UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2009
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
000-28867
(Commission
file number)
ENERGY
COMPOSITES CORPORATION
(Exact
name of registrant as specified in its charter)
|
Nevada
|
88-0409170
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
4400
Commerce Drive, Wisconsin Rapids, WI 54494
(Address
of principal executive offices) (Zip Code)
(715)
421-2060
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
ý
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer
o
|
Accelerated
filer
o
|
|
Non-accelerated
filer
o
|
Smaller
reporting company
ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
ý
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
42,105,106
shares as of November 3,
2009
ENERGY
COMPOSITES CORPORATION
FORM
10-Q
FOR
THE QUARTER ENDED
SEPTEMBER
30, 2009
INDEX
|
|
|
Page
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
2
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
4
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
24
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
24
|
|
|
|
|
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
25
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
25
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
25
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
25
|
|
|
|
|
|
Item
5.
|
Other
Information
|
25
|
|
|
|
|
|
Item
6.
|
Exhibits
|
26
|
|
|
|
|
|
SIGNATURES
|
27
|
ENERGY
COMPOSITES CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,392,875
|
|
|
$
|
2,985,289
|
|
|
Accounts
receivable, net of allowance for doubtful
|
|
|
|
|
|
|
|
|
|
accounts
of $181,000 in 2009 and $108,000 in 2008
|
|
|
1,478,843
|
|
|
|
2,556,945
|
|
|
Accounts
receivable - related party
|
|
|
1,366
|
|
|
|
-
|
|
|
Inventories
|
|
|
1,098,006
|
|
|
|
1,353,915
|
|
|
Deferred
income taxes
|
|
|
134,000
|
|
|
|
68,000
|
|
|
Other
current assets
|
|
|
126,669
|
|
|
|
107,423
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
4,231,759
|
|
|
|
7,071,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
5,823,603
|
|
|
|
5,682,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
3,055,000
|
|
|
|
1,787,000
|
|
|
Intangible
assets, net
|
|
|
60,802
|
|
|
|
69,815
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets, net
|
|
|
3,115,802
|
|
|
|
1,856,815
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
13,171,164
|
|
|
$
|
14,610,844
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt obligations
|
|
$
|
532,692
|
|
|
$
|
503,576
|
|
|
Lines
of credit - bank
|
|
|
97,934
|
|
|
|
-
|
|
|
Short-term
notes payable
|
|
|
1,400,000
|
|
|
|
1,000,000
|
|
|
Accounts
payable
|
|
|
480,422
|
|
|
|
1,421,423
|
|
|
Accounts
payable - related party
|
|
|
275,363
|
|
|
|
89,372
|
|
|
Accrued
expenses
|
|
|
187,908
|
|
|
|
162,136
|
|
|
Accrued
payroll and payroll taxes
|
|
|
388,655
|
|
|
|
324,339
|
|
|
Customer
deposits
|
|
|
45,609
|
|
|
|
431,775
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,408,583
|
|
|
|
3,932,621
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations, net of current portion
|
|
|
5,375,524
|
|
|
|
5,487,293
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock - $.001 par value; 100,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized,
42,098,009 and 41,579,157 shares issued
|
|
|
|
|
|
|
|
|
|
and
outstanding, respectively
|
|
|
42,098
|
|
|
|
41,579
|
|
|
Additional
paid-in capital
|
|
|
10,312,993
|
|
|
|
8,998,941
|
|
|
Accumulated
deficit
|
|
|
(5,968,034
|
)
|
|
|
(3,849,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
4,387,057
|
|
|
|
5,190,930
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
13,171,164
|
|
|
$
|
14,610,844
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ENERGY
COMPOSITES CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,861,409
|
|
|
$
|
2,159,909
|
|
|
$
|
6,210,734
|
|
|
$
|
5,729,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
1,502,393
|
|
|
|
1,995,987
|
|
|
|
5,235,857
|
|
|
|
5,025,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
359,016
|
|
|
|
163,922
|
|
|
|
974,877
|
|
|
|
703,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
978,014
|
|
|
|
563,840
|
|
|
|
2,752,176
|
|
|
|
1,588,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(618,998
|
)
|
|
|
(399,918
|
)
|
|
|
(1,777,299
|
)
|
|
|
(885,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(237,709
|
)
|
|
|
(111,049
|
)
|
|
|
(1,689,625
|
)
|
|
|
(282,855
|
)
|
|
Interest
income
|
|
|
2,686
|
|
|
|
-
|
|
|
|
14,480
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(235,023
|
)
|
|
|
(111,049
|
)
|
|
|
(1,675,145
|
)
|
|
|
(282,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before (benefit) for income taxes
|
|
|
(854,021
|
)
|
|
|
(510,967
|
)
|
|
|
(3,452,444
|
)
|
|
|
(1,167,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
(306,000
|
)
|
|
|
(228,000
|
)
|
|
|
(1,334,000
|
)
|
|
|
(413,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(548,021
|
)
|
|
|
(282,967
|
)
|
|
|
(2,118,444
|
)
|
|
|
(754,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Net income attributable to non-controlling interest in variable interest
entities
|
|
|
-
|
|
|
|
(43,838
|
)
|
|
|
-
|
|
|
|
(138,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to Energy Composites Corporation
|
|
$
|
(548,021
|
)
|
|
$
|
(326,805
|
)
|
|
$
|
(2,118,444
|
)
|
|
$
|
(893,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
42,097,929
|
|
|
|
24,000,000
|
|
|
|
42,030,708
|
|
|
|
24,000,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ENERGY
COMPOSITES CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
(Unaudited)
|
|
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,118,444
|
)
|
|
$
|
(893,082
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest in variable interest entities
|
|
|
-
|
|
|
|
138,144
|
|
|
Depreciation
and amortization
|
|
|
325,549
|
|
|
|
254,252
|
|
|
(Gain)
loss on sale of other assets
|
|
|
(650
|
)
|
|
|
3,285
|
|
|
Amortization
of debt discount for imputed interest
|
|
|
2,935
|
|
|
|
2,745
|
|
|
Amortization
of discount for warrants and beneficial
|
|
|
|
|
|
|
|
|
|
conversion
feature on convertible debt
|
|
|
1,327,291
|
|
|
|
-
|
|
|
Stock
issued for interest payments
|
|
|
73,948
|
|
|
|
-
|
|
|
Stock
issued for compensation
|
|
|
165,623
|
|
|
|
-
|
|
|
Deferred
income taxes
|
|
|
(1,334,000
|
)
|
|
|
(413,000
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
1,078,102
|
|
|
|
(532,388
|
)
|
|
Accounts
receivable - related party
|
|
|
(1,366
|
)
|
|
|
-
|
|
|
Inventories
|
|
|
255,909
|
|
|
|
(492,896
|
)
|
|
Other
current assets
|
|
|
(19,246
|
)
|
|
|
(66,167
|
)
|
|
Accounts
payable
|
|
|
(941,001
|
)
|
|
|
295,806
|
|
|
Accounts
payable - related party
|
|
|
185,991
|
|
|
|
-
|
|
|
Accrued
expenses
|
|
|
25,772
|
|
|
|
113,425
|
|
|
Accrued
payroll and payroll taxes
|
|
|
64,316
|
|
|
|
239,234
|
|
|
Customer
deposits
|
|
|
(386,166
|
)
|
|
|
113,316
|
|
|
Net
cash used in operating activities
|
|
|
(1,295,437
|
)
|
|
|
(1,237,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(444,949
|
)
|
|
|
(740,148
|
)
|
|
Proceeds
from sale of property and equipment
|
|
|
650
|
|
|
|
16,500
|
|
|
Net
cash used in investing activities
|
|
|
(444,299
|
)
|
|
|
(723,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in bank overdraft payable
|
|
|
-
|
|
|
|
(168,087
|
)
|
|
Net
borrowings from lines of credit - bank
|
|
|
97,934
|
|
|
|
205,622
|
|
|
Financing
costs for long-term debt
|
|
|
(3,320
|
)
|
|
|
-
|
|
|
Net
borrowings from short-term notes payable
|
|
|
400,000
|
|
|
|
2,874,774
|
|
|
Payments
on long-term debt
|
|
|
(347,292
|
)
|
|
|
(193,067
|
)
|
|
Capital
distributions by variable interest entities
|
|
|
-
|
|
|
|
(52,250
|
)
|
|
Net
cash provided by financing activities
|
|
|
147,322
|
|
|
|
2,666,992
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,592,414
|
)
|
|
|
706,018
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
2,985,289
|
|
|
|
30,739
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period
|
|
$
|
1,392,875
|
|
|
$
|
736,757
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Basis of Presentation
The
accompanying unaudited consolidated financial information has been prepared by
Energy Composites Corporation (formerly Las Palmas Mobile Estates) (“Company” or
“ECC”) in accordance with accounting principles generally accepted in the United
States of America for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission
(“SEC”). Accordingly, it does not include all the information and
notes required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement of this financial information have
been included. Financial results for the interim periods presented
are not necessarily indicative of the results that may be expected for the
fiscal year as a whole or any other interim period. This financial
information should be read in conjunction with the December 31, 2008 audited
consolidated financial statements and notes included in the Company’s Form 10-K
filed on March 31, 2009.
Note
2. Nature of Business and Significant Accounting
Policies
Nature
of Business
The
Company is a manufacturer, installer and marketer of fiberglass products which
are sold throughout the United States, but primarily in the
Midwest. The Company has a service division that provides
installation and repair of various piping projects. The Company
serves the paper, petro-chemical, water, waste-water, bio-fuel and power
industries.
The
Company was organized October 29, 1992 under the laws of the State of
Nevada. The Company had not started its planned principal operations
until October 14, 2008. On June 27, 2008, Las Palmas Mobile Estates
entered into a Share Exchange Agreement whereby it agreed to issue 28,750,000
shares of its common stock to acquire all of the outstanding shares of Advanced
Fiberglass Technologies, Inc., a Wisconsin corporation (“AFT”).
As part
of the Share Exchange Agreement, prior to the closing of the transaction on
October 14, 2008, 4,750,000 restricted common shares were issued to a consultant
for services provided in connection with this transaction, which were valued at
$420,000. These 4,750,000 shares were part of the 28,750,000 shares
described above. Upon completion of the transaction on October 14,
2008, AFT became a wholly-owned subsidiary of the Company. Since this
transaction resulted in the existing shareholders of AFT acquiring control of
Energy Composites Corporation, for financial reporting purposes, the business
combination has been accounted for as an additional capitalization of the
Company (a reverse acquisition with AFT as the accounting
acquirer). Accordingly, AFT’s net assets are included in the
consolidated balance sheet at their historical value. The operations
of AFT were the only continuing operations of the Company.
The
accompanying financial statements for the three and nine months ended September
30, 2008 present the historical financial information of AFT. The
outstanding common shares of AFT at September 30, 2008 have been restated to
reflect the shares issued upon reorganization.
In June
2009, we created a wholly-owned subsidiary, Innovative Composite Solutions, LLC
(“ICS”) to serve as a distribution company for resins and composites
materials.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries AFT and ICS, after elimination of all
intercompany accounts, transactions, and profits.
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company also consolidates its financial results with entities determined to be
variable interest entities (VIEs), for which the Company is deemed to be the
VIE’s primary beneficiary. See the accounting policy on “Variable
Interest Entities” for further information.
Variable
Interest Entities
Until
December 31, 2008, the Company was considered the primary beneficiary of the
following entities:
M&W
Fiberglass, LLC (“M&W”) was a lessor of real estate to AFT and was wholly
owned by the initial stockholder of AFT, now the majority stockholder of the
Company. As of August 2007, M&W began leasing a newly constructed
manufacturing and office facility (73,000 square feet) at Commerce Drive,
Wisconsin Rapids, Wisconsin to the Company at $30,000 per month from August 1,
2007 to December 31, 2007 and $35,000 per month starting January 1,
2008. On December 31, 2008, the Company exercised an option to
purchase the manufacturing facility from M&W for $4,500,000 and assumed all
of M&W’s debt related to the property. In addition, all
guarantees of M&W debt by the Company were released by the
lender. As a result of these actions, the Company was no longer
considered the primary beneficiary of M&W after December 30,
2008.
Fiberglass
Piping & Fitting Company (“FPF”) is a wholesale distributor of fiberglass
piping and was wholly owned by the initial stockholder of AFT, now the majority
stockholder of the Company. FPF started operations as a newly formed
S-corporation on September 16, 2006 and had limited operations during 2006 and
2007. Prior to December 31, 2008, all FPF financing was secured by
the unlimited guarantee of the Company. As of December 31, 2008, FPF
became financially independent of the Company by the sole FPF stockholder
contributing $200,000 of additional capital to FPF and FPF moving out of AFT’s
manufacturing facility to its own location. In addition, all
guarantees of FPF debt by the Company were released by the lender. As
a result of these actions, the Company was no longer considered the primary
beneficiary of FPF after December 30, 2008.
For the
three and nine months ended September 30, 2008, the statements of operations and
cash flows have been presented on a consolidated basis to include the variable
interests in M&W and FPF. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The
Company’s consolidated balance sheets at September 30, 2009 and December 31,
2008 and the statements of operations and cash flows for the three and nine
months ended September 30, 2009 do not include the activities of M&W and
FPF.
For the
three months ended September 30, 2008, the revenue of the VIEs represented
$147,547, or 6.8% of the consolidated revenue of the Company. For the
nine months ended September 30, 2008, the revenue of the VIEs represented
$454,523, or 7.9% of the consolidated revenue of the Company. The
Company recognized the net earnings of the VIEs only to the extent it recovered
losses previously recognized with respect to the VIEs. Earnings of
the VIEs in excess of the Company’s previously recognized losses with respect to
that VIE were eliminated from the Company’s earnings and attributed to the
respective equity owner of the VIEs by recording such earnings as
non-controlling interest in variable interest entities on the Company’s
consolidated financial statements. During the three and nine months
ended September 30, 2008, the VIEs experienced a combined net income of $43,838
and $138,144, respectively, which accordingly resulted in a non-controlling
charge on the Company’s statements of operations.
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Credit
Risk and Major Customers
Financial
instruments that may subject the Company to significant concentrations of credit
risk consist primarily of trade receivables. The Company grants
credit to its customers throughout the United States in the normal course of
business. Customer creditworthiness is routinely monitored and
collateral is not required. The following is a schedule of
significant sales to customers for the nine months ended September 30, 2009 and
2008 and significant customer accounts receivable balances at September 30, 2009
and 2008:
|
|
|
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
Trade
Accounts
|
|
|
|
Total
Sales
|
|
Receivable
|
|
Customer
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
1
|
|
49.8%
|
|
1.4%
|
|
54.9%
|
|
3.6%
|
|
2
|
|
9.0
|
|
1.6
|
|
6.4
|
|
-
|
|
3
|
|
-
|
|
27.2
|
|
9.0
|
|
7.2
|
|
4
|
|
5.8
|
|
8.6
|
|
2.2
|
|
15.2
|
|
|
|
64.6%
|
|
38.8%
|
|
72.5%
|
|
26.0%
|
Segment
Reporting
Through
September 30, 2009, the Company provided products and services through one
reportable operating segment, Industrial Tank and Piping.
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued authoritative
guidance codifying generally accepted accounting principles in the United States
(“GAAP”). While the guidance was not intended to change GAAP, it did
change the way the Company references these accounting principles in the Notes
to the Consolidated Financial Statements. This guidance was effective
for interim and annual reporting periods ending after September 15,
2009. The Company’s adoption of this authoritative guidance as of
September 30, 2009 changed how it references GAAP in its
disclosures.
In June
2009, the FASB issued authoritative guidance that eliminates the quantitative
approach previously required for determining the primary beneficiary of a
variable interest entity and requires on-going qualitative reassessments of
whether an enterprise is the primary beneficiary of a variable interest
entity. This guidance is effective for fiscal years beginning after
November 15, 2009. The Company does not expect the adoption of this
authoritative guidance to have any current impact on the consolidated financial
statements.
Note
3. Inventories
Inventories
consist of the following:
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Raw
materials
|
|
$
|
420,285
|
|
|
$
|
440,741
|
|
|
Work
in progress
|
|
|
677,721
|
|
|
|
913,174
|
|
|
Finished
goods
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
1,098,006
|
|
|
$
|
1,353,915
|
|
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4. Property and Equipment, Net
Property
and equipment are as follows:
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Land
and improvements
|
|
$
|
82,572
|
|
|
$
|
74,023
|
|
|
Buildings
and improvements
|
|
|
3,610,997
|
|
|
|
3,590,267
|
|
|
Machinery
and equipment
|
|
|
2,511,398
|
|
|
|
2,125,177
|
|
|
Vehicles
and trailers
|
|
|
376,925
|
|
|
|
381,212
|
|
|
Computer
equipment
|
|
|
200,478
|
|
|
|
173,926
|
|
|
Furniture
and office equipment
|
|
|
107,072
|
|
|
|
104,813
|
|
|
|
|
|
6,889,442
|
|
|
|
6,449,418
|
|
|
Less
accumulated depreciation
|
|
|
(1,065,839
|
)
|
|
|
(766,961
|
)
|
|
Net
property and equipment
|
|
$
|
5,823,603
|
|
|
$
|
5,682,457
|
|
Depreciation
expense was $117,838 and $83,616 for the three months ended September 30, 2009
and 2008, respectively. Depreciation expense was $313,215 and
$245,273 for the nine months ended September 30, 2009 and 2008,
respectively.
The cost
of equipment under capital lease as of September 30, 2009 and December 31, 2008
was $21,075. The accumulated amortization of equipment under capital
lease as of September 30, 2009 and December 31, 2008 was $4,039 and $2,459,
respectively.
Note
5. Intangible Assets
Intangible
assets are as follows:
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Non-compete
agreement
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
Customer
list
|
|
|
74,434
|
|
|
|
74,434
|
|
|
Deferred
financing costs
|
|
|
69,338
|
|
|
|
66,017
|
|
|
|
|
|
148,772
|
|
|
|
145,451
|
|
|
Less
accumulated amortization
|
|
|
(87,970
|
)
|
|
|
(75,636
|
)
|
|
Net
intangible assets
|
|
$
|
60,802
|
|
|
$
|
69,815
|
|
Amortization
expense was $3,382 and $2,949 for the three months ended September 30, 2009 and
2008, respectively. Amortization expense was $12,334 and $8,979 for
the nine months ended September 30, 2009 and 2008,
respectively. Estimated amortization expense for the next five years
is as follows:
|
2009
– remaining
|
|
$
|
2,513
|
|
|
2010
|
|
|
8,293
|
|
|
2011
|
|
|
7,114
|
|
|
2012
|
|
|
5,396
|
|
|
2013
|
|
|
4,872
|
|
|
Thereafter
|
|
|
32,614
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,802
|
|
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
6. Financing Arrangements
Line
of Credit – Bank
The
Company utilizes a line of credit with Nekoosa Port Edwards State Bank (“NPESB”)
that provides for maximum borrowings of $250,000, bears interest at a fixed rate
of 6.75% at September 30, 2009 and matures in December 2009. The line
is secured by all business assets of AFT, an assignment of life insurance on the
officer/stockholder, a junior mortgage on land and buildings, and an unlimited
guaranty by ECC. The Company had a balance of $97,934 and $0 on the
line of credit at September 30, 2009 and December 31, 2008,
respectively.
Short-Term
Notes Payable
The
Company uses short-term notes from NPESB to fund bulk purchases of inventory and
large jobs in addition to utilizing its line of credit. The
underlying inventory and customer purchase orders serve as specific collateral
for these notes. In addition, the short-term notes are also typically
secured by all business assets of the Company. The notes bear
interest at fixed rates. The notes are typically twelve months or
less. The Company had $1,400,000 and $1,000,000 of outstanding notes
payable with weighted average interest rates of 6.75% and 7.45% as of September
30, 2009 and December 31, 2008, respectively.
Long-Term
Debt Obligations
Long-term
debt obligations are as follows:
|
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
NPESB
- a term loan secured by 15 ton deck crane, interest rate of 7.25%, due
October 2010, monthly payments of $948
|
|
$
|
9,518
|
|
|
$
|
17,302
|
|
|
|
|
|
|
|
|
|
|
|
|
NPESB
– a term loan secured by all general business assets of AFT and unlimited
continuing guarantee of ECC; interest rate of 6.75%, due on demand,
monthly payments of $898
|
|
|
46,220
|
|
|
|
51,808
|
|
|
|
|
|
|
|
|
|
|
|
|
NPESB
- an industrial revenue bond term loan, secured by equipment and unlimited
continuing guarantee of ECC; contains restrictive financial covenants,
interest rate of 5.75%, due July 2014, monthly payment of
$7,266
|
|
|
364,110
|
|
|
|
412,391
|
|
|
|
|
|
|
|
|
|
|
|
|
NPESB
- an industrial revenue bond term loan, secured by equipment and unlimited
continuing guarantee of ECC; contains restrictive financial covenants,
interest rate of 5.75%, due July 2014, monthly payment of
$7,266
|
|
|
358,230
|
|
|
|
406,761
|
|
|
|
|
|
|
|
|
|
|
|
|
City
of Wisconsin Rapids, a term loan, secured by all assets and unlimited
continuing guarantee of ECC; contains various operating covenants,
interest rate 2%, due April 2012, monthly payment of
$4,499
|
|
|
405,429
|
|
|
|
439,545
|
|
|
|
|
|
|
|
|
|
|
|
|
Yale
Financial Services, a capital lease term loan, secured by two Yale
forklifts, interest rate 7.7%, due October 2010, monthly payment of
$657
|
|
|
8,176
|
|
|
|
13,451
|
|
|
|
|
|
|
|
|
|
|
|
|
City
of Wisconsin Rapids, a $75,000 term loan, secured by ECC and AFT
guarantees; imputed interest at 8% resulting in an original issue discount
with an unamortized balance of $24,305 at September 30, 2009, balloons in
August 2014; debt was assumed by AFT from M&W as part of the land and
building purchase on December 31, 2008
|
|
|
50,695
|
|
|
|
47,760
|
|
|
|
|
|
|
|
|
|
|
|
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
NPESB
– an industrial revenue bond term loan, secured by real estate, ECC and
AFT guarantees; contains restrictive financial covenants, interest rate of
5.50%, due July 2027, monthly payment of $20,776; debt was assumed by AFT
from M&W as part of the land and building purchase on December 31,
2008
|
|
|
2,811,970
|
|
|
|
2,879,672
|
|
|
|
|
|
|
|
|
|
|
|
|
M&W
LLC (related party) – an unsecured term loan, interest rate of 4.775%, due
December 2015, quarterly payment of $24,493 beginning March
2009
|
|
|
1,008,705
|
|
|
|
1,045,328
|
|
|
|
|
|
|
|
|
|
|
|
|
NPESB
– a term loan secured by all general business assets of AFT and an
unlimited continuing guarantee of ECC; due January 2012, interest rate of
6.75%, monthly payments of $13,405 beginning February 2009
|
|
|
346,021
|
|
|
|
430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable ($1,420,000 face value) – see Note 7
|
|
|
499,142
|
|
|
|
246,851
|
|
|
|
|
|
5,908,216
|
|
|
|
5,990,869
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of long-term obligations
|
|
|
(532,692
|
)
|
|
|
(503,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt obligations, net of current portion
|
|
$
|
5,375,524
|
|
|
$
|
5,487,293
|
|
Maturities
of long-term debt obligations are as follows:
|
2009
– remaining
|
|
$
|
165,696
|
|
|
2010
|
|
|
489,194
|
|
|
2011
|
|
|
1,923,380
|
|
|
2012
|
|
|
631,588
|
|
|
2013
|
|
|
337,056
|
|
|
Thereafter
|
|
|
3,282,160
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,829,074
|
|
At
December 31, 2008, the Company was not in compliance with various restrictive
financial covenants contained in the industrial revenue bonds. The
Company, prior to December 31, 2008, received a waiver letter on the covenant
defaults from the lenders. These violated covenants were waived
through December 31, 2009.
On March
13, 2009, the Company executed an amendment to the credit agreement for the
three industrial revenue bonds held by NPESB. The amendment to the
credit agreement includes the redefinition of the covenants attached to the
bonds. Under the terms of the amended credit agreement, the covenants
apply to the Company and its subsidiaries on a consolidated
basis. The covenants require the Company to maintain (a) a Debt
Service Coverage Ratio of not less than 1.25 to 1.0 and (b) a Total Indebtedness
to Equity Ratio of not more than 3.5 to 1.0.
Debt
Service Coverage Ratio is defined as the ratio of (i) EBITDA, a non-GAAP
measurement, for the 12-month period ending on the measurement date to (ii)
interest expenses plus principal payments coming due during the 12-month period
beginning on the day after measurement. EBITDA is defined as net
income after taxes, plus interest expense which has been deducted in the
determination of net income, plus federal, state and local taxes which have been
deducted in the determination of net income, plus depreciation and amortization
expenses which have been deducted in the determination of net income, plus
extraordinary losses which have been deducted in the determination of net
income, minus extraordinary gains which have been included in the determination
of net income. The Company did not calculate this ratio at September
30, 2009 because the Company had recorded negative EBITDA for the previous
12-month period.
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Total
Indebtedness to Equity Ratio is defined as the ratio of all liabilities or
obligations to Equity. This ratio at September 30, 2009 has been
calculated by the Company as follows:
|
Total
current liabilities
|
|
$
|
3,408,583
|
|
|
Long-term
debt obligations, net of current portion
|
|
|
5,375,524
|
|
|
Total
indebtedness
|
|
$
|
8,784,107
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
4,387,057
|
|
|
Total
indebtedness to equity
|
|
|
2.0
|
|
The next
measurement date of these covenants will be December 31, 2009.
Note
7. Convertible Notes Payable
In August
2008, the Company began a private placement offering of Units, each Unit
consisting of (i) a 3-year, 6% convertible debenture with a conversion price of
$2.50 (the “Conversion Price”) per share (subject to adjustment for stock splits
and stock dividends) (the “Debentures”), and (ii) a number of warrants equal to
the number of shares issuable upon conversion of the principal amount of the
Convertible Debenture (the “Warrants”). This placement offering was
in anticipation of the AFT reverse acquisition taking place which became
effective on October 14, 2008.
Each
Warrant is immediately exercisable into shares of common stock for a term of 3
years at $5.00 per share. The Warrants also provide anti-dilution
protection for the following events: reorganization, reclassification,
consolidation, merger or sale; subdivision, combination or other dividend of the
Company’s Common Stock. No warrants were exercised nor expired during
2008 or 2009.
The
private placement was closed on December 14, 2008. Debentures in the
aggregate principal amount of $6,370,000 were sold which included the issuance
of 2,548,000 Warrants. The Debentures are considered to be
conventional convertible debt.
The
issued Warrants were deemed to have a relative fair market value of $4,068,422
which was recorded as a discount to the face value of the Debentures and as a
credit to Additional Paid-In Capital and will be accreted to interest expense
over the 3-year term using the effective interest method. The Company
used the Black-Scholes-Merton pricing model as a method for determining the
estimated fair value of the Warrants.
The
proceeds of the Debentures were allocated based on the relative fair value of
the Debentures and Warrants as of the commitment date. The Company
then calculated the intrinsic value of the beneficial conversion feature
embedded in the Debentures and because the amount of the beneficial conversion
feature exceeded the fair value allocated to the Debentures, the amount of the
beneficial conversion feature to be recorded was limited to the proceeds
allocated to the Debentures. Accordingly, the beneficial conversion
feature was calculated to be $2,301,578 and was recorded as an additional
discount on the Debentures and a credit to Additional Paid-In Capital of
$1,412,578 and a credit of $889,000 to deferred income tax
liability. The Company is accreting the beneficial conversion feature
to interest expense over the 3-year term of the debt using the effective
interest method.
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the convertible note balance as of September 30,
2009:
|
Balance
at January 1, 2008
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Plus:
gross proceeds received in 2008
|
|
|
6,370,000
|
|
|
|
|
|
|
|
|
Less:
value assigned to:
|
|
|
|
|
|
Warrants
|
|
|
(4,068,422
|
)
|
|
Beneficial
conversion feature allotted to:
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
(1,412,578
|
)
|
|
Deferred
income tax liability
|
|
|
(889,000
|
)
|
|
Sub-total
of assigned values
|
|
|
(6,370,000
|
)
|
|
|
|
|
|
|
|
Plus:
accretion of original issue discount from warrants and beneficial
conversion feature
|
|
|
4,121,851
|
|
|
|
|
|
|
|
|
Less:
conversion of debt to common stock
|
|
|
(3,875,000
|
)
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
246,851
|
|
|
|
|
|
|
|
|
Plus:
accretion of original issue discount from warrants and beneficial
conversion feature
|
|
|
1,327,291
|
|
|
|
|
|
|
|
|
Less:
conversion of debt to common stock
|
|
|
(1,075,000
|
)
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
$
|
499,142
|
|
All
outstanding convertible debentures at September 30, 2009 mature at various dates
in 2011. The $1,420,000 of maturities related to these debentures are
included in the long-term debt maturities table found in Note 6.
The
effective annual interest rate for the nine months ended September 30, 2009 was
95%. The rate is considerably higher than the stated rate of 6% due
to the amortization of the discount recorded against the debt for the detachable
warrants and beneficial conversion feature.
Note
8. Stockholders’ Equity
In
conjunction with the private placement of convertible debt in 2008, $1,075,000
of the debt was converted to common shares of the Company during the nine months
ended September 30, 2009 at $2.50 per share. 459,605 common shares
were issued for the debt and related interest on the debt.
During
the nine months ended September 30, 2009, the Company issued 49,272 restricted
common shares to officers valued at $150,000 for services rendered and to be
rendered in the future. Of these shares, 12,136 shares (valued at
$37,500) remain unvested until April 28, 2010 and were recorded as deferred
compensation. Through September 30, 2009 amortization of the deferred
compensation has totaled $15,625. Also, the Company established a
compensation plan, payable in arrears, for its board of
directors. Pursuant to the plan each director will receive $30,000 in
restricted stock grants per year of service. At September 30, 2009,
shares issued to Directors as compensation for services totaled 9,975 and were
valued at $37,500 for the service period January 2009 through May
2009. An accrual for $35,000 for director compensation for June 2009
through September 2009 has been recorded to accrued expenses.
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
9. Income Taxes
The
Company accounts for income taxes based upon an asset and liability approach.
Deferred tax assets and liabilities represent the future tax consequences of the
differences between the financial statement carrying amounts of assets and
liabilities versus the tax basis of assets and liabilities. Under this method,
deferred tax assets are recognized for deductible temporary differences, and
operating loss and tax credit carry-forwards. Deferred tax liabilities are
recognized for taxable temporary differences. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
The
income tax provision consisted of the following for the three months ended
September 30, 2009 and 2008:
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
Currently
payable (refundable)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred
tax (benefit)
|
|
|
(306,000
|
)
|
|
|
(228,000
|
)
|
|
Total
income tax (benefit)
|
|
$
|
(306,000
|
)
|
|
$
|
(228,000
|
)
|
The
income tax provision consisted of the following for the nine months ended
September 30, 2009 and 2008:
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
Currently
payable (refundable)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred
tax (benefit)
|
|
|
(1,334,000
|
)
|
|
|
(523,000
|
)
|
|
|
|
|
(1,334,000
|
)
|
|
|
(523,000
|
)
|
|
Establishment
of the net deferred tax liabilities as of January 1, 2008 due to change in
tax status
|
|
|
-
|
|
|
|
110,000
|
|
|
Total
income tax (benefit)
|
|
$
|
(1,334,000
|
)
|
|
$
|
(413,000
|
)
|
At
September 30, 2009, the Company reviewed all available evidence pertaining to
the realization of recorded deferred tax assets. Positive evidence
available to the Company at September 30, 2009 supporting the realization of the
recorded deferred tax assets included the historical operating profits of AFT,
continued growth in product and service delivery for AFT, progress in new
product development for AFT, an operating plan indicating a near-term return to
operating profits supported by the 2007/2008/2009 production capacity additions,
and certain near-term strategic efforts. Negative evidence available
to the Company at September 30, 2009 included the operating losses recorded
prior to September 30, 2009. Based on this, the Company concluded
that the evidence available at September 30, 2009 did not indicate that it was
more likely than not that the deferred tax assets would not be
realized. Therefore, a valuation allowance was not recorded as of
September 30, 2009. The Company will re-assess the valuation
allowance at December 31, 2009.
Note
10. Employee Benefit Plans
In
January 2009, the Company began sponsoring a defined contribution savings plan
that allows substantially all employees not covered by separate collective
bargaining agreements to contribute a portion of their pre-tax and/or after-tax
income up to statutory limits. The plan requires the Company to match
50% of the participant’s contributions up to 6% of the participants’
compensation. The Company’s expense was $16,833 and $47,397 for the
three and nine months ended September 30, 2009, respectively.
Prior to
2009, the Company sponsored a Simple IRA plan which required the Company to
match 100% of the eligible participant’s contributions up to 3% of the
participant’s earned income. The Company’s expense was $9,217 and
$31,018 for the three and nine months ended September 30, 2008,
respectively.
In
addition to the plans described, the Company participates in certain customary
employee benefit plans, including those which provide health insurance benefits
to employees.
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
11. Related Party Transactions
Manufacturing
and Office Facility Lease and Purchase
The
Company leased its manufacturing facility at Commerce Drive, Wisconsin Rapids,
Wisconsin with M&W which was considered a variable interest entity of the
Company until December 30, 2008. On December 31, 2008, the Company
purchased the facility from M&W and had no lease payments for
2009. Total lease payments to M&W were $35,000 per month in
2008. For the three and nine months ended September 30, 2009, the
Company paid interest expense to M&W on the building term loan of $12,275
and $36,856, respectively.
Other
Related Party Transactions
AFT
purchased fiberglass pipe fittings from FPF totaling $63,925 and $34,499 for the
three months ended September 30, 2009 and 2008, respectively. AFT
purchased fiberglass pipe fittings from FPF totaling $355,032 and $95,731 for
the nine months ended September 30, 2009 and 2008, respectively.
Note
12. Commitments and Contingencies
Legal
Proceedings
The
Company is subject to legal proceedings and claims arising in the ordinary
course of business. As of the date hereof, in the opinion of
management, the resolution of such matters will not have a material effect on
the Company’s financial position, results of operations, or cash
flow.
Note
13. Sales and Cost of Sales
The
following information summarizes the net sales and related cost of
sales/services for the Company’s product and service offerings. The
Company does not consider the product sales and service components of their
business to be reportable operating segments because the financial results of
each component is not separately evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
|
|
|
Three
Months Ended September 30, 2009
|
|
|
|
|
Products
&
|
|
|
Service
&
|
|
|
|
|
|
|
|
Components
|
|
|
Installation
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
827,428
|
|
|
$
|
1,033,981
|
|
|
$
|
1,861,409
|
|
|
Cost
of sales
|
|
|
711,803
|
|
|
|
790,590
|
|
|
|
1,502,393
|
|
|
Gross
Profit
|
|
$
|
115,625
|
|
|
$
|
243,391
|
|
|
$
|
359,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2008
|
|
|
|
|
Products
&
|
|
|
Service
&
|
|
|
|
|
|
|
|
|
Components
|
|
|
Installation
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
779,356
|
|
|
$
|
1,380,553
|
|
|
$
|
2,159,909
|
|
|
Cost
of sales
|
|
|
939,007
|
|
|
|
1,056,980
|
|
|
|
1,995,987
|
|
|
Gross
Profit (Loss)
|
|
$
|
(159,651
|
)
|
|
$
|
323,573
|
|
|
$
|
163,922
|
|
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Nine
Months Ended September 30, 2009
|
|
|
|
|
Products
&
|
|
|
Service
&
|
|
|
|
|
|
|
|
Components
|
|
|
Installation
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
4,450,443
|
|
|
$
|
1,760,291
|
|
|
$
|
6,210,734
|
|
|
Cost
of sales
|
|
|
4,029,904
|
|
|
|
1,205,953
|
|
|
|
5,235,857
|
|
|
Gross
Profit
|
|
$
|
420,539
|
|
|
$
|
554,338
|
|
|
$
|
974,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
Products
&
|
|
|
Service
&
|
|
|
|
|
|
|
|
|
Components
|
|
|
Installation
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
3,482,546
|
|
|
$
|
2,246,688
|
|
|
$
|
5,729,234
|
|
|
Cost
of sales
|
|
|
3,219,540
|
|
|
|
1,805,971
|
|
|
|
5,025,511
|
|
|
Gross
Profit
|
|
$
|
263,006
|
|
|
$
|
440,717
|
|
|
$
|
703,723
|
|
Note
14. Earnings (Loss) Per Share
The
Company computes earnings per using two different methods, basic and diluted,
and present per share data for all periods in which statements of operations are
presented. Basic earnings per share are computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding. Diluted
earnings per share are computed by dividing net income (loss) by the weighted
average number of common stock and common stock equivalents
outstanding.
The
following tables provide a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings (loss) per share for the three
and nine month periods ended September 30, 2009 and 2008:
|
|
|
Three
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Basic
earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
Net
income (loss) to common shareholders
|
|
$
|
(548,021
|
)
|
|
$
|
(326,805
|
)
|
|
Weighted
average of common shares outstanding
|
|
|
42,097,929
|
|
|
|
24,000,000
|
|
|
Basic
net earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
Net
income (loss) to common shareholders
|
|
$
|
(548,021
|
)
|
|
$
|
(326,805
|
)
|
|
Weighted
average of common shares outstanding
|
|
|
42,097,929
|
|
|
|
24,000,000
|
|
|
Convertible
debentures (1)
|
|
|
-
|
|
|
|
-
|
|
|
Warrants
(2)
|
|
|
-
|
|
|
|
-
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
42,097,929
|
|
|
|
24,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
ENERGY
COMPOSITES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Basic
earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
Net
income (loss) to common shareholders
|
|
$
|
(2,118,444
|
)
|
|
$
|
(893,082
|
)
|
|
Weighted
average of common shares outstanding
|
|
|
42,030,708
|
|
|
|
24,000,000
|
|
|
Basic
net earnings (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
Net
income (loss) to common shareholders
|
|
$
|
(2,118,444
|
)
|
|
$
|
(893,082
|
)
|
|
Weighted
average of common shares outstanding
|
|
|
42,030,708
|
|
|
|
24,000,000
|
|
|
Convertible
debentures (1)
|
|
|
-
|
|
|
|
-
|
|
|
Warrants
(2)
|
|
|
-
|
|
|
|
-
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
42,030,708
|
|
|
|
24,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
(1)
|
At
September 30, 2009 and 2008, there were outstanding convertible debentures
equivalent to 568,000 and 0 common shares, respectively. The
convertible debentures are anti-dilutive at September 30, 2009 and
therefore have been excluded from diluted earnings per
share.
|
|
(2)
|
At
September 30, 2009 and 2008, there were outstanding warrants equivalent to
2,548,000 and 0 common shares, respectively. The warrants
expire 3 years from their 2008 date of issuance and have an exercise price
of $5.00 per share. The warrants are anti-dilutive at September 30, 2009
and therefore have been excluded from diluted earnings per
share.
|
Note
15. Supplemental Disclosure of Cash Flow Information
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
295,104
|
|
|
$
|
257,346
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment with long-term debt
|
|
$
|
9,412
|
|
|
$
|
67,673
|
|
|
Debt
converted to common stock
|
|
$
|
1,075,000
|
|
|
$
|
-
|
|
Note
16. Subsequent Events
The
Company has evaluated all subsequent events through November 12, 2009, the date
the financial statements were available to be issued.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
discussion contained herein contains “forward-looking statements” that involve
risk and uncertainties. These statements may be identified by the use
of terminology such as “believes,” “expects,” “may,” “should” or
“anticipates” or expressing this terminology negatively or similar expressions
or by discussions of strategy. The cautionary statements made in our
Annual Report on Form 10-K, filed March 31, 2009, should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-Q. Our actual results could differ materially from those
discussed in this report. The following discussion should be read in
conjunction with the financial statements and the related notes included herein
as Item 1.
Accounting
Policies and Estimates
The
methods, estimates and judgments that we use in applying our critical accounting
policies have a significant impact on the results that we report in our
financial statements. Some of our accounting policies require us to
make difficult and subjective judgments, often as a result of the need to make
estimates regarding matters that are inherently uncertain. We also
have other policies that we consider key accounting policies, such as those for
revenue recognition; however, these policies typically do not require us to make
estimates or judgments that are difficult or subjective.
We have
identified accounting policies that we consider critical in Note 2 “Nature of
Business and Significant Accounting Policies” of the notes to our financial
statements included in this report. The accounting policies and
estimates described in this report should be read in conjunction with Note 1,
“Nature of Business and Significant Accounting Policies,” of the notes to our
consolidated financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2008, which includes a discussion of the policies identified
in this report and other significant accounting policies.
Overview
Energy
Composites Corporation (formerly Las Palmas Mobile Estates) (“we,” “us,” “our,”
or the “Company”) is a manufacturer of composite structures and vessels for a
range of clean technology industries. Based on our research of
companies in this sector, we believe we have the Midwest’s largest and most
automated manufacturing capabilities with our world-class, automated 73,000
square foot climate-controlled manufacturing facility in Wisconsin Rapids,
Wisconsin.
Our
Company was incorporated on October 29, 1992 under the laws of the State of
Nevada. At first, we were defined as a “shell” company whose sole
purpose was to locate and consummate a merger or acquisition with a private
entity. As of October 14, 2008, we completed a reverse acquisition of
Advanced Fiberglass Technologies, Inc., a Wisconsin corporation
(“AFT”). Pursuant to the reverse acquisition, we issued 28,750,000
shares of our common stock to AFT’s shareholders (approximately 72% of the then
issued and outstanding common stock) and AFT’s shareholders gained voting
control of our Company. As a result of the reverse acquisition, we
are no longer considered a “shell” company. AFT is now our
wholly-owned subsidiary.
Advanced
Fiberglass Technologies
. AFT was incorporated in the state of
Wisconsin on January 1, 2005, following nearly ten years operating as M&W
Fiberglass, LLC (“M&W”). Founded in 1995 by Jamie Lee Mancl,
M&W was the operating entity that developed and operated AFT’s
business. In January 2005, M&W transferred all operating assets
and liabilities into a newly formed S-Corporation: AFT. M&W,
solely owned by Jamie Lee Mancl, retained ownership of AFT’s former
manufacturing facility. In February 2007, M&W sold AFT’s former
manufacturing facility to the city of Wisconsin Rapids. M&W and
AFT then purchased and developed our current manufacturing facility by obtaining
$4,000,000 of financing in the form of industrial revenue bonds. On
December 31, 2008, we purchased the manufacturing facility from M&W by
assuming the industrial revenue bonds, paying M&W $500,000 in cash and
delivering a promissory note to M&W for $1,045,328.
Fiberglass Piping
& Fitting Company
. In September 2006, our largest
shareholder, Jamie Lee Mancl, formed Fiberglass Piping & Fitting Company
(“FPF”). FPF is a wholesale distributor of imported fiberglass piping
and fitting products. We purchase products from FPF from time to time
for use in the manufacture of our products pursuant to a long-term supply
agreement at a price equal to FPF’s net direct costs for such
products.
Both
M&W and FPF were considered variable interest entities (“VIEs”) until
December 31, 2008. In general, a VIE is a corporation, partnership,
limited liability company, trust, or any other legal structure used to conduct
activities or hold assets that either (i) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (ii) has a group of equity owners that are unable to make significant
decisions about its activities, or (iii) has a group of equity owners that do
not have the obligation to absorb losses or the right to receive returns
generated by its operations. On December 30, 2008, we terminated the
beneficiary relationship with these VIE entities by: (A) purchasing the
manufacturing facility from M&W on December 31, 2008; (B) the sole
stockholder of FPF contributing an additional $200,000 of capital to FPF so that
FPF would be sufficient on its own; and (C) all prior guarantees of M&W and
FPF debt by AFT having been released by the lender. We consolidated
M&W and FPF’s operations with AFT’s operations for financial accounting and
reporting purposes up to December 30, 2008, the date the VIE relationship
ended.
Innovative
Composite Solutions, LLC
. In June 2009, further executing our growth
strategy, we established Innovative Composite Solutions, LLC (“ICS”) as a
wholly-owned subsidiary of Energy Composites Corporation. ICS will
serve as our distribution arm for resins and composite
materials. Through September 30, 2009, ICS has established and
stocked three regional warehouses in the United States with resin inventory, has
completed the hiring of its sales personnel in each of those regions, and has
begun generating revenue in each of these regions. As of September
30, 2009 the operating results of ICS are immaterial to the Company and are
included in the Industrial Tank and Piping reporting segment under the Products
category.
Results
of Operations
The
tables below separate our results from the 2008 revenues and expenses
attributable to M&W and FPF so that appropriate comparisons can be
made. Unless otherwise noted, the discussion refers only to our
results on a non-consolidated basis in 2008.
|
Revenue
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
ECC/AFT/ICS
|
|
$
|
1,861,409
|
|
|
$
|
2,012,362
|
|
|
$
|
6,210,734
|
|
|
$
|
5,274,711
|
|
|
M&W/FPF,
net of eliminations
|
|
|
-
|
|
|
|
147,547
|
|
|
|
-
|
|
|
|
454,523
|
|
|
Total
consolidated revenue
|
|
$
|
1,861,409
|
|
|
$
|
2,159,909
|
|
|
$
|
6,210,734
|
|
|
$
|
5,729,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC/AFT/ICS
increase/(decrease) from 2008
|
|
$
|
(150,953
|
)
|
|
|
|
|
|
$
|
936,023
|
|
|
|
|
|
|
ECC/AFT/ICS
% increase/(decrease) from 2008
|
|
|
(7.5%
|
)
|
|
|
|
|
|
|
17.7%
|
|
|
|
|
|
During
the third quarter of 2009, we recorded $195,619 of increased revenue from
product sales, while field services revenues decreased $346,572. For
the nine-month period ended September 30, 2009, revenue from product sales
increased $1,422,420 primarily as a result of several tank and pipe contracts
with a major chlor-alkali producer. Field service revenue revenues
decreased $486,397 during the nine months ended September 30,
2009. The decrease in field service revenues during both periods has
primarily been timing driven with the rescheduling and postponement of
outage-related work and the timing of contract completion.
|
Cost
of goods sold
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
ECC/AFT/ICS
|
|
$
|
1,502,393
|
|
|
$
|
1,874,152
|
|
|
$
|
5,235,857
|
|
|
$
|
4,638,790
|
|
|
M&W/FPF,
net of eliminations
|
|
|
-
|
|
|
|
121,835
|
|
|
|
-
|
|
|
|
386,721
|
|
|
Total
cost of goods sold
|
|
$
|
1,502,393
|
|
|
$
|
1,995,987
|
|
|
$
|
5,235,857
|
|
|
$
|
5,025,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC/AFT/ICS
increase/(decrease) from 2008
|
|
$
|
(371,759
|
)
|
|
|
|
|
|
$
|
597,067
|
|
|
|
|
|
|
ECC/AFT/ICS
% increase/(decrease) from 2008
|
|
|
(19.8%
|
)
|
|
|
|
|
|
|
12.9%
|
|
|
|
|
|
The
primary components of cost of goods sold are raw materials used in
manufacturing, manufacturing labor, and manufacturing overhead. The
primary raw materials used in our manufacturing processes are isophathalic,
polyester, and vinyl-ester resins and fiberglass. Manufacturing labor
includes wages, employment taxes, employee benefits, and union
expenses. The major components of manufacturing overhead are
utilities and depreciation associated with our manufacturing facility and
equipment, travel and lodging expense associated with field service activities
and manufacturing supplies.
For the
three months ended September 30, 2009, our cost of materials decreased to 20% of
revenue from 26% of revenue for the three months ended September 30,
2008. The decrease in materials as a percent of revenue was primarily
driven by a greater mix of sales coming from small diameter pipe in both the
product and service categories during the quarter. The field service
related activities during the three months ended September 30, 2008 included a
higher percentage of tank relining work in the field as well as a higher
percentage of large diameter tank sales in the product category. For
the nine months ended September 30, 2009, material costs were 26% of revenue
compared to 27% for the nine months ended September 30, 2008. This
decrease in cost as a percent of revenue is also a result of the sales mix shift
during the nine months ended September 30, 2009.
Our cost
of labor decreased to 42% of revenue for the three months ended September 30,
2009 compared to 43% of revenue for the comparable period in
2008. For the nine-month period ended September 30, 2009, our cost of
labor remained at 39% of revenue, the same level recorded for the comparable
period in 2008. Decreases in labor cost as a percent of sales for the
third quarter 2009 are primarily attributable to pipe and tank contracts
completed during the quarter that required a lower mix of union
pipefitters.
Manufacturing
overhead decreased from 24% of revenue during the third quarter of 2008 to 19%
in the third quarter 2009. Lower travel and lodging expenses related
to field service work, and lower freight expense on tank shipments contributed
to the decrease as a percent of revenue. During the nine-month period
ended September 30, 2009, manufacturing overhead decreased to 19% of revenue
compared to 22% for the same period in 2008. We have incurred
increased depreciation expense and utility cost from added equipment; however,
our increased year-to-date revenue has allowed for better absorption of these
cost increases, thus lowering manufacturing overhead cost as a percent of
revenue.
|
Gross
profit
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
ECC/AFT/ICS
|
|
$
|
359,016
|
|
|
$
|
138,210
|
|
|
$
|
974,877
|
|
|
$
|
635,921
|
|
|
M&W/FPF,
net of eliminations
|
|
|
-
|
|
|
|
25,712
|
|
|
|
-
|
|
|
|
67,802
|
|
|
Total
gross profit
|
|
$
|
359,016
|
|
|
$
|
163,922
|
|
|
$
|
974,877
|
|
|
$
|
703,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC/AFT/ICS
% of revenue
|
|
|
19.3%
|
|
|
|
6.9%
|
|
|
|
15.7%
|
|
|
|
12.1%
|
|
|
Selling,
general & administrative expenses
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
ECC/AFT/ICS
|
|
$
|
978,014
|
|
|
$
|
635,997
|
|
|
$
|
2,752,176
|
|
|
$
|
1,817,903
|
|
|
M&W/FPF,
net of eliminations
|
|
|
-
|
|
|
|
(72,157
|
)
|
|
|
-
|
|
|
|
(229,097
|
)
|
|
Total
SG&A expenses
|
|
$
|
978,014
|
|
|
$
|
563,840
|
|
|
$
|
2,752,176
|
|
|
$
|
1,588,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC/AFT/ICS
% of revenue
|
|
|
52.5%
|
|
|
|
31.6%
|
|
|
|
44.3%
|
|
|
|
34.5%
|
|
The
increase in our selling, general and administrative expenses is driven by our
continued investment in our growth strategy, notably our investment in expanded
in-house capabilities, increased sales and sales support staff, and the creation
of ICS as our resin and composites materials distribution arm in June
2009. Taken together, these additional expenses represent a platform
for managing and driving our growth. We have also continued our
investment into the development of our WindFiber™ strategy, including planning
the construction of a significant wind blade production plant in Wisconsin
Rapids within the next 12 months.
|
(Loss)
from operations
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
ECC/AFT/ICS
|
|
$
|
(618,998
|
)
|
|
$
|
(497,787
|
)
|
|
$
|
(1,777,299
|
)
|
|
$
|
(1,181,982
|
)
|
|
M&W/FPF,
net of eliminations
|
|
|
-
|
|
|
|
97,869
|
|
|
|
-
|
|
|
|
296,899
|
|
|
Total
(loss) from operations
|
|
$
|
(618,998
|
)
|
|
$
|
(399,918
|
)
|
|
$
|
(1,777,299
|
)
|
|
$
|
(885,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC/AFT/ICS
% of revenue
|
|
|
(33.3%
|
)
|
|
|
(24.7%
|
)
|
|
|
(28.6%
|
)
|
|
|
(22.4%
|
)
|
The
$121,211 and $595,317 increases in our operating loss for the three and nine
months ended September 30, 2009, respectively, are primarily due to industry
postponement of anticipated projects leading to insufficient sales to cover our
planned increase in overhead, increased cost of goods sold, and the increase in
selling, general and administrative expenses observed in 2009, as described
above.
|
Other
(expense)
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
ECC/AFT/ICS
|
|
$
|
(235,023
|
)
|
|
$
|
(57,018
|
)
|
|
$
|
(1,675,145
|
)
|
|
$
|
(124,100
|
)
|
|
M&W/FPF
|
|
|
-
|
|
|
|
(54,031
|
)
|
|
|
-
|
|
|
|
(158,755
|
)
|
|
Total
other (expense)
|
|
$
|
(235,023
|
)
|
|
$
|
(111,049
|
)
|
|
$
|
(1,675,145
|
)
|
|
$
|
(282,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC/AFT/ICS
% of revenue
|
|
|
(12.6%
|
)
|
|
|
(2.8%
|
)
|
|
|
(27.0%
|
)
|
|
|
(2.4%
|
)
|
Other
income and expense consists of interest expense, interest income, non-cash
amortization of deferred financing costs, and non-cash amortization of
beneficial conversion features and warrant discounts associated with convertible
debt. Non-cash amortization of debt discounts for warrants and
beneficial conversion feature related to the convertible debt was $118,333 and
$1,327,291 for the three and nine months ended September 30, 2009,
respectively. The remaining increase in expenses in 2009 compared to
2008 is due to additional interest expense from increased short and long-term
debt borrowings in 2009 relating to the manufacturing facility acquired at the
end of 2008 and equipment and working capital notes to fund our growing
operations. For the three and nine months ended September 30, 2009,
interest expense was partially offset by bank interest income of $2,686 and
$14,480, respectively.
|
Net
loss
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Loss
before provision for income taxes
|
|
$
|
(854,021
|
)
|
|
$
|
(510,967
|
)
|
|
$
|
(3,452,444
|
)
|
|
$
|
(1,167,938
|
)
|
|
Income
tax benefit
|
|
|
306,000
|
|
|
|
228,000
|
|
|
|
1,334,000
|
|
|
|
413,000
|
|
|
Net
loss for ECC
|
|
$
|
(548,021
|
)
|
|
$
|
(282,967
|
)
|
|
$
|
(2,118,444
|
)
|
|
$
|
(754,938
|
)
|
|
Less:
Net income attributable to M&W/FPF
|
|
|
-
|
|
|
|
(43,838
|
)
|
|
|
-
|
|
|
|
(138,144
|
)
|
|
Net
loss
|
|
$
|
(548,021
|
)
|
|
$
|
(326,805
|
)
|
|
$
|
(2,118,444
|
)
|
|
$
|
(893,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of ECC/AFT/ICS revenue
|
|
|
(29.4%
|
)
|
|
|
(16.2%
|
)
|
|
|
(34.1%
|
)
|
|
|
(16.9%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC/AFT/ICS
increase/(decrease) from 2008
|
|
$
|
(265,054
|
)
|
|
|
|
|
|
$
|
(1,363,506
|
)
|
|
|
|
|
|
ECC/AFT/ICS
% increase/(decrease) from 2008
|
|
|
(93.7%
|
)
|
|
|
|
|
|
|
(180.6%
|
)
|
|
|
|
|
The net
income tax benefit recorded during the three and nine months ended September 30,
2009 was the result of deferred tax assets recorded relative to net operating
losses being generated and timing differences between financial and income tax
reporting. We believe it is more likely than not that we will realize
the full benefit of the deferred tax assets and have not recorded a valuation
allowance as of September 30, 2009 due to our previous history of operating
profits prior to 2008 and other factors. We will reassess this
position at the end of 2009. Effective January 1, 2008, we terminated
our S-Corporation election and began operating as a C-Corporation. As
a result of the change in tax status, an initial $110,000 of net deferred tax
liability was recorded as income tax expense which was offset by a net income
tax benefit of $523,000 associated with net operating losses and temporary book
and tax
timing differences for the nine months ended September 30,
2008. Significant components of the income tax benefit include the
net operating loss for the year, fair value of warrants and temporary timing
differences of fixed assets, accruals, and reserves.
The
increase in our 2009 net loss stems from our investment in our growth strategy
and recessionary economic pressures. In our bid to grow, we have
invested in our infrastructure and overhead, adding selling, general and
administrative costs and increasing our borrowings and interest
expense. We continue to face a difficult economic period in the
United States and the world. While we continue to record increases in
our product sales, the growth is slower than what we would expect in a robust
economy and we anticipated faster growth in this category due to our expansion
efforts. Additionally, we have experienced a shift in timing of our
outage-related service sales volume as our customers have postponed planned
repairs due to poor economic conditions. The economic downturn
has also placed pressure on our pricing strategy as our customers become more
sensitive to price. The pressure on our prices has limited our
ability to pass along our expenses to our customers in the form of incremental
price increases. Although we have recorded improvement in margins,
the improvement in margins is also slower than what we would expect in a robust
economy. We anticipate that the launch of several material
innovations, including the use of our new abrasion-resistant tank liner, will
allow us to increase our margins in our legacy business. We continue
to pursue our four-part strategy to expand and diversify our
business. We believe that our increasing involvement in the wind
energy industry and other market segments will also position our Company to
profit when and as the economy recovers and expands.
Liquidity
and Capital Resources
Our
liquidity and capital resources continue to be driven by our growth
strategy. Beginning in 2007 and continuing into 2009, we have
significantly expanded our operations and our manufacturing
capabilities. We have invested in our plant and equipment to become a
large manufacturing concern with a diverse manufacturing capability, both
in-house and on-client-site. As a result of our expansion efforts, we
believe we are well positioned to take advantage of market opportunities and to
introduce our products and services into emerging markets like wind
energy.
To
capitalize on our expanding manufacturing capabilities, we have made significant
investments in our sales personnel, marketing program, our new WindFiber™
strategy, and our new raw materials distribution arm, ICS. With these
expenditures, we have increased our visibility in our existing markets and have
captured early attention from major targeted customers within the wind energy
market and in our core markets. Furthermore, we anticipate field
service revenues will begin to increase consistent with historical seasonal
trends as major manufacturers complete planned and re-scheduled maintenance,
repair and overhaul activities.
Our
primary sources of liquidity to fund our growth strategy are cash generated from
operations and short and long-term term financing arrangements. As of
September 30, 2009, cash and cash equivalents totaled $1,392,875. Our
working capital was $823,176 at September 30, 2009. We believe we
have sufficient resources available to meet our liquidity requirements,
including debt service, for the remainder of 2009. We will require
additional financing to pursue our WindFiber™ strategy over the next 12 months,
including the construction of a new wind blade production plant.
Operating
Cash Flows
Operating
activities used $1,295,437 and $1,237,326 of cash for the nine months ended
September 30, 2009 and 2008, respectively. The increase in cash used
by operating activities for 2009 was due primarily to the significant decreases
in accounts payable and customer deposits associated with the large tank
contract we completed and the increase in the overall net loss for the nine
months ended September 30, 2009. The increase in cash used in
operations was partially offset by decreases in accounts receivable and
inventories primarily associated with the same contract.
Investing
Cash Flows
Investing
activities used $444,299 and $723,648 of cash for the nine months ended
September 30, 2009 and 2008, respectively. The primary use of cash in
investing activities for both periods was the purchase of additional
manufacturing equipment supporting plant and field service activities, as well
as the purchase of office equipment for added office staff
positions.
Financing
Cash Flows
Financing
activities provided $147,322 and $2,666,992 for the nine months ended September
30, 2009 and 2008, respectively. Proceeds from financing activities
for the nine months ended September 30, 2009 were $497,934 raised from
additional short-term notes and our line of credit which was partially offset by
financing costs and payments on long-term debt of $347,292. For the
nine months ended September 30, 2008, proceeds from financing activities
included proceeds from short-term notes and our line of credit of
$3,080,396. Cash used in financing activities for the nine months
ended September 30, 2008 included a reduction in bank overdrafts of $168,087,
payments on long-term debt of $193,067, and distributions to a stockholder of
$52,250 primarily for income taxes due by the shareholders relating to the pass
through income from M&W and FPF.
Debenture
Financing
In August
to December 2008, we raised $6,370,000 by selling units, each unit consisting of
(i) a 3-year, 6% convertible debenture (the “Debentures”) with a conversion
price of $2.50 per share (subject to adjustment for stock splits and stock
dividends), and (ii) a number of warrants equal to the number of shares issuable
upon conversion of the principal amount of the Debenture (the
“Warrants”). The Debentures sold included the issuance of 2,548,000
Warrants. Each Warrant is exercisable into shares of common stock for
a term of 3 years at $5.00 per share. The Warrant also provides
anti-dilution protection for the following events: reorganization,
reclassification, consolidation, merger or sale; subdivision, combination or
dividend of our common stock.
At
September 30, 2009, Debentures totaling $1,420,000 remain outstanding and will
become due during the last part of 2011. $4,950,000 of Debentures has
been converted to common stock as of September 30, 2009. Many
Debenture holders have elected to receive interest in the form of stock,
lowering our cash outlays for debt service on the Debentures. We
believe that the growth of our business and revenue will improve the value of
our stock and motivate the remaining Debenture holders to convert their debt
into stock which will further reduce our cash requirements to settle the debt in
2011. We also anticipate that the Debenture holders will exercise
their Warrants when and if the value of our stock increases above $5.00 per
share. The money we raise from the exercise of Warrants, if any, will
be used to continue our growth strategy.
As we
roll out the sequential elements of our WindFiber™ strategy, it may be
appropriate to pursue an additional tranche of equity financing to support the
construction of a new manufacturing plant and logistics center, the equipping of
the production lines, training of employee-associates, the development of a
research and development center, and WindFiber™ -related working
capital. While we anticipate a substantial portion of our WindFiber™
financing requirements will be met with subsidized or otherwise advantaged debt
financing, it may be prudent to support such financing with a tranche of
supplemental equity.
Purchase
of Manufacturing Plant and Related Debts
On
December 31, 2008, we exercised our option to purchase the manufacturing
facility we were leasing from M&W for a purchase price of
$4,500,000. We elected to exercise this option in order to lower the
monthly cash requirement associated with our manufacturing facility and to
remove conflicting interests between our business and Jamie and Jennifer Mancls’
other business interest: M&W. The favorable interest rate we
negotiated with the Mancls (described below) will improve our cash flows by
approximately $72,000 annually because the associated annual debt service is
less than the annual lease payments we were paying. We believe
removing the Mancls’ control over our business (as exercised through the
facility lease) will, in the long run, improve our balance sheet and our ability
to borrow money from large institutional investors.
The
purchase price for the facility was paid in the form of: (i) an assumption of
the industrial revenue bonds and note related to the building and land; (ii)
cash at closing in the amount of $500,000; and (iii) the balance ($1,045,328) in
the form of an unsecured promissory note bearing interest at an annual fixed
rate of 4.775% which was determined using the twelve-month LIBOR as of December
31, 2008 (2.025%) plus 2.75%, payable in quarterly installments of principal and
interest amortized over not more than 15 years with the unpaid principal balance
due not later than December 15, 2015. The assumed debt consisted of
all obligations of M&W under the bond agreement and all obligations of
M&W under that certain promissory note dated February 28, 2007 in the
principal amount of $75,000 issued to the City of Wisconsin
Rapids. As of December 31, 2008, the amount of the assumed debt of
the industrial revenue bonds was $2,879,672.
The
assumed building-related industrial revenue bonds mature in 2027 with an annual
interest rate of 5.5%. Monthly principal and interest payments on the
assumed bonds are $20,776. Our manufacturing equipment was financed
with two $500,000 industrial revenue bonds expiring July 2014 with interest at
5.75% and a $500,000 note from the City of Wisconsin Rapids expiring April 2012
with interest at 2%. Monthly principal and interest payments for each
of these bonds and the Wisconsin Rapids note are $7,266 and
$4,499. The long maturities and low interest rates associated with
the building and equipment loans allow us enough time to successfully execute
our growth strategy at a low cost of capital. As we begin to generate
positive cash from operations, we anticipate that we will be able to service
these building- and equipment-related debts without the need of raising
additional capital.
The
4.775% interest rate on the $1,045,328 note held by M&W is also low relative
to historical market rates. Going forward, we believe that we will be
able to service the M&W note with cash from operations. We may
settle the M&W note prior to its 2015 due date with the proceeds of a future
debt or equity financing.
On March
13, 2009, we executed an amendment to the credit agreement for the three
building- and equipment-related industrial revenue bonds. The amended
financial covenants require us to maintain (a) a Debt Service Coverage Ratio of
not less than 1.25 to 1.0 and (b) a Debt to Equity Ratio of not more than 3.5 to
1.0. The next measurement date of these covenants will be December
31, 2009.
Other
Debt Activity
On
November 3, 2009, we settled a $300,000 short-term note and borrowed $300,000
under a new short-term note which carries a three-month term, 6.75% interest per
annum, and is secured by our business assets and receivables and certain
customer purchase orders.
Leases
We have
entered into various operating leases to support operations. We lease
several vehicles supporting our Field Services Division, forklifts for the
plant, office equipment, and lodging space in Biron, Wisconsin. Total
monthly lease payments for this equipment and lodging space are
$3,657. The lease we previously held for the office space in
Hastings, Michigan expired March 1, 2009 and was not renewed. The
monthly payment for the Hastings office was $925 per month.
Going
Forward
We have
developed a four-part strategy to expand our business and profitability, defined
in our 2008 Annual Report on Form 10-K. While we have sufficient
capital to complete the first step of our four-part growth strategy in 2009, we
need additional capital to grow our business, especially our WindFiber™
strategy. If our cash flow from operations is insufficient to fund
debt service and other obligations, we may be required to increase our
borrowings, reduce or delay capital expenditures, and seek additional capital or
refinance our indebtedness. There can be no assurance, however, that
we will continue to generate cash flows at or above current levels or that we
will be able to maintain our ability to borrow under revolving credit
facilities.
Off-Balance
Sheet Arrangements
As of
September 30, 2009, we did not have any off-balance sheet
arrangements.
Item
3. Quantitative and Qualitative Disclosures about
Market Risk
Not
applicable to smaller reporting companies.
Item
4. Controls and Procedures
Under the
supervision and with the participation of our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of
our disclosure controls and procedures as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of
the period covered by this report. Based on this evaluation, the
officers concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and is
accumulated and communicated to our management including our principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
There
were no changes in our internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect our internal control over financial
reporting.
On
October 14, 2008, we acquired AFT, which has increased the controls and
procedures that we employ to process, record and report our financial
results. We will continue to evaluate and strengthen our controls and
procedures to improve the accuracy and timeliness of our financial
disclosure.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
From time
to time we are involved in litigation and other proceedings arising in the
ordinary course of our business, including actions with respect to contract
claims, labor and employment claims and other matters. Although
litigation and other proceedings are inherently uncertain and their results
cannot be predicted with certainty, we believe that the resolution of our
current pending matters will not have a material adverse effect on our business,
financial conditions or results of operations. Regardless of the
outcome, litigation can have an adverse impact on us because of defense costs,
diversion of management resources and other factors. In addition, it
is possible that an unfavorable resolution in litigation or other proceedings
could in the future materially and adversely affect our financial position or
results of operations in a particular period.
Item 1A.
Risk
Factors
Not
applicable to smaller reporting companies.
Item
2. Unregistered Sales of Equity Securities and Use
of Proceeds
During
the third quarter of 2009, we issued the unregistered securities set forth in
the table below.
|
Date
|
Persons
or Class of Persons
|
Securities
|
Consideration
|
|
|
30
accredited investors
|
7,377
shares of common stock
|
$18,406
of accrued interest paid to debenture
holders
|
No
underwriters were used in the above stock transactions. We relied
upon the exemption from registration contained in Section 4(2) and/or Rule 506
as to all of the transactions as the investors were deemed to be sophisticated
with respect to the investment in the securities due to their financial
condition and involvement in our business or were accredited
investors. Restrictive legends were placed on the certificates
evidencing the securities issued in all of the above transactions.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
|
Regulation
S-K
Number
|
Document
|
|
3.1
|
Articles
of Merger effective October 14, 2008 (1)
|
|
3.2
|
Amended
and Restated Articles of Incorporation effective October 14, 2008
(1)
|
|
3.3
|
Amended
and Restated Bylaws adopted October 14, 2008 (1)
|
|
4.1
|
Form
of Debenture (2)
|
|
4.2
|
Form
of Warrant (2)
|
|
10.1
|
Share
Exchange Agreement dated June 26, 2008 (3)
|
|
10.2
|
First
Amendment to Share Exchange Agreement dated August 8, 2008
(4)
|
|
10.3
|
2008
Stock Incentive Plan (1)
|
|
10.4
|
Industrial
Development Revenue Bonds, Bond Agreement dated February 28, 2007
(1)
|
|
10.5
|
Industrial
Development Revenue Bonds, Promissory Note 2007A dated February 28, 2007
(1)
|
|
10.6
|
Industrial
Development Revenue Bonds, Promissory Note 2007B dated February 28, 2007
(1)
|
|
10.7
|
Industrial
Development Revenue Bonds, Promissory Note 2007C dated February 28, 2007
(1)
|
|
10.8
|
Industrial
Development Revenue Bonds, Credit Agreement dated February 28, 2007
(1)
|
|
10.9
|
Industrial
Development Revenue Bonds, Construction Mortgage, Assignment Of Leases And
Rents and Fixture Filing dated February 28, 2007 (1)
|
|
10.10
|
Industrial
Development Revenue Bonds, Security Agreement dated February 28, 2007
(1)
|
|
10.11
|
Option
Agreement dated June 18, 2008 (1)
|
|
10.12
|
Purchase
and Supply Agreement dated October 13, 2008 (1)
|
|
10.13
|
Unsecured
Promissory Note dated December 31, 2008 (5)
|
|
10.14
|
Assignment
and Assumption Agreement dated December 31, 2008 (6)
|
|
10.15
|
Amendment
to the Credit Agreement dated March 13, 2009 (7)
|
|
10.16
|
Employee
Stock Purchase Plan (8)
|
|
31.1
|
Rule
13a-14(a) Certification of Samuel W. Fairchild
|
|
31.2
|
Rule
13a-14(a) Certification of Jeffrey S. Keuntjes
|
|
32.1
|
Certification
of Samuel W. Fairchild Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Jeffrey S. Keuntjes Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
________________
|
(1)
|
Filed
as an exhibit to the Current Report on Form 8-K dated October 14, 2008,
filed October 17, 2008.
|
|
(2)
|
Filed
as an exhibit to the Current Report on Form 8-K dated December 15, 2008,
filed December 19, 2008.
|
|
(3)
|
Filed
as an exhibit to the Current Report on Form 8-K dated June 26, 2008, filed
June 27, 2008.
|
|
(4)
|
Filed
as an exhibit to the Definitive Information Statement on Schedule 14C,
filed September 24, 2008.
|
|
(5)
|
Filed
as an exhibit to the Current Report on Form 8-K/A dated December 31, 2008,
filed January 26, 2009.
|
|
(6)
|
Filed
as an exhibit to the Current Report on Form 8-K dated December 31, 2008,
filed January 6, 2009.
|
|
(7)
|
Filed
as an exhibit to the Annual Report for the year ended December 31, 2008 on
Form 10-K filed March 31, 2009.
|
|
(8)
|
Filed
as an exhibit to the Current Report on Form 8-K dated June 2, 2009, filed
June 5, 2009.
|
SIGNATURES
Pursuant
to with the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
ENERGY
COMPOSITES CORPORATION
|
|
|
|
|
|
Dated: November
12, 2009
|
By:
|
/s/
Samuel W. Fairchild
|
|
|
|
Samuel
W. Fairchild, Chief Executive Officer
|
|
|
|
|
|
Dated: November
12, 2009
|
By:
|
/s/
Jeffrey S. Keuntjes
|
|
|
|
Jeffrey
S. Keuntjes, Vice President –
Finance
|
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