LEGACY CARE PARTNERS INC. - Quarter Report: 2009 September (Form 10-Q)

f10q-ecc.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

000-28867

(Commission file number)

ENERGY COMPOSITES CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	88-0409170
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

4400 Commerce Drive, Wisconsin Rapids, WI 54494

(Address of principal executive offices) (Zip Code)

(715) 421-2060

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company ý

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 42,105,106 shares as of November 3, 2009

ENERGY COMPOSITES CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED

SEPTEMBER 30, 2009

INDEX

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets	2

	Consolidated Statements of Operations	3

	Consolidated Statements of Cash Flows	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24

Item 4.	Controls and Procedures	24


PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	25

Item 5.	Other Information	25

Item 6.	Exhibits	26

SIGNATURES		27

ENERGY COMPOSITES CORPORATION

CONSOLIDATED BALANCE SHEETS

	(Unaudited)			(Audited)
	September 30,			December 31,
	2009			2008
ASSETS
Current assets:
Cash	$	1,392,875		$	2,985,289
Accounts receivable, net of allowance for doubtful
accounts of $181,000 in 2009 and $108,000 in 2008		1,478,843			2,556,945
Accounts receivable - related party		1,366			-
Inventories		1,098,006			1,353,915
Deferred income taxes		134,000			68,000
Other current assets		126,669			107,423

Total current assets		4,231,759			7,071,572

Property and equipment, net		5,823,603			5,682,457

Other assets:
Deferred income taxes		3,055,000			1,787,000
Intangible assets, net		60,802			69,815

Total other assets, net		3,115,802			1,856,815

Total assets	$	13,171,164		$	14,610,844

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt obligations	$	532,692		$	503,576
Lines of credit - bank		97,934			-
Short-term notes payable		1,400,000			1,000,000
Accounts payable		480,422			1,421,423
Accounts payable - related party		275,363			89,372
Accrued expenses		187,908			162,136
Accrued payroll and payroll taxes		388,655			324,339
Customer deposits		45,609			431,775

Total current liabilities		3,408,583			3,932,621

Long-term debt obligations, net of current portion		5,375,524			5,487,293

Stockholders’ equity:
Common stock - $.001 par value; 100,000,000 shares
authorized, 42,098,009 and 41,579,157 shares issued
and outstanding, respectively		42,098			41,579
Additional paid-in capital		10,312,993			8,998,941
Accumulated deficit		(5,968,034	)		(3,849,590	)

Total stockholders’ equity		4,387,057			5,190,930

Total liabilities and stockholders’ equity	$	13,171,164		$	14,610,844

The accompanying notes are an integral part of these consolidated financial statements.

ENERGY COMPOSITES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	(Unaudited)						(Unaudited)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2009			2008			2009			2008

Revenue	$	1,861,409		$	2,159,909		$	6,210,734		$	5,729,234

Cost of goods sold		1,502,393			1,995,987			5,235,857			5,025,511

Gross profit		359,016			163,922			974,877			703,723

Selling, general and administrative expenses		978,014			563,840			2,752,176			1,588,806

Loss from operations		(618,998	)		(399,918	)		(1,777,299	)		(885,083	)

Other income (expense):
Interest expense		(237,709	)		(111,049	)		(1,689,625	)		(282,855	)
Interest income		2,686			-			14,480			-

Total other income (expense)		(235,023	)		(111,049	)		(1,675,145	)		(282,855	)

Loss before (benefit) for income taxes		(854,021	)		(510,967	)		(3,452,444	)		(1,167,938	)

Income tax (benefit)		(306,000	)		(228,000	)		(1,334,000	)		(413,000	)

Net loss		(548,021	)		(282,967	)		(2,118,444	)		(754,938	)

Less: Net income attributable to non-controlling interest in variable interest entities		-			(43,838	)		-			(138,144	)

Net loss attributable to Energy Composites Corporation	$	(548,021	)	$	(326,805	)	$	(2,118,444	)	$	(893,082	)

Net loss per common share - basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.05	)	$	(0.04	)


Weighted average shares outstanding - basic and diluted		42,097,929			24,000,000			42,030,708			24,000,000

The accompanying notes are an integral part of these consolidated financial statements.

ENERGY COMPOSITES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	For the Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(2,118,444	)	$	(893,082	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-controlling interest in variable interest entities		-			138,144
Depreciation and amortization		325,549			254,252
(Gain) loss on sale of other assets		(650	)		3,285
Amortization of debt discount for imputed interest		2,935			2,745
Amortization of discount for warrants and beneficial
conversion feature on convertible debt		1,327,291			-
Stock issued for interest payments		73,948			-
Stock issued for compensation		165,623			-
Deferred income taxes		(1,334,000	)		(413,000	)
Changes in operating assets and liabilities:
Accounts receivable, net		1,078,102			(532,388	)
Accounts receivable - related party		(1,366	)		-
Inventories		255,909			(492,896	)
Other current assets		(19,246	)		(66,167	)
Accounts payable		(941,001	)		295,806
Accounts payable - related party		185,991			-
Accrued expenses		25,772			113,425
Accrued payroll and payroll taxes		64,316			239,234
Customer deposits		(386,166	)		113,316
Net cash used in operating activities		(1,295,437	)		(1,237,326	)

Cash flows from investing activities:
Purchase of property and equipment		(444,949	)		(740,148	)
Proceeds from sale of property and equipment		650			16,500
Net cash used in investing activities		(444,299	)		(723,648	)

Cash flows from financing activities:
Increase (decrease) in bank overdraft payable		-			(168,087	)
Net borrowings from lines of credit - bank		97,934			205,622
Financing costs for long-term debt		(3,320	)		-
Net borrowings from short-term notes payable		400,000			2,874,774
Payments on long-term debt		(347,292	)		(193,067	)
Capital distributions by variable interest entities		-			(52,250	)
Net cash provided by financing activities		147,322			2,666,992

Net increase (decrease) in cash and cash equivalents		(1,592,414	)		706,018

Cash and cash equivalents:
Beginning of period		2,985,289			30,739

End of period	$	1,392,875		$	736,757

The accompanying notes are an integral part of these consolidated financial statements.

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial information has been prepared by Energy Composites Corporation (formerly Las Palmas Mobile Estates) (“Company” or “ECC”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, it does not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period. This financial information should be read in conjunction with the December 31, 2008 audited consolidated financial statements and notes included in the Company’s Form 10-K filed on March 31, 2009.

Note 2. Nature of Business and Significant Accounting Policies

Nature of Business

The Company is a manufacturer, installer and marketer of fiberglass products which are sold throughout the United States, but primarily in the Midwest. The Company has a service division that provides installation and repair of various piping projects. The Company serves the paper, petro-chemical, water, waste-water, bio-fuel and power industries.

The Company was organized October 29, 1992 under the laws of the State of Nevada. The Company had not started its planned principal operations until October 14, 2008. On June 27, 2008, Las Palmas Mobile Estates entered into a Share Exchange Agreement whereby it agreed to issue 28,750,000 shares of its common stock to acquire all of the outstanding shares of Advanced Fiberglass Technologies, Inc., a Wisconsin corporation (“AFT”).

As part of the Share Exchange Agreement, prior to the closing of the transaction on October 14, 2008, 4,750,000 restricted common shares were issued to a consultant for services provided in connection with this transaction, which were valued at $420,000. These 4,750,000 shares were part of the 28,750,000 shares described above. Upon completion of the transaction on October 14, 2008, AFT became a wholly-owned subsidiary of the Company. Since this transaction resulted in the existing shareholders of AFT acquiring control of Energy Composites Corporation, for financial reporting purposes, the business combination has been accounted for as an additional capitalization of the Company (a reverse acquisition with AFT as the accounting acquirer). Accordingly, AFT’s net assets are included in the consolidated balance sheet at their historical value. The operations of AFT were the only continuing operations of the Company.

The accompanying financial statements for the three and nine months ended September 30, 2008 present the historical financial information of AFT. The outstanding common shares of AFT at September 30, 2008 have been restated to reflect the shares issued upon reorganization.

In June 2009, we created a wholly-owned subsidiary, Innovative Composite Solutions, LLC (“ICS”) to serve as a distribution company for resins and composites materials.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries AFT and ICS, after elimination of all intercompany accounts, transactions, and profits.

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company also consolidates its financial results with entities determined to be variable interest entities (VIEs), for which the Company is deemed to be the VIE’s primary beneficiary. See the accounting policy on “Variable Interest Entities” for further information.

Variable Interest Entities

Until December 31, 2008, the Company was considered the primary beneficiary of the following entities:

M&W Fiberglass, LLC (“M&W”) was a lessor of real estate to AFT and was wholly owned by the initial stockholder of AFT, now the majority stockholder of the Company. As of August 2007, M&W began leasing a newly constructed manufacturing and office facility (73,000 square feet) at Commerce Drive, Wisconsin Rapids, Wisconsin to the Company at $30,000 per month from August 1, 2007 to December 31, 2007 and $35,000 per month starting January 1, 2008. On December 31, 2008, the Company exercised an option to purchase the manufacturing facility from M&W for $4,500,000 and assumed all of M&W’s debt related to the property. In addition, all guarantees of M&W debt by the Company were released by the lender. As a result of these actions, the Company was no longer considered the primary beneficiary of M&W after December 30, 2008.

Fiberglass Piping & Fitting Company (“FPF”) is a wholesale distributor of fiberglass piping and was wholly owned by the initial stockholder of AFT, now the majority stockholder of the Company. FPF started operations as a newly formed S-corporation on September 16, 2006 and had limited operations during 2006 and 2007. Prior to December 31, 2008, all FPF financing was secured by the unlimited guarantee of the Company. As of December 31, 2008, FPF became financially independent of the Company by the sole FPF stockholder contributing $200,000 of additional capital to FPF and FPF moving out of AFT’s manufacturing facility to its own location. In addition, all guarantees of FPF debt by the Company were released by the lender. As a result of these actions, the Company was no longer considered the primary beneficiary of FPF after December 30, 2008.

For the three and nine months ended September 30, 2008, the statements of operations and cash flows have been presented on a consolidated basis to include the variable interests in M&W and FPF. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company’s consolidated balance sheets at September 30, 2009 and December 31, 2008 and the statements of operations and cash flows for the three and nine months ended September 30, 2009 do not include the activities of M&W and FPF.

For the three months ended September 30, 2008, the revenue of the VIEs represented $147,547, or 6.8% of the consolidated revenue of the Company. For the nine months ended September 30, 2008, the revenue of the VIEs represented $454,523, or 7.9% of the consolidated revenue of the Company. The Company recognized the net earnings of the VIEs only to the extent it recovered losses previously recognized with respect to the VIEs. Earnings of the VIEs in excess of the Company’s previously recognized losses with respect to that VIE were eliminated from the Company’s earnings and attributed to the respective equity owner of the VIEs by recording such earnings as non-controlling interest in variable interest entities on the Company’s consolidated financial statements. During the three and nine months ended September 30, 2008, the VIEs experienced a combined net income of $43,838 and $138,144, respectively, which accordingly resulted in a non-controlling charge on the Company’s statements of operations.

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Risk and Major Customers

Financial instruments that may subject the Company to significant concentrations of credit risk consist primarily of trade receivables. The Company grants credit to its customers throughout the United States in the normal course of business. Customer creditworthiness is routinely monitored and collateral is not required. The following is a schedule of significant sales to customers for the nine months ended September 30, 2009 and 2008 and significant customer accounts receivable balances at September 30, 2009 and 2008:

			Percentage of
	Percentage of		Trade Accounts
	Total Sales		Receivable
Customer	2009	2008	2009	2008
1	49.8%	1.4%	54.9%	3.6%
2	9.0	1.6	6.4	-
3	-	27.2	9.0	7.2
4	5.8	8.6	2.2	15.2
	64.6%	38.8%	72.5%	26.0%

Segment Reporting

Through September 30, 2009, the Company provided products and services through one reportable operating segment, Industrial Tank and Piping.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance codifying generally accepted accounting principles in the United States (“GAAP”). While the guidance was not intended to change GAAP, it did change the way the Company references these accounting principles in the Notes to the Consolidated Financial Statements. This guidance was effective for interim and annual reporting periods ending after September 15, 2009. The Company’s adoption of this authoritative guidance as of September 30, 2009 changed how it references GAAP in its disclosures.

In June 2009, the FASB issued authoritative guidance that eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires on-going qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This guidance is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this authoritative guidance to have any current impact on the consolidated financial statements.

Note 3. Inventories

Inventories consist of the following:

	September 30, 2009		December 31, 2008
Raw materials	$	420,285	$	440,741
Work in progress		677,721		913,174
Finished goods		-		-
Total	$	1,098,006	$	1,353,915

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Property and Equipment, Net

Property and equipment are as follows:

	September 30, 2009			December 31, 2008
Land and improvements	$	82,572		$	74,023
Buildings and improvements		3,610,997			3,590,267
Machinery and equipment		2,511,398			2,125,177
Vehicles and trailers		376,925			381,212
Computer equipment		200,478			173,926
Furniture and office equipment		107,072			104,813
		6,889,442			6,449,418
Less accumulated depreciation		(1,065,839	)		(766,961	)
Net property and equipment	$	5,823,603		$	5,682,457

Depreciation expense was $117,838 and $83,616 for the three months ended September 30, 2009 and 2008, respectively. Depreciation expense was $313,215 and $245,273 for the nine months ended September 30, 2009 and 2008, respectively.

The cost of equipment under capital lease as of September 30, 2009 and December 31, 2008 was $21,075. The accumulated amortization of equipment under capital lease as of September 30, 2009 and December 31, 2008 was $4,039 and $2,459, respectively.

Note 5. Intangible Assets

Intangible assets are as follows:

	September 30, 2009			December 31, 2008
Non-compete agreement	$	5,000		$	5,000
Customer list		74,434			74,434
Deferred financing costs		69,338			66,017
		148,772			145,451
Less accumulated amortization		(87,970	)		(75,636	)
Net intangible assets	$	60,802		$	69,815

Amortization expense was $3,382 and $2,949 for the three months ended September 30, 2009 and 2008, respectively. Amortization expense was $12,334 and $8,979 for the nine months ended September 30, 2009 and 2008, respectively. Estimated amortization expense for the next five years is as follows:

2009 – remaining	$	2,513
2010		8,293
2011		7,114
2012		5,396
2013		4,872
Thereafter		32,614

Total	$	60,802

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Financing Arrangements

Line of Credit – Bank

The Company utilizes a line of credit with Nekoosa Port Edwards State Bank (“NPESB”) that provides for maximum borrowings of $250,000, bears interest at a fixed rate of 6.75% at September 30, 2009 and matures in December 2009. The line is secured by all business assets of AFT, an assignment of life insurance on the officer/stockholder, a junior mortgage on land and buildings, and an unlimited guaranty by ECC. The Company had a balance of $97,934 and $0 on the line of credit at September 30, 2009 and December 31, 2008, respectively.

Short-Term Notes Payable

The Company uses short-term notes from NPESB to fund bulk purchases of inventory and large jobs in addition to utilizing its line of credit. The underlying inventory and customer purchase orders serve as specific collateral for these notes. In addition, the short-term notes are also typically secured by all business assets of the Company. The notes bear interest at fixed rates. The notes are typically twelve months or less. The Company had $1,400,000 and $1,000,000 of outstanding notes payable with weighted average interest rates of 6.75% and 7.45% as of September 30, 2009 and December 31, 2008, respectively.

Long-Term Debt Obligations

Long-term debt obligations are as follows:

	September 30, 2009		December 31, 2008
NPESB - a term loan secured by 15 ton deck crane, interest rate of 7.25%, due October 2010, monthly payments of $948	$	9,518	$	17,302

NPESB – a term loan secured by all general business assets of AFT and unlimited continuing guarantee of ECC; interest rate of 6.75%, due on demand, monthly payments of $898		46,220		51,808

NPESB - an industrial revenue bond term loan, secured by equipment and unlimited continuing guarantee of ECC; contains restrictive financial covenants, interest rate of 5.75%, due July 2014, monthly payment of $7,266		364,110		412,391

NPESB - an industrial revenue bond term loan, secured by equipment and unlimited continuing guarantee of ECC; contains restrictive financial covenants, interest rate of 5.75%, due July 2014, monthly payment of $7,266		358,230		406,761

City of Wisconsin Rapids, a term loan, secured by all assets and unlimited continuing guarantee of ECC; contains various operating covenants, interest rate 2%, due April 2012, monthly payment of $4,499		405,429		439,545

Yale Financial Services, a capital lease term loan, secured by two Yale forklifts, interest rate 7.7%, due October 2010, monthly payment of $657		8,176		13,451

City of Wisconsin Rapids, a $75,000 term loan, secured by ECC and AFT guarantees; imputed interest at 8% resulting in an original issue discount with an unamortized balance of $24,305 at September 30, 2009, balloons in August 2014; debt was assumed by AFT from M&W as part of the land and building purchase on December 31, 2008		50,695		47,760

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	September 30, 2009			December 31, 2008
NPESB – an industrial revenue bond term loan, secured by real estate, ECC and AFT guarantees; contains restrictive financial covenants, interest rate of 5.50%, due July 2027, monthly payment of $20,776; debt was assumed by AFT from M&W as part of the land and building purchase on December 31, 2008		2,811,970			2,879,672

M&W LLC (related party) – an unsecured term loan, interest rate of 4.775%, due December 2015, quarterly payment of $24,493 beginning March 2009		1,008,705			1,045,328

NPESB – a term loan secured by all general business assets of AFT and an unlimited continuing guarantee of ECC; due January 2012, interest rate of 6.75%, monthly payments of $13,405 beginning February 2009		346,021			430,000

Convertible notes payable ($1,420,000 face value) – see Note 7		499,142			246,851
		5,908,216			5,990,869

Less current portion of long-term obligations		(532,692	)		(503,576	)

Total long-term debt obligations, net of current portion	$	5,375,524		$	5,487,293

Maturities of long-term debt obligations are as follows:

2009 – remaining	$	165,696
2010		489,194
2011		1,923,380
2012		631,588
2013		337,056
Thereafter		3,282,160

Total	$	6,829,074

At December 31, 2008, the Company was not in compliance with various restrictive financial covenants contained in the industrial revenue bonds. The Company, prior to December 31, 2008, received a waiver letter on the covenant defaults from the lenders. These violated covenants were waived through December 31, 2009.

On March 13, 2009, the Company executed an amendment to the credit agreement for the three industrial revenue bonds held by NPESB. The amendment to the credit agreement includes the redefinition of the covenants attached to the bonds. Under the terms of the amended credit agreement, the covenants apply to the Company and its subsidiaries on a consolidated basis. The covenants require the Company to maintain (a) a Debt Service Coverage Ratio of not less than 1.25 to 1.0 and (b) a Total Indebtedness to Equity Ratio of not more than 3.5 to 1.0.

Debt Service Coverage Ratio is defined as the ratio of (i) EBITDA, a non-GAAP measurement, for the 12-month period ending on the measurement date to (ii) interest expenses plus principal payments coming due during the 12-month period beginning on the day after measurement. EBITDA is defined as net income after taxes, plus interest expense which has been deducted in the determination of net income, plus federal, state and local taxes which have been deducted in the determination of net income, plus depreciation and amortization expenses which have been deducted in the determination of net income, plus extraordinary losses which have been deducted in the determination of net income, minus extraordinary gains which have been included in the determination of net income. The Company did not calculate this ratio at September 30, 2009 because the Company had recorded negative EBITDA for the previous 12-month period.

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total Indebtedness to Equity Ratio is defined as the ratio of all liabilities or obligations to Equity. This ratio at September 30, 2009 has been calculated by the Company as follows:

Total current liabilities	$	3,408,583
Long-term debt obligations, net of current portion		5,375,524
Total indebtedness	$	8,784,107

Total stockholders’ equity		4,387,057
Total indebtedness to equity		2.0

The next measurement date of these covenants will be December 31, 2009.

Note 7. Convertible Notes Payable

In August 2008, the Company began a private placement offering of Units, each Unit consisting of (i) a 3-year, 6% convertible debenture with a conversion price of $2.50 (the “Conversion Price”) per share (subject to adjustment for stock splits and stock dividends) (the “Debentures”), and (ii) a number of warrants equal to the number of shares issuable upon conversion of the principal amount of the Convertible Debenture (the “Warrants”). This placement offering was in anticipation of the AFT reverse acquisition taking place which became effective on October 14, 2008.

Each Warrant is immediately exercisable into shares of common stock for a term of 3 years at $5.00 per share. The Warrants also provide anti-dilution protection for the following events: reorganization, reclassification, consolidation, merger or sale; subdivision, combination or other dividend of the Company’s Common Stock. No warrants were exercised nor expired during 2008 or 2009.

The private placement was closed on December 14, 2008. Debentures in the aggregate principal amount of $6,370,000 were sold which included the issuance of 2,548,000 Warrants. The Debentures are considered to be conventional convertible debt.

The issued Warrants were deemed to have a relative fair market value of $4,068,422 which was recorded as a discount to the face value of the Debentures and as a credit to Additional Paid-In Capital and will be accreted to interest expense over the 3-year term using the effective interest method. The Company used the Black-Scholes-Merton pricing model as a method for determining the estimated fair value of the Warrants.

The proceeds of the Debentures were allocated based on the relative fair value of the Debentures and Warrants as of the commitment date. The Company then calculated the intrinsic value of the beneficial conversion feature embedded in the Debentures and because the amount of the beneficial conversion feature exceeded the fair value allocated to the Debentures, the amount of the beneficial conversion feature to be recorded was limited to the proceeds allocated to the Debentures. Accordingly, the beneficial conversion feature was calculated to be $2,301,578 and was recorded as an additional discount on the Debentures and a credit to Additional Paid-In Capital of $1,412,578 and a credit of $889,000 to deferred income tax liability. The Company is accreting the beneficial conversion feature to interest expense over the 3-year term of the debt using the effective interest method.

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the convertible note balance as of September 30, 2009:

Balance at January 1, 2008	$	-

Plus: gross proceeds received in 2008		6,370,000

Less: value assigned to:
Warrants		(4,068,422	)
Beneficial conversion feature allotted to:
Additional paid-in capital		(1,412,578	)
Deferred income tax liability		(889,000	)
Sub-total of assigned values		(6,370,000	)

Plus: accretion of original issue discount from warrants and beneficial conversion feature		4,121,851

Less: conversion of debt to common stock		(3,875,000	)

Balance at December 31, 2008		246,851

Plus: accretion of original issue discount from warrants and beneficial conversion feature		1,327,291

Less: conversion of debt to common stock		(1,075,000	)

Balance at September 30, 2009	$	499,142

All outstanding convertible debentures at September 30, 2009 mature at various dates in 2011. The $1,420,000 of maturities related to these debentures are included in the long-term debt maturities table found in Note 6.

The effective annual interest rate for the nine months ended September 30, 2009 was 95%. The rate is considerably higher than the stated rate of 6% due to the amortization of the discount recorded against the debt for the detachable warrants and beneficial conversion feature.

Note 8. Stockholders’ Equity

In conjunction with the private placement of convertible debt in 2008, $1,075,000 of the debt was converted to common shares of the Company during the nine months ended September 30, 2009 at $2.50 per share. 459,605 common shares were issued for the debt and related interest on the debt.

During the nine months ended September 30, 2009, the Company issued 49,272 restricted common shares to officers valued at $150,000 for services rendered and to be rendered in the future. Of these shares, 12,136 shares (valued at $37,500) remain unvested until April 28, 2010 and were recorded as deferred compensation. Through September 30, 2009 amortization of the deferred compensation has totaled $15,625. Also, the Company established a compensation plan, payable in arrears, for its board of directors. Pursuant to the plan each director will receive $30,000 in restricted stock grants per year of service. At September 30, 2009, shares issued to Directors as compensation for services totaled 9,975 and were valued at $37,500 for the service period January 2009 through May 2009. An accrual for $35,000 for director compensation for June 2009 through September 2009 has been recorded to accrued expenses.

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Income Taxes

The Company accounts for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carry-forwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The income tax provision consisted of the following for the three months ended September 30, 2009 and 2008:

	September 30, 2009			September 30, 2008
Currently payable (refundable)	$	-		$	-
Deferred tax (benefit)		(306,000	)		(228,000	)
Total income tax (benefit)	$	(306,000	)	$	(228,000	)

The income tax provision consisted of the following for the nine months ended September 30, 2009 and 2008:

	September 30, 2009			September 30, 2008
Currently payable (refundable)	$	-		$	-
Deferred tax (benefit)		(1,334,000	)		(523,000	)
		(1,334,000	)		(523,000	)
Establishment of the net deferred tax liabilities as of January 1, 2008 due to change in tax status		-			110,000
Total income tax (benefit)	$	(1,334,000	)	$	(413,000	)

At September 30, 2009, the Company reviewed all available evidence pertaining to the realization of recorded deferred tax assets. Positive evidence available to the Company at September 30, 2009 supporting the realization of the recorded deferred tax assets included the historical operating profits of AFT, continued growth in product and service delivery for AFT, progress in new product development for AFT, an operating plan indicating a near-term return to operating profits supported by the 2007/2008/2009 production capacity additions, and certain near-term strategic efforts. Negative evidence available to the Company at September 30, 2009 included the operating losses recorded prior to September 30, 2009. Based on this, the Company concluded that the evidence available at September 30, 2009 did not indicate that it was more likely than not that the deferred tax assets would not be realized. Therefore, a valuation allowance was not recorded as of September 30, 2009. The Company will re-assess the valuation allowance at December 31, 2009.

Note 10. Employee Benefit Plans

In January 2009, the Company began sponsoring a defined contribution savings plan that allows substantially all employees not covered by separate collective bargaining agreements to contribute a portion of their pre-tax and/or after-tax income up to statutory limits. The plan requires the Company to match 50% of the participant’s contributions up to 6% of the participants’ compensation. The Company’s expense was $16,833 and $47,397 for the three and nine months ended September 30, 2009, respectively.

Prior to 2009, the Company sponsored a Simple IRA plan which required the Company to match 100% of the eligible participant’s contributions up to 3% of the participant’s earned income. The Company’s expense was $9,217 and $31,018 for the three and nine months ended September 30, 2008, respectively.

In addition to the plans described, the Company participates in certain customary employee benefit plans, including those which provide health insurance benefits to employees.

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11. Related Party Transactions

Manufacturing and Office Facility Lease and Purchase

The Company leased its manufacturing facility at Commerce Drive, Wisconsin Rapids, Wisconsin with M&W which was considered a variable interest entity of the Company until December 30, 2008. On December 31, 2008, the Company purchased the facility from M&W and had no lease payments for 2009. Total lease payments to M&W were $35,000 per month in 2008. For the three and nine months ended September 30, 2009, the Company paid interest expense to M&W on the building term loan of $12,275 and $36,856, respectively.

Other Related Party Transactions

AFT purchased fiberglass pipe fittings from FPF totaling $63,925 and $34,499 for the three months ended September 30, 2009 and 2008, respectively. AFT purchased fiberglass pipe fittings from FPF totaling $355,032 and $95,731 for the nine months ended September 30, 2009 and 2008, respectively.

Note 12. Commitments and Contingencies

Legal Proceedings

The Company is subject to legal proceedings and claims arising in the ordinary course of business. As of the date hereof, in the opinion of management, the resolution of such matters will not have a material effect on the Company’s financial position, results of operations, or cash flow.

Note 13. Sales and Cost of Sales

The following information summarizes the net sales and related cost of sales/services for the Company’s product and service offerings. The Company does not consider the product sales and service components of their business to be reportable operating segments because the financial results of each component is not separately evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

	Three Months Ended September 30, 2009
	Products &			Service &
	Components			Installation		Total
Net sales	$	827,428		$	1,033,981	$	1,861,409
Cost of sales		711,803			790,590		1,502,393
Gross Profit	$	115,625		$	243,391	$	359,016

	Three Months Ended September 30, 2008
	Products &			Service &
	Components			Installation		Total
Net sales	$	779,356		$	1,380,553	$	2,159,909
Cost of sales		939,007			1,056,980		1,995,987
Gross Profit (Loss)	$	(159,651	)	$	323,573	$	163,922

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended September 30, 2009
	Products &		Service &
	Components		Installation		Total
Net sales	$	4,450,443	$	1,760,291	$	6,210,734
Cost of sales		4,029,904		1,205,953		5,235,857
Gross Profit	$	420,539	$	554,338	$	974,877

	Nine Months Ended September 30, 2008
	Products &		Service &
	Components		Installation		Total
Net sales	$	3,482,546	$	2,246,688	$	5,729,234
Cost of sales		3,219,540		1,805,971		5,025,511
Gross Profit	$	263,006	$	440,717	$	703,723

Note 14. Earnings (Loss) Per Share

The Company computes earnings per using two different methods, basic and diluted, and present per share data for all periods in which statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of common stock and common stock equivalents outstanding.

The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the three and nine month periods ended September 30, 2009 and 2008:

	Three months ended September 30,
	2009			2008
Basic earnings (loss) per share calculation:
Net income (loss) to common shareholders	$	(548,021	)	$	(326,805	)
Weighted average of common shares outstanding		42,097,929			24,000,000
Basic net earnings (loss) per share	$	(0.01	)	$	(0.01	)

Diluted earnings (loss) per share calculation:
Net income (loss) to common shareholders	$	(548,021	)	$	(326,805	)
Weighted average of common shares outstanding		42,097,929			24,000,000
Convertible debentures (1)		-			-
Warrants (2)		-			-
Diluted weighted average common shares outstanding		42,097,929			24,000,000

Diluted net income (loss) per share	$	(0.01	)	$	(0.01	)

ENERGY COMPOSITES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Nine months ended September 30,
	2009			2008
Basic earnings (loss) per share calculation:
Net income (loss) to common shareholders	$	(2,118,444	)	$	(893,082	)
Weighted average of common shares outstanding		42,030,708			24,000,000
Basic net earnings (loss) per share	$	(0.05	)	$	(0.04	)

Diluted earnings (loss) per share calculation:
Net income (loss) to common shareholders	$	(2,118,444	)	$	(893,082	)
Weighted average of common shares outstanding		42,030,708			24,000,000
Convertible debentures (1)		-			-
Warrants (2)		-			-
Diluted weighted average common shares outstanding		42,030,708			24,000,000

Diluted net income (loss) per share	$	(0.05	)	$	(0.04	)

(1)	At September 30, 2009 and 2008, there were outstanding convertible debentures equivalent to 568,000 and 0 common shares, respectively. The convertible debentures are anti-dilutive at September 30, 2009 and therefore have been excluded from diluted earnings per share.

(2)

At September 30, 2009 and 2008, there were outstanding warrants equivalent to 2,548,000 and 0 common shares, respectively. The warrants expire 3 years from their 2008 date of issuance and have an exercise price of $5.00 per share. The warrants are anti-dilutive at September 30, 2009 and therefore have been excluded from diluted earnings per share.

Note 15. Supplemental Disclosure of Cash Flow Information

	September 30,
	2009		2008
Supplemental disclosure of cash flow information:
Cash paid for interest	$	295,104	$	257,346

Non-cash investing and financing activities:
Purchase of property and equipment with long-term debt	$	9,412	$	67,673
Debt converted to common stock	$	1,075,000	$	-

Note 16. Subsequent Events

The Company has evaluated all subsequent events through November 12, 2009, the date the financial statements were available to be issued.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion contained herein contains “forward-looking statements” that involve risk and uncertainties. These statements may be identified by the use of terminology such as “believes,” “expects,” “may,” “should” or “anticipates” or expressing this terminology negatively or similar expressions or by discussions of strategy. The cautionary statements made in our Annual Report on Form 10-K, filed March 31, 2009, should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those discussed in this report. The following discussion should be read in conjunction with the financial statements and the related notes included herein as Item 1.

Accounting Policies and Estimates

The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. We also have other policies that we consider key accounting policies, such as those for revenue recognition; however, these policies typically do not require us to make estimates or judgments that are difficult or subjective.

We have identified accounting policies that we consider critical in Note 2 “Nature of Business and Significant Accounting Policies” of the notes to our financial statements included in this report. The accounting policies and estimates described in this report should be read in conjunction with Note 1, “Nature of Business and Significant Accounting Policies,” of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008, which includes a discussion of the policies identified in this report and other significant accounting policies.

Overview

Energy Composites Corporation (formerly Las Palmas Mobile Estates) (“we,” “us,” “our,” or the “Company”) is a manufacturer of composite structures and vessels for a range of clean technology industries. Based on our research of companies in this sector, we believe we have the Midwest’s largest and most automated manufacturing capabilities with our world-class, automated 73,000 square foot climate-controlled manufacturing facility in Wisconsin Rapids, Wisconsin.

Our Company was incorporated on October 29, 1992 under the laws of the State of Nevada. At first, we were defined as a “shell” company whose sole purpose was to locate and consummate a merger or acquisition with a private entity. As of October 14, 2008, we completed a reverse acquisition of Advanced Fiberglass Technologies, Inc., a Wisconsin corporation (“AFT”). Pursuant to the reverse acquisition, we issued 28,750,000 shares of our common stock to AFT’s shareholders (approximately 72% of the then issued and outstanding common stock) and AFT’s shareholders gained voting control of our Company. As a result of the reverse acquisition, we are no longer considered a “shell” company. AFT is now our wholly-owned subsidiary.

Advanced Fiberglass Technologies. AFT was incorporated in the state of Wisconsin on January 1, 2005, following nearly ten years operating as M&W Fiberglass, LLC (“M&W”). Founded in 1995 by Jamie Lee Mancl, M&W was the operating entity that developed and operated AFT’s business. In January 2005, M&W transferred all operating assets and liabilities into a newly formed S-Corporation: AFT. M&W, solely owned by Jamie Lee Mancl, retained ownership of AFT’s former manufacturing facility. In February 2007, M&W sold AFT’s former manufacturing facility to the city of Wisconsin Rapids. M&W and AFT then purchased and developed our current manufacturing facility by obtaining $4,000,000 of financing in the form of industrial revenue bonds. On December 31, 2008, we purchased the manufacturing facility from M&W by assuming the industrial revenue bonds, paying M&W $500,000 in cash and delivering a promissory note to M&W for $1,045,328.

Fiberglass Piping & Fitting Company. In September 2006, our largest shareholder, Jamie Lee Mancl, formed Fiberglass Piping & Fitting Company (“FPF”). FPF is a wholesale distributor of imported fiberglass piping and fitting products. We purchase products from FPF from time to time for use in the manufacture of our products pursuant to a long-term supply agreement at a price equal to FPF’s net direct costs for such products.

Both M&W and FPF were considered variable interest entities (“VIEs”) until December 31, 2008. In general, a VIE is a corporation, partnership, limited liability company, trust, or any other legal structure used to conduct activities or hold assets that either (i) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (ii) has a group of equity owners that are unable to make significant decisions about its activities, or (iii) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. On December 30, 2008, we terminated the beneficiary relationship with these VIE entities by: (A) purchasing the manufacturing facility from M&W on December 31, 2008; (B) the sole stockholder of FPF contributing an additional $200,000 of capital to FPF so that FPF would be sufficient on its own; and (C) all prior guarantees of M&W and FPF debt by AFT having been released by the lender. We consolidated M&W and FPF’s operations with AFT’s operations for financial accounting and reporting purposes up to December 30, 2008, the date the VIE relationship ended.

Innovative Composite Solutions, LLC. In June 2009, further executing our growth strategy, we established Innovative Composite Solutions, LLC (“ICS”) as a wholly-owned subsidiary of Energy Composites Corporation. ICS will serve as our distribution arm for resins and composite materials. Through September 30, 2009, ICS has established and stocked three regional warehouses in the United States with resin inventory, has completed the hiring of its sales personnel in each of those regions, and has begun generating revenue in each of these regions. As of September 30, 2009 the operating results of ICS are immaterial to the Company and are included in the Industrial Tank and Piping reporting segment under the Products category.

Results of Operations

The tables below separate our results from the 2008 revenues and expenses attributable to M&W and FPF so that appropriate comparisons can be made. Unless otherwise noted, the discussion refers only to our results on a non-consolidated basis in 2008.

Revenue	Three months ended September 30,					Nine months ended September 30,
	2009			2008		2009		2008
ECC/AFT/ICS	$	1,861,409		$	2,012,362	$	6,210,734	$	5,274,711
M&W/FPF, net of eliminations		-			147,547		-		454,523
Total consolidated revenue	$	1,861,409		$	2,159,909	$	6,210,734	$	5,729,234

ECC/AFT/ICS increase/(decrease) from 2008	$	(150,953	)			$	936,023
ECC/AFT/ICS % increase/(decrease) from 2008		(7.5%	)				17.7%

During the third quarter of 2009, we recorded $195,619 of increased revenue from product sales, while field services revenues decreased $346,572. For the nine-month period ended September 30, 2009, revenue from product sales increased $1,422,420 primarily as a result of several tank and pipe contracts with a major chlor-alkali producer. Field service revenue revenues decreased $486,397 during the nine months ended September 30, 2009. The decrease in field service revenues during both periods has primarily been timing driven with the rescheduling and postponement of outage-related work and the timing of contract completion.

Cost of goods sold	Three months ended September 30,					Nine months ended September 30,
	2009			2008		2009		2008
ECC/AFT/ICS	$	1,502,393		$	1,874,152	$	5,235,857	$	4,638,790
M&W/FPF, net of eliminations		-			121,835		-		386,721
Total cost of goods sold	$	1,502,393		$	1,995,987	$	5,235,857	$	5,025,511

ECC/AFT/ICS increase/(decrease) from 2008	$	(371,759	)			$	597,067
ECC/AFT/ICS % increase/(decrease) from 2008		(19.8%	)				12.9%

The primary components of cost of goods sold are raw materials used in manufacturing, manufacturing labor, and manufacturing overhead. The primary raw materials used in our manufacturing processes are isophathalic, polyester, and vinyl-ester resins and fiberglass. Manufacturing labor includes wages, employment taxes, employee benefits, and union expenses. The major components of manufacturing overhead are utilities and depreciation associated with our manufacturing facility and equipment, travel and lodging expense associated with field service activities and manufacturing supplies.

For the three months ended September 30, 2009, our cost of materials decreased to 20% of revenue from 26% of revenue for the three months ended September 30, 2008. The decrease in materials as a percent of revenue was primarily driven by a greater mix of sales coming from small diameter pipe in both the product and service categories during the quarter. The field service related activities during the three months ended September 30, 2008 included a higher percentage of tank relining work in the field as well as a higher percentage of large diameter tank sales in the product category. For the nine months ended September 30, 2009, material costs were 26% of revenue compared to 27% for the nine months ended September 30, 2008. This decrease in cost as a percent of revenue is also a result of the sales mix shift during the nine months ended September 30, 2009.

Our cost of labor decreased to 42% of revenue for the three months ended September 30, 2009 compared to 43% of revenue for the comparable period in 2008. For the nine-month period ended September 30, 2009, our cost of labor remained at 39% of revenue, the same level recorded for the comparable period in 2008. Decreases in labor cost as a percent of sales for the third quarter 2009 are primarily attributable to pipe and tank contracts completed during the quarter that required a lower mix of union pipefitters.

Manufacturing overhead decreased from 24% of revenue during the third quarter of 2008 to 19% in the third quarter 2009. Lower travel and lodging expenses related to field service work, and lower freight expense on tank shipments contributed to the decrease as a percent of revenue. During the nine-month period ended September 30, 2009, manufacturing overhead decreased to 19% of revenue compared to 22% for the same period in 2008. We have incurred increased depreciation expense and utility cost from added equipment; however, our increased year-to-date revenue has allowed for better absorption of these cost increases, thus lowering manufacturing overhead cost as a percent of revenue.

Gross profit	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
ECC/AFT/ICS	$	359,016	$	138,210	$	974,877	$	635,921
M&W/FPF, net of eliminations		-		25,712		-		67,802
Total gross profit	$	359,016	$	163,922	$	974,877	$	703,723

ECC/AFT/ICS % of revenue		19.3%		6.9%		15.7%		12.1%

Selling, general & administrative expenses	Three months ended September 30,					Nine months ended September 30,
	2009		2008			2009		2008
ECC/AFT/ICS	$	978,014	$	635,997		$	2,752,176	$	1,817,903
M&W/FPF, net of eliminations		-		(72,157	)		-		(229,097	)
Total SG&A expenses	$	978,014	$	563,840		$	2,752,176	$	1,588,806

ECC/AFT/ICS % of revenue		52.5%		31.6%			44.3%		34.5%

The increase in our selling, general and administrative expenses is driven by our continued investment in our growth strategy, notably our investment in expanded in-house capabilities, increased sales and sales support staff, and the creation of ICS as our resin and composites materials distribution arm in June 2009. Taken together, these additional expenses represent a platform for managing and driving our growth. We have also continued our investment into the development of our WindFiber™ strategy, including planning the construction of a significant wind blade production plant in Wisconsin Rapids within the next 12 months.

(Loss) from operations	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
ECC/AFT/ICS	$	(618,998	)	$	(497,787	)	$	(1,777,299	)	$	(1,181,982	)
M&W/FPF, net of eliminations		-			97,869			-			296,899
Total (loss) from operations	$	(618,998	)	$	(399,918	)	$	(1,777,299	)	$	(885,083	)

ECC/AFT/ICS % of revenue		(33.3%	)		(24.7%	)		(28.6%	)		(22.4%	)

The $121,211 and $595,317 increases in our operating loss for the three and nine months ended September 30, 2009, respectively, are primarily due to industry postponement of anticipated projects leading to insufficient sales to cover our planned increase in overhead, increased cost of goods sold, and the increase in selling, general and administrative expenses observed in 2009, as described above.

Other (expense)	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
ECC/AFT/ICS	$	(235,023	)	$	(57,018	)	$	(1,675,145	)	$	(124,100	)
M&W/FPF		-			(54,031	)		-			(158,755	)
Total other (expense)	$	(235,023	)	$	(111,049	)	$	(1,675,145	)	$	(282,855	)

ECC/AFT/ICS % of revenue		(12.6%	)		(2.8%	)		(27.0%	)		(2.4%	)

Other income and expense consists of interest expense, interest income, non-cash amortization of deferred financing costs, and non-cash amortization of beneficial conversion features and warrant discounts associated with convertible debt. Non-cash amortization of debt discounts for warrants and beneficial conversion feature related to the convertible debt was $118,333 and $1,327,291 for the three and nine months ended September 30, 2009, respectively. The remaining increase in expenses in 2009 compared to 2008 is due to additional interest expense from increased short and long-term debt borrowings in 2009 relating to the manufacturing facility acquired at the end of 2008 and equipment and working capital notes to fund our growing operations. For the three and nine months ended September 30, 2009, interest expense was partially offset by bank interest income of $2,686 and $14,480, respectively.

Net loss	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Loss before provision for income taxes	$	(854,021	)	$	(510,967	)	$	(3,452,444	)	$	(1,167,938	)
Income tax benefit		306,000			228,000			1,334,000			413,000
Net loss for ECC	$	(548,021	)	$	(282,967	)	$	(2,118,444	)	$	(754,938	)
Less: Net income attributable to M&W/FPF		-			(43,838	)		-			(138,144	)
Net loss	$	(548,021	)	$	(326,805	)	$	(2,118,444	)	$	(893,082	)

% of ECC/AFT/ICS revenue		(29.4%	)		(16.2%	)		(34.1%	)		(16.9%	)

ECC/AFT/ICS increase/(decrease) from 2008	$	(265,054	)				$	(1,363,506	)
ECC/AFT/ICS % increase/(decrease) from 2008		(93.7%	)					(180.6%	)

The net income tax benefit recorded during the three and nine months ended September 30, 2009 was the result of deferred tax assets recorded relative to net operating losses being generated and timing differences between financial and income tax reporting. We believe it is more likely than not that we will realize the full benefit of the deferred tax assets and have not recorded a valuation allowance as of September 30, 2009 due to our previous history of operating profits prior to 2008 and other factors. We will reassess this position at the end of 2009. Effective January 1, 2008, we terminated our S-Corporation election and began operating as a C-Corporation. As a result of the change in tax status, an initial $110,000 of net deferred tax liability was recorded as income tax expense which was offset by a net income tax benefit of $523,000 associated with net operating losses and temporary book

and tax timing differences for the nine months ended September 30, 2008. Significant components of the income tax benefit include the net operating loss for the year, fair value of warrants and temporary timing differences of fixed assets, accruals, and reserves.

The increase in our 2009 net loss stems from our investment in our growth strategy and recessionary economic pressures. In our bid to grow, we have invested in our infrastructure and overhead, adding selling, general and administrative costs and increasing our borrowings and interest expense. We continue to face a difficult economic period in the United States and the world. While we continue to record increases in our product sales, the growth is slower than what we would expect in a robust economy and we anticipated faster growth in this category due to our expansion efforts. Additionally, we have experienced a shift in timing of our outage-related service sales volume as our customers have postponed planned repairs due to poor economic conditions. The economic downturn has also placed pressure on our pricing strategy as our customers become more sensitive to price. The pressure on our prices has limited our ability to pass along our expenses to our customers in the form of incremental price increases. Although we have recorded improvement in margins, the improvement in margins is also slower than what we would expect in a robust economy. We anticipate that the launch of several material innovations, including the use of our new abrasion-resistant tank liner, will allow us to increase our margins in our legacy business. We continue to pursue our four-part strategy to expand and diversify our business. We believe that our increasing involvement in the wind energy industry and other market segments will also position our Company to profit when and as the economy recovers and expands.

Liquidity and Capital Resources

Our liquidity and capital resources continue to be driven by our growth strategy. Beginning in 2007 and continuing into 2009, we have significantly expanded our operations and our manufacturing capabilities. We have invested in our plant and equipment to become a large manufacturing concern with a diverse manufacturing capability, both in-house and on-client-site. As a result of our expansion efforts, we believe we are well positioned to take advantage of market opportunities and to introduce our products and services into emerging markets like wind energy.

To capitalize on our expanding manufacturing capabilities, we have made significant investments in our sales personnel, marketing program, our new WindFiber™ strategy, and our new raw materials distribution arm, ICS. With these expenditures, we have increased our visibility in our existing markets and have captured early attention from major targeted customers within the wind energy market and in our core markets. Furthermore, we anticipate field service revenues will begin to increase consistent with historical seasonal trends as major manufacturers complete planned and re-scheduled maintenance, repair and overhaul activities.

Our primary sources of liquidity to fund our growth strategy are cash generated from operations and short and long-term term financing arrangements. As of September 30, 2009, cash and cash equivalents totaled $1,392,875. Our working capital was $823,176 at September 30, 2009. We believe we have sufficient resources available to meet our liquidity requirements, including debt service, for the remainder of 2009. We will require additional financing to pursue our WindFiber™ strategy over the next 12 months, including the construction of a new wind blade production plant.

Operating Cash Flows

Operating activities used $1,295,437 and $1,237,326 of cash for the nine months ended September 30, 2009 and 2008, respectively. The increase in cash used by operating activities for 2009 was due primarily to the significant decreases in accounts payable and customer deposits associated with the large tank contract we completed and the increase in the overall net loss for the nine months ended September 30, 2009. The increase in cash used in operations was partially offset by decreases in accounts receivable and inventories primarily associated with the same contract.

Investing Cash Flows

Investing activities used $444,299 and $723,648 of cash for the nine months ended September 30, 2009 and 2008, respectively. The primary use of cash in investing activities for both periods was the purchase of additional manufacturing equipment supporting plant and field service activities, as well as the purchase of office equipment for added office staff positions.

Financing Cash Flows

Financing activities provided $147,322 and $2,666,992 for the nine months ended September 30, 2009 and 2008, respectively. Proceeds from financing activities for the nine months ended September 30, 2009 were $497,934 raised from additional short-term notes and our line of credit which was partially offset by financing costs and payments on long-term debt of $347,292. For the nine months ended September 30, 2008, proceeds from financing activities included proceeds from short-term notes and our line of credit of $3,080,396. Cash used in financing activities for the nine months ended September 30, 2008 included a reduction in bank overdrafts of $168,087, payments on long-term debt of $193,067, and distributions to a stockholder of $52,250 primarily for income taxes due by the shareholders relating to the pass through income from M&W and FPF.

Debenture Financing

In August to December 2008, we raised $6,370,000 by selling units, each unit consisting of (i) a 3-year, 6% convertible debenture (the “Debentures”) with a conversion price of $2.50 per share (subject to adjustment for stock splits and stock dividends), and (ii) a number of warrants equal to the number of shares issuable upon conversion of the principal amount of the Debenture (the “Warrants”). The Debentures sold included the issuance of 2,548,000 Warrants. Each Warrant is exercisable into shares of common stock for a term of 3 years at $5.00 per share. The Warrant also provides anti-dilution protection for the following events: reorganization, reclassification, consolidation, merger or sale; subdivision, combination or dividend of our common stock.

At September 30, 2009, Debentures totaling $1,420,000 remain outstanding and will become due during the last part of 2011. $4,950,000 of Debentures has been converted to common stock as of September 30, 2009. Many Debenture holders have elected to receive interest in the form of stock, lowering our cash outlays for debt service on the Debentures. We believe that the growth of our business and revenue will improve the value of our stock and motivate the remaining Debenture holders to convert their debt into stock which will further reduce our cash requirements to settle the debt in 2011. We also anticipate that the Debenture holders will exercise their Warrants when and if the value of our stock increases above $5.00 per share. The money we raise from the exercise of Warrants, if any, will be used to continue our growth strategy.

As we roll out the sequential elements of our WindFiber™ strategy, it may be appropriate to pursue an additional tranche of equity financing to support the construction of a new manufacturing plant and logistics center, the equipping of the production lines, training of employee-associates, the development of a research and development center, and WindFiber™ -related working capital. While we anticipate a substantial portion of our WindFiber™ financing requirements will be met with subsidized or otherwise advantaged debt financing, it may be prudent to support such financing with a tranche of supplemental equity.

Purchase of Manufacturing Plant and Related Debts

On December 31, 2008, we exercised our option to purchase the manufacturing facility we were leasing from M&W for a purchase price of $4,500,000. We elected to exercise this option in order to lower the monthly cash requirement associated with our manufacturing facility and to remove conflicting interests between our business and Jamie and Jennifer Mancls’ other business interest: M&W. The favorable interest rate we negotiated with the Mancls (described below) will improve our cash flows by approximately $72,000 annually because the associated annual debt service is less than the annual lease payments we were paying. We believe removing the Mancls’ control over our business (as exercised through the facility lease) will, in the long run, improve our balance sheet and our ability to borrow money from large institutional investors.

The purchase price for the facility was paid in the form of: (i) an assumption of the industrial revenue bonds and note related to the building and land; (ii) cash at closing in the amount of $500,000; and (iii) the balance ($1,045,328) in the form of an unsecured promissory note bearing interest at an annual fixed rate of 4.775% which was determined using the twelve-month LIBOR as of December 31, 2008 (2.025%) plus 2.75%, payable in quarterly installments of principal and interest amortized over not more than 15 years with the unpaid principal balance due not later than December 15, 2015. The assumed debt consisted of all obligations of M&W under the bond agreement and all obligations of M&W under that certain promissory note dated February 28, 2007 in the principal amount of $75,000 issued to the City of Wisconsin Rapids. As of December 31, 2008, the amount of the assumed debt of the industrial revenue bonds was $2,879,672.

The assumed building-related industrial revenue bonds mature in 2027 with an annual interest rate of 5.5%. Monthly principal and interest payments on the assumed bonds are $20,776. Our manufacturing equipment was financed with two $500,000 industrial revenue bonds expiring July 2014 with interest at 5.75% and a $500,000 note from the City of Wisconsin Rapids expiring April 2012 with interest at 2%. Monthly principal and interest payments for each of these bonds and the Wisconsin Rapids note are $7,266 and $4,499. The long maturities and low interest rates associated with the building and equipment loans allow us enough time to successfully execute our growth strategy at a low cost of capital. As we begin to generate positive cash from operations, we anticipate that we will be able to service these building- and equipment-related debts without the need of raising additional capital.

The 4.775% interest rate on the $1,045,328 note held by M&W is also low relative to historical market rates. Going forward, we believe that we will be able to service the M&W note with cash from operations. We may settle the M&W note prior to its 2015 due date with the proceeds of a future debt or equity financing.

On March 13, 2009, we executed an amendment to the credit agreement for the three building- and equipment-related industrial revenue bonds. The amended financial covenants require us to maintain (a) a Debt Service Coverage Ratio of not less than 1.25 to 1.0 and (b) a Debt to Equity Ratio of not more than 3.5 to 1.0. The next measurement date of these covenants will be December 31, 2009.

Other Debt Activity

On November 3, 2009, we settled a $300,000 short-term note and borrowed $300,000 under a new short-term note which carries a three-month term, 6.75% interest per annum, and is secured by our business assets and receivables and certain customer purchase orders.

Leases

We have entered into various operating leases to support operations. We lease several vehicles supporting our Field Services Division, forklifts for the plant, office equipment, and lodging space in Biron, Wisconsin. Total monthly lease payments for this equipment and lodging space are $3,657. The lease we previously held for the office space in Hastings, Michigan expired March 1, 2009 and was not renewed. The monthly payment for the Hastings office was $925 per month.

Going Forward

We have developed a four-part strategy to expand our business and profitability, defined in our 2008 Annual Report on Form 10-K. While we have sufficient capital to complete the first step of our four-part growth strategy in 2009, we need additional capital to grow our business, especially our WindFiber™ strategy. If our cash flow from operations is insufficient to fund debt service and other obligations, we may be required to increase our borrowings, reduce or delay capital expenditures, and seek additional capital or refinance our indebtedness. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under revolving credit facilities.

Off-Balance Sheet Arrangements

As of September 30, 2009, we did not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report. Based on this evaluation, the officers concluded that our disclosure controls and procedures are effective to ensure 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 the SEC’s rules and forms, and is accumulated and communicated to our management including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

On October 14, 2008, we acquired AFT, which has increased the controls and procedures that we employ to process, record and report our financial results. We will continue to evaluate and strengthen our controls and procedures to improve the accuracy and timeliness of our financial disclosure.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in litigation and other proceedings arising in the ordinary course of our business, including actions with respect to contract claims, labor and employment claims and other matters. Although litigation and other proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending matters will not have a material adverse effect on our business, financial conditions or results of operations. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution in litigation or other proceedings could in the future materially and adversely affect our financial position or results of operations in a particular period.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of 2009, we issued the unregistered securities set forth in the table below.

Date	Persons or Class of Persons	Securities	Consideration
July 1, 2009	30 accredited investors	7,377 shares of common stock	$18,406 of accrued interest paid to debenture holders

No underwriters were used in the above stock transactions. We relied upon the exemption from registration contained in Section 4(2) and/or Rule 506 as to all of the transactions as the investors were deemed to be sophisticated with respect to the investment in the securities due to their financial condition and involvement in our business or were accredited investors. Restrictive legends were placed on the certificates evidencing the securities issued in all of the above transactions.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Regulation S-K Number	Document
3.1	Articles of Merger effective October 14, 2008 (1)
3.2	Amended and Restated Articles of Incorporation effective October 14, 2008 (1)
3.3	Amended and Restated Bylaws adopted October 14, 2008 (1)
4.1	Form of Debenture (2)
4.2	Form of Warrant (2)
10.1	Share Exchange Agreement dated June 26, 2008 (3)
10.2	First Amendment to Share Exchange Agreement dated August 8, 2008 (4)
10.3	2008 Stock Incentive Plan (1)
10.4	Industrial Development Revenue Bonds, Bond Agreement dated February 28, 2007 (1)
10.5	Industrial Development Revenue Bonds, Promissory Note 2007A dated February 28, 2007 (1)
10.6	Industrial Development Revenue Bonds, Promissory Note 2007B dated February 28, 2007 (1)
10.7	Industrial Development Revenue Bonds, Promissory Note 2007C dated February 28, 2007 (1)
10.8	Industrial Development Revenue Bonds, Credit Agreement dated February 28, 2007 (1)
10.9	Industrial Development Revenue Bonds, Construction Mortgage, Assignment Of Leases And Rents and Fixture Filing dated February 28, 2007 (1)
10.10	Industrial Development Revenue Bonds, Security Agreement dated February 28, 2007 (1)
10.11	Option Agreement dated June 18, 2008 (1)
10.12	Purchase and Supply Agreement dated October 13, 2008 (1)
10.13	Unsecured Promissory Note dated December 31, 2008 (5)
10.14	Assignment and Assumption Agreement dated December 31, 2008 (6)
10.15	Amendment to the Credit Agreement dated March 13, 2009 (7)
10.16	Employee Stock Purchase Plan (8)
31.1	Rule 13a-14(a) Certification of Samuel W. Fairchild
31.2	Rule 13a-14(a) Certification of Jeffrey S. Keuntjes
32.1	Certification of Samuel W. Fairchild Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Jeffrey S. Keuntjes Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

________________

(1)	Filed as an exhibit to the Current Report on Form 8-K dated October 14, 2008, filed October 17, 2008.

(2)	Filed as an exhibit to the Current Report on Form 8-K dated December 15, 2008, filed December 19, 2008.

(3)	Filed as an exhibit to the Current Report on Form 8-K dated June 26, 2008, filed June 27, 2008.

(4)	Filed as an exhibit to the Definitive Information Statement on Schedule 14C, filed September 24, 2008.

(5)	Filed as an exhibit to the Current Report on Form 8-K/A dated December 31, 2008, filed January 26, 2009.

(6)	Filed as an exhibit to the Current Report on Form 8-K dated December 31, 2008, filed January 6, 2009.

(7)	Filed as an exhibit to the Annual Report for the year ended December 31, 2008 on Form 10-K filed March 31, 2009.

(8)	Filed as an exhibit to the Current Report on Form 8-K dated June 2, 2009, filed June 5, 2009.

SIGNATURES

Pursuant to with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ENERGY COMPOSITES CORPORATION

Dated: November 12, 2009	By:	/s/ Samuel W. Fairchild
		Samuel W. Fairchild, Chief Executive Officer

Dated: November 12, 2009	By:	/s/ Jeffrey S. Keuntjes
		Jeffrey S. Keuntjes, Vice President – Finance