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, 2011





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.  Yesý    Noo





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).  Yeso    Noo  (not required)





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).  Yeso   Noý





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  46,701,621shares as ofJune 1, 2011.





ENERGY COMPOSITES CORPORATION





FORM 10-Q


FOR THE QUARTER ENDED


MARCH 31, 2011





INDEX





PagePART I.  FINANCIAL INFORMATIONItem 1.
Financial Statements:Consolidated Balance Sheets (Unaudited)
2Consolidated Statements of Operations (Unaudited)
3Consolidated Statements of Cash Flows (Unaudited)
4Notes to Consolidated Financial Statements (Unaudited)
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 3.
Quantitative and Qualitative Disclosures about Market Risk
20Item 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 5.
Other Information
22Item 6.
Exhibits
22SIGNATURES
24





1


ENERGY COMPOSITES CORPORATIONCONSOLIDATED BALANCE SHEETS(Unaudited)


(Audited)March 31,


December 31,2011


2010ASSETSCurrent Assets:Cash

$
17,577


$
6,719Accounts receivable, net of allowance for doubtfulaccounts of $64,000 in 2011 and $61,000 in 2010


677,076



835,160Inventories, net


945,881



609,001Other current assets


81,453



84,836Prepaid consulting expense


2,268,000



2,268,000Total current assets


3,989,987



3,803,716Property and equipment, net


6,186,106



6,237,215Other assets:Intangible assets, net


47,872



49,669Prepaid consulting expense, net of current portion


1,134,000



1,701,000Total other assets


1,181,872



1,750,669Total assets

$
11,357,965


$
11,791,600LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Current portion of long-term debt obligations

$
4,624,203


$
4,724,913Line of credit - bank


188,603



113,900Short-term notes payable


675,000



575,000Accounts payable


1,147,209



1,265,123Accounts payable - related party


191,691



183,012Accrued expenses


346,008



314,519Accrued payroll and payroll taxes


343,486



283,617Customer deposits


703,865



51,795Total current liabilities


8,220,065



7,511,879Long-term liabilitiesLong-term debt obligations, net of current portion


179,279



95,823Deferred income - land purchase


429,494



429,494Total long-term liabilities


608,773



525,317Total liabilities


8,828,838



8,037,196Stockholders' equity (deficit):Common stock - $.001 par value; 100,000,000 sharesauthorized, 46,683,949 and 46,659,800 shares issuedand outstanding, respectively


46,685



46,661Additional paid-in capital


18,635,377



18,576,546Accumulated deficit


(16,152,935
)


(14,868,803
)Total stockholders' equity


2,529,127



3,754,404Total liabilities and stockholders' equity

$
11,357,965


$
11,791,600


See notes to the consolidated financial statements.


2


ENERGY COMPOSITES CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)For the Three Months EndedMarch 31,2011


2010Revenue

$
950,072


$
759,605Cost of goods sold


899,558



731,911Gross profit


50,514



27,694Selling, general and administrative expenses


1,153,697



1,182,437Loss from operations


(1,103,183
)


(1,154,743
)Other income (expense):Interest expense


(180,949
)


(242,040
)Interest income


-



176Total other income (expense)


(180,949
)


(241,864
)Loss before income tax provision


(1,284,132
)


(1,396,607
)Income tax provision


-



-Net loss

$
(1,284,132
)

$
(1,396,607
)Net loss per common share - basic and diluted

$
(0.03
)

$
(0.03
)Weighted average shares outstanding - basic and diluted


46,683,681



42,130,064




See notes to the consolidated financial statements.


3





ENERGY COMPOSITES CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS




(Unaudited)For the Three Months EndedMarch 31,2011


2010Cash flows from operating activities:Net loss

$
(1,284,132
)

$
(1,396,607
)Adjustments to reconcile net loss to net cashprovided by (used in) operating activities:Depreciation and amortization


120,353



114,443Provision for losses on accounts receivable


5,862Amortization of debt discount for imputed interest


1,113



1,027Amortization of discount for warrants and beneficial conversionfeature on convertible debt


94,363



128,104Amortization of prepaid consulting expense


567,000



-Discount for stock sold under employee stock purchase plan


1,940



-Stock issued for interest payments


15,577



18,156Stock issued for employee and director compensation


9,375



9,375Stock option compensation expense


20,968



144,575Deferred income taxes


-



-Changes in operating assets and liabilities:Accounts receivable, net


152,222



1,518,866Accounts receivable - related party


-



1,029Inventories, net


(336,880
)


(253,386
)Other current assets


3,383



32,600Accounts payable


(117,914
)


71,128Accounts payable - related party


8,679



(76,313
)Accrued expenses


31,489



50,905Accrued payroll and payroll taxes


59,869



111,876Customer deposits


652,070



(7,630
)Net cash provided by operating activities


5,337



468,148Cash flows from investing activities:Purchase of property and equipment


(67,447
)


(86,018
)Net cash used in investing activities


(67,447
)


(86,018
)Cash flows from financing activities:Net borrowings (repayments) from lines of credit - bank


74,703



(34,036
)Net borrowings (repayments) from short-term notes payable


100,000



(420,000
)Payments on long-term debt


(112,730
)


(124,015
)Proceeds from employee stock purchase plan


10,995



-Net cash provided by (used in) financing activities


72,968



(578,051
)Net decrease in cash and cash equivalents


10,858



(195,921
)Cash and cash equivalents:Beginning of period


6,719



281,809End of period

$
17,577


$
85,888





See notes to the consolidated financial statements.


4




ENERGY COMPOSITES CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Note 1.  Nature of Business and Significant Accounting Policies





Basis of Presentation





The accompanying unaudited consolidated financial information has been prepared by Energy Composites Corporation (“Company” or “ECC”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”).  Accordingly, it does not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included.  Financial results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.  This financial information should be read in conjunction with the December 31, 2010 audited consolidated financial statements and notes included in the Company’s Form 10-K filed on April 19, 2011.





Nature of Business





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





Principles of Consolidation





The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries ECC Corrosion, Inc. (“ECC-C”), formerly known as Advanced Fiberglass Technologies, Inc. (“AFT”), and Innovative Composite Solutions, LLC (“ICS”), after elimination of all intercompany accounts, transactions, and profits.





Concentrations of Risk





Cash Deposits: The Company maintains its cash in high-quality financial institutions.  The balances, at times, may exceed the federally insured limits.





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, 2011 and 2010 and significant customer accounts receivable balances at March 31, 2011 and 2010:


Percentage ofPercentage of

Trade AccountsTotal Sales

ReceivableCustomer

2011

2010

2011

20101

37.6%

25.1%

4.7%

17.6%2

14.6

19.8

-

8.53

10.4

1.3

-

15.84

6.1

3.6

-

9.75

4.7

-

12.8

-73.4%

49.8%

17.5%

51.6%








5


Labor Force:   A significant part of the Company’s production labor force is covered by two collective bargaining agreements which expire in May and June 2012.





Cash and Cash Equivalents





For purposes of balance sheet presentation, the Company considers all unrestricted demand deposits, money market funds, savings funds and investments with an original maturity of three months or less to be cash and cash equivalents.





Segment Reporting





Through March 31, 2011, the Company provided products and services into one reportable operating segment, Industrial Tank and Piping. The results of ICS, are immaterial for purposes of segment reporting and are included in the Industrial Tank and Piping segment. The detail of products and service activity in this operating segment is further described in Note 13.





Recent Accounting Pronouncements





There were no new accounting standards issued or effective during the three months ended March 31, 2011 that had or are expected to have a material impact on the Company’s results of operations, financial condition, or cash flows.





Note 2.  Going Concern Uncertainty





The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  At March 31, 2011, the Company had cash on hand of $17,577, a working capital deficiency of $6,498,078 net of Prepaid Consulting Expense, a net loss of $1,284,132 for the three months ended March 31, 2011 and an accumulated deficit of $16,152,935.




The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow or successfully raising additional funds to meet its obligations on a timely basis in order to comply with the terms and covenants of its financing agreements.  Management is continuing its efforts to obtain additional financing, restructure its existing obligations, improve profit margins, and reduce costs and related near-term working capital requirements. Despite these efforts, management cannot provide assurance that the Company will be able to obtain additional financing or that cash flows from operations will be sufficient to allow it to meet its obligations. If we are unsuccessful in raising funds, we may have to further reduce expenses, seek other alternatives or cease operations until funding is obtained.




Note 3.  Inventories





Inventories consist of the following:





March 31, 2011


December 31, 2010Raw materials

$
471,032


$
320,480Work in progress


474,219



289,375Finished goods


2,338



-Obsolescence reserve


(1,708
)


(854
)Total

$
945,881


$
609,001





6


Note 4.  Prepaid Consulting Expense




On August 24, 2010, the Company’s Board of Directors approved the issuance of 3,375,000 restricted shares of common stock to Diversified Equities Partners, LLC, an entity owned by a minority shareholder of ECC, as a non-refundable retainer for financial advisory consulting services to be rendered through September 30, 2012.  These shares were valued at $4,725,000 using the closing market price of our stock on August 24, 2010 of $1.40 per share and recorded to Additional Paid-In Capital and the debit recorded to Prepaid Consulting Expense.  The expense will be amortized over the 25-month period of the contract.  $567,000 was recorded to expense under the contract for the three months ended March 31, 2011. The remaining unamortized balance at March 31, 2011 is $3,402,000.




Note 5.  Property and Equipment, Net





Property and equipment are as follows:





March 31, 2011


December 31, 2010Land and improvements

$
559,800


$
559,800Buildings and improvements


3,886,550



3,886,550Machinery and equipment


2,707,063



2,639,616Vehicles and trailers


373,015



373,015Computer equipment


249,284



249,284Furniture and office equipment


138,128



138,1287,913,840



7,846,393Less accumulated depreciation


(1,727,734
)


(1,609,178
)Net property and equipment

$
6,186,106


$
6,237,215





Depreciation expense was $118,556 and $112,320 for the three months ended March 31, 2011 and 2010, respectively.





Real Estate Purchase





On April 30, 2010, the Company purchased approximately 94 acres of land from the City of Wisconsin Rapids as part of the Company’s WindFiberTM expansion.  The purchase price of the land was $47,734.  Because the purchase price of the real estate was well below estimated fair market values, the real estate was recorded at its estimated fair market value of $5,000 per acre for a total value of $477,228 including the transaction costs.  The excess fair market value of $429,494 was recorded to Deferred Income – Land Purchase to be amortized over the life of any future manufacturing plant. On April 20, 2011, the City of Wisconsin Rapids repurchased the land from the Company. See Note 15 for further information.





Note 6.  Intangible Assets





Intangible assets are as follows:





March 31, 2011


December 31, 2010Non-compete agreement

$
5,000


$
5,000Customer list


74,434



74,434Deferred financing costs


69,338



69,338148,772



148,772Less accumulated amortization


(100,900
)


(99,103
)Net intangible assets

$
47,872


$
49,669








7


Amortization expense was $1,797 and $2,123 for the three months ended March 31, 2011 and 2010, respectively.  Estimated amortization expense for the next five years is as follows:





2011 – remaining

$
4,8872012


5,3962013


4,8722014


3,1722015


2,981Thereafter


26,564Total

$
47,872





Note 7.  Financing Arrangements





Line of Credit – Bank





The Company utilizes a line of credit with Nekoosa Port Edwards State Bank (“NPESB”) that provides for maximum borrowings of $250,000, bears interest at a fixed rate of 6.75% at March 31, 2011 and matures on December 16, 2011.  The line is secured by all business assets of ECC-C (formerly AFT), an assignment of life insurance on the officer/stockholder, a junior mortgage on land and buildings, and an unlimited guaranty by ECC.  The Company had a balance of $188,603 and $113,900 on the line of credit at March 31, 2011 and December 31, 2010, respectively.





Short-Term Notes Payable





The Company uses short-term notes from NPESB for purposes of bulk purchases of inventory and project financing in addition to utilizing its line of credit.  The underlying inventory and customer purchase orders serve as specific collateral for these notes.  In addition, the short-term notes are also typically secured by all business assets of the Company.  The notes bear interest at fixed rates.  The notes are typically twelve months or less.  The Company had $550,000 and $550,000 of outstanding notes payable to NPESB with weighted average interest rates of 6.75% at March 31, 2011 and December 31, 2010.





The Company also utilizes unsecured, short-term financing from private investors (primarily existing shareholders) to fund operations.  These short-term notes bear interest at 6.0%.  The Company had $125,000 and $25,000 of outstanding notes payable to these private investors at March 31, 2011 and December 31, 2010, respectively.




















8





Long-Term Debt Obligations





Long-term debt obligations are as follows:




March 31,


December 31,2011


2010NPESB – a term loan secured by all general business assets of ECC-C (formerly AFT) and unlimited continuing guarantee of ECC; interest rate of 6.75%, due October 2014, monthly payments of $900

$
34,246


$
36,333NPESB - 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


260,904



278,776NPESB - 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


254,488



272,451City of Wisconsin Rapids, a term loan, secured by all assets and unlimited continuing guarantee of ECC; contains various operating covenants, interest rate 2%, due April 2012, monthly payment of $4,499


335,604



347,405City of Wisconsin Rapids, a $75,000 term loan, secured by ECC and ECC-C (formerly AFT) guarantees; imputed interest at 8% resulting in an original issue discount with an unamortized balance of $17,871 at March 31, 2011, balloons in August 2014


57,129



56,017NPESB – an industrial revenue bond term loan, secured by real estate, ECC and ECC-C (formerly AFT) guarantees; contains restrictive financial covenants, interest rate of 5.50%, due July 2027, monthly payment of $20,776


2,666,963



2,692,378NPESB – a term loan secured by all general business assets of ECC-C (formerly AFT) and an unlimited continuing guarantee of ECC; due January 2012, interest rate of 6.75%, monthly payments of $13,405


129,915



167,506Convertible notes payable ($1,230,000 face value) – see Note 8


1,064,233



969,8704,803,482



4,820,736Less current portion of long-term obligations


(4,624,203
)


(4,724,913
)Total long-term debt obligations, net of current portion

$
179,279


$
95,823
  Maturities of long-term debt obligations are as follows:




Principal


Discount


Net2011 remaining

$
4,624,203


$
(165,767
)

$
4,458,4362012


287,917



0



287,9172013


0



0



02014


75,000



(17,871
)


57,129Total

$
4,987,120


$
(183,638
)

$
4,803,482





On March 13, 2009, the Company executed an amendment to the credit agreement for the three industrial revenue bonds held by NPESB.  The amendment to the credit agreement includes the redefinition of the covenants attached to the bonds.  Under the terms of the amended credit agreement, the covenants apply to the Company and its subsidiaries on a consolidated basis.  The quarterly covenants require the consolidated Company to maintain (a) a





9
 
  Debt Service Coverage Ratio of not less than 1.25 to 1 and (b) a Total Indebtedness to Equity Ratio of not more than 3.5 to 1.0.





Debt Service Coverage Ratio is defined as the ratio of (i) EBITDA for the 12-month period ending on the measurement date to (ii) interest expenses plus principal payments coming due during the 12-month period beginning on the day after measurement.  EBITDA is defined as net income after taxes plus a) interest expense, b) federal, state and local taxes, c) depreciation and amortization expenses, and d) extraordinary losses minus extraordinary gains. The Company did not calculate this ratio at March 31, 2011 because the Company had recorded negative EBITDA for the previous 12-month period.





Total Indebtedness to Equity Ratio is defined as the ratio of all liabilities or obligations to Equity.  Equity is defined as the total of all assets of the Company minus the aggregate of all liabilities, all determined in accordance with generally accepted accounting principles consistent with those followed in preparation of the financial statements. This ratio at March 31, 2011 has been calculated by the Company as follows:





Total current liabilities

$
8,220,065Long-term debt obligations, net of current portion


179,279Total indebtedness

$
8,399,344Total stockholders' equity

$
2,529,127Total indebtedness to equity


3.3





As of December 31, 2010, the Company was not in compliance with the debt service coverage ratio. On January 27, 2011, the Company received notification from the lender waiving compliance for the Debt Service Coverage ratio until May 31, 2011 and that further compliance will be waived until December 31, 2011 if the Company is able to complete a Qualified Financing in the amount of $1,200,000 prior to May 31, 2011. Since the Company was unable to complete a Qualified Financing prior to May 31, 2011, the lender will require a re-measurement date on June 30, 2011.  Since the Company was in violation of the debt service coverage ratio as of March 31, 2011 and because of the anticipated failure to meet the June 30, 2011 bank covenants, the bank will have the ability to demand repayment of the debt. Since it is very unlikely that the Company will be able to obtain additional financing or that cash flows from operations will be sufficient to allow it to meet its obligations, and since the Company cannot assume that it will automatically receive another waiver from the bank, the Company has classified all debt from Nekoosa Port Edwards State Bank to be a current liability as of March 31, 2011.





Note 8.  Convertible Notes Payable





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





Each Warrant is immediately exercisable into shares of common stock for a term of 3 years at $5.00 per share.  The Warrants also provide anti-dilution protection for the following events: reorganization, reclassification, consolidation, merger or sale; subdivision, combination or other dividend of the Company’s Common Stock.





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





The issued Warrants were deemed to have a relative fair market value of $4,068,422 which was recorded as a discount to the face value of the Debentures and as a credit to Additional Paid-In Capital and is being accreted to interest expense over the 3-year term of the warrants 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.





10


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





The following table summarizes the convertible note balance as of March 31, 2011:




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 andbeneficial conversion feature for 2008, 2009 and 2010


6,109,870Less: conversion of debt to common stock


(5,140,000
)Balance at December 31, 2010


969,870Plus: accretion of original issue discount from warrants and beneficial conversion feature


94,363Balance at March 31, 2011 (face value $1,230,000)

$
1,064,233





All outstanding convertible debentures at March 31, 2011 totaling $1,230,000 mature at various dates in 2011 and are included in the current maturities table found in Note 7.





The effective annual interest rate for the three months ended March 31, 2011 was 49%.  The rate is higher than the stated rate of 6% due to the amortization of the discount recorded against the debt for the detachable warrants and beneficial conversion feature.





Note 9.  Stockholders’ Equity




Converted Debt




In conjunction with the 2008 private placement of convertible debt, a total of 6,246 and 17,281 common shares were issued for the conversion of debt and related interest payments during the three months ended March 31, 2011 and 2010, respectively.




Warrants




As of March 31, 2011, there were 2,311,671 warrants outstanding. No warrants were exercised during the three months ended March 31, 2011.




11


Stock Issuances




During the year ended December 31, 2010, the Company issued 18,337 restricted common shares to officers valued at $75,000 for services rendered. Of these shares, 9,168 shares (valued at $37,500) remained unvested until April 28, 2011 and were recorded as deferred compensation.  For the three months ended March 31, 2011, amortization of the deferred compensation related to these shares totaled $9,375.  All of the remaining shares vested immediately.




Pursuant to the Company’s Director Compensation Plan, an accrual of $45,000 was recorded for director stock compensation for January 2011 through March 2011. This accrued expense will be settled with common stock of the Company in June 2011.  The total accrual at March 31, 2011 was $174,500.  For the three months ended March 31, 2010, director stock compensation totaled $37,500.




Employee Stock Purchase Plan




On January 3, 2011, the Company issued 17,903 shares of common stock valued at $12,935 pursuant to the Company’s Employee Stock Purchase Plan which was approved by the Board of Directors in April 2009.  The shares were purchased by the employees at a 15% discount to the lower of the closing price on the first day and the last day of the plan offering period for a total discount of $1,940.




Stock Option Awards




During the twelve months ended December 31, 2010, the Company made stock option awards under the 2008 Stock Incentive Plan to 29 employees of the Company totaling 705,000 shares of the Company valued at $1,489,800 using the Black-Scholes-Merton pricing model.  These awards vest ratably over a 4-year period. The Company recorded expense related to these stock option awards of $20,968 and $144,575 for the three months ended March 31, 2011 and 2010, respectively.   The Company made no stock option awards under the 2008 Stock Incentive Plan during the three months ended March 31, 2011.




Note 10. Income Taxes




Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.




The Company accounts for income taxes pursuant to FASB guidance.  This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more-likely-than not to be sustained upon examination by taxing authorities. The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves, or related accruals for interest and penalties have been recorded at March 31, 2011 and December 31, 2010.  In accordance with the guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations.  The Company’s remaining open tax years subject to examination include the years ended December 31, 2008 through 2010.








12




The income tax provision consisted of the following for the three months ended March 31, 2011 and 2010:





March 31,


March 31,2011


2010Currently payable (refundable)

$
-


$
-Deferred tax benefit


(353,000
)


(547,000
)Valuation allowance


353,000



547,000Total income tax provision

$
-


$
-





Deferred tax components included in the Company’s balance sheet at March 31, 2011 and December 31, 2010 are as follows:





March 31,

2011


December 31, 2010Current deferred tax assets

$
138,000


$
84,000Long-term deferred tax assets


5,284,000



4,985,000Valuation allowance


(5,422,000
)


(5,069,000
)Net deferred tax assets

$
-


$
-




Note 11.  Related Party Transactions





For the three months ended March 31, 2011 and 2010, the Company paid interest expense to M&W Fiberglass (“M&W”) which is 100% owned by Jamie Lee Mancl, ECC’s majority shareholder, on the building promissory note of $0 and $11,719, respectively.





For the three months ended March 31, 2011, the Company incurred interest expense on short-term promissory notes from shareholders totaling $370.





ECC-C (formerly AFT) purchased fiberglass pipe fittings from Fiberglass Piping & Fitting Company (“FPF”) which is 100% owned by Jamie Lee Mancl, ECC’s majority shareholder, totaling $8,679 and $18,821 for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011, the Company has an accounts payable balance of $191,691 owed to FPF and an accounts receivable balance of $7,977 due from FPF related to product sold to FPF.





Note 12.  Commitments and Contingencies





Operating Leases





The Company has entered into various operating leases expiring through April 2013 for equipment, vehicles and temporary lodging. At March 31, 2011, the monthly payment for all operating leases totals $5,963.





Future minimum operating lease payments for all leases for the years ending December 31 are as follows:





2011 - remaining

$
15,2232012


28,5172013


4,5972014


-$
48,337





13


Legal Proceedings





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





Note 13.  Sales and Cost of Sales





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





Three Months Ended March 31, 2011Products &


Service &Components


Installation


TotalNet sales

$
567,163


$
382,909


$
950,072Cost of sales


713,364



186,194



899,558Gross profit

$
(146,201
)

$
196,715


$
50,514Three Months Ended March 31, 2010Products &


Service &Components


Installation


TotalNet sales

$
626,212


$
133,393


$
759,605Cost of sales


582,462



149,449



731,911Gross profit

$
43,750


$
(16,056
)

$
27,694




Note 14.  Earnings (Loss) Per Share





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





The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the three months ended March 31, 2011 and 2010:





2011


2010Basic earnings (loss) per share calculation:Net income (loss) to common shareholders

$
(1,284,132)


$
(1,396,607
)Weighted average of common shares outstanding


46,683,681



42,130,064Basic net earnings (loss) per share

$
(.03
)

$
(0.03
)


14





Diluted earnings (loss) per share calculation:Net income (loss) to common shareholders

$
(1,284,132
)

$
(1,396,607
)Weighted average of common shares outstanding


46,683,681



42,130,064Convertible debentures (1)


-



-Warrants (2)


-



-Options (3)


-



-Diluted weighted average common shares outstanding


46,683,681



42,130,064Diluted net income (loss) per share

$
(0.03
)

$
(0.03
)





The following common stock equivalents have been excluded from the diluted per share calculations since they are anti-dilutive:





(1)
At March 31, 2011 and 2010, there were outstanding convertible debentures equivalent to 492,000 and 548,000 common shares, respectively. The convertible shares are anti-dilutive for both periods and therefore have been excluded from diluted earnings per share.





(2)
At March 31, 2011 and 2010, there were outstanding warrants equivalent to 2,311,671 and 2,548,000 common shares, respectively. The convertible shares are anti-dilutive for both periods and therefore, have been excluded from diluted earnings per share.





(3)
At March 31, 2011 and 2010, there were outstanding options equivalent to 425,750 and 679,500 common shares, respectively.  The options are anti-dilutive for both periods and therefore, have been excluded from diluted earnings per share.





Note 15.  Subsequent Events





Financing Transactions





On April 20, 2011, the Company sold approximately 94 acres of land to the City of Wisconsin Rapids.  The land was originally purchased from the City for development as part of the Company’s WindFiberTM expansion.     The City of Wisconsin Rapids repurchased the land from the Company at the price at which the Company originally purchased the property ($47,734).  In the upcoming second quarter of 2011, the Company will reverse the purchase price of the land plus the deferred income portion of the purchase contained in the long term liabilities section of the balance sheet. There will be no gain or loss with this transaction except for a small loss related to the minimal legal costs that were capitalized in connection with the original purchase.





Note 16.  Supplemental Disclosure of Cash Flow Information





Three months ended March 31,2011


2010Supplemental disclosure of cash flow information:Cash paid for interest

$
66,113


$
93,263








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 April 19, 2011, 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 the accounting policies that we consider critical in Note 1 “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, 2010, which includes a discussion of the policies identified in this report and other significant accounting policies.





Overview





Energy Composites Corporation (“we,” “us,” “our,” or the “Company”), a Nevada corporation, 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.





The Company has one operating subsidiary, ECC Corrosion, Inc. (“ECC-C”).  Formerly known as Advanced Fiberglass Technologies (“AFT”), ECC-C 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.   On September 1, 2010, AFT changed its name to ECC Corrosion, Inc.





Results of Operations





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








16




Three Months Ended March 31, 2011Products &


Service &Components


Installation


TotalNet sales

$
567,163


$
382,909


$
950,072Cost of sales


713,364



186,194



899,558Gross profit

$
(146,201
)

$
196,715


$
50,514Three Months Ended March 31, 2010Products &


Service &Components


Installation


TotalNet sales

$
626,212


$
133,393


$
759,605Cost of sales


582,462



149,449



731,911Gross profit

$
43,750


$
(16,056
)

$
27,694





Revenue





During the three months ended March 31, 2011, we recorded revenue from product sales of $567,163, a decrease from the three month period ended March 31, 2010 of $59,049 or 9.4%.  Revenue from field services was $382,909 for the three months ended March 31, 2011, an increase from the three-month period ended March 31, 2010 of $249,516 or 187.0%.  The decrease in product revenue during the quarter was due to time being spent on work in process for a large contract previously announced with a large Canadian mining firm.  Revenue for products related to this large contract will start to be recognized in the second quarter.  The increase in service revenue during the first quarter is attributable to recognition of the engineering and design services from the same Canadian mining contract mentioned above.


Cost of goods sold





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





For the three-month period ended March 31, 2011, cost of goods sold increased to $899,558, resulting in gross profit of $50,514.  For the three-month period ended March 31, 2010, cost of goods sold was $731,911 resulting in gross profit of $27,694.  The improvement in gross profit for the three-month period ended March 31, 2011 was driven by higher margin product mix due to the recognition of services related to a large project partially offset by higher material and labor costs.





For the three months ended March 31, 2011, our cost of materials was 32.3% of revenue compared to cost of materials of 27.2% for the three months ended March 31, 2010.  We experienced higher costs for our primary raw materials consisting of the isophathalic, polyester, and vinyl-ester resins and fiberglass this quarter compared to a year ago.   Our cost of labor was 44.2% of revenue for the three months ended March 31, 2011 compared to labor cost of 35.9% of revenue for the three months ended March 31, 2010. The higher labor costs in the first quarter were due to the utilization of more highly skilled and paid laborers. Manufacturing overhead was 18.2% of revenue during the three months ended March 31, 2011 compared to 33.3% for the three months ended March 31, 2010.





Selling, general & administrative expenses





Selling, general and administrative expenses decreased to $1,153,697 during the three months ended March 31, 2011 from $1,182,437 during the three months ended March 31, 2010. The decrease in our selling, general and administrative expenses is a result of our reduced investment in WindFiberTM and administrative headcount salaries partially offset by an increase of $567,000 of non-cash professional fees related to a financial advisory consulting





17
 
  agreement. We recorded stock option compensation expense of $20,968 during the three months ended March 31, 2011, compared to $144,575 during the three months ended March 31, 2010.  As noted above, we recorded $567,000 of stock compensation expense during the three months ended March 31, 2011 related to a consulting agreement with Diversified Equities Partners, LLC (“Diversified”) whereby Diversified will provide financial advisory services through September 2012.





Other income (expense)




Other income and expense consists of interest income and interest expense which includes non-cash amortization of deferred financing costs and non-cash amortization of beneficial conversion features and warrant discounts associated with convertible debt.  Total interest expense for the three months ended March 31, 2011 and 2010 was $180,949 and $242,040, respectively.  Non-cash amortization of debt discounts for warrants and beneficial conversion feature related to the convertible debt was $94,363 and $128,104 for the three months ended March 31, 2011 and 2010, respectively.




Interest expense is partially offset by bank interest income.  For the three months ended March 31, 2011 and 2010, interest income was $0 and $176, respectively.




Net loss before provision (benefit) for income taxes




The Company’s loss before income tax benefit decreased to $1,284,132 during the three months ended March 31, 2011 from $1,396,607 during the three months ended March 31, 2010. The decrease in our net loss before income tax for the three-month period ended March 31, 2011 was due to the increase in gross profit and reduced selling, general and administrative expenses related to decreased investments made in our WindFiberTM strategy.





Income tax benefit





In 2009, the Company established a full valuation allowance against its deferred tax assets because it was more likely than not, that the net deferred tax assets may not be realized. The Company continued to record a full valuation allowance and therefore, there is no tax provision recorded for the three months ended March 31, 2011 and 2010.





Net loss





The Company’s loss before income tax benefit decreased to $1,284,132 during the three months ended March 31, 2011 from $1,396,607 during the three months ended March 31, 2010. The decrease in our net loss before income tax for the three month period ended March 31, 2011 resulted primarily from an increase in gross profit and a reduction in selling, general and administrative expenses related to decreased investments made in our WindFiberTM strategy.





Liquidity and Capital Resources





At March 31, 2011, the Company had cash on hand of $17,577, a working capital deficiency of $(6,498,078) net of prepaid consulting expense, a net loss of $1,284,132 for the quarter ended March 31, 2011 and an accumulated deficit of $(16,152,935).  The Company's continuation as a going concern is dependent upon its ability to generate sufficient operations cash flow or successfully raise additional funds to meet its obligations on a timely basis in order to comply with the terms and covenants of its financing agreements.  Management is continuing its efforts to try and obtain additional financing, restructure its existing obligations, improve profit margins, and reduce costs and related near-term working capital requirements. Despite these efforts, management cannot provide assurance that the Company will be able to obtain additional financing or that cash flows from operations will be sufficient to allow it to meet its obligations.





As a result of the working capital deficiency, recent losses and accumulated deficit, we were unable to remain in compliance with the Debt Service Coverage Ratio covenant in our credit agreement with our primary lender.  The required ratio is 1.25 and the Company’s ratio at March 31, 2011 was a negative (.18).





18


Our lender has waived compliance with this covenant through May 31, 2011.  The next measurement date for this financial covenant is June 30, 2011.  Our lender agreed to further waive compliance with this covenant through December 31, 2011 if we have raised gross proceeds of not less than $1,200,000 as a result of the issuance of common stock or common stock equivalents not later than May 31, 2011 (a “Qualified Financing”).  To date, we have been unable to complete a Qualified Financing or renegotiate our credit agreement with our lender. Because it is unlikely that the Company will be able to obtain additional financing or that cash flows from operations will be sufficient to allow it to meet its Debt Service Coverage ratio obligations and the Company cannot assume that it will automatically receive another waiver from the bank, the Company has classified all debt from Nekoosa Port Edwards State Bank to be a current liability as of March 31, 2011.





In addition, the Company also has $830,000 of convertible debentures that are due and payable in the third quarter of 2011. If we are unable to raise additional capital or otherwise refinance the debenture obligations as and when they come due, it would result in a breach of those agreements which would also be a violation of the covenants of our other debt obligations with the Company’s bank.





In the event we are unable to obtain additional financing or renegotiate our credit agreement, it is highly unlikely that we would be able to satisfy such an obligation, and we would likely be unable to continue operating as a going concern.  However, we continue to work closely with our lender to renegotiate the terms of those arrangements, and we continue to actively explore alternative sources of capital and other means to refinance all or some of our indebtedness. We are also exploring other restructuring options at this time, which includes the possibility of selling our operating business (currently conducted by ECC-C) to Jamie Mancl and his wife in exchange for their shares in the Company.  This would allow the Company to acquire another business operation, which hopefully will have a greater potential for profitability.  Our board of directors has accepted in principal a proposal from the Mancls and further negotiations are in process with respect to this proposed transaction.





Operating Cash Flows





Operating activities provided $5,337 during the three months ended March 31, 2011 compared $468,148 during the three months ended March 31, 2010.  The decrease in net cash flow from operating activities in 2011 relative to 2010 was due primarily to the timing and management of cash requirements associated with accounts payable and accounts receivable, and customer deposits made during the period as progress payments on certain fabrication contracts.  This was partially offset by a timing difference between periods in work-in-process inventories related to ongoing and upcoming contracts, the timing of accrued expenses, and the increase in the overall net loss for the three months ended March 31, 2011.





Investing Cash Flows





Investing activities used $67,447 and $86,018 of cash for the three months ended March 31, 2011 and 2010, respectively.  The primary use of cash in investing activities in the first quarter of 2011 has been additional manufacturing equipment in our corrosion business.  The primary use of cash in investing activities in the first quarter of 2010 was the purchase of additional manufacturing equipment supporting plant and field service activities, as well as the purchase of office equipment for added office staff positions.





Financing Cash Flows





Financing activities provided $72,968 during the three months ended March 31, 2011.  Proceeds from borrowing against our bank line of credit and short-term notes payable and stock purchased under the ECC Employee Stock Purchase Plan, were offset by net payments on long-term debt totaling $112,730 for the three months ended March 31, 2011.  For the three months ended March 31, 2010, financing activities used $578,051 comprised of net payments on short-term debt and lines of credit totaling $454,036 and net payments on long-term debt net of $124,015.




19


Employee Stock Purchase Plan




Proceeds to the Company from stock purchased under the ECC Employee Stock Purchase Plan totaled $10,995 for the three months ended March 31, 2011.




Debenture Financing





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





At March 31, 2011, Debentures totaling $1,230,000 remain outstanding and will become due during the third and fourth quarter of 2011.  $5,140,000 of Debentures have been converted to common stock as of March 31, 2011.  Many of the remaining Debenture holders have elected to receive interest in the form of stock, lowering our cash outlays for debt service on the Debentures.





Leases





The Company has entered into various operating leases expiring through April 2013 for equipment, vehicles and temporary lodging.  At March 31, 2011, the monthly payment for all operating leases totals $5,963.





Going Forward





As described above, the Company is working with its lender to renegotiate the terms of its financial covenants and evaluating restructuring and other strategic options for the Company.  There is no assurance we will be successful.  If our lender requires us to repay all amounts outstanding under our credit facility because we are unsuccessful in renegotiating or obtaining a waiver of the covenants in our lending agreements, it is highly unlikely that we would be able to satisfy such an obligation, and we would likely be unable to continue operations as a going concern.  However, we continue our efforts to renegotiate the terms of those arrangements and to actively explore alternative sources of capital and ways in which we can refinance all or some of our indebtedness.





In addition, we continue to implement changes in our operations to increase sales and improve our operating cash flows in 2011, including the elimination of administrative and staff positions.  We have a sizable contracted backlog, primarily with one customer, and have hired a new South Regional Manager to improve our ability to identify and secure domestic sales opportunities.





Off-Balance Sheet Arrangements





As of March 31, 2011, we did not have any off-balance sheet arrangements.




Item 3.      Quantitative and Qualitative Disclosures about Market Risk





Not applicable to smaller reporting companies.





20





Item 4.      Controls and Procedures





Evaluation of Disclosure Controls and Procedures and Changes in Internal Controls





We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Interim Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.





As of March 31, 2011, our management, with the participation of our President and Interim Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act. Based on this evaluation, the President and Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2011, because of the identification of a significant deficiency in internal control over financial reporting described below. Notwithstanding the material weaknesses that existed as of March 31, 2011, our President and Interim Chief Financial Officer have each concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States of America (“GAAP”).





The following control deficiencies were previously identified in our December 31, 2010 10-K filing:





With the abrupt departure of our key financial employees (Vice President of Finance and Accounting Manager) in early January 2011, our finance reporting close process for our March 31, 2011 quarter end had weaknesses pertaining to financial disclosures, and our ability to timely file our required SEC reports.





This situation was exacerbated by our lack of cash during the period after the departure of these employees, that prevented us from being able to hire personnel to perform the work necessary for the close process in order to permit a timely filing of this report.  With our transition to an interim CFO and a contracted accounting manager, these weaknesses should be able to be remediated in the near future once these new key financial employees get fully up to speed with the Company and its financial reporting needs.





Changes in Internal Control over Financial Reporting





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.

















21


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 2011, we issued the unregistered securities set forth in the table below.





Date
Persons or Class of Persons
Securities
ConsiderationJanuary 13, 2011
24 accredited investors
6,246 shares of common stock
$15,577 of accrued interest paid to debenture holders





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





Item 3.      Defaults Upon Senior Securities





None.





Item 5.      Other Information





None.





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)  22
  Regulation

S-K Number
Document
 10.6
Industrial Development Revenue Bonds, Promissory Note 2007B dated February 28, 2007 (1)10.7
Industrial Development Revenue Bonds, Promissory Note 2007C dated February 28, 2007 (1)10.8
Industrial Development Revenue Bonds, Credit Agreement dated February 28, 2007 (1)10.9
Industrial Development Revenue Bonds, Construction Mortgage, Assignment Of Leases And Rents and Fixture Filing dated February 28, 2007 (1)10.10
Industrial Development Revenue Bonds, Security Agreement dated February 28, 2007 (1)10.11
Option Agreement dated June 18, 2008 (1)10.12
Purchase and Supply Agreement dated October 13, 2008 (1)10.13
Unsecured Promissory Note dated December 31, 2008 (5)10.14
Assignment and Assumption Agreement dated December 31, 2008 (6)10.15
Amendment to the Credit Agreement dated March 13, 2009 (7)10.16
Employee Stock Purchase Plan (8)10.17
Debt Exchange Agreement (9)31.1
Rule 13a-14(a) Certification of Jamie L. Mancl31.2
Rule 13a-14(a) Certification of Timothy Sherlock32.1
Certification of Jamie L. Mancl Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
Certification of Timothy Sherlock Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




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


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


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


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


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


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


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


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


(9)
Filed as an exhibit to the Current Report on Form 8-K dated August 13, 2010, filed August 19, 2010.





23


SIGNATURES





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





ENERGY COMPOSITES CORPORATIONDated:  June 13, 2011
By:
/s/ Jamie L. ManclJamie L. Mancl, PresidentDated:  June 13, 2011
By:
/s/ Timothy SherlockTimothy Sherlock, Interim Chief Financial Officer