—				—
Lower of cost or market adjustments to inventory			—				1,595,476				—
Change in assets and liabilities:
Trade accounts receivables			(7,317,494	)			(5,945,146	)			—
Miscellaneous receivable			(8,718	)			(994,479	)			(22,460	)
Interest receivable			—				—				21,618
Inventories			(2,541,838	)			(7,386,778	)			—
Prepaid and other current assets			(118,328	)			(789,048	)			(37,924	)
Deposits			923,947				322,563				(1,097,450	)
Derivative instruments			(4,260,000	)			2,937,925				—
Accounts payable			824,585				1,153,663				141,822
Accounts payable-corn			1,709,592				1,556,398				—
Accrued expenses			(330,915	)			1,229,356				73,744
Net cash provided by (used for) operating activities			19,940,794				(2,244,876	)			(1,894,355	)
Cash Flows from Investing Activities
Capital expenditures			(284,978	)			(912,507	)			(846,152	)
Payments for construction in process			(3,480,322	)			(13,019,182	)			(79,043,000	)
Proceeds from investments, net			—				—				20,600,000
Net cash used for investing activities			(3,765,300	)			(13,931,689	)			(59,289,152	)
Cash Flows from Financing Activities
Dividends paid			(876,360	)			—				—
Payments for financing costs			—				(24,744	)			112,399
Payments for capital lease obligations			(7,770	)			(7,245	)			—
Proceeds from long-term debt			—				24,806,928				61,117,940
Payments on long-term debt			(19,238,669	)			(1,794,784	)			—
Net cash provided by (used for) financing activities			(20,122,799	)			22,980,155				61,005,451
Net Increase (Decrease) in Cash			(3,947,305	)			6,803,590				(177,966	)
Cash — Beginning of Period			7,265,125				461,535				639,501
Cash — End of Period		$	3,317,820			$	7,265,125			$	461,535

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

CARDINAL ETHANOL, LLC

Statements of Cash Flows

		Fiscal Year Ended				Fiscal Year Ended				Fiscal Year Ended
		September 30, 2010				September 30, 2009				September 30, 2008
Supplemental Cash Flow Information
Interest paid, net of $0 and $387,167 and $1,533,995 capitalized, respectively		$	5,067,484			$	2,874,893			$	—
Supplemental Disclosure of Noncash Investing and Financing Activities
Construction costs in construction retainage and accounts payable		$	—			$	351,700			$	9,429,538
Interest paid by debt financing			—				—			$	675,132
Financing costs in accounts payable			—				—				12,000
Change in derivative instruments included in accumulated other comprehensive loss			(519,168	)			(2,378,351	)			(1,530,692	)
Accrued interest capitalized in construction process			—				—				214,785
Amortization of financing costs capitalized			—				17,243				56,699
Capital expenditures included in accrued expenses			62,497				—				—

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

CARDINAL ETHANOL, LLC

Statement of Changes in Members’ Equity

										Accumulated
						Retained				Other
		Member				Earnings				Comprehensive
		Contributions				(Deficit)				Loss
Balance — October 1, 2007			70,912,213				1,773,772				(222,506	)
Net loss for year ended September 30, 2008			—				(1,008,254	)			—
Other comprehensive loss
Unrealized loss on derivative contracts, net			—				—				(1,530,692	)
Balance — September 30, 2008			70,912,213				765,518				(1,753,198	)
Net loss for year ended September 30, 2009			—				(951,185	)			—
Other comprehensive income
Unrealized loss on derivative contracts, net			—				—				(2,378,351	)
Balance — September 30, 2009		$	70,912,213			$	(185,667	)		$	(4,131,549	)
Net income for year ended September 30, 2010			—				20,450,579				—
Members Distributions							(876,360	)
Other comprehensive income
Unrealized loss on derivative contracts, net			—				—				(519,168	)
Balance — September 30, 2010		$	70,912,213			$	19,388,552			$	(4,650,717	)

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

CARDINAL ETHANOL, LLC
Notes to Financial Statements

September 30, 2010 and 2009

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Cardinal Ethanol, LLC, (an Indiana Limited Liability Company) was organized in February 2005 to pool investors to build a 100 million gallon annual production ethanol plant near Union City, Indiana. The Company was formed on February 7, 2005 to have a perpetual life. The Company was originally named Indiana Ethanol, LLC and changed its name to Cardinal Ethanol, LLC effective September 27, 2005. The construction of the ethanol plant was substantially completed in November 2008 and began operations at that time. Prior to November 2008, the Company was in the development stage with its efforts being principally devoted to organizational activities and construction of the plant.

Fiscal Reporting Period

The Company has adopted a fiscal year ending September 30 for reporting financial operations. Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others, the useful lives of fixed assets, allowance for doubtful accounts, the valuation of basis and delay price contracts on corn purchases, the valuation of derivatives, inventory, fixed assets, and inventory purchase commitments. Actual results may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

Cash

The Company maintains its accounts primarily at two financial institutions. At times throughout the year the Company’s cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.

Accounts Receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.

Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Amounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At September 30, 2010 and September 30,2009, the Company was of the belief that such amounts would be collectible and thus an allowance was not considered necessary. It is at least possible this estimate will change in the future.

Inventories

Inventories are stated at the lower of cost or market. Inventories consist of raw materials, work in process, finished goods and parts. Corn is the primary raw material. Finished goods consist of ethanol, dried distiller grains and corn oil. Cost for substantially all inventory is determined using the lower of (average) cost or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line depreciation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Depreciation is computed using the straight-line method over the following useful lives:

Land improvements		15-20 years
Office building		10-40 years
Office equipment		5 years
Plant and process equipment		10-40 years

As a result of management’s review of depreciable lives and analysis of information available in the industry, on April 1, 2009, the Company increased its estimate of the useful lives of certain processing equipment from 15 years to 20 years. As a result of this change the Company recorded approximately $520,000 less in depreciation expense for the fiscal year ended September 30, 2009.

Long-Lived Assets

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

In November 2008, the Company completed construction of its ethanol production facilities, with installed capacity of 100 million gallons per year. The carrying value of these facilities at September 30, 2010 was approximately $133 million and approximately $137 million at September 30, 2009. In accordance with the Company’s policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facility based on projected future cash flows from operations over the facility’s estimated useful life. Management has determined that the projected future undiscounted cash flows from operations of this facility exceeds its carrying value at September 30, 2010 and September 30, 2009 therefore, no impairment loss was indicated or recognized. In determining the projected future undiscounted cash flows, the Company has made significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity. Given the recent completion of the facilities, replacement cost would likely approximate the carrying value of the facilities. However, there have been recent transactions between independent parties to purchase plants at prices substantially below the carrying value of the facilities, some of the facilities have been in bankruptcy and may not be representative of transactions outside of bankruptcy. Given these circumstances, should management be required to adjust the carrying value of the facilities to fair value at some future point in time, the adjustment could be significant and could significantly impact the Company’s financial position and results of operations. No adjustment has been made in these financial statements for this uncertainty.

Financing Costs

Costs associated with the issuance of loans are classified as financing costs. Financing costs are amortized over the term of the related debt by use of the effective interest method, beginning when the Company draws on the loans. Amortization for the years ended September 30, 2010 and 2009 was approximately $195,000 and $226,000, respectively.

Grants

The Company recognizes grant proceeds as other income upon complying with the conditions of the grant. For reimbursements of incremental expenses (expenses the Company otherwise would not have incurred had it not been for the grant), the grant proceeds are recognized as a reduction of the related expense. For reimbursement of capital expenditures, the grants are recognized as a reduction of the basis of the asset upon complying with the conditions of the grant.

Revenue Recognition

The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. The Company believes that there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue. The Company’s products are sold FOB shipping point.

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees, commissions and freight due to the marketers are deducted from the gross sales price at the time incurred. Commissions were approximately $2,500,000 and $1,950,000 for the years ended September 30, 2010 and 2009, respectively. Freight was approximately $10,280,000 and $12,170,000 for the years ended September 30, 2010 and 2009, respectively. Revenue is recorded net of these commissions and freight as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products.

Derivative Instruments

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in earnings.

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted 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. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

Fair Value of Financial Instruments

The Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. On January 1, 2009, the Company adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

	•		Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
	•		Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value at September 30, 2010 and 2009 due to the short maturity nature of these instruments. The fair value of the Company’s debt approximates its carrying value due to its variable interest rate. The fair value of derivative instruments is disclosed in Note 7.

Capitalization of interest

The Company capitalizes interest cost on construction in progress and capitalized development costs as required for the portion of interest that is attributable to the historical cost of developing or constructing the asset. The Company capitalized approximately $1,921,000 of interest through completion of construction in 2009. These costs have been included in fixed assets as of September 30, 2010 and 2009.

Environmental Liabilities

The Company’s operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated. No liabilities were recorded at September 30, 2010 or 2009.

Net Income (Loss) per Unit

Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members’ units outstanding during the period. Diluted net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members’ units and members’ unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company’s basic and diluted net income (loss) per unit are the same.

Income Taxes

Cardinal Ethanol LLC is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, their income or losses are included in the income tax returns of the members and partners. Accordingly, no provision or liability for federal or state income taxes has been included in these financial statements. Differences between the financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the modified accelerated cost recovery system method (MACRS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences.

2. CONCENTRATIONS

One major customer accounted for approximately 93% of the outstanding accounts receivable balance at September 30, 2010 and 84% of the balance at September 30. 2009. This same customer also accounted for approximately 85% and 84% of revenue for the year ended September 30, 2010 and 2009, respectively.

3. INCOME TAXES

The differences between financial statement basis and tax basis of assets and liabilities at September 30, 2010 and 2009 are as follows:

		2010				2009
Financial statement basis of assets		$	162,921,791			$	160,328,252
Organization and start-up costs			1,976,610				1,976,610
Book to tax depreciation and amortization			(47,327,329	)			(25,874,665	)
Book to tax derivative instruments			(1,970,877	)			(135,012	)
Income tax basis of assets		$	115,600,195			$	136,295,185
Financial statement basis of liabilities		$	77,271,743			$	93,733,255
Interest rate swap			(4,650,717	)			(4,131,549	)
Income tax basis of liabilities		$	72,621,026			$	89,601,706

4. MEMBERS’ EQUITY

The Company has one class of membership units, which include certain transfer restrictions as specified in the operating agreement and pursuant to applicable tax and securities laws. Income and losses are allocated to all members based upon their respective percentage of units held.

In March of 2010, the Company made a distribution of $60.00 per unit for a total of $876,360.

5. INVENTORIES

Inventories consist of the following as of September 30, 2010 and 2009:

		2010				2009
Raw materials		$	2,481,521			$	1,806,167
Work in progress			1,646,842				1,348,451
Finished goods			3,214,725				2,021,267
Spare parts			990,052				615,417
Total		$	8,333,140			$	5,791,302

For the fiscal year ended September 30 2009, the Company recorded a loss of approximately $1,595,000 related to inventory where the market value was less than the cost basis, attributable primarily to decreases in market prices of corn and ethanol for the inventory on hand. The loss was recorded in cost of goods sold in the statement of operations. No market value adjustments were required during the fiscal year ended September 30, 2010.

In the ordinary course of business, the Company enters into forward purchase contracts for its commodity purchases and sales. At September 30, 2010, the Company has forward corn purchase contracts for various delivery periods through July 2012 for a total commitment of approximately $34,084,000. Approximately $7,027,000 of the forward corn purchases were with a related party. At September 30, 2009, the Company had forward corn purchase contracts for various delivery periods through July 2010 of approximately $5,417,000 with approximately $810,000 due to a related party. During 2010, the Company began obtaining part of its natural gas needs by using forward purchase contracts. At September 30, 2010, the Company had forward natural gas purchase contracts with various delivery periods through December 2010 for a total commitment of approximately $2,027,000. Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn contracts in future periods. Management has evaluated these forward contracts using a methodology similar to that used in the impairment evaluation with respect to inventory and has determined that no loss has been incurred on these forward contracts at September 30, 2010 and 2009.

6. DERIVATIVE INSTRUMENTS

As of September 30, 2010 and 2009, the Company has entered into corn derivative instruments and interest rate swap agreements, which are required to be recorded as either assets or liabilities at fair value in the statement of financial position. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure. The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis. The Company does not assess the effectiveness of hedges on an ongoing basis when those hedges were originally designated under the shortcut method.

Commodity Contracts

The Company enters into commodity-based derivatives, for corn and ethanol, in order to protect cash flows from fluctuations caused by volatility in commodity prices to protect gross profit margins from potentially adverse effects of market and price volatility on commodity based purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Commodity derivative changes in fair market value are included in costs of goods sold.

The table below shows the underlying quantities of corn and ethanol resulting from the short (selling) positions and long (buying) positions that the Company had to hedge its forward corn contracts and corn inventory. Corn positions are traded on the Chicago Board of Trade and ethanol positions are traded on the New York Mercantile Exchange. These derivatives have not been designated as an effective hedge for accounting purposes. Corn and ethanol derivatives are forecasted to settle for various delivery periods through March 2012 and November 2010, respectively as of September 30, 2010.

The following table indicates the bushels of corn under contract as of September 30, 2010 and 2009:

		2010				2009
Short			5,425,000				620,000
Long			—				190,000