UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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





For
the quarterly period ended March 31, 2009





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





000-28867


(Commission
file number)











ENERGY
COMPOSITES CORPORATION


(Exact
name of registrant as specified in its charter)





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





4400
Commerce Drive, Wisconsin Rapids, WI  54494


(Address
of principal executive offices) (Zip Code)





(715)
421-2060


(Registrant’s
telephone number, including area code)





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





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





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





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





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





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:  42,070,585 shares as of April 30,
2009





ENERGY
COMPOSITES CORPORATION





FORM
10-Q


FOR
THE QUARTER ENDED


MARCH
31, 2009





INDEX





PagePART
      I.  FINANCIAL INFORMATIONItem
      1.
            Financial
      StatementsConsolidated
      Balance Sheets
            2Consolidated
      Statements of Operations
            3Consolidated
      Statements of Cash Flows
            4Notes
      to Consolidated Financial Statements
            5Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            16Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            21Item
      4.
            Controls
      and Procedures
            21PART
      II.  OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            22Item
      1A.
            Risk
      Factors
            22Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            22Item
      3.
            Defaults
      Upon Senior Securities
            22Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            22Item
      5.
            Other
      Information
            22Item
      6.
            Exhibits
            23SIGNATURES
            23





1





ENERGY
      COMPOSITES CORPORATIONCONSOLIDATED
      BALANCE SHEETS(Unaudited)
                        
                        
                        (Audited)March
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008ASSETSCurrent
      assets:Cash
                        
                        $
                        2,884,096
                        
                        
                        $
                        2,985,289Accounts
      receivable, net of allowance for doubtfulaccounts
      of $108,000 in 2009 and 2008
                        
                        
                        1,692,971
                        
                        
                        
                        2,556,945Inventories,
      net
                        
                        
                        1,073,439
                        
                        
                        
                        1,353,915Deferred
      income taxes
                        
                        
                        92,000
                        
                        
                        
                        68,000Other
      current assets
                        
                        
                        73,777
                        
                        
                        
                        107,423Total
      current assets
                        
                        
                        5,816,283
                        
                        
                        
                        7,071,572Property
      and equipment, net
                        
                        
                        5,669,787
                        
                        
                        
                        5,682,457Other
      assets:Deferred
      income taxes
                        
                        
                        2,387,000
                        
                        
                        
                        1,787,000Intangible
      assets, net
                        
                        
                        66,583
                        
                        
                        
                        69,815Total
      other assets, net
                        
                        
                        2,453,583
                        
                        
                        
                        1,856,815Total
      assets
                        
                        $
                        13,939,653
                        
                        
                        $
                        14,610,844LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      liabilities:Current
      portion of long-term debt obligations
                        
                        $
                        527,908
                        
                        
                        $
                        503,576Short-term
      notes payable
                        
                        
                        1,200,000
                        
                        
                        
                        1,000,000Accounts
      payable
                        
                        
                        724,547
                        
                        
                        
                        1,421,423Accounts
      payable - related party
                        
                        
                        157,488
                        
                        
                        
                        89,372Accrued
      expenses
                        
                        
                        148,245
                        
                        
                        
                        162,136Accrued
      payroll and payroll taxes
                        
                        
                        360,801
                        
                        
                        
                        324,339Customer
      deposits
                        
                        
                        53,026
                        
                        
                        
                        431,775Total
      current liabilities
                        
                        
                        3,172,015
                        
                        
                        
                        3,932,621Long-term
      debt obligations, net of current portion
                        
                        
                        5,395,510
                        
                        
                        
                        5,487,293Stockholders’
      equity :Common
      stock - $.001 par value; 100,000,000 sharesauthorized,
      42,028,901 and 41,579,157 shares issuedand
      outstanding, respectively
                        
                        
                        42,029
                        
                        
                        
                        41,579Additional
      paid-in capital
                        
                        
                        10,170,331
                        
                        
                        
                        8,998,941Accumulated
      deficit
                        
                        
                        (4,840,232
                        )
                        
                        
                        (3,849,590
                        )Total
      stockholders’ equity
                        
                        
                        5,372,128
                        
                        
                        
                        5,190,930Total
      liabilities and stockholders’ equity
                        
                        $
                        13,939,653
                        
                        
                        $
                        14,610,844





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


2





ENERGY
      COMPOSITES CORPORATIONCONSOLIDATED
      STATEMENTS OF OPERATIONS(Unaudited)
                                  For
      the Three Months
                                  Ended
      March 31,2009
                                
                                
                                2008Revenue
                                
                                $
                                2,412,669
                                
                                
                                $
                                1,809,117Cost
      of goods sold
                                
                                
                                1,968,202
                                
                                
                                
                                1,440,217Gross profit
                                
                                
                                444,467
                                
                                
                                
                                368,900Selling,
      general and administrative expenses
                                
                                
                                892,316
                                
                                
                                
                                452,589Income (loss) from
      operations
                                
                                
                                (447,849
                                )
                                
                                
                                (83,689
                                )Other
      income (expense):Interest
      expense
                                
                                
                                (1,174,538
                                )
                                
                                
                                (81,838
                                )Interest
      income
                                
                                
                                7,745
                                
                                
                                
                                -Total other income
      (expense)
                                
                                
                                (1,166,793
                                )
                                
                                
                                (81,838
                                )Loss
      before provision for income taxes
                                
                                
                                (1,614,642
                                )
                                
                                
                                (165,527
                                )Income
      tax provision (benefit)
                                
                                
                                (624,000
                                )
                                
                                
                                28,000Net
      loss
                                
                                
                                (990,642
                                )
                                
                                
                                (193,527
                                )Less:
      net income attributable to non-controlling interest in variable interest
      entities
                                
                                
                                -
                                
                                
                                
                                (52,955
                                )Net
      loss attributable to Energy Composites Corporation
                                
                                $
                                (990,642
                                )
                                
                                $
                                (246,482
                                )Net
      loss per common share - basic and diluted
                                
                                $
                                (0.02
                                )
                                
                                $
                                (0.01
                                )Weighted
      average shares outstanding - basic and diluted
                                
                                
                                41,931,223
                                
                                
                                
                                24,000,000





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





3





ENERGY
      COMPOSITES CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)
                            For
      the Three Months
                            Ended
      March 31,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (990,642
                          )
                          
                          $
                          (246,482
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Non-controlling
      interest in variable interest entities
                          
                          
                          -
                          
                          
                          
                          52,955Depreciation
      and amortization
                          
                          
                          103,765
                          
                          
                          
                          81,200Gain
      on sale of other assets
                          
                          
                          (150
                          )
                          
                          
                          -Amortization
      of debt discount for imputed interest
                          
                          
                          948
                          
                          
                          
                          915Amortization
      of discount for warrants and beneficial conversion feature on convertible
      debt
                          
                          
                          1,049,213
                          
                          
                          
                          -Stock
      issued for interest payments
                          
                          
                          36,840
                          
                          
                          
                          -Stock
      issued for compensation
                          
                          
                          110,000
                          
                          
                          
                          -Deferred
      income taxes
                          
                          
                          (624,000
                          )
                          
                          
                          28,000Changes
      in operating assets and liabilities:Accounts
      receivable, net
                          
                          
                          863,974
                          
                          
                          
                          (16,088
                          )Inventories,
      net
                          
                          
                          280,476
                          
                          
                          
                          (4,487
                          )Other
      current assets
                          
                          
                          33,646
                          
                          
                          
                          (6,943
                          )Accounts
      payable
                          
                          
                          (696,876
                          )
                          
                          
                          (99,551
                          )Accounts
      payable - related party
                          
                          
                          68,116
                          
                          
                          
                          -Accrued
      expenses
                          
                          
                          (13,891
                          )
                          
                          
                          30,375Accrued
      payroll and payroll taxes
                          
                          
                          36,462
                          
                          
                          
                          84,869Customer
      deposits
                          
                          
                          (378,749
                          )
                          
                          
                          4,217Net
      cash used in operating activities
                          
                          
                          (120,868
                          )
                          
                          
                          (91,020
                          )Cash
      flows from investing activities:Purchase
      of property and equipment
                          
                          
                          (75,130
                          )
                          
                          
                          (112,055
                          )Proceeds
      from sale of property and equipment
                          
                          
                          150
                          
                          
                          
                          -Net
      cash used in investing activities
                          
                          
                          (74,980
                          )
                          
                          
                          (112,055
                          )Cash
      flows from financing activities:Increase
      (decrease) in bank overdraft payable
                          
                          
                          -
                          
                          
                          
                          (168,087
                          )Net
      borrowings from lines of credit - bank
                          
                          
                          -
                          
                          
                          
                          (27,691
                          )Financing
      costs for long-term debt
                          
                          
                          (3,320
                          )
                          
                          
                          -Net
      borrowings from short-term notes payable
                          
                          
                          200,000
                          
                          
                          
                          506,063Proceeds
      from long-term debt
                          
                          
                          -
                          
                          
                          
                          -Payments
      on long-term debt
                          
                          
                          (102,025
                          )
                          
                          
                          (70,642
                          )Capital
      distributions by variable interest entities
                          
                          
                          -
                          
                          
                          
                          (10,000
                          )Net
      cash provided by financing activities
                          
                          
                          94,655
                          
                          
                          
                          229,643Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          (101,193
                          )
                          
                          
                          26,568Cash
      and cash equivalents:Beginning
      of period
                          
                          
                          2,985,289
                          
                          
                          
                          30,739End
      of period
                          
                          $
                          2,884,096
                          
                          
                          $
                          57,307





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


4





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





Note
1.  Basis of Presentation





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





Note
2.  Nature of Business and Significant Accounting
Policies





Nature
of Business





The
Company was organized October 29, 1992 under the laws of the State of
Nevada.  The Company had not started its planned principal operations
until October 14, 2008, and, in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 7, Accounting and Reporting by
Development Stage Enterprises, was considered a Development Stage
Enterprise.  On June 27, 2008, Las Palmas Mobile Estates entered into
a Share Exchange Agreement whereby it agreed to issue 28,750,000 shares of its
common stock to acquire all of the outstanding shared of Advanced Fiberglass
Technologies, Inc., a Wisconsin corporation (“AFT”).





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





The
accompanying financial statements as of March 31, 2009 and 2008 and for the
three months then ended, present the historical financial information of
AFT.  The  outstanding  common  shares
of AFT at March  31,  2008
have  been  restated  to  reflect  the  shares  issued  upon
reorganization.





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





5





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





Principles
of Consolidation





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





The
Company also consolidates its financial results in accordance with Financial
Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest
Entities, or FIN 46R, which requires a company to consolidate entities
determined to be variable interest entities (VIEs), for which the Company is
deemed to be the VIE’s primary beneficiary.  See the accounting policy
on “Variable Interest Entities” for further information.





Variable
Interest Entities





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





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





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





For the
three months ended March 31, 2008, the statements of operations and cash flows
have been presented on a consolidated basis to include the variable interests in
M&W and FPF.  All significant intercompany accounts and
transactions have been eliminated in consolidation.





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





For the
three months ended March 31, 2008, the revenue of the VIEs represented $186,103
or 10.3% of the consolidated revenue of the Company.  Through
consolidation, the Company recognizes all net losses of the VIEs in excess of
the equity in those VIEs which currently is none.  The Company
recognizes net earnings of the VIEs only to the extent it is recovering losses
previously recognized with respect to the VIEs.  Earnings of the VIEs
in excess of the Company’s previously recognized losses with respect to that VIE
are eliminated from the Company’s earnings and are attributed to the respective
equity owner of the VIEs by recording such earnings as non-controlling interest
in variable interest entities on the Company’s consolidated financial
statements.  During the three months ended March 31, 2008, the VIEs
experienced a combined net income of $52,955 which accordingly resulted in a
non-controlling charge on the Company’s statements of operations.





6





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





Credit
Risk and Major Customers





Financial
instruments that may subject the Company to significant concentrations of credit
risk consist primarily of trade receivables.  The Company grants
credit to its customers throughout the United States in the normal course of
business.  Customer creditworthiness is routinely monitored and
collateral is not required.  The following is a schedule of
significant sales to customers for the three months ended March 31, 2009 and
2008 and significant customer accounts receivable balances at March 31, 2009 and
2008:





Percentage
      ofPercentage
      of
                        
                        Trade
      AccountsTotal
      Sales
                        
                        ReceivableCustomer
                        
                        2009
                        
                        2008
                        
                        2009
                        
                        20081
                        
                        60.3%
                        
                        59.4%
                        
                        49.2%
                        
                        30.6%2
                        
                        11.8
                        
                        6.5
                        
                        2.1
                        
                        0.53
                        
                        10.6
                        
                        4.9
                        
                        -
                        
                        7.282.7%
                        
                        70.8%
                        
                        51.3%
                        
                        38.3%





Revenue
Recognition





The
Company derives revenue primarily from the sale of the Company’s manufactured
products (tanks, piping, and ductwork), installation of those tanks on occasion
and service/repair.  In accordance with SEC Staff Accounting Bulletin
No. 104, Revenue
Recognition (“SAB 104”), revenue is recognized when persuasive evidence
of an arrangement exists, the price is fixed and determinable, transfer of title
has occurred, services have been rendered or delivery has occurred per contract
terms and collection of the related receivable is reasonably assured. At times,
customer deposits and other receipts are received and are deferred and
recognized as revenue when earned.





Most of
the Company’s products are sold without installation services
included.  Revenue for product only sales is generally recognized at
the time of shipment and if all other contractual obligations have been
satisfied.  When the Company provides a combination of products and
installation services, the arrangement is evaluated under Emerging Issues Task
Force Issue (“EITF”) No. 00-21 Revenue Arrangements with Multiple
Deliverables.  Most installation work is generally done in a
short period of time (less than 30 days) and the corresponding revenue is
recorded upon the completion of the installation and all contractual obligations
have been met.





For any
service/repair, most work is performed on a time and material basis and revenue
is recognized upon performance.





Segment
Reporting





Through
March 31, 2009, the Company provided products and services through one
reportable operating segment, Industrial Tank and Piping.





Recent
Accounting Pronouncements





In April
2009, FASB issued FASB Staff Position (“FSP”) No. FAS 157-4, Determining Fair Values When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Indentifying Transactions That Are Not
Orderly.  This FSP provides guidance on (1) estimating the fair
value of an asset or liability when the volume and level of the activity for the
asset or liability have significantly declined and (2) identifying transactions
that are not orderly.  The FSP also amends certain disclosure
provisions of SFAS No. 157 to require, among other things, disclosures in
interim periods of the inputs and valuation techniques used to measure fair
value.  This FSP is effective prospectively beginning April 1,
2009.  The Company is currently evaluating the impact of this
standard, but would not expect it to have a material impact on the Company’s
consolidated results of operations or financial conditions.


7





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





In April
2009, FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments.This FSP essentially expands the
disclosure about fair value of financial instruments that were previously
required only annually to be also required for interim period
reporting.  In addition, the FSP requires certain additional
disclosures regarding the methods and significant assumptions used to estimate
the fair value of financial instruments.  These additional disclosures
will be required beginning with the quarter ending June 30, 2009.  The
Company is currently evaluating the requirement of these additional
disclosures.





Note
3.  Inventories, Net





Inventories
consist of the following:


March
      31, 2009
                    
                    
                    December
      31, 2008Raw
      materials
                    
                    $
                    333,981
                    
                    
                    $
                    440,741Work
      in progress
                    
                    
                    739,458
                    
                    
                    
                    913,174Finished
      goods
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    1,073,439
                    
                    
                    $
                    1,353,915





Note
4.  Property and Equipment, Net





Property
and equipment are as follows:


March
      31, 2009
                  
                  
                  December
      31, 2008Land
      and improvements
                  
                  $
                  82,572
                  
                  
                  $
                  74,023Buildings
      and improvements
                  
                  
                  3,581,717
                  
                  
                  
                  3,590,267Machinery
      and equipment
                  
                  
                  2,196,219
                  
                  
                  
                  2,125,177Vehicles
      and trailers
                  
                  
                  390,625
                  
                  
                  
                  381,212Computer
      equipment
                  
                  
                  178,014
                  
                  
                  
                  173,926Furniture
      and office equipment
                  
                  
                  104,813
                  
                  
                  
                  104,8136,533,960
                  
                  
                  
                  6,449,418Less
      accumulated depreciation
                  
                  
                  (864,173
                  )
                  
                  
                  (766,961
                  )Net
      property and equipment
                  
                  $
                  5,669,787
                  
                  
                  $
                  5,682,457





Depreciation
expense was $97,212 and $78,115 for the three months ended March 31, 2009 and
2008, respectively.





The cost
and accumulated amortization of equipment and vehicles under capital lease as of
March 31, 2009 was $30,487 and $3,378, respectively. The cost and accumulated
amortization of equipment under capital lease as of December 31, 2008 was
$21,075 and $2,459, respectively.





Note
5.  Intangible Assets





Intangible
assets are as follows:


March
      31, 2009
                    
                    
                    December
      31, 2008Non-compete
      agreement
                    
                    $
                    5,000
                    
                    
                    $
                    5,000Customer
      list
                    
                    
                    74,434
                    
                    
                    
                    74,434Deferred
      financing costs
                    
                    
                    69,338
                    
                    
                    
                    66,017148,772
                    
                    
                    
                    145,451Less
      accumulated amortization
                    
                    
                    (82,189
                    )
                    
                    
                    (75,636
                    )Net
      intangible assets
                    
                    $
                    66,583
                    
                    
                    $
                    69,815





8





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





Amortization
expense was $6,553 and $3,086 for the three months ended March 31, 2009 and
2008, respectively.  Estimated amortization expense for the next five
years is as follows:


2009
      - remaining
                        
                        $
                        7,7462010
                        
                        
                        8,5672011
                        
                        
                        7,3882012
                        
                        
                        5,3962013
                        
                        
                        4,872Thereafter
                        
                        
                        32,614Total
                        
                        $
                        66,583





Note
6.  Financing Arrangements





Line
of Credit - Bank





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





Short-Term
Notes Payable





AFT uses
short-term notes from NPESB to fund bulk purchases of inventory and large jobs
in addition to utilizing its line of credit.  The underlying inventory
and customer purchase orders serve as specific collateral for these
notes.  In addition, the short-term notes are also typically secured
by all business assets of the Company.  The notes bear interest at
fixed rates.  The notes are typically twelve months or
less.  AFT had $1,200,000 and $1,000,000 of outstanding short-term
notes payable with weighted average interest rates of 6.75% and 7.45% as of
March 31, 2009 and December 31, 2008, respectively.





Long-Term
Debt Obligations





Long-term
debt obligations are as follows:


March
      31, 2009
              
              December
      31, 2008NPESB
      - a term loan secured by 15 ton deck crane, interest rate of 7.25%, due
      October 2010, monthly payments of $948
              $14,736
              
              $17,302NPESB
      – a term loan secured by all general business assets of AFT and unlimited
      continuing guarantee of ECC; interest rate of 6.75%, due on demand,
      monthly payments of $898
              49,939
              
              51,808NPESB
      - an industrial revenue bond term loan, secured by equipment and unlimited
      continuing guarantee of ECC; contains restrictive financial covenants,
      interest rate of 5.75%, due July 2014, monthly payments of
      $7,266
              396,449
              
              412,391NPESB
      - an industrial revenue bond term loan, secured by equipment and unlimited
      continuing guarantee of ECC; contains restrictive financial covenants,
      interest rate of 5.75%, due July 2014, monthly payment of
      $7,266
              390,738
              
              406,761





9





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





March
      31, 2009
              
              December
      31, 2008City
      of Wisconsin Rapids, a term loan, secured by all assets and unlimited
      continuing guarantee of ECC; contains various operating covenants,
      interest rate 2%, due April 2012, monthly payments of
    $4,499
              428,199
              
              439,545Yale
      Financial Services, a capital lease term loan, secured by two Yale
      forklifts, interest rate 7.7%, due October 2010, monthly payments of
      $657
              11,726
              
              13,451City
      of Wisconsin Rapids, a $75,000 term loan, secured by ECC and AFT
      guarantees; imputed interest at 8% resulting in an original issue discount
      with an unamortized balance of $26,292 at March 31, 2009, balloons in
      August 2014; debt was assumed by AFT from M&W as part of the land and
      building purchase on December 31, 2008
              48,708
              
              47,760NPESB
      – an industrial revenue bond term loan, secured by real estate, ECC and
      AFT guarantees; contains restrictive financial covenants, interest rate of
      5.50%, due July 2027, monthly payment of $20,766; debt was assumed by AFT
      from M&W as part of the land and building purchase on December 31,
      2008
              2,856,844
              
              2,879,672M&W
      LLC (related party) – an unsecured term loan, interest rate of 4.775%, due
      December 2015, quarterly payment of $24,493 beginning March
      2009
              1,033,130
              
              1,045,328NPESB
      – a term loan secured by all general business assets of AFT and an
      unlimited continuing guarantee of ECC; due January 2012, interest rate of
      6.75%, monthly payments of $13,405 beginning February 2009
              413,158
              
              430,000American
      Automotive Leasing, a capital lease term loan, secured by a vehicle,
      interest rate 17.87%, due February 2011, monthly payments of
      $410
              8,727
              
              -Convertible
      notes payable ($1,470,000 face value) – see Note 7
              271,064
              
              246,8515,923,418
              
              5,990,869Less
      current portion of long-term obligations
              (527,908)
              
              (503,576)Total
      long-term debt obligations, net of current portion
              $5,395,510
              
              $5,487,293





Maturities
of long-term debt obligations are as follows:





2009
      - remaining
                  
                  $
                  404,9132010
                  
                  
                  493,3632011
                  
                  
                  1,975,2622012
                  
                  
                  631,5882013
                  
                  
                  337,056Thereafter
                  
                  
                  3,280,172Total
                  
                  $
                  7,122,354





10





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





At
December 31, 2008, the Company was not in compliance with various restrictive
financial covenants contained in the industrial revenue bonds. The tangible net
worth covenant required AFT to maintain at least $600,000 in net
worth.  The debt service coverage ratio covenant required AFT to
maintain at least 1.25 coverage.  The indebtedness to tangible net
worth ratio required AFT to maintain a ratio of less than 3.5 to
1.  The Company, prior to December 31, 2008, received a waiver letter
on the covenant defaults from the lenders. These violated covenants are waived
through December 31, 2009.





On March
13, 2009, the Company executed an amendment to the credit agreement for the
three industrial revenue bonds held by Nekoosa Port Edwards State
Bank.  The amendment to the credit agreement includes the redefinition
of the covenants attached to the bonds.  Under the terms of the
amended credit agreement, the covenants apply to the Company and its subsidiary
AFT on a consolidated basis.  The covenants require the consolidated
Company to maintain (a) a Debt Service Coverage Ratio of not less than 1.25 to
1, (b) a Debt to Equity Ratio of not more than 3.5 to 1, and (c) an Equity level
of not less than $600,000.  The next measurement date of these
covenants will be December 31, 2009.





Note
7.  Convertible Notes Payable





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





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





The
private placement was closed on December 14, 2008.  Debentures in the
aggregate principal amount of $6,370,000 were sold which included the issuance
of 2,548,000 Warrants.  The Debentures are considered to be
conventional convertible debt under the accounting guidance of Emerging Issues
Task Force (“EITF”) 05-2, The
Meaning of ‘Conventional Convertible Debt’ in Issue No.
00-19.





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





The
application of the provisions of EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF 00-27, Application of Issue 98-5 to Certain
Convertible Instruments resulted in the proceeds of the Debentures being
allocated based on the relative fair value of the Debentures and Warrants as of
the commitment date.  The Company then calculated the intrinsic value
of the beneficial conversion feature embedded in the Debentures and because the
amount of the beneficial conversion feature exceeded the fair value allocated to
the Debentures, the amount of the beneficial conversion feature to be recorded
was limited to the proceeds allocated to the Debentures.  Accordingly,
the beneficial conversion feature was calculated to be $2,301,578 and was
recorded as an additional discount on the Debentures and a credit to Additional
Paid-In Capital of $1,412,578 and a credit of $889,000 to deferred income tax
liability.  Following the guidance of Issue 6 in EITF 00-27, the
Company is accreting the beneficial conversion feature to interest expense over
the 3-year term of the debt using the effective interest method.





11





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





The
following table summarizes the convertible note balance as of March 31,
2009:





Balance
      at January 1, 2008
                  
                  $
                  -Plus:
      gross proceeds received in 2008
                  
                  
                  6,370,000Less:
      value assigned to:Warrants
                  
                  
                  (4,068,422
                  )Beneficial
      conversion feature allotted to:Additional
      paid-in capital
                  
                  
                  (1,412,578
                  )Deferred
      income tax liability
                  
                  
                  (889,000
                  )Sub-total
      of assigned values
                  
                  
                  (6,370,000
                  )Plus:
      accretion of original issue discount from warrants and beneficial
      conversion feature
                  
                  
                  4,121,851Less:
      conversion of debt to common stock
                  
                  
                  (3,875,000
                  )Balance
      at December 31, 2008
                  
                  
                  246,851Plus:
      accretion of original issue discount from warrants and beneficial
      conversion feature
                  
                  
                  1,049,213Less:
      conversion of debt to common stock
                  
                  
                  (1,025,000
                  )Balance
      at March 31, 2009
                  
                  $
                  271,064





All
outstanding convertible debentures at March 31, 2009 mature at various dates in
2011.  The $1,470,000 of maturities related to these debentures are
included in the long-term debt maturities table found in Note 6.





The
effective annual interest rate for the three months ended March 31, 2009 was
71%. The rate is considerably higher than the stated rate of 6% due to the
discount recorded against the debt for the detachable warrants and beneficial
conversion feature.





Note
8.  Stockholders’ Equity





In
conjunction with the private placement of convertible debt, an additional
$1,025,000 of debt was converted to common shares of the Company during the
three-month period ended March 31, 2009.  424,744 common shares were
issued for the debt and related interest on the debt.





During
the three-month period ended March 31, 2009, the Company issued 25,000 shares
valued at $75,000 for services rendered in the first quarter.  Also,
the Company established a compensation plan, payable in arrears, for its board
of directors.  Each director will receive a $30,000 restricted stock
grant per year of service.  At March 31, 2009, a $35,000 accrual has
been recorded to additional paid-in capital for the restricted shares that have
been earned by the directors during the quarter.





12





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





Note
9.  Income Taxes





The
income tax provision consisted of the following for the three months ended March
31, 2009 and 2008:





March
      31, 2009
                  
                  
                  March
      31, 2008Currently
      payable (refundable)
                  
                  $
                  -
                  
                  
                  $
                  -Deferred
      tax benefit
                  
                  
                  (624,000
                  )
                  
                  
                  (82,000
                  )(624,000
                  )
                  
                  
                  (82,000
                  )Establishment
      of the net deferred tax liabilities as of January 1, 2008 due to change in
      tax status
                  
                  
                  -
                  
                  
                  
                  110,000Total
      income tax provision (benefit)
                  
                  $
                  (624,000
                  )
                  
                  $
                  (28,000
                  )





The
Company recorded a tax benefit relating to the loss incurred for the three
months ended March 31, 2009 and 2008.  The Company assessed its
quarter-end and year-end tax assets pursuant to SFAS No. 109 and determined it
is likely the full amount of the recorded deferred tax assets will be realized
due to the Company’s previous history of operating profits prior to
2008.  Therefore, a valuation allowance was not recorded against the
deferred tax assets at March 31, 2009 or December 31, 2008.





Note
10.  Employee Benefit Plans





In
January 2009, the Company began sponsoring a defined contribution savings plan
that allows substantially all employees not covered by separate collective
bargaining agreements to contribute a portion of their pre-tax and/or after-tax
income up to statutory limits.  The plan requires the company to match
50% of the participant’s contributions up to 6% of the participants’
compensation.  The Company’s expense was $12,493 for the three months
ended March 31, 2009.





Prior to
2009, the Company sponsored a Simple IRA plan which required the Company to
match 100% of the eligible participant’s contributions up to 3% of the
participant’s earned income.  The Company’s expense was $10,128 for
the three months ended March 31, 2008.





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





Note
11.  Related Party Transactions





Manufacturing
and Office Facility Lease and Purchase





The
Company leased its manufacturing facility at Commerce Drive, Wisconsin Rapids,
Wisconsin with M&W which was considered a variable interest entity of the
Company until December 30, 2008.  On December 31, 2008, the Company
purchased the facility from M&W and had no lease payments for the three
month period ended March 31, 2009.  Total lease payments to M&W
for the three months ended March 31, 2008 were $105,000.





Other
Related Party Transactions





AFT
purchased fiberglass pipe fittings from FPF totaling $88,834 and $23,495 for the
three months ended March 31, 2009 and 2008, respectively.





13





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





Note
12.  Commitments and Contingencies





Legal
Proceedings





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





Note
13.  Sales and Cost of Sales





The
following information summarizes the net sales and related cost of
sales/services for the Company’s product and service offerings.  The
Company does not consider the product sales and service components of their
business to be reportable operating segments as discrete financial information
is not available nor are the financial results of each component separately
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.





Three
      Months Ended March 31, 2009Products
      &
                            
                            
                            Service
      &Components
                            
                            
                            Installation
                            
                            
                            TotalNet
      sales
                            
                            $
                            2,230,617
                            
                            
                            $
                            182,052
                            
                            
                            $
                            2,412,669Cost
      of sales
                            
                            
                            1,775,822
                            
                            
                            
                            192,380
                            
                            
                            
                            1,968,202Gross
      Profit
                            
                            $
                            454,795
                            
                            
                            $
                            (10,328
                            )
                            
                            $
                            444,467Three
      Months Ended March 31, 2008Products
      &
                            
                            
                            Service
      &Components
                            
                            
                            Installation
                            
                            
                            TotalNet
      sales
                            
                            $
                            1,538,471
                            
                            
                            $
                            270,646
                            
                            
                            $
                            1,809,117Cost
      of sales
                            
                            
                            1,196,621
                            
                            
                            
                            243,596
                            
                            
                            
                            1,440,217Gross
      Profit
                            
                            $
                            341,850
                            
                            
                            $
                            27,050
                            
                            
                            $
                            368,900





Note
14  Earnings (Loss) Per Share





The
Company computes earnings per share in accordance with FASB Statement of
Financial Accounting Standards No. 128, Earnings Per Share (“SFAS
128”).  SFAS 128 requires companies to compute earnings per share
under two different methods, basic and diluted, and present per share data for
all periods in which statements of operations are presented. Basic earnings per
share are computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding. Diluted earnings per share are computed
by dividing net income (loss) by the weighted average number of common stock and
common stock equivalents outstanding.





14





ENERGY
      COMPOSITES CORPORATIONNOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS





The
following table provides a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings (loss) per share for the three
months ended March 31, 2009 and 2008:





March
      31, 2009
                  
                  
                  March
      31, 2008Basic
      earnings (loss) per share calculation:Net
      income (loss) to common shareholders
                  
                  $
                  (990,642
                  )
                  
                  $
                  (246,482
                  )Weighted
      average of common shares outstanding
                  
                  
                  41,931,223
                  
                  
                  
                  24,000,000Basic
      net earnings (loss) per share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )Diluted
      earnings (loss) per share calculation:Net
      income (loss) to common shareholders
                  
                  $
                  (990,642
                  )
                  
                  $
                  (246,482
                  )Weighted
      average of common shares outstanding
                  
                  
                  41,931,223
                  
                  
                  
                  24,000,000Convertible
      debentures (1)
                  
                  
                  -
                  
                  
                  
                  -Warrants
      (2)
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average common shares outstanding
                  
                  
                  41,931,223
                  
                  
                  
                  24,000,000Diluted
      net income (loss) per share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )





(1)
            At
      March 31, 2009, there were outstanding convertible debentures equivalent
      to 588,000 common shares.  The convertible debentures are
      anti-dilutive at March 31, 2009 and therefore have been excluded from
      diluted earnings per share.





(2)
            At
      March 31, 2009, there were outstanding warrants equivalent to 2,548,000
      common shares.  The warrants expire 3 years from their 2008 date
      of issuance and have an exercise price of $5.00 per share. The warrants
      are anti-dilutive for the three months ended March 31, 2009 and therefore
      have been excluded from diluted earnings per
  share.





Note
15.  Supplemental Disclosure of Cash Flow Information





March
      31,2009
                  
                  
                  2008Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                  
                  $
                  103,265
                  
                  
                  $
                  73,536Non-cash
      investing and financing activities:Purchase
      of property and equipment with long-term debt
                  
                  $
                  9,412
                  
                  
                  $
                  67,673Debt
      converted to common stock
                  
                  $
                  1,025,000
                  
                  
                  $
                  -





15


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





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





Accounting
Policies and Estimates





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





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





Overview





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





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





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





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





16


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





Results
of Operations





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





Revenue
                
                Three
      months ended March 31,
                
                
                Increase
      /
                
                
                %
      increase /2009
                
                
                2008
                
                
                (decrease)
                
                
                (decrease)AFT
                
                $
                2,412,669
                
                
                $
                1,623,014
                
                
                $
                789,655
                
                
                
                48.7
                %M&W/FPF,
      net of eliminations
                
                
                -
                
                
                
                186,103
                
                
                
                (186,103
                )
                
                NATotal
      consolidated revenue
                
                $
                2,412,669
                
                
                $
                1,809,117
                
                
                $
                603,552
                
                
                
                33.4
                %





Our
revenue growth during the first quarter of 2009 was primarily attributable to
our successful completion and delivery of an eighteen tank contract with a major
chlor-alkali producer.  During the first quarter of 2009, we recorded
$878,249 of increased revenue from product sales, $38,076 of increased revenue
associated with field services tank work, and decreased revenue of ($126,670)
associated with field pipefitting contracts due to the timing of field
pipefitting outages, some of which are sensitive to weather
conditions.





Cost
      of goods sold
                
                Three
      months ended March 31,
                
                
                Increase
      /
                
                
                %
      increase /2009
                
                
                2008
                
                
                (decrease)
                
                
                (decrease)AFT
                
                $
                1,968,202
                
                
                $
                1,284,666
                
                
                $
                683,536
                
                
                
                53.2
                %M&W/FPF,
      net of eliminations
                
                
                -
                
                
                
                155,551
                
                
                
                (155,551
                )
                
                NATotal
      cost of goods sold
                
                $
                1,968,202
                
                
                $
                1,440,217
                
                
                $
                527,985
                
                
                
                36.7
                %





The major
components of cost of goods sold are raw materials used in manufacturing,
manufacturing labor, and manufacturing overhead.  The primary raw
materials used in our manufacturing processes are isophathalic, polyester, and
vinyl-ester resins and fiberglass.  Manufacturing labor includes
wages, employment taxes, employee benefits, and union expenses.  The
major components of manufacturing overhead are utilities and depreciation
associated with our manufacturing facility and equipment, travel and lodging
expense associated with field service activities and manufacturing
supplies.  For the three months ended March 31, 2009, our cost of
materials increased to 29% of revenue from 28% of revenue for the comparable
period in 2008.  The increase in material cost as a percentage of
revenue is primarily due to a sales mix with slightly lower service and
installation revenue.  Our cost of labor remained stable at 31% of
revenue for the three months ended March 31, 2009 and
2008.  Manufacturing overhead increased from 20% of revenue during the
first quarter of 2008 to 21% in 2009 primarily as a result of increased
depreciation expense from added equipment.  These factors resulted in
a 2% decline in gross profit for the first quarter of 2009 compared to
2008.





Gross
      profit
                
                Three
      months ended March 31,
                
                
                %
      of revenue
                
                
                %
      of revenue2009
                
                
                2008
                
                
                2009
                
                
                2008AFT
                
                $
                444,467
                
                
                $
                338,348
                
                
                
                18.4
                %
                
                
                20.8
                %M&W/FPF,
      net of eliminations
                
                
                -
                
                
                
                30,552
                
                
                NA
                
                
                
                16.4
                %Total
      gross profit
                
                $
                444,467
                
                
                $
                368,900
                
                
                
                18.4
                %
                
                
                20.4
                %





17





Selling,
      general & administrative expenses
                
                Three
      months ended March 31,
                
                
                %
      of revenue
                
                
                %
      of revenue2009
                
                
                2008
                
                
                2009
                
                
                2008AFT
                
                $
                892,316
                
                
                $
                528,360
                
                
                
                37.0
                %
                
                
                32.6
                %M&W/FPF,
      net of eliminations
                
                
                -
                
                
                
                (75,771
                )
                
                NA
                
                
                
                (40.7
                )%Total
      SG&A expenses
                
                $
                892,316
                
                
                $
                452,589
                
                
                
                37.0
                %
                
                
                25.0
                %





The
increase in our selling, general and administrative expenses is driven by our
growth strategy, including costs associated with being a public company,
continuing investment in certain in-house capabilities, such as expanded sales,
engineering and design staff, more robust human resource management, augmented
financial and legal staff, and a more aggressive, and thus more costly,
marketing program.  Taken together, these additional expenses
represent a platform for managing and driving our
growth.  Accordingly, we expect our sales to increase robustly in 2009
as a result of our investment in this management platform.  We have
also invested time and effort into the development of our WindFiberTM strategy,
including planning the construction of a 350,000 square foot wind blade
production plant in Wisconsin Rapids within the next 12 months.  Selling,
general and administrative expenses for both M&W and FPF for the three
months ended March 31, 2008 were $33,729 net of eliminations of rental activity
for M&W of $109,500.





Income
      (loss) from operations
                
                Three
      months ended March 31,
                
                
                %
      of revenue
                
                
                %
      of revenue2009
                
                
                2008
                
                
                2009
                
                
                2008AFT
                
                $
                (447,849
                )
                
                $
                (190,012
                )
                
                
                (18.6
                )%
                
                
                (11.7
                )%M&W/FPF,
      net of eliminations
                
                
                -
                
                
                
                106,323
                
                
                NA
                
                
                
                (57.1
                )%Total
      income (loss) from operations
                
                $
                (447,849
                )
                
                $
                (83,689
                )
                
                
                (18.6
                )%
                
                
                (4.6
                )%





The
$257,837 increase in our net loss in 2009 is primarily due to increased cost of
goods sold, costs associated with public company reporting, and the increase in
selling, general and administrative expenses observed in 2009, as described
above.





Interest
      expense
                
                Three
      months ended March 31,
                
                
                %
      of revenue
                
                
                %
      of revenue2009
                
                
                2008
                
                
                2009
                
                
                2008AFT
                
                $
                (1,174,538
                )
                
                $
                (28,470
                )
                
                
                (48.7
                )%
                
                
                (1.8
                )%M&W/FPF
                
                
                -
                
                
                
                (53,368
                )
                
                NA
                
                
                
                (28.7
                )%Total
      interest expense
                
                $
                (1,174,538
                )
                
                $
                (81,838
                )
                
                
                (48.7
                )%
                
                
                (4.5
                )%





Non-cash
amortization of debt discounts for warrants and beneficial conversion feature
related to the convertible debt was $1,049,213 for the three months ended March
31, 2009.  The remaining increase is due to increased short and
long-term debt borrowings in 2009 relating to the new manufacturing facility
acquired at the end of 2008 and equipment and working capital notes to fund our
growing operations.  For the three months ended March 31, 2009,
interest expense was partially offset by bank interest income of
$7,745.





Net
      loss
                
                Three
      months ended March 31,
                
                
                %
      of revenue
                
                
                %
      of revenue2009
                
                
                2008
                
                
                2009
                
                
                2008Loss
      before income taxes
                
                $
                (1,614,642
                )
                
                $
                (165,527
                )
                
                
                (66.9
                )%
                
                
                (10.2
                )%Income
      tax provision (benefit)
                
                
                (624,000
                )
                
                
                28,000
                
                
                
                (25.9
                )%
                
                
                15.0
                %Net
      loss
                
                $
                (990,642
                )
                
                $
                (193,527
                )
                
                
                (41.1
                )%
                
                
                (10.7
                )%





Effective
January 1, 2008, we terminated our S-Corporation election and began operating as
a C-Corporation.  As a result of the change in tax status, an initial
$110,000 of net deferred tax liability was recorded as income tax expense which
was offset by a net income tax benefit of $82,000 associated with net operating
losses and temporary book and tax timing differences for the three months ended
March 31, 2008.  We believe the full amount of the benefit is
realizable due to our previous history of operating profits prior to 2008 and,
therefore, have not recorded a valuation allowance against the deferred tax
benefits.  Significant components of the income tax benefit include
the net operating loss for the year, fair value of warrants and temporary timing
differences of fixed assets, accruals, and reserves.





Our
consolidated net loss for the three months ended March 31, 2009 was $(990,642)
compared to a net loss of $(246,482) for the three months ended March 31, 2008,
as a result of the factors described above.





18


We
believe that the most meaningful measurement of our performance is EBITDA
because of the substantial effect of the non-cash charges to the income
statement due to the method of accounting for convertible
debt.  EBITDA as of March 31, 2009 and 2008 was $(336,339) and
$(122,788), respectively.  The increase in current year EBITDA loss is
largely due to the investment we are making in our growth strategy resulting in
increased selling, general and administrative costs, as described
above.





Liquidity
and Capital Resources





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





To
capitalize on our expanding manufacturing capabilities, we have made significant
investments in our sales personnel and marketing program and in our new
WindFiberTM strategy.  With these expenditures, we have increased our
visibility in our existing markets and have captured early attention from major
targeted customers within the wind energy market and in our core
markets.  Furthermore, we anticipate field service revenues will
increase sharply from the first quarter 2009 results, consistent with historical
seasonal trends.  Major manufacturers typically plan maintenance,
repair and overhaul activities (“outages”) for the spring, summer and fall
months.  Historically, we experience sharp increases in field service
backlog and revenue in the second and third quarter of the year, and we expect
this trend to continue in 2009.  As we realize increased revenue
during the “outage” season, we believe our liquidity outlook will
improve.





Our
primary sources of liquidity to fund our growth strategy are cash generated from
operations and short and long-term term financing arrangements.  As of
March 31, 2009, cash and cash equivalents totaled $2,884,096.  Our
working capital was $2,644,268 and $3,138,951 at March 31, 2009 and December 31,
2008, respectively.  We believe we have sufficient resources available
to meet our liquidity requirements, including debt service, for the remainder of
2009.  We will require additional financing to pursue 
our WindFiberTM strategy over the next 12 months, including the
construction of a new 350,000 square foot wind blade production
plant.





Operating
Cash Flows





Operating
activities used $120,868 and $91,019 of cash for the three months ended March
31, 2009 and 2008, respectively.  The increase in cash used by
operating activities for 2009, was due primarily to the significant decreases in
accounts payable and customer deposits associated with the large tank contract
we completed and the increase in the overall net loss for the three months ended
March 31, 2009.  These increases in operating cash uses were partially
offset by decreases in accounts receivable and inventories primarily associated
with the same contract.





Investing
Cash Flows





Investing
activities used $74,980 and $112,055 of cash for the three months ended March
31, 2009 and 2008, respectively.  The primary use of cash in investing
activities for both periods was the purchase of additional manufacturing
equipment supporting plant and field service activities, as well as purchase of
office equipment for added office staff positions.





Financing
Cash Flows





Financing
activities provided $94,655 and $229,643 for the three months ended March 31,
2009 and 2008, respectively.  Proceeds from financing activities for
the three months ended March 31, 2009 were $200,000 raised from additional
short-term notes which was partially offset by financing costs and payments on
long-term debt of $105,345.  For the three months ended March 31,
2008, proceeds from financing activities included proceeds from short-term notes
of $506,063.  Cash used in financing activities for the three months
ended March 31, 2008 included a reduction in bank overdrafts of $168,087,
payments on the bank line of credit of $27,691, payments on long-term debt of
$70,642, and distributions to a stockholder of $10,000 primarily for income
taxes due by the shareholders relating to the pass through income from M&W
and FPF.





19


Debenture
Financing





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





The
Debentures sold included the issuance of 2,548,000 Warrants.  The
issued Warrants were deemed to have a relative fair market value of $4,068,422
which was recorded as a discount to the face value of the Debentures and as a
credit to additional paid-in capital and will be accreted to interest expense
over the 3-year term using the effective interest method.  We used the
Black-Scholes-Merton pricing model as a method for determining the estimated
fair value of the Warrants.





At March
31, 2009, Debentures totaling $1,470,000 remain outstanding and will become due
during the last part of 2011.  $4,900,000 of Debentures has been
converted to common stock as of March 31, 2009.  Many Debenture
holders have elected to receive interest in the form of stock, lowering our cash
outlays for debt service on the Debentures.  We believe that the
growth of our business and revenue will improve the value of our stock and
motivate the remaining Debenture holders to convert their debt into stock which
will further reduce our cash requirements to settle the debt in
2011.  We also anticipate that the Debenture holders will exercise
their Warrants when and if the value of our stock increases above $5.00 per
share.  The money we raise from the exercise of Warrants, if any, will
be used to continue our growth strategy.





As we
roll out the sequential elements of our WindFiberTM strategy, it may be
appropriate to pursue an additional tranche of equity financing to support the
construction of a new 350,000 square foot manufacturing plant, the equipping of
the production lines, training of employee-associates, and working
capital.  While we anticipate a substantial portion of our WindFiberTM
financing requirements will be met with subsidized or otherwise advantaged debt
financing, it may be prudent to supplement such financing with a modest tranche
of supplemental equity.





Purchase
of Manufacturing Plant and Related Debts





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





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





The
assumed building-related industrial revenue bonds mature in 2027 with an annual
interest rate of 5.5%.  Monthly principal and interest payments on the
assumed bonds are $20,766.  Our manufacturing equipment was financed
with two $500,000 industrial revenue bonds expiring July 2014 with interest at
5.75% and a $500,000 note from the City of Wisconsin Rapids expiring April 2012
with interest at 2%.  Monthly principal and interest payments for each
of these bonds and the Wisconsin Rapids note are $7,266 and
$4,499.  The long maturities and






20
 
  low
interest rates associated with the building and equipment loans allow us enough
time to successfully execute our growth strategy at a low cost of
capital.  As we begin to generate positive cash from operations, we
anticipate that we will be able to service these building- and equipment-related
debts without the need of raising additional capital.





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





On March
13, 2009, we executed an amendment to the credit agreement for the three
building- and equipment-related industrial revenue bonds.  The amended
financial covenants require us to maintain (a) a Debt Service Coverage Ratio of
not less than 1.25 to 1, (b) a Debt to Equity Ratio of not more than 3.5 to 1,
and (c) an Equity level of not less than $600,000.  The next
measurement date of these covenants will be December 31, 2009.





Other
Debt Activity





As of May
5, 2009, we have decreased our total short-term borrowings for working capital
purposes by settling a $500,000 note that was due May 4, 2009 and borrowing an
additional $300,000 under a new short-term note which carries a three-month
term, 6.75% interest per annum, and is secured by our business assets and
receivables and certain customer purchase orders.





Leases





We have
entered into various operating leases to support operations.  We lease
several vehicles supporting our Field Services Division, forklifts for the
plant, office equipment, and lodging space in Biron, Wisconsin.  Total
monthly lease payments for this equipment and office space are
$3,587.  The lease we previously held for the office space in
Hastings, Michigan expired March 1, 2009 and was not renewed.  The
monthly payment for the Hastings office was $925 per month.





Going
Forward





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





Off-Balance
Sheet Arrangements





As of
March 31, 2009, we did not have any off-balance sheet arrangements.





Item
3.      Quantitative and Qualitative Disclosures
about Market Risk





Not
applicable to smaller reporting companies.





Item
4.      Controls and Procedures





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





21


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





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





PART
II.  OTHER INFORMATION





Item
1.      Legal Proceedings





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





Item 1A.   Risk
Factors





Not
applicable to smaller reporting companies.





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





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


Date
                            Persons
      or Class of Persons
                            Securities
                            ConsiderationJanuary 1, 2009
                            25
      accredited investors
                            7,544
      shares of common stock
                            $18,839
      of accrued interest paid to debenture holdersJanuary
      5, 2009
                            Executive
      officer
                            25,000
      shares of common stock
                            Compensation
      awardJanuary
      to March  31,
                              2009
                            30
      accredited investors
                            417,200
      shares of common stock
                            Conversion
      of $1,025,000 of Debenture principal and $18,000 of accrued
      interest





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





Item
3.      Defaults Upon Senior
Securities





None.





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





None.





Item
5.      Other Information





None.





22


Item
6.      Exhibits





Regulation
                      S-K
      Number
                    Document3.1
                    Articles
      of Merger effective October 14, 2008 (1)3.2
                    Amended
      and Restated Articles of Incorporation effective October 14, 2008
      (1)3.3
                    Amended
      and Restated Bylaws adopted October 14, 2008 (1)4.1
                    Form
      of Debenture (2)4.2
                    Form
      of Warrant (2)10.1
                    Share
      Exchange Agreement dated June 26, 2008 (3)10.2
                    First
      Amendment to Share Exchange Agreement dated August 8, 2008
    (4)10.3
                    2008
      Stock Incentive Plan (1)10.4
                    Industrial
      Development Revenue Bonds, Bond Agreement dated February 28, 2007
      (1)10.5
                    Industrial
      Development Revenue Bonds, Promissory Note 2007A dated February 28, 2007
      (1)10.6
                    Industrial
      Development Revenue Bonds, Promissory Note 2007B dated February 28, 2007
      (1)10.7
                    Industrial
      Development Revenue Bonds, Promissory Note 2007C dated February 28, 2007
      (1)10.8
                    Industrial
      Development Revenue Bonds, Credit Agreement dated February 28, 2007
      (1)10.9
                    Industrial
      Development Revenue Bonds, Construction Mortgage, Assignment Of Leases And
      Rents and Fixture Filing dated February 28, 2007 (1)10.10
                    Industrial
      Development Revenue Bonds, Security Agreement dated February 28, 2007
      (1)10.11
                    Option
      Agreement dated June 18, 2008 (1)10.12
                    Purchase
      and Supply Agreement dated October 13, 2008 (1)10.13
                    Unsecured
      Promissory Note dated December 31, 2008 (5)10.14
                    Assignment
      and Assumption Agreement dated December 31, 2008 (6)10.15
                    Amendment
      to the Credit Agreement dated March 13, 2009 (7)31.1
                    Rule
      13a-14(a) Certification of Samuel W. Fairchild31.2
                    Rule
      13a-14(a) Certification of Jeffrey S. Keuntjes32.1
                    Certification
      of Samuel W. Fairchild Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
                    Certification
      of Jeffrey S. Keuntjes Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002


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


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


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


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


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


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


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





SIGNATURES





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





ENERGY
      COMPOSITES CORPORATIONDated:  May
      14, 2009
            By:
            /s/
      Samuel W. FairchildSamuel
      W. Fairchild, Chief Executive
Officer