**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 
| **ý**                                              | **Quarterly report under Section 13 or  15(d) of the Securities Exchange Act of 1934.** |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|                                                    |                                                                                              |
| **For the  quarterly period ended June 30, 2005.** |
|                                                    |
| **OR**                                                  |
|                                                    |
| **o**                                                   | **Transition report under Section 13 or  15(d) of the Exchange Act.**                   |
|                                                    |                                                                                              |
| **Commission file number  000-51278**                   |

 

**EAST KANSAS AGRI-ENERGY, L.L.C.**

(Exact name of small businessissuer as specified in its charter)

 
| **Kansas**                                                          | ** ** | **48-1251578**                       |
|---------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)     |       | (I.R.S. Employer Identification No.) |
|                                                                |
| **P.O. Box  225, 210 1/2 East 4th Ave. Garnett, Kansas 66032** |
| (Address of  principal executive offices)                           |
|                                                                |
| **(785)  448-2888**                                                 |
| (Issuer’s  telephone number)                                   |

 

Check whether the issuer:  (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.                ý  Yes                o  No

 

State the number of shares outstanding for each of the issuer’s classesof common equity as of the latest practicable date:  As of August 12, 2005, there were 23,798 membership units outstanding.

 

Transitional Small Business Disclosure Format (Check one):                o  Yes                ý  No

 

 

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**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** | ** **                                              |
|-----------------------------------------|---------------------------------------------------------|
| ** **                              | ** **                                              |
| **Item 1.**                             | **Financial Statements**                                | ** ** |
| **Item 2.**                             | **Management’s Discussion and Analysis**           | ** ** |
| **Item 3.**                             | **Controls and Procedures**                             | ** ** |
| ** **                              | ** **                                              | ** ** |
| **PART II.  OTHER INFORMATION**    | ** **                                              |
| ** **                              | ** **                                              |
| **Item 1.**                             | **Legal  Proceedings**                                  | ** ** |
| **Item 2.**                             | **Changes in Securities**                               | ** ** |
| **Item 3.**                             | **Defaults Upon Senior Securities**                     | ** ** |
| **Item 4.**                             | **Submission of Matters to a Vote of Security Holders** | ** ** |
| **Item 5.**                             | **Other  Information**                                  | ** ** |
| **Item  6.**                            | **Exhibits**                                            | ** ** |
| ** **                              | ** **                                              | ** ** |
| **SIGNATURES**                          | ** **                                              | ** ** |

 

2

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**PART I.****    FINANCIALINFORMATION**

 

**Item 1.****           FinancialStatements**

 

**EAST KANSAS AGRI-ENERGY, LLC**

 

Table of Contents

 
| **FINANCIAL STATEMENTS (UNAUDITED)**     | ** ** |
|------------------------------------------|------------|
| Balance Sheet                            |       |
| Statements of  Operations                |       |
| Statements of Cash Flows                 |       |
| Notes to  Unaudited Financial Statements |       |

 

3

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**EAST KANSAS AGRI-ENERGY, LLC**

**BALANCE SHEET (UNAUDITED)**

**JUNE 30, 2005**

 
| **ASSETS**                                                                                                     |   |       |       |
|----------------------------------------------------------------------------------------------------------------|--------|------------|------------|
|                                                                                                           |   |       |       |
| CURRENT  ASSETS                                                                                                |   |       |       |
| Cash and  cash equivalents                                                                                     |   | $          | 323,358    |   |
| Trade  accounts receivable - related party                                                                     |   | 707,710    |       |
| Incentive  receivable                                                                                          |   | 104,717    |       |
| Inventory                                                                                                      |   | 1,209,381  |       |
| Investment  in commodity contracts                                                                             |   | 84,855     |       |
| Prepaid  offering costs                                                                                        |   | 159,428    |       |
| Prepaid  expense                                                                                               |   | 105,797    |       |
| Total  current assets                                                                                          |   | 2,695,246  |       |
|                                                                                                           |   |       |       |
| PROPERTY,  PLANT AND EQUIPMENT                                                                                 |   |       |       |
| Land                                                                                                           |   | 280,322    |       |
| Land  improvements                                                                                             |   | 1,730,317  |       |
| Office  equipment                                                                                              |   | 160,533    |       |
| Manufacturing  buildings and equipment                                                                         |   | 39,850,672 |       |
| Vehicles                                                                                                       |   | 22,476     |       |
| Construction  in progress                                                                                      |   | 2,055,224  |       |
|                                                                                                           |   | 44,099,544 |       |
| Less  accumulated depreciation                                                                                 |   | (129,584   | )          |
| Total  property, plant, and equipment                                                                          |   | 43,969,960 |       |
|                                                                                                           |   |       |       |
| OTHER ASSETS                                                                                                   |   |       |       |
| Financing  costs                                                                                               |   | 577,527    |       |
|                                                                                                           |   | 577,527    |       |
| Total assets                                                                                                   |   | $          | 47,242,733 |   |
|                                                                                                           |   |       |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                                      |   |       |       |
|                                                                                                           |   |       |       |
| CURRENT  LIABILITIES                                                                                           |   |       |       |
| Current  portion of long-term debt                                                                             |   | $          | 1,041,863  |   |
| Accounts  payable                                                                                              |   |       |       |
| Trade                                                                                                          |   | 939,461    |       |
| Related  parties                                                                                               |   | 2,707,039  |       |
| Accrued  payroll, taxes and withholdings                                                                       |   | 37,685     |       |
| Accrued  interest                                                                                              |   | 61,461     |       |
| Total  current liabilities                                                                                     |   | 4,787,509  |       |
| LONG-TERM  DEBT (less current maturities)                                                                      |   | 24,177,885 |       |
|                                                                                                           |   |       |       |
| MEMBERS’  EQUITY                                                                                          |   |       |       |
| Capital  contributions, 40,000 units authorized, 20,957 units issued and outstanding  as of June 30, 2005 |   | 20,957,000 |       |
| Retained  earnings (accumulated deficit)                                                                       |   | (2,679,661 | )          |
| Total  members’ equity                                                                                    |   | 18,277,339 |       |
| Total  liabilities and members’ equity                                                                    |   | $          | 47,242,733 |   |

 

See Notes to Unaudited Financial Statements

 

4

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**EAST KANSAS AGRI-ENERGY, LLC**

**STATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                             | ** ** | **Three Months  Ended  June 30,  2005** | ** **     | **Six Months  Ended  June 30,  2005** | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------|----------------|--------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
|                                                   |       |                                         |           |                                       |       |                                         |       |                                       |       |
| REVENUE                                                |       |                                         |           |                                       |       |                                         |       |                                       |       |
| Related  parties                                       |       | **$**                                        | **738,982**    | ** **                                 | **$**      | **738,982**                                  | ** ** | $                                          | —     |   | $ | — |   |
| Incentive  funds                                       |       | **104,717**                                  | ** **     | **104,717**                                | ** ** | —                                       |       | —                                     |       |
|                                                   |       | **843,699**                                  | ** **     | **843,699**                                | ** ** |                                         |       |                                       |       |
|                                                   |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| COST OF  SALES                                         |       | **(988,606**                                 | **)**          | **(988,606**                               | **)**      | —                                       |       | —                                     |       |
|                                                   |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| GROSS PROFIT                                           |       | **(144,907**                                 | **)**          | **(144,907**                               | **)**      | —                                       |       | —                                     |       |
|                                                   |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| OPERATING  EXPENSES                                    |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| General and  administrative expenses                   |       | **47,380**                                   | ** **     | **47,380**                                 | ** ** | —                                       |       | —                                     |       |
| Start-up  expenses                                     |       | **775,770**                                  | ** **     | **926,057**                                | ** ** | 53,117                                       |       | 134,001                                    |       |
|                                                   |       | **823,150**                                  | ** **     | **973,437**                                | ** ** | 53,117                                       |       | 134,001                                    |       |
|                                                   |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| OTHER INCOME  (EXPENSE)                                |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| Interest  income                                       |       | **30**                                       | ** **     | **882**                                    | ** ** | 16,051                                       |       | 26,375                                     |       |
| Interest  expense                                      |       | **(45,418**                                  | **)**          | **(45,418**                                | **)**      | (1,251                                       | )          | (2,470                                     | )          |
| Other income                                           |       | **2,200**                                    | ** **     | **2,200**                                  | ** ** | —                                       |       | —                                     |       |
|                                                   |       | **(43,188**                                  | **)**          | **(42,336**                                | **)**      | 14,800                                       |       | 23,905                                     |       |
|                                                   |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| NET (LOSS)                                             |       | **$**                                        | **(1,011,245** | **)**                                      | **$**      | **(1,160,680**                               | **)**      | $                                          | (38,317    | ) | $ | (110,096 | ) |
|                                                   |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| BASIC AND  DILUTED LOSS PER UNIT                       |       | **$**                                        | **(48**        | **)**                                      | **$**      | **(57**                                      | **)**      | $                                          | (3         | ) | $ | (15 | ) |
|                                                   |       | ** **                                   | ** **     | ** **                                 | ** ** |                                         |       |                                       |       |
| WEIGHTED  AVERAGE UNITS OUTSTANDING, BASIC AND DILUTED |       | **20,957**                                   | ** **     | **20,335**                                 | ** ** | 12,707                                       |       | 7,531                                      |       |

 

See Notes to Unaudited Financial Statements

 

5

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**EAST KANSAS AGRI-ENERGY, LLC**

**STATEMENTS OF CASH FLOWS (UNAUDITED)**

 
| ** **                                                                  | ** ** | **Six Months  Ended  June 30,  2005** | ** **     | **Six Months  Ended  June 30,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|----------------|--------------------------------------------|------------|
| CASH FLOWS  FROM OPERATING ACTIVITIES                                       |       | ** **                                 | ** **     |                                       |       |
| Net loss                                                                    |       | **$**                                      | **(1,160,680** | **)**                                      | $          | (110,096 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities |       | ** **                                 | ** **     |                                       |       |
| Depreciation                                                                |       | **122,766**                                | ** **     | 1,640                                      |       |
| Non-cash  compensation for capital units                                    |       | **—**                                 | ** **     | 30,000                                     |       |
| (Increase)  decrease in current assets                                      |       | ** **                                 | ** **     |                                       |       |
| Accounts  receivable                                                        |       | **(707,710**                               | **)**          | (28,514                                    | )          |
| Incentive  receivable                                                       |       | **(104,717**                               | **)**          | —                                     |       |
| Inventory                                                                   |       | **(1,209,381**                             | **)**          | —                                     |       |
| Commodity  contracts                                                        |       | **(84,855**                                | **)**          | —                                     |       |
| Grants  receivable                                                          |       | **54,906**                                 | ** **     | —                                     |       |
| Prepaid  expense                                                            |       | **(100,859**                               | **)**          | (6,017                                     | )          |
| Interest  Receivable                                                        |       | **—**                                 | ** **     | (17,765                                    | )          |
| Increase  (decrease) in current liabilities:                                |       | ** **                                 | ** **     |                                       |       |
| Accounts  payable                                                           |       | **1,216,061**                              | ** **     | 59,279                                     |       |
| Accrued  expenses                                                           |       | **57,302**                                 | ** **     | 4,606                                      |       |
| NET CASH  USED IN OPERATING ACTIVITIES                                      |       | **(1,917,167**                             | **)**          | (66,867                                    | )          |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                       |       | ** **                                 | ** **     |                                       |       |
| Purchase of  plant and equipment, including construction in progress        |       | **(33,413,116**                            | **)**          | (11,651                                    | )          |
| Purchase of  land and land option payments                                  |       | **(90,000**                                | **)**          | (10,001                                    | )          |
| NET CASH  USED IN INVESTING ACTIVITIES                                      |       | **(33,503,116**                            | **)**          | (21,652                                    | )          |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                       |       | ** **                                 | ** **     |                                       |       |
| Cost of  raising capital                                                    |       | **(134,338**                               | **)**          | (1,260                                     | )          |
| Payment of  financing fees                                                  |       | **(25,097**                                | **)**          | (31,750                                    | )          |
| Proceeds  from notes payable                                                |       | **90,000**                                 | ** **     | —                                     |       |
| Repayment of  notes payable                                                 |       | **(90,000**                                | **)**          | —                                     |       |
| Proceeds  from long-term debt                                               |       | **23,442,257**                             | ** **     | —                                     |       |
| Proceeds  from units subject to redemption                                  |       | **6,250,000**                              | ** **     | —                                     |       |
| Capital  contributions                                                      |       | **—**                                 | ** **     | 11,707,000                                 |       |
|                                                                        |       | ** **                                 | ** **     |                                       |       |
| NET CASH  PROVIDED BY FINANCING ACTIVITIES                                  |       | **29,532,822**                             | ** **     | 11,673,990                                 |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                       |       | **(5,887,461**                             | **)**          | 11,585,471                                 |       |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD                             |       | **6,210,819**                              | ** **     | 42,587                                     |       |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                   |       | **$**                                      | **323,358**    | ** **                                 | $          | 11,628,058 |   |

 

See Notes to Unaudited Financial Statements

 

6

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**EAST KANSAS AGRI-ENERGY, LLC**

**STATEMENTS OF CASHFLOWS (UNAUDITED) (page 2)**

 
| ** **                                                                | ** ** | **Six Months  Ended  June 30,  2005** | ** **    | **Six Months  Ended  June 30,  2004** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|---------------|--------------------------------------------|------------|
|                                                                      |       |                                       |          |                                       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                         |       |                                       |          |                                       |       |
| Cash paid  for interest, net of capitalized interest of $248,674 for 2005 |       | **$**                                      | **1,174**     | ** **                                 | $          | — |   |
|                                                                      |       | ** **                                 | ** **    |                                       |       |
| NON CASH  INVESTING AND FINANCING ACTIVITIES                              |       | ** **                                 | ** **    |                                       |       |
| Deferred  offering costs incurred                                         |       | **$**                                      | **25,090**    | ** **                                 | $          | — |   |
|                                                                      |       | ** **                                 | ** **    |                                       |       |
| Financing  costs incurred                                                 |       | **$**                                      | **45**        | ** **                                 | $          | — |   |
|                                                                      |       | ** **                                 | ** **    |                                       |       |
| Property,  plant, and equipment costs incurred                            |       | **$**                                      | **2,298,343** | ** **                                 | $          | 76,752 |   |
|                                                                      |       | ** **                                 | ** **    |                                       |       |
| Accrued  interest payable capitalized                                     |       | **$**                                      | **17,217**    | ** **                                 | $          | — |   |
|                                                                      |       | ** **                                 | ** **    |                                       |       |
| Property,  plant, and equipment financed by a note payable                |       | **$**                                      | **1,760,274** | ** **                                 | $          | — |   |
|                                                                      |       | ** **                                 | ** **    |                                       |       |
| Cost of  raising capital reclassified to members’ equity             |       | **$**                                      | **—**    | ** **                                 | $          | 264,129 |   |
|                                                                      |       | ** **                                 | ** **    |                                       |       |
| Capital  contributions issued for compensation                            |       | ** **                                 | ** **    |                                       |       |
| Expensed  during the 6 months ended June 30, 2004                    |       | **$**                                      | **—**    | ** **                                 | $          | 15,000 |   |
| Liability  converted to capital units                                     |       | **—**                                 | ** **    | 15,000                                     |       |
|                                                                      |       | **$**                                      | **—**    | ** **                                 | $          | 30,000 |   |

 

See Notes to Unaudited Financial Statements

 

7

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**NOTE 1 -****                SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

*Nature of Business*

 

East Kansas Agri-Energy, LLC, (a Kansas limited liability company)located in Garnett, Kansas, was organized to own and operate a 35 milliongallon ethanol plant with distribution within the United States. East KansasAgri-Energy, LLC (the Company) was formally organized as a limited liabilitycompany as of October 16, 2001. Prior to that date the Company operated asa general partnership with no formal partnership agreement. The Company beganits principal operations in June 2005. Prior to that date, the Company was considered to be in developmentstage.

 

*Basis of Accounting*

 

The unaudited financial statements contained herein have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission. Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica.

 

In the opinion of management, all adjustments considered necessary fora fair presentation have been included in the accompanying financialstatements. The results of operations for the six months ended June 30,2005 and 2004, are not necessarily indicative of the results expected for afull year.

 

These financial statements should be read in conjunction with thefinancial statements and notes included in the Company’s financial statementsfor the year ended December 31, 2004.

 

*Accounts receivable*

 

Accounts receivable are presented at face value, net of the allowancefor doubtful accounts.  The allowance fordoubtful accounts is established through provisions charged against income andis maintained at a level believed adequate by management to absorb estimatedbad debts based on historical experience and current economic conditions.  Management believes all receivables will becollected and therefore the allowance has been established to be zero at June 30,2005.

 

The Company’s policy is to charge simpleinterest on trade receivables past due balances; accrual of interest isdiscontinued when management believes collection is doubtful.  Receivables are considered past due basedupon payment terms set forth at the date of the related sale.  The Company has no receivables accruinginterest at June 30, 2005.

 

*Prepaid offering costs*

 

Costs incurred related to the sale of units are recorded as prepaidoffering costs until the related units are issued. Upon issuance of unitsoffering costs are deducted from additional paid-in capital, with any remainingamount applied to retained earnings. Offering costs include direct costs related to the offering such aslegal fees, cost of meetings and materials and related costs associated withthe Company’s private offering and initial public offering.

 

8

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

*Estimates*

 

Management uses estimates and assumptions in preparing financialstatements. Those estimates and assumptions affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses. Actual results could differ from the estimates used.

 

*Earnings Per Unit*

 

Earnings per unit are calculated based on the period of time units havebeen issued and outstanding. For purposes of calculating diluted earnings percapital unit, units subscribed for but not issued are included in thecomputation of outstanding capital units. As of June 30, 2005, there wasnot a difference between basic and diluted earnings per unit since calculationof diluted earnings per unit for the effect of units subscribed but not issuedwould have been anti-dilutive.

 

*Stock based compensation*

 

The Company records stock based compensation basedon the fair value of the units issued for the compensation.

 

*General and administrative expenses*

 

The primary components of general andadministrative expenses are management fees, insurance expense and payroll.

 

*Cost of revenues*

 

The primary components of cost of sales from theproduction of ethanol and related products are corn expense, energy expense(natural gas and electricity), raw materials expense (chemicals anddenaturant), labor and depreciation on process equipment.

 

*Shipping and handling*

 

Shipping and handling costs are expensed asincurred and are included in the cost of goods sold.

 

**NOTE 2 -****                INCENTIVERECEIVABLE**

 

Revenue from federal andstate incentive programs is recorded when the Company has produced or sold theethanol and satisfied the reporting requirements under each applicable program.When it is uncertain that the Company will receive full allocation and paymentdue under the federal incentive program, it derives an estimate of theincentive revenue for the relevant period based on various factors includingthe most recently used payment factor applied to the program. The estimate issubject to change as management becomes aware of increases or decreases in theamount of funding available under the incentive programs or other factors thataffect funding or allocation of funds under such programs.

 

The amount of incentives receivable at June 30, 2005, are asfollows:

 
| Federal |   | $      | 104,717 |   |
|---------|--------|--------|---------|--------|
| Kansas  |   | — |    |
|    |   |   |    |
| Total   |   | $      | 104,717 |   |

 

9

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**NOTE 3 -****                PROPERTY ANDEQUIPMENT**

 

The Company initiated operations on June 15, 2005.  As a result, the period ended June 30,2005 is the initial period for depreciation. Machinery, equipment, land improvements and buildings are depreciatedover their estimated economic lives ranging from 5 to 39 years.

 

**NOTE 4 -****                INVENTORY**

 

Inventory is stated at the lower of cost, determined on a first in,first out basis, or market value.

 

Inventory consists of:

 
| Raw Material      |   | $       | 695,610   |   |
|-------------------|--------|---------|-----------|--------|
| Work in  Progress |   | 191,841 |      |
| Finished  Goods   |   | 321,930 |      |
|              |   |    |      |
|              |   | $       | 1,209,381 |   |

 

**NOTE 5 -****                INVESTMENT INCOMMODITY CONTRACTS**

 

SFAS No. 133 requires acompany to evaluate its contracts to determine whether the contracts arederivatives. Certain contracts that literally meet the definition of aderivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

 

The Company enters intoshort-term cash grain, option and futures contracts as a means of securing cornfor the ethanol plant and managing exposure to changes in commodity prices. Allderivatives are designated as non-hedge derivatives. Although the contracts areeffective economic hedges of specified risks, they are not designated as andaccounted for as hedging instruments.

 

As part of its tradingactivity, the Company uses futures and option contracts offered throughregulated commodity exchanges to reduce risk and is exposed to risk of loss inthe market value of inventories. To reduce that risk, the Company generallytakes positions using cash and futures contracts and options.

 

During the period ended June 30, 2005this activity resulted in net gains (losses) of $(28,495) which is reported incost of sales.

 

10

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**NOTE 6 -****                UNITS SUBJECT TOREDEMPTION**

 

On October 11, 2004, the Company executed a Unit Purchase andRedemption Agreement with ICM, Inc. and Fagen, Inc. in which theCompany agreed to issue a total of 6,250 units to them in exchange for theircombined capital contribution of $6,250,000. The Company also agreed to redeemall 6,250 units from ICM, Inc. and Fagen, Inc. using the proceedsfrom the sale of units in a future registered offering or, to the extent thefuture offering is unsuccessful, from cash flow generated by operations subjectto certain loan covenants, restrictions and tax distributions. The redemptionprice will be $1,100 per unit if the Company is able to raise at least$6,875,000 in the future offering. Otherwise, the redemption price will bebased on a current fair market value of the units. In connection with thiscapital contribution, the Company amended the Operating Agreement to allow ICM, Inc.and Fagen, Inc. to appoint a total of three directors to the Company’sboard of directors, subject to the Company’s ability to terminate one of theirdirector positions for every $2,000,000 dollars in redemption payments made toeither or both of ICM, Inc. and Fagen, Inc. On January 19, 2005,the Company closed on the purchase of these units by ICM, Inc. and Fagen, Inc.and issued 3,125 units to Fagen, Inc. and 3,125 units to ICM, Inc. ata purchase price of $1,000 per unit. The purchases were made with cash and thetotal amount of cash consideration for those securities was $6,250,000.

 

On December 16, 2004, the Company filed a registration statementon Form SB-2 (Commission File 333-121323) with pre-effective amendments tothe registration statement on February 1, 2005, April 6, 2005 and April 19,2005, which became effective April 20, 2005.

 

The Company is offering units at an aggregate minimum price of$2,000,900 and an aggregate maximum price of $10,000,100 and intends to use theproceeds of the registered offering to redeem units from ICM, Inc. andFagen, Inc. in accordance with the agreement and retain the balance of anyproceeds for working capital. Upon completion of the offering and resolution ofcontingencies related to the unit purchase and redemption agreement, theseunits will be accounted for as a liability until repaid.

 

**NOTE 7 -****                LONG-TERM DEBT**

 

Long-term obligations of the Company aresummarized as follows at June 30, 2005:

 
| Construction  note payable - see below  |   | $          | 23,459,474 |   |
|-----------------------------------------|--------|------------|------------|--------|
| Equipment  note payable - related party |   | 1,760,274  |       |
| Less current  portion                   |   | (1,041,863 | )          |
| Long-term  portion                      |   | $          | 24,177,885 |   |

 

The estimated maturities of long-term debt atJune 30, 2005, assuming the entire amount available under the constructionfinancing is drawn on September 1, 2005, when it is converted to termloans are as follows:

 

| **Years Ending** | ** ** | **Amount** | ** ** |
|------------------|------------|------------|------------|
|             |       |       |       |
| 2005             |       | $          | 1,041,863  |   |
| 2006             |       | 2,479,303  |       |
| 2007             |       | 2,624,245  |       |
| 2008             |       | 2,633,608  |       |
| 2009             |       | 2,361,552  |       |
| Thereafter       |       | 16,619,704 |       |
|             |       | $          | 27,760,275 |   |

 

11

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

At June 30, 2005 the Company had $2,540,526 available to borrowunder the Credit Agreement.

 

On November 23, 2004, the Company entered into a Credit Agreementwith Home Federal Savings Bank, establishing a construction loan facility forthe construction of a 35 million gallon per year ethanol plant. Theconstruction financing is in the amount of $26,000,000 consisting of a$21,000,000 conventional term loan and a $5,000,000 USDA 80% guaranteed loan,and is secured by substantially all of our assets.

 

During the construction phase, the Company will make monthly paymentsof interest only at a variable interest rate equal to prime plus 1.75% with afloor of 6%. The construction phase shall end no later than September 1,2005. Following construction completion, the loan will be segmented into twoloans (1) a $5,000,000 USDA 80% guaranteed loan, and (2) a$21,000,000 conventional term loan. The $5,000,000 USDA guaranteed loan willhave an amortization period and maturity date of 10 years. The Company willmake monthly payments of principal and interest on the $5,000,000 loan at avariable interest rate of prime plus 1.25%. This variable rate will be adjustedquarterly. The $21,000,000 conventional loan will have an amortization periodof ten years but will mature at the end of five years. The Company will makemonthly payments of principal and interest on the $21,000,000 loan at avariable rate equal to prime plus 1.75% with a floor of 6%.

 

The Company will pay a $30,000 annual administration fee related to thecredit facility. The credit facility is secured by a mortgage on our realproperty and a security interest in all personal and intangible assets of theCompany, including assignment of all material contracts.

 

During the construction phase, a 1% prepayment penalty of the totalconstruction loan of $26,000,000 will be assessed if the loan is placed with alender other than Home Federal Savings Bank. After the construction phase, the$5,000,000 USDA 80% guaranteed loan will impose a prepayment penalty dependingon the year of refinancing starting with the 5% penalty in year one anddecreasing to 1% in year five. With respect to the $21,000,000 conventionalloan, a prepayment penalty will be imposed starting with a 3% penalty in yearone and decreasing to 1% in year three.

 

During the term of the loan, all deposit accounts related to theCompany must be maintained at Home Federal Savings Bank. The Company will alsobe subject to certain financial loan covenants consisting of minimum workingcapital, minimum fixed charge coverage, minimum current ratio, minimum debtservice, minimum net worth and maximum debt to net worth covenants during theterm of the loan. The Company will also be prohibited from making distributionsto their members; however, the Company will be allowed to distribute 40% of ournet income to our members after our lender has received audited financialstatements for the fiscal year. The Company must be in compliance with allfinancial ratio requirements and loan covenants before and after anydistributions to the members.

 

After the construction phase, the Company will only be allowed to makeannual capital expenditures up to $400,000 annually without the lender’s priorapproval. During the term of the loan, the Company is required to pay to thelender an annual amount equal to the greater of: 1) 75% of any Commodity CreditCorporation Bio-Energy income payments received during the year, or 2) 25% ofthe Company’s free cash flow for each year. Payments consisting of USDACommodity Credit Corporation Bio-Energy income must be paid to the lenderwithin 15 days of receipt of any such payments. These payments will continueuntil an aggregate sum of $7,500,000 has been received by the lender.

 

On May 10, 2005 the Company entered into a contract with ICM, Inc.to purchase a steam turbine electric generator for $1,760,274.  The note is payable in quarterly installmentsof $146,689.50 plus interest at a variable rate of prime plus 1%, starting October 1,2005 and maturing July 1, 2008.  Thevariable interest rate will be adjusted quarterly on the first day of January,April, July and October.  The noteis secured by the equipment.

 

12

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**NOTE 8 -****                MEMBERS’ EQUITY**

 

As specified in the Company’s Operating Agreement, voting rights areone vote for each voting unit registered in the name of such Member as shown onthe Membership Registration maintained by the Company. No Member shall directlyor indirectly own or control more than 25% of the issued and outstanding votingmembership interest in the Company at any time.

 

Income and losses of the Company shall be allocated among the Membersin proportion to each Member’s respective percentage of units when comparedwith the total Units issued.

 

The Company’s cash flow shall first be applied to the payment of theCompany’s operating expenses (including debt service) and then to maintenanceof adequate cash reserves as determined by the board of directors in its solediscretion, and then shall be distributed from time to time to the Members inproportion to their respective percentage units. No member has the right todemand and receive any distribution from the Company other than in cash. Nodistribution shall be made if, as a result thereof, the Company would be inviolation of any loan agreement, and if the Company would be in violation ofany loan agreement, if the Company’s total assets would be less than the sum ofits total liabilities.

 

Transfer, disposition or encumbrance of Capital Units is subject tocertain restrictions, including approval by the board of directors.

 

Initial investors purchased their units at $500 per unit subject to aprivate placement memorandum. As part of the Company’s initial public offering,units were offered at a minimum of $1,000 per unit. The difference has beenreflected as a discount on the units and has been recorded as a distribution.

 

Upon completion of the private placement memorandum, costs related tothe issuance of the units of $14,398 were charged to members’ equity.

 

In addition to transactions discussed in Note 6, the Company issuedduring 2004 a total of 30 units for compensation. The former projectcoordinator received 15 units in exchange for amounts previously owed forservices.

 

The current project coordinator and treasurer (who are full timeemployees of the Company) received a total of 15 units as a bonus for theirservices related to the development and financing of the Company. Compensationexpense related to this bonus totaled $15,000 for the six months ended June 30,2004.

 

During September 2004, the Company amended its Operating Agreementwhereby the number of authorized units was increased from 20,000 to 40,000units. In addition, the amendments to the Operating Agreement provide for twoclasses of members of the board of directors, Class A and Class B. Class Amembers of the board of directors consist of previously existing members of theboard of directors, prior to amendment. Up to (3) Class B members ofthe board of directors may be appointed by Fagen, Inc., ICM, Inc., orboth of these parties in conjunction with their agreement to purchase units.

 

The Company has entered into a Unit Purchase and Redemption Agreementfor membership units with Fagen, Inc. and ICM, Inc. See Note 6.

 

Upon issuance of the units related to theinitial public offering, costs related to the issuance of the units of $264,129was charged to members’ equity.

 

13

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

As discussed in Note 6, the Company is undertaking a registeredoffering for additional membership units which became effective on April 20,2005. As of June 30, 2005 we have received subscriptions for 12,134 units,for a total of $13,347,400, and have deposited subscription proceeds in theamount of $7,753,010 in an escrow account. At June 30, 2005, we have notyet accepted any subscriptions for units related to this registered offering.

 

On July 14, 2005, we have received additional subscriptions for 20units, for a total of $22,000, and have deposited subscription proceeds in theamount of $22,000 in an escrow account.

 

**NOTE 9 -****                CONCENTRATION OFCREDIT RISK**

 

The Company maintains cash balances at two financial institutions inits trade area. The account is secured by the Federal Deposit InsuranceCorporation up to $100,000. At times, the Company’s bank balance may exceed$100,000.

 

**NOTE 10 -****         RELATED PARTYTRANSACTIONS**

 

The former project coordinator (Note 8) purchased membership unitsduring the period ended December 31, 2002.

 

Other agreements with related parties and affiliates are discussed inNote 11.

 

**NOTE 11 -****         COMMITMENTS ANDCONTINGENCIES**

 

The Company has entered into an optionagreement to purchase approximately 10 acres of land. The option was originallypurchased for $5,000, plus $5,000 for an extension during 2003, and providesfor a purchase price of $9,000 per acre, plus the cost to replace boundaryfencing and relocate an existing structure along with water and electricutilities. The option was extended to September 1, 2004 and the Companypaid an additional $5,000 for the extension. On September 1, 2004, theoption was extended until such time as closing on the property would occur. Thepurchase price of the land will be reduced by amounts previously paid for theoption and extension. On November 17, 2004, the Company exercised the land option andpurchased approximately 19 acres of real estate in Anderson County, Kansas. TheCompany paid $170,010, which excluded the cost to replace boundary fencing andrelocate an existing structure along with water and electric utilities.Previous deposits totaling $20,000 were applied to the purchase price of theland and a sum of $150,010 was paid at closing. During the period ended June 30,2005, the Company incurred costs totaling $20,311 for construction of boundaryfencing and structural improvements.

 

On May 14, 2002, the Company enteredinto an option to purchase real property for the plant site with a fair valueof approximately $172,500. The option was for the purchase of approximately 23acres within the Golden Prairie Industrial Park of the City of Garnett, Kansasfor $1. On May 27, 2004, the Company gave notice of exercise of theoption, and received title to the property on September 1, 2004.

 

During the year ended December 31, 2003,the Company terminated its agreement with Value Added Ventures, LLC (VAV). TheCompany has been notified by VAV requesting payment for services from theinception of the contract through the date of termination totaling $33,380. TheCompany and VAV are negotiating settlement of this contract. The Company has aliability related to this agreement of $5,847 as of June 30, 2005.

 

14

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

During the year ended December 31, 2003, the Company negotiatedwith a board member to perform certain consulting services, which were to beginon October 1, 2003. The parties did not execute a contract for theseservices. Subsequent to December 31, 2003, the board member resigned andthe Company received a claim for the payment of approximately $50,000,consisting of approximately $2,000 and 48 units of the Company. The Companycontends that since a contract was not executed and services were not performedrelated to the proposed agreement, no liability exists. The Company intends tovigorously defend itself against the claim.

 

The Company completed its initial public offering and escrow was brokenin March 2004. A total of 13,457 units were subscribed and paid for duringthe year ended December 31, 2004.

 

The Company has entered into a design-build contract with ICM, Inc. fora fixed price of $35,900,000, subsequently amended to $35,977,582, excludingcertain owner furnished costs, pursuant to an agreement for the construction ofthe 35 million gallon annual capacity ethanol plant. As of June 30, 2005,the remaining obligation on the contract was approximately $500,000 and theCompany had incurred and paid for costs of $35,477,582. The Company also has anaccounts payable for time and materials construction totaling $1,276,148 as of June 30,2005.

 

On September 3, 2004, the Company entered into an agreement withAntioch International, Inc. for design services related to the railroadspur for a fixed price of $32,486, subsequently amended to $50,876. As of June 30,2005, the Company incurred and paid for costs under the contract of $50,876 andadditional services of $30,214, of which $2,050 is included in accountspayable.

 

On November 12, 2004, the Company entered into a Trading Agreementwith United Bio Energy Trading, LLC, an affiliated related party, in whichUnited Bio Energy Trading, LLC will provide market information and consultingservices for the Company. The Company anticipates that the term of the agreementwill be for at least five years and will pay a monthly fee of $6,000.

 

OnNovember 12, 2004, the Company entered into a Distillers Grains MarketingAgreement with United Bio Energy Ingredients, LLC, an affiliated related party,pursuant to which United Bio Energy Ingredients, LLC will purchase all driedand wet distillers grains produced at the plant for a term of at least fiveyears at a price of 98% of the FOB plant price United Bio Energy Ingredients,LLC charges its buyers of dried distillers grains, and 96% of the FOB plantprice United Bio Energy Ingredients, LLC charges its buyers of wet distillersgrains. United Bio Energy Ingredients, LLC, will use its best efforts toachieve the highest resale price available under prevailing market conditions.The Company is responsible for supplying all labor and equipment to load orunload trucks or rail cars without charge to United Bio Energy Ingredients, LLCand is required to provide storage for at least 10 days production of wet anddry distiller grains. In addition, the distiller grains must meet qualityrequirements so that they will meet current industry standards for primaryanimal feed ingredients. If the Company fails to supply distiller grains thatcomply with industry standards, United Bio Energy Ingredients, LLC may rejectthem.

 

On November 12, 2004, the Company entered into a Raw GrainsAgreement with United Bio Energy Ingredients, LLC, an affiliated related party.The Raw Grains Agreement provides for the Company to purchase all raw grainsnecessary for ethanol production from United Bio Energy Ingredients, LLC for aperiod of at least five years. Pursuant to the agreement, United Bio EnergyIngredients, LLC will use its best efforts to arrange for the purchase of grainat the lowest price available under prevailing market conditions and we willsupply all labor and equipment necessary to load or unload trucks or rail cars.For its service, the Company will pay United Bio Energy Ingredients, LLC theactual cash procurement price and all reasonable and necessary expenses to getthe grain to the plant plus a $.02 per bushel fee. The title, risk of loss, andresponsibility for the quality of grain will transfer to the Company when itunloads the grain at the plant. Prior to that time, United Bio EnergyIngredients, LLC will bear the risk of loss. All grain delivered to the plantshall meet certain quality standards and the Company will have the option toreduce the price the Company will pay or fully reject any delivery that failsto conform to these standards, depending upon the severity of thenoncompliance.

 

15

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

On November 12, 2004, the Company also entered into an EthanolAgreement with United Bio Energy Fuels, LLC, an affiliated related party. Theterms of the agreement provide that United Bio Energy Fuels, LLC will marketall fuel-grade ethanol produced at our plant. In exchange, the Company agreesto pay United Bio Energy Fuels, LLC a fee of $.01 for each gallon of ethanolproduced at the Company’s plant during the term of the agreement. The Companyexpects that the term of the agreement will be at least 5 years. United BioEnergy Fuels, LLC also agreed to use its best efforts to obtain the highestprice for ethanol available under prevailing market conditions.

 

On November 12, 2004, the Company entered into a ManagementAgreement with United Bio Energy Management, LLC, a related party, in whichUnited Bio Energy Management, LLC will supervise and direct the generaloperations of the plant for an anticipated period of at least five years.United Bio Energy Management, LLC will provide the services of a full-timegeneral manager to the plant. United Bio Energy Management, LLC is wholly ownedby ICM, Inc. and Fagen, Inc. Accordingly, the Company may not be ableto negotiate any further transactions at arms length, as the Company would beable to do with an independent party. The Company has agreed to compensateUnited Bio Energy Management, LLC an annual fee of $250,000 for these servicespayable in monthly installments of $20,833, plus an incentive bonus based onthe attainment of certain financial benchmarks. United Bio Energy Management,LLC will appoint a general manager to be based on site at our plant, and shallwork exclusively for us. In the event of a dispute, the Management Agreementprovides that the Company will first attempt to amicably settle any dispute ordifference privately between United Bio Energy Management, LLC and the Company.If the Company cannot resolve the dispute as a result of the discussions, thenthe Company must submit the matter to non-binding mediation. In the event thatthe dispute is not settled through mediation, the matter must be resolved bynon-appealable arbitration in accordance with the rules of the AmericanArbitration Association as applicable in the State of Kansas. The determinationof the arbitrator is expected to be final and may not be appealed to any court.The prevailing party in any arbitration proceeding is entitled to recoverreasonable attorneys’ fees and expenses incurred. The agreement commencedduring March 2005. For the period ended June 30, 2005, the Companyincurred costs of $83,891 related to this agreement including reimbursable expenses,of which 20,833 is in accounts payable.

 

On February 24, 2005, the Company entered into a facilityconstruction, ownership and operating agreement with Southern Star Central GasPipeline. Inc. to construct, install, operate and maintain a measurementstation capable of flowing natural gas in sufficient hourly quantities to meetthe total daily requirements and design specifications requested by theCompany. The Company will pay for the actual cost of construction of thefacilities which is currently estimated to be $312,471 less the deposit of$25,000 already paid by the Company. As of June 30, 2005, the Companyincurred and paid total costs of $312,471.

 

On February 28, 2005, the Company entered into an agreement withKansas City Power & Light Company to provide electric utility serviceand install electrical facilities to the plant. The Company has agreed to haveKansas City Power & Light Company provide electric service to theplant for a term of fifteen years. In exchange for the installation ofelectrical facilities to the plant and the electric service agreement, theCompany has agreed to pay Kansas City Power & Light Company $515,720payable in five equal installments. In addition, the Company is liable foractual costs incurred that exceed $515,720 as a direct result of discoveringrock during the installation of the facilities. However, the Company’s totalliability for the project is limited to $813,837. As of June 30, 2005, theCompany has recognized and paid the total cost of $515,720.

 

On March 25, 2005, the Company entered into an agreement with GasDistribution Contractors to construct a connecting gas pipeline system thatreceives natural gas from Southern Star Central Gas Pipeline facilities anddelivers this gas to the plant for a price of $39,000. As of June 30,2005, the Company had incurred costs of $43,503 under the contract which isincluded in accounts payable.

 

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

On March 30, 2005, the Company entered into two agreements withKinder Morgan Interstate Gas Transmission LLC for discounted interruptiblestorage service of natural gas. The contracts provide for a maximum storagequantity totaling 191,500 dth for the period from April 1, 2005 through February 28,2006 at a cost of $.0338 per dth daily average storage.

 

On March 31, 2005, the Company entered into an agreement withShafer, Kline & Warren, Inc. to provide engineering services inconnection with the construction of the natural gas pipeline system to theplant. The amount of the contract is for $16,000 plus reimbursable material andexpenses. As of June 30, 2005, $32,579 had been incurred under thecontract and is included in accounts payable.

 

The Company has an agreement with the City of Garnett, Kansas to sharethe cost of certain highway improvements. Management estimates the obligationunder this agreement will be approximately $135,000.

 

On April 18, 2005, the Company entered into an agreement with ICM, Inc.to provide services enumerated in the agreement related to a Safety and HealthProgram for the Company for the period from April 18, 2005 until November 11,2005. The amount due to ICM, Inc. related to this agreement is$20,000.  As of June 30, 2005 costsof $20,000 had been incurred and paid under the contract.

 

The Company had an agreement with a member in which the Company wouldconstruct a pond on the member’s property in exchange for the Company’sunlimited use of dirt from this same property. The Company has now agreed to pay a cash settlement to the memberinstead of constructing the pond.  At June 30,2005, management has estimated that the amount of the settlement will beapproximately $300,000.

 

The Company is negotiating with the City of Garnett to issue IndustrialRevenue Bonds in the amount of $50,000,000 and $525,000.  The $50,000,000 bond issue will be purchasedby the Company and is being sought to receive a property tax exemption.  The $525,000 bond will be used to finance thewaste water project. At June 30, 2005 no commitments have been made oneither bond issue.

 

The following is a schedule of the annual commitments related tothe above agreements.

 

12 months endingJune 30,

 

| 2006       |   | $         | 919,691   |   |
|------------|--------|-----------|-----------|--------|
| 2007       |   | 664,108   |      |
| 2008       |   | 664,108   |      |
| 2009       |   | 664,108   |      |
| 2010       |   | 562,775   |      |
| Thereafter |   | 1,628,522 |      |
|       |   |      |      |
|       |   | $         | 5,103,312 |   |

 

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**NOTE 12 -****         VALUE ADDED GRANT**

 

During the year ended December 31, 2003, the Company receivednotification of award of a United States Department of Agriculture Value-AddedAgricultural Product Market Development Grant (the Grant) for approximately$450,000. The Grant can be used to pay for certain organizational, offering andstart-up costs related to the formation and capitalization of the Company. Forthe six months ended June 30, 2005 the Company did not qualify for anyreimbursement of costs incurred. For the six months ended June 30, 2004the Company qualified for reimbursement of $132,149 of which $1,409 related tocost of raising capital.

 

**NOTE 13 -****         SUBSEQUENT EVENTS**

 

As of July 20, 2005, the Company accepted subscriptions for 9,091units for a total of $10,000,100 and declined subscriptions for 3,063 units fora total of $3,369,300.

 

On August 1, 2005 the Company repurchased the units subject toredemption (Note 6) from ICM, Inc. and Fagen, Inc. for $6,875,000.

 

The Company has agreed in principle to incur approximately $1,500,000for additional work on the railroad spur project.

 

18

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**Item 2.****           Management’s DiscussionAnd Analysis**

 

This report contains forward-lookingstatements that involve future events, our future performance and our expectedfuture operations and actions.  In some cases you can identifyforward-looking statements by the use of words such as “may,” “should,” “anticipate,”“believe,” “expect,” “will,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,”“hope,” “potential,” “continue,” or the negative of these terms or othersimilar expressions.  These forward-looking statements are only ourpredictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-lookingstatements for many reasons, including the following factors:

 

•                  Changesin the availability and price of corn;

•                  Increasesor decreases in the supply and demand for ethanol;

•                  Changesin the environmental regulations that apply to our plant operations;

•                  Delaysin plant construction or increases in the cost of construction;

•                  Changesin interest rates or the availability of credit;

•                  Changesin our business strategy, capital improvement or development plans;

•                  Changesin plant production capacity or technical difficulties in operating the plant;

•                  Changesin general economic conditions or the occurrence of certain events causing aneconomic impact in the agriculture, oil or automobile industries;

•                  Changesin the availability and price of natural gas;

•                  Increasesor decreases in the supply and demand for distiller grains; and

•                  Changesand advances in ethanol production technology.

 

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

 

**Overview**

 

East Kansas Agri-Energy, LLC was formed as a Kansaslimited liability company on October 16, 2001, for the purpose ofconstructing and operating an ethanol plant near Garnett, Kansas. On April 29,2005, we filed a Form 8-A registration statement with the Securities andExchange Commission indicating that we have total assets exceeding $10 millionand more than 500 unit-holders.  Inaddition to filing periodic reports, we will now have to comply with the proxyand tender offer rules and our directors, officers and significantunit-holders will have additional reporting obligations.

 

On October 11, 2004, to supplement our debtfinancing and complete our capitalization plan we entered into a Unit Purchaseand Redemption Agreement with ICM, Inc. of Colwich, Kansas and Fagen, Inc.of Granite Falls, Minnesota.  In the UnitPurchase and Redemption Agreement we agreed to issue up to 6,250 of our unitsto ICM, Inc. and Fagen, Inc. at a purchase price of $1,000 per unitin exchange for a combined capital contribution from them of up to $6,250,000. Wealso agreed to redeem all 6,250 units from ICM, Inc. and Fagen, Inc.using the proceeds from the sale of units in a registered offering or, to theextent the offering is unsuccessful, from cash flow generated by operationssubject to certain loan covenants, restrictions and tax distributions.  Toraise the proceeds necessary to redeem the units, we commenced a registeredoffering for additional membership units. Our registered offering became effective on April 20, 2005 and webegan our efforts to sell the registered membership units shortlythereafter.  Subsequent to the periodcovered by this report, on July 20, 2005 we closed our public offering.  Duringthe offering, we sold 9,091 units for an

 

19

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aggregateprice of $10,000,100.  On August 1,2005, we used the proceeds of the public offering to redeem 3,125 units eachfrom ICM, Inc. and Fagen, Inc. at a total redemption price of$6,875,000 in accordance with the Unit Purchase Agreement executed with ICM, Inc.and Fagen, Inc and retained the balance of the proceeds for working capital.

 

During the second fiscal quarter, the Companycompleted the construction phase of the project and began productionoperations.  Since June 2005,we have been engaged in the production of ethanol and distillers grains. Ourrevenues are derived from the sale and distribution of our ethanol anddistillers grains throughout the continental United States.  We expect to fund our operations during thenext 12 months using cash flow from continuing operations, USDA Commodity Credit Corporation BioenergyProgram payments, lines of credit, our senior credit facility, and theremaining balance of our recent public offering.

 

We are subject to industry-wide factors thataffect our operating and financial performance. These factors include, but are not limited to, the available supply andcost of corn from which our ethanol and distillers grains are processed; thecost of natural gas, which we use in the production process; dependence on ourethanol marketer and distillers grains marketer to market and distribute ourproducts; the intensely competitive nature of the ethanol industry; possiblelegislation at the federal, state and/or local level; changes in federal ethanoltax incentives and the cost of complying with extensive environmental laws thatregulate our industry.

 

Since we only recently became operational, wedo not yet have comparable income, production and sales data for the threemonths ended June 30, 2005. Accordingly, we do not provide a comparison of our financial resultsbetween reporting periods in this report. If you undertake your own comparison of our second fiscal quarter of2004 and our second quarter of 2005, it is important that you keep this inmind.

 

**Plan of Operations for the Next 12 Months**

 

We expect to spend the next 12 monthsoperating the ethanol plant to produce and sell ethanol and distillersgrains.  Our primary focus will beconcentrated on three main areas: (i) operating the plant and completingany unfinished site work; (ii) making sure the plant is operating asefficiently as possible; and (iii) cost-effective purchasing of importantmanufacturing inputs such as corn and natural gas.

 

*Plant Construction, Site Development and Permitting*

 

On June 9, 2005, we received ourCertificate of Substantial Completion from ICM, Inc, the design/builder of ourplant.  By “substantial completion,” wemean that the plant was certified by ICM, Inc. as ready for occupancy andethanol production.  On June 15,2005, we commenced start-up operations and as of July 15, 2005, the plantpassed performance testing and became fully operational.  Final completion of construction is dependantupon compliance with all federal, state and local government environmentalrequirements and full completion of remaining construction “punch list”items.  We expect that final completion punchlist items will occur in September 2005 and that environmental testingwill be completed in October 2005.

 

In the second fiscal quarter we have spentsignificant funds on plant construction and equipment.  Subsequent to the end of the periodcovered by this report, our outstanding balance on the plant design-buildcontract is approximately $500,000.  We will pay $250,000 of the $500,000 retainageto ICM, Inc. once we are satisfied that ICM, Inc. has satisfied itsobligations under the contract. We will pay the remaining $250,000 to ICM, Inc.after we receive a written emissions compliance report documenting compliancewith the applicable atmospheric emission testing.  Other construction account payablestotaled $1,276,148 as of June 30, 2005.

 

As owner of the project, we are responsible for severalnon-operational construction projects.  Asof June 30, 2005, installation and construction of all necessary naturalgas facilities, equipment and pipeline for operation of the ethanol plant wascompleted and these facilities are operational. In addition, we still need to complete the construction of the stormwater pond and grey water recycling project, rail site preparation and railspur construction, road improvements, finished products logistics flow andelectric service facilities.  We expectto complete these items over the next few months without interruption or delayof plant operations.  Pending completionof our permanent electric service facilities, a back-up system has beeninstalled and is in operation. Subsequent to the period covered by this report, on August 1, 2005,we were able to move into our administration building although construction ofthe administration building is not yet substantially complete.  We expect that the administration buildingwill be

 

20

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substantiallycomplete in August 2005.

 

On April 13, 2005, we purchased an additional17 acres of real estate adjacent to our plant site for a purchase price of$90,000.  We intend to use this land forour metering station and for a portion of our railroad spur.  In order to finance the purchase of thisland, we entered into a promissory note agreement in the amount of $90,000 withPatriots Bank on April 13, 2005. The entire principal amount along withaccrued interest at 7% was due on June 12, 2005.  We granted a mortgage on the real estate to PatriotsBank to secure the loan.  On June 22,2005, we paid $91,173.70 to Patriots Bank in satisfaction of the principal andaccrued interest due under the promissory note and secured a release of the mortgagefrom the Patriots Bank.

 

On April 5, 2005, we received an easement fromthe State of Kansas in exchange for $1.00 which will allow us to construct and operatea railroad spur line across state park property owned by the State ofKansas.  We anticipate final approvalfrom Union Pacific Railroad of our track plans and crossings by September 2005.Pending final approval of our track plans and crossing, we have begunthe dirt work**for the rail siding to connectour plant to the main rail line.  We expect to be reliant upon trucks totransport grain and ethanol until our rail service is completed.  This may negatively affect our ability tomake a profit due to the higher cost associated with transport by trucks.

 

We have entered into a verbal agreement with MikeBurns, a member of the Company, for compacted dirt fill for our rail spur site.  As of June 30, 2005 we are stillextracting fill from Mike Burns’ property.  Management estimates our continuing liabilityunder this agreement at $300,000. However, the actual amount of our liability may vary from management’sestimate.

 

Subsequent to the period covered by this report, inJuly 2005 we received a proposal from HDB Construction, Inc for rail spur sitepreparation work in exchange for payment of an aggregate cost not to exceed$1,556,468.  On July 28, 2005, weaccepted HDB Construction, Inc.’s proposal and instructed HDB to commence railspur site preparation work.

 

We engaged Natural Resource Group of Minneapolis,Minnesota to coordinate and assist us with proper permitting. It submitted theapplication for the NPDES Wastewater Discharge Permit to the Kansas Departmentof Health and Environment (“KDHE”).  On June 14,2005, KDHE issued a NDPES Wastewater Discharge Permit for the ethanol plantwhich became effective on June 15, 2005 and will expire on December 31,2009.  As a condition of our permit, wemust submit monthly monitoring reports to KDHE beginning July 1, 2005.

 

On April 6, 2005, we submitted an applicationfor an alcohol fuel producer’s permit to the Alcohol and Tobacco Tax andTrade Bureau (formerly the Bureau of Alcohol, Tobacco and Firearms) and effective June 13, 2005, theAlcohol and Tobacco Tax and Trade Bureau issued our alcohol fuel producer’s permit.  The term of the permit isindefinite until terminated, revoked, or suspended.  As a condition of our permit, we must maintaincertain security measures, including 24-hour monitoring of the plant and accessto only authorized individuals.

 

On May 10, 2005, we entered into an agreementwith ICM, Inc. for the purchase of a steam turbine generator. In order tofinance the purchase of the generator, we executed a promissory for $1,760,274at an interest rate of 1% plus the prime rate payable to ICM, Inc andgranted a security interest in the generator to ICM, Inc. as collateralfor the loan.  We also entered into asubordination agreement with Home Federal Savings Bank (“Home Federal”), oursenior lender, in which Home Federal agrees ICM, Inc’s security interest in thegenerator is senior to the security interest of Home Federal Savings Bank inthe generator.  Under the terms of thepromissory note, we agree to make quarterly installment payments of principaland interest with the balance due on July 1, 2008.  The first quarterly payment under the note isdue October 1, 2005.  We tookdelivery of the generator on May 10, 2005. We expect that the generator will generate approximately 68% of theplant’s electricity needs and anticipate that the generator will result inenergy savings.  We are currently in theprocess of identifying the plant’s remaining equipment needs for successfulplant operations and expect to continue to purchase additional equipment in thethird fiscal quarter.

 

*Plant Operations*

 

We have entered into agreements for the operation ofthe ethanol plant with United Bio Energy Management, LLC; United Bio EnergyFuels, LLC; United Bio Energy Ingredients, LLC; and United Bio Energy Trading,LLC. United Bio Energy Management,

 

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LLCwill manage the ethanol plant and United Bio Energy Fuels, LLC will provide usethanol marketing services. United Bio Energy Ingredients, LLC will provide usdistillers grains marketing and grain origination services. United Bio EnergyTrading, LLC will provide us with overall risk management. In March 2005,United Bio Energy Management, LLC began providing us management services inexchange for payment as provided in our Management Agreement.  These companies are owned by United BioEnergy, LLC of Wichita, Kansas. United Bio Energy, LLC was owned by anaffiliate of ICM, Inc. and an affiliate of Fagen, Inc.  However, in April 2005, United BioEnergy, LLC announced its merger with US BioEnergy Corporation of Brookings,South Dakota which builds and operates biofuel production facilities which maybe in competition with our plant.  We areand will continue to be highly dependent on United Bio Energy, LLC and itssubsidiaries.  The merger between UnitedBio Energy, LLC and US BioEnergy Corporation could result in a conflict ofinterest with our company and adversely affect our ability to make a profit.

 

On January 28, 2004, we entered in to a letterof intent with BOC Group, Inc. of Murray Hill, New Jersey. The terms ofthe letter of intent provide that we will make available to BOC Group, Inc.for purchase all of the carbon dioxide produced at the plant. The letter ofintent contemplates that BOC Group, Inc. will purchase a substantialquantity of our raw carbon dioxide gas annually and will construct a carbondioxide liquefaction plant. We expect to lease a parcel of our land adjacent toour ethanol plant to BOC Group, Inc. for construction of the liquefactionplant. In April 2005, we negotiated an extension of the letter of intent withBOC Group, Inc.  Pursuant to theterms of the extension, the letter of intent expired on May 13, 2005.  Prior to the expiration of the letter ofintent, we were unable to negotiate a final contract with BOC Group, Inc.and do not expect that a final contract will be negotiated with BOC Group, Inc.  As of August 12, 2005, we have noother commitments or agreement to sell the raw carbon dioxide we produce.  Further, we cannot provide anyassurances that we will sell our raw carbon dioxide at any time in thefuture.  If we do not enter into anagreement to sell our raw carbon dioxide, we will have to emit it into the air.  This will result in the loss of a potentialsource of revenue.

 

On April 18, 2005, we entered into an agreementwith ICM, Inc. to provide certain safety and health program materialsrelated to our plant and its employees in exchange for payment of an aggregatefee of $20,000.

 

On April 25, 2005 we entered into an agreementwith Pearson Risk Consulting to provide risk management services.  As part of this agreement, Pearson RiskConsulting agreed to develop and maintain our insurance program, interview andselect brokers to implement the program, assist in maintaining fire protectionstandards, develop and maintain risk-sharing methods, and inform us of riskmanagement issues in exchange for payment of $3,750 for the period of April 11through November 11, 2005.  Inaddition, we have obtained property, casualty, automobile, general liability,umbrella liability, pollution and workers compensation insurance coveragesthrough November 11, 2005.

 

In June 2005, we terminated our relationshipwith Christianson & Associates, LLP and engaged Kennedy and Coe, LLCto provide accounting services for the Company. As part of this agreement, Kennedy and Coe, LLP agreed to assistus in monthly and quarterly financial accounting at their standard hourly fees,estimated at $2,500 per month, plus out of pocket expenses.  On June 13, 2005, we entered into asecond agreement with Kennedy and Coe, LLC for preparation of tax returns andKansas tax credit applications.  Pursuantto this agreement, Kennedy and Coe, LLC will prepare annual federal andstate tax returns for an annual fee of $13,500 or $20 per K-1 tax return if theCompany has more than 650 members; Kansas income tax credit applications for afee of $25,000 in year 1, $15,000 in year 2 and 3; and Kansas Employment Creditforms and schedule for a annual fee of $3,000.

 

*Administration and Employees*

 

On May 1, 2005, we entered into anemployment agreement with Administrative, Accounting and Office Manager, DianeAllen, formerly our project coordinator, wherein we agreed to pay her a basesalary.  She will also be eligible for anannual bonus based on overall financial performance of the Company compared tobudgeted guidelines.  On May 5,2005, we entered into an employment agreement with our plant manager, DerekPeine, wherein we agreed to pay him a base salary and a one-time payment formoving expenses.  He will also beeligible for an annual bonus based on achievement of certain performanceconditions.  On June 29, 2005, weentered into an employment agreement with our controller, Thomas Leitnaker.Pursuant to his employment agreement, Thomas Leitnaker will receive a basesalary and will be eligible for an annual bonus based on overall financialperformance of the Company compared to budgeted guidelines.  As we previously disclosed on Form 8-Kfiled August 5, 2005, our board of directors has appointed Mr. Leitnakerto the position of Chief Financial Officer of the Company and terminated the positionof Treasurer, formerly

 

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held by Jill Zimmerman.  Theduties formerly performed by the Treasurer have been transferred to the ChiefFinancial Officer.

 

As of August 12, 2005, our ethanol plantis fully staffed with 36 full-time employees. We do not expect a significant change in this number over the nexttwelve months.

 

*Trends and Uncertainties Impacting the Cornand Natural Gas Markets and Our Future Cost of Goods Sold*

 

Projections of the 2005 corn crop have beenreduced by very dry growing conditions in much of the Corn Belt, with portionsof Illinois being the hardest hit.  Cornprices have been very volatile as the market attempts to estimate the damagedone to the crop and subsequent reductions in the yield. Continued hot and dryweather could further decrease yields or additional demand could send cornprices considerably higher, however normal weather or lack of demand will keepprices stagnant.  Prices may move higheras a result of events elsewhere but corn availability is expected to beadequate to support operation of the plant. Given the current range ofprojected yields in corn, and given normal growing conditions the remainder ofthe season, corn prices are likely to range between 1.70-$2.10 per bushel.

 

Natural gas is also an important inputcommodity to our manufacturing process. We estimate that our natural gas usage will be approximately4,000 British thermal units (mmbtu) per day when drying the distillers grains.  We use natural gas to dry our distiller’sgrain products to moisture contents at which they can be stored for longperiods of time, and can be transported greater distances.  Dry distiller’s grains have a much broadermarket base, including the western cattle feedlots, and the dairies ofCalifornia and Florida.  Recently, theprice of natural gas has risen along with other energy sources.  We look for continued volatility in thenatural gas market, led mainly by the speculators who are taking advantage ofthis market, and any increases in the price of natural gas will increase ourcost of production and negatively impact our profit margins. Natural gas hasrecently been available only at prices exceeding historical averages.  We expect natural gas prices to remain highor increase.

 

*CommodityPrice Risk Protection*

 

We seek to minimize the risks from fluctuations in the prices of rawmaterial inputs, such as corn and natural gas, and finished products, such asethanol and distillers grains, through the use of hedging instruments.  As we move forward, we will continue to monitorour risk, and adjust our hedging strategies as appropriate.  Although we believe our hedge positionsaccomplish an economic hedge against our future purchases, they do not qualifyfor hedge accounting, which would match the gain or loss on our hedge positionsto the specific commodity purchase being hedged.  We are using fair value accounting for ourhedge positions, which means as the current market price of our hedge positionschanges, the gains and losses are immediately recognized in our cost of goodssold.  For example, it is likely and wewould generally expect that a positive 10% increase in the cash price of cornwould produce a positive increase of approximately 10% in the fair value of ourderivative instruments and vice versa. The immediate recognition of hedging gains and losses under fair valueaccounting can cause net income to be volatile from quarter to quarter due tothe timing of the change in value of the derivative instruments relative to thecost and use of the commodity being hedged. There are several variables that could affect the extent to which ourderivative instruments are impacted by price fluctuations in the cost of cornor natural gas.  However, it is likelythat commodity cash prices will have the greatest impact on the derivativesinstruments with delivery dates nearest the current cash price.

 

As of June 30, 2005, we have forward cornpurchase contracts for the purchase of approximately 1.26 million bushels ofcorn at various dates through December 2005.  The corn price of those contracts rangesbetween $2.25 and $2.45 per bushel.  Aswe move forward, additional protection may be necessary.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on theimpact such market movements have on the value of our derivativeinstruments.  As we move forward intofall, additional price protection may be required to solidify our margins throughthe end of fiscal year 2005.  Dependingon market movements, crop prospects and weather, these price protectionpositions may cause immediate adverse effects but are expected to producelong-term positive growth for the Company.

 

As of June 30, 2005, we have futurescontracts to purchase approximately 80 million British thermal units (mmbtu) ofnatural gas through August and September 2005 at an average price of$6.785 per mmbtu.  Additional priceprotection for natural gas

 

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purchases may be necessary as we attempt to further reduce oursusceptibility to price increases.  However,we may not be able to secure natural gas for prices less than current marketprice and we may not recover high costs of production resulting from highnatural gas prices, which may raise our costs of production.

 

*Trends and Uncertainties Impacting theEthanol Industry and Our Future Revenues*

 

As we continue our transition from adevelopment-stage company to an operating company in the next fiscal quarter,our revenues will consist of sales of ethanol and distillers grains.  We expect ethanol sales to constitute thebulk of our revenues. Last quarter, the demand for ethanol increased relativeto supply causing upward pressure on ethanol market prices.  It is uncertain whether the upward trend ofethanol market prices will be sustainable for any significant period oftime.  Based upon the number of newethanol plants scheduled to begin production and the expansion of currentplants, it is possible that market prices may stabilize or begin to trenddownward.  However, increasing ethanoldemand may balance the increase in supply. Areas where ethanol demand may increase are new markets in Atlanta,Nashville, Baton Rouge and Houston. Minnesota may also generate additional demand due to recent legislationmandating a 20% ethanol blend in its gasoline by the year 2013.

 

In June 2001, California requested awaiver from the reformulated gasoline (“RFG”) oxygenate requirement under theClean Air Act.  This means that ratherthan using ethanol as an alternative oxygenate to MTBE, California is seekingto be released from federal requirements to use any oxygenates at all. TheEnvironmental Protection Agency (“EPA”) initially denied the request.  However, the U.S. Court of Appeals for theNinth Circuit’s July 2003 decision overturned that denial and remandingthe decision back to the EPA for further review.  Since the Court’s decision, California hasreissued its appeal to the EPA.  InJune 2005, the EPA denied California’s waiver request after determiningthat the petition for waiver submitted by California failed to meet the waiverrequirements outlined in the Clean Air Act.

 

The states ofNew York, Connecticut and Georgia have also filed requests for waiver of theoxygenate requirement.  New York’s andConnecticut’s waiver requests were also denied in June 2005, because theirwaiver petitions failed to meet the waiver requirements outlined in the CleanAir Act.  The EPA has also denied Georgia’srequest for a waiver.  Georgia hasappealed the decision in both the district court and the 11thCircuit Court of Appeals.  In November 2004,the district court affirmed the EPA’s decision to impose a RFG requirement inAtlanta but stayed the program until the 11th Circuit Court couldhear the state’s appeal.  The cases havebeen consolidated and a ruling is anticipated by the end of 2005.  Until a ruling is issued, the RFG program inAtlanta will be delayed.  Atlanta’sethanol market is currently estimated to be approximately 250 million gallonsper year.

 

Potential increases in demand do not includenational implementation of a Renewable Fuels Standard or similar legislation,which could cause increases in demand to be greater than currentlyprojected.  On August 8, 2005,President George W. Bush signed the Energy Policy Act of 2005 into law.  This much anticipated bill includes variousprovisions that are expected to favorably impact the ethanol industry byenhancing both the production and use of ethanol.

 

One of the most significant provisionsimpacting the ethanol industry is the creation of a 7.5 billion gallonrenewable fuels standard (RFS).  The RFSestablishes a specific baseline volume of renewable fuel to be used in gasolineon a nationwide basis but does not require that any renewable fuels be used inany particular area or state, allowing refiners to use renewable fuel blends inthose areas where it is most cost-effective. The RFS requires the use of 4.0 billion gallons of renewable fuels in2006, increasing to 7.5 billion in gallons by 2012.  The RFS will be met largely through the use ofethanol. According to the Renewable Fuels Association, the bill is expected tolead to about $6 billion in new investment in ethanol plants across the country. An increase in the number of new plants will bring an increase in thesupply of ethanol.  Thus, while this billmay cause ethanol prices to increase in the short term due to additionaldemand, future supply could outweigh the demand for ethanol in the future.  This would have a negative impact on ourearnings.  Alternatively, since the RFSbegins at 4 billion gallons in 2006 and national production is expected toexceed this amount, there could be a short-term oversupply until the RFSrequirements exceed national production. This would have an immediate adverse effect on our earnings.

 

Thebill also expands who may qualify as a small ethanol producer.  Historically, small ethanol producers wereallowed a 10-cents per gallon production income tax credit on up to 15 milliongallons of production annually.  The sizeof the plant eligible for the tax credit was limited to 30 milliongallons.  Under the Energy Policy Act of2005 the size limitation on the production capacity for small ethanol producersincreases from 30 million to 60 million gallons.  The credit can be taken on the first 15million gallons of production.  The tax creditis capped at $1.5 million per year per producer.  The credit is effective for taxable yearsending after the date of enactment. Since we now qualify as a small ethanol producer under the newlegislation, we expect to be eligible for this credit this taxable year.

 

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TheEnergy Policy Act of 2005 also creates a new credit that permits taxpayers toclaim a 30% credit (up to $30,000) for the cost of installing clean-fuelvehicle refueling equipment, such as an E85 fuel pump, to be used in a trade orbusiness of the taxpayer or installed at the principal residence of thetaxpayer. Under the provision, clean fuels are any fuel of at least 85% of thevolume of which consists of ethanol, natural gas, compressed natural gas,liquefied natural gas, liquefied petroleum gas, and hydrogen and any mixture ofdiesel fuel and biodiesel containing at least 20% biodiesel.  The provision is effective for equipmentplaced in service December 31, 2005 and before January 1, 2010.  While it is unclear how this credit willaffect the demand for ethanol in the short term, we expect it will help raiseconsumer awareness of alternative sources of fuel and could positively impactfuture demand for ethanol.

 

The Energy Policy Act of 2005 signedby the President did not provide for a national ban on the ban the useof MBTE as a gasoline additive,a provision included in previous drafts of the legislation.  If the use of MTBE is phased out on anational level in the next few years and the reformulated gasoline oxygenaterequirement remains unchanged, the anticipated growth may yield a doubling ofethanol demand much sooner than currently anticipated.  However, even as new markets develop, the industrycontinues to grow rapidly and national production is expected to rise by750,000 gallons over the next year from 3.4 billion gallons to 4.15 billiongallons annually.  In addition, none ofthese new markets is assured nor is the timing of any other new demand in theethanol industry.

 

Ethanol production continues to grow asadditional plants become operational. According to the Renewable FuelsAssociation, there are currently 90 ethanol plants nationwide that have thecapacity to produce over 3.9 billion gallons annual.  Demand for ethanol has been supported byhigher oil prices and its refined components and by clean air standardsmandated by federal agencies have required highly populated areas to blendethanol into their gasoline supplies as an oxygenate. The intent of the airstandards is to reduce harmful emissions into the atmosphere. These mandateshave been challenged in several metropolitan areas, and are currently beingreviewed by the courts. In the future, the combination of additional supply,successful challenges to the clean air standards and stagnant or reduced demandmay adversely affect our revenues, profit margin and ability to maintainpositive cash flows.

 

*Technology Developments*

 

A new technology has recently been introduced byVortex Dehydration Technology of Hanover, Maryland, to remove corn oil fromconcentrated thin stillage (a byproduct of “dry milling” ethanol processingfacilities) which would be used as an animal feed supplement or possibly as aninput for bio-diesel production. Although the recovery of oil from the thin stillage may be economicallyfeasible, it fails to produce the advantages of removing the oil prior to thefermentation process.  The FWS Group ofCompanies, headquartered out of Canada with offices in the United States, iscurrently working on a starch separation technology that would economicallyseparate a corn kernel into its main components. The process removes the germ,pericarp and tip of the kernel leaving only the endosperm of kernel for theproduction of ethanol.  This technologyhas the capability to reduce drying costs and the loading of volatile organiccompounds.  The separated germ would alsobe available through this process for other uses such as high oil feeds orbio-diesel production.  Each of these newtechnologies is currently in its early stages of development.  There is no guarantee that either technologywill be successful or that we will be able to implement the technology in ourethanol plant.

 

**Application of Critical Accounting Policies**

 

Management uses estimates and assumptions inpreparing our financial statements in accordance with generally acceptedaccounting principles.  These estimatesand assumptions affect the reported amount of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses. Actual amounts could differ from the estimates used.

 

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Asummary of our significant accounting policies are described in the notes toour Financial Statements as of June 30, 2005 located in Note 1 above.

 

**Liquidity and Capital Resources**

 

As of June 30, 2005, wehad current assets of $2,695,246, including cash and cash equivalents of$323,358, and we had total assets of $47,242,733.  As of June 30,2005, we had current liabilities of $4,787,509 and long term liabilities of$24,177,885.  For the fiscal quarter ended June 30,2005, we have a net loss of $1,011,245 primarily due to start-up businesscosts.  As of June 30, 2005, ourmembers’ contributions, net of costs related to capital contributions, were $20,957,000. The accumulated deficit from inception through June 30, 2005, was $2,679,661.  Total members’ equity as of June 30,2005, was $18,277,339.

 

On April 20, 2005, our second public offeringbecame effective and we began our efforts to sell the registered membershipunits shortly thereafter.  Subsequent tothe period covered by this report, on July 20, 2005 we sold 9,091 units anaggregate price of $10,000,100 and closed our second public offering.  On August 1, 2005 we redeemed all 6,250units from ICM, Inc. and Fagen, Inc. at a total redemption price of$6,875,000 using proceeds from the sale of our second public offering andretained the balance of the proceeds for working capital.

 

*Debt Financing*

 

On November 23, 2004 we entered into a CreditAgreement with Home Federal Savings Bank, establishing a construction loanfacility for the construction of a 35 million gallon per year ethanolplant. The construction financing is in the amount of $26,000,000 consisting ofa $21,000,000 conventional term loan and a $5,000,000 USDA 80% guaranteed loan,and is secured by substantially all of our assets.  Now that the ethanol plant is complete andoperating, we anticipate that we will convert the construction loan senior debtinto a term loan by September 2005. The term loan will be segmented intotwo loans (1) a $21,000,000 conventional term loan, and (2) a$5,000,000 USDA 80% guaranteed loan.

 

The $5,000,000 USDA guaranteed loan will have anamortization period and maturity date of 10 years. We will make monthlypayments of principal and interest on the $5,000,000 loan at a variableinterest rate of prime plus 1.25%. This variable rate will be adjustedquarterly. The $5,000,000 USDA guaranteed loan will impose a prepayment penaltydepending on the year of refinancing starting with the 5% penalty in year oneand decreasing to 1% in year 5.  On June 6,2005, we received a conditional commitment from the USDA for the $5,000,000USDA guaranteed loan.

 

The $21,000,000 conventional loan will have anamortization period of 10 years but will mature at the end of5 years. We will make monthly payments of principal and interest on the$21,000,000 loan at a variable rate equal to prime plus 1.75% with a floor of6%.  With respect to the $21,000,000 conventionalloan, a prepayment penalty will be imposed starting with a 3% penalty in yearone and decreasing to 1% in year 3.

 

We will be subject to certain financial loancovenants consisting of minimum working capital, minimum fixed coverage,minimum current ratio, minimum net worth and maximum debt/net worth covenantsduring the term of the loan. We will also be prohibited from makingdistributions to our members, however, we will be allowed to distribute 40% ofour net income to our members after our lender has received audited financialstatements for the fiscal year. We must be in compliance with all financialratio requirements and loan covenants before and after any distributions to themembers.

 

After we convert the construction loan senior debtinto a term loan, the Company will only be allowed to make annual capitalexpenditures up to $400,000 annually without the lender’s prior approval.During the term of the loan, we are required to pay to the lender an annualamount equal to the greater of (1) 75% of any Commodity Credit CorporationBio Energy income payments received during the year or (2) 25% of theCompany’s free cash flow for each year. Payments consisting of USDA CommodityCredit Corporation Bio Energy income must be paid to the lender within15 days of receipt of any such payments. These payments will continueuntil an aggregate sum of $7,500,000 has been received by the lender.

 

On April 13, 2005, we entered into a promissorynote with Patriots Bank in Garnett, Kansas in the amount of $90,000 payable ata fixed interest rate of 7% to be paid on June 12, 2005.  We also granted a mortgage on real estate to PatriotsBank to secure

 

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theloan.  On June 22, 2005, we paid$91,173.70 to Patriots Bank in satisfaction of the principal and accruedinterest due under the promissory note and secured a release of the mortgagefrom the Patriots Bank.

 

On May 10, 2005, we executed a promissory for$1,760,274 at an interest rate of 1% plus the prime rate payable toICM, Inc and granted a security interest in a steam turbine generator toICM, Inc. as collateral for the loan. Under the terms of the promissory note, we agree to make quarterlyinstallment payments of principal and interest with the balance due on July 1,2008.  The first quarterly payment underthe note is due October 1, 2005.  Wealso entered into a subordination agreement with Home Federal Savings Bank (“HomeFederal”), our senior lender, in which Home Federal agrees ICM, Inc.’ssecurity interest in the generator is senior to the security interest of HomeFederal Savings Bank in the generator.

 

*Raising Additional Capital*

 

We issued units to ICM, Inc. and Fagen, Inc.in exchange for their combined capital contribution of $6,250,000. Pursuant to aUnit Purchase and Redemption Agreement executed with ICM, Inc. and Fagen, Inc.,we have agreed to redeem all 6,250 units from ICM, Inc. and Fagen, Inc.using the proceeds from the sale of units in a registered offering or, to theextent the offering is unsuccessful, from cash flow generated by operationssubject to certain loan covenants, restrictions and tax distributions.

 

To raise the proceeds necessary to redeem the unitsin accordance with the terms of Unit Purchase and Redemption Agreement, we commenceda registered offering for additional membership units.  Our registered offering became effective on April 20,2005 and we began our efforts to sell the registered membership units shortlythereafter.  Subsequent to the periodcovered by this report, on July 20, 2005 we closed our public offering.  Duringthe offering, we sold 9,091 units an aggregate price of $10,000,100.  On August 1, 2005 we used the proceedsof the public offering to redeem 3,125 units each from ICM, Inc. and Fagen, Inc.at a total redemption price of $6,875,000 in accordance with the Unit Purchase andRedemption Agreement executed with ICM, Inc. and Fagen, Inc and retainedthe balance of the proceeds for working capital.

 

In connection with the capital contributionby ICM, Inc. and Fagen, Inc., we amended our Operating Agreement toallow ICM, Inc. and Fagen, Inc. to appoint a total of three directorsto our board of directors, subject to the termination of one of their directorpositions for every $2,000,000 dollars in redemption payments made to either orboth of ICM, Inc. and Fagen, Inc. Two of our initial directorsresigned from our board in January 2005, and ICM, Inc. and Fagen, Inc.appointed their three directors on February 1, 2005.  As we previously reported in our Amended 8-Kfiled August 11, 2005, the terms of directors Brian Thome, JerryJones, and Dave Vander Griend expired on August 1, 2005 when we redeemedall 6,250 units from ICM, Inc. and Fagen, Inc, and they are no longer serving on theCompany’s board of directors.

 

On May 5, 2005, we entered into an agreementwith Ethanol Capital Partners, L.P. in which we agreed to accept EthanolCapital Partners, L.P.’s subscription for 4,550 units in our public offeringand to appoint two representatives from Ethanol Capital Partners, L.P. to our initialboard of directors.  Pursuant to thisagreement, the appointed directors will serve for a term ending with theelection of directors by our members at the 2006 annual meeting of members.  Our obligations under this agreement are contingentupon Ethanol Capital Partners, L.P.’s fulfillment of all of its outstandingobligations owed under its subscription agreement and promissory note.  In July 2005, Ethanol Capital Partners,L.P. fulfilled all of its outstanding obligations owed under its subscriptionagreement and promissory note. Subsequent to the period covered by this report, on July 20, 2005we accepted Ethanol Capital Partners, L.P.’s subscription for 4,550 units andhave issued the units to Ethanol Capital Partners, L.P.  We expect that the two representatives fromEthanol Capital Partners, L.P. will be appointed to our board of directors in August 2005.

 

*Grants, Government Programs and Tax Rebates*

 

We received a Value-Added Agricultural ProductMarket Development Grant of $450,000 from the USDA, which is a matching grantto be used for start-up costs. We have applied with the City of Garnett, Kansasunder the Neighborhood Revitalization Program for a rebate of any additionalproperty taxes attributable to our site improvements. The City of Garnett,Kansas was awarded an Economic Development grant and loan through the U.S. SmallCities Community Development Block Program for $750,000 to

 

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assistwith water infrastructure improvements at the plant site. The City has alsoreceived approval from the Kansas Department of Transportation for grant fundsto assist with highway improvements. The program provides that the state willcontribute 85% of the actual project construction and engineering costs. Wehave entered into an agreement with the City of Garnett, and Anderson County toshare equally the total remaining funds that will be required.  It has been estimated that the funds requiredwill be a total of $400,000. We have agreed to pay one-third of this obligationin installment payments.  Our portion ofthis obligation is estimated at approximately $135,000.

 

We have applied for a grant from the USDA’sCommodity Credit Corporation. Under the grant program, the Commodity CreditCorporation will reimburse eligible ethanol producers of less than65 million gallons of bioenergy one bushel of corn for every two andone-half bushels of corn used for the increased production of ethanol. Underthe program, no eligible producer may receive more than $7,500,000 in anyfiscal year. However, some ethanol producers have received more than thisamount when the start-up period has extended over more than one fiscal year ofthe U.S. government. Because we expect to be an eligible producer and to annuallyutilize approximately 13 million bushels of corn in the increasedproduction of ethanol, we expect to potentially receive a maximum award ofapproximately $7,500,000. However, the Commodity Credit Corporation may awardonly $150,000,000 annually and any award we receive may be reduced based uponthe volume of applications from other eligible producers. In addition, paymentsunder the program in any one fiscal year may be less if Congress does not fullyfund the program for that fiscal year (funding for the program is subject to anannual appropriation). According to the Farm Service Agency, payments under theprogram in fiscal year 2004 totaled nearly $150,000,000 and approved federalfunding for fiscal year 2005 is set at $100,000,000. We expect to be eligibleto receive an award under the program only once during the life of our project.The Commodity Credit Corporation Bio Energy Program is scheduled to expire on September 30,2006. The grants available under the program may not continue beyond their scheduledexpiration date or if they do continue, the grants may not be at the samelevel.

 

**Off-BalanceSheet Arrangements**

 

We do not have any off-balance sheetarrangements other than those described in the notes to our FinancialStatements as of June 30, 2005 located in Note 6 above.

 

**Item 3.****           ControlsAnd Procedures**

 

Our management, including our President (theprincipal executive officer), William Pracht, our Chief Financial Officer, ThomasLeitnaker, and our General Manager, Michael Goblirsch, have reviewed andevaluated the effectiveness of our disclosure controls and procedures as of theend of the period covered by this report. Based upon this review and evaluation, these officers believe that ourdisclosure controls and procedures are effective in ensuring that materialinformation related to us is recorded, processed, summarized and reportedwithin the time periods required by the forms and rules of the Securitiesand Exchange Commission except that our management has noted the followingmaterial weaknesses in our internal controls for the period covered by thisreport: 1) there is a lack of segregation of duties due to the limited numberof personnel involved in processing of accounting data; 2) disclosures includedin the notes to the draft financial statements prepared by the Company includedincorrect information significant to the financial presentation; and 3) it wasnecessary for the auditor to propose significant adjustments to the Company’sfinancial statements in order to comply with generally accepted accounting principles.

 

Our management, including our principalexecutive officer and principal financial officer, have reviewed and evaluatedany changes in our internal control over financial reporting that occurred asof the end of the period covered by this report and there has been no changethat has materially affected or is reasonably likely to materially affect ourinternal control over financial reporting.

 

**PART II.****                                                OTHERINFORMATION**

 

**Item 1.****           LegalProceedings**

 

 None.

 

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**Item 2.****           Unregistered Sales ofEquity Securities and Use of Proceeds**

 

*Unregistered Sales of Equity Securities*

 

We previously disclosed on Form 8-Kfiled October 15, 2004 the unregistered sale of our units to ICM, Inc.and Fagen, Inc. pursuant to the Unit Purchase and Redemption Agreemententered into on October 11, 2004. The units were issued to ICM, Inc. and Fagen, Inc. inexchange for their combined capital contribution of $6,250,000 on January 19,2005. Pursuant to the Unit Purchase and Redemption Agreement, we agreed to redeemall 6,250 units from ICM, Inc. and Fagen, Inc. using the proceedsfrom the sale of units in a registered offering or, to the extent the offeringis unsuccessful, from cash flow generated by operations subject to certain loancovenants, restrictions and tax distributions. Subsequent to the period covered by this report, on August 1, 2005 we redeemed all 6,250units from ICM, Inc. and Fagen, Inc. at a total redemption price of$6,875,000 using proceeds from the sale of our recently completed publicoffering.

 

*Use of Proceeds*

 

The Securities and Exchange Commissiondeclared our registration statement on Form SB-2 (SEC Registration No.333-96703) effective on January 24, 2003. We commenced our public offering shortly thereafter.

 

The following is a breakdown of membershipunits registered and the membership units sold in that offering:

 
| **Amount Registered** | ** ** | **Aggregate price of the  amount registered** | ** **     | **Amount Sold** | ** ** | **Aggregate price of the  amount sold to date** | ** ** |
|-----------------------|------------|-----------------------------------------------|----------------|-----------------|------------|-------------------------------------------------|------------|
| **18,000**            | ** ** | **$**                                         | **18,000,000** | ** **      | **13,457** | ** **                                      | **$**      | **13,457,000** | ** ** |
|                       |            |                                               |                |                 |            |                                                 |            |  |  |

 

On January 24, 2004, we closed theoffering and stopped selling units registered under our registrationstatement.  During the offering we sold13,457 units for an aggregate price of $13,457,000.  We sold the units without the assistance ofan underwriter.

 

In addition to the units sold, we issued atotal of thirty membership units for compensation.  We issued five membership units to JillZimmerman, a former employee, who is a member, was awarded five membershipunits as part of her bonus for services related to our development andfinancing.  We awarded ten units to ouremployee, Diane Allen, who formerly served as our project coordinator, as partof her bonus.  Finally, we issued fifteenunits to a former project coordinator, Bill Barnes, in exchange for amountspreviously owed for services.

 

We released funds from escrow and issued13,487 units in the Company, including 13,457 units sold in our offering and anadditional thirty units issued for compensation.  As of June 30, 2005, we had used netoffering proceeds of approximately $12,488,447 for construction of plant,building and facilities, $75,000 for repayment of indebtedness, $570,653 forfinancing costs and $322,900 for operating expenses.  All of these payments were direct or indirectpayments to others.

 

On December 16, 2004, we filed a registrationstatement on Form SB-2 (Commission File 333-121323).  The Securities and Exchange Commissiondeclared our registration statement effective on April 20, 2005.  We commenced our public offering shortlythereafter.  Subsequent to the period covered bythis report, on July 20,2005 we closed our public offering and stopped selling units registered under our registration statement.

 

The following is a breakdown of membershipunits registered and the membership units sold in that offering:

 
| **Amount Registered** | ** ** | **Aggregate price of the  amount registered** | ** **     | **Amount Sold** | ** ** | **Aggregate price of the  amount sold to date** | ** ** |
|-----------------------|------------|-----------------------------------------------|----------------|-----------------|------------|-------------------------------------------------|------------|
| **9,091**             | ** ** | **$**                                         | **10,000,100** | ** **      | **9,091**  | ** **                                      | **$**      | **10,000,100** | ** ** |
|                       |            |                                               |                |                 |            |                                                 |            |  |  |

 

29

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During the offering, we sold 9,091 units anaggregate price of $10,000,100.  On August 1,2005, we broke escrow in accordance with the procedures outlined in the EscrowAgreement between the Company and Mission Bank dated April 15, 2005 andthe Company registration statement.

 

On August 1, 2005 we used the proceedsof the public offering to redeem 3,125 units each from ICM, Inc. and Fagen, Inc.at a total redemption price of $6,875,000 in accordance with the Unit PurchaseAgreement executed with ICM, Inc. and Fagen, Inc and retained the balanceof the proceeds for working capital.

 

**Item 3.****           Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****          ****Submission of Matters to a Voteof Security Holders**

 

None.

 

**Item 5.****          ****Other Information**

 

None.

 

**Item 6.****          ****Exhibits.**

 

The following exhibits are filed as part ofthis report.  Exhibits previously filedare incorporated by reference, as noted.

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.1                 |       | Facility Construction,  Ownership and Operating Agreement dated February 24, 2005, between East  Kansas Agri-Energy, LLC and Southern Star Central Gas Pipeline, Inc.  previously submitted as an Exhibit to registrant’s Pre-Effective  Amendment No. 3 filed on April 19, 2005 and incorporated by  reference herein. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.2                 |       | Grant of Easement and  Right of Way Agreement dated April 5, 2005 between East Kansas  Agri-Energy, LLC and the State of Kansas.                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.3                 |       | Contract for Sale of  Equipment dated May 10, 2005 between East Kansas Agri-Energy, LLC and  ICM, Inc.                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.4                 |       | Letter Agreement with  Kennedy and Coe, LLC dated May 17, 2005.                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.5                 |       | Letter Agreement with  Kennedy and Coe, LLC dated May 17, 2005.                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.6                 |       | Letter Agreement with  Diane Allen dated May 1, 2005.                                                                                                                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.7                 |       | Letter Agreement with  Derek Peine dated May 5, 2005 previously submitted as as  Exhibit 10.5 to registrant’s quarterly report dated March 31, 2005  on Form 10-QSB and incorporated by reference herein.                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.8                 |       | Letter Agreement with  Thomas Leitnaker dated June 29, 2005.                                                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 10.9                 |       | Letter  Agreement with Ethanol Capital Partners, L.P. dated May 5, 2005.                                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                  |
| 31.1                 |       | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)                                                                                                                                                                                                                                                                                                       |

 

30

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| 31.2   |   | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)      |
|--------|--------|------------------------------------------------------|
|   |   |                                                 |
| 31.3   |   | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)      |
|   |   |                                                 |
| 32.1   |   | Certificate  Pursuant to 18 U.S.C. Section 1350 |
|   |   |                                                 |
| 32.2   |   | Certificate  Pursuant to 18 U.S.C. Section 1350 |
|   |   |                                                 |
| 32.3   |   | Certificate  Pursuant to 18 U.S.C. Section 1350 |

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

 
|   |                      | EAST KANSAS AGRI-ENERGY, LLC                                          |
|--------|---------------------------|-----------------------------------------------------------------------|
|   |                      |                                                                  |
|   |                      |                                                                  |
| Date:  | August 15, 2005 |                                                                  | /s/ William Pracht |   |
|   |                      | William Pracht                                                        |
|   |                      | President  (Principal Executive Officer)                              |
|   |                      |                                                                  |
|   |                      |                                                                  |
| Date:  | August 15, 2005 |                                                                  | /s/ Thomas Leitnaker |   |
|   |                      | Thomas Leitnaker                                                      |
|   |                      | Chief Financial Officer  (Principal Financial and Accounting Officer) |
|   |                      |                                                                  |
|   |                      |                                                                  |
| Date:  | August 15, 2005 |                                                                  | /s/ Michael Goblirsch |   |
|   |                      | Michael Goblirsch                                                     |
|   |                      | General Manager                                                       |

 

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