<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 2
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended: June 30, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from _____________ to ____________
Commission File Number 0-29838
-------
INDUSTRIAL ECOSYSTEMS, INC.
----------------------------------------------
(Name of Small Business Issuer in its charter)
Utah 94-3200034
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2040 West Broadway, Bloomfield, New Mexico 87413
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(505) 632-1786
----------------------------------------------------
(Registrant's telephone number, including area code)
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.
(1) Yes X No (2) Yes No X
--- --- --- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Par Value $0.001 35,500,905
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of June 30, 1999
<PAGE>
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUSTRIAL ECOSYSTEMS, INC.
FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying financial statements have been prepared by the
Company, without audit, in accordance with the instructions to Form 10-QSB
pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore may not include all information and footnotes
necessary for a complete presentation of the financial position, results of
operations, cash flows, and stockholders' equity in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
(which include only normal recurring accruals) necessary to present fairly the
financial position and results of operations for the periods presented have
been made. These financial statements should be read in conjunction with the
accompanying notes, and with the historical financial information of the
Company.
INDEPENDENT ACCOUNTANT'S REPORT
-------------------------------
The Board of Directors
Industrial Ecosystems, Inc. and Subsidiaries
Pacifica, California
The accompanying consolidated balance sheet of Industrial Ecosystems, Inc. and
Subsidiaries as of June 30, 1999 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the three and
six months ended June 30, 1999 and 1998 were not audited by us and accordingly
we do not express an opinion on them. The accompanying balance sheet as of
December 31, 1998 was audited by us and we expressed an unqualified opinion on
it in our report dated February 19, 1999.
As discussed in Note 13 to the consolidated financial statements, an error
resulting in the overstatement of previously reported amounts in Additional
Paid-In Capital and Accumulated Deficit as of December 31, 1998, and in the
overstatement of previously reported net income for the six months and three
months ended June 30, 1999 and March 31, 1999, was discovered by management of
the Company during the current year. Accordingly, an adjustment has been made
to the above-mentioned accounts as of December 31, 1998 and for the six months
and three months ended June 30, 1999 and March 31, 1999, respectively, to
correct the error.
Jones, Jensen & Company
Salt Lake City, Utah
August 9, 1999
<PAGE>
<PAGE> 3
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited) (As Restated
CURRENT ASSETS See Note 13)
Cash and cash equivalents $ 231,981 $ 12,552
Restricted cash (Note 1) 42,431 40,669
Accounts receivable (Note 1) 123,558 35,079
Prepaid expenses 43,529 -
------------ ------------
Total Current Assets 441,499 88,300
------------ ------------
PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 245,276 275,973
------------ ------------
OTHER ASSETS
Investment in joint venture (Note 7) - -
Deposits 21,606 10,740
------------ ------------
Total Other Assets 21,606 10,740
------------ ------------
TOTAL ASSETS $ 708,381 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 4
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited) (As Restated
CURRENT LIABILITIES See Note 13)
Accounts payable $ 75,326 $ 356,890
Accrued expenses (Note 4) 340,216 323,755
Unearned revenue (Note 1) - 21,666
Due to related party (Note 3) 9,286 14,286
Notes payable, current portion (Note 5) 33,861 85,902
------------ ------------
Total Current Liabilities 458,689 802,499
------------ ------------
LONG-TERM DEBT
Note payable, related party (Note 6) 750,000 -
Notes payable (Note 5) 167,353 157,405
------------ ------------
Total Long-Term Debt 917,353 157,405
------------ ------------
Total Liabilities 1,376,042 959,904
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 8) 500,232 747,819
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; 100,000,000 shares authorized
of $0.001 par value, 35,500,905 and
33,000,905 shares issued and outstanding,
respectively 35,501 33,001
Additional paid-in capital 20,837,259 20,589,759
Other comprehensive income 45,088 38,419
Accumulated deficit (22,085,741) (21,993,889)
------------ ------------
Total Stockholders' Equity (Deficit) (1,167,893) (1,332,710)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 708,381 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE> 5
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C>(As Restated <C>
REVENUES See Note 13)
Net sales $ 204,059 $ 79,956 $ 334,892 $ 255,584
Direct costs 125,390 58,869 212,107 163,844
---------- ---------- ---------- ----------
Gross Profit 78,669 21,087 122,786 91,740
---------- ---------- ---------- ----------
EXPENSES
General and administrative 311,446 198,070 547,512 1,026,008
Depreciation and amortization 24,865 27,784 49,528 55,726
---------- ---------- ---------- ----------
Total Expenses 336,311 225,854 597,040 1,081,734
---------- ---------- ---------- ----------
Loss From Operations (257,642) (204,767) (474,255) (989,994)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Other income 5,630 38,130 32,499 41,463
Interest income 3 103 115 224
Interest expense (15,715) (7,705) (24,739) (17,166)
Loss on investment - (32,013) - (71,071)
Loss on disposition of assets - - - (14,311)
---------- ---------- ---------- ----------
Total Other Income (Expense) (10,082) (1,485) 7,875 (60,861)
---------- ---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEMS (267,724) (206,252) (466,380) (1,050,855)
---------- ---------- ---------- ----------
EXTRAORDINARY ITEMS
Debt forgiveness (Note 8) 48,571 - 374,528 -
---------- ---------- ---------- ---------
Total Extraordinary Items 48,571 - 374,528 -
---------- ---------- ---------- ----------
NET LOSS $ (219,153) $ (206,252) $ (91,852) $(1,050,855)
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME
Foreign currency adjustments 3,321 - 6,669 -
---------- ---------- ---------- ----------
NET COMPREHENSIVE LOSS $ (215,832) $ (206,252) $ (85,183) $(1,050,855)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 6
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(As Restated
See Note 13)
BASIC EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.00) $ (0.01) $ (0.01) $ (0.04)
Extraordinary items 0.00 - 0.01 -
---------- ---------- ---------- ----------
BASIC EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.01) $ 0.00 $ (0.04)
========== ========== ========== ==========
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.00) $ (0.01) $ (0.01) $ (0.04)
Extraordinary items 0.00 - 0.01 -
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.01) $ 0.00 $ (0.04)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 7
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional Other
Common Stock Paid-In Comprehensive Accumulated
Shares Amount Capital Income Deficit
----------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 25,289,876 $ 25,290 $ 18,880,552 $ 23,755 $ (20,626,747)
(Previously reported)
Correction of Error (Note 13) 596,001 596 (527,011) - 527,607
Restated balance,
December 31, 1997 24,693,875 24,694 18,353,541 23,755 (20,099,140)
Common stock issued for cash
at an average price of $0.35
per share 2,865,701 2,866 998,056 - -
Common stock issued in lieu
of debt at an average price
of $0.16 per share 5,341,330 5,341 830,726 - -
Common stock issued for
services rendered at an
average of $0.21 per share 99,999 100 21,325 - -
Additional capital contributed - - 386,111 - -
Currency translation adjustment - - - 14,664 -
Net loss for the year ended
December 31, 1998 - - - - (1,894,749)
----------- -------- ------------ ----------- ------------
Balance, December 31, 1998 33,000,905 33,597 20,589,759 38,419 (21,993,889)
Common stock issued for cash
at $0.10 per share 2,500,000 2,500 247,500 - -
Currency translation adjustment
(Unaudited) - - - 6,669 -
Net loss for the six
months ended June 30, 1999
(Unaudited) - - - - (91,852)
----------- -------- ------------ ----------- ------------
Balance, June 30, 1999
(Unaudited) 35,500,905 $ 35,501 $ 20,837,259 $ 45,088 $(22,085,741)
=========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 8
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(As Restated
See Note 13)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (219,153) $ (206,252) $ (91,852) $(1,050,855)
Adjustments to reconcile net income to net
cash (used) by operating activities:
Debt forgiveness (48,571) - (374,528) -
Loss on investment in joint venture - 32,013 - 71,071
Loss on disposition of assets - - - 14,311
Depreciation and amortization 24,865 27,784 49,528 55,726
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (25,455) (112,710) (88,479) (16,043)
(Increase) decrease in deposits and prepaid
expenses (10,666) 104,906 (54,395) (9,400)
Increase (decrease) in accounts payable (81,787) (173,786) (281,564) (525,253)
Increase (decrease) in unearned revenue - - (21,666) -
Increase (decrease) in contingent liabilities 158,816 207,574 133,610 76,668
Increase (decrease) in accrued expenses (34,293) 250,735 16,461 50,486
---------- ---------- ---------- ----------
Net Cash (Used) by Operating Activities (236,244) 130,264 (712,885) (1,333,289)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (70,141) (18,831) (104,064)
---------- ---------- ---------- ----------
Net Cash (Used) by Investing Activities - (70,141) (18,831) (104,064)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash 250,000 - 250,000 1,000,992
Additional capital contributed - - - 386,111
Proceeds from notes payable 192,463 4,271 750,000 100,341
Principle payments on notes payable (12,936) (16,976) (47,093) (16,976)
---------- ---------- ---------- ----------
Net Cash Provided by Financing Activities 429,527 (12,705) 952,907 1,470,398
========== ========== ========== ==========
NET INCREASE (DECREASE) IN CASH 193,283 47,418 221,191 33,045
CASH, BEGINNING OF PERIOD 81,120 86 53,221 14,459
---------- ---------- ---------- ----------
CASH, END OF PERIOD $ 274,412 $ 47,504 $ 274,412 $ 47,504
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 19,615 $ 10,871 $ 28,639 $ 18,940
Income taxes $ - $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $ - $ - $ - $ -
Common stock issued on conversion
debt to common stock $ - $ 240,000 $ - $ 240,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 9
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The consolidated financial statements presented are those of Industrial
Ecosystems, Inc.(IEI) and its wholly-owned subsidiaries, Environmental
Protection Company (EPC), I.E.I. Canada, Inc. (IEI Canada) and 1297833
Ontario, Ltd. and 1303873 Ontario, Ltd. Collectively, they are referred to
herein as the "Company". IEI was incorporated in January, 1994 through the
acquisition of Agri World Development Corp., a dormant public company. Agri
World Development Corp. later changed its name to Industrial Ecosystems, Inc.
IEI is principally a holding company but pays operating expenses for the
bioremediation business.
In March 1994, IEI acquired 100% of EPC in exchange for 7,017,300 shares of
its outstanding common stock. At the time of this acquisition, IEI was
essentially inactive. Also, the exchange of IEI's common stock for the common
stock of EPC resulted in the former stockholders of EPC obtaining control of
IEI. Accordingly, EPC became the continuing entity for accounting purposes,
and the transaction was accounted for as a recapitalization of EPC with no
adjustment to the basis of EPC's assets acquired or liabilities assumed. For
legal purposes, IEI was the surviving entity. EPC is in the bioremediation
business and operates principally in New Mexico.
Effective June 30, 1994, IEI, through its wholly-owned subsidiary, IEI Canada,
Inc. (a Canadian Corporation) acquired 100% of I.T.E. Ecosystems, Inc., Amlin
Grain Roasting, Inc. and a minority interest in N-Viro Systems Canada, Inc.
The operations of I.T.E. Ecosystems, Inc. and Amlin Grain Roasting, Inc. were
discontinued during 1994. In September 1994, IEI incorporated three wholly-
owned subsidiaries called RFP Management & Development Corp., ROP Management &
Development Corp. and IEI Canada, Inc. In December of 1996, IEI incorporated
a separate wholly-owned subsidiary called ROP Liquid Feed Corp. In March
1998, IEI created an entity (merger company) for the purpose of merging IEI
Canada, Inc., ROP Liquid Feed Corp., ROP Management & Development Corp. and
RFP Management & Development Corp. into that entity. At the same time, the
merger company was merged into a new entity named IEI Canada, Inc. Certain
assets and certain liabilities of all of these companies were assumed by ROP
North America, LLC, a joint venture company formed in March, 1998 (see Note
7), and the companies operations were discontinued. The assets and liabilities
were transferred to the joint venture at the related companies' book value.
During 1998, IEI Canada, Inc. incorporated two separate wholly-owned
subsidiaries called 1297833 Ontario, Ltd. and 1303873 Ontario, Ltd. 1297833
Ontario, Ltd. was organized to be in the bioremediation business. Neither
1297833 Ontario, Ltd. or 1303873 Ontario, Ltd. have had any revenue since
organization.
b. Accounting Methods
The Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31, year end.
<PAGE>
<PAGE> 10
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition.
d. Basic and Fully Diluted Earnings (Loss) Per Share
The computations of basic earnings (loss) per share of common stock are based
on the weighted average number of common shares outstanding during the period
of the consolidated financial statements. Common stock equivalents,
consisting of stock options and the IEI Canada Inc. class A-special shares,
have been included in the fully diluted earnings (loss) per share for the
periods presented.
e. Change in Accounting Principle
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" during the year ended December 31, 1998. In
accordance with SFAS No. 128, diluted earnings per share must be calculated
when an entity has convertible securities, warrants, options, and other
securities that represent potential common shares. The purpose of calculating
diluted earnings (loss) per share is to show (on a pro forma basis) per share
earnings or losses assuming the exercise or conversion of all securities that
are exercisable or convertible into common stock and that would either dilute
or not affect basis EPS. As permitted by SFAS No. 128, the Company has
retroactively applied the provisions of this new standard by showing the fully
diluted earnings (loss) per common share for all periods presented.
The Company also adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" during the year ended December 31,
1998. SFAS No. 130 established standards for reporting and display of
comprehensive income (loss) and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. This statement
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company has
retroactively applied the provisions of this new standard by showing the other
comprehensive income (loss) for all periods presented.
f. Unearned Revenue
The Company entered into a one-year consulting agreement with the JV (see Note
7) whereby the Company would receive a total of $200,000 for management
consulting. During 1998, the Company received a payment of $100,000 under the
consulting agreement. The balance was payable based on meeting certain
performance standards. At December 31, 1998, the Company had not met the
performance standards and was not entitled to the additional $100,000 under
the consulting agreement. Because the term of the agreement went from March,
1998 to March, 1999, the Company had unearned revenue of $0 and $21,666 as of
June 30, 1999 and December 31, 1998, respectively.
<PAGE> 11
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Property and Equipment
Property and equipment is recorded at cost. Major additions and improvement
are capitalized. The cost and related accumulated depreciation of equipment
retired or sold are removed from the accounts and any differences between the
undepreciated amount and the proceeds from the sale are recorded as gain or
loss on sale of equipment. Depreciation is computed using the straight-line
method over the estimated useful life of the assets as follows:
Description Estimated Useful Life
------------------------ ---------------------
Furniture and fixtures 3 to 7 years
Machinery and equipment 5 to 7 years
Computers 5 years
Vehicles 5 years
Leasehold improvements 15 years
Buildings 15 years
h. Restricted Cash
The Company holds a certificate of deposit with a Canadian bank in the amount
of $42,431 and $40,669 as of June 30, 1999 and December 31, 1998,
respectively, which is being used as security and collateral on a demand note
with the same bank. The cash cannot be withdrawn from the CD until after the
demand note is paid in full.
i. Accounts Receivable
Accounts receivable consists almost entirely of amounts due from a major oil
company. Those outstanding invoices are considered to be fully collectible
and no allowance for doubtful accounts has been recorded.
j. Provision For Taxes
At December 31, 1998, the Company has an accumulated deficit of $21,993,889
which includes net operating loss carryforwards that may be offset against
future taxable income through 2013. No tax benefit has been reported in the
consolidated financial statements because the Company believes there is a 50%
or greater chance the net operating loss carryforwards will not be used.
Accordingly, the potential tax benefits of the net operating loss
carryforwards are offset by a valuation allowance of the same amount.
k. Principles of Consolidation
The consolidated financial statements include those of Industrial Ecosystems,
Inc. and its wholly-owned subsidiaries.
All material intercompany accounts and transactions have been eliminated.
<PAGE>
<PAGE> 12
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1998 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. Statement of Cash Flows
For the Company's foreign subsidiary, (IEI Canada and its subsidiaries), the
functional currency has been determined to be the local currency. Accordingly,
assets and liabilities are translated at year-end exchange rates, and
operating statement items are translated at average exchange rates prevailing
during the year. The resultant cumulative translation adjustments to the
assets and liabilities are recorded as a separate component of stockholders'
equity. Exchange adjustments resulting from foreign currency transactions are
included in the determination of net income (loss). Such amounts are
immaterial for all periods presented.
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's foreign subsidiaries
are calculated based upon the local currencies. As a result, amounts related
to assets and liabilities reported on the consolidated statement of cash flows
will not necessarily agree with changes in the corresponding balances on the
balance sheets.
m. 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 could differ from those estimates.
n. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
o. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements include all of
the adjustments which, in the opinion of management, are necessary for a fair
presentation. Such adjustments are of a normal, recurring nature.
<PAGE>
<PAGE> 13
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Furniture and fixtures $ 35,535 $ 35,535
Machinery and equipment 435,005 429,005
Computers 14,875 14,875
Vehicles 81,400 70,900
Leasehold improvements 4,033 10,340
Building 14,905 14,905
Land 40,199 31,561
------------ ------------
625,952 607,121
Accumulated depreciation (380,676) (331,148)
------------ ------------
Net property and equipment $ 245,276 $ 275,973
============ ============
NOTE 3 - RELATED PARTY TRANSACTIONS
As of June 30, 1999 and December 31, 1998, the Company owed $9,286 and
$14,286, respectively, to an employee of the joint venture. This amount
represents an advance made to the Company during 1996. The amount is non-
interest bearing and due on demand.
The Company also has been involved in a number of related party transactions.
The most significant of those transactions are summarized as follows:
The Company has made disbursements and issued shares of its common stock to
certain officers and directors of the Company, relatives of these officers and
directors and companies owned by these officers and directors, although those
individuals are no longer officers or directors of the Company. Most of these
funds have been paid for services rendered or for payments related to
construction of the Company's facilities and equipment. Any disbursements made
to the related parties for which there was no supporting documentation were
recorded by the Company as compensation to the related party.
The Company's former president, from time to time, received payments in the
form of loans that have been repaid without interest. The Company's former
president also advanced funds to the Company from time to time in order for
the Company to meet its ongoing needs. These advances were also repaid
without interest.
The Company's transfer agent as of December 31, 1998, was controlled by a
minority shareholder who has received options recorded at their fair market
value on the date of issuance from the Company for consulting services. As of
June 30, 1999 and December 31, 1998, the Company owed its transfer agent a
<PAGE> 14
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
total of $0 and $25,000, respectively. The minority shareholder has played a
significant role in obtaining professional consulting, accounting and legal
services for the Company in helping the Company try to become fully reporting
with the SEC.
From inception through mid 1996, a former director of the Company had also
controlled an entity that served as the Company's transfer agent. At April 1,
1999, the Company engaged Atlas Stock Transfer, Salt Lake City, Utah, as its
transfer agent.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses as of June 30, 1999 and December 31, 1998 consist primarily
of accrued interest and unpaid payroll taxes, unemployment taxes, sales taxes
and gross receipts taxes due both the federal and state taxing authorities.
The Company has been delinquent on filing these tax forms and has unfiled
taxes for both the 1997 and 1998 tax years. Reasonable interest and penalties
have also been accrued as of June 30, 1999 and December 31, 1998. Following is
the breakout of accrued expenses as of June 30, 1999 and December 31, 1998:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Accrued payroll $ 34,542 $ 12,411
Accrued payroll taxes, penalties and interest 198,282 198,282
Accrued interest 22,500 26,400
Other 89,892 86,662
------------ ------------
$ 340,216 $ 323,755
============ ============
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Note payable to a bank, interest at prime + 3%
per annum, requires monthly payments of $1,860
plus interest, matures in December, 2005,
secured by machinery, equipment and certificate
of deposit. $ 145,090 $ 156,250
Note payable to a company, interest at 11.5% per
annum, principle and interest of $ 5,002 due
monthly, matures in June, 2000, secured by
equipment. 56,124 82,058
Other obligations - 4,999
------------ ------------
Total Notes Payable 201,214 243,307
Less: Current Portion (33,861) (85,902)
------------ ------------
Long-Term Notes Payable $ 167,353 $ 157,405
============ ============
<PAGE> 15
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
The aggregate principal maturities of notes payable are as follows:
Year Ended
December 31, Amount
------------ ---------
1999 $ 85,902
2000 45,795
2001 22,320
2002 22,320
2003 22,320
2004 and thereafter 44,650
--------
Total $ 243,307
========
NOTE 6 - NOTES PAYABLE - RELATED PARTY
During the six months ended June 30, 1999, the Company obtained a line-of-
credit with a related party for up to $750,000 at 6% interest per annum.
Withdrawals from the line-of-credit are to be authorized by an independent
credit committee on a case-by-case basis. Total advances from the line-of-
credit through June 30, 1999 was $750,000. The line-of-credit is secured by
the Company's interest in the JV and is due and payable in full by December
31, 2000.
NOTE 7 - INVESTMENT IN JOINT VENTURE
During March, 1998, IEI Canada, Inc., a wholly-owned subsidiary of IEI,
entered into a joint venture agreement with JFJ Ecosystems, Inc. to form ROP
North America, LLC (the JV). The JV created a wholly-owned subsidiary called
ROP North America, Inc. (an Ontario Corporation) which became the operating
entity. As of December 31, 1998, pursuant to a subsequent transaction, IEI
Canada, Inc. has a 50% equity interest in the JV but does not have management
control. The investment is being recorded under the equity method of
accounting. Because of a significant first year loss of the JV, the
investment is being recorded at $-0- as of December 31, 1998. The Company has
the right to acquire the remaining 50% interest in the JV on or prior to
December 31, 2000 conditional on meeting certain requirements established by
the JV.
The joint venture was established to transform organic by-product from
commercial waste streams into livestock feed. This process is accomplished in
part, through the joint venture's liquid feed system. The joint venture also
raises approximately 3,000 hogs under contract. In addition, the hog farm is
a beta-site for the joint venture's liquid feed products.
On March 20, 1998, the Company entered into an equipment lease agreement with
the JV whereby the JV has agreed to lease from the Company a certain liquid
feed distribution system for $4,414 per month for a term of seven years.
The Company also entered into an agreement with the JV on January 4, 1999,
whereby the joint venture partner received an immediate vesting of its 50%
membership interest in the JV and the termination of the Company's option to
reduce the joint venture partners membership interest to 19%. The joint
<PAGE>
<PAGE> 16
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 7 - INVESTMENT IN JOINT VENTURE (CONTINUED)
venture partner was also granted certain rights, subject to certain
conditions, to exercise an option to exchange their membership interest in the
JV for that number of shares of the Company's common stock which would make
the joint venture partner a 33.3% owner of the total outstanding common shares
of the Company's stock issued and outstanding at January 4, 1999.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Currently, the Company entered into a month to month lease agreement for its
office facilities in Pacifica, California. The monthly rental payment is
$1,900.
The Company also has reserved and recorded contingent liabilities to
individuals who claim they are still owed although the Company issued shares
of common stock in payment of the debts. The Company has recorded a total of
contingent liabilities at June 30, 1999 and December 31, 1998 of $500,232 and
$747,819, respectively. During the six months ended June 30, 1999, $25,962
was paid by the Company and $374,528 of the contingent liabilities were
settled through a full release by the respective creditors. Corresponding
income from the debt forgiveness has been recorded in the accompanying
financial statements for the six months ended June 30, 1999. Additional
contingent liabilities of $152,903 were recorded by the Company during the six
months ended June 30, 1999. It is currently uncertain as to whether or not
the remaining amounts will be paid in the future and management of the Company
intends on vigorously contesting any claim that is made. It is reasonably
possible, however, that the Company will have to pay the amounts and to be
conservative, management has recorded these possible debts as contingent
liabilities.
The Company is involved in certain litigation with a New Mexico limited
liability company regarding an open account and a distribution agreement. A
complaint against the Company was filed in July 1997. The Company contends
that they had never ordered the product delivered and that the distribution
agreement was breached. The Company has recorded a contingency of $75,000 and
$30,000 (included in contingent liabilities of $500,232 and $747,819 at June
30, 1999 and December 31, 1998, respectively), although management intends on
vigorously contesting the claim.
The Company is also involved in threatened litigation with Middlemarch Farms,
Ltd. (Middlemarch), a Canadian company, whereby Middlemarch is claiming a
security interest in certain property transferred to the joint venture during
March 1998. Middlemarch is claiming that there is an outstanding balance due
of $230,300 plus interest. The property subject to the security interest is
comprised of the assets and liabilities which were transferred to the joint
venture in March 1998.
The Company claims that the amount has been paid but has recorded a contingent
liability for the claimed amount (included in contingent liabilities of
$500,232 and $747,819 at June 30, 1999 and December 31, 1998, respectively).
If Middlemarch proceeds with its claim, the Company may be involved in
litigation in regards to the circumstances surrounding the creation of the
claimed interest and the payment of the debt.
<PAGE>
<PAGE> 17
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 9 - CLASS A-SPECIAL SHARES
During 1997, the Company issued 2,163,917 shares of common stock in exchange
for the conversion of 2,163,917 shares of class-A special shares of IEI
Canada, Inc., a wholly owned subsidiary of the Company (by virtue of voting
rights and common stock shares). The class-A special shares were originally
issued in connection with a Global Share Purchase Agreement during 1994. Each
of the original shareholders of the class-A special shares received a warrant
permitting the exchange of the shares for an equal number of shares of the
Company at any time until 2015. A total of 4,000,000 class-A shares were
originally issued.
At June 30, 1999 and December 31, 1998, 324,390 class A-special shares remain
outstanding that are convertible at the holder's option into 254,573 (post
split) shares of the Company's common stock. These shares have been included
in additional paid-in capital of the Company until they are converted into IEI
shares.
NOTE 10 - STOCK OPTIONS
On July 23, 1997, the Board of Directors agreed to issue an option to purchase
166,667 (post-split) shares of common stock at an exercise price of $0.15 per
share to an entity that provided a loan to the Company. At the time the
options were granted the exercise price was equal to or greater than the prior
10-day average trading price of the Company's shares.
On March 13, 1998, the Board of Directors agreed to issue options to various
individuals who have provided and may continue to provide consulting and other
services to the Company. Stock options for a total of 4,131,000 (post-split)
shares of common stock were granted at an exercise price of $0.225 per share.
At the time the options were granted, the exercise price was equal to or
greater than the prior 10 day average trading price of the Company's shares.
As of December 31, 1998, an aggregate of 4,297,667 options to purchase common
shares were outstanding with exercise prices ranging from $0.15 to $0.225 per
share. At the time the options were granted, the exercise price was equal to
or greater than the prior 10 day average trading price of the Company's
shares.
166,667 of the options will expire if not exercised by July 23, 2002 and
591,000 of the options will expire if not exercised by March 13, 2003. The
remaining 3,540,000 options are "cashless" options and will expire if not
exercised by March 13, 2005. 3,277,667 of the options were exercisable on
December 31, 1998 and the remaining 1,020,000 options became exercisable if
the Company successfully files Form 10SB with the Securities and Exchange
Commission prior to December 31, 1999.
In May 1999, the Board of Directors of the Company agreed to issue 225,000
options, exercisable at $1.00 per share and expiring on May 31, 2003, to an
unaffiliated third party in settlement of an outstanding lease obligation for
one of its Canadian subsidiaries. The exercise price for the options was
determined by negotiations between the parties.
In April 1999 the Company issued 720,000 options exercisable at $0.16 per
share and expiring on April 30, 2004. In June 1999, the Company issued an
additional 400,000 options exercisable at $0.20 per share and expiring on June
3, 2004. The 720,000 options and the 400,000 shares were issued pursuant to
the Company's 1999 Stock Option and Award Plan and the exercise price of the
respective options is equal to or greater than the prior 10 day average
trading price of the Company's shares.
<PAGE>
<PAGE> 18
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 11 - GOING CONCERN
The Company's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company has historically incurred significant
losses which have resulted in an accumulated deficit of $21,993,889 at
December 31, 1998, a working capital deficit and limited internal financial
resources. These factors combined raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty. It is the intent of management to rely upon additional equity
financing if required to sustain operations until revenues are adequate to
cover the costs. During 1998, the Company began to effect measures to reduce
cash outflows and increase working capital through the issuance of additional
shares of common stock for cash, services, and conversion of debt. The
Company has implemented a cash flow plan and has developed an overall strategy
and certain financing options to meet its ongoing needs. It is the intent of
management to rely upon additional equity financing if required to sustain
operations until revenues are adequate to cover the costs.
NOTE 12 - SUBSEQUENT EVENTS
On March 17, 1999, the Company received a letter from Canadian counsel
threatening litigation on behalf of Diamond Measure, Inc., a Canadian
corporation with which the Company engaged in discussions about a possible
acquisition during 1994. The negotiations were never consummated, and no
contract was ever signed. On August 6, 1999, the Company's Canadian counsel
was served with a statement of Claim filed in Superior Court of Justice in
Windsor Ontario on August 4, 1999, by Diamond Measure, Inc. and Ronald
McGuire, against the Company. The claim is for a total of $1.5 million
dollars Canadian for breach of contract and detrimental reliance, $1 million
to Diamond Measure, Inc. and $500,000 to Ronald McGuire. Because no agreement
was ever reached and no written contract signed, the Company believes that the
action is without merit.
NOTE 13 - CORRECTION OF AN ERROR
Subsequent to the issuance of the December 31, 1998 consolidated financial
statements, the Company was able to recover a total of 596,001 shares of its
outstanding common stock that had originally been recorded by the Company
during 1995 and 1996 at a total cost of $527,607. The shares were determined
to have been issued in error in that no consideration was ever received for
the shares. The Company is treating these shares now as having never been
issued. Consequently, an adjustment has been made to correctly reflect the
total outstanding shares as of December 31, 1998, and to correctly reflect the
net income (loss) for the six months ended June 30, 1999.
<PAGE>
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
None.
(b) Reports on Form 8-K.
--------------------
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDUSTRIAL ECOSYSTEMS, INC.
[Registrant]
Dated: December 6, 1999 By/S/Tom Jarnagin, President and
Director
