UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended Commission file Number
September 30, 2000 0-9180
Thermal Energy Storage, Inc.
(Exact name of registrant as specified in its charter.)
Colorado 5-3333931
(State of incorporation) (IRS Employer Identification No.)
6362 Ferris Square, Suite C
San Diego, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 453-1395
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 [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report: Common
Stock, $.001 Par Value - 59,131,289 shares
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of December 31, 1999 and September 30, 2000 1
Statements of Operations for the three months ended
September 30, 2000 2
Statements of Cash Flows for the three months ended
September 30,2000 3
Notes to Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 8
SIGNATURE PAGE 9
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PART I. - FINANCIAL INFORMATION
ITEM 1.
<TABLE>
<CAPTION>
THERMAL ENERGY STORAGE, INC.
BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
September December
<S> <C> 2000 <C> 1999
ASSETS ($000) ($000)
Current assets
Cash 10 23
Accounts receivable 0 0
Inventories 1 1
Prepaid expenses 3 2
Total current assets 14 26
Property and equipment less
accumulated depreciation of
$109,623 0 0
TOTAL ASSETS 14 26
LIABILITIES AND STOCKHOLDERS' DEFICIT ($000) ($000)
Current liabilities
Accounts payable 24 26
Accrued payroll 131 131
Payable to officers and affiliates 568 569
Total current liabilities 724 726
Stockholder's deficit
Common stock par value $.001 per share
Authorized 110,000,000 shares Issued and
outstanding 59,131,289 shares 59 59
Additional paid in capital 4,046 4,040
Accumulated deficit (4,815) (4,799)
Total stockholders' deficit (710) (700)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT (1) 14 26
<FN>
(1) Numbers may not add because of rounding
See Accompanying Notes to Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
THERMAL ENERGY STORAGE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
(Amounts in thousands, except per share data)
September 30, September 30,
Results of Operations 2000 1999
<S> <C>($000) <C> ($000)
Contract services 5 32
Cost of revenues 0 40
Gross profit (loss) 5 (9)
Operating Expenses
Research and Development 6 0
Selling, general and
administrative expenses 0 1
Operating profit (loss) (1) (10)
Transfer fees 0 0
Other income (expense) 1 1
Net income (loss) (1) (1) (9)
Accumulated deficit
- Beginning of period (4815) (4,768)
- End of period (4815) (4,777)
Gain (Loss) per share ($0.000) ($0.000)
<FN>
(1) Numbers may not add because of rounding
See Accompanying Notes to Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
THERMAL ENERGY STORAGE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
(Amounts in thousands)
Cash flow from operating September 30, September 30,
activities: 2000 1999
($000) ($000)
<S> <C> <C>
Income (loss) from operations 2 (13)
Adjustments to reconcile net income
to net cash provided by
operating activities
Depreciation 0 0
Decrease (increase) from changes:
Receivables 0 25
Prepaid expenses (1) 0
Accounts payable (2) 0
Payable to officers & affiliates 0 0
Net cash provided (used) by
operating activities (1) 12
Net cash provided from financing
activities 6 0
Increase (Decrease) in cash (1) 12
Cash at beginning of year 5 1
Cash at end of period (1) 10 13
<FN>
(1) Numbers may not add because of rounding
See Accompanying Notes to Financial Statements
</TABLE>
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THERMAL ENERGY STORAGE, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
FINANCIAL INFORMATION - The accompanying financial statements have been
prepared assuming the Company will continue as a going concern; they do not
include adjustments relating to the recoverability of recorded asset amounts
and classification of assets and liabilities that would be necessary should the
Company be unable to continue as a going concern. The going concern basis
might not be appropriate since the Company has required additional funds in the
form of loans from the President's solely owned consulting company to sustain
operations. As of September 30, 2000 its current liabilities exceeded its
current assets and total liabilities exceeded its total assets.
The financial information has been prepared by Thermal Energy Storage, Inc.,
without audit, in accordance with the instructions to Form 10-Q and therefore
does not include all information and footnotes necessary for a fair
presentation of financial position, and results of operations and cash flows in
accordance with generally accepted accounting principles.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA - In the opinion of management, the unaudited
consolidated financial statements for the interim periods presented reflect all
adjustments, consisting of only normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations as of and for
such periods indicated. These financial statements and notes thereto should be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K (including items incorporated by
reference therein) for the year ended December 31, 1999. Results for the
interim period presented herein are not necessarily indicative of results which
may be reported for any other interim period or for the entire fiscal year.
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<PAGE>
THERMAL ENERGY STORAGE, INC.
September 30, 2000
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
As of September 30, 2000 cash and cash equivalents amounted to $10,152 as
compared to $4703 as of June 30, 2000. The increase since June 30, 2000 was
primarily attributable to a loss for the three months ended September 30,
2000 of $635 offset by $6085 raised in a private placement of restricted shares
of common stock.
As of September 30, 2000 total shareholders' deficit amounted to
($4,815,436) as compared to ($4,814,802) at June 30, 2000. The increase in
deficit since December 31, 1999 was attributable to the net loss during the
period.
RESEARCH AND DEVELOPMENT
Research and development expenses are included as cost of sales for
projects funded in part by a support agreement with the Bureau of Reclamation,
and in part by loans from the President. These expenses were primarily to
complete a project supported by the Bureau of Reclamation for experiments with
a scale model desalination system, and for research into alternative clathrate
formers. The experiments with the scale model system reduced the salinity from
35,000 parts per million (ppm) in seawater to less than the 500 ppm salinity
limit on drinking water established by the EPA. Several alternative clathrate
formers that have zero ozone depletion potential were identified in the second
quarter. Experiments with those alternative clathrate formers planned in the
next quarter were deferred and are now planned for the fourth quarter.
SALES AND MARKETING
There were no sales and marketing expenses during the period.
GENERAL AND ADMINISTRATIVE
General and administrative expenses included the bookkeeping, accounting,
and SEC report preparation expenses, and accrued management compensation due.
The Company's President continues to support the company's projects without
current compensation.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
the private sale of equity securities, borrowings from certain of its investors
for bridge financing, bank borrowings, its initial public offering, which
resulted in net proceeds to the Company of approximately $4 million. As of
September 30, 2000, the Company had approximately $10,153 in cash and cash
equivalents.
The Company requires working capital to fund its business, particularly
to finance research, development, and design activities. The Company's future
capital requirements will depend on many factors, including the timing and
extent of spending to support system development efforts and the development of
sales, marketing and support; the timing of introductions of new products and
enhancements to existing products; and overall industry conditions. The Company
believes
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that it must and can obtain additional working capital to sustain
operations and provide for the future expansion and development of its business
over the next 12 months.
YEAR 2000 READINESS
The company has evaluated the computer systems used and upgraded them as
required for year 2000 compliance. The shareholder database records are stored
in a year 2000 compliant computer system, in a year 2000 compliant database
using a format that records the date with the full century. The database is in
the process of an upgrade to make its operation less labor intensive and that
upgrade should be completed this year.
SECURITIES MARKET & FINANCING ACTIVITIES
Through the first quarter, the Common Shares of the Company were traded
via an over-the-counter bulletin board (OTCBB) and quoted under the symbol
"THES". TESI Common Shares are not currently quoted by the National Quotation
Bureau. The Company acts as Transfer Agent for the Common Shares. There are
approximately 3,000 shareholders of record of Common Shares.
The Company has not, since inception, declared or paid a cash or other
dividend with respect to the Common Shares. Management does not contemplate
the payment of such dividend on the Common Shares in the foreseeable future.
On June 26, 1984, the Company was removed from the NASDAQ automated
reporting system as the Company was not in compliance with requirements of the
NASD Bylaws because it no longer met the financial net worth standards set by
NASDAQ.
Delinquent filings and effects in market for securities
The Company did not hold its annual meeting in 1989 or 1990 until
November of each year, and did not hold an annual meeting in 1992, 1994, 1995,
1996, 1997, 1998 and 1999, and did not timely file all of the quarterly form
10-Q reports required to be filed under Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, therefore, the Company failed during these
periods to qualify for the use of Rule 144 under the Securities Act of 1933.
By filing this 10-Q the company will be current in its reporting under the
referenced provisions of the 1934 act.
In 1998 the company failed to file the first of two required Y2K
compliance reports and in 1999 the Securities and Exchange Commission cited the
Company for violations of Section 17 (a)(3) and Section 17A (d) (1) of the
Securities Exchange Act of 1934 and Rule 17Ad-18. In 1999 the company
submitted the first and second of the required Y2K planning reports, and
entered into a settlement agreement with the Securities and Exchange Commission
ordering the firm to cease and desist from further such violations. The civil
penalty was waived by the SEC because of the financial condition of the
Company.
Through the first quarter, the Common Shares of the Company were traded
in the National Association of Securities Dealers Over-the- Counter Bulletin
Board market under the symbol THES. In late March the Company received a
third-party notice that the Company was to be removed from the Bulletin Board
until it came into compliance with SEC financial reporting requirements. The
Company has not submitted audited financial statements in its 10-K annual
reports since 1991 as a cost-saving measure. The management is unaware of any
material deficiencies in the financial statements and has not had disagreements
with the CPA firm, William
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<PAGE>
G. McKee Inc., that prepared the Company's corporate tax returns. The
management believes that the Company's shares may be traded via "Pink Sheets"
and market makers.
During the first quarter the Company accepted a proposal for engineering
services from Innovative Engineering Services, Inc. (IES) in which IES proposed
that the services be paid either in cash or in stock, at the Company's option.
The Board of Directors established a price of $0.03 per share as reasonable in
light of the recent volatility in share price and IES accepted that price as
the basis for the contract. The work was completed in February 2000 and the
sale of 202,833 restricted common shares to IES via a private placement was
anticipated in the second quarter to fund payment for the engineering services.
After further discussions with IES, the Company and IES agreed that a total of
200,000 shares would be issued for the services provided by IES. The private
placement to issue these restricted common shares was completed in the third
quarter.
Sales of restricted Common Shares under Rule 144 under the Securities Act of
1933 are available.
LEGAL MATTERS
On September 26, 2000 the company was served with a complaint that was filed in
the Third Circuit Court of the State of Hawaii on September 12, 2000. The
lawsuit alleges that the several complainants were injured during desalination
experiments being conducted by the company at the Natural Energy Laboratory of
Hawaii Authority. The complaint alleges injuries caused by the release into
the ocean of a toxic chemical. As of the end of the reporting period, the
company's liability insurance carrier had not evaluated the complaint. The
company believes that the lawsuit is without merit. The defense of this action
may cause some disruption in the Company's operations and may from time to time
distract management from day-to-day operations. The ultimate outcome of these
actions cannot be presently determined. Accordingly, no provision for any
liability or loss that may result from adjudication or settlement thereof has
been made in the accompanying financial statements.
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<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The company has not prepared quantitative evaluations of market risks for
its systems. In the recent past regulatory actions have made the use of the
Company's clathrate formers impracticable, precluding the sale of the company's
systems, both for thermal energy storage and for desalination. The research
completed to date into alternative clathrate formers to find a suitable
chemical that is safe, non-toxic, and commercially available at prices that
result in competitive desalination systems has identified several promising
candidates that are available in commercial quantities. There is no assurance,
however, that the Company will be able to apply these alternative clathrate
formers to commercial desalination or thermal storage systems, nor is there
assurance that future regulatory actions will not have a similar adverse effect
on the ability of the Company to market its systems.
The Company's product and proposed products are subject to, or are
affected directly and indirectly by various aspects of federal, state and local
governmental regulations and tax laws. The federal excise tax imposed on R11,
which made the Company's use of R11 impractical, is an example. After 2003 the
clathrate former R141b will also be prohibited by EPA regulations. Residential
and commercial use of the Company's thermal energy storage systems is also
affected by various state and local building codes. Such regulations, while not
directed specifically to thermal energy storage devices, can impact the use of
systems in which the Company's energy storage units are used.
There is growing interest and activity at all levels relating to
government and industry regulation of alternate energy sources. Governmental
entities could impose regulations applicable to the Company and its products,
which might require the Company to submit its systems to various testing,
certification and labeling programs. Management also expects that private
industry associations will become more active in this area. In the future the
Company may also be required to submit its products for testing and
certification to independent organizations. Compliance with future regulatory
or private industry standards could involve substantial costs and have a
material effect on Company operations.
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THERMAL ENERGY STORAGE, INC.
SIGNATURE PAGE
Pursuant to the requirement 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.
THERMAL ENERGY STORAGE, INC.
Registrant
Date: November 8, 2000 By:
__________________________
Richard A. McCormack
President
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