UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the Quarterly Period Ended February 28,May 31, 2007

Commission File Number 333-121321

GREEN PLAINS RENEWABLE ENERGY, INC.
(Exact name of registrant as specified in its charter)

4124 Airport Road, Shenandoah, Iowa  51601

(Address of principal executive offices and zip code)

(712) 246-2932

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

         S   Yes   £   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition orof “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer

£

Accelerated filer     

S

Non-accelerated filer

£

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

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

TABLE OF CONTENTS

In this Quarterly Report, references to “we,” “us,” “our” or the “Company” refer to Green Plains Renewable Energy, Inc. and its subsidiary, Superior Ethanol, L.L.C.

The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements. Forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast” and other words and terms of similar meaning. Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Part II, Item 1A, “Risk Factors,” in this Quarterly Report and under Part I, Item 1A, “Risk Factors,” ; in our Annual Report on Form 10-K for the year ended November 30, 2006.

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PART I. — FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

See Notes to Condensed Consolidated Financial Statements.

See Notes to Condensed Consolidated Financial Statements.

4

See Notes to Condensed Consolidated Financial Statements.  

45

GREEN PLAINS RENEWABLE ENERGY, INC.

 (A DEVELOPMENT STAGE COMPANY)

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

GREEN PLAINS RENEWABLE ENERGY, INC.

 (A DEVELOPMENT STAGE COMPANY)

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

67

GREEN PLAINS RENEWABLE ENERGY, INC.

(A DEVELOMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.

BASIS OF PRESENTATION

Green Plains Renewable Energy, Inc. (hereinafter referred to as the "Company") isWe are a later stage development company incorporated on June 29, 2004 under the laws of the state of Iowa. Green Plains Renewable Energy, Inc. wasWe were organized to construct and operate dry mill, fuel grade ethanol plants (the "Plants").plants. Construction on the Company’sof our first Plant,plant, located in Shenandoah, Iowa, began in April of 2006.  In August 2006, construction began on a second plant, similar to the Shenandoah facility, in Superior, Iowa. OurThe Shenandoah and Superior ethanol production facilitiesplants under construction are name-plate 50 million gallon per year (“mmgy”) plants. Name-plate means the plants are guaranteedplant is designed by the Design Buildersdesign builders and the process technology providers to produce at least 50 million gallonsthe stated quantity of ethanol per year once it becomes operational. At name-plate capacity, each of the Plants become operational. The Shenandoah Plant is being built by Fagen, Inc. (“Fagen”). ICM is the process technology provider for that Plant. Agra Industrie s is building the Superior, Iowa Plant and weplants are using Delta T as the technology provider for this Plant. We are building the Plantsexpected to, each haveon an annual capacity to processbasis, consume approximately 18 million bushels of corn into approximately 50 million gallons of ethanol and produce, in addition to ethanol, approximately 160,000 tons annually of animal feed known as Distillers Dried Grainsdistillers dried grains with Solublessolubl es (“DDGS”) on a dry matter basis. Distillers’ grains are. In addition, the principal by-products of the ethanol production process. The Plantsplants will alsoeach produce approximately 148148,000 tons of CO². However, because the Iowa marketcarbon dioxide annually which is saturated with CO² dueexpected to the number of ethanol plants in Iowa, we intend to scrub the CO² produced at the Plantsbe scrubbed and vent it off.vented.

The accompanying condensed consolidated balance sheet as of November 30, 2006, which has been derived from  our audited consolidated financial statements as filed in our annual report for the period ended November 30, 2006, and the unaudited interim condensed consolidated financial statements, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and include the accounts of Green Plains Renewable Energy, Inc. (GPRE) and its wholly ownedwholly-owned subsidiary Superior Ethanol, LLC.  GPRE and its subsidiary are collectively referred to as the “Company”.L.L.C.  All material inter-company accounts and transactions have been eliminated in consolidation. Certain information and notefootnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations.  The condensed consolidated financial statements should be read in conjunction with thet he consolidated financial statements included in our Form 10-K (the “Annual Report”) as filed with the Securities and Exchange Commission and notes thereto and risk factors contained therein for the fiscal year ended November 30, 20062006.

In the opinion of Management, the accompanying unaudited interim financial statements as of February 28,May 31, 2007 contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented.

Management is required to make certain estimates and assumptions which affect the amount of assets, liabilities, revenues and expenses the Company haswe reported and itsour disclosure of contingent assets and liabilities as of the date of the consolidated financial statements.  The results of the interim periods are not necessarily indicative of the results for the full year.

Recently issued accounting standards - In February, 2007 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“FASB”SFAS”) issued FASNo. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Liabilities.”including an amendment of FASB Statement No. 115.  This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This statement is expected to expand the use of fair market value measurement, which is consistent with long-term measurement objectives for accounting for financial instruments. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management doesWe do not expect the adoption of this statement to be significantsignifica nt to the Company’sour consolidated financial statements.

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2.

PROPERTY AND EQUIPMENT – NET  

The components of property and equipment are as follows:

During the threesix months ended February 28,May 31, 2007 the Companywe purchased approximately 215 acres ofadditional land in Dickinson County for the Superior Iowa plant.  The CompanyWe paid $1,259,829$1,261,910 cash for the land including certain fees and $10,300 in common stock. In addition, $396,956 was reallocated to land. The reallocation to land included Site Development Costs of $386,856 related to the acquisition of Superior Ethanol, LLCsite development and $10,100 of land option costs. The remaining $8,383 ofcosts previously reflected as Other Assets, were transferred to Property and Equipment and are included now in land and improvements were related to the Shenandoah plant.above.  

The CompanyWe capitalized interest, including amortization of $123,270debt issuance costs, of $372,640 and $495,910 in construction-in-progress for the three monthsand six month periods ended February 28, 2007. The capitalized interest included interest of $120,107 on our long-term debt and $3,163 from the amortization of debt issuance costs. All interest was capitalized to construction-in-progress for the three month period ended February 28,May 31, 2007, because the Company invested $12,564,335 for construction-in-progress on the Shenandoah project which was in excess of the loan draws, therefore, all the draws were deemed for construction-in-progress.

Accruals and retainage for land improvements and construction-in-progress and capitalized interest from the amortization of debt issuance costs are considered non-cash investing activities, therefore they are not included as purchases of property and equipment in the Statements of Cash Flows.  The construction-in-progress accruals and retainage of $8,756,831 and $8,967,722 at February 28, 2007 and November 30, 2006, respectively, are detailed in the Footnote 4 – Accounts Payable and Accrued Expenses.respectively.

3.

OTHER ASSETS

The components of other assets are as follows:

8

During the quartersix month period ended February 28,May 31, 2007, the Companywe incurred $12,255$240,500 of debt issuance costs related to drawing funds onloan agreements for the Shenandoah plant loans.  The CompanySuperior plant.  We transferred $386,856$396,956 of site development and land option costs from the acquisition of Superior Ethanol, LLC to land upon the exercise of approximately 70 acres in Dickinson County, Iowa.  In addition, the Company exercised an option to purchase approximately 145 acres in Dickinson County, Iowa andland for a portion of the option cost of $10,000 was transferred to land as a cost to acquire the land.  Both parcels will be used for theSuperior plant in Superior, Iowa. Long-term deferred tax assets were adjusted to reflect changes and netted against long-term tax liabilities.site.  

4.

ACCOUNTS PAYABLE AND ACCRUED EXPENSESLIABILITIES

The components of the Company’s accounts payable and accrued expensesliabilities are as follows:

Accrued construction-in-progress

9

At May 31, 2007, and retainage includes $451,200 of accrualsNovember 30, 2006, accounts payable and accrued liabilities include $15,438,114 and $8,973,829, respectively for costs related to land and improvements, and construction-in-progress.  Changes in these balances during the period of invoicing cut-off from February 25 to February 28, 2007.  The accruals above for land improvements, land improvements-retainage, construction-in- progress and construction-in-progress-retainageperiods are considered non-operating and non-cash investing activities, and are therefore they are not included asexcluded from purchases of property and equipment in the Condensed Consolidated Statements of Cash Flows.

5.

LONG-TERM DEBT

The components of the Company’s long-term debt are as follows:

Shenandoah Loan Agreements

Agreement

On February 6, 2006, the Companywe entered into a Master Loan Agreement, Construction and Term Loan Supplement, Construction and Revolving Term Loan Supplement, Security Agreement and Real Estate Mortgage with Farm Credit Services of America, FLCA (individually and collectively, the “Loan Agreements”“Shenandoah Loan Agreement”) for the construction of the Shenandoah plant.. A participating interest under the Shenandoah Loan DocumentsAgreement was transferred to CoBank, ACB. This agreement required a $1,000 equity investment in both Farm Credit Services of America and CoBank. Under the Shenandoah Loan Agreements,Agreement, the lenders will lendloan up to $47,000,000. The loan proceeds are$47,000,000 to partially finance construction of the Shenandoah Plant and to provide funding for working capital purposes.  ThisIn December 2006, we complied with all conditions precedent and began drawing on the credit line is available after the required equity has been used for the construction of the plant in Shenandoah Plant.after first, as required under the Shenandoah Loan Agreement, spending the equity we had committed to build the Shenandoah plant. The loan is comprised of a $30,000,000 amortizing term loan and a $17,000,000 revolving term facility.

9The Shenandoah Loan Agreement was amended effective May 31, 2007, to reflect the current construction costs and schedule for the Shenandoah plant, to modify certain covenants and repayment requirements, and to reflect changes that had been agreed to as a result of our acquisition of Superior Ethanol.  The following summarizes the significant terms of the Shenandoah Loan Agreement as amended.

Loan Commitments and Repayment Terms –

·

Term Loan – This loan is available for advances until JulyDecember 1, 2007.  Principal payments are to commence thereafter with $1,200,000 due NovemberMay 20, 2007,2008, and each quarter thereafter with a final maturity on Novemberor before May 20, 2013 at the latest.2014. In addition, for each fiscal years ending in 2007 and thereafter,year, we are also required to make a special paymentpayments equal to 65% of the available (if any) free cash flow from operations, not to exceed $2,000,000 per year, provided, however, that if such payments would result in a covenant default under the Shenandoah Loan Agreements,Agreement, the amount of the payments shall be reduced to an amount which would not result in a covenant default. The free cash flow payments are discontinued when the aggregate total received from such payments exceeds $8,000,000.

·

Revolving Term – This loan is available for advances throughout the life of the commitment. ThisAllowable advances under this loan requires semi-annualare reduced by $2,400,000 payments on/step-downs of the commitment to commenceeach six month period commencing on the first day of the month beginning approximately six months after repayment of the term loan, by Maybut in no event later than November 1, 2014, atwith the latest with a final maturity no later than November 1, 2017.

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Pricing and fees –

·

The loans will bear interest at either the Agent Base Rate (prime) plus 0%-1/2% (based on a ratio of total equity0.00% to total assets)0.50% or short-term fixed rates at LIBOR (1, 3 or 6 month) +285plus 2.85% to +335 basis points (based3.35% (each based on a ratio of total equity to total assets).

·

The LendersWe may, however, allow the Company to elect to pay interest at a fixed interest rate to be determined.determined by the Lenders.

·

OriginationWe have incurred origination fees of $352,500, $2,000 for equity in lenders of $2,000 and other fees in the amount of $106,260 have been incurred by the Company$117,060 through February 28,May 31, 2007.  Appraisal, inspecting engineer, and title Company insurance and disbursing fees are at the Company’sour expense.

·

There are annual administrative fees of $25,000 beginning November 20, 2006.

·

An unused commitment fee of ½%0.50% on the $17,000,000 Revolving Term Loan began on February 1, 2007.

Availability of Advances, Interest Rates and Fees –

Advances are subject to satisfaction of specified lending conditions. Advances correlate to budget and construction timeline projections, with verification of progress by a third-party engineer.

Security –

As security for the loans, the lenders received a first-position lien on all personal property and real estate owned by us,we own, including an assignment of all contracts and rights pertinent to construction and on-going operations of the Plant.  The Company will be required to maintain certain financial and non-financial covenants during the term of the loans.

10plant.  

Representations, Warranties andSummary of Loan Covenants –

The Shenandoah Loan Agreements contain representations, warranties, conditions precedent,Agreement contains affirmative covenants (including financial covenants) and negative covenants.covenants including:

·

The Loan Agreements requireMaintenance of working capital (current assets over current liabilities in accordance with GAAP consistently applied) of not less than $5,000,000 at the earlier of commencement of operations or by MayOctober 31, 2007 and increasing to $6,000,000 at fiscal year ending 2007,effective May 31, 2008, and there after,thereafter, except that in determining current assets, any amounts available under the Revolving Term Loan (less the amount that would be considered a current liability under GAAP if fully advanced) may be included.  

·

The Loan Agreements requireMaintenance of net worth (total assets over total liabilities in accordance with GAAP consistently applied) of $31,000,000 million,$34,000,000, increasing to $32,000,000 at fiscal year ending 2007,$35,500,000 effective May 31, 2008, and increasing to $34,000,000$37,500,000 at fiscal year ending 2008 and thereafter.  

·

The Loan Agreements requireMaintenance of Debt Service Coverage Ratio of not less than 1.5 to 1.0 for fiscal year end 20072008 and thereafter.  Debt Service Coverage Ratio is defined as (all as calculated for the most current year-end in accordance with GAAP consistently applied): 1) net income (after taxes), plus depreciation and amortization,; divided by 2) all current portions of regularly scheduled long term debt for the prior period (previous fiscal year end).

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·

In addition,Restrictions on dividends or other distributions to stockholders will be limited toof no more than 40% of the profit, net of income taxes for each fiscal year, and may be paidallowable only where we are expected to remain in compliance with all loan covenants, terms and conditions. Furthermore, with respect to the fiscal years ending in 2008 and thereafter, an additional distribution may be made to stockholders in excess of the 40% limit for such fiscal year if we have made the required free cash flow payment for/based onfor such fiscal year, and will thereafter remain in compliance with all loan covenants, terms and conditions on a pro forma basis net of saidsuch potential additional payment. ThereWe are currently in compliance with all covenants under the Shenandoah Loan Agreement; however, there can be no assurance that we can remain in compliance with all loan covenants.covenants in the future.

During the three months ended February 28, 2007, the Company began drawingAll amounts outstanding on the credit line for the construction of the Shenandoah Plant after fulfilling the equity requirement as well as all necessary conditions precedent to funding.  At February 28,Loan Agreement at May 31, 2007, the Company hadwere drawn $10,462,197 on the term loan and wasloan.  At May 31, 2007, we were paying interest based on the Agent Base Rate of 8.25% plus .5% oradvances outstanding at 8.75% percent and incurred total interest (including amortization of $113,496 on the drawn funds. In addition, on February 1, 2007, the Company began paying the unused commitment feedebt issuance costs) of ½% on the available $17,000,000 revolving term loan for $6,611.  All interest was capitalized to construction-in-progress$418,472 and $541,758 for the three and six month periodperiods ended February 28, 2007 because the Company invested $12,564,335 for construction-in-progress which was in excess of the loan draws, therefore, all the draws were deemed for construction-in-progress.May 31, 2007.  

Superior Loan Agreement

On October 16, 2006 the Company entered into a Commitment Letter for $51,600,000 with Farm Credit Services, FLCA.  This agreement is withMarch 21, 2007, Superior Ethanol LLC, a wholly owned subsidiary of the Company to provide partial funding for the construction of the Superior Plant and was expected to be finalized during the second quarter of fiscal 2007. The Company has incurred debt issuance costs of $254,910 as of February 28, 2007 related to securing this loan agreement.

Economic Development Loans and Grants

At November 30, 2006, the Company classified $330,000 as long-term debt and $60,000 as current portion of long-term debt based on a $290,000 note and $100,000 grant with the Iowa Department of Economic Development (IDED).  The Company paid $15,000 ($5,000/month) during the three months ended February 28, 2007 on this obligation.

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In April 2005, the Iowa Department of Economic Development (IDED) awarded the Company a High-Quality Job Creation (HQJC) financing incentive comprised of a $300,000 zero interest loan and a $100,000 forgivable loan (grant) for the Shenandoah project.  The IDED funds became available for use by the Company in March, 2006 - upon closing of the senior debt financing commitment.  Associated with this award are job creation covenants.  The Company believes those covenants will be fulfilled.  The Shenandoah project has been awarded a tax incentive package from the Iowa Department of Economic Development under their High Quality Job Creation (HQJC) program with, according to the IDED, an estimated value of approximately $3.5 million.

The $300,000 zero interest loan terms are $5,000 per month for sixty months beginning October 1, 2006. The $100,000 grant was recorded as long-term debt as the covenants related to jobs creation have not been fulfilled.  The intention is that when the initial requirements have been fulfilled, the creation of the 33 full time jobs with 21 qualifying as High Quality Jobs, the Company will record the $100,000 grant as other income.  

6.

STOCKHOLDERS’ EQUITY

The following was the activity during the three months ending February 28, 2007:

In February 2007, the Company issued 75 shares of the Company’s common stock to three different employees (25 shares each) as gifts.  The shares were valued at fair market value based on upon the current market price of $22.04 per share.

The Company had net income of $777,243 and $11,828 for the three months ended February 28, 2007 and 2006, respectively. The Company has accumulated earnings of $1,247,615 since inception on June 29, 2004 through February 28, 2007.

The Company has not paid any dividends since inception. Dividends to shareholders are restricted by the Company’s credit agreements as described in Footnote 5 – Long-term Debt and Credit Lines.

The following is a review of prior period activities:

In July 2004, the Company issued 400,000 and 150,000 shares of common stock to the founders of the Company for cash and services, respectively.  The shares were issued in consideration of cash and services totaling $100,000 and $37,500, respectively.  The shares for services were issued at $.25 per share based upon the issuance of the stock to the founders.

In August, October and November 2004, the Company issued 73,000 shares of common stock to directors for cash totaling $182,500.

In August, September, October and November 2004, the Company issued 142,000 shares of common stock to various non-related individuals and entities for cash totaling $355,000 less $1,712 of offering costs.

In November 2005, the Company issued 3,445,990 shares of common stock to various non-related individuals and entities for cash totaling $34,459,900.  The Company incurred $256,658 of costs related to this offering.

In November 2005, the Company issued 5,000 shares of common stock to a director for services valued at $50,000 or $10 per share. The value assigned was at the recent IPO issuance price of $10 per share.

In January 2006, the Company issued 5,000 shares of common stock to an engineering firm for services valued at $50,000 or $10 per share.  The value assigned was at the recent IPO issuance price of $10 per share.

In February 2006, the Company issued 100,000 shares to a director in exchange for 100% ownership in Superior Ethanol, LLC. Superior Ethanol, LLC had cash of $210,291 in its accounts, holds options on real estate, property tax abatements and other assets in an area where the Company is building its second ethanol Plant in Superior, Iowa. The value assigned was at the recent IPO issuance price of $10 per share.

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In May 2006, the Company issued 10,900 shares to a director in exchange for land.  The shares were valued at fair market value at the then current market price of $43.90 per share.  The land purchase was approximately 68 acres of land near Superior Iowa in Dickinson County where the Company is building a 50 Million Gallon, Fuel Grade Ethanol Plant.

In May 2006, the Company issued 2,500 shares valued at $93,250 based upon fair market value at the then current market price of $37.30 per share to the Shenandoah Chamber and Industry Association as a gift to enhance the Community of Shenandoah, Iowa.

On July 31, 2006, the Company closed on a second public offering and issued 1,600,069 shares of common stock to various non-related individuals and entities for cash totaling $48,002,069.  The Company incurred $1,173,671 of fees and costs related to this offering.

Purchasers of the Company’s IPO that closed in November of 2005 bought 3,445,990 shares of the Company’s common stock at $10 per share. Each share purchased in the offering was accompanied by a warrant. Four warrants are needed to purchase one share of common stock at $30 per share. Said warrants expire on December 31, 2007. The Company’s common stock was trading above the $30 strike price in the past. During these times, some of the Company’s shareholders exercised their warrants. As of November 30, 2006, shareholders had exercised 273,108 warrants for which 68,277 shares of the Company’s common shares were issued at $30 per share, plus transfer fees, for total proceeds of $2,049,120. As of February 28, 2007 there were 3,172,884 warrants outstanding that could be exercised for a total of 793,221 shares of common stock.  If all warrants still outstanding were to be exercised, the Company would realize an additional $23,796,630 of capital.

Purchasers of the Company’s second public offering, which closed on July 31, 2006, bought 1,600,069 shares of common stock at $30.00 per share.  Each share purchased in the offering was accompanied by a warrant.  Five warrants are needed to purchase one share of common stock at $60.00 per share.  The total warrants in the offering were 1,600,069 for equivalent shares of 320,014. The warrants have a call option that can be exercised on twenty days’ notice, subject to the price being above $72 for twenty consecutive trading days; otherwise the warrants can be exercised at any time through December 31, 2008.  To date, no warrants issued in the second public offering have been exercised.  As of the date hereof, all of the warrants issued in the IPO and second public offering are out of the money and there can be no assurance that any outstanding warrants will ever be exercised.

7.

EARNINGS PER SHARE

The following table sets forth the computation of earnings per share for the three months ended February 28, 2007 and 2006:

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8.

INCOME TAXES

The pre- tax income for the three months ended February 28, 2007 and 2006 are as follows:

The current and deferred components of income tax expense (benefit) for the three months ended February 28, 2007 and 2006 are as follow:

Total income tax expense (benefit) differed from the amount computed by applying the U.S. Federal statutory rates of 34% for the three months ended February 28, 2007 and 2006.

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Deferred tax assets and liabilities as of February 28, 2007 and November 30, 2006 are summarized as follows:

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

During 2005 and 2004, the Company established a valuation allowance for all deferred tax assets and tax liabilities as the Company was in the early start-up phase and any future income or tax benefits was uncertain. The Company did not provide for valuation allowances for 2006 due to the determination based on industry trends that it is more likely than not that the benefit of the deferred taxable assets will be realized

For the three months ended February 28, 2007 the Company incurred an unrealized gain of $1,799,988 on derivative financial instruments increasing the resulting deferred tax liability to $806,200. The resulting tax loss excluding this gain produced a deferred tax asset of $323,500.  The Company believes that all deferred income taxes will be realized based on the past results of the company and profitability of other similar companies.  For financial statement presentation, the Company has offset all current deferred tax liabilities and assets and offset all non-current liabilities and assets as single amounts.

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9.

EMPLOYEE BENEFIT PLANS

On October 1, 2006, the Company established a comprehensive Employee Benefits Plan that includes Health, Dental, Prescription Drugs, Flexible Spending Account, Vision, Life and Accidental Death, Short-term Disability and Long-term Disability.  Additionally, the Company offers a Simple IRA plan that enables eligible employees to save on a tax-deferred basis up to the limits allowable under the Internal Revenue Service Code and that requires the Company to offer matching contributions not less than 3% of participating employee salaries for two calendar years of a five year period.  Employees with at least 31 days of service are eligible to participate in the Employee Benefits Plan.  The Company provided matching contributions up to 2% of participating employee salaries totaling $4,403 and $0 for three months ended February 28, 2007, respectively. The Company provided matching contributions $6,511 for the period of June 29, 2004 (Inception) through Februa ry 28, 2007. The Company expects to pay significantly more in this fiscal year than prior years due to the ramp up of employees to manage and operate the Company.

10.

COMMITMENTS AND CONTINGENCIES

Plant Construction

Shenandoah –

In October 2005, we entered into an agreement with Fagen Engineering for design services for the Phase I and II Pre Engineering work to be done at the Plant site by the Company, prior to turning the site over to Fagen, Inc. for the construction of the Plant itself. The Company agreed to pay Fagen Engineering a lump sum fee for said engineering. However, said amount is included as part of the total cost of the Plant itself, as outlined in the Design Build Contract we have entered into with Fagen, Inc. (“Fagen”), which is anticipated to be $55,881,454. Therefore, the cost of the pre-engineering design services will be deducted from the total cost of Plant, once the plant is completed. The pre-engineering contract was completed during the quarter ended August 31, 2006 and all payments were made to Fagen as we were invoiced.

On January 13, 2006, we entered into a construction agreement with Fagen Inc., under which Fagen, Inc. will provide all work and services in connection with the engineering, design, procurement, construction startup, performances tests, training for the operation and maintenance of its Plant and provide all material, equipment, tools and labor necessary to complete the Plant. As consideration for the services to be performed, Fagen, Inc. will be paid $55,881,454, subject to adjustments. The Company has made all required payments to Fagen, Inc. based upon monthly application for payment.

The Company was required to pay an initial payment of $5,000,000, less retainage, at the time of the notice to proceed. The Company made this payment and is required to make payments to Fagen, Inc. based upon monthly applications for payment.  The Company paid $11.4 million for the three months ended February 28, 2007 and $37.8 since work began on the contract. At February 28, 2007, the Company owed Fagen $2,928,559 (net of retainage) for progress billings through February 25, 2007 and used a days approach to accrue an additional $258,400 for the February 26 through February 28, 2006 stub period for services rendered for that period. At February 28, 2007, accrued retainage for Fagen, Inc. was $2,794,073.

If Fagen completes that Plant early, we will have to pay Fagen an early completion bonus. If this were to happen, we could expend any extra cash we may have on hand by paying the early completion bonus. However, our contract with Fagen stipulates that under certain conditions, payment of any early completion bonus can be converted to a note and paid in installments.

In February 2006, we entered into an agreement with Mathiowetz Construction to do the grading and dirt work at the site in Shenandoah, Iowa to prepare the site for Fagen so construction on the Plant could commence. The original contract was for approximately $1.75 million. There were a change orders for an additional sums of $318,447. We have been billed and paid $2,068,266 through February 28, 2007 completing the contract.

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In April 2006, we entered into an agreement with Peterson Contractors, Inc. to install the geopiers to support certain buildings to be constructed at the Plant. The contract was for $1,062,000 and the Company paid $1,062,000 for the work completing the contract in the fourth quarter of fiscal year 2006.

In June 2006, we entered into an agreement with Kelly-Hill Company to rehabilitate a small portion of the existing rail spur running directly south of the Plant in Shenandoah that is deemed industrial track. We are currently leasing this track from BNSF, but will eventually purchase it from them for a nominal amount. As part of said agreement, Kelly-Hill will also construct additional track at the Plant in Shenandoah, Iowa.  The contract is for $341,549 and as of February 28, 2007 the Company had paid $21,787 and accrued retainage of $7,050 for completed construction. The Company owed Kelly-Hill Company $72,491 at February 28, 2007.

In July 2006, we entered into an agreement with Sunderman, Inc. to build the administrative building to support our operations at the Shenandoah Plant.  The contract is for approximately $289,000 with change orders.  At February 28, 2007 the Company had paid $215,673 for completed construction.

In July 2006, we entered into and agreement with McCormick Construction Company, Inc for auger cast pilings for the grain silo area at the site in Shenandoah, Iowa.  The original contract was for $337,100 and change orders for $149,000 have been added. At February 28, 2007 the Company has paid $461,795 for completed work and has recorded accrued retainage of $24,305.

In January, 2006 work began on the Wastewater Treatment Plant Improvements Project at the City of Shenandoah.  The Company has agreed to fund this Project with the City of Shenandoah.  This Project is contracted at $989,700 and the Company has accrued $89,775 and accrued retainage of $4,725 for completed work on this project.

In February 2007 the Company entered into a construction management agreement with Engineering & Construction Services to manage the Shenandoah Plant project. The agreement is $15,000 per month for six months plus a percentage of cost savings. We have paid $15,000 through February 28, 2007.

Superior –

In August 2006, our wholly owned subsidiary, Superior Ethanol, LLC entered into a construction agreement with Agra Industries, Inc. under which Agra Industries, Inc. will provide all work and services in connection with the engineering, design, procurement, construction startup, performance tests, training for the operation and maintenance of the Plant and provide all materials, equipment, tools and labor necessary to complete the Plant in Superior, Iowa. As consideration for the services to be performed, Agra Industries, Inc. will be paid $75,953,276, subject to adjustments. The Company was required to pay an initial payment of $7,595,328, less retainage, and has paid $14,891,952 for completed work and has recorded accrued retainage of $1,239,450. At February 28, 2007, the Company owed Agra Industries, Inc. $1,594,965 (net of retainage) for progress billings through February 24th, 2007 and used an estimate from Agra to accrue an additional $192,800 for the February 25 through February 28, 2007 stub period for completed construction.

The Agra Industries, Inc. contract includes an early completion bonus for $2,500 per day if substantial completion occurs in advance of the required substantial completion date of November 30, 2007, provided that the facility meets 100% of the performance guarantees within ninety days following the actual date of substantial completion.  Substantial completion is achieved when (i) the project has been constructed according to the approved plans and specifications therefore and so certified by Agra Industries, Inc. (ii) a certificate of occupancy has been issued for the project by the applicable governmental authority (if required) (iii) the punch list provided for in the agreement has been agreed by the Company and Agra Industries, Inc., and (iv)  each of the applicable performance guarantees achieve a ninety percent (90%) or better result.

In September 2006, Superior Ethanol, LLC, entered into a construction management agreement with Engineering & Construction Services to manage the Superior Plant project. The agreement is for $10,000 per month plus a percentage of cost savings. To date, we have paid $60,000 and $23,780 for cost savings and other costs.

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Loan Agreements and Grants

Shenandoah –

Farm Credit Services of America (FLCA) - On February 6, 2006, the Company entered into a Master Loan Agreement, Construction and Term Loan Supplement, Construction and Revolving Term Loan Supplement, Security Agreement and Real Estate Mortgage with Farm Credit Services of America, FLCA (individually and collectively, the “Loan Agreements”“Superior Loan Agreement”). A participating interest under the Superior Loan DocumentsAgreement was transferred to CoBank, ACB.  This agreement required a $1,000 equity investment in both Farm Credit Services of America and CoBank. Under the Superior Loan Agreements,Agreement, the lenders will lend up to $47,000,000. The loan proceeds are$50,000,000 to partially finance construction of the Shenandoah PlantSuperior plant and to provide funding for working capital purposes. This credit line is available after the required equity has been used for the construction of the Shenandoah Plant.Superior plant.  The loan is comprised of a $30,000,000$40,000,000 amortizing term loan and a $17,000,000$10,000,000 revolving term facility. The following summarizes the significant terms of the Superior Loan Agreement.

Loan Commitments and Repayment Terms – – The Loan Agreements are comprised of a $30,000,000 amortizing term loan and a $17,000,000 revolving term facility.

·

Term Loan – This loan is available for advances until July 1,December 31, 2007.  Principal payments are to commence thereafter with $1,200,000$1,375,000 due NovemberJuly 20, 2007,2008, and each quarter thereafter with a final maturity on Novemberor before July 20, 2013 at the latest.2015. In addition, for each fiscal years ending in 2007 and thereafter,year, we are also required to make a special paymentpayments equal to 65%75% of the available (if any) free cash flow from operations, not to exceed $2,000,000 per year, provided, however, that if such payments would result in a covenant default under the Superior Loan Agreements,Agreement, the amount of the payments shall be reduced to an amount which would not result in a covenant default. The free cash flow payments are discontinued when the aggregate total received from such payments exceeds $8,000,000$10,000,000.

·

Revolving Term – This loan is available for advances throughout the life of the commitment. ThisAllowable advances under this loan requires semi-annual $2,400,000 payments on/step-downs of the commitment to commenceare reduced by $2,500,000 each six month period commencing on the first day of the month beginning approximately six months after repayment of the term loan, by Maybut in no event later than July 1, 2014 at2015, with the latest with a final maturity no later than NovemberJuly 1, 2017.

Pricing and fees –

·

The loans will bear interest at either Agent Base Rate (prime) minus 0.15% to plus 0%-1/2% (based on a ratio of total equity to total assets)0.25% or short-term fixed rates at LIBOR (1, 3 or 6 month) +2852.80% to 335 basis points (based3.15% (each depending on a ratio of total equity to total assets)whether the operations for the preceding fiscal year were profitable or unprofitable).

·

The lendersWe may, however, allow the Company to elect to pay interest at a fixed interest rate to be determined.determined by the Lenders.

·

OriginationWe have incurred origination fees of $352,500, $2,000 for$422,000, equity in lenders of $2,000 and other fees in the amount of $106,260 have been incurred by the Company$73,410 through February 28,May 31, 2007.  Appraisal, inspecting engineer, and title Company insurance and disbursing fees are at the Company’sour expense.

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·

There are annual administrative fees of $25,000$35,000 beginning November 20, 2006.1, 2007.

·

An unused commitment fee of ½%0.75% on the $17,000,000$10,000,000 Revolving Term Loan began on February 1,March 15, 2007.

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Availability of Advances, Interest Rates and Fees–

Advances are subject to satisfaction of specified lending conditions. Advances correlate to budget and construction timeline projections, with verification of progress by a third-party engineer.

Security –

As security for the loans, the lenders received a first-position lien on all personal property and real estate owned by us,Superior Ethanol, including an assignment of all contracts and rights pertinent to construction and on-going operations of the Plant.  The Company will be required to maintain certain financial and non-financial covenants during the term of the loans.plant.  

Representations, Warranties andSummary of Loan Covenants –

 The Superior Loan Agreements contain representations, warranties, conditions precedent,Agreement contains affirmative covenants (including financial covenants) and negative covenants.covenants including:

·

The Loan Agreements require working capital (current assets over current liabilities in accordance with GAAP consistently applied)Maintenance of not less than $5,000,000 at the earlier of commencement of operations or by May 31, 2007 and increasing to $6,000,000 at fiscal year ending 2007, and there after, except that in determining current assets, any amounts available (less the amount that would be considered a current liability under GAAP if fully advanced) may be included.  

·

The Loan Agreements require net worth (total assets over total liabilities in accordance with GAAP consistently applied) of $31,000,000 million, increasing to $32,000,000 at fiscal year ending 2007, and increasing to $34,000,000 at fiscal year ending 2008 and thereafter.  

·

The Loan Agreements require Debt Service Coverage Ratio of 1.5 to 1.0 for fiscal year end 2007 and thereafter.  Debt Service Coverage Ratio is defined as (all as calculated for the most current year-end in accordance with GAAP consistently applied): 1) net income (after taxes), plus depreciation and amortization,; divided by 2) all current portion of regularly scheduled long term debt for the prior period (previous year end).

·

In addition, dividends or other distributions to stockholders will be limited to 40% of the profit net of income taxes for each fiscal year and may be paid only where we are expected to remain in compliance with all loan covenants, terms and conditions. Furthermore, with respect to the fiscal years ending in 2008 and thereafter, an additional distribution may be made to stockholders in excess of the 40% limit for such fiscal year if we have made the required free cash flow payment for/based on such fiscal year, and will thereafter remain in compliance with all loan covenants, terms and conditions on a pro forma basis net of said potential additional payment. There can be no assurance that we can remain in compliance with all loan covenants.

At November 30, 2006 the Company had not drawn on the credit line with Farm Credit Services of America and CoBank.  During the three months ended February 28, 2007, the Company began drawing on the credit line for the construction of the Plant in Shenandoah after fulfilling the equity requirement as well as all necessary conditions precedent to funding.  At February 28, 2007, the Company had drawn $10,462,197.

Iowa Department of Economic Development –

In April 2005, we were awarded a $300,000 zero interest loan, and a $100,000 forgivable loan (grant) by the State of Iowa. We signed that agreement in August 2005. However, we could not receive the funds until the other funding for the Plant had been secured (equity and debt financing). On March 8, 2006, the $400,000 was received into the accounts of the Company. We have agreed to pay the $300,000 loan in installments of $5,000 per month over a 60 month period commencing on October 1, 2006.

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Superior –

On October 16, 2006 the Company entered into a Commitment Letter for $51,600,000 with Farm Credit Services of America, FLCA.  This agreement is with Superior Ethanol, LLC, a wholly owned subsidiary of Green Plains Renewable Energy, Inc. to provide partial funding for the construction of the Superior Plant and is expected to be finalized in early fiscal 2007. The Company has incurred debt issuance costs of $254,910 as of February 28, 2006 related to securing this loan agreement.

Subsequently, on March 21, 2007, Superior Ethanol, LLC entered into a Master Loan Agreement, Construction and Term Loan Supplement, Construction and Revolving Term Loan Supplement, Security Agreement and Real Estate Mortgage with Farm Credit Services of America, FLCA (individually and collectively, the “Loan Agreements”). A participating interest under the Loan Documents was transferred to CoBank, ACB. This agreement required a $1,000 equity investment in both Farm Credit Services of America and CoBank. Under the Loan Agreements, the lenders will lend up to $50,000,000. The amount was lowered from the Commitment Letter based upon negotiations with the lenders. The loan proceeds are to partially finance construction of the Superior Plant and to provide funding for working capital purposes. This credit line is available after the required equity has been used for the construction of the Superior Plant.  The loan is comprised of a $40, 000,000 amortizing term loan and a $10,000,000 revolving term facility. Superior Ethanol, LLC paid loan origination fees of $422,000, $2,000 for equity in lenders and $73,410 for other debt issuance fees through the close the agreement. Superior Ethanol, LLC has not commenced drawing on this credit facility.

Utilities

Shenandoah –

On October 27, 2006, the Company entered into a capacity agreement with Kinder Morgan, Natural Gas Pipeline Company of America, to provide natural gas capacity on their pipeline to the Company for the Shenandoah facility.  The Company deposited $90,000 with Kinder Morgan for credit purposes and plans to replace this deposit with a Letter of Credit in the near future.

On October 27, 2006, the Company entered into an agreement with MidAmerican Energy to install a primary electric distribution system for the Shenandoah facility.  The Company will pay an “Excess Facilities” tariff of 1.75% of the installed cost on a monthly basis.  The cost is estimated to be approximately $500,000.  The Company may purchase this equipment from MidAmerican Energy in the future.

Superior –

The Company’s wholly owned subsidiary, Superior Ethanol, LLC is currently working on a Service Extension Agreement with Iowa Lakes Electric Cooperative to supply electrical distribution facilities to the Superior Plant. Superior Ethanol, LLC deposited $350,000 with Iowa Lakes Electric Cooperative for purchase commitments related to the project. Superior is also working out a final agreement with Northern Natural Gas Company to supply natural gas to the Superior facility.

Sales and Marketing

The Company and its wholly owned subsidiary, Superior Ethanol, LLC have entered into exclusive agreements with Renewable Products Marketing Group, LLC (RPMG) for the sale of the total ethanol produced at both the Shenandoah and Superior Plants. The agreements are for one year commencing on the first day ethanol is shipped from the respective Plants.  After the one year contract commitment, if the agreements are not renewed, then the rail car leases entered into by RPMG will be assigned to the Company and Superior Ethanol, LLC.  The Company would assume the lease for 150 rail cars for approximately $650 per car per month for the remainder of an original seven year lease term. Superior Ethanol, LLC would assume the lease for 150 rail cars for approximately $700 per car per month for the remainder of an original ten year lease term.

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The Company and its wholly owned subsidiary, Superior Ethanol, LLC have entered into exclusive agreements with Commodity Specialists Company (CSC) for the sale of the total Distillers Dried Grains with Solubles (DDGS), Wet Distillers Grains (WDG) and Solubles (Solubles) produced at both the Shenandoah and Superior Plants. These agreements are for one year commencing on the first day of production at each of the Plants.

In March, 2007, the Company executed a lease contract for 100 rail cars for a ten year period for $637 per car per month for the Shenandoah facility. It is anticipated that the Company will negotiate a similar lease agreement for rail cars for the Superior plant at some time in the future.  These rail cars will be utilized by the Company to ship Distillers Grains to customers.

Commodities - Corn

At February 28, 2007 the Company had entered into fixed price contracts for corn for a total of approximately 2.1 million bushels. The Company also has taken positions in corn futures and options to secure supply for operations.

11.

BUSINESS COMBINATIONS

On February 22, 2006, the Company acquired 100% of the equity of Superior Ethanol, LLC (Superior) pursuant to a Share Exchange Agreement for the purpose of building the Superior plant and also obtained land options on other potential sites. The sole shareholder was Brian Peterson, a director of the Company. The Company issued 100,000 shares of common stock based on a per share price of $10.00 in exchange for the shares of Superior. This price per share of $10.00 was based on the recent IPO price of $10.00 per share. Superior had cash, options for over 159 acres of land in Dickinson County, Iowa and the management of Superior had spent considerable time and resources to acquire the options and develop the project of building an ethanol plant on the land held by the options as well as other properties.  Therefore, the following summary is the purchase price allocation of the Superior Ethanol, LLC exchange transaction.   

The Company has allocated the site development cost to the land based on acres.  The Company has exercised two of the three land options related to the Superior plant received in the acquisition for approximately 140 acres of land and allocated $719,846 of the site development costs to this land as a cost to acquire the property.  The remaining $58,763 is recorded as an Other Assets and the Company does not believe it is impaired at this time. In addition, $10,100 of the cost associated with the exercised land option was allocated to the cost of the land.

12.

SUBSEQUENT EVENTS

Rail Car Lease

On March 12, 2007, the Company executed a lease contract for 100 rail cars for a ten year period for $637 per month for the Shenandoah facility. It is anticipated that the Company will negotiate a similar lease agreement for rail cars for the Superior plant at some time in the future.  These rail cars will be utilized by the Company to ship Distillers Grains to customers.

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Construction Agreements

On March 20, 2007, in connection with the execution of the Loan Agreements, and at the request of the lenders, Superior Ethanol, LLC entered into an amendment to the design-build agreement (the “Amendment”) between the Company and Agra Industries, Inc., the design-builder for the Superior Plant. The Amendment provides for various contract revisions, including, but not limited to, the following:

·

Delta T Corporation (the “Contractor”) will provide a performance warranty rather than the design-builder;

·

The construction agreement between design-builder and contractor was assigned from Agra Industries, Inc. to the Company (the “Assignment”);

·

Various contract amounts were revised in the Amendment as a result of the Assignment and to satisfy requirements of the lenders;

·

The Company entered into a Construction Management Agreement with Agra so that Agra will manage the Contractor’s services on the project;

·

The amount of the errors and omissions insurance policies were increased;

·

The work to be performed by various subcontractors was required to be bonded; and

·

The schedule of values was updated.

Superior Ethanol, LLC Loan Agreement

On October 16, 2006 the Company entered into a Commitment Letter for $51,600,000 with Farm Credit Services, FLCA.  The Commitment Letter was with Superior Ethanol, LLC, a wholly owned subsidiary of Green Plains Renewable Energy, Inc. to provide partial funding for the construction of our second ethanol plant which is being built near Superior, Iowa (“Superior Plant”).

On March 21, 2007, Superior Ethanol, LLC entered into a Master Loan Agreement, Construction and Term Loan Supplement, Construction and Revolving Term Loan Supplement, Security Agreement and Real Estate Mortgage with Farm Credit Services of America, FLCA (individually and collectively, the “Loan Agreements”). A participating interest under the Loan Documents was transferred to CoBank, ACB. This agreement required a $1,000 equity investment in both Farm Credit Services of America and CoBank. Under the Loan Agreements, the lenders will lend up to $50,000,000. The amount was lowered from the Commitment Letter based upon negotiations with the lenders. The loan proceeds are to partially finance construction of the Superior Plant and to provide funding for working capital purposes. This credit line is available after the required equity has been used for the construction of the Superior Plant.  The loan is comprised of a $40,000,000 amor tizing term loan and a $10,000,000 revolving term facility. Superior Ethanol, LLC paid loan origination fees of $422,000, $2,000 for equity in lenders and $73,410 for other debt issuance fees through the close the agreement. Superior Ethanol, LLC has not commenced drawing on this credit facility.

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Loan Commitments and Repayment Terms

The Loan Agreements are comprised of a $40,000,000 amortizing term loan and a $10,000,000 revolving term facility.

·

Term Loan -The term loan is for $40,000,000. The term loan will be available for advances until December 31, 2007. Principal payments will commence with $1,375,000 due July 20, 2008, and then each quarter thereafter. In addition, any refund of sales tax paid in conjunction with construction of the Plant will be applied as an additional payment to the loan. Subject to adjustment in certain cases, final maturity of the term loan is July 20, 2015 at the latest.  In addition, for fiscal years ending in 2007 and ending with fiscal year 2010, we are also required to make a special payment equal to 75% of the available (if any) free cash flow from operations provided, however, that if such payments would result in a covenant default under the Loan Agreements, the amount of the payments shall be reduced to an amount which would not result in a covenant default. The free cash flow payments are discontinued wh en the aggregate total received from such payments exceeds $10,000,000.

·

Revolving loan - The revolving loan is for $10,000,000. The revolving loan will be available for advances and readvances throughout the life of the commitment. Semi-annual $2,500,000 payments on/step-downs of the commitment will commence on the first day of the month beginning approximately six months after repayment of the term loan, and by January 1, 2016 at the latest. The final maturity date is no later than July 1, 2017.

Pricing and fees

·

The loans will bear interest at either Agent Base Rate (prime) less 10 basis points to plus 25 basis points or short-term fixed rates at LIBOR (1, 3 or 6 month) +280 to +315 basis points based on fulfilling free cash flow payments and profitable operations.

·

The lenders may, however, allow the Company to elect to pay interest at a fixed interest rate to be determined

·

The Loan Agreements provides for a loan origination fee of $422,000. Origination fees of $185,000 and other fees of $69,910 have been incurred by the Company through February 28, 2007. Superior Ethanol, LLC paid loan origination fees of $237,000, $2,000 for equity in lenders and $3,500 for other debt issuance fees upon closing the Loan Agreements. Superior Ethanol, LLC has not commenced drawing on this credit facility. Additional appraisal, inspecting engineer, title Company insurance and disbursing fees are also at the Company’s expense.

·

There are annual administrative fees of $35,000 beginning November 1, 2007.

·

An unused commitment fee of ¾% on the $10,000,000 Revolving Term Loan will commence upon drawing on the loans.

Availability of Advances, Interest Rates and Fees

Advances are subject to satisfaction of specified lending conditions. Advances correlate to budget and construction timeline projections, with verification of progress by a third-party engineer.

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Security

As security for the loans, the lenders received a first-position lien on all personal property and real estate owned by us and Superior Ethanol, our wholly owned subsidiary, including an assignment of all contracts and rights pertinent to construction and on-going operations of the Plants. The Company will be required to maintain certain financial and non-financial covenants during the term of the loans.

Representations, Warranties and Covenants

The loan agreements contain representations, warranties, conditions precedent, affirmative covenants (including financial covenants) and negative covenants.

·

The Loan Agreements require working capital (current assets over current liabilities in accordance with GAAP consistently applied) of not less than $4,500,000 at the earlier of commencement of operations or by December 31, 2007 and increasing to $5,000,000 at fiscal year endingeffective November 30, 2008, and there after,thereafter, except that in determining current assets, any amounts available under the Revolving Term Loan (less the amount that would be considered a current liability under GAAP if fully advanced) may be included.

·

The Loan Agreements requireMaintenance of net worth (total assets over total liabilities in accordance with GAAP consistently applied) of $43,500,000 million,$45,100,000, and increasing to $47,000,000$48,600,000 at fiscal year ending 2008 and thereafter.

·

The Loan Agreements requireMaintenance of Debt Service Coverage Ratio of not less than 1.25 to 1.0 for fiscal year end 2008 and thereafter.  Debt Service Coverage Ratio is defined as (all as calculated for the most current year-end in accordance with GAAP consistently applied): 1) net income (after taxes), plus depreciation and amortization,; divided by 2) all current portions of regularly scheduled long term debt for the prior period (previous fiscal year end).

·

In addition,Restrictions on dividends or other distributions to stockholders will be limited toof no more than 40% of the profit, net of income taxes for each fiscal year and may be paidallowable only where we are expected to remain in compliance with all loan covenants, terms and conditions. Furthermore, with respect to the fiscal years ending in 2008 and thereafter, an additional distribution may be made to stockholders in excess of the 40% limit for such fiscal year if we have made the required free cash flow payment for/based onfor such fiscal year, and will thereafter remain in compliance with all loan covenants, terms and conditions on a pro forma basis net of said potential additional payment. ThereWe are currently in compliance with all covenants under the Superior Loan Agreement; however, there can be no assurance that we can remain in compliance with all covenants in the future.

Economic Development Loans and Grants

In April 2005, the Iowa Department of Economic Development (“IDED”) awarded us a High-Quality Job Creation (“HQJC”) financing incentive comprised of a $300,000 zero interest loan and a $100,000 forgivable loan (grant) for the Shenandoah project.  The IDED funds became available for our use in March, 2006 - upon closing of the senior debt financing commitment.  Associated with this award are job creation covenants.  We believe those covenants will be fulfilled shortly after the plants commence operations.  

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Repayments are due on the $300,000 zero interest loan at $5,000 per month for sixty months beginning October 1, 2006. The $100,000 grant was recorded as long-term debt as the covenants related to jobs creation have not been fulfilled as of May 31, 2007.  If the initial requirements for job creation are met we will recognize the grant as income at that time.  

6.

STOCK-BASED COMPENSATION

The Green Plains Renewable Energy, Inc. 2007 Equity Incentive Plan (“Equity Incentive Plan”) provides for the granting of stock-based compensation, including options to purchase shares of common stock, stock appreciation rights tied to the value of common stock, restricted stock and restricted stock unit awards to eligible employees, non-employee directors and consultants. We have reserved a total of 1.0 million shares of common stock for issuance under the plan. The maximum number of shares of common stock granted to any employee during any year is 50,000.

Grants under the Equity Incentive Plan may include:

Options- Stock options may be granted that are not exercisable until a fixed future date or in installments. Options issued to date are exercisable during their term regardless of termination of employment. The options issued to date may be exercised immediately and must be exercised no later than five years after the grant date.

Stock Awards- Stock awards may be granted to directors and key employees with ownership of the common stock vesting immediately or over a period determined by the Compensation Committee and stated in the award. Those granted to date vested immediately but were restricted as to sales for a specified period. Compensation expense was recognized upon the grant award. The stock awards are measured at fair value on the grant date, adjusted for estimated forfeitures.

Stock Compensation Election for Certain Officers and Directors– We have allowed certain officers and directors the option to receive a portion of their compensation for services in common stock.  The stock is priced at the closing price at the end of each quarter immediately prior to issuance.

We apply SFAS 123(R)“Accounting for Stock-Based Compensation” for all compensation related to stock, options or warrants.  For all awards outstanding, we used a forfeiture rate of zero percent since we have no historical forfeiture experience under our share-based payment plans. We use original issuances of common stock to satisfy our share-based payment obligations.  Compensation cost expensed for our share-based payment plans described below was $2,827,684 and $2,829,337 for the three and six month periods ended May 31, 2007, respectively. The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payment arrangements totaled $1,111,000 and $1,112,000 for the three and six month periods ended May 31, 2007, respectively.  However, due to uncertainty that the tax benefits will be realized, these potential benefits were not recognized currently.

Effective May 22, 2007, we granted options to purchase 325,000 shares of our common stock to our nine directors for services rendered.  These options are immediately exercisable for up to five years from the grant date at a price of $30.00 per share. The total fair value of the stock option grant was $2,462,615 which was expensed in the second quarter of 2007. The fair value of the grant was determined using the Black-Scholes model and was based on an assumed annual volatility (based on historical volatility experienced) of 48.8%, a dividend yield of 0%, a risk-free interest rate of 4.76% and an expected life of five years.  Since the option price exceeded the closing stock price the aggregate intrinsic value was zero at May 31, 2007.

Also, effective May 22, 2007, we granted 2,000 shares of our common stock to each of our nine directors (for a total of 18,000 shares) for services rendered.  We recorded $365,022 of expense for the value of the shares at the time of issuance, $20.28 per share, which was the closing price of our stock on May 22, 2007.  

Certain officers and directors have elected to receive a portion of their compensation for services since January 1, 2007, in unrestricted shares of common stock.  In July 2007, 12,887 shares will be distributed to these individuals valued at $189,787.  Accrued Liabilities at May 31, 2007, included compensation earned to that date of $124,917.

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7.

EARNINGS PER SHARE

At May 31, 2007 we had outstanding warrants that are exercisable for 793,221 shares of common stock at an exercise price of $30 per share and warrants that are exercisable for 320,014 shares of common stock at an exercise price of $60 per share. The warrants were sold in our initial and secondary public offerings and the common stock issuable upon exercise of the warrants may be sold by non-affiliates without restriction.  The calculation of diluted earnings per share gives effect to common stock equivalents; however, potential common shares that may be issued upon exercise of all outstanding warrants were excluded for the 2007 periods since their effect would be antidilutive.  For the three and six month periods ended May 31, 2006, the dilutive effect of the warrants using the treasury stock method was 177,101 and 90,017 shares, respectively.

8.

INCOME TAXES

The pre-tax income for the three and six month periods ended May 31, 2007 and 2006 are as follows:

The current and deferred components of income tax expense (benefit) for the three months ended May 31, 2007 and 2006 are as follow:

Total income tax expense (benefit) differed from the amount computed by applying the U.S. Federal statutory rates of 34% for the three and six month periods ended May 31, 2007 and 2006 as follows: