** **

**SECURITIES & EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 

| **ý****  QUARTERLY  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |
|--------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                     |
| **For the quarterly period ended March 31, 2004**                                                                        |
|                                                                                                                     |
| **o****   TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934 (No Fee Required)** |
|                                                                                                                     |
| **Commission File No. 000-24551**                                                                                        |

 

**COMPOSITE SOLUTIONS, INC.**

(Name of Small Business Issuer in its Charter)

 

| **Florida**                                                   |   | **65-0790758**                      |
|---------------------------------------------------------------|--------|-------------------------------------|
| State or other jurisdiction of  incorporation or organization |   | I.R.S. Employer  Identification No. |
|                                                          |   |                                |
| **3252 Holiday Court, Suite 206, La Jolla,  California**      |   | **92037**                           |
| Address of principal executive office                         |   | Zip Code                            |
|                                                          |   |                                |
| **Issuer’s telephone number:  (858) 459-4843**      |

 

 

Former name and address, ifchanged since last report

 

Check whether the issuer has(1) filed all reports required by Section 13 or 15(d) of the Exchange Actduring the past 12 months, and (2) been subject to such filing requirements forthe past ninety (90) days.  Yes ý  No  o   

 

 

As of March 31, 2004, 23,510,569shares of Common Stock were outstanding.

 

 

----

 

**PART 1 - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

The following consolidated financialstatements contain information regarding the Company’s balance sheet, profit& loss, shareholder’s equity, and cash flow for the quarters ended March31, 2004 and 2003.

 

 

**INDEX TO FINANCIAL STATEMENTS**

 
|                                                |
|-----------------------------------------------------|
| Balance Sheets                                      |
|                                                |
| Statements of Operations                            |
|                                                |
| Statements of Changes in Stockholders’  Equity |
|                                                |
| Statements of Cash Flows                            |
|                                                |
| Notes to Financial Statements                       |

 

2

----

 

**COMPOSITE SOLUTIONS, INC AND SUBSIDIARIES**

(A Development Stage Company)

**ConsolidatedBalance Sheets**

 
|                                                                                                                    |   | **March 31,  2004** |      | **September  30,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------------------------|--------|
|                                                                                                                    |   | **(Unaudited)**     |      | **(Audited)**            |   |
| **ASSETS**                                                                                                              |   |                |      |                     |   |
| **Current assets**                                                                                                      |   |                |      |                     |   |
| Cash                                                                                                                    |   | $                   | 145,772   |                     | $      | 49,495 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $0                                                      |   | 19,875              |      | —                   |   |
| Costs in excess of billings                                                                                             |   | 1,963               |      | 6,832                    |   |
| Prepaid expenses                                                                                                        |   | 24,581              |      | 416                      |   |
| Total current assets                                                                                                    |   | 192,191             |      | 56,743                   |   |
|                                                                                                                    |   |                |      |                     |   |
| **Property, plant and equipment, net**                                                                                  |   | —              |      | 649                      |   |
|                                                                                                                    |   |                |      |                     |   |
| **Other assets**                                                                                                        |   |                |      |                     |   |
| Deposits                                                                                                                |   | 10,050              |      | 10,071                   |   |
| Intangible assets, net                                                                                                  |   | 562,912             |      | 427,684                  |   |
| Goodwill                                                                                                                |   | 418,956             |      | 418,956                  |   |
| Total assets                                                                                                            |   | $                   | 1,184,109 |                     | $      | 914,103 |   |
|                                                                                                                    |   |                |      |                     |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                           |   |                |      |                     |   |
| **Current liabilities**                                                                                                 |   |                |      |                     |   |
| Accounts payable                                                                                                        |   | $                   | 220,399   |                     | $      | 266,775 |   |
| Billings in excess of costs                                                                                             |   | 93,396              |      | 131,169                  |   |
| Line of credit                                                                                                          |   | —              |      | 51,887                   |   |
| Employee and director payable                                                                                           |   | 117,882             |      | 62,415                   |   |
| Related party payable                                                                                                   |   | 153,499             |      | 132,205                  |   |
| Current portion of long-term debt                                                                                       |   | 24,508              |      | —                   |   |
| Related party notes payable                                                                                             |   | 242,885             |      | 46,376                   |   |
| Accrued expenses                                                                                                        |   | 198,692             |      | 181,817                  |   |
| Accrued losses on future contracts                                                                                      |   | 4,513               |      | 3,013                    |   |
| Income taxes payable                                                                                                    |   | 16,342              |      | 24,881                   |   |
| Total current liabilities                                                                                               |   | 1,072,116           |      | 900,538                  |   |
|                                                                                                                    |   |                |      |                     |   |
| **Long term debt**                                                                                                      |   |                |      |                     |   |
| Note payable, less current portion                                                                                      |   | 17,423              |      | —                   |   |
| Total liabilities                                                                                                       |   | 1,089,539           |      | 900,538                  |   |
|                                                                                                                    |   |                |      |                     |   |
| **Stockholders’ equity**                                                                                           |   |                |      |                     |   |
| Preferred stock; $0.0001 par value;  10,000,000 shares authorized; 0 shares issued and outstanding                      |   | —              |      | —                   |   |
| Common stock; $0.0001 par value; 50,000,000  shares authorized; 23,510,569 and 21,670,555 shares issued and outstanding |   | 2,350               |      | 2,166                    |   |
| Additional paid in capital                                                                                              |   | 5,677,323           |      | 5,120,957                |   |
| Accumulated deficit                                                                                                     |   | (5,585,103          | )         | (5,109,558               | )      |
| Total stockholders’ equity                                                                                         |   | 94,570              |      | 13,565                   |   |
| Total liabilities and stockholders’ equity                                                                         |   | $                   | 1,184,109 |                     | $      | 914,103 |   |

 

See accompanying notes.

 

3

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A DevelopmentStage Company)

**ConsolidatedStatements of Operations**

(Unaudited)

 
|                                                                                                  |   | **Three  Months Ended  March 31,** |     | **Six Months  Ended  March 31,** |   | **October  20, 1997  (Inception)  to  March 31,  2004** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------|----------|----------------------------------|--------|---------------------------------------------------------|--------|
| **2004**                                                                                              |   | **2003**                           |     | **2004**                         |   | **2003**                                                |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Contract revenue**                                                                                  |   | $                                  | 268,776  |                             | $      | 61,104                                                  |   | $ | 955,946 |   | $ | 128,012 |   | $ | 1,691,501 |   |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Cost of sales**                                                                                     |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Salaries and consulting fees                                                                          |   | 4,325                              |     | 55,297                           |   | 19,925                                                  |   | 92,974 |   | 476,900 |   |
| Consulting fees - related party                                                                       |   | 174,376                            |     | —                           |   | 226,541                                                 |   | — |   | 436,179 |   |
| Materials                                                                                             |   | 13,394                             |     | 45,268                           |   | 317,416                                                 |   | 45,595 |   | 343,117 |   |
| Materials - related party                                                                             |   | 9,611                              |     | —                           |   | 176,058                                                 |   | — |   | 252,845 |   |
| Cost of sales                                                                                         |   | 201,706                            |     | 100,565                          |   | 739,940                                                 |   | 138,569 |   | 1,509,041 |   |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Gross profit                                                                                          |   | 67,070                             |     | (39,461                          | )      | 216,006                                                 |   | (10,557 | ) | 182,460 |   |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Expenses**                                                                                          |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Consulting fees                                                                                       |   | 12,990                             |     | 92,660                           |   | 12,990                                                  |   | 177,770 |   | 641,344 |   |
| Consulting fees - related party                                                                       |   | 123,543                            |     | 98,631                           |   | 139,793                                                 |   | 179,431 |   | 1,179,809 |   |
| Depreciation and amortization                                                                         |   | 12,664                             |     | 12,922                           |   | 25,294                                                  |   | 26,118 |   | 403,424 |   |
| General and administrative expenses                                                                   |   | 76,364                             |     | 84,404                           |   | 103,475                                                 |   | 119,134 |   | 1,197,655 |   |
| Organizational expenses                                                                               |   | —                             |     | —                           |   | —                                                  |   | — |   | 514 |   |
| Professional fees - other                                                                             |   | 42,548                             |     | 37,908                           |   | 43,550                                                  |   | 40,943 |   | 454,099 |   |
| Professional fees - related party                                                                     |   | 19,785                             |     | 2,584                            |   | 20,165                                                  |   | 5,657 |   | 30,180 |   |
| Salaries                                                                                              |   | 287,170                            |     | 30,420                           |   | 298,090                                                 |   | 41,340 |   | 1,592,799 |   |
| Provision for future contract losses                                                                  |   | 1,500                              |     | 26,497                           |   | 1,500                                                   |   | 26,497 |   | 4,513 |   |
| Impairment loss                                                                                       |   | —                             |     | —                           |   | —                                                  |   | — |   | 237,248 |   |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Total expenses                                                                                        |   | 576,564                            |     | 386,026                          |   | 644,857                                                 |   | 616,890 |   | 5,741,585 |   |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Income (loss) from operations                                                                         |   | (509,494                           | )        | (425,487                         | )      | (428,851                                                | )      | (627,447 | ) | (5,559,125 | ) |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Other income (expense)**                                                                            |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Interest income                                                                                       |   | —                             |     | —                           |   | —                                                  |   | — |   | 8,363 |   |
| Interest income - forgiveness of debt                                                                 |   | —                             |     | —                           |   | —                                                  |   | — |   | 17,825 |   |
| Other Income                                                                                          |   | 4,033                              |     | —                           |   | 4,033                                                   |   | — |   | 100,091 |   |
| Gain on forgiveness of debt                                                                           |   | —                             |     | —                           |   | —                                                  |   | — |   | 8,261 |   |
| Other expenses                                                                                        |   | (1,590                             | )        | (11,005                          | )      | (2,723                                                  | )      | (11,574 | ) | (25,042 | ) |
| Loss on disposal of assets                                                                            |   | —                             |     | —                           |   | —                                                  |   | — |   | (190 | ) |
| Interest expense                                                                                      |   | (41,682                            | )        | (15,304                          | )      | (43,804                                                 | )      | (26,867 | ) | (190,551 | ) |
| Loss on forgiveness of debt                                                                           |   | —                             |     | —                           |   | —                                                  |   | — |   | (11,021 | ) |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Total other income (expense)                                                                          |   | (39,239                            | )        | (26,309                          | )      | (42,494                                                 | )      | (38,441 | ) | (92,264 | ) |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Income (loss) before provision for income  taxes                                                      |   | (548,733                           | )        | (451,796                         | )      | (471,345                                                | )      | (665,888 | ) | (5,651,389 | ) |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Provision for income taxes                                                                            |   | 2,400                              |     | 21,681                           |   | 4,200                                                   |   | 21,681 |   | 39,009 |   |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Income (loss) from continuting operations**                                                         |   | (551,133                           | )        | (473,477                         | )      | (475,545                                                | )      | (687,569 | ) | (5,690,398 | ) |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Discontinued operations**                                                                           |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Income from discontinued operations  (including gain on sale of subsidiary in the amount of $177,755) |   | —                             |     | —                           |   | —                                                  |   | — |   | 105,295 |   |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Net income (loss)**                                                                                 |   | $                                  | (551,133 | )                                | $      | (473,477                                                | )      | $ | (475,545 | ) | $ | (687,569 | ) | $ | (5,585,103 | ) |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Income (loss) per common share basic and  diluted**                                                 |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Net income (loss) from continuing  operations                                                         |   | $                                  | (0.02    | )                                | $      | (0.02                                                   | )      | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.34 | ) |
| Income from discontinued operations                                                                   |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 0.01 |   |
| Income (loss) per share basic and diluted                                                             |   | $                                  | (0.02    | )                                | $      | (0.02                                                   | )      | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.33 | ) |
|                                                                                                  |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Weighted average number of shares basic and  diluted                                                  |   | 22,695,227                         |     | 19,767,096                       |   | 22,180,092                                              |   | 19,281,223 |   | 16,940,032 |   |

 

See accompanying notes.

 

4

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**COMPOSITESOLUTIONS, INC. AND SUBSIDIARIES**

(A DevelopmentStage Company)

**ConsolidatedStatements of Changes in Stockholder****s’ Equity**

(Unaudited)

 
|                                                    |   |       |   | **Additional  Paid in Capital** |   | **Accumulated  Deficit** |   | **Total  Stockholders’  Equity** |   |
|---------------------------------------------------------|--------|------------|--------|---------------------------------|--------|--------------------------|--------|---------------------------------------|--------|
| **Common  Stock**                                       |
| **Shares**                                              |   | **Amount** |
|                                                    |   |       |   |                            |   |                     |   |                                  |   |   |   |
| **Balance, October 20, 1997 (inception)**               |   | —     |   | $                               | — |                     | $      | —                                |   | $ | — |   | $ | — |   |
| Common stock issued in exchange for  services           |   | 15,233,910 |   | 1,521                           |   | (2,120                   | )      | —                                |   | (599 | ) |
| Common stock issued for cash                            |   | 5,962,500  |   | 599                             |   | 18,335                   |   | —                                |   | 18,934 |   |
| Net loss                                                |   |       |   |                            |   |                     |   | (12,193                               | )      | (12,193 | ) |
| **Balance, September 30, 1998**                         |   | 21,196,410 |   | 2,120                           |   | 16,215                   |   | (12,193                               | )      | 6,142 |   |
| Common stock contributed                                |   | (7,896,410 | )      | (790                            | )      | 790                      |   | —                                |   | — |   |
| Pre-acquisition income                                  |   | —     |   | —                          |   | —                   |   | 47                                    |   | 47 |   |
| Common stock issued in acquisition                      |   | 1,000,000  |   | 100                             |   | 47                       |   | (47                                   | )      | 100 |   |
| Common stock issued for payment of note  payable        |   | 200,000    |   | 20                              |   | 999,980                  |   | —                                |   | 1,000,000 |   |
| Net loss                                                |   |       |   |                            |   |                     |   | (574,850                              | )      | (574,850 | ) |
| **Balance, September 30, 1999**                         |   | 14,500,000 |   | 1,450                           |   | 1,017,032                |   | (587,043                              | )      | 431,439 |   |
| Common stock surrendered                                |   | (4,300,000 | )      | (430                            | )      | 430                      |   |                                  |   | — |   |
| Common stock issued for cash                            |   | 668,333    |   | 67                              |   | 759,933                  |   |                                  |   | 760,000 |   |
| Common stock issued in acquisitions                     |   | 1,103,371  |   | 110                             |   | 808,668                  |   |                                  |   | 808,778 |   |
| Common stock issued for finder’s fee               |   | 100,000    |   | 10                              |   | (10                      | )      |                                  |   | — |   |
| Common stock issued in exchange for  services           |   | 300,000    |   | 30                              |   | 173,970                  |   |                                  |   | 174,000 |   |
| Net loss                                                |   |       |   |                            |   |                     |   | (1,090,715                            | )      | (1,090,715 | ) |
| **Balance, September 30, 2000**                         |   | 12,371,704 |   | 1,237                           |   | 2,760,023                |   | (1,677,758                            | )      | 1,083,502 |   |
| Common stock surrendered                                |   | (150,000   | )      | (15                             | )      | (93,735                  | )      |                                  |   | (93,750 | ) |
| Common stock issued for cash                            |   | 725,000    |   | 73                              |   | 244,927                  |   |                                  |   | 245,000 |   |
| Common stock issued in exchange for  services           |   | 1,061,760  |   | 106                             |   | 128,227                  |   |                                  |   | 128,333 |   |
| Common stock issued for finder’s fee               |   | 200,000    |   | 20                              |   | (20                      | )      |                                  |   | — |   |
| Net loss                                                |   |       |   |                            |   |                     |   | (1,367,322                            | )      | (1,367,322 | ) |
| **Balance, September 30, 2001**                         |   | 14,208,464 |   | 1,421                           |   | 3,039,422                |   | (3,045,080                            | )      | (4,237 | ) |
| Common stock issued for cash                            |   | 2,339,047  |   | 234                             |   | 227,266                  |   |                                  |   | 227,500 |   |
| Common stock issued for compensation                    |   | 1,183,149  |   | 118                             |   | 206,391                  |   |                                  |   | 206,509 |   |
| Common stock issued in exchange for  services           |   | 514,034    |   | 51                              |   | 91,568                   |   |                                  |   | 91,619 |   |
| Common stock issued for interest due on  notes payable  |   | 47,350     |   | 5                               |   | 5,677                    |   |                                  |   | 5,682 |   |
| Net loss                                                |   |       |   |                            |   |                     |   | (1,166,742                            | )      | (1,166,742 | ) |
| **Balance, September 30, 2002**                         |   | 18,292,044 |   | 1,829                           |   | 3,570,324                |   | (4,211,822                            | )      | (639,669 | ) |
| Common stock issued for cash                            |   | 2,404,696  |   | 240                             |   | 365,060                  |   |                                  |   | 365,300 |   |
| Common stock issued to settle accounts  payable         |   | 582,024    |   | 58                              |   | 70,325                   |   |                                  |   | 70,383 |   |
| Common stock issued for services                        |   | 400,000    |   | 40                              |   | 58,960                   |   |                                  |   | 59,000 |   |
| Common stock issued through exercise of  options        |   | 71,428     |   | 7                               |   | 4,993                    |   |                                  |   | 5,000 |   |
| Common stock issued for interest due on  notes payable  |   | 90,363     |   | 9                               |   | 14,412                   |   |                                  |   | 14,421 |   |
| Common stock issued for compensation                    |   | 50,000     |   | 5                               |   | 8,495                    |   |                                  |   | 8,500 |   |
| Common stock surrendered                                |   | (220,000   | )      | (22                             | )      | 22                       |   |                                  |   | — |   |
| Recapitalization of accounts payable and  accrued wages |   |       |   |                            |   | 1,028,366                |   |                                  |   | 1,028,366 |   |
| Net loss                                                |   |       |   |                            |   |                     |   | (897,736                              | )      | (897,736 | ) |
| **Balance, September 30, 2003**                         |   | 21,670,555 |   | 2,166                           |   | 5,120,957                |   | (5,109,558                            | )      | 13,565 |   |
| Net income                                              |   |       |   |                            |   |                     |   | 75,588                                |   | 75,588 |   |
| **Balance, December 31, 2003**                          |   | 21,670,555 |   | 2,166                           |   | 5,120,957                |   | (5,033,970                            | )      | 89,153 |   |
| Common stock issued for compensation                    |   | 1,000,000  |   | 100                             |   | 219,900                  |   |                                  |   | 220,000 |   |
| Common stock issued for interest due on  notes payable  |   | 5,014      |   | 1                               |   | 500                      |   |                                  |   | 501 |   |
| Common stock issued for accounts payable                |   | 377,788    |   | 38                              |   | 108,172                  |   |                                  |   | 108,210 |   |
| Common stock issued for past due royalty  late fees     |   | 44,733     |   | 4                               |   | 13,186                   |   |                                  |   | 13,190 |   |
| Common stock issued for new license fees                |   | 287,479    |   | 29                              |   | 82,571                   |   |                                  |   | 82,600 |   |
| Common stock issued for warrant exercise                |   | 125,000    |   | 13                              |   | —                   |   |                                  |   | 13 |   |
| Warrants issued in debt financing                       |   |       |   |                            |   | 93,293                   |   |                                  |   | 93,293 |   |
| Warrants issued for consulting                          |   |       |   |                            |   | 38,744                   |   |                                  |   | 38,744 |   |
| Net loss                                                |   |       |   |                            |   |                     |   | (551,133                              | )      | (551,133 | ) |
| **Balance, March 31, 2004**                             |   | 23,510,569 |   | $                               | 2,350  |                     | $      | 5,677,323                             |   | $ | (5,585,103 | ) | $ | 94,570 |   |

 

See accompanying notes.

 

5

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A DevelopmentStage Company)

**ConsolidatedStatements of Cash Flows**

(Unaudited)

 
|                                                                         |   | **Three  Months Ended  March 31,** |     | **Six Months  Ended  March 31,** |   | **October  20, 1997  (Inception)  to  March 31,  2004** |   |
|------------------------------------------------------------------------------|--------|------------------------------------|----------|----------------------------------|--------|---------------------------------------------------------|--------|
| **2004**                                                                     |   | **2003**                           |     | **2004**                         |   | **2003**                                                |
|                                                                         |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Cash flows from operating activities**                                     |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Net loss                                                                     |   | $                                  | (551,133 | )                                | $      | (473,477                                                | )      | $ | (475,545 | ) | $ | (687,569 | ) | $ | (5,585,103 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Depreciation and amortization                                                |   | 12,664                             |     | 12,922                           |   | 25,294                                                  |   | 26,118 |   | 403,424 |   |
| Amortization of discount on note payable                                     |   | 23,802                             |     | —                           |   | 23,802                                                  |   | — |   | 23,802 |   |
| Common stock issued in exchange for  services                                |   | —                             |     | 59,000                           |   | —                                                  |   | 59,000 |   | 361,180 |   |
| Common stock issued for interest due                                         |   | 13,691                             |     | 13,546                           |   | 13,691                                                  |   | 13,546 |   | 31,506 |   |
| Common stock issued for compensation                                         |   | 220,000                            |     | 8,500                            |   | 220,000                                                 |   | 8,500 |   | 529,516 |   |
| Warrants issued for consulting                                               |   | 38,744                             |     | —                           |   | 38,744                                                  |   | — |   | 38,744 |   |
| Forgiveness of accounts payable                                              |   | —                             |     | —                           |   | —                                                  |   | — |   | (3,400 | ) |
| Pre-acquisition income                                                       |   | —                             |     | —                           |   | —                                                  |   | — |   | 47 |   |
| Loss on disposal of assets                                                   |   | —                             |     | —                           |   | —                                                  |   | — |   | 190 |   |
| Loss from discontinued operations                                            |   | —                             |     | —                           |   | —                                                  |   | — |   | 93,267 |   |
| Gain on disposal of subsidiary                                               |   | —                             |     | —                           |   | —                                                  |   | — |   | (177,755 | ) |
| Impairment loss                                                              |   | —                             |     | —                           |   | —                                                  |   | — |   | 237,248 |   |
| Provision for future contract losses                                         |   | 1,500                              |     | 26,497                           |   | 1,500                                                   |   | 26,497 |   | 4,513 |   |
| (Increase) decrease in operating assets                                      |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Accounts receivable                                                          |   | 254,730                            |     | 25,000                           |   | (19,875                                                 | )      | — |   | (19,875 | ) |
| Related party receivable                                                     |   | —                             |     | (16,081                          | )      | —                                                  |   | (16,081 | ) | (22,021 | ) |
| Costs in excess of billings                                                  |   | —                             |     | (2,000                           | )      | 4,869                                                   |   | (2,000 | ) | (1,963 | ) |
| Inventory                                                                    |   | —                             |     | —                           |   | —                                                  |   | — |   | — |   |
| Prepaid expenses and other assets                                            |   | (22,795                            | )        | 6,854                            |   | (24,165                                                 | )      | (24,734 | ) | (24,581 | ) |
| Deposit                                                                      |   | (25                                | )        | (37                              | )      | 21                                                      |   | (37 | ) | (10,050 | ) |
| Increase (decrease) in operating  liabilities                                |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Accounts payable                                                             |   | (2,705                             | )        | 124,499                          |   | (175                                                    | )      | 165 |   | 1,427,358 |   |
| Employee and director payable                                                |   | 37,290                             |     | 71,377                           |   | 55,467                                                  |   | 144,125 |   | 117,882 |   |
| Billings in excess of costs                                                  |   | (231,165                           | )        | (20,554                          | )      | (37,773                                                 | )      | 44,687 |   | 93,396 |   |
| Related party payable                                                        |   | (130,517                           | )        | 39,502                           |   | 21,294                                                  |   | 99,452 |   | 158,012 |   |
| Accrued expenses                                                             |   | 44,808                             |     | (86,108                          | )      | 15,894                                                  |   | 73,675 |   | 245,384 |   |
| Income taxes payable                                                         |   | (3,643                             | )        | 19,281                           |   | (8,539                                                  | )      | 19,281 |   | 16,342 |   |
| Net cash used in operating activities                                        |   | (294,754                           | )        | (191,279                         | )      | (145,496                                                | )      | (215,375 | ) | (2,062,937 | ) |
|                                                                         |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Cash flows from investing activities**                                     |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Purchase of property, plant and equipment                                    |   | —                             |     | —                           |   | —                                                  |   | — |   | (29,660 | ) |
| Acquisition of intangible assets                                             |   | (10,036                            | )        | (2,066                           | )      | (15,264                                                 | )      | (4,342 | ) | (643,041 | ) |
| Loans made to related party                                                  |   | —                             |     | —                           |   | —                                                  |   | — |   | (10,000 | ) |
| Repayments of loans to related party                                         |   | —                             |     | —                           |   | —                                                  |   | — |   | 10,000 |   |
| Acquisition of subsidiary                                                    |   | —                             |     | —                           |   | —                                                  |   | — |   | (500,000 | ) |
| Cash of discontinued operations                                              |   | —                             |     | —                           |   | —                                                  |   | — |   | (19,999 | ) |
| Cash of acquired subsidiaries                                                |   | —                             |     | —                           |   | —                                                  |   | — |   | 17,261 |   |
| Net cash used in investing activities                                        |   | (10,036                            | )        | (2,066                           | )      | (15,264                                                 | )      | (4,342 | ) | (1,175,439 | ) |
|                                                                         |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Cash flows from financing activities**                                     |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Increase (decrease) in line of credit                                        |   | —                             |     | (200                             | )      | (1,153                                                  | )      | (200 | ) | — |   |
| Proceeds from notes payable                                                  |   | —                             |     | —                           |   | —                                                  |   | — |   | 1,064,500 |   |
| Payment of notes payable                                                     |   | (5,815                             | )        | —                           |   | (7,822                                                  | )      | — |   | (88,322 | ) |
| Proceeds from notes payable to related  parties                              |   | 266,000                            |     | (184                             | )      | 266,000                                                 |   | — |   | 550,181 |   |
| Payments of notes payable to related  parties                                |   | —                             |     | (57,477                          | )      | —                                                  |   | (98,527 | ) | (247,669 | ) |
| Proceeds from convertible debenture                                          |   | —                             |     | —                           |   | —                                                  |   | — |   | 500,000 |   |
| Proceeds from issuance of common stock, net                                  |   | 13                                 |     | 208,000                          |   | 13                                                      |   | 278,300 |   | 1,613,513 |   |
| Net cash provided by financing activities                                    |   | 260,198                            |     | 150,139                          |   | 257,038                                                 |   | 179,573 |   | 3,392,203 |   |
|                                                                         |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Net increase (decrease) in cash                                              |   | (44,593                            | )        | (43,206                          | )      | 96,277                                                  |   | (40,144 | ) | 145,772 |   |
| Cash, beginning of period                                                    |   | 190,365                            |     | 53,583                           |   | 49,495                                                  |   | 50,521 |   | — |   |
| Cash, end of period                                                          |   | $                                  | 145,772  |                             | $      | 10,377                                                  |   | $ | 145,772 |   | $ | 10,377 |   | $ | 145,772 |   |
|                                                                         |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Supplementary disclosures**                                                |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Interest paid                                                                |   | $                                  | 16,500   |                             | $      | 1,005                                                   |   | $ | 17,552 |   | $ | 1,310 |   | $ | 43,637 |   |
| Income taxes paid                                                            |   | $                                  | 2,600    |                             | $      | —                                                  |   | $ | 9,296 |   | $ | 600 |   | $ | 20,024 |   |
|                                                                         |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| **Non-cash financing and investing activities**                              |   |                               |     |                             |   |                                                    |   |   |   |   |   |
| Note payable paid through issuance of  common stock                          |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 1,000,000 |   |
| Note payable paid through exercise of  option                                |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 5,000 |   |
| Investment in subsidiary                                                     |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 796,732 |   |
| Common stock acquired in sale of subsidiary                                  |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 93,750 |   |
| 8% debenture released in sale of subsidiary                                  |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 500,000 |   |
| Note payable released in sale of subsidiary                                  |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 64,500 |   |
| Inter-company receivable released in sale  of subsidiary                     |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 22,021 |   |
| Accrued interest released in sale of  subsidiary                             |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 28,867 |   |
| Forgiveness of interest on note payable                                      |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 17,825 |   |
| Common stock issued to settle accounts  payable                              |   | $                                  | 108,210  |                             | $      | —                                                  |   | $ | 108,210 |   | $ | — |   | $ | 178,593 |   |
| Recapitalization of accounts payable and  accrued wages                      |   | $                                  | —   |                             | $      | —                                                  |   | $ | — |   | $ | — |   | $ | 1,028,366 |   |
| Line of credit converted into note payable                                   |   | $                                  | 49,752   |                             | $      | —                                                  |   | $ | 49,752 |   | $ | — |   | $ | 49,752 |   |
| Common stock issued for intagible asset                                      |   | $                                  | 82,600   |                             | $      | —                                                  |   | $ | 82,600 |   | $ | — |   | $ | 82,600 |   |
| Warrants issued for discount on note  payable                                |   | $                                  | 93,293   |                             | $      | —                                                  |   | $ | 93,293 |   | $ | — |   | $ | 93,293 |   |

 

See accompanying notes.

 

6

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**COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES**

(A DevelopmentStage Company)

# **NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

# **NOTE 1- SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

## ***TheCompany***

 

CompositeSolutions, Inc. (the “Company”), formerly JS Business Works, Inc., wasincorporated in the state of Florida on October 20, 1997.  The Company has two wholly ownedsubsidiaries: Composite Solutions, Inc., incorporated in the state of Nevada onDecember 8, 1998 and Trans-Science Corporation, incorporated in the state ofCalifornia on September 15, 1980.  Athird wholly owned subsidiary, Penultimo, Inc. dba Anchor Reinforcements,incorporated in the state of California on January 13, 1992, was sold on March31, 2001.  The Company is also a generalpartner in CSI Construction Services, an inactive majority ownedpartnership.  Composite Solutions, Inc.and subsidiaries were organized to develop, manufacture and market hightechnology products and processes in key areas of existing and newconstruction.

 

The Company isin the development stage and its efforts through March 31, 2004 have been principally devoted to raising additionalcapital and negotiating with potential key personnel and leasing facilities.  There is no assurance that any benefit willresult from such activities.  TheCompany will continue to incur expenses and losses as it pursues itsdevelopment efforts.

 

**Basis of Presentation**

 

Theconsolidated financial statements include the accounts of the Company and itssubsidiaries.  All significantintercompany transactions have been eliminated in consolidation.

 

**Unaudited Financial Statements**

 

Theaccompanying unaudited financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and according to regulatory requirements of Article 10 ofRegulation S-X for form 10-QSB. Accordingly, the unaudited financial statements do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States and should be read in conjunction with Form10-KSB for the fiscal year ended September30, 2003.

 

**Use of Estimates**

 

Thepresentation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the periodspresented.  Actual results may differsignificantly from those estimates.

 

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**Reclassifications**

 

Certain priorperiod amounts have been reclassified to conform to the March 31, 2004 presentation. These changes had no impact on previously reported consolidated resultsof operations or stockholders’ equity.

 

**NOTE 2 – NOTEPAYABLE**

 

Note payableat March 31, 2004 and September 30, 2003 were as follows:

 
|                                                                                                                                                                                                                                |   | **2004** |   | **2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| In November 2003 the Company converted  their existing line of credit in the amount of $49,752 into an installment  loan.  The loan is payable in  24 monthly installments of $2,262  including interest (8.5% per annum) |   | $        | 41,931 |     | $      | — |   |
|                                                                                                                                                                                                                                |   |     |   |     |   |
| Less current portion                                                                                                                                                                                                                |   | (24,508  | )      | —   |   |
|                                                                                                                                                                                                                                |   | $        | 17,423 |     | $      | — |   |

 

The maturities of long-term debt for each ofthe succeeding five years subsequent to March 31, 2004 are as follows:

 
| **Twelve Months  Ending  March 31,** |   |   |   |
|--------------------------------------|--------|--------|--------|
| 2004                                 |   | $      | 24,508 |   |
| 2005                                 |   | 17,423 |   |
| Thereafter                           |   | — |   |
|                                 |   | $      | 41,931 |   |

 

**NOTE 3 - COMMITMENTS**

 

The Companyand subsidiaries lease office space under a non-cancelable operatinglease.  At March 31, 2004, there are future minimum payments under the leaseof $12,497, which are due through June 30, 2004.

 

Rental expense was$12,496 and $11,219 for the three months ended March 31, 2004 and 2003,respectively and $24,993 and $23,235 for the six months ended March 31, 2004 and 2003, respectivelyand was $323,980 for the period October 27, 1997 (inception) to March 31, 2004.

 

8

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**NOTE 4 – EARNINGS PER SHARE**

 

At March 31,2004 and 2003, respectively there were 200,000 and 271,428 weighted averagenumber of options and 126,374 and 0 weighted average number of warrants topurchase shares of common stock not included in the calculation of dilutedearnings per share for the three months then ended, and there were 200,000 and271,428 weighted average number of options and 62,842 and 0 weighted averagenumber of warrants to purchase shares of common stock not included in thecalculation of diluted earnings per share for the six months then ended.  The options and warrants were not includedin diluted earnings per share because they would have been antidilutive.

 

**NOTE 5 - RELATED PARTY TRANSACTIONS**

 

**Related Party Payable, Consulting Fees,Materials, and Professional Fees**

 

The Company has and expects to continue tohave transactions, including advances and notes payable, with its officers,directors, stockholders, and their affiliates.

 

**Related Party Notes Payable**

 

On January 8,2001, the Company entered into a promissory note with an officer in the amountof $159,439 and again with the same officer on April 20, 2001 and June 5, 2002in the amount of $56,965 and $26,584, respectively.   Terms of the note required principal to be advanced in variousamounts, interest to accrue at 12%, and payment of principal and interest ninemonths from the date of latest advance. As of March 31, 2004 and September30, 2003, there was no principal balance outstanding, however there wasaccrued interest due in the amount of $0 and $26,053, respectively.

 

On April 23,2001, the Company issued a promissory note payable to an employee in the amountof $41,945. The principal is to be advanced to the Company in various amountsand is to be repaid nine months from the date of the latest advance.  As of March 31, 2004 and September30, 2003, there was a past due principal balance outstanding in theamount of $33,376 and accruedinterest in the amount of $12,059and $10,033, respectively.

 

On January 17, 2002, the Company issued a promissory note payable to astockholder in the amount of $10,000, plus interest at a rate of 10% perannum.  Accrued interest is to be paidin the Company’s common stock each quarter. The note was originally due on January 17, 2003 and has been extended toJanuary 17, 2005 under the same terms. As of March 31, 2004 and September 30, 2003, principal in theamount of $10,000 wasoutstanding.  As of March 31, 2004 the Company has accrueda liability to issue 2,520 shares of common stock valued at $252.

 

On June 17,2002, the Company issued a promissory note payable to a stockholder in theamount of $3,000, plus interest at a rate of 10% per annum.  The note was due on July 17, 2002.  As of March 31, 2004 and September30, 2003, there was a principal balance

 

9

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outstanding inthe amount of $3,000 and accruedinterest in the amount of $545 and $395, respectively.  The note is past due.

 

On March 8, 2004,the Company issued a promissory note payable in the amount of $300,000, plusinterest at a rate of 12% per annum.  Anofficer and stockholder is participating in $50,000 of this loan amount.  The note is due on the earlier of July 9,2004 or upon a minimum of $500,000 of debt or equity financing by the Companyand is personally guaranteed by a stockholder. Warrants were issued to purchase 300,000 and 200,000 shares of commonstock with exercise prices at 75% or 100% of the Company’s next offering ofequity or convertible debt securities, respectively or $.25 per share,whichever is less.  The warrants werevalued at $93,293 and are recorded as a discount to the debt.  The note provided net proceeds in the amountof $266,000, net of debt issue costs of $34,000.  The net carrying amount of the debt at March 31,2004 was $196,509, the amount due at maturity, adjusted for unamortizeddiscount and cost of issuance.

 

**Agreements**

 

The Company hasseveral consulting agreements with stockholders and officers for management,marketing and technical services which are applied between cost of goods soldand expenses as appropriate. Consulting fees were $297,919 and $98,631 for thethree months ended March 31, 2004 and 2003, respectively and $366,334 and$179,431 for the six months ended March 31, 2004 and 2003, respectively.  Consulting fees for the period October 20,1977 (Inception) to March 31, 2004 were $1,615,988.  The balance payable at March 31, 2004 and September 30, 2003 was$163,304 and $69,118, respectively.

 

**Stock-basedCompensation**

 

In January2004 the Company hired a new president and chief executive officer and issued1,000,000 shares of common stock valued at $220,000 for compensation.

 

**Intangible Assets**

 

Intangible assetsinclude a license agreement with UCSD, a stockholder, for a license underpatent rights to make, use, sell, offer for sale, import licensed products, topractice licensed methods, and to use certain technology.  The original nonexclusive license agreementdated August 4, 1999 was cancelled on February 26, 2004 when the Companyentered into an exclusive license agreement with UCSD.  Under the terms of the new licenseagreement, the Company continues the original license exclusively, in exchangefor 287,479 shares of common stock valued at $82,600.  The new license agreement terminates on the expiration date ofthe longest-lived patent rights. In addition, the Company is obligated to payfor one-half of all past and future patent costs.  Under the terms of the new agreement, the Company must pay to thelicensor a royalty of 2.0% on net sales of the licensed products or a minimumroyalty up to $50,000 and a royalty, the higher of 2.0% on net sales ofsublicensed products or 50% of royalties received from the sublicensor.  Royalties begin in the calendar year

 

10

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licensed productis first sold.

 

Future minimumroyalty payments are contingent upon the first date of sale of licensed productand are due on or before February 28 of each year are as follows:

 
| **Twelve Months  Ending  February 28,** |   |    |    |
|-----------------------------------------|--------|---------|---------|
| 1st Year of Sale                        |   | $       | 15,000  |   |
| 2nd Year of Sale                        |   | 25,000  |    |
| 3rd Year of Sale                        |   | 35,000  |    |
| 4th Year of Sale                        |   | 50,000  |    |
| 5th Year of Sale                        |   | 50,000  |    |
| Thereafter                              |   | 500,000 |    |
|                                    |   | $       | 675,000 |   |

 

In connectionwith the new license agreement the Company issued 377,788 shares of commonstock valued at $108,210 in exchange for royalties under the original licenseagreement, included in accounts payable. The Company also issued 44,733 shares of common stock valued at $13,190in exchange for late fees charged for past due royalty payments.

 

**NOTE 6 – CONCENTRATIONS OF CREDIT RISK**

 

The Companymaintains some of its cash in bank deposit accounts, which may be uninsured orexceed the federally insured limits. No losses have been experienced related tosuch accounts. The Company believes it places its cash with quality financialinstitutions and is not exposed to any significant concentrations of creditrisk on cash.

 

For the sixmonths ended March 31, 2004 and 2003, and for the period October 20, 1997(inception) to March 31, 2004, one customer located in Korea accounted forapproximately 96%, 0% and 48% of consolidated sales, respectively.  At March 31, 2004, this customer accountedfor all of the Company’s accounts receivable.

 

**NOTE 7 – GOING CONCERN**

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company’s financial positionand operating results raise substantial doubt about the Company’s ability tocontinue as a going concern, as reflected by losses of $5,585,103 accumulatedfrom October 20, 1997 (inception) to March 31, 2004. In addition, the Company’scurrent liabilities exceed current assets by $879,925 at March 31, 2004. The abilityof the Company to continue as a going concern is dependent upon commencingoperations, developing sales and obtaining additional capital and

 

11

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financing. Theconsolidated financial statements do not include any adjustments that might benecessary if the Company is unable to continue as a going concern.

 

The Company iscurrently seeking additional capital to allow it to continue its plannedoperations.  Management believes theCompany’s sales and marketing efforts will partially reduce the impact ofaccumulated losses and the negative working capital.    In addition, the Company continues its efforts to re-capitalizeaccounts payable into stockholders’ equity and negotiate reductions in otheraccounts payable.  The Company’smanagement believes these efforts will substantially reduce currentliabilities.

 

**NOTE 8 – WARRANTS**

 

On February 1,2004 the Company issued a warrant to purchase 125,000 shares of common stockwith an exercise price of $0.0001 to a consultant valued at $38,744.  On February 26, 2004 the warrant wasexercised for cash in the amount of $13. On March 8, 2004 the Company issued warrants to purchase 300,000 and200,000 shares of common stock with exercise prices at 75% or 100% of the Company’snext offering of equity or convertible debt securities, respectively or $.25per share, whichever is less.  Thewarrants were valued at $93,293 and are recorded as a discount to thepromissory note payable described in Note 5.

 

12

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**Item 2.Management’s Discussion and Analysis**

 

 

**GeneralOverview**

 

Composite Solutions, Inc. (“CSI or the Company”) isa development stage company licensing and distributing composite materialstechnology, engineering services, and special applications for use in the civilengineering and civil construction markets. These composite materials consistof advanced fiber reinforced polymers (FRPs). Examples include ultrahigh-strength carbon or aramid fibers in a thermoset (e.g., epoxy) matrix. Whenused in concert with traditional building material systems, these providesuperior structural performance with a minimization of cost. The Company’s newtechnology material/composite systems fall into the following main categories:1) Composite Overlays for structural retrofits; 2) the Carbon Shell System(CSS) for new construction and infrastructure renewal; and 3) Specialty Systemsfor ballistic and blast protection.

 

The effectiveness and integrity of the Company’scomposite overlay technologies and the CSS has been extensively validated byfull-scale laboratory tests at The Charles Lee Powell Structural ResearchLaboratories (“Powell Laboratories”) located at The University of California,San Diego (“UCSD”). These tests included both reinforced and un-reinforcedwall specimens that ranged from single-story walls to a full-scale five-storybuilding as well as columns ranging from single columns to full-scale bridgebents.  The Powell Laboratories are one of the few such facilities in theworld with the capability to execute full-scale tests and have performedextensive tests relating to the retrofit, and upgrading of structural elementssuch as walls, columns and floor slabs. For blast retrofits, the compositeoverlay technology has been validated in U.S. Government field tests. Thesetests range from structural components to a full-scale building.

 

**BusinessAreas**

 

The Company is marketing its new material systemsand technologies in four primary areas. These are: 1) Force Protection/HomelandSecurity; 2) Seismic Retrofits and Structural Upgrades; 3) InfrastructureRenewal; and 4) New Construction. In each area the CSI product lines includedesign services, FRP material systems, data bases, design methodologies, anddesign software for civil structures such as buildings, bridges, roadways, andpipelines.

 

13

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**CriticalAccounting Policies and Estimates**

 

There are no recent accounting pronouncements thathave had, or are expected to have, a material effect on the Company’s financialstatements.

 

 

**Results ofOperations**

 

In the following paragraphs we discuss the resultsof operations for the second quarter (ending March 31, 2004) of the Company’scurrent fiscal year relative to the second quarter of the previous fiscal year.We also show the results for the Company from its inception,

 

Revenue- Contract revenue for thethree months ended March 31, 2004 was $268,776, more than four times greaterthan the revenue for the three months ended March 31, 2003. The revenue for thefirst six months of the current fiscal year was $955,946, substantially greaterthan the annual revenue in the amount of $426,021 and $227,439 reported in Form10-KSB for the years ended September 30, 2003 and 2002, respectively. Most(96%) of the revenue for the for the six months ended March 31, 2004 is fromsales of the Company’s RetroshieldTM system under terms of an exclusive licenseagreement with Composite Solutions, Korea (CSK). CSK has installed RetroshieldTMin three projects in Korea.

 

Cost of Sales - The cost of sales for thethree months ended March 31, 2004 is dominated (87% of the total) by“consulting fees – related party”. Of the $174,376 of consulting fees – relatedparty, $129,900 is for services associated with completion of the CSK projects,and the remaining $44,476 is for services associated with three U.S. projects(two completed and one ongoing). The latter includes $33,758 for testing doneby UCSD on a fee-for-service basis. For the six months ended March 31, 2004cost of sales was dominated by “materials” reflecting sales of RetroshieldTMcomponents to CSK in Korea.

 

Gross Profit -The gross profit for thethree months ended March 31, 2004 is $67,070, or 25% of contract revenue. Forthe six-months ended March 31, 2004 gross profit is $216,006, or 23% of contractrevenue. These amounts compare to a negative gross profit for the same periodslast year.

 

Net Income - The Company posted a lossof $551,133 for the three months ended March 31, 2004 and a total loss of$475,545 for the six months ended March 31, 2004. Included in the expenseentries is a $220,000 non-cash charge taken in January 2004 for 1,000,000shares of common stock awarded to the new president and chief executive officerto provide an appropriate ownership incentive. Also included in the expenseentries for the six months ended March 31, 2004 is $163,670 in compensation tosenior management (Professor Hegemier and Dr. Bache) with payment beingdeferred pending improved operational performance.

 

**Stockholders’Equity**

 

At March 31, 2004, the Company had current assets of$192,191 and current liabilities of $1,072,116, for a difference of $879,925,slightly larger than the $843,795 working capital deficit (current assets –current liabilities) at September 30, 2003. The intangible assets increased by $141,981during the three months ended March 31, 2004, primarily due to renegotiation ofCSI’s

 

14

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patent licensing agreement with UCSD (see Note 5 tothe financial statements). The shareholders’ equity is $94,570 at March 31,2004 compared to $13,565 at September 30, 2003.

 

**Liquidityand Capital Resources**

 

For the six months ended March 31, 2004 net cashused in operating activities was $145,496 compared to $215,375 for the sixmonths ended March 31, 2003.

 

Although the Company’s revenues and other businessindicators have improved over the six months ended March 31, 2004 the Companyhas been operating with insufficient capital. As a consequence, the differencebetween current assets and current liabilities, a deficit of $879,925 is largecompared to revenue and gross profit. To remedy this situation, the Company isconsidering sale of common stock to generate additional capital. Additionaloutside investment will also provide the capital needed for marketing and otheractivities needed for increased revenue growth.

 

**RelatedParty Debt Obligations**

 

The following payment obligations are due to relatedparties. These amounts are included in accounts payable as well as othercurrent liabilities.

 
|                                                  |   | **Relation**         |   |    |    |
|-------------------------------------------------------|--------|----------------------|--------|---------|---------|
| **Employee and director payable**                     |   |                 |   |    |    |
| Gilbert Hegemier                                      |   | Officer              |   | $       | 112,211 |   |
| Jang Lee                                              |   | Employee             |   | 5,566   |    |
| Other                                                 |   | Employee             |   | 105     |    |
| Total                                                 |   |                 |   | $       | 117,882 |   |
| **Related party payable**                             |   |                 |   |    |    |
| Blanchard, Krasner & French                       |   | Stockholder          |   | $       | 16,655  |   |
| Smaha & Daley                                     |   | Stockholder          |   | 17,822  |    |
| UC Regents                                            |   | Stockholder          |   | 69,106  |    |
| Composite Designs                                     |   | Stockholder          |   | 33,325  |    |
| Other                                                 |   | Stockholder          |   | 15,513  |    |
| Other                                                 |   | Affiliate            |   | 1,078   |    |
| Total                                                 |   |                 |   | $       | 153,499 |   |
| **Accrued expenses and related party notes  payable** |   |                 |   |    |    |
| Accrued wages                                         |   | Employee/Stockholder |   | $       | 180,408 |   |
| Loan P&I                                          |   | Employee/Stockholder |   | 45,435  |    |
| Loan P&I                                          |   | Stockholder          |   | 10,252  |    |
| Loan P&I                                          |   | Stockholder          |   | 198,876 |    |
| Loan P&I                                          |   | Stockholder          |   | 3,545   |    |
| Total                                                 |   |                 |   | $       | 438,516 |   |

 

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**ManagementTeam**

 

As reported under Results of Operation, the Companyhas a growing business base. To lead continued growth and reach sustainedprofitability, the Company has hired Dr. Thomas Bache to serve as President andCEO. Dr. Bache is an experienced manager (most recently Senior Vice Presidentand Group Manager at SAIC, a $6.5Billion per year corporation) with a strongfoundation in composite materials technology (he completed his PhD at UCSD witha thesis on the dynamic response of composite materials).

 

**CautionaryStatement Regarding Forward-Looking Statements**

 

This report contains “forward-looking”statements.  The Company is including this statement for the expresspurpose of availing itself of protections of the safe harbor provided by thePrivate Securities Litigation Act of 1995 with respect to all suchforward-looking statements.  Examples of forward-looking statementsinclude, but are not limited to: (a) projections of revenues, capitalexpenditures, growth, prospects, dividends, capital structure and otherfinancial matters; (b) statements of plans objectives of the Company or itsmanagement or Board of Directors; (c) statements of future economicperformance; (d) statements of assumptions underlying other statements andstatements about the Company and its business relating to the future; and (e)any statements using the words “expects,” “intends,” “anticipates,” “may,”“plans,” “projects” and “estimates,” and analogous or similar expressions.

 

The Company’s ability to predict projected resultsor the effect of certain events on the Company’s operating results isinherently uncertain.  Therefore, the Company wishes to caution eachreader of this report to carefully consider the following factors, any or allof which have in the past and could in the future affect the ability of theCompany to achieve its anticipated results and could cause actual results todiffer materially than those discussed herein: (1) ability to attract andretain customers to purchase its products and services, (2) ability tocommercialize and market products (3) results of research and development, (4)technological advances by third parties and competition, (5) future capitalneeds of the Company, (6) history of operating losses, (7) dependence upon keypersonnel, and (8) general economic and business conditions.  The Companyexpressly disclaims any obligation or undertaking to release publicly anyupdates or revisions to any forward—looking statement contained herein toreflect any change in the Company’s expectations with regard thereto or anychange in events, conditions or circumstances on which any such statement isbased.

 

**Risks**

 

Need for Additional Capital**-**The Company’s future issubject to substantial risks and uncertainties. During the six months endedMarch 31, 2004 the Company’s revenue has improved substantially ($955,946, or$827,934 more than for the six months ended March 31, 2003), but the Companyposted a substantial loss from operations, primarily due to investment infull-time management dedicated to moving the Company forward. There is noassurance of growth in revenue and gross profit to the levels needed forsustained profitable operation. The Company had a net loss of

 

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$5,585,103 for the period October 20, 1997(Inception) to March 31, 2004.  Current liabilities exceed currentassets by $879,925.  Profitability from operations is unlikely to generateadequate capital for the increased investment in marketing, management, and technicalstaff that is required for future growth. Additional capital is needed tosupport operations, and there can be no assurance that such capital will becomeavailable.

 

Limited Public Market for Common Stock **-**There currently is a verylimited public market for the Company’s common stock and no assurance can begiven that a large public market will develop in the future. The Company’scommon stock may be thinly traded, if at all, even if the Company achieves fulloperation and has significant revenues.

 

Our shares of common stock should be consideredspeculative. Prospective investors should consider carefully all risk factors.

 

Future Sales of Common Stock by Our ExistingShareholders Could Reduce the Price of Our Common Stock**-**The market price of ourcommon stock could decline as a result of sales by our existing shareholders ofshares of common stock in the market.  Likewise, the perception that thesesales could occur may result in the decline of the market price of our commonstock. These sales also might make it more difficult for us to sell equitysecurities in the future.

 

The Loss of Our Key Technical Individuals Would Havean Adverse Impact on Future Development and Could Impair Our Ability to Succeed**-**Our performance issubstantially dependent on the technical expertise of Gilbert A. Hegemier,Ph.D. and our ability to hire and retain personnel with similar technicalexpertise. The loss of any of Gilbert A. Hegemier, Ph.D.’s services could havea materially adverse effect on our business, development, financial condition,and operating results.  We do not maintain “key person” life insurance onany of our directors or senior executive officers and we do not have lifeinsurance on Gilbert A. Hegemier, Ph.D.

 

We Do Not Expect to Declare or Pay Any Dividends**-**We have not declared or paidany dividends on our common stock since our inception, and we do not anticipatepaying any such dividends for the foreseeable future.

 

Because of Our Limited Operating History, It IsDifficult to Predict Our Future Revenues - As a result of ourlimited operating history and uncertainty about the pace of acceptance of thenew technology we seek to introduce into the market, we are unable toaccurately forecast our revenues.  Our current and future expense levelsare based largely on our plan of operation.  Revenues and operatingresults generally depend on our ability to develop a base of customers andbusinesses.  We may be unable to adjust spending in a timely manner tocompensate for any unexpected revenue shortfall.  Accordingly, anysignificant shortfall in estimated revenues in relation to our plannedexpenditures would have an immediate adverse effect on our business, prospects,financial condition and results of operations.

 

Our Future Revenues are Dependent on the Acceptanceof the Products and Services that We Offer **-**Our future revenues and ourability to generate profits in the future are substantially dependent upon thewidespread acceptance and use of our composite materials technology. There can be no

 

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assurance that our composite materials technologywill become widely accepted or that a sufficiently broad base of newconstruction or infrastructure renewal will use our composite materialstechnology.

 

We Will Have to Expend Substantial Funds onManagement and Marketing in the Future**-**We have not incurred significant advertising,sales, and marketing expenses to date.  The Company operated withoutfull-time dedicated management from January 2002 through December 2004. To increasemarket penetration of our composite materials technology, we need to spendsignificantly more on dedicated professional management, engineering to certifyour advanced solutions, and focused marketing..  If our strategy isunsuccessful, we may not be able to recover these expenses or even generateincreased revenues.  To date, our experience with respect to marketing ourproducts and services is limited.  We may also elect to enter intoagreements or relationships with third parties regarding the promotion ormarketing of our composite materials technology.  There can be noassurance that we will be able to establish adequate sales and marketingcapabilities, that we will be able to enter into marketing agreements orrelationships with third parties on financially acceptable terms, or that anythird parties with whom we enter into such arrangements will be successful inmarketing and promoting our composite materials technology, or other productsand services offered by us.

 

 

###### **Part II**

######  

**Item 1.  Legal Proceedings**

 

Neither the Company nor its subsidiary is the subject of any pendinglegal proceeding.

 

**Item 6. Exhibits and Reports on Form 8-K**

** **

**(a)****      ****Exhibits**

 

 
| **Exhibit  Number** |   | **Description**                                          |
|---------------------|--------|----------------------------------------------------------|
|                |   |                                                     |
| 3.1                 |   | Articles  of Incorporation of the Company, as amended(1) |
| 3.2                 |   | Bylaws  of the Company, as amended(1)                    |
| 10.1                |   | License  Agreement with UCSD (Case No. SD96-040)(2)      |
| 10.2                |   | Share  Exchange Agreement(3)                             |
| 10.3                |   | Share  Exchange Agreement with and Acquisition of TSC(4) |
| 31                  |   | Sarbanes-Oxley  Section 302 Certification           |
| 32                  |   | Sarbanes-Oxley  Section 906 Certification           |

 

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(1)                                  Incorporated by reference to thereferenced document filed as an exhibit to the Company’s Registration Statementon Form 10SB12G/A, Commission File No. 000-24551, filed on October 20,1998.

 

(2)                                  Incorporated by reference to thereferenced document filed as an exhibit to the Company’s Annual Report on Form10-KSB, Commission File No. 000-24551, filed on January 13, 2000.

 

(3)                                  Incorporated by reference to the referenceddocument filed as an exhibit to the Company’s Current Report on Form 8-K,Commission File No. 000-24551, filed on July 14, 2000 and August 31,2000.

 

(4)                                  Incorporated by reference to thereferenced documents related to the Acquisition of TSC and filed on Form 8-K,Commission File No. 000-24551, on June 26, 2000 and July 25, 2000.

 

**(b).**                               **Reports on Form 8-K.**

 

None.

 

**Signatures**

 

In accordancewith Section 13 or 15(d) of the Securities Exchange Act the Company has causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Date: May  14, 2004 |                       |
|---------------------|----------------------------|
|                |                       |
|                | Composite  Solutions, Inc. |
|                |                       |
|                |                       |
|                | By:                        | */s/ Thomas C. Bache* |   |
|                |                       |   |
|                |                       | Thomas C.  Bache, President & CEO |

 

 

Pursuant tothe requirements of the Securities Exchange Act, of 1934 this report has beensigned below by the following person on behalf of the Company and in thecapacity and on the date indicated.

 
| **Signature**         |   | **Capacity** |               | **Date** |
|-----------------------|--------|--------------|--------------------|----------|
|                  |   |         |               |     |
| */s/ Thomas C. Bache* |   |         | President  and CEO |     | May 14, 2004 |
| Thomas C.  Bache      |   |         |               |     |
|                       |        |              |                    |          |  |

 

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