TRAILBLAZER RESOURCES INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - TRAILBLAZER RESOURCES INC.	Financial_Report.xls
EX-31.1 - EXH 31-1 CERTIFICATION - TRAILBLAZER RESOURCES INC.	exh31-1_certification.htm
EX-32.1 - EXH 32-1 CERTIFICATION - TRAILBLAZER RESOURCES INC.	exh32-1_certification.htm
EX-31.2 - EXH 31-2 CERTIFICATION - TRAILBLAZER RESOURCES INC.	exh31-2_certification.htm
EX-32.2 - EXH 32-2 CERTIFICATION - TRAILBLAZER RESOURCES INC.	exh32-2_certification.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period June 30, 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. 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 ý No o (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 o
Non-accelerated filer o	Smaller reporting company ý

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 46,737,210 shares as of August 11, 2011.

ENERGY COMPOSITES CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED

JUNE 30, 2011

INDEX

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets (Unaudited)	2

	Consolidated Statements of Operations (Unaudited)	3

	Consolidated Statements of Cash Flows (Unaudited)	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22

Item 4.	Controls and Procedures	22


PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

SIGNATURES		25

ENERGY COMPOSITES CORPORATION
CONSOLIDATED BALANCE SHEETS
	(Unaudited)			(Audited)
	June 30,			December 31,
	2011			2010
ASSETS

Current Assets:
Cash	$	37,964		$	6,719
Accounts receivable, net of allowance for doubtful
accounts of $61,000 in 2011 and $61,000 in 2010		581,196			835,160
Inventories, net		1,722,743			609,001
Other current assets		44,531			84,836
Prepaid consulting expense		2,268,000			2,268,000
Total current assets		4,654,434			3,803,716

Property and equipment, net		5,682,163			6,237,215

Other assets:
Intangible assets, net		46,052			49,669
Prepaid consulting expense, net of current portion		567,000			1,701,000
Total other assets		613,052			1,750,669

Total assets	$	10,949,649		$	11,791,600

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt obligations	$	5,393,738		$	4,724,913
Line of credit - bank		235,505			113,900
Short-term notes payable		170,000			575,000
Accounts payable		1,147,615			1,265,123
Accounts payable - related party		48,005			183,012
Accrued expenses		385,108			314,519
Accrued payroll and payroll taxes		327,575			283,617
Customer deposits		1,489,593			51,795
Total current liabilities		9,197,139			7,511,879

Long-term liabilities
Long-term debt obligations, net of current portion		58,276			95,823
Deferred income - land purchase		-			429,494
Total long-term liabilities		58,276			525,317

Total liabilities		9,255,415			8,037,196

Stockholders' equity (deficit):
Common stock - $.001 par value; 100,000,000 shares
authorized, 46,731,964 and 46,659,800 shares issued
and outstanding, respectively		46,733			46,661
Additional paid-in capital		18,767,529			18,576,546
Accumulated deficit		(17,120,028	)		(14,868,803	)
Total stockholders' equity		1,694,234			3,754,404

Total liabilities and stockholders' equity	$	10,949,649		$	11,791,600

See notes to the consolidated financial statements.

ENERGY COMPOSITES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	(Unaudited)						(Unaudited)
	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

Revenue	$	1,263,797		$	2,064,991		$	2,213,869		$	2,824,596

Cost of goods sold		1,026,197			1,395,354			1,925,755			2,127,265

Gross profit		237,600			669,637			288,114			697,331

Selling, general and administrative expenses		1,008,533			1,215,577			2,162,230			2,398,014

Loss from operations		(770,933	)		(545,940	)		(1,874,116	)		(1,700,683	)

Other income (expense):
Interest expense		(196,160	)		(289,317	)		(377,109	)		(531,357	)
Interest income		-			33			-			209

Total other income (expense)		(196,160	)		(289,284	)		(377,109	)		(531,148	)

Loss before provision (benefit) for income taxes		(967,093	)		(835,224	)		(2,251,225	)		(2,231,831	)

Income tax provision (benefit)		-			-			-			-

Net loss	$	(967,093	)	$	(835,224	)	$	(2,251,225	)	$	(2,231,831	)

Net loss per common share - basic and diluted	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.05	)

Weighted average shares outstanding - basic and diluted		46,707,782			42,328,662			46,695,798			42,229,912

See notes to the consolidated financial statements.

ENERGY COMPOSITES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	For the Months Ended
	June 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(2,251,225	)	$	(2,231,831	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization		242,974			233,725
Provision for losses on accounts receivable		(2,138	)		-
(Gain) loss on asset disposal		18,331			3,205
Amortization of debt discount for imputed interest		2,259			2,085
Amortization of discount for warrants and beneficial conversion
feature on convertible debt		198,997			300,335
Amortization of prepaid consulting expense		1,134,000			-
Discount for stock sold under employee stock purchase plan		1,940			-
Stock issued for interest payments		30,605			35,597
Stock issued for employee and director compensation		18,750			188,125
Stock option compensation expense		23,765			224,071
Changes in operating assets and liabilities:
Accounts receivable, net		256,102			1,051,612
Accounts receivable - related party		-			(809	)
Inventories, net		(1,113,742	)		(243,397	)
Other current assets		40,305			62,967
Accounts payable		(117,508	)		269,603
Accounts payable - related party		(135,007	)		(64,805	)
Accrued expenses		70,589			(42,791	)
Accrued payroll and payroll taxes		43,958			25,538
Customer deposits		1,437,798			74,895

Net cash used in operating activities		(99,247	)		(111,875	)

Cash flows from investing activities:
Purchase of property and equipment		(179,103	)		(218,015	)
Proceeds from sale of property and equipment		46,973			-

Net cash used in investing activities		(132,130	)		(218,015	)

Cash flows from financing activities:
Net borrowings (repayments) from lines of credit - bank		121,605			(19,197	)
Net borrowings (repayments) from short-term notes payable		(405,000	)		(220,000	)
Proceeds from long-term debt		877,272			-
Payments on long-term debt		(342,250	)		(248,454	)
Proceeds from exercise of warrants		-			590,823
Proceeds from employee stock purchase plan		10,995			-
Net cash provided by financing activities		262,622			103,172

Net increase (decrease) in cash and cash equivalents		31,245			(226,718	)

Cash and cash equivalents:
Beginning of period		6,719			281,809

End of period	$	37,964		$	55,091

See notes to the consolidated financial statements.

NOTES 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 six months ended June 30, 2011 and 2010 and significant customer accounts receivable balances at June 30, 2011 and 2010:

			Percentage of
	Percentage of		Trade Accounts
	Total Sales		Receivable
Customer	2011	2010	2011	2010
1	30.3%	24.4%	-	39.8%
2	16.0	13.9	15.0%	14.2
3	10.1	1.0	25.0	6.8
4	6.7	1.1	-	0.1
5	4.6	-	-	7.8
	67.7%	40.4%	40.0%	68.7%

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 June 30, 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 six months ended June 30, 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 June 30, 2011, the Company had cash on hand of $37,964, a working capital deficiency of $6,810,705 net of Prepaid Consulting Expense, a net loss of $2,251,225 for the six months ended June 30, 2011 and an accumulated deficit of $17,120,128.

The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow from operations 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 restructure its existing obligations, improve profit margins, reduce costs and related near-term working capital requirements and obtain additional financing. Despite these efforts, management cannot provide assurance that the Company will be able to sufficiently improve cash flows from operations or obtain additional financing that will be sufficient to allow it to meet its obligations. If we are unsuccessful in restructuring our existing obligations, improving cash flows from operations or raising funds we would likely have to seek other alternatives such as reorganization or other protection from our creditors, or cease operations until funding is obtained.

Note 3. Inventories

Inventories consist of the following:

	June 30, 2011		December 31, 2010
Raw materials	$	529,954	$	320,480
Work in progress		1,190,451		289,375
Finished goods		2,338		-
Obsolescence reserve		-		(854	)
Total	$	1,722,743	$	609,001

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 a debit recorded to Prepaid Consulting Expense. The expense is being amortized over the 25 month period of the contract. $1,134,000 was recorded to expense under the contract for the six months ended June 30, 2011. The remaining unamortized balance at June 30, 2011 is $2,835,000.

Note 5. Property and Equipment, Net

Property and equipment are as follows:

	June 30, 2011			December 31, 2010
Land and improvements	$	82,572		$	559,800
Buildings and improvements		3,868,982			3,886,550
Machinery and equipment		2,796,396			2,639,616
Vehicles and trailers		392,762			373,015
Computer equipment		251,859			249,284
Furniture and office equipment		138,128			138,128
		7,530,699			7,846,393
Less accumulated depreciation		(1,848,536	)		(1,609,178	)
Net property and equipment	$	5,682,163		$	6,237,215

Depreciation expense was $239,358 and $229,368 for the six months ended June 30, 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 WindFiber™ 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 at the same price at which the Company originally purchased the property less the transaction costs for net proceeds of $46,973. The Company reversed the purchase price of the land plus the deferred income portion of the purchase in the long-term liabilities section of the balance sheet and recorded a loss of $18,331 on disposal of assets related to capitalized legal and engineering costs.

Note 6. Intangible Assets

Intangible assets are as follows:

	June 30, 2011			December 31, 2010
Non-compete agreement	$	5,000		$	5,000
Customer list		74,434			74,434
Deferred financing costs		69,338			69,338
		148,772			148,772
Less accumulated amortization		(102,720	)		(99,103	)
Net intangible assets	$	46,052		$	49,669

Amortization expense was $3,616 and $4,357 for the six months ended June 30, 2011 and 2010, respectively. Estimated amortization expense for the next five years is as follows:

2011 – remaining	$	3,315
2012		5,397
2013		5,276
2014		3,925
2015		2,444
Thereafter		25,695

Total	$	46,052

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 June 30, 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 $235,505 and $113,900 on the line of credit at June 30, 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 $25,000 and $550,000 of outstanding notes payable to NPESB with a weighted average interest rate of 6.75% at June 30, 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 $145,000 and $25,000 of outstanding notes payable to these private investors at June 30, 2011 and December 31, 2010, respectively.

Long-Term Debt Obligations

Long-term debt obligations are as follows:

	June 30,			December 31,
	2011			2010
NPESB – 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 payment of $900	$	32,157		$	36,333

NPESB - an industrial revenue bond term loan, secured by equipment and unlimited continuing guarantee of ECC; contains restrictive financial covenants, interest rate of 5.75%, due July 2014, monthly payment of $7,266		242,880			278,776

NPESB - an industrial revenue bond term loan, secured by equipment and unlimited continuing guarantee of ECC; contains restrictive financial covenants, interest rate of 5.75%, due July 2014, monthly payment of $7,266		236,360			272,451

NPESB – 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		2,642,004			2,692,378

NPESB – 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 payment of $13,405		-			167,506

NPESB – a term loan secured by all general business assets of ECC-C (formerly AFT) and an unlimited continuing guarantee of ECC; due April 2016, interest rate of 6.75%, monthly payment of $8,234		405,543			-

NPESB – a term loan secured by all general business assets of ECC-C (formerly AFT) and an unlimited continuing guarantee of ECC; due April 2016, interest rate of 6.75%, monthly payment of $8,682		427,632			-

NPESB – a term loan secured by 2008 Ford F-350; due May 2014, interest rate of 6.75%, monthly payment of $616		19,515			-

City of Wisconsin Rapids, a term loan, secured by all assets and unlimited continuing guarantee of ECC; contains various operating covenants, interest rate 2%, due April 2012, monthly payment of $4,499		323,780			347,405

City 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 $16,724 at June 30, 2011, balloons in August 2014		58,276			56,017

Convertible notes payable ($1,125,000 face value) – see Note 8		1,063,867			969,870
		5,452,014			4,820,736
Less current portion of long-term obligations		(5,393,738	)		(4,724,913	)
Total long-term debt obligations, net of current portion	$	58,276		$	95,823

Maturities of long-term debt obligations are as follows:

	Principal		Discount			Net
2011 - remaining	$	5,454,871	$	(61,133	)	$	5,393,738
2012		0		0			0
2013		0		0			0
2014		75,000		(16,724	)		58,276
2015		0					0
Thereafter		0					0
Total	$	5,529,871	$	(77,857	)	$	5,452,014

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

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 expense 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 June 30, 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 June 30, 2011 has been calculated by the Company as follows:

Total current liabilities	$	9,197,139
Long-term debt obligations, net of current portion		58,276
Total indebtedness	$	9,255,415

Total stockholders' equity	$	1,694,234
Total indebtedness to equity		5.5

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 required a re-measurement as of June 30, 2011. After failing the required covenant calculations, on June 30, 2011, the Company received notification from the lender waiving compliance with the Debt Service Coverage Ratio and the Total Indebtedness to Equity Ratio through September 30, 2011. As consideration for the waiver, the Company has agreed to work with the lender to negotiate and implement revised covenants by October 31, 2011. Because 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, and the Company cannot assume that they will be able to revise the current covenants, the Company has classified all debt from Nekoosa Port Edwards Bank to be a current liability at June 30, 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 debt using the effective interest method. The Company used the Black-Scholes-Merton pricing model as a method for determining the estimated fair value of the Warrants.

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

The following table summarizes the convertible note balance as of June 30, 2011:

Balance at January 1, 2008	$	-

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

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

Plus: accretion of original issue discount from warrants and beneficial conversion feature for 2008, 2009 and 2010		6,109,870

Less: conversion of debt to common stock		(5,140,000	)

Balance at December 31, 2010		969,870

Plus: accretion of original issue discount from warrants and beneficial conversion feature for the six months ended June 30, 2011		198,997

Less: conversion of debt to common stock		(105,000	)

Balance at June 30, 2011 (face value $1,125,000)	$	1,063,867

All outstanding convertible debentures at June 30, 2011 totaling $1,125,000 mature at various dates in 2011, commencing in August 2011, and are included in the current maturities table found in Note 7. It is unlikely that the Company will be able to satisfy its obligations to pay outstanding convertible debentures as they mature. Accordingly, the Company intends to work with debenture holders to convert, extend or otherwise amend the terms and conditions of the outstanding convertible debentures.

The effective annual interest rate for the six months ended June 30, 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 54,261 and 44,261 common shares were issued for the conversion of debt ($105,000 in 2010 and $75,000 in 2009, respectively) at $2.50 per share and related interest payments during the six months ended June 30, 2011 and 2010, respectively.

Warrants

As of June 30, 2011, there were 2,311,671 warrants outstanding. No warrants were exercised during the six months ended June 30, 2011.

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 six months ended June 30, 2011, amortization of the deferred compensation related to these shares totaled $12,500. All of the remaining shares vested immediately.

Pursuant to the Company’s Director Compensation Plan, an expense of $90,000 was recorded for director stock compensation for January 2011 through June 2011. The total accrual at June 30, 2011 was $219,500 and this accrued expense will be settled with common stock of the Company in the third quarter 2011. For the six months ended June 30, 2010, director stock compensation totaled $96,875.

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 $23,765 and $224,071 for the six months ended June 30, 2011 and 2010, respectively. The Company made no stock option awards under the 2008 Stock Incentive Plan during the six months ended June 30, 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 June 30, 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.

The income tax provision consisted of the following for the six months ended June 30, 2011 and 2010:

	June 30,			June 30,
	2011			2010
Currently payable (refundable)	$	-		$	-
Deferred tax benefit		(579,000	)		(290,000	)
Valuation allowance		579,000			290,000
Total income tax provision	$	-		$	-

Deferred tax components included in the Company’s balance sheet at June 30, 2011 and December 31, 2010 are as follows:

	June 30,			December 31,
	2011			2010
Current deferred tax assets	$	76,000		$	84,000
Long-term deferred tax assets		5,572,000			4,985,000
Valuation allowance		(5,648,000	)		(5,069,000	)
Net deferred tax assets	$	-		$	-

Note 11. Related Party Transactions

For the six months ended June 30, 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 $23,417, respectively.

For the six months ended June 30, 2011 and 2010, the Company incurred interest expense on short-term promissory notes from shareholders totaling $1,059 and $14,862.

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 $67,203 and $30,113 for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, the Company has an accounts payable balance of $48,005 owed to FPF and an accounts receivable balance of $635 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 October 2013 for equipment, vehicles and temporary lodging. At June 30, 2011, the monthly payment for all operating leases totals $4,517.

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

2011 - remaining	$	21,948
2012		28,984
2013		4,674
2014		-
Total	$	55,606

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 June 30, 2011
	Products &			Service &
	Components			Installation		Total
Net sales	$	814,508		$	449,289	$	1,263,797
Cost of sales		854,150			172,047		1,026,197
Gross profit	$	(39,642	)	$	277,242	$	237,600

		Three Months Ended June 30, 2010
	Products &			Service &
	Components			Installation		Total
Net sales	$	817,275		$	1,247,716	$	2,064,991
Cost of sales		861,663			533,691		1,395,354
Gross profit	$	(44,388	)	$	714,025	$	669,637

		Six Months Ended June 30, 2011
	Products &			Service &
	Components			Installation		Total
Net sales	$	1,381,671		$	832,198	$	2,213,869
Cost of sales		1,593,042			332,713		1,925,755
Gross profit	$	(211,371	)	$	499,485	$	288,114

		Six Months Ended June 30, 2010
	Products &			Service &
	Components			Installation		Total
Net sales	$	1,443,487		$	1,381,109	$	2,824,596
Cost of sales		1,444,125			683,140		2,127,265
Gross profit	$	(638	)	$	697,969	$	697,331

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 June 30, 2011and 2010:

	2011			2010
Basic earnings (loss) per share calculations:
Net income (loss) to common shareholders	$	(967,093	)	$	(835,224	)
Weighted average of common shares outstanding		46,707,782			42,328,662
Basic net earnings (loss) per share	$	(0.02	)	$	(0.02	)

Diluted earnings (loss) per share calculation:
Net income (loss) to common shareholders	$	(967,093	)	$	(835,224	)
Weighted average of common shares outstanding		46,707,782			42,328,662
Converible debentures (1)		-			-
Warrants (2)		-			-
Options (3)		-			-
Diluted weighted average common shares outstanding		46,707,782			42,328,662

Diluted net income (loss) per share	$	(0.02	)	$	(0.02	)

The following tables provide a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share for the six months ended June 30, 2011 and 2010:

	2011			2010
Basic earnings (loss) per share calculations:
Net income (loss) to common shareholders	$	(2,251,225	)	$	(2,231,831	)
Weighted average of common shares outstanding		46,695,798			42,229,912
Basic net earnings (loss) per share	$	(0.05	)	$	(0.05	)

Diluted earnings (loss) per share calculation:
Net income (loss) to common shareholders	$	(2,251,225	)	$	(2,231,831	)
Weighted average of common shares outstanding		46,695,798			42,229,912
Converible debentures (1)		-			-
Warrants (2)		-			-
Options (3)		-			-
Diluted weighted average common shares outstanding		46,695,798			42,229,912

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

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

(1)	At June 30, 2011 and 2010, there were outstanding convertible debentures equivalent to 450,000 and 528,000 common shares, respectively. The convertible shares are anti-dilutive for both periods and therefore have been excluded from diluted earnings per share.

(2)	At June 30, 2011 and 2010, there were outstanding warrants equivalent to 2,311,671 and 2,311,671 common shares, respectively. The warrants are anti-dilutive for both periods and therefore, have been excluded from diluted earnings per share.

(3)	At June 30, 2011 and 2010, there were outstanding options equivalent to 260,750 and 430,000 common shares, respectively. The options are anti-dilutive for both periods and therefore, have been excluded from diluted earnings per share.

Note 15. Supplemental Disclosure of Cash Flow Information

	Six months ended June 30,
	2011			2010
Supplemental disclosure of cash flow information:
Cash paid for interest	$	138,961		$	184,176

Non-cash investing and financing activities:
Increase (decrease) in land and deferred income
due to discounted land purchased from and sold
to the City of Wisconsin Rapids	$	(429,494	)	$	429,494
Debt converted to common stock	$	105,000		$	75,000

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.

	Three Months Ended June 30, 2011
	Products &			Service &
	Components			Installation		Total
Net sales	$	814,508		$	449,289	$	1,263,797
Cost of sales		854,150			172,047		1,026,197
Gross profit	$	(39,642	)	$	277,242	$	237,600

		Three Months Ended June 30, 2010
	Products &			Service &
	Components			Installation		Total
Net sales	$	817,275		$	1,247,716	$	2,064,991
Cost of sales		861,663			533,691		1,395,354
Gross profit	$	(44,388	)	$	714,025	$	669,637

		Six Months Ended June 30, 2011
	Products &			Service &
	Components			Installation		Total
Net sales	$	1,381,671		$	832,198	$	2,213,869
Cost of sales		1,593,042			332,713		1,925,755
Gross profit	$	(211,371	)	$	499,485	$	288,114

		Six Months Ended June 30, 2010
	Products &			Service &
	Components			Installation		Total
Net sales	$	1,443,487		$	1,381,109	$	2,824,596
Cost of sales		1,444,125			683,140		2,127,265
Gross profit	$	(638	)	$	697,969	$	697,331

Revenue

During the three months ended June 30, 2011, we recorded revenue from product sales of $814,508, a small decrease from the three month period ended June 30, 2010 of $2,767 or .03%. Revenue from field services was $449,289 for the three months ended June 30, 2011, a decrease from the three-month period ended June 30, 2010 of $798,427 or 64%. The decrease in service revenue during the second quarter is attributable to a decrease in revenue from the paper mill industry due to less shut downs and less requirements for resealing tanks in the current year.

During the six months ended June 30, 2011, we recorded revenue from product sales of $1,381,671, a decrease from the six month period ended June 30, 2010 of $61,816 or 4.3%. Revenue from field services was $832,198 for the six months ended June 30, 2011, a decrease from the six month period ended June 30, 2010 of $548,911 or 39.7%. The small decrease in product revenue during the six months was due to the timing of revenue recognition for a large contract previously announced with a large Canadian mining firm. The decrease in service revenue during the six months is attributable to a decrease in revenue from the paper mill industry due to less shut downs and less requirements for resealing tanks in the current year.

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 June 30, 2011, cost of goods sold decreased to $1,026,197, resulting in gross profit of $237,600 (18.8%). For the three month period ended June 30, 2010, cost of goods sold was $1,395,354 resulting in gross profit of $669,637 (32.4%). The decline in gross profit for the three month period ended June 30, 2011 was driven by higher resin material costs and increased labor costs due to production start-up inefficiencies for the first six tanks related to the large mining project the company is engaged in.

For the three months ended June 30, 2011, our cost of materials was 30.3% of revenue compared to cost of materials of 25.0% for the three months ended June 30, 2010. We experienced continuing higher costs for our primary raw materials consisting of the isophathalic, polyester, and vinyl-ester resins and fiberglass in the second quarter. Our cost of labor was 38.5% of revenue for the three months ended June 30, 2011 compared to labor cost of 25.3% of revenue for the three months ended June 30, 2010. The higher labor costs in the second quarter were due to the utilization of more highly skilled and paid laborers plus significant overtime hours due to production start-up inefficiencies for the first six tanks related to the large mining project the company is engaged in. Manufacturing overhead was 12.4% of revenue during the three months ended June 30, 2011 compared to 17.3% for the three months ended June 30, 2010

For the six month period ended June 30, 2011, cost of goods sold decreased to $1,925,755, resulting in gross profit of $288,114 (13.0%). For the six month period ended June 30, 2010, cost of goods sold was $2,127,265 resulting in gross profit of $697,331 (24.7%). The decline in gross profit for the six month period ended June 30, 2011 was driven by higher material and labor costs incurred as a result of the start-up inefficiencies of the large project mentioned above.

For the six months ended June 30, 2011, our cost of materials was 31.2% of revenue compared to cost of materials of 30.3% for the six months ended June 30, 2010. We experienced continuing higher costs for our primary raw materials consisting of the isophathalic, polyester, and vinyl-ester resins and fiberglass in the second quarter. Our cost of labor was 40.9% of revenue for the six months ended June 30, 2011 compared to labor cost of 29.0% of revenue for the six months ended June 30, 2010. The higher labor costs were due to the utilization of more highly skilled and paid laborers plus significant overtime hours incurred as a result of the start-up inefficiencies of the large project mentioned above. Manufacturing overhead was 14.9% of revenue during the six months ended June 30, 2011 compared to 21.3% for the six months ended June 30, 2010.

Selling, general & administrative expenses

Selling, general and administrative expenses decreased to $1,008,533 during the three months ended June 30, 2011 from $1,215,577 during the three months ended June 30, 2010. The decrease in our selling, general and administrative expenses is a result of our reduced investment in WindFiber™ and administrative headcount salaries but offset by an increase of $567,000 due to professional fees related to a financial advisory consulting agreement. We recorded stock option compensation expense of $2,797 during the three months ended June 30, 2011, compared to $71,185 during the three months ended June 30, 2010. As noted above, we recorded $567,000 of stock compensation expense during the three months ended June 30, 2011 related to a consulting agreement with Diversified Equities Partners, LLC (“Diversified”) whereby Diversified will provide financial advisory services through September 2012. This non-cash expense was not incurred during the prior period.

Selling, general and administrative expenses decreased to $2,162,230 during the six months ended June 30, 2011 from $2,398,014 during the six months ended June 30, 2010. The decrease in our selling, general and administrative expenses is a result of our significantly reduced investment in WindFiber™ and administrative headcount salaries due to the company’s liquidity problems but offset by an increase of $1,134,0000 due to

professional fees related to a financial advisory consulting agreement. We recorded stock option compensation expense of $23,765 during the six months ended June 30, 2011, compared to $224,071 during the six months ended June 30, 2010. As noted above, we recorded $1,134,000 of stock compensation expense during the six months ended June 30, 2011 related to a consulting agreement with Diversified Equities Partners, LLC (“Diversified”) whereby Diversified will provide financial advisory services through September 2012. This non-cash expense was not incurred during the prior period.

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 June 30, 2011 and 2010 was $196,160 and $289,317, respectively. Total interest expense for the six months ended June 30, 2011 and 2010 was $377,109 and $531,357, respectively.

Non-cash amortization of debt discounts for warrants and beneficial conversion feature related to the convertible debt was $104,634 and $172,231 for the three months ended June 30, 2011 and 2010, respectively. Non-cash amortization of debt discounts for warrants and beneficial conversion feature related to the convertible debt was $198,997 and $300,335 for the six months ended June 30, 2011 and 2010, respectively.

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 will not be realized. Since 2009 the Company has continued to record a full valuation allowance and therefore, there is no tax provision recorded for the six months ended June 30, 2011 and 2010.

Net loss

The Company’s net loss increased to $967,093 during the three months ended June 30, 2011 from $835,224 during the three months ended June 30, 2010. The increase in our net loss for the three month period ended June 30, 2011 was due to decreased sales volume, a decrease in gross profit primarily due to increased resin costs, start-up inefficiencies of the large project but partially offset by reduced selling, general and administrative expenses, and also to decreased investments made in our WindFiber™ strategy and overall.

The Company’s loss increased to $2,251,225 during the six months ended June 30, 2011 from $2,231,831 during the six months ended June 30, 2010. The increase in our net loss for the six month period ended June 30, 2011 was due to the decreased sales volume, a decrease in gross profit which was partially offset by reduced selling, general and administrative expenses, and also to decreased investments made in our WindFiber™ strategy and overall changes as noted above.

Liquidity and Capital Resources

At June 30, 2011, the Company had cash on hand of $37,964, a working capital deficiency of $6,810,705 net of prepaid consulting expense, a net loss of $967,093 for the quarter ended June 30, 2011 and an accumulated deficit of $(17,120,028). 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 restructure its existing obligations, improve profit margins, reduce costs and related near-term working capital requirements and obtain additional financing. Despite these efforts, management cannot provide assurance that the Company will be able to sufficiently improve cash flows from operations or obtain additional financing that will be sufficient to allow it to meet its obligations and would likely have to seek other alternatives such as reorganization or other protection from our creditors, or cease operations until funding is obtained.

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 and the Indebtedness to Equity Ratio covenants in our credit agreement with our primary lender. The required Debt Service Coverage ratio is 1.25 and the Company’s ratio at June 30, 2011 was a negative (3.7). The required Indebtedness to Equity Ratio is not more than 3.5 to 1 and the Company’s ratio at June 30, 2011 was 5.5 to 1.

On June 30, 2011, our lender waived compliance with the Debt Service Coverage Ratio and the Total Indebtedness to Equity Ratio through September 30, 2011. As consideration for the waiver, the Company has agreed to work with the lender to negotiate and implement revised covenants by October 31, 2011. Without these covenant amendments from our lender, the Company will not meet these covenants looking ahead to September 30, 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 refinance the debenture obligations or raise additional capital as and when they come due, it would result in a breach of those agreements.

In the event we are unable to renegotiate the terms of our credit agreement or convertible debentures or obtain additional financing, it is highly unlikely that we would be able to satisfy such obligations, and we would likely be unable to continue operating as a going concern and would likely have to seek other alternatives such as reorganization or other protection from our creditors. However, we continue to work closely with our lender to renegotiate the terms of those arrangements, and we continue to explore alternative sources of capital and other means to refinance all or some of our indebtedness. We also intend to work with debenture holders to convert, extend or otherwise amend the terms and conditions of the outstanding convertible debentures.

The Company's cash flow from operations relies very significantly upon scheduled bi-weekly payments from the one large customer discussed previously and the successful negotiation of material future contract change related payment streams. Disruption of these payments would affect our liquidity and we would likely have to cease operations or seek other alternatives such as reorganization or other protection from our creditors.

We are also actively exploring and negotiating other restructuring options at this time, which includes the possibility of selling our operating business (currently conducted by ECC-C) to Jamie and Jennifer Mancl 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 entered into a definitive agreement with the Mancls with respect to this proposed transaction. Completion of the transaction, however, is conditioned, among other things, upon the Company obtaining approval from its shareholders and the primary lender agreeing to release the Company from its guarantees of the ECC-C bank loans. More details of the agreement are contained in a current report on Form 8-K.

However, in the event we are unable to complete the sale of ECC-C to the Mancls or obtain additional financing or restructure our existing obligations, including our obligations under the convertible debentures, we would likely have to seek other alternatives such as reorganization or other protection from our creditors, or cease operations.

Operating Cash Flows

Operating activities used $99,247 during the six months ended June 30, 2011 compared to $111,875 during the six months ended June 30, 2010. The slight decrease in net cash flow used in 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 six months ended June 30, 2011.

Investing Cash Flows

Investing activities used $132,130 and $218,015 of cash for the six months ended June 30, 2011 and 2010, respectively. The primary use of cash in investing activities in the second quarter of 2011 has been additional manufacturing equipment in our corrosion business offset by proceeds received from the land sale back to the City of Wisconsin Rapids. The primary use of cash in investing activities in the second 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 $262,622 during the six months ended June 30, 2011. Proceeds from financing activities, detailed below, were partially offset by net payments on long-term debt totaling $342,250 for the six months ended June 30, 2011. Additionally, $877,272 was added in new long-term debt agreements, which were partially used toward the repayment of a $550,000 short term note as well as an existing $117,272 long term note. The remaining $210,000 of the funding was used to pay down $190,000 on accounts payable and $20,000 for the buy-out of a previously leased vehicle. For the six months ended June 30, 2010, financing activities provided $103,172 comprised of $590,823 of cash received from the exercise of stock warrants offset by net payments on short-term debt and lines of credit totaling $239,197 and net payments on long-term debt net of $248,454.

Employee Stock Purchase Plan

Proceeds to the Company from stock purchased under the ECC Employee Stock Purchase Plan totaled $10,995 for the six months ended June 30, 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 June 30, 2011, Debentures totaling $1,125,000 remain outstanding and will become due during the third and fourth quarter of 2011. $5,245,000 of Debentures has been converted to common stock as of June 30, 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. Since the Company does not have the capital resources to repay these Debentures currently it will attempt to convert, extend or otherwise renegotiate their terms. If we are not successful in converting, extending or otherwise renegotiating the terms of these Debentures we would likely have to seek reorganization or other protection from our creditors.

Leases

The Company has entered into various operating leases expiring through April 2013 for equipment, vehicles and temporary lodging. At June 30, 2011, the monthly payment for all operating leases totals $4,517.

Going Forward

As described above, the Company is working with its lender to renegotiate the terms of its financial covenants, pursuing the sale of ECC-C and evaluating restructuring and other strategic options for the Company. There is no assurance we will be successful with any of these efforts. If our lender or convertible debenture holders require us to repay all amounts or a significant portion outstanding under our credit facility or outstanding debentures, 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 and would likely need to seek reorganization or other protection from our creditors. However, we will continue our efforts to renegotiate the terms of those arrangements and to 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. While we continue to have a sizable contracted backlog, primarily with one customer, we need to improve our ability to identify and secure domestic sales opportunities for the upcoming year. Inquiries and quotes from our current corrosion industry segments appear to be at or above levels from previous years and there maybe new sales opportunities in the waste management, mining and chemical processing industries. Additionally, the Company will need to achieve consistent profitability on the production floor with the large mining contract it is currently working on going forward after experiencing production inefficiencies on the initial batch of tanks as well as improving production floor profitability from other customers. Our field service division continues to have respectable margins over 50% and we need to improve our ability to expand field sales opportunities for the upcoming year.

Off-Balance Sheet Arrangements

As of June 30, 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.

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 June 30, 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 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. 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 December 31, 2010 and March 30 year end and 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, control procedures have been put into place to meet the timely filing with the SEC. The first test of these procedures was to be a timely filing of the June 30, 2011 quarterly report, which had been anticipated until delayed by the disclosures pertaining to the agreement with the Mancls. We will test these procedures again with the filing expected on September 30, 2011.

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.

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

Date	Persons or Class of Persons	Securities	Considerations
April 19, 2011	21 accredited investors	5,624 shares of common stock	$14,055 of accured interest paid to debenture holders
April 26, 2011	1 accredited investors	12,048 shares of common stock	Conversion of $30,000 of Debenture principal and $119 of accrued interest
June 2, 2011	1 accredited investors	20,204 shares of common stock	Conversion of $50,000 of Debenture principal and $510 of accrued interest
June 24, 2011	1 accredited investors	10,139 shares of common stock	Conversion of $25,000 of Debenture principal and $345 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. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

Regulation S-K Number	Document
3.1	Articles of Merger effective October 14, 2008 (1)
3.2	Amended and Restated Articles of Incorporation effective October 14, 2008 (1)
3.3	Amended and Restated Bylaws adopted October 14, 2008 (1)
4.1	Form of Debenture (2)
4.2	Form of Warrant (2)
10.1	Share Exchange Agreement dated June 26, 2008 (3)
10.2	First Amendment to Share Exchange Agreement dated August 8, 2008 (4)
10.3	2008 Stock Incentive Plan (1)
10.4	Industrial Development Revenue Bonds, Bond Agreement dated February 28, 2007 (1)
10.5	Industrial Development Revenue Bonds, Promissory Note 2007A dated February 28, 2007 (1)
10.6	Industrial Development Revenue Bonds, Promissory Note 2007B dated February 28, 2007 (1)
10.7	Industrial Development Revenue Bonds, Promissory Note 2007C dated February 28, 2007 (1)
10.8	Industrial Development Revenue Bonds, Credit Agreement dated February 28, 2007 (1)
10.9	Industrial Development Revenue Bonds, Construction Mortgage, Assignment Of Leases And Rents and Fixture Filing dated February 28, 2007 (1)
10.10	Industrial Development Revenue Bonds, Security Agreement dated February 28, 2007 (1)
10.11	Option Agreement dated June 18, 2008 (1)
10.12	Purchase and Supply Agreement dated October 13, 2008 (1)
10.13	Unsecured Promissory Note dated December 31, 2008 (5)
10.14	Assignment and Assumption Agreement dated December 31, 2008 (6)
10.15	Amendment to the Credit Agreement dated March 13, 2009 (7)
10.16	Employee Stock Purchase Plan (8)
10.17	Debt Exchange Agreement (9)
31.1	Rule 13a-14(a) Certification of Jamie L. Mancl
31.2	Rule 13a-14(a) Certification of Timothy Sherlock
32.1	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 2002
32.2	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.

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 CORPORATION

Dated: August 19, 2011	By:	/s/ Jamie L. Mancl
		Jamie L. Mancl, President

Dated: August 19, 2011	By:	/s/ Timothy Sherlock
		Timothy Sherlock, Interim Chief Financial Officer

Attached files

TRAILBLAZER RESOURCES INC. Reports

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