exousia10q063009.htm

Indicate by check 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 (X) No 

PART I - FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Analysis of Market Risks	12

Item 4.	Controls and Procedures	12

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	14

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14

Item 3.	Default Upon Senior Securities	14

Item 4.	Submission of Matters to a Vote of Security Holders	14

Item 5.	Other Information	15

Item 6.	Exhibits	15

SIGNATURES		16

	June 30, 2009		December 31, 2008
ASSETS	(unaudited)
Cash and cash equivalents	$	80,146	$	139,967
Accounts receivable trade, net		46,079		79,863
Inventory		734,565		657,700
Prepaid expenses		35,480		121,833
TOTAL CURRENT ASSETS		896,270		999,363

NON-CURRENT ASSETS Fixed assets, net of accumulated depreciation of $44,767 and $23,567 as of June 30, 2009 and December 31, 2008, respectively		213,094		224,113
Patent, net of amortization of $257,496 and $176,531 as of June 30, 2009 and December 31, 2008, respectively		1,492,504		1,579,830
Other assets		162,119		14,417
TOTAL NON-CURRENT ASSETS		1,867,717		1,818,360
TOTAL ASSETS	$	2,763,987	$	2,817,723

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	816,147		$	736,859
Reserve for legal costs		232,829			232,829
Notes payable		1,295,997			109,855
Debenture principal and interest payable		53,337			50,362
TOTAL CURRENT LIABILITIES		2,398,310			1,129,905
SHAREHOLDERS' EQUITY
Common stock $0.001 par value, 100 million shares authorized; 57,133,270 and 50,917,866 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		57,133			50,917
Additional paid-in capital		16,323,927			14,312,710
Accumulated deficit		(16,015,383	)		(12,675,809	)
Total shareholders' equity		365,677			1,687,818
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,763,987		$	2,817,723

	Three Months Ended June 30						Six Months Ended June 30
	2009			2008			2009			2008
REVENUES:
Sales	$	121,393		$	520,811		$	204,254		$	683,764

EXPENSES:
Cost of Sales		73,820			411,921			123,850			528,350
Compensation - officers and directors		90,646			559,910			605,248			746,410
General and administrative expenses		1,187,914			1,477,353			2,528,242			1,790,134
Professional fees		75,362			109,675			123,446			199,555
Research and development expenses		13,771			39,340			17,179			69,781
China Relations		-			3,325,128			-			3,325,128
Depreciation and amortization		54,331			44,468			108,525			102,370
TOTAL OPERATING EXPENSES		1,495,844			5,967,795			3,506,490			6,761,728

OPERATING LOSS		(1,374,451	)		(5,446,984	)		(3,302,236	)		(6,077,964	)

OTHER INCOME (EXPENSE):
Interest expense		(27,194	)		(4,035	)		(33,854	)		(7,244	)
Abandoned acquisition expense		-			-			-			(19,999	)
Interest income		20			882			36			3,447
Other expense		(3,482	)		(6,812	)		(3,520	)		(6,812	)
Total Other Income & Expenses		(30,656	)		(9,965	)		(37,338	)		(30,608	)

Net loss before extraordinary items		(1,405,107	)		(5,456,949	)		(3,339,574	)		(6,108,572	)
Extraordinary gain- bargain purchase		-			-			-			234,583

NET LOSS	$	(1,405,107	)	$	(5,456,949	)	$	(3,339,574	)	$	(5,873,989	)

Basic and diluted net loss per share	$	(0.02	)	$	(0.13	)	$	(0.06	)	$	(0.15	)

Weighted average number of shares outstanding		56,740,345			42,386,530			55,342,484			39,289,444

	No. of Shares		Capital Stock		Additional Paid In Capital		Accumulated Deficit			Total

Balance, December 31, 2008		50,917,866	$	50,917	$	14,312,710	$	(12,675,809	)	$	1,687,818
Shares issued for services		5,474,833		5,475		1,585,786		-			1,591,261
Shares issued for cash		740,571		741		219,759		-			220,500
Warrants issued for services						113,930					113,930
Warrants issued for cash						14,625					14,625
Stock based compensation						77,117					77,117
Net loss		-		-		-		(3,339,574	)		(3,339,574	)
Balance, June 30, 2009		57,133,270	$	57,133	$	16,323,927	$	(16,015,383	)	$	365,677

	Six Months Ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,339,574	)	$	(5,873,989	)
Adjustments to reconcile net loss to net cash used in operating activities:
Extraordinary items		-			(234,583	)
Capital stock issued for services		1,591,261			4,654,691
Warrants issued for services		113,930
Stock based compensation		77,117
Depreciation and amortization		108,525			102,370
Abandoned acquisition expense		-			19,999
Change in operating assets and liabilities:
---Investment		-			5,176
---Accounts receivable		33,784			(211,989	)
---Inventory		(76,865	)		(383,715	)
---Prepaid expenses		121,741			(51,634	)
---Other assets		(147,701	)		-
---Interest payable to related parties		22,090			927
---Accounts payable and accrued liabilities		79,288			318,806
Net cash used in operating activities		(1,405,704	)		(1,653,941	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used for asset purchase		(10,181	)		(39,210	)
Net cash used in investing activities		(10,181	)		(39,210	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of insurance payable		(61,243	)		(27,149	)
Payments on debt		(2,818	)		(60,000	)
Proceeds from sale of warrants		14,625			-
Proceeds from sale of stock		220,500			1,593,250
Notes payable		1,185,000			-
Net cash provided by financing activities		1,356,064			1,506,101
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		(59,821	)		(187,050	)
Cash and cash equivalents, beginning of period		139,967			267,212
Cash and cash equivalents, end of period	$	80,146		$	80,162
NON CASH TRANSACTIONS
Financed Insurance Premium	$	35,388		$	-
SUPPLEMENTAL INFORMATION
Interest Paid	$	-		$	-
Taxes Paid	$	-		$	-

The accompanying consolidated financial statements of Exousia Advanced Materials, Inc. and Consolidated Subsidiaries (“Exousia” or the “Company”) have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted or condensed pursuant to such rules and regulations. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2008. In management’s opinion, these interim consolidated financial statements reflect all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the consolidated financial position and results of operations for each of the periods presented. The accompanying unaudited interim financial statements as of and for the six months ended June 30, 2009 are not necessarily indicative of the results which can be expected for the entire year.

On February 19, 2009, the Company acquired two short term loans in the amount of $610,000 for use of operations. These loans are to be paid back on or before June 15, 2009 bearing interest of 7.5% per annum. In addition, as consideration for the loan, the Company issued 383,333 shares valued at the closing share price of $0.30 for a total value of $115,000. For the period ended June 30, 2009, the Company recorded the $115,000 in expense and accrued interest expense of $16,041, which is included in the note payable balance of $1,295,997. As of June 30, the company had not made the payments required under this note but is currently negotiating an extension of the loan and fully expects the loan to be repaid in full with interest in the third quarter.

In May 2009, the Company acquired a short term loan in the amount of $300,000 for use of operations. This loan bears interest at 1.5% per month and is due on demand. The Company recorded accrued interest expense of $10,701, which is included in the note payable balance of $1,295,997. At June 30, 2009, the Company had not made the required payments under the terms of the note. Subsequent to the end of the quarter, the note has been paid in full from the proceeds of a bridge loan pending the closing of the Senior Convertible Note disclosed in the Subsequent Events section of this filing.

On or about July 21, 2008, a suit was filed by Baker & Daniels, LLP against the Company in St. Joseph circuit Court, in the State of Indiana, bearing Cause No. 71C01-0807-CC-01617, for unpaid legal fees in the amount of $7,051, with late fees accruing at $63 monthly. The Company disputes the claim, and intends to vigorously defend the claim. At June 30, 2009 the Company accrued $7,051 in legal costs.

On or about November 6, 2008, a Judgment was entered in Cause No. 20D02-0709-PL-79 in the Elkhart Superior Court No. 2, Elkhart, Indiana, in favor of Group Impact, LLC, Tektrellis, Inc., Marc Lacounte and Mary Wetzel, Plaintiffs, against J. Wayne Rodrigue, Exousia Advanced Materials, Inc., Re-Engineered Composite Systems, LLC and Engineered Particle Systems, LLC, Defendants, jointly and severally, in the amount of One Hundred Thousand Dollars ($100,000), plus prejudgment interest at the rate of 12% A.P.R. from May 1, 2007 through April 1, 2008 totaling Eleven Thousand Dollars ($11,000), plus post judgment interest accruing on the outstanding judgment amount at the statutory rate of Eight Percent (8%) from the date of summary judgment of April 1, 2008. In addition, Judgment was entered against the Defendants, jointly and severally, in the amount of Seven Thousand Three Hundred Thirty-Eight Dollars ($7,338) in attorney’s fees and costs, plus post judgment interest accruing on the outstanding judgment amount at the statutory rate of Eight Percent (8%) from the date of award of attorneys fees and costs of May 21, 2008. On or about November 12, 2008, Plaintiffs filed a Notice of Filing Foreign Judgment in the 240th Judicial District Court of Fort Bend County, Texas bearing Cause Number 08-DCV-167838.

On or about February 6, 2009, Defendants J. Wayne Rodrigue and Exousia Advanced Materials, Inc. filed a Motion to Vacate Judgment alleging certain defects in the Judgment and the attempt to file the Judgment as a Foreign Judgment. The Company is continuing to investigate the matter, including investigating the possibility of an out-of-court settlement of the claim. At June 30, 2009, the Company accrued $125,778 in legal costs.

In January, 2007, the Company entered into an Asset Purchase and Sale Agreement under which the Company would acquire certain assets of The Little Trailer company, Inc., and Indiana Corporation. The Company has received notice from The Little Trailer Company, Inc. that it claims to be owed a ‘break-up fee’ of approximately One Hundred Thousand Dollars ($100,000) in connection with the alleged failure of Exousia to close the transaction. The Company disputes the claim of The Little Trailer Company, Inc., and intends to vigorously defend the claim and any lawsuit that may be initiated with respect thereto. At June 30, 2009, the Company accrued $100,000 in legal costs.

·	740,571 shares issued for cash totaling $220,500 to accredited investors as part of a private placement with attached warrants of 740,571 with an exercise price range of $0.35 to $0.50 and a term of 30 months. The relative fair value of the common stock is $73,709 and the relative fair value of the warrants is $70,849.
·	5,474,833 shares issued for services valued at $1,591,261 based upon the closing price of the Company’s common stock on the date of issue.

The Company is subject to the risks associated with companies that lack working capital, operating resources and contracts, cash and ready access to the credit and equity markets. Without additional funding, the Company may be unable to continue as a going concern. The Company expects to obtain additional debt and equity financing from various sources in order to finance its operations and to grow through merger and acquisition opportunities. However, the Company is currently dependent upon external debt and cash flows have historically been insufficient for the Company’s cash needs. New debt or equity capital may contain provisions that could suppress future stock prices further, or cause significant dilution to current shareholders and increase the cost of doing business. In the event the Company is unable to obtain additional debt and equity financing, the Company may not be able to continue its operations.

On March 5, 2008 the Company acquired the assets of Aegeon, LLC (“Aegeon”) for a purchase price of $193,000 which was paid in cash at the close of this transaction. Aegeon primarily has focused on the manufacturing and distribution of industrial grade coatings. Certain notes and other liabilities due from Aegeon were not part of this transaction. This purchase has been accounted for as a business purchase pursuant to an evaluation by management of EITF 98-3. The transaction was evaluated and the Company believes that the historical cost of the assets acquired approximated fair market value given the current nature of the assets acquired. The fair value of the net assets acquired was $427,583 resulting in a bargain purchase of $234,583. Pursuant to business combination accounting and specifically FASB statement 141 in a bargain purchase any shortfall of consideration is first netted against the long term assets acquired. Given that the fair value of any long term assets acquired was zero the in accordance with purchase accounting the next step would be to consider any contingent consideration. Since there was no contingent consideration in this transaction pursuant to purchase accounting the excess purchase price of $234,583 is treated as an extraordinary gain.

The Company manufactures and sells industrial coating applied to a variety of applications including Petrochemical Plants, Refineries and Oil and Gas Equipment. The Company has two operating segments, Domestic Industrial Coatings (marketed under the Aegeon Brand) and China Industrial Coatings (marketed under the power Shield Brand). Each segment operates independently, manufacturing and selling in their respective markets.

Net sales of each segment include end-user revenue from the sale of industrial coatings manufactured by the company. The costs included in each of the reportable segments’ operating results include the direct costs of the products sold to end-users and operating expenses managed by each reportable segment. Certain operating expenses managed by the Company’s selling and corporate functions, including all stock-based compensation expense, are not included in the reportable segment’s operating profit. As a result, reportable segment operating profit or loss is not representative of the operating profit or loss of the products in these reportable segments. Additionally, certain assets are managed by the Company’s corporate functions including corporate cash.

(Unaudited)	Domestic			China			Other			Total

Three Months ended June 30, 2009
Net Sales	$	92,711		$	28,682			---		$	121,393
Operating Profit (Loss)	$	(1,286,559	)	$	(59,818	)	$	(28,074	)	$	(1,374,451	)

Six Months ended June 30, 2009
Net Sales	$	175,572		$	28,682			---		$	204,254
Operating Profit (Loss)	$	(3,148,996	)	$	(125,166	)	$	(28,074	)	$	(3,302,236	)

On July 28, 2009, the company entered into a $3.0 million Senior Convertible Note with PTV LLC. The Note bears interest at a rate of 12% per annum and is convertible into the Company’s Common Stock at $0.35 per share. As a further inducement the Company granted 3.5 million warrants convertible into Company common stock at a rate of $0.25 per share. The note is secured by the company’s patents and other intellectual properties. The Company realized $1.0 million of the $3.0 million Note at Closing. The terms of the Note provide for certain milestones or mutual agreements to be met prior to the funding of the balance of the Note.

As of June 30, 2009, total assets were $2,763,987 and $2,398,310 in current liabilities. As of December 31, 2008, total assets were $2,817,723 and $1,129,905 in current liabilities. Our revenues for the six months ended June 30, 2009 and 2008 were $204,254 and $683,764, respectively. The Company sustained losses of $3,339,574 and $5,873,989 for the six months ended June 30, 2009 and 2008, respectively. Cash used in operating activities was $1,405,704 and $1,653,941 for the six months ended June 30, 2009 and 2008, respectively.

Our financial statements are prepared using principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we do not have significant cash or other material liquid assets, nor do we have an established source of revenue sufficient to cover our operating costs and to allow us to continue as a going concern. We may, in the future, experience significant fluctuations in our results of operations. If we are required to obtain additional debt and equity financing or our illiquidity could suppress the value and price of our shares if and when trading in those shares develops. However, our future offerings of securities may not be undertaken, and if undertaken, may not be successful or the proceeds derived from these offerings may be less than anticipated and/or may be insufficient to fund operations and meet the needs of our business plan. Our current working capital is not sufficient to cover expected cash requirements for 2008 or to bring us to a positive cash flow position. It is possible that we will never become profitable and will not be able to continue as a going concern.

The company ended the second quarter preparing to launch its newest business unit, combining distribution of its RPA technology and family of resins with direct sales of finished products using the technology. Headed by its Vice President of Sales, Exousia began implementation of this strategy in the second quarter and will continue to put the building blocks into place for full implementation of its distribution model. Exousia’s and Universal Forest Products announced an Exclusive Distribution Agreement aimed at marketing and selling Exousia Tuffcore panels which are manufactured using Exousia’s patented RPA Technology. Management feels that the combination of this relationship and the proprietary nature of its TPV family of polymers, branded EXLAR™, gives it a timely opportunity to pursue distribution opportunities both domestically and internationally. The cornerstone of this initiative is Exousia’s 6 formulations that offer a broad range of applications for general purpose TPVs and for applications where cold weather impact and weather ability are required.

The company has lined up 70 million pounds of manufacturing capacity earmarked to support this launch. The company has been working with Chemtrusion for over 5 years and has continued to increase the strategic value of that relationship. The ability of Chemtrusion to provide capacity, Quality Control, application development and lab services is paramount to the successful implementation of the distribution model. The company can achieve the volumes without further capital expenditures thus leaving capital for working needs.

The distribution channels for plastics and engineered compounds are very mature and well understood. There are several national and international distributors that have holes in their product mix that Exousia’s EXLAR TPV fills. Management is currently working with these companies to secure distribution agreements with the goal of having marketing materials and formulations completed in the 3rd quarter and the first distributors in place before the end of the 4th quarter.

Since the acquisition of Aegeon approximately 1 ½ years ago the Company has instituted many changes and adjustments to the business plan and operations of that company. Included in these changes has been a redirection of focus, from simply tolling other’s products to development of a recognizable Aegeon brand. Management is bullish on its ability to re-position the company and extract value from the acquisition and expects the results of this repositioning to be demonstrable in the third quarter 2009. The company is targeting general maintenance coatings as the basis of the growth in the third quarter, and is confident that this exposure will lead to acceptance of Exousia’s line of high temperature coatings and other specialty products. In addition to the domestic growth that management is anticipating, there is also tremendous value resulting from the support of Exousia’s China operations with application development, technical support and innovation creation.

In the second quarter Tianjin Exousia Advanced Material’s facility in Tianjin, China became fully operational and has begun shipping coatings. The first sales of coatings in China began in June when TEAM shipped a little over $25,000 of coatings to China United Construction Company. TEAM’s products and management team has developed a solid reputation with that company. Management is confident it is making significant progress toward achieving a share of the China market. To support this effort the company hired its first Technical Support and Services manager who is fully engaged and is assisting existing customers, e.g. China United while supporting the marketing efforts to grow the number of customers.. The management team in China is actively pursuing additional technical support personnel in an effort to have 6 to 8 field tested tech services persons by year’s end. They will assist in application development, customer relations, spraying, etc. Management believes that these hires will be instrumental in our execution efforts with our current customer base of NIG and Bohai.

In summary, Exousia has not been exempt from the world-wide economic slowdown which has delayed implementation of the Company’s business plan. Exousia’s customer base has shown continued support and commitment for the remainder of 2009 and into 2010 and while no one can be certain of timing and external conditions Exousia is positioned to benefit from the stimulus plans and other measures for economic growth both in the U.S. and in other parts of the world

As of June 30, 2009, the Company's management carried out an evaluation, under the supervision of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective, as of the date of their evaluation, for the purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934.

As of June 30, 2009, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.

	1.	As of June 30, 2009, effective controls over the control environment were not maintained. Specifically, a formally adopted a written code of business conduct and ethics that governs to the Company’s employees, officers and directors was not in place. Additionally, management has not developed and effectively communicated to its employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
	2.	As of June 30, 2009, effective controls over financial statement disclosure were not maintained. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.

On or about December 10, 2007 a lawsuit was filed by CorrBan Technologies, Inc and Thin Film Technology, Inc. against Exousia Advanced Materials, Inc, Shield Industries, Inc, Global Development Enterprise, Inc, Vickers Industrial Coatings, Inc and other individuals. In the Lawsuit Plaintiffs allege misappropriation of proprietary information, breach of fiduciary duty and fraud. The allegations stem from the certain individuals previous association with CorrBan Technologies and CorrBan’s belief that these individuals used technology obtained from CorrBan. The defendants have agreed to a temporary restriction regarding the use of the disputed technology. Exousia does not believe this temporary agreement will affect their day to day business operations. A settlement was reached during the nine month period ending September 30, 2008 and the Company paid $25,000 on July 28, 2008 to CorrBan Technologies.

Exhibit No.	Description of Exhibit
3.1	Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s SB-2 Registration Statement declared effective August 6, 2002 is incorporated here by reference)
3.2	By-laws of the Company (filed as Exhibit 3.2 to the Company’s SB-2 Registration Statement declared effective August 6, 2002 is incorporated here by reference)
31.1	Certification Pursuant to 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Texas	90-0347581
(State or Other Jurisdiction of
incorporation or Organization)	(I.R.S. Employer Identification No.)

Large accelerated filer 	Accelerated filer 
Non-accelerated filer  (Do not check if a smaller reporting company)	Smaller reporting company (X)

TITLE OF CLASS	NUMBER OF SHARES OUTSTANDING
Common Stock, $0.001 par value.	57,133,270

Cash	$	37,787
Accounts Receivable		140,066
Inventory		435,651
Prepaid Expenses		18,220
LESS: Liabilities assumed		(204,141	)

Net Assets Acquired		427,583

Less: Excess purchase price		(234,583	)
Total Consideration	$	193,000

Domestic	$	2,298,937
China		460,050
Other		5,000

Total Assets	$	2,763,987