**UNITED        STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM        10-QSB**

 

x    QUARTERLY REPORT        UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

         

**For        The Quarterly Period Ended March 31, 2008**

         

OR

 

oTRANSITION REPORT UNDER SECTION 13 OR 15(d)        OF THE EXCHANGE ACT

 

 

 

(Exact        name of registrant as specified in its charter)

|                                                           |   |                                    |
|----------------------------------------------------------------|--------|-----------------------------------------|
| **Iowa**                                                       |   | **20-4195009**                          |
| (State or other jurisdiction of                                |   | (I.R.S. Employer Identification Number) |
| incorporation or organization)

                          |   |                                    |

**2108        140th Avenue, P.O. Box 21**

**Algona, IA 50511**

(Address        of principal executive offices)

**(515)        395-8888**

(Registrant’s Telephone Number)

 

 

 

Check        whether the issuer has (1) filed all reports required by Section 12 or 15(d) of the        Exchange Act during the past 12 months, and (2) been subject to such filing requirements        for the past ninety (90) days.  Yeso    Nox

 

| Indicate by check mark whether the registrant is a shell                        company (as defined in Rule 12b-2 of the Exchange Act). Yeso   | Nox |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|-----|

 

State the        number of shares outstanding of each of the issuer’s classes of common equity, as of        the latest practicable date: As of May 14, 2008, there were49,159        membership unitsissued.

 

| Transitional Small Business Disclosure Format (Check one):                        Yeso   | Nox |
|----------------------------------------------------------------------------------------------------|-----|

 

 

 

----

 

 

 

 

| **TABLE OF CONTENTS**                      |
|--------------------------------------------|
|                                       |   |
|                                       |   |
| **TABLE OF CONTENTS**                      | **PAGE** |
|                                       |   |
|  

**PART I - FINANCIAL INFORMATION** |   |
|                                       | Item 1.   | Financial Statements. |   |   |
|                                       |   | Unaudited Balance Sheets | 2 |   |
|                                       |   | Unaudited Statements of Operations | 3 |   |
|                                       |   | Unaudited Statements of Members’ Equity | 4 |   |
|                                       |   | Unaudited Statements of Cash Flows | 5 |   |
|                                       |   | Notes to Unaudited Financial Statements | 6 |   |
|                                       | Item 2.   | Management’s Discussion and Analysis or Plan of                        Operation. | 15 |   |
|                                       | Item 3.   | Controls and Procedures. | 23 |   |
|                                       |   |   |
| **PART II - OTHER INFORMATION**            |   |   |
|                                       | Item 1.   | Legal Proceedings. | 24 |   |
|                                       | Item 2.   | Unregistered Sales of Equity Securities and Use of                        Proceeds. | 24 |   |
|                                       | Item 3.   | Defaults Upon Senior Securities. | 24 |   |
|                                       | Item 4.   | Submission of Matters to a Vote of Security                        Holders. | 24 |   |
|                                       | Item 5.   | Other Information. | 24 |   |
|                                       | Item 6.   | Exhibits. | 24 |   |
|                                       | **SIGNATURES** |   |
|                                            |  |  |  |  |  |  |  |  |  |

 

1

 

----

**PART I        - FINANCIAL INFORMATION**

 

| **Item** **1.** | **Financial Statements.** |
|----------------------|---------------------------|

 

| **East Fork Biodiesel, LLC**      |                                                                                                                  |   |   |           |   |   |
|-----------------------------------|-----------------------------------------------------------------------------------------------------------------------|--------|--------|----------------|--------|--------|
| **(A Development Stage Company)** |                                                                                                                  |   |   |           |   |   |
|                              |                                                                                                                  |   |   |           |   |   |
| **Unaudited Balance Sheets**      |                                                                                                                  |   |   |           |   |   |
|                              |                                                                                                                  |   |   | **March 31,**  |   |   | September 30, |   |   |
|                              | **Assets (Note                        3)**                                                   |   |   | **2008**       |   |   | 2007 |   |   |
|                              | Current Assets:                                                                              |   |   |           |   |   |   |   |   |
|                              | Cash and cash                        equivalents                                             |   | **$**  | **500,317**    |   | $      | 168,926 |   |   |
|                              | Due from broker                                                                              |   |   | **9,304**      |   |   | 1,190,558 |   |   |
|                              | Accounts Receivable                                                                          |   |   | **485,596**    |   |   | — |   |   |
|                              | Federal Incentive                        Receivable                                          |   |   | **990,758**    |   |   | — |   |   |
|                              | Inventory                                                                                    |   |   | **156,676**    |   |   | — |   |   |
|                              | Prepaid expenses                                                                             |   |   | **87,210**     |   |   | 48,905 |   |   |
|                              |                                                                                                                  |   |   | **2,229,861**  |   |   | 1,408,389 |   |   |
|                              | Property and                        Equipment:                                               |   |   |           |   |   |   |   |   |
|                              | Land                                                                                         |   |   | **539,291**    |   |   | 539,291 |   |   |
|                              | Construction in                        progress                                              |   |   | **—**    |   |   | 55,784,680 |   |   |
|                              | Plant and processing                        equipment                                        |   |   | **59,415,991** |   |   | — |   |   |
|                              | Office building, furniture and                        fixtures                               |   |   | **489,154**    |   |   | 56,920 |   |   |
|                              |                                                                                                                  |   |   | **60,444,436** |   |   | 56,380,891 |   |   |
|                              | Accumulated                        depreciation                                              |   |   | **1,297,723**  |   |   | 10,209 |   |   |
|                              |                                                                                                                  |   |   | **59,146,713** |   |   | 56,370,682 |   |   |
|                              |                                                                                                                  |   |   |           |   |   |   |   |   |
|                              | Other Assets:                                                                                |   |   |           |   |   |   |   |   |
|                              | Restricted cash in                        escrow                                             |   |   | **552,589**    |   |   | 718,550 |   |   |
|                              | Deferred financing costs, net of accumulated                        amortization             |   |   | **343,834**    |   |   | 377,637 |   |   |
|                              |                                                                                                                  |   |   | **896,423**    |   |   | 1,096,187 |   |   |
|                              |                                                                                                                  |   | **$**  | **62,272,997** |   | $      | 58,875,258 |   |   |
|                              |                                                                                                                  |   |   |           |   |   |   |   |   |
|                              | **Liabilities and Members’                        Equity**                             |   |   |           |   |   |   |   |   |
|                              | Current                        Liabilities:                                                  |   |   |           |   |   |   |   |   |
|                              | Current maturities of long-term debt (Note                        3)                         |   | **$**  | **18,190,024** |   | $      | 10,322,010 |   |   |
|                              | Accounts payable and accrued                        expenses                                 |   |   | **580,165**    |   |   | 200,898 |   |   |
|                              | Derivative                        instruments                                                |   |   | **—**    |   |   | 517,724 |   |   |
|                              | Construction payable, including $150,000 of retainage (Note                        6)

                          |   |   | **4,499,378**  |   |   | 6,283,239 |   |   |
|                              | **Total current                        liabilities**                                         |   |   | **23,269,567** |   |   | 17,323,871 |   |   |
|                              |                                                                                                                  |   |   |           |   |   |   |   |   |
|                              | Commitments (Notes 6, 7 and                        8)                                        |   |   |           |   |   |   |   |   |
|                              |                                                                                                                  |   |   |           |   |   |   |   |   |
|                              | Members’ Equity (Note                        2):                                       |   |   |           |   |   |   |   |   |
|                              | Member contributions, net of issuance costs,                        units                    |   |   |           |   |   |   |   |   |
|                              | outstanding of                        47,159                                                 |   |   | **42,115,810** |   |   | 42,094,543 |   |   |
|                              | Membership units subscription                        receivable                              |   |   | **—**    |   |   | (135,000 | ) |   |
|                              | Deficit accumulated during the development                        stage                      |   |   | **(3,112,380** | **)**  |   | (408,156 | ) |   |
|                              |                                                                                                                  |   |   | **39,003,430** |   |   | 41,551,387 |   |   |
|                              |                                                                                                                  |   | **$**  | **62,272,997** |   | $      | 58,875,258 |   |   |
|                              |                                                                                                                  |   |   |           |   |   |   |   |   |
|                              | See Notes to Unaudited Financial                        Statements.                          |   |   |           |   |   |   |   |   |
|                                   |                                                                                                                       |        |        |                |        |        |  |  |  |  |  |  |  |  |  |  |

 

 

2

 

----

 

|  

                         

                         

                         

                         

**East Fork Biodiesel, LLC** |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| **(A Development Stage Company)**                                                                                                                                    |   |   |   |   |   |   |
|                                                                                                                                                                 |   |   |   |   |   |   |
| **Unaudited Statements of Operations**                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                 |   |

 

|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |
|-----------------------------------------------------------------------------|--------|--------------------|------------|-----------|--------|------------------|--------|---------------|--------|-----------|------------|-----------------|--------|
|                                                                        |   |               |       |      |   |             |   |          |   |      |       | January 5, 2006 |   |
|                                                                        |   | Three Months Ended |       |      |   | Six Months Ended |   | (Date of      |   |
|                                                                        |   | **March 31,**      |       | March 31, |   |             |   | **March 31,** |   | March 31, |       | Inception) to   |   |
|                                                                        |   | **2008**           |       | 2007      |   |             |   | **2008**      |   | 2007      |       | March 31, 2008  |   |
|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Revenues                                                                    |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Sales                                                                       |   | $                  | 3,586,171  |      | $      | —          |   |          |   | $         | 3,586,171  |            | $      | — |   | $ | 3,586,171 |   |
| Federal Incentives                                                          |   |               | 990,758    |      |   | —          |   |          |   |      | 990,758    |            |   | — |   |   | 990,758 |   |
|                                                                        |   |               | 4,576,929  |      |   | —          |   |          |   |      | 4,576,929  |            |   | — |   |   | 4,576,929 |   |
|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Expenses:                                                                   |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Cost of sales, including plant operating expenses                           |   |               | 5,538,470  |      |   | —          |   |          |   |      | 5,854,304  |            |   | — |   |   | 5,854,304 |   |
| Consulting fees (Note 4)                                                    |   |               | —    |      |   | 69,200           |   |          |   |      | —    |            |   | 78,800 |   |   | 257,359 |   |
| General and administrative                                                  |   |               | 477,073    |      |   | 133,521          |   |          |   |      | 684,704    |            |   | 222,820 |   |   | 1,375,361 |   |
|                                                                        |   |               | 6,015,543  |      |   | 202,721          |   |          |   |      | 6,539,008  |            |   | 301,620 |   |   | 7,487,024 |   |
|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| **Loss before other income (expense)**                                      |   |               | (1,438,614 | )         |   | (202,721         | )      |          |   |      | (1,962,079 | )               |   | (301,620 | ) |   | (2,910,095 | ) |
|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Other income (expense):                                                     |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Grants and other income                                                     |   |               | 28,559     |      |   | —          |   |          |   |      | 28,559     |            |   | 5,000 |   |   | 42,039 |   |
| Interest income                                                             |   |               | 11,243     |      |   | 660,438          |   |          |   |      | 25,247     |            |   | 1,022,405 |   |   | 1,275,793 |   |
| Interest expense                                                            |   |               | (381,413   | )         |   | —          |   |          |   |      | (518,421   | )               |   | — |   |   | (518,421 | ) |
| Loss on sale contract                                                       |   |               | —    |      |   | —          |   |          |   |      | (158,000   | )               |   | — |   |   | (158,000 | ) |
| Loss on derivative instruments                                              |   |               | (46,652    | )         |   | —          |   |          |   |      | (119,530   | )               |   | — |   |   | (843,696 | ) |
|                                                                        |   |               | (388,263   | )         |   | 660,438          |   |          |   |      | (742,145   | )               |   | 1,027,405 |   |   | (202,285 | ) |
| **Net income (loss)**                                                       |   | $                  | (1,826,877 | )         | $      | 457,717          |   |          |   | $         | (2,704,224 | )               | $      | 725,785 |   | $ | (3,112,380 | ) |
|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Weighted average basic and diluted units                        outstanding |   |               | 47,159     |      |   | 46,547           |   |          |   |      | 47,159     |            |   | 42,363 |   |   | 36,303 |   |
|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| Net income (loss) per unit - basic and diluted                              |   | $                  | (38.74     | )         | $      | 9.83             |   |          |   | $         | (57.34     | )               | $      | 17.13 |   | $ | (85.73 | ) |
|                                                                        |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |
| See Notes to Unaudited Financial Statements.                                |   |               |       |      |   |             |   |          |   |      |       |            |   |   |   |   |   |   |

 

 

 

3

 

----

| **East Fork Biodiesel, LLC**                                                               |   |   |   |   |       |   |   |
|--------------------------------------------------------------------------------------------|--------|--------|--------|--------|------------|--------|--------|
| **(A Development Stage Company)**                                                          |   |   |   |   |       |   |   |
|                                                                                       |   |   |   |   |       |   |   |
| **Unaudited Statements of Members’                        Equity**                   |   |   |   |   |       |   |   |
|                                                                                       |   |   |   |   |       |   |   |
| Balance, January 5, 2006 (date of inception)                                               |   |   |   | $      | —    |   |
| Issuance of 200 membership units at $250 per unit (Note                        2)          |   |   |   |   | 50,000     |   |
| Issuance of 1,553 membership units at $333 per unit (Note                        2)        |   |   |   |   | 517,666    |   |
| Issuance of 7,015 membership units at $500 per                        unit                 |   |   |   |   |       |   |
| in March 2006 (Note 2)                                                                     |   |   |   |   | 3,507,500  |   |
| Member units earned for consulting services but not issued                        (Note 4) |   |   |   |   | 50,000     |   |
| Net loss                                                                                   |   |   |   |   | (318,069   | )      |
| Balance, September 30, 2006                                                                |   |   |   |   | 3,807,097  |   |
| Issuance of 38,341 membership units at $1,000 per unit (Note                        2)     |   |   |   |   | 38,341,000 |   |
| Offering costs                                                                             |   |   |   |   | (371,623   | )      |
| Issuance of 50 member units for services                                                   |   |   |   |   | —    |   |
| Membership units subscription receivable                                                   |   |   |   |   | (135,000   | )      |
| Net loss                                                                                   |   |   |   |   | (90,087    | )      |
| Balance, September 30, 2007                                                                |   |   |   |   | 41,551,387 |   |
| Collection of Unit Subscription Receivable                                                 |   |   |   |   | 156,267    |   |
| Net loss                                                                                   |   |   |   |   | (2,704,224 | )      |
| Balance, March 31, 2008                                                                    |   |   |   | $      | 39,003,430 |   |
|                                                                                       |   |   |   |   |       |   |   |
| See Notes to Unaudited Financial Statements.                                               |   |   |   |   |       |   |   |

 

4

 

----

 

| **East Fork Biodiesel, LLC**           |                                                                                           |
|----------------------------------------|------------------------------------------------------------------------------------------------|
| **(A Development Stage Company)**      |                                                                                           |
|                                   |                                                                                           |
| **Unaudited Statements of Cash Flows** |                                                                                           |
|                                   |                                                                                           |   |   |   |   |   | January 5, 2006 |   |
|                                   |                                                                                           |   | Six Months Ended |   | (Date of |   |
|                                   |                                                                                           |   | **March 31** |   | March 31 |   | Inception) to |   |
|                                   |                                                                                           |   | **2008** |   | 2007 |   | March 31, 2008 |   |
|                                   | Cash Flows from Operating Activities:                                                          |   |   |   |   |   |   |   |   |   |   |
|                                   | Net income (loss)                                                                              |   | $ | (2,704,224 | ) | $ | 725,785 |   | $ | (3,112,380 | ) |
|                                   | Adjustments to reconcile net income (loss) to net                        cash                  |   |   |   |   |   |   |   |   |   |   |
|                                   | provided by (used in) operating activities:                                                    |   |   |   |   |   |   |   |   |   |   |
|                                   | Depreciation                                                                                   |   |   | 1,287,514 |   |   | 3,978 |   |   | 1,297,723 |   |
|                                   | Amortization                                                                                   |   |   | 22,537 |   |   | — |   |   | 22,537 |   |
|                                   | Unrealized (gain) on derivative financial                        instruments                   |   |   | (517,724 | ) |   | — |   |   | — |   |
|                                   | Member units earned for consulting services                                                    |   |   | — |   |   | — |   |   | 50,000 |   |
|                                   | Changes in working capital components:                                                         |   |   |   |   |   |   |   |   |   |   |
|                                   | (Increase) in receivables                                                                      |   |   | (1,476,354 | ) |   | — |   |   | (1,476,354 | ) |
|                                   | (Increase) in inventories                                                                      |   |   | (156,676 | ) |   | — |   |   | (156,676 | ) |
|                                   | (Increase) decrease in due from broker                                                         |   |   | 1,181,254 |   |   | — |   |   | (9,304 | ) |
|                                   | (Increase) in prepaid expenses                                                                 |   |   | (38,305 | ) |   | (58,758 | ) |   | (87,210 | ) |
|                                   | Increase (decrease) in accounts payable and accrued                        expenses            |   |   | 432,328 |   |   | (15,905 | ) |   | 580,165 |   |
|                                   | **Net cash provided by (used in) operating                        activities**                 |   |   | (1,969,650 | ) |   | 655,100 |   |   | (2,891,499 | ) |
|                                   |                                                                                           |   |   |   |   |   |   |   |   |   |   |
|                                   | Cash Flows from Investing Activities:                                                          |   |   |   |   |   |   |   |   |   |   |
|                                   | Purchase and construction of property and                        equipment,                    |   |   |   |   |   |   |   |   |   |   |
|                                   | net of sales tax refund                                                                        |   |   | (5,889,201 | ) |   | (14,331,580 | ) |   | (55,917,292 | ) |
|                                   | (Increase) decrease in restricted cash in escrow,                        net                   |   |   | 165,961 |   |   | (435,606 | ) |   | (552,589 | ) |
|                                   | **Net cash used in investing activities**                                                      |   |   | (5,723,240 | ) |   | (14,767,186 | ) |   | (56,469,881 | ) |
|                                   |                                                                                           |   |   |   |   |   |   |   |   |   |   |
|                                   | Cash Flows from Financing Activities:                                                          |   |   |   |   |   |   |   |   |   |   |
|                                   | Issuance of membership units                                                                   |   |   | — |   |   | 37,967,000 |   |   | 42,281,166 |   |
|                                   | Collection of Membership Unit Subscription                        Receivable                   |   |   | 156,267 |   |   | — |   |   | 156,267 |   |
|                                   | Payments of offering costs                                                                     |   |   | — |   |   | (106,747 | ) |   | (371,623 | ) |
|                                   | Payments of financing costs                                                                    |   |   | — |   |   | (303,780 | ) |   | (394,137 | ) |
|                                   | Payments of long-term debt                                                                     |   |   | (10,000 | ) |   | — |   |   | (10,000 | ) |
|                                   | Proceeds from long-term borrowings                                                             |   |   | 7,878,014 |   |   | — |   |   | 18,200,024 |   |
|                                   | **Net cash provided by financing activities**                                                  |   |   | 8,024,281 |   |   | 37,556,473 |   |   | 59,861,697 |   |
|                                   |                                                                                           |   |   |   |   |   |   |   |   |   |   |
|                                   | **Net increase in cash and cash equivalents**                                                  |   |   | 331,391 |   |   | 23,444,387 |   |   | 500,317 |   |
|                                   |                                                                                           |   |   |   |   |   |   |   |   |   |   |
|                                   | Cash and cash equivalents:                                                                     |   |   |   |   |   |   |   |   |   |   |
|                                   | Beginning                                                                                      |   |   | 168,926 |   |   | 471,529 |   |   | — |   |
|                                   | Ending                                                                                         |   | $ | 500,317 |   | $ | 23,915,916 |   | $ | 500,317 |   |
|                                   |                                                                                           |   |   |   |   |   |   |   |   |   |   |
|                                   | Supplemental Disclosure of Cash Flow Information,                                              |   |   |   |   |   |   |   |   |   |   |
|                                   | cash payments for interest, net of amount                        capitalized                   |   | $ | 397,243 |   | $ | — |   | $ | 397,243 |   |
|                                   |                                                                                           |   |   |   |   |   |   |   |   |   |   |
|                                   | Supplemental Disclosures of Noncash Operating and Financing                        Activities: |   |   |   |   |   |   |   |   |   |   |
|                                   | Construction in progress included in accounts and                        construction payable  |   | $ | 4,499,378 |   | $ | 8,183,136 |   | $ | 4,499,378 |   |
|                                   | Amortized financing costs included in construction in                        process           |   |   | 11,266 |   |   | — |   |   | 27,766 |   |
|                                   |                                                                                           |   |   |   |   |   |   |   |   |   |   |
|                                   | See Notes to Unaudited Financial Statements.                                                   |   |   |   |   |   |   |   |   |   |   |
|                                        |                                                                                                |  |  |  |  |  |  |  |  |  |  |  |

 

5

 

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**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

 

| **Note 1.** | **Nature of Business, Basis of Presentation and Significant                        Accounting Policies** |
|-------------|----------------------------------------------------------------------------------------------------------|

**Nature        of business:**

 

East Fork Biodiesel, LLC (the Company), located in Algona, Iowa, was formed        on January 5, 2006 to pool investors to build a 60 million gallon annual production        biodiesel manufacturing plant. The Company is in the development stage, devoting        substantially all of its efforts to establishing a new business. However, because of        continuing adverse economic conditions explained below, the Company's planned principal        operation of its plant has not commenced. The plant was substantially complete and started        production on December 5, 2007 to verify the production capabilities of the new plant. In        December the plant produced in the aggregate approximately 1.1 million gallons of biodiesel        and glycerin and then shut down due to the current adverse market conditions (See Note        8).

 

**Basis of        presentation:**

 

The accompanying unaudited condensed interim financial statements have been        prepared pursuant to the rules and regulations of the Securities and Exchange Commission.        Certain information and footnote disclosures normally included in annual financial        statements prepared in accordance with accounting principles generally accepted in the        United States of America have been condensed or omitted as permitted by such rules and        regulations. These financial statements and related notes should be read in conjunction        with the financial statements and notes thereto included in the Company’s audited        financial statements for the year ended September 30, 2007 included in Amendment No. 3        to the Company’s Registration Statement on Form 10. In the opinion of management, the        interim financial statements reflect all adjustments (consisting of normal recurring        accruals) that we consider necessary to present fairly the Company’s results of        operations, financial position and cash flows. The results reported in these interim        financial statements should not be regarded as necessarily indicative of results that may        be expected for the entire year.

 

**Significant accounting policies:**

 

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

         

Concentrations of credit risk: The        Company’s cash balances are maintained in bank deposit accounts which at times may        exceed federally insured limits.

         

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

         

Accounts receivable: Accounts receivable are        presented at face value, net of the allowance for doubtful accounts. The allowance for        doubtful accounts is established through provisions charged against income and is        maintained at a level believed adequate by management to absorb estimated bad debts based        on historical experience and current economic conditions. Management believes all        receivables will be collected and, therefore, there is no allowance as of March 31,        2008.

 

6

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

| **Note 1.** | **Nature of Business, Basis of Presentation and Significant                        Accounting Policies (Continued)** |
|-------------|----------------------------------------------------------------------------------------------------------------------|

Receivables are considered past due based upon payment terms set forth at        the date of the related sale. The Company had no receivables accruing interest as of March        31, 2008.

 

Inventory: Inventory is valued at the lower of        cost or market using the first-in, first out (FIFO) method. Inventory consists of the        following as of March  31, 2008:

         

| Raw material   | $      | 88,642  |
|----------------|--------|---------|
| Finished goods |   | 68,034  |
|           | $      | 156,676 |

         

Property and equipment: Property and equipment        is stated at cost. Depreciation is computed using the straight-line method over the        following estimated useful lives:

         

|                        | Years   |
|-----------------------------|---------|
|                        |    |
| Plant and process equipment | 15 - 20 |
| Office building             | 20      |
| Office equipment            | 3 - 7   |
| Other equipment             | 3 - 7   |

         

Maintenance and repairs are expensed as incurred and major improvements and        betterments are capitalized. As of March 31, 2008 the Company has capitalized $345,416 of        interest and financing costs in construction in progress.

         

Restricted cash in escrow: As of March 31, 2008        the Company had an agreement with a natural gas company that requires a restricted escrow        balance of $552,589 consisting of a $45,589 deposit and $507,000 to cover storage        transportation and/or construction of the town border station. Under the terms of the        agreement the escrow will be released at the discretion of the natural gas company but no        less than 1/15 of the total deposit annually beginning on October 1, 2008.

         

Offering costs: The Company classifies all        costs directly related to raising capital as deferred offering costs until the capital is        raised, at which point the costs are reclassified as an offset to equity as issuance costs.        Offering costs of $371,623, including amounts incurred during the six months ended March        31, 2007, were offset against equity during the year ended September 30, 2007.

         

Deferred financing costs: Expenditures directly        related to securing long-term financing are recorded as a deferred cost on the balance        sheet. These costs are being amortized using the effective interest method over the term of        the credit agreement. During the six months ended March 31, 2008 and the period from        inception to March 31, 2008, the Company amortized $11,266 and $27,766, respectively, of        these costs to construction in progress.

         

7

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

| **Note 1.** | **Nature of Business, Basis of Presentation and Significant                        Accounting Policies (Continued)** |
|-------------|----------------------------------------------------------------------------------------------------------------------|

Derivative instruments: The Company has entered        into derivative contracts to hedge its exposure to price risk related to forecasted soybean        oil purchases and forecasted biodiesel sales. These derivative contracts are accounted for        under Statement of Financial Accounting Standard (SFAS) No. 133,*Accounting for Derivative Instruments and Hedging        Activities*. SFAS No. 133 establishes accounting and        reporting standards for derivative instruments, including certain derivative instruments        embedded in other contracts, and for hedging activities. It requires that an entity        recognize all derivatives as either assets or liabilities in the balance sheet and measure        those instruments at fair value. If certain conditions are met, a derivative may be        specifically designated as (a) a hedge of the exposure to changes in the fair value of        a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the        exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the        foreign currency exposure of a net investment in a foreign operation, an unrecognized firm        commitment, an available-for-sale security or a foreign-currency-denominated forecasted        transaction.

         

Although the Company believes its derivative positions are economic hedges,        none have been designated as hedges for accounting purposes. Therefore, derivative        positions are recorded on the balance sheet at their fair market value, with changes in        fair value recognized in the statement of operations. The Company recognized a net loss of        $46,652 and $119,530, respectively, during the three and six month periods ended March 31,        2008. There was no derivative activity in the period ended March 31, 2007.

         

Revenue recognition: Revenue from the        production of biodiesel and related products is recorded upon transfer of the risks and        rewards of ownership and delivery to customers and the selling price is fixed and        determinable. Revenue from federal incentive programs is recorded when the Company has sold        blended biodiesel and satisfied the reporting requirements under the applicable program.        When it is uncertain that the Company will receive full allocation and payment due under        the federal incentive program, it derives an estimate of the incentive revenue for the        relevant period based on various factors including the most recently used payment factor        applied to the program. The estimate is subject to change as management becomes aware of        increases or decreases in the amount of funding available under the incentive programs or        other factors that affect funding or allocation of funds under such programs. Interest        income is recognized as earned.

         

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

         

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

         

Income (loss) per unit: Income (loss) per unit        has been computed on the basis of the weighted average number of units outstanding during        each period presented.

         

Organizational and start-up costs: The Company        expenses all organizational and start-up costs as incurred.

         

8

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

| **Note 1.** | **Nature of Business, Basis of Presentation and Significant                        Accounting Policies (Continued)** |
|-------------|----------------------------------------------------------------------------------------------------------------------|

Fair value of financial instruments: The        estimated fair value of financial instruments was determined by reference to various market        data and other valuation techniques as appropriate. The carrying amounts of cash and cash        equivalents, due from broker, restricted cash in escrow, accounts payable and accrued        expenses approximate fair value because of the short maturity of these financial        instruments. The carrying value of the debt also approximates fair value as the interest        rate reprices when market interest rates change. The fair values of the derivative        instruments are based on quoted prices in active exchange-traded or over-the-counter        markets.

 

| **Note 2.** | **Members' Equity** |
|-------------|---------------------|

The Company        was formed on January 5, 2006 to have a perpetual life. The Company has one class of        membership units with each unit representing a pro rata ownership interest in the        Company’s capital, profits, losses and distributions. Income and losses are allocated        to all members in proportion to units held.

 

The Company        was initially capitalized by founding members who contributed a total of $50,000 in        exchange for 200 units at $250 per unit. Subsequently, a total of 1,553 units valued at        approximately $333 per unit for a total of $517,666 were issued to three of the founding        members and nineteen additional members. The Company was further capitalized by additional        seed capital members who contributed an aggregate of $3,507,500 in exchange for 7,015 units        at $500 per unit. These units were issued under a private placement memorandum in which the        Company offered a maximum of 10,000 units at an offering price of $500 per unit for a total        offering of $5,000,000. On March 31, 2006 the private placement memorandum for the        seed capital offering was closed and the seed capital subscription agreements were accepted        and approved.

 

On June 22,        2006, the Company issued an Iowa registered offering of membership units which was amended        to increase the offering size on September 7, 2006. The intrastate offering was set for a        minimum of 31,000 membership units up to a maximum of 40,000 units for sale at $1,000 per        unit, for a minimum offering amount of $31,000,000 and a maximum offering amount of        $40,000,000. The minimum purchase requirements were 10 units for a minimum investment of        $10,000. On October 16, 2006 the Company accepted 34,294 units at $1,000 per unit. There        were six additional closings occurring on various dates between November 20, 2006 and June        15, 2007 in which an additional 4,047 units were accepted at $1,000 per unit.

 

9

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

| **Note 3.** | **Long-Term Debt** |
|-------------|--------------------|

On January        30, 2007, the Company entered into a $36,500,000 Master Loan Agreement (credit agreement)        consisting of a $12,000,000 revolving-term loan and a $24,500,000 construction-term loan        was used for working capital and to complete the biodiesel project. The construction-term        loan consists of two phases: a “start-up phase” during which the Company makes        periodic requests for fund advances to meet construction obligations and at the completion        of construction and payment of construction costs, a "term loan phase" where the loan will        convert to a “senior debt instrument”. The construction loan is secured by        substantially all the assets of the Company and is payable in quarterly installments of        $912,500 beginning on May 20, 2008. The revolving term loan may be drawn down and repaid        from time to time during the term of the credit agreement, but the availability will be        reduced by $2,000,000 semi-annually beginning on November 1, 2015. The credit agreement        also provides for a special annual payment equal to 75% of “free cash flow” as        defined in the agreement, limited to a total payment $2,000,000 annually and $7,000,000 in        aggregate, provided that the payment does not result in a covenant default. At March 31,        2008 $260,378 was outstanding under the revolving-term loan credit agreement and        $17,539,646 was outstanding under the construction-term loan credit agreement.

 

The Company        shall select one or more of the following interest rate options under the credit        agreement:

         

Agent base rate: A variable interest rate equal        to the rate established by the Agent plus three-quarters of one percent (0.75%) per        annum.

         

Quoted rate: A fixed rate per annum to be        quoted by the Agent in its sole discretion in each instance.

         

LIBOR: A fixed rate per annum equal to London        Inter Bank Offered Rate at the date selected plus 3.25%.

         

Interest shall be calculated by multiplying the actual number of days        elapsed in the period for which interest is being calculated based on a 360-day        year.

         

At March 31, 2008 all borrowings were at the Agent Base Rate option,        6.00%.

         

The loans        are subject to affirmative and negative covenants outlined in the credit agreement.        Significant covenants are as follows:

         

Working capital: Company will have at the end        of each period for which financial statements are required an excess of current assets over        current liabilities of not less than $11.0 million at the earlier of start-up or        December 16, 2007. The Company was not in compliance with this covenant as of March        31, 2008.

         

Debt service coverage ratio: Company will have        at the end of each fiscal year effective with fiscal year ending September 30, 2008, a debt        service coverage ratio for the year of not less than 1.25:1.00.

         

Net worth: Prior to the initial loan advance,        the Company must secure evidence of funding from invested equity capital of not less than        $41,075,000. Thereafter, the Company is continuously required to maintain a net worth of        not less than $39,500,000, increasing to $41,075,000 effective at fiscal year ending 2008        and continuously thereafter. The Company was not in compliance with this covenant as of        March 31, 2008.

 

10

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

| **Note 3.** | **Long-Term Debt (Continued)** |
|-------------|--------------------------------|

Capital expenditures: During any fiscal year of        the Company after operations have commenced, the Company will not, without prior consent of        the lender, expend more than $500,000 on capitalized expenditures.

         

The credit agreement also provides for an event of default if the lender        determines that there has been a material adverse change in the Company’s financial        condition, results of operations, or ability to perform its obligations under the        agreement. In November 2007 the Company was informed by its lender that its credit        agreement is considered to be a distressed loan subject to restructuring. As a result, all        of the debt has been classified as current in the financial statements.

         

In June 2006, the Company entered into a financial assistance contract        with the Iowa Department of Economic Development whereby the Company was awarded a $100,000        forgivable loan and a $300,000 non-interest bearing loan. The Company is obligated to        create 36 full-time equivalent jobs, with 30 of the created jobs having starting wages,        including benefits, that meet or exceed $16.09 per hour with an average rate per hour        including benefits of $19.47. The Company was also required to execute promissory notes        which outline the repayment obligations and terms and conditions of each loan. As of March        31, 2008, $390,000 was outstanding. The agreement provides for a monthly principal payment        of $5,000 per month.

 

| **Note 4.** | **Related Party Transactions** |
|-------------|--------------------------------|

The Company        paid a consulting company owned by a member for project coordination, administration and        consulting services, under the terms of an unwritten, month-to-month consulting        arrangement. The member is also the President and Chairman of the Board of Directors. From        inception through March 31, 2008, the Company had incurred consulting charges of        approximately $72,300 under this agreement. No costs were incurred under the agreement        during the three months and six months ending March 31, 2008. For the three and six months        ending March 31, 2007, $66,000 was incurred under the agreement.

 

In March        2006, the Company entered into a consulting agreement with an entity, owned by a member of        the Company, to serve as the Company’s project consultant. The fee for the services        was $3,200 per month, plus bonuses for reaching certain milestones relative to the signing        of the contract, completion of the business plan, loan commitment, loan closing and the        starting of the equity offering. The consulting agreement ended in 2007. Since inception,        the Company incurred consulting charges totaling $225,059 under the agreement. The total        included $50,000 of services exchanged for 50 units issued to the consulting company and        $40,000 of fees that were capitalized as deferred financing costs. During the three months        ended March 31, 2008 and 2007 the consulting expense under the contract was none and        $3,200, respectively. During the six months ended March 31, 2008 and 2007 the consulting        expense under the contract was none and $12,800, respectively.

 

 

11

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

| **Note 5.** | **Benefit Plans** |
|-------------|-------------------|

On        September 17, 2007 the Company adopted a 2007 Unit Appreciation Plan whereby a committee of        the Board of Directors can identify certain board members and employees to receive awards        under the plan in the form of unit appreciation rights. The rights vest over a four year        period and provide for a cash payment equal to the increase in the fair market value of the        units since the grant date. The awards are payable at the later of the recipient attaining        age 65 or the recipient’s termination date. The plan also provides for a single lump        sum payment in the event of disability, death or a change in control. On September 18,        2007, five units were issued under the plan for which the expense was        insignificant.

 

On        September 30, 2007 the Company also adopted a nonqualified deferred compensation plan for        its directors whereby they may elect to defer payment a portion of their director        fees.

         

| **Note 6.** | **Commitments and Contingencies** |
|-------------|-----------------------------------|

The Company        is party to a design-build agreement with REG Construction & Technology Group, LLC,        formerly known as, REG Construction Services, LLC, for construction of the biodiesel plant        for $57,238,000 due in monthly progress payments. The agreement provides for a 5% retainage        to be withheld from each invoice. As of December 31, 2007 the contract was increased by        $1,390,095 of change orders and the Company had made payments totaling $54,128,177 to the        contractor. The total remaining commitments are expected to be paid in 2008. (See Note        8.)

 

On December        15, 2006 the Company entered into two put option agreements whereby the sellers can require        the Company to purchase property adjacent to the plant. One agreement provides for a        purchase price of $120,750 plus 105% of the cost of any improvements or additions made to        the property prior to the exercise of the option and the other provides for a purchase        price of $236,250. The options expire two years after the announced date of operation of        the biodiesel facility. If the options expire unexercised they will become effective again        upon the expansion of 25% of the initial capacity of the plant or upon the construction or        operation of any new separate facility. The Company paid $5,000 for each option and        believes that the purchase price approximated the fair market values of the property at the        dates of the agreements.

 

In May        2006, the Company entered into an option agreement which it subsequently exercised to        purchase its current property. Part of the agreement also provided the Company the option        to purchase additional adjacent land for $12,500 per acre in ten acre increments. The        option covers approximately 44 acres and will expire in May 2011.

 

In        September 2006, the Company executed an agreement with a natural gas company to        provide the natural gas required by the Company for a period commencing on August 1, 2007        and continuing for a period of fifteen years. The contract was amended in October 2006 to        delay the start date until November 1, 2007. The Company will pay a monthly delivery charge        plus the applicable maximum rates and surcharges under the applicable rate schedule on file        with the Iowa Commerce Commission for the gas that it uses. The contract reserves pipeline        capacity of 984 dekatherms/day, at a cost of approximately $15,000 per month. The Company        has hired a broker to market the excess pipeline capacity.

 

12

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

                         

| **Note 7.** | **Major Customer** |
|-------------|--------------------|

On        September 26, 2006, the Company entered into a Management and Operational Services        Agreement (management agreement) with Renewable Energy Group, LLC. Under the management        agreement Renewable Energy Group will place the general and operations managers, acquire        feedstocks and basic chemicals necessary for the operation of the facility, and perform the        administrative, sales and marketing functions for the Company. In exchange for these        services, the Company has agreed to pay Renewable Energy Group a flat monthly fee ("flat        fee") and a per-gallon rate fee ("rate fee"). For the first month in which the        Company’s biodiesel is produced and sold, and for six months thereafter (the "initial        period"), it will pay a flat fee of $112,500, plus a $0.0175 rate fee for each gallon of        biodiesel produced. For the first month after the initial period the Company will pay a        flat fee of $172,500, plus a $0.0175 rate fee for each gallon of biodiesel produced. The        flat fee and rate fee are adjusted beginning in the month following the first anniversary        of the Company’s producing biodiesel for sale and annually for such month thereafter        according to a complex formula based on movement in theConsumer        Price Index for All-Urban Consumers, U.S. City Average, All        Items, published by the U.S. Department of Labor. In addition to        the flat fee and monthly fee, the management agreement also provides for the payment to        Renewable Energy Group of a yearly bonus equal to 6% of the Company’s net income. The        management agreement has an initial term ending December 31, 2010 and it will continue        thereafter unless either party gives written notice to the other of a proposed termination        date at least twelve months in advance of the proposed termination date. On December 1,        2007, the Company and Renewable Energy Group amended the management agreement to reduce the        monthly fee to the amount of the compensation costs (including benefits) of the General        Manager and Operations Manager while the plant is idle. Sales of biodiesel and glycerin to        Renewable Energy Group for the three and six month periods ended March 31, 2008 were        $3,586,171. Expense incurred under the agreement was $58,574 during the three and six month        periods ended March 31, 2008. The related accounts receivable from Renewable Energy Group        as of March 31, 2008 were $479,017.

 

| **Note 8.** | **Going Concern** |
|-------------|-------------------|

The        accompanying financial statements have been prepared assuming that the Company will        continue as a going concern. Through March 31, 2008, the Company was in the development        stage, has undertaken significant borrowings to finance the construction of its biodiesel        plant and has experienced a significant increase in the cost of soybean oil which is        currently the primary ingredient in the Company’s planned production of biodiesel. As        a result of the high cost of soybean oil, the Company suspended plant operations in        December 2007 after initial testing and production start-up. If the prices remain at the        current levels, the Company can not produce its product at a profit. In November 2007, the        Company was informed by its lender that its credit agreement is considered to be a        distressed loan under which the lender is unwilling to make any further advances pending        renegotiation and restructuring. In addition the credit agreement allows the lender to        consider the Company in default of the credit agreement at any point for poor financial        performance. If the credit agreement is not restructured or is considered to be in default,        the lender has the option of accelerating the unpaid loan balance. These liquidity issues        raise substantial doubt about whether the Company will continue as a going        concern.

 

The Company        has been in communication with its lender as to the steps it needs to take to resolve this        situation, but there can be no assurance that the lender will continue to finance the        Company. The Company’s ability to continue as a going concern is dependent on the        Company’s ability to comply with the credit agreement covenants and the lender's        willingness to waive any noncompliance, together with its ability to produce biodiesel at a        profit.

 

As of March        31, 2008, Company was not in compliance with its covenant that it have at the end of each        period for which financial statements are required an excess of current assets over current        liabilities of not less than $11.0 million at the

 

13

 

----

**East Fork Biodiesel, LLC**

**(A Development Stage Company)**

 

**Notes to Unaudited Financial Statements**

----

| **Note 8.** | **Going Concern (Continued)** |
|-------------|-------------------------------|

         

earlier of        start-up or December 16, 2007. Also, as of March 31, 2008, the Company was not in        compliance with this covenant that, prior to the initial loan advance, it must (a) secure        evidence of funding from invested equity capital of not less than $41,075,000, and (b)        thereafter, continuously maintain a net worth of not less than $39,500,000, increasing to        $41,075,000 effective at fiscal year ending 2008 and continuously thereafter. These        conditions impose significant liquidity issues for the Company. In order to address these        issues the Company has implemented or is exploring various alternatives including delaying        regular plant operations until the prices stabilize, exploring partnerships with other        entities, investigating the use of different oil sources, investigating alternative uses        for the plant, negotiating with REG Construction & Technology Group, LLC to accept        2,000 membership units as payment for $2,000,000 due under the design-build agreement,        obtaining additional financing or raising additional capital.

 

| **Note 9.** | **Subsequent Event** |
|-------------|----------------------|

On May 1,        2008, $2,349,217 of the construction obligation was paid to REG Construction &        Technology Group, LLC by a draw on the construction-term loan and $2,000,000 was paid        through the issuance of 2,000 membership units to such entity.

 

14

 

----

| **Item 2.** | **Management’s Discussion and Analysis or Plan of                        Operation.** |
|-------------|---------------------------------------------------------------------------------------------|

 

We are a        development stage company, devoting substantially all of our efforts to establishing a new        business. However, because of continuing adverse economic conditions explained below, our        planned principal operation of our plant has not commenced. Our plant was substantially        complete and we started production on December 5, 2007 to verify the production        capabilities of our new plant and produced in the aggregate approximately 1.1 million        gallons of biodiesel and glycerin. We have subsequently sold most of the test-phase        inventory, and, for the three months ended March 31, 2008, sales of biodiesel and glycerin        and federal incentives payments totaled approximately $4,576,929. Projected future sales of        our remaining inventory are estimated to be approximately $70,000. However, in response to        the continuing increase in the prices of our primary raw material, soybean oil, which is at        or near record levels, coupled with the comparatively slower increases in diesel fuel        prices, we believe then that it was not in our best interest to begin regular operation of        our plant until economic conditions improve, nor have conditions improved to the point to        allow us to begin our planned operation of our plant.

 

Our        independent registered public accounting firm has raised doubts about our ability to        continue as a going concern. See Note 8 in Item 1, “Financial Statements”,        above.

 

Our Plan        of Operation is provided in addition to the accompanying financial statements and notes to        assist readers in understanding our financial condition and cash flows.

 

The        various sections of this Plan of Operation contain a number of forward-looking statements.        Words such as “expects,” “goals,” “plans,”        “believes,” “continues,” “may,” and variations of such        words and similar expressions are intended to identify such forward-looking statements. In        addition, any statements that refer to projections of our future financial performance, our        anticipated growth and trends in our businesses and other characterizations of future        events or circumstances are forward-looking statements. Such statements are based on our        current expectations. However, there may be events in the future that we are not able to        accurately predict and/or over which we have no control. The risk factors listed in        Amendment No. 3 to our Registration Statement on Form 10 filed on April 29, 2008, other        risk factors about which we may not be aware, as well as any cautionary language in this        report, provide examples of risks, uncertainties and events that may cause our actual        results to differ materially from the expectations we describe in our forward-looking        statements.

 

***Plan of Operations***

 

The        prices of the various commodities we use to make biodiesel represent the majority of our        production costs. Prices have risen dramatically – most notable is soybean oil and        methanol (which is used to a much lesser degree than soybean oil). Since March 2007,        soybean oil has increased from $0.30 per pound to over $0.62 per pound delivered to Algona        in March 2008, an increase of more than 100%. Since March 2007, methanol has increased from        $1.10 per gallon to $1.70 per gallon delivered to Algona on May 1, 2008, a 64% increase.        The market price for biodiesel has increased but to a lesser degree than our commodity        costs. Since March 2007, the market price for biodiesel has increased from $3.20 per gallon        to over $4.20 per gallon in March 2008, a 38% increase. We cannot predict when refined        soybean oil prices will allow us to operate the plant profitably, nor can we be assured at        such time that the market price for biodiesel will allow us to operate the plant        profitably. We estimate the lead time needed to restart our plant is six to eight        weeks.

 

We have        incurred an accumulated net loss of $3,112,380, from our inception in January 2006 through        March 31, 2008. In the three months ended March 31, 2008 our loss was $1,826,877. The        reasons for the increase in our loss during the three month period were due to the        following:

|   | **•** | Sales (and related federal incentives) for the quarter were                        $4,576,929, all of which relate to product that was produced in December                        2007. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

15

 

----

|   | **•** | In December 2007, construction of our plant was completed                        and as a result we started to depreciate the assets and discontinued the                        capitalization of the construction period interest expense. Depreciation                        and interest expense for the 3 months ended March 31, 2008 were $964,212                        and $381,413, respectively. We expect that monthly depreciation will be                        approximately $321,000 per month for the remainder of 2008. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | General and administration expenses primarily consisted of                        professional fees incurred in connection with our registration statement on                        Form 10 and ongoing bank negotiations, payroll and                        insurance.             |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Since the majority of our invested cash had been used to                        finance the construction of the plant, interest income for the quarter was                        only $11,243. Since inception we have earned $1,275,793 of interest income.                        However, since the proceeds have been expended for plant construction, we                        anticipate 2008 interest income will be approximately $40,000. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We incurred an additional $46,652 loss on our derivative                        instruments. We have entered into derivative contracts to hedge our                        exposure to price risk related to forecasted soybean oil purchases and                        forecasted biodiesel sales. These derivative contracts are accounted for                        under Statement of Financial Accounting Standard (SFAS) No. 133,                        Accounting for Derivative Instruments and Hedging Activities. SFAS                        No. 133 establishes accounting and reporting standards for derivative                        instruments, including certain derivative instruments embedded in other                        contracts and for hedging activities. It requires that an entity recognize                        all derivatives as either assets or liabilities in the balance sheet and                        measure those instruments at fair value. If certain conditions are met, a                        derivative may be specifically designated as a particular type of                        hedge.

                         

Although we believe our derivative positions are economic                        hedges, none have been designated as hedges for accounting purposes. We                        record derivative positions on the balance sheet at their fair market value                        based on quoted market prices, with changes in fair value recognized in the                        statement of operations. All of the derivative positions were closed during                        the quarter and there was no open exposure as of March 31, 2008. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

***Debt Financing***

 

On        January 30, 2007, we entered into a $36,500,000 senior credit agreement (credit agreement)        with Farm Credit Services of America, FLCA (Farm Credit) consisting of a $24,500,000        Construction Loan (construction loan) to complete the biodiesel project and a $12,000,000        Revolving Loan (revolving loan) to be used for working capital. We refer to the        construction loan and revolving loan collectively as the loans.

 

Our        credit agreement is secured by a mortgage and security agreement in favor of Farm Credit        creating a first lien on substantially all of our assets, including our real estate, plant,        all personal property located on our property and all revenues and income arising from the        land, plant or personal property under the credit agreement. Through May 1, 2008, we have        drawn $19,889,044 on our construction loan and $260,378 on our revolving loan. All of our        interest payments to Farm Credit through May 1, 2008 are current.

 

The        construction loan consisted of two phases: a “construction phase” during which        we make periodic requests for fund advances to meet construction obligations and a        “term loan debt phase.” The construction loan is payable in monthly interest        payments and quarterly principal installments of $912,500 beginning on May 20, 2008. The        credit agreement also provides for special annual payments, payable first on the        construction loan and, when that is paid in full, on the revolving loan, equal to 75% of        “free cash flow” (as defined in the credit agreement), limited to a total        payment of $2,000,000 annually and $7,000,000 in aggregate, provided that the annual        payment does not result in a covenant default.

 

The        revolving loan is due in full on November 1, 2017, with monthly interest payments and with        the maximum amount of the revolving loan being reduced by $2,000,000 semi-annually        beginning on November 1, 2015.

 

16

 

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The        credit agreement contains customary affirmative and negative covenants for financing of its        type. These covenants include, among others, interest rate, working capital, debt service        coverage ratio, net worth, capital expenditure and dividend payment covenants consistent        with our expected normal operations. Significant covenants are summarized below:

 

Interest rate: We may select one or more of the        following interest rate options under the credit agreement:

         

|   | **•** | Agent Base Rate: At a variable                        interest rate equal to the rate established by the Agent plus                        three-quarters of one percent (0.75%) per annum. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Quoted rate: At a fixed rate                        per annum to be quoted by our agent in its sole discretion in each                        instance. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | LIBOR: At a fixed rate per                        annum equal to London Inter Bank Offered Rate at the date selected plus                        3.25%. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

         

During start-up, only the Agent Base Rate option will be available. At March        31, 2008 the rate was 6.0%.

         

Working capital: We must have at the end of        each period for which financial statements are required an excess of current assets over        current liabilities of not less than $11.0 million at the earlier of start-up or        December 16, 2007.

         

Debt service coverage ratio: We will have at        the end of each fiscal year effective with fiscal year-end 2008, a debt service coverage        ratio for the year of not less than 1.25:1.00.

         

Net worth: Prior to the initial loan advance,        we must provide evidence of funding from invested equity capital of not less than        $41,075,000. Thereafter, we are continuously required to maintain a net worth of not less        than $39,500,000, increasing to $41,075,000 effective at fiscal year ending in 2008 and        continuously thereafter.

         

Capital expenditures: During any fiscal year of        ours after operations have commenced, we will not, without Farm Credit’s prior        consent, expend more than $500,000 on capitalized expenditures.

         

Dividend Restrictions: We may not declare or        pay dividends, make distribution of assets to our members, or retire or otherwise acquire        our membership units, except that in any fiscal year a distribution may be made to our        members of up to 40% of the net profit for such fiscal year provided that we are then and        will remain in compliance with all loan covenants, terms and conditions. Also, there is an        opportunity, as limited by the terms of the credit agreement, to make distributions in        excess of 40% of the net profit in years where a “free cash flow” payment has        been made.

 

The        credit agreement also permits Farm Credit to declare an event of default if it determines        that there has been a material adverse change in our financial condition, results of        operations or our ability to perform our obligations under the credit agreement.

 

We were        notified by letter dated November 29, 2007 that Farm Credit determined our outstanding        construction loan and revolving loan to be “distressed loans,” because of        material adverse changes in the markets for soybean oil and soybean biodiesel which        presently preclude profitable operation of our plant. As of May 1, 2008, Farm Credit had        made available to us: (1) a $19,889,044 advance against the $24,500,000 maximum of our        construction loan, and (2) $260,378 advance against the $12,000,000 maximum of our        revolving loan.

 

As of        March 31, 2008, Company was not in compliance with its covenant that it have at the end of        each period for which financial statements are required an excess of current assets over        current liabilities of not less than $11.0 million at the earlier of start-up or        December 16, 2007. Also, as of March 31, 2008, the Company was not in compliance with        this covenant that, prior to the initial loan advance, it must (a) secure evidence of        funding from invested equity capital of not less than $41,075,000, and (b) thereafter,        continuously maintain a

 

17

 

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net        worth of not less than $39,500,000, increasing to $41,075,000 effective at fiscal year        ending 2008 and continuously thereafter. These conditions impose significant liquidity        issues for the Company.

 

Our        intention prior to receipt of the November 29, 2007 letter from Farm Credit had been to        draw the maximum amount of the construction loan, pay all remaining construction expenses,        and have approximately $5,000,000 of available cash to fund, if needed, an extended        shutdown of the plant pending changes in market conditions. Our intention had been to use        the remaining unusedrevolvingloan to fund        purchases of soybean oil and other raw materials in any periods where the plant could        operate profitably.

 

As a        result of Farm Credit’s classification of our loans as “distressed        loans”, Farm Credit has been unwilling to make further advances (except as provided        under the Construction Payment Agreement discussed below) pending renegotiation of the        terms of the loans both to restrict the amount of credit available to us and to make        further credit advances subject to Farm Credit’s approval. Farm Credit is seeking to        limit access to the constructionloan to payment of the remaining        construction bills without making a further advance of cash to us that we could use for the        funding of shutdown expenses. Also, Farm Credit is seeking to impose further restrictions        on advances under therevolvingloan that would        limit such advances to the sole discretion of Farm Credit.

 

We have        been engaged in discussions and negotiations with Farm Credit since receipt of its November        29, 2007 “distressed loans” notification and have provided to Farm Credit our        strategic plan. We are in continuing negotiations with Farm Credit regarding future loan        advances and loan repayment terms that would allow us to successfully execute our strategic        plan. To date our negotiations with Farm Credit have not yet resulted in a definitive        agreement, and our negotiations continue. However, as more specifically described in the        following paragraph, on May 1, 2008 we consummated the transactions contemplated by an        Agreement regarding Payment for Construction (the Construction Payment Agreement) with REG        Construction and & Technology Group, LLC, formerly known as REG Construction Services,        LLC (REG Construction) and Farm Credit in which Farm Credit agreed to fund an additional        $2,349,217 under the construction loan.

 

On March        24, 2008, REG Construction filed of record a mechanic’s lien against our biodiesel        plant alleging an outstanding unpaid bill for construction at our plant under our        Design-Build Agreement with REG Construction in the amount of $4,349,217. The Construction        Payment Agreement provides for satisfaction of this mechanic’s lien through Farm        Credit’s advance of $2,349,217 under the construction loan and through REG Ventures,        LLC, an affiliate of REG Construction, acquiring 2,000 of our units, valued at $1,000 per        unit, in lieu of cash payment of $2,000,000 for the construction services. REG Construction        has received the $2,349,217 payment and the Company has issued 2,000 units to REG Ventures,        LLC. There remains outstanding an additional $289,009 owing to REG Construction under the        Design-Build Agreement. As part of this negotiated agreement, Farm Credit will advance        $289,009 to us under the construction loan at such time as we request to be paid to REG        Construction.

 

***Strategic Plan***

 

We have        been reevaluating our business plan in response to the harsh financial environment,        including consideration of the following initiatives to ensure our survival and        eventual profitability:

 

|   | **•** | production initiatives; |
|--------|------------|-------------------------|

|   | **•** | use of different oil sources and increasing the value of                        co-products; |
|--------|------------|----------------------------------------------------------------------------------------------|

|   | **•** | partnerships with other entities; |
|--------|------------|-----------------------------------|

|   | **•** | alternative plant use; and |
|--------|------------|----------------------------|

|   | **•** | securing funds to cover expenses. |
|--------|------------|-----------------------------------|

 

We        believe the best long-range alternative is to secure feedstock for biodiesel plants that        does not compete with food oils. We believed that soybean oil, although food oil, would        provide a bridge to the non-food oils.

 

18

 

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However,        the recent high prices for soybean oil highlight the need for us to use non-food oil, which        has become urgent under the current market conditions.

 

| What follows is a summary of our strategic initiatives for                        the balance of 2008. |
|--------------------------------------------------------------------------------------------------------|

 

1.   Production        Initiatives. Our goal is to operate profitably. This is a        difficult proposition considering current and forecasted market conditions. Our decision to        run the plant will be predicated on our ability to generate positive cash flow margins. We        believe we can achieve that margin when the per gallon spread between biodiesel and soybean        oil is $0.30 to $0.35. It is, however, difficult to lock in back-to-back margins in the        spot market. Forward pricing is difficult to achieve. Based on recommendations from our        consultant, Renewable Energy Group, we will attempt to capture margin opportunities. We        will seek to lock in either soybean oil or biodiesel/heating oil opportunities when they        present themselves. We plan to use cash contracts to lessen the capital constraints of        option or futures positions when feasible.

 

We see indications that soybean oil market prices may offer an opportunity        to operate our plant profitably sometime in the June 2008 to September 2008 time frame. Our        belief is based on several factors that should increase the supply of soybeans and/or        soybean oil to the market and relieve some of the pressure on the current near or record        high prices for each commodity:

 

|   | **•** | *The Battle for Acres Fueling Today’s Higher                        Prices Should Subside**.*The number of United States acres planted for soybeans and                        alternative crops will be known in June 2008. This information should                        relieve the recent constant bidding of commodity prices higher that we have                        seen in the market. A relief in soybean prices should provide relief to                        soybean oil prices. Current USDA projections are that an additional 7.4                        million acres of soybeans will be planted during Spring 2008. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *South America Harvest.*The total amount of soybean production from South America                        will be known in May of 2008, when the country’s soybean harvest is                        completed. There are indications from crop reporting services that the                        South American soybean harvest is large. Just removing the uncertainty of                        South America’s harvest should help relieve price                        pressure. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *Lower Biodiesel Production from Soybean                        Oil.*Based on our plant’s size and                        design, we believe that we are a very efficient plant. If it is difficult                        for a plant of our size to generate positive cash flow margins running                        soybean oil in the current environment, we do not believe that many other                        biodiesel plants are able to generate positive cash flow margins either.                        F.C. Stone, our commodity trader, believes that about 20% of the U.S.                        soybean oil produced in 2007 was used for biodiesel production. If most of                        this production is not running in today’s market, there should be a                        commensurate reduction in demand for soybean oil. The increase in soybean                        oil supply should lead to softer soybean oil prices. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *Frequently, High Prices Cure High                        Prices*. A commodity’s high price                        frequently causes users of that commodity to either find alternate lower                        cost products that can be substituted or encourage users to use less of the                        commodity. These actions lead to a lower demand for the commodity. Lower                        demand leads to lower prices. These actions are not instantaneous but occur                        over some period of time. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *International Pricing                        Pressures*. Recently, China announced efforts                        to curb higher soybean prices. China is the world’s largest importer                        of soybeans. China is known to be importing soy oil in connection with the                        Beijing 2008 Olympic Games (August 8-24, 2008). When that demand pressure                        is relieved, there should be lower international demand. The lower demand                        should lead to lower prices for soy oil. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Also, we believe that the recent trends for methanol and glycerin prices        will improve the likelihood that we can operate our plant profitably.

 

|   | **•** | *Methanol.*Methanol                        prices have more than doubled since mid-2007 as a result of a shortage of                        natural gas caused the world’s largest methanol producer to cut                        production. The high prices have caused some idled methanol plants to be                        brought back on stream to relieve the shortage. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

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Although contract quoted prices for methanol have been in the $2.60 per        gallon range, recent spot prices have been as low as $2.05 per gallon. As of May 1, 2008,        the market price for methanol has dropped to $1.70 per gallon. We expect further decreases        in methanol prices to occur during the summer of 2008 and beyond as supply comes more into        balance with demand. For us, this $0.90 price reduction in methanol represents a $0.09        lower production cost for every gallon of biodiesel we produce.

|   | **•** | *Glycerin.*We produce                        about one pound of glycerin for each gallon of biodiesel. Glycerin prices                        have steadily climbed as export demand has increased. During the Summer of                        2007, glycerin was selling for about $0.03 per pound. In February 2008, the                        market price of glycerin was $0.20 to $0.25 per pound. Our soy oil-based                        glycerin commands a higher price than animal fat generated glycerin. In May                        2008, we expect to be able to sell glycerin for about $0.25 to $0.30 per                        pound. For comparison, we sold our soy-based glycerin produced during our                        December 2007 plant test phase at $0.30 per pound. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We cannot predict how commodity prices will fluctuate in the        future.

         

During the period when the plant is idle, we will monitor monthly expenses        to ensure they are consistent with our planned expenses.

         

We have shifted our focus to the initiatives discussed below, since the soy        oil market may not give us the opportunity to generate positive cash flow margins in the        short-term.

         

2.   Different Sources of Oil and        Co-product Value Improvement. At our plant, we can process        alternative feedstocks, such as corn oil and animal fats. Each of these feedstocks will        need to be refined and will require additional capital investment to adapt our plant to        utilize each alternative feedstock. We are uncertain about the amount of such investment        and our ability to finance such additional investment given our current financial        circumstances. We will monitor each of these alternatives and will act when they become        profitable for us to run in our plant.

 

|   | **•** | *DDGS Corn Oil*.The most promising economical alternative to soybean oil is                        corn oil extracted from dried distillers grains with solubles, known as                        DDGS. The cost saving over soybean oil could be as much as $0.25 per                        gallon. We believe that corn oil, extracted from DDGS from ethanol plants,                        is currently the closest oil to being economically available. Several                        companies are involved with this extraction, but large commercial                        quantities that could be run in our plant are expected to be 8 to 12 months                        away. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

Our plant is located among many ethanol plants and more are planned. A 100        million gallon per year ethanol plant can produce about 7 to 10 milliongallons of extracted        DDGS corn oil per year. We are working to define the best technology and cost to acquire it        so that we can run this type of corn oil in our facility. Depending on the technology, it        will take from 8 to 14 months to get the facilities installed. This should be about the        time when DDGS corn oil becomes more available. Whether we will have the financial        capability to acquire the necessary technology is uncertain. See “Debt        Financing” herein above and “Available Cash and Cash Requirements” herein        below.

         

|   | **•** | *Refined Palm Oil*.Our plant can process refined palm oil. Under current                        market prices, the prices of refined palm oil delivered to our plant and                        refined soybean oil are essentially the same. Palm oil may become                        profitable for us to use if palm oil prices decline relative to soybean oil                        prices. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | *Animal Fat*. We are                        exploring the feasibility of purchasing pretreated animal fat. Due to its                        higher gel point, biodiesel produced from animal fat or animal fat blends                        is currently selling at a discount to soy-based biodiesel. If we use                        pretreated animal fat, it will be as a blend to lower the over all cost of                        the soybean oil. There is currently a significant amount of volatility in                        both the animal fat discount and the cost of the inputs. However, to the                        extent that the cost savings exceed the discount in the sales price of the                        blended biodiesel, our gross margin would improve. We may be in a position                        to use this product in three to four months. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   | **•** | *Algae Oil*.We have been approached by a company with algae oil                        technology to provide algae oil as a feedstock for use at our plant. We                        have signed a letter of intent to purchase their algae oil when it is                        available. The cost reduction of algae oil over soybean oil is estimated to                        be 30%. However, availability may be a year or more away, according to                        knowledgeable estimates. We are also in contact with two other companies                        that are developing algae oil. We believe that the availability of                        commercial quantities of algae oil for our plant is about 8 to 12 months                        away, but we also know that at least one company announced that they have                        algae oil in production. Algae oil is a non-food oil and its per acre yield                        is much larger than that of soybean oil. Some reports indicate algae oil                        may yield between 7,500 to 15,000 gallons per acre compared to a yield of                        approximately 80 gallons per acre from soybeans. Some in the biodiesel                        industry view algae oil as the best source of oil. It can be produced in                        very large quantities, is economical to produce, is easy to grow, is                        renewable and it is a non-food oil. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | *Plant Modifications.*Because the supply of                        pretreated fats and oils are limited, we are evaluating raising additional                        capital and modifying the plant so that it can run untreated fats and oils,                        such as the DDGS and animal fats discussed above. The modification could                        take the form of adding pretreating facilities or changing the catalyst                        used. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|  | P  | Pretreating Facilities. There                        are three types of technologies that we could use to pretreat: mechanical                        extraction, acid extraction and esterification. These systems vary in cost                        from about $3,000,000 up to $10,000,000 for our plant. The esterification                        converts all of the free fatty acid (FFA) present in the raw feed, thereby                        allowing most of the feedstock purchased to be converted to biodiesel. For                        the others, the FFA is extracted and has to be sold at a low                        value. |
|--|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | P  | Catalyst Change. We are working                        with three companies that have technology that would allow us, with minor                        changes to our plant, to utilize a different catalyst that permits running                        untreated fats and oils. If we are able to use any of these technologies,                        we would not have to install the pretreatment facilities and could possibly                        gain reductions in the chemical cost of the materials used to produce                        biodiesel. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | *Improve Value of Co-Products.*We are in discussions with a company whose technology may                        allow us to upgrade our co-product, glycerin, to higher value chemicals. If                        the technology proves out, we will first have the products made for us                        under a toll arrangement and will decide at a later date whether or not to                        bring that production in-house. Some of these higher value products are                        selling for more than $5.00 per pound compared to the approximate $0.30 per                        pound that we are currently receiving. These discussions are in a                        preliminary stage but we are actively investigating this                        technology. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

3.   Explore        Partnerships. We will attempt, through partnerships, to establish        link to soybean oil, corn oil, algae oil or other feedstocks to provide better access to        the raw materials we consume and to seek more stable pricing. These partnerships could be        in one or more forms, including, but not limited to, merger, sale of our assets, sale of        our membership interests or joint ventures. However, none of these initiatives has yet        moved beyond a preliminary discussion stage.

         

4.   Alternative Use for        Plant. We are exploring the possibility of using the plant to        refine glycerin. These discussions are in the early stage. Also, we are exploring leasing        our tanks to store crude soybean oil while our plant is idle.

         

A biodiesel plant is basically a soap-making plant except that steps have        been taken to prevent soap formation. We could convert to the manufacture of soap and soap        stock. We have not yet examined this alternative to know if it is a viable        option.

 

 

21

 

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***Available Cash and Cash Requirements***

         

As of        April 30, 2008, we have current assets of approximately $1.8 million with which we can fund        continued plant shutdown as well as required Farm Credit principal and interest payments        through May 31, 2008. If Farm Credit would agree to deferral of the principal payment of        $912,500 due May 20, 2008, we project that we could fund plant shutdown as well as Farm        Credit interest payments until August 20, 2008, when another principal payment of $912,500        is due to Farm Credit. However, there is no assurance that Farm Credit will defer any        principal payments.

 

If we        are unable to reach mutually acceptable terms with Farm Credit regarding future credit        availability and loan repayment terms, we will have to resort to one or more of the        following:

 

|   | **•** | find replacement lenders, the availability of which is                        uncertain in the current market conditions, |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

|   | **•** | sell the plant and pay off the loans to Farm                        Credit, |
|--------|------------|-----------------------------------------------------------------------------|

|   | **•** | raise additional funds from an investor or investors to pay                        Farm Credit, the availability of which is uncertain in the current market                        conditions and, depending on the circumstances, may result in additional                        dilution to our members, |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | sell our assets or merge with another entity, or |
|--------|------------|--------------------------------------------------|

|   | **•** | seek bankruptcy court relief including seeking                        court-mandated refinancing terms with Farm Credit. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------|

 

Our        preference and goal is to accomplish a mutually agreeable restructuring of our loans with        Farm Credit and avoid resorting to bankruptcy court relief. To date our negotiations with        Farm Credit have not resulted in any substantial progress, and we remain uncertain as to        the likely outcome of our negotiations with Farm Credit. However, in the absence of terms        and lending arrangements which would allow us to either operate the plant as market        conditions permit or to shutdown the plant as market conditions require, we may be required        to resort to bankruptcy court relief.

 

We        cannot predict the outcome of our negotiations with Farm Credit.

 

***Plant and Equipment***

 

We do        not expect to purchase any plant and significant equipment during the next 12 months,        unless we are able to obtain additional capital. If additional capital is obtained, we        would then adapt our plant to utilize an alternative feedstock. See “Strategic        Plan” hereinabove. As discussed above, if we are unable to reach mutually acceptable        terms with Farm Credit regarding future credit availability, then we may have to sell some        or all of our plant and equipment.

 

***Research and Development***

 

We do        not conduct any research and development activities associated with producing biodiesel or        glycerin. However, as part of our strategic plan submitted to Farm Credit, we are        investigating our ability to process different oils and our ability to make other uses of        our plant.

 

As noted        above, we believe a long-range alternative is to secure feedstock for biodiesel plants that        does not compete with food oils. We believed that soybean oil, although a food oil, would        provide a bridge to the non-food oils. However, the recent high prices for soybean oil        highlight a need for us to use non-food oil, which has become urgent under the current        environment.

 

We are        seeking possible alternate sources of oil. We believe that DDGS corn oil extracted from        DDGS by ethanol plants is currently the closest oil to being economically available.        Several companies are involved with this extraction, but large commercial quantities that        could be run in our plant are expected to be 8 to 12 months away. We are alsoin contactwith two companies that are developing        biodiesel based on algae oil. The availability of commercial quantities of algae oil is        expected to be at least one to two years away.

 

22

 

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***Changes in Employment***

 

We        estimate that normal operation of a plant of our size would require 36 full-time employees.        We believe five full-time employees, together with our General Manager and Operating        Manager furnished under our Management Agreement, will be sufficient to maintain an        idle plant staffed with a minimal crew to prevent damage to the plant and our business.        When market conditions permit us to operate the plant profitably, we will need to staff        with temporary workers furnished to us by Renewable Energy Group until we are able to hire        the 36 full-time employees we estimate are needed for normal operation of our plant. For        the two-month period needed to hire and train our own employees, we estimate the cost of        these temporary workers will be approximately $50,000 less than the compensation and        benefits of the payroll cost of 36 full-time employees, as we will not need all of the 36        positions to be filled for start-up and training. We estimate the lead time needed to        restart our plant is six to eight weeks.

 

***Off-balance Sheet Arrangements***

 

We have no        off-balance sheet arrangements.

 

| **Item 3.** | **Controls and Procedures.** |
|-------------|------------------------------|

 

Evaluation of Disclosure Controls and        Procedures. Based on management’s evaluation (with the        participation of our principal executive officer, Mr. Kenneth        Clark (PEO), and principal financial officer, Mr. Dale W. Mechler        (PFO)), as of the end of the period covered by this report, our PEO and PFO have        concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e))        under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) are        effective to provide reasonable assurance that information required to be disclosed by us        in reports that we file or submit under the Exchange Act is recorded, processed, summarized        and reported within the time periods specified in Securities and Exchange Commission rules        and forms and is accumulated and communicated to management, including our principal        executive officer and principal financial officer, as appropriate to allow timely decisions        regarding required disclosure.

 

Changes in Internal Control over Financial        Reporting. There were no changes to our internal control over        financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred        during the period covered by this report that have materially affected, or are reasonably        likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of        Controls. Our management, including the PEO and PFO,        does not expect that our disclosure controls and procedures or our internal control over        financial reporting will prevent or detect all error and all fraud. A control system, no        matter how well designed and operated, can provide only reasonable, not absolute, assurance        that the control system’s objectives will be met. The design of a control system must        reflect the fact that there are resource constraints, and the benefits of controls must be        considered relative to their costs. Further, because of the inherent limitations in all        control systems, no evaluation of controls can provide absolute assurance that        misstatements due to error or fraud will not occur or that all control issues and instances        of fraud, if any, have been detected. These inherent limitations include the realities that        judgments in decision-making can be faulty and that breakdowns can occur because of simple        error or mistake. Controls can also be circumvented by the individual acts of some persons,        by collusion of two or more people or by management override of the controls. The design of        any system of controls is based in part on certain assumptions about the likelihood of        future events, and there can be no assurance that any design will succeed in achieving its        stated goals under all potential future conditions. Projections of any evaluation of        controls effectiveness to future periods are subject to risks. Over time, controls may        become inadequate because of changes in conditions or deterioration in the degree of        compliance with policies or procedures.

 

 

 

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**PART        II - OTHER INFORMATION**

 

| **Item 1.** | **Legal Proceedings.** |
|-------------|------------------------|

 

We are        not currently subject to any material legal proceeding and no such proceedings by, or to        the best of our knowledge, against us have been threatened, except that on March 28, 2008,        we received notice of REG Construction’s mechanic’s lien filed of record on        March 24, 2008 against our biodiesel plant alleging an outstanding unpaid bill for        construction of our plant in the amount of $4,349,217. This mechanic’s lien was        satisfied and released on May 1, 2008. See Item 5, “Other Information”,        below.

 

As        discussed above, we may face the need to seek bankruptcy court relief. Our preference and        goal is to accomplish a mutually agreeable restructuring of our loans with Farm Credit and        avoid resorting to bankruptcy court relief. See Item 2, “Management’s        Discussion and Analysis or Plan of Operation”, above.

 

| **Item 2.** | **Unregistered Sales of Equity Securities and Use of                        Proceeds.** |
|-------------|-----------------------------------------------------------------------------------------|

 

Inapplicable. 

 

| **Item 3.** | **Defaults Upon Senior Securities.** |
|-------------|--------------------------------------|

 

With        respect to the Company’s material default and its indebtedness to Farm Credit and the        nature of such default see Item 2, “Management’s Discussion and Analysis or        Plan of Operation”, above.

 

| **Item 4.** | **Submission of Matters to a Vote of Security                        Holders.** |
|-------------|---------------------------------------------------------------------------------|

 

Inapplicable. 

 

| **Item 5.** | **Other Information.** |
|-------------|------------------------|

 

On March        28, 2008, we received notice of REG Construction’s mechanic’s lien filed of        record on March 24, 2008 against our biodiesel plant alleging an outstanding unpaid bill        for construction of our plant under our Design-Build Agreement with REG Construction in the        amount of $4,349,217.

 

We        entered into the Construction Payment Agreement, effective April 29, 2008, with Farm Credit        and REG Construction.

 

The        Construction Payment Agreement provides for satisfaction and release of REG        Construction’s mechanic’s lien through Farm Credit’s advance of        $2,349,217 under our construction loan and through the acquisition by REG Ventures, LLC, an        affiliate of REG Construction, of 2,000 of our units, valued at $1,000 per unit, in lieu of        cash payment of $2,000,000 for the construction services. On May 1, 2008, REG Construction        received the $2,349,217 payment and the Company issued 2,000 units to REG Ventures, LLC.        There remains outstanding an additional $289,009 owing to REG Construction, of which        $150,000 pertains to retainage and $139,009 is for work to be performed. The Construction        Payment Agreement provides that Farm Credit will advance, at our request, $289,009 for us        to pay REG Construction.

 

| **Item 6.** | **Exhibits.** |
|-------------|---------------|

 

| **Number** | **Description**                                                                                                                                                                      |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                 |
| 31.1       | Certification of Principal Executive Officer Pursuant to                        Section 302 of the Sarbanes-Oxley Act of 2002                                                        |
| 31.2       | Certification of Principal Financial Officer Pursuant to                        Section 302 of the Sarbanes-Oxley Act of 2002                                                        |
| 32         | Certification of Principal Executive Officer and Principal                        Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of                        2002 |

 

 

24

 

----

 

**SIGNATURES**

 

In        accordance with the requirements of the Exchange Act, the registrant caused this report to        be signed on its behalf by the undersigned, there unto duly authorized.

|                     |                               |                                   |  

                          |   |
|--------------------------|------------------------------------|----------------------------------------|----------------------------------------|--------|
|                     | **EAST FORK BIODIESEL, LLC**  |                                   |
|                     |                               |  

                          |                                        |   |
| Date: May 15, 2008  | By:                      |                                   |                                   |
|                     |                               | Kenneth M. Clark, President       |  

                          |

 

 

25

 

----

**Exhibit        31.1**

**CERTIFICATION**

I, Kenneth        M. Clark, certify that:

| 1. | I have reviewed this quarterly report on Form 10-QSB of East                        Fork Biodiesel, LLC; |
|----|----------------------------------------------------------------------------------------------------------|

| 2. | Based on my knowledge, this report does not contain any                        untrue statement of a material fact or omit to state a material fact                        necessary to make the statements made, in light of the circumstances under                        which such statements were made, not misleading with respect to the period                        covered by this report; |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | Based on my knowledge, the financial statements, and other                        financial information included in this report, fairly present in all                        material respects the financial condition, results of operations and cash                        flows of the small business issuer as of, and for, the periods presented in                        this report; |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | The small business issuer’s other certifying officer                        and I are responsible for establishing and maintaining disclosure controls                        and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))                        for the small business issuer and have: |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | Designed such disclosure controls and procedures, or caused                        such disclosure controls and procedures to be designed under our                        supervision, to ensure that material information relating to the small                        business issuer, including its consolidated subsidiaries, is made known to                        us by others within those entities, particularly during the period in which                        this report is being prepared; |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Evaluated the effectiveness of the small business                        issuer’s disclosure controls and procedures and presented in this                        report our conclusions about the effectiveness of the disclosure controls                        and procedures as of the end of the period covered by this report based on                        such evaluation; and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | Disclosed in this report any change in the small business                        issuer’s internal control over financial reporting that occurred                        during the small business issuer’s most recent fiscal quarter (the                        small business issuer’s fourth fiscal quarter in the case of an                        annual report) that has materially affected, or is reasonably likely to                        materially affect, the small business issuer’s internal control over                        financial reporting; and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | The small business issuer’s other certifying officer                        and I have disclosed, based on our most recent evaluation of internal                        control over financial reporting, to the small business issuer’s                        auditors and the audit committee of small business issuer’s board of                        directors (or persons performing the equivalent functions): |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | all significant deficiencies and material weaknesses in the                        design or operation of internal control over financial reporting which are                        reasonably likely to adversely affect the small business issuer’s                        ability to record, process, summarize and report financial information;                        and |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | any fraud, whether or not material, that involves management                        or other employees who have a significant role in the small business                        issuer’s internal control over financial reporting.   |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|               |   |   |   |                   |
|--------------------|--------|--------|--------|------------------------|
| Date: May 15, 2008 |   |   |
|               |   |   |   |                        |
|               |   |   |   | Kenneth M. Clark       |
|               |   |   |   | President and Chairman |

 

 

26

 

----

**Exhibit        31.2**

**CERTIFICATION**

I, Dale W.        Mechler, certify that:

| 1. | I have reviewed this quarterly report on Form 10-QSB of East                        Fork Biodiesel, LLC; |
|----|----------------------------------------------------------------------------------------------------------|

| 2. | Based on my knowledge, this report does not contain any                        untrue statement of a material fact or omit to state a material fact                        necessary to make the statements made, in light of the circumstances under                        which such statements were made, not misleading with respect to the period                        covered by this report; |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | Based on my knowledge, the financial statements, and other                        financial information included in this report, fairly present in all                        material respects the financial condition, results of operations and cash                        flows of the small business issuer as of, and for, the periods presented in                        this report; |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | The small business issuer’s other certifying officer                        and I are responsible for establishing and maintaining disclosure controls                        and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))                        for the small business issuer and have: |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | Designed such disclosure controls and procedures, or caused                        such disclosure controls and procedures to be designed under our                        supervision, to ensure that material information relating to the small                        business issuer, including its consolidated subsidiaries, is made known to                        us by others within those entities, particularly during the period in which                        this report is being prepared; |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Evaluated the effectiveness of the small business                        issuer’s disclosure controls and procedures and presented in this                        report our conclusions about the effectiveness of the disclosure controls                        and procedures as of the end of the period covered by this report based on                        such evaluation; and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | Disclosed in this report any change in the small business                        issuer’s internal control over financial reporting that occurred                        during the small business issuer’s most recent fiscal quarter (the                        small business issuer’s fourth fiscal quarter in the case of an                        annual report) that has materially affected, or is reasonably likely to                        materially affect, the small business issuer’s internal control over                        financial reporting; and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | The small business issuer’s other certifying officer                        and I have disclosed, based on our most recent evaluation of internal                        control over financial reporting, to the small business issuer’s                        auditors and the audit committee of small business issuer’s board of                        directors (or persons performing the equivalent functions): |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | all significant deficiencies and material weaknesses in the                        design or operation of internal control over financial reporting which are                        reasonably likely to adversely affect the small business issuer’s                        ability to record, process, summarize and report financial information;                        and |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | any fraud, whether or not material, that involves management                        or other employees who have a significant role in the small business                        issuer’s internal control over financial reporting. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|               |   |   |   |            |
|--------------------|--------|--------|--------|-----------------|
| Date: May 15, 2008 |   |   |
|               |   |   |   |            |
|               |   |   |   |                 |
|               |   |   |   | Dale W. Mechler |
|               |   |   |   | Treasurer       |

 

 

27

 

----

 

**Exhibit        32.1**

**CERTIFICATION**

 

Each of        the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title        18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley        Act of 2002, in his capacity as an officer of East Fork Biodiesel, LLC (the        “Company”), that, to his knowledge, the Quarterly Report of the Company on Form        10-QSB for the period ended March 31, 2008, fully complies with the requirements of Section        13(a) of the Securities Exchange Act of 1934 and that the information contained in such        report fairly presents, in all material respects, the financial condition and results of        operation of the Company. This written statement is being furnished to the Securities and        Exchange Commission as an exhibit to such Form 10-QSB. A signed original of this statement        has been provided to the Company and will be retained by the Company and furnished to the        Securities and Exchange Commission or its staff upon request.

 

 

|               |   |                   |
|--------------------|--------|------------------------|
|               |   |                        |
| Date: May 15, 2008 | By:    |
|               |   | Kenneth M. Clark       |
|               |   | President and Chairman |
|               |   |                   |
|               |   |                   |
|               |   |                        |
| Date: May 15, 2008 | By:    |
|               |   | Dale W. Mechler        |
|               |   | Treasurer              |

 

 

 

 

28