<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended: June 30, 2000
[ ] 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
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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 X No
--- --- --- ---
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 64,600,613
-------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of June 30, 2000
<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.
<PAGE>
<PAGE> 3
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
------
June 30, December 31,
2000 1999
------------ ------------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ - $ 44,277
Restricted cash (Note 1) 43,000 43,306
Accounts receivable (Note 1) 22,051 9,902
Prepaid expenses - 7,500
------------ ------------
Total Current Assets 65,051 104,985
------------ ------------
PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 767,164 191,884
------------ ------------
TOTAL ASSETS $ 832,215 $ 296,869
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 84,216 $ 85,680
Accrued expenses (Note 4) 305,360 326,346
Bank overdraft 2,485 -
Note payable, related party (Noted 6) - 750,000
Notes payable, current portion (Note 5) 10,750 49,458
------------ ------------
Total Current Liabilities 402,811 1,211,484
------------ ------------
LONG-TERM DEBT
Notes payable (Note 5) 107,500 108,266
------------ ------------
Total Long-Term Debt 107,500 108,266
------------ ------------
Total Liabilities 510,311 1,319,750
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 8) 582,336 582,336
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; 100,000,000 shares authorized
of $0.001 par value, 64,600,613 and
40,241,683 shares issued and outstanding,
respectively 64,601 40,242
Additional paid-in capital 23,345,383 21,136,268
Prepaid services (8,333) -
Other comprehensive income 23,278 26,760
Accumulated deficit (23,685,361) (22,808,487)
------------ ------------
Total Stockholders' Equity (Deficit) (260,432) (1,605,217)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 832,215 $ 296,896
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 4
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,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 5,972 $ 204,059 $ 133,940 $ 334,892
Direct costs 44,140 125,390 150,107 212,107
---------- ---------- ---------- ----------
Gross Profit (38,168) 78,669 (16,167) 122,785
---------- ---------- ---------- ----------
EXPENSES
General and administrative 204,325 311,446 446,045 547,512
Depreciation and amortization 14,361 24,865 27,129 49,528
---------- ---------- ---------- ----------
Total Expenses 218,686 336,311 473,174 597,040
---------- ---------- ---------- ----------
Loss From Operations (256,854) (257,642) (489,341) (474,255)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Other income 13,938 5,630 22,205 32,499
Interest income - 3 - 115
Impairment of goodwill (Note 7) (379,981) - (379,981) -
Interest expense (15,635) (15,715) (29,757) (24,739)
---------- ---------- ---------- ----------
Total Other Income (Expense) (381,678) (10,082) (387,533) 7,875
---------- ---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEMS (638,532) (267,724) (876,874) (466,380)
---------- ---------- ---------- ----------
EXTRAORDINARY ITEMS
Debt forgiveness (Note 8) - 48,571 - 374,528
---------- ---------- ---------- ----------
Total Extraordinary Items - 48,571 - 374,528
---------- ---------- ---------- ----------
NET LOSS $ (638,532) $ (219,153) $ (876,874) $ (91,852)
---------- ---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency adjustments 5,780 3,321 (3,482) 6,669
---------- ---------- ---------- ----------
NET COMPREHENSIVE LOSS $ (632,752) $ (215,832) $ (880,356) $ (85,183)
========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.01) $ (0.00) $ (0.02) $ (0.01)
Extraordinary items - 0.00 - 0.01
---------- ---------- ---------- ----------
BASIC EARNINGS (LOSS) PER SHARE $ (0.01) $ (0.00) $ (0.02) $ 0.00
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 5
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, 1998 33,018,931 $ 33,019 $ 20,589,741 $ 38,419 $(21,993,889)
Common stock issued for cash
at an average price of $0.10
per share 2,500,000 2,500 247,500 - -
Common stock issued for cash
at $0.0675 per share 4,500,000 4,500 299,250 - -
Common stock issued in
conversion of Class A-special
shares of subsidiary (Note 9) 222,752 223 (223) - -
Currency translation adjustment - - - (11,659) -
Net loss for the year ended
December 31, 1999 - - - - (814,598)
----------- -------- ------------ ----------- ------------
Balance, December 31, 1999 40,241,683 40,242 21,136,268 26,760 (22,808,487)
Common stock and warrants
issued for cash at $0.0675
per share 2,400,000 2,400 159,600 - -
Common stock and warrants
issued for cash at $0.10
per share 1,800,000 1,800 178,200 - -
Common stock issued through
exercise of options at $0.22
per share 484,000 484 105,996 - -
Common stock and warrants
issued for cash at $0.10
per share 900,000 900 89,100 - -
Common stock issued through
exercise of options at $0.16
per share 75,000 75 11,925 - -
Common stock issued in lieu of
debt and acquisition of remaining
50% of ROP North America, Inc.
(Note 7)(unaudited) 18,699,930 18,700 1,664,294 - -
Currency translation adjustment - - - (3,482) -
Net loss for the six months
ended June 30, 2000
(Unaudited) - - - - (876,874)
----------- -------- ------------ ----------- ------------
Balance, March 31, 2000
(Unaudited) 64,600,613 $ 64,601 $ 23,345,383 $ 23,278 $(23,685,361)
=========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 6
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>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (638,532) $ (219,153) $ (876,874) $ (91,852)
Adjustments to reconcile net income to net
cash (used) by operating activities:
Depreciation and amortization 14,361 24,865 27,129 49,528
Debt forgiveness - (48,571) - (374,528)
Impairment of goodwill 379,981 - 379,981 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 77,177 (25,455) 9,643 (88,479)
(Increase) decrease in deposits and prepaid
expenses - (10,666) - (54,395)
(Increase) decrease in restricted cash - - 306 -
(Increase) decrease in prepaid services 26,667 - (8,333) -
Increase (decrease) in accounts payable (36,341) (81,787) (37,838) (281,564)
Increase (decrease) in unearned revenue - - - (21,666)
Increase (decrease) in accrued expenses (22,534) (34,293) (20,986) 16,461
Increase (decrease) in bank overdraft 2,485 - 2,485 -
Increase (decrease) in investor deposits (15,000) - - -
Increase (decrease) in contingent liabilities - 158,816 - 133,610
---------- ---------- ---------- ----------
Net Cash (Used) by Operating Activities (211,736) (236,244) (524,487) (712,885)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (30,796) - (30,796) (18,831)
---------- ---------- ---------- ----------
Net Cash (Used) by Investing Activities (30,796) - (30,796) (18,831)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash 30,000 250,000 550,480 250,000
Additional capital contributed - - - -
Principle payments on notes payable (14,800) (12,936) (39,474) 750,000
Cash received from notes payable - 192,463 - (47,093)
---------- ---------- ---------- ----------
Net Cash Provided by Financing Activities 15,200 429,527 511,006 952,907
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (227,332) 193,283 (44,277) 221,191
CASH, BEGINNING OF PERIOD 227,332 81,129 44,277 53,221
---------- ---------- ---------- ----------
CASH, END OF PERIOD $ - $ 274,412 $ - $ 274,412
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 15,635 $ 19,615 $ 29,757 $ 28,639
Income taxes $ - $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued in lieu of debt and in
acquisition of the remaining 50% of ROP
North America, Inc. $1,682,994 $ - $1,682,994 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
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 operations.
On June 30, 2000, the Company acquired the remaining 50% interest in ROP North
America, Inc. through a series of transactions by issuing 18,699,930 shares of
its outstanding common stock valued at $1,682,994. This 50% interest was
recorded as a purchase on June 30, 2000 (see Note 7). ROP North America, Inc.
is a 100% owned subsidiary at June 30, 2000. Since the transaction was
accounted for as a purchase at June 30,2000, the consolidated balance sheet
includes the accounts of ROP North America, Inc., but the consolidated
statement of operations for the six and three months ended June 30, 2000, do
not include the operations of the subsidiary for those time periods.
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> 8
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
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 Financial Accounting Standards Board has issued certain new standards,
including standards on earnings per share (SFAS 128), capital structure (SFAS
129), comprehensive income (SFAS 130), operating segments (SFAS 131) and
postretirement benefits (SFAS 132). The adoption of these standards did not
have a material impact on the Company's consolidated financial statements.
f. 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
g. Restricted Cash
The Company holds a certificate of deposit with a Canadian bank in the amount
of $43,000 and $43,306 as of June 30, 2000 and December 31, 1999,
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.
h. 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.
<PAGE>
<PAGE> 9
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Provision For Taxes
At December 31, 1999, the Company has an accumulated deficit of $22,808,487
which includes net operating loss carryforwards that may be offset against
future taxable income through 2019. 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.
j. 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.
k. 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).
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.
l. 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.
m. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
n. Revenue Recognition
Revenue is recognized as billings are submitted to the customer for the
bioremediation process. Billings are submitted once the jobs are substantially
completed.
<PAGE>
<PAGE> 10
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
Furniture and fixtures $ 33,185 $ 26,853
Machinery and equipment 1,070,466 435,005
Computers 14,875 14,875
Vehicles 105,718 76,000
Leasehold improvements 232,435 11,671
Building 14,905 14,905
Land 31,561 31,561
------------ ------------
1,503,145 610,870
Accumulated depreciation (735,981) (418,986)
------------ ------------
Net property and equipment $ 767,164 $ 191,884
============ ============
NOTE 3 - RELATED PARTY TRANSACTIONS
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 former officers and directors of the Company, relatives of these
former officers and directors and companies owned by these former officers and
directors. The majority of these stock issuances have been for services
rendered or for payments related to construction of the Company's facilities
and equipment. Any disbursements made to related parties for which there was
no supporting documentation have been recorded by the Company as compensation
to the related parties.
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.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses as of June 30, 2000 and December 31, 1999 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. A settlement has been reached
with the State of New Mexico for sales tax owed and the Company is current
with the settlement arrangements as of June 30, 2000. Reasonable interest and
penalties have also been accrued as of June 30, 2000 and December 31, 1999.
<PAGE> 11
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
SBA 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. $ 118,250 $ 129,919
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. - 27,805
----------- ------------
Total Notes Payable 118,250 157,724
Less: Current Portion (10,750) (49,458)
----------- ------------
Long-Term Notes Payable $ 107,500 $ 108,266
=========== ============
The aggregate principle maturities of notes payable are as follows:
Year Ended
December 31, Amount
------------ ------------
2000 $ 49,458
2001 22,320
2002 22,320
2003 22,320
2004 22,320
2005 and thereafter 18,986
------------
Total $ 157,724
============
NOTE 6 - NOTE PAYABLE - RELATED PARTY
During the year ended December 31, 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 were authorized by an independent credit committee on
a case-by-case basis. Amounts due on the line-of-credit at June 30, 2000 and
December 31, 1999 was $-0- and $750,000, respectively. On June 30, 2000, the
Company acquired the remaining interest in the joint venture and as part of
the transaction, 6,235,402 shares were issued in lieu of the $750,000 (see
Note 7).
<PAGE>
<PAGE> 12
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
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.(JFJ) 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, 1999, IEI Canada, Inc. had a 50% equity
interest in the JV but did not have management control. Therefore, at
December 31, 1999, the investment was being recorded under the equity method
of accounting. The Company had the right to acquire the remaining 50%
interest in the JV on or prior to December 31, 2000 conditional on meeting
certain requirements established in the agreement between the Company and JFJ
Ecosystems, Inc. On June 30, 2000, the Company signed an Agreement of Merger
to acquire the remaining 50% ownership of the JV.
On June 30, 2000, the Company issued a total of 18,699,930 shares of its
outstanding common stock in lieu of debt and to acquire JFJ's 50% interest in
the joint venture through a series of transactions as follows:
1. 10,392,337 shares issued to acquire JFJ's 50% membership interest in
the joint venture and the resulting wholly-owned subsidiary was merged into
the Company.
2. 6,715,071 shares issued to JFJ in lieu of the outstanding line-of-
credit due of $750,000 plus interest, plus an additional $57,695 that was owed
to JFJ by the joint venture (see Note 6).
3. 1,592,522 shares issued in lieu of debt owed by the joint venture to
an affiliate of the Company and a principal of JFJ of $191,550 in principal
and interest.
4. JFJ also received options to acquire and additional 2,261,334 shares
of the Company's common stock at an exercise price of $0.09 per share (see
Note 10).
As part of the transaction, ROP North America, LLC was dissolved leaving ROP
North America, Inc. as the surviving operating entity. In addition, IEI
Canada, Inc. transferred its ownership interest in ROP North America, Inc. to
the parent company, IEI. Therefore, at June 30, 2000, ROP North America, Inc.
became a wholly-owned subsidiary of IEI.
As part of the transaction, goodwill of $379,981 was recorded which consisted
of the excess of the purchase price over the fair value of net tangible assets
of the purchased subsidiary. For the six months ended June 30, 2000, an
impairment loss on goodwill of $379,981 was recorded since the Company was
unable to determine the present value of the future cash flows of the
purchased subsidiary.
ROP North America, Inc. was established to transform organic by-product from
commercial waste streams into livestock feed. This process is accomplished in
part, through a liquid feed system. ROP North America, Inc. also raises
approximately 15,000 hogs under contract. In addition, the hog farm is a
beta-site for liquid feed products.
<PAGE>
<PAGE> 13
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company 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 contingent
liabilities at June 30, 2000 and December 31, 1999 of $582,336 and $582,336,
respectively. During the year ended December 31, 1999, $350,957 of
contingent liabilities were settled through a full release by the respective
creditors. Corresponding income from the debt forgiveness was recorded by the
Company for the year ended December 31, 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 debts as contingent
liabilities.
The Company was involved in certain litigation during 1998 and 1999 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 contended that they had never ordered the product delivered and that
the distribution agreement was breached. On January 3, 2000, a judgment was
entered into ordering the Company to pay a total of $31,991 plus attorney fees
of approximately $12,000. This total amounts has been included in accounts
payable as of June 30, 2000 and December 31, 1999. The Company has been
making the required payments pursuant to the judgment and is current as of
June 30, 2000.
The Company is also involved in 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
$582,336 at June 30, 2000 and December 31, 1999). If Middlemarch proceeds
with its claim, the Company may be involved in litigation with regard to the
circumstances surrounding the creation of the claimed interest and the payment
of the debt.
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 Company claims that 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 the
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.
The Company claims no agreement was ever reached and no written contract
signed, the Company believes that the action is without merit.
<PAGE> 14
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
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-special shares
were originally issued.
During the year ended December 31, 1999, the Company issued 222,752 shares of
its outstanding common stock to convert a total of 283,841 of the class A-
special shares. At June 30, 2000 and December 31, 1999, 40,549 class A-
special shares remain outstanding that are convertible at the holders option
into 31,822 shares of the Company's common stock. These shares have been
included in additional paid-in capital of the Company until they are converted
in IEI shares.
NOTE 10 - STOCK OPTIONS AND WARRANTS
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. These options expire
on July 23, 2002. 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.
591,000 of these 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. During the six months ended June 30, 2000, a
total of 484,000 of the options were exercised for $106,480.
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. In July 1999, the Company issued an additional 100,000 options
exercisable at $0.21 per share and expiring on July 28, 2004. In December
1999, the Company issued an additional 80,000 options exercisable at $0.06 per
share and expiring on December 1, 2004. The 720,000 options, the 400,000
options, the 100,000 options and the 80,000 options 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. During the six months ended June 30,
2000, 75,000 options were exercised at $0.16 per share for $12,000.
<PAGE> 15
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
NOTE 10 -STOCK OPTIONS AND WARRANTS (Continued)
On June 30, 2000, pursuant to the acquisition agreement with JFJ Ecosystems,
Inc., the Company issued 2,261,334 options to JFJ exercisable at $0.09 per
share and expiring on June 30, 2005 (see Note 7). The exercise price of the
options is equal to or greater than the prior 10-day average trading price of
the Company's shares.
As of June 30, 2000 and December 31, 1999, an aggregate of 7,525,001 and
5,822,667 options to purchase common shares were outstanding, respectively,
with exercise prices ranging from $0.06 to $1.00 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.
Pursuant to a certain stock issuance for cash during the year ended December
31, 1999, the Company issued a total of 4,500,000 warrants to a related party
to purchase shares of common stock. The warrants are exercisable in blocks at
prices ranging from $0.07 to $0.19 per share and expire on November 3, 2000.
Pursuant to certain stock issuances for cash during the six months ended June
30, 2000, the Company issued a total of 6,150,000 warrants to purchase shares
of common stock. The warrants are exercisable in blocks at prices ranging
from $0.07 to $1.00 per share.
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 $22,808,487 at
December 31, 1999, 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. During 1999 and 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.
<PAGE>
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
---------------------------------------------------------
This report may contain "forward-looking" statements. The Company is
including this cautionary statement for the express purpose of availing itself
of the protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all such forward-looking
statements. Examples of forward-looking statements include, but are not
limited to: (a) projections of revenues, capital expenditures, growth,
prospects, dividends, capital structure and other financial matters; (b)
statements of plans and objectives of the Company or its management or Board
of Directors; (c) statements of future economic performance; (d) statements of
assumptions underlying other statements and statements about the Company and
its business relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar expressions.
Year 2000 Disclosure
--------------------
The Company did not experience any year 2000 problems.
Agreement of Merger
-------------------
On June 30, 2000 (the "Effective Date"), the "Company") signed an Agreement of
Merger with ROP Merger Corp., a Missouri corporation, in order to accomplish
the transactions contemplated in a Rights Agreement dated December 31, 1998,
wherein JFJ Ecosystems, LLC ("JFJ"), the Company's joint venture partner, had
the right on or prior to December 31, 2000 to sell its 50% membership interest
in the joint venture, ROP North America, LLC (the "JV") to the Company through
a share exchange, wherein the Company would issue to JFJ shares of the
Company's restricted Common Stock in exchange for JFJ's membership interest in
the JV (the "Sale Rights"). On January 26, 2000, JFJ gave the Company written
notice of its intent to exercise its Sale Rights.
In consideration for JFJ exercising its Sale Rights, JFJ received a total of
17,107,408 shares of the Company's Common Stock, plus an option to acquire an
additional 2,261,334 shares of Common Stock at an exercise price of $0.09 per
share, the five day trailing average of the Company's stock prior to the
Effective Date.
In exchange for the shares and options:
1. The Company received all of JFJ's interest in the JV, and the resulting
wholly-owned subsidiary was merged into the Company;
2. JFJ converted its loan of $750,000 and accrued interest (advanced to the
Company in connection with the Rights Agreement); and
3. JFJ converted an additional $57,695 in principal and interest loaned to
the JV.
The Agreement of Merger also provided for the issuance of 1,592,522 shares to
John P. Crowe, an affiliate of the Company and a principal of JFJ, in
settlement of a total of $191,550 in principal and interest loaned to the JV.
The complete Agreement of Merger, which details the share and option issuances
outlined above, is included as an Exhibit to the Current Report on Form 8-K,
filed with the Commission on July 14, 2000.
<PAGE>
<PAGE> 17
Results of Operations
---------------------
General
-------
The Company's revenues are generated primarily by its business operations in
the United States through its wholly owned subsidiary Environmental Protection
Company ("EPC"). Since March, 1998, the Company has pursued the development
of ROP North America, LLC ("ROP"), through the Company's wholly owned Canadian
subsidiary, IEI Canada which held a 50% interest in ROP. At June 30, 2000,
the Company acquired all of IEI Canada's interest in ROP, and the remaining
50% interest in ROP, and effected a merger of ROP into the Company. Since the
transaction was accounted for as a purchase at June 30,2000, the consolidated
balance sheet includes the accounts of ROP North America, Inc., but the
consolidated statement of operations for the six and three months ended June
30, 2000, do not include the operations of the subsidiary for those time
periods.
For the six months ended June 30, 2000, the functional currency for the
Company's foreign subsidiary (IEI Canada and its subsidiaries) has been
determined to be the Canadian Dollar. Any applicable assets and liabilities
have been translated at period end exchange rates and operating statement
items are translated at average exchange rates prevailing during the period.
For the six month period ended June 30, 2000, the Company had a loss of $3,482
as a result of foreign currency translation adjustment.
Six Month Period ended June 30, 2000 compared to June 30, 1999
--------------------------------------------------------------
Substantially all revenue during the six month period ended June 30, 2000 was
derived from EPC's operations, with total revenues of $133,940 and direct
costs of $150,107 or approximately 112% of revenues. Total revenues for the
six month period ended June 30, 1999 were $334,892 with direct costs of
$212,107, or approximately 63% of revenue. The significant decrease in
revenues for the period ended June 30, 2000 compared to same period in the
preceding year is primarily attributable to the fact that remediation revenues
from Amoco, EPC's principal customer, dropped significantly.
During 1999, Amoco merged with British Petroleum (now "BP-Amoco"), and has
since been undergoing a review of all of its operations, including those in
the Farmington, New Mexico area. As a result of BP-Amoco's review, much of
EPC's anticipated bioremediation work during the current period has been
delayed or canceled. The cost of EPC's bioremediation work for BP-Amoco has
generally been allocated between routine site maintenance and emergency clean-
up. In the past, substantially all of the Company's revenues have been
derived from bioremediation work performed for BP-Amoco. During the fiscal
year 1999 and continuing through the current period bioremediation revenues
from BP-Amoco have significantly decreased. Management of the Company hopes
that this trend will reverse for balance of fiscal year 2000, but has not
received any assurances or commitments from BP-Amoco.
The Company's relationship with BP-Amoco provides for the Company to provide
bioremediation work for BP-Amoco sites in Colorado and New Mexico on an as
needed basis. There is no specific time limit, guaranteed dollar amount of
work, or term for the agreement. The Company has started work on some BP-Amoco
Colorado projects, but there is no guarantee that the Company's BP-Amoco
revenues will continue and the Company cannot predict what events or
uncertainties may be reasonably expected to have a material impact on the net
sales revenues or income from continuing BP-Amoco remediation operations. BP-
Amoco has told management that they have a 5 year plan for remediation in New
Mexico and a 3 year plan for Colorado, but has made no commitments to the
Company on specific amounts of work in either state.
<PAGE>
<PAGE> 18
In addition to the overall decrease in revenues during the current period, the
Company performed a greater number of general roustabout jobs, including some
jobs for Public Service Company of New Mexico, with lower revenues and higher
direct costs as opposed to remediation jobs with higher revenue and lower
direct costs. The substantial increase in direct costs for the six month
period ended June 30, 2000 as a percent of sales compared to the same period
in the preceding year is attributable to both the increase in jobs with higher
direct costs and the need to maintain a minimum workforce and operation in
spite of lower overall revenues.
In an attempt to expand its revenue base for fiscal year 2000, the Company has
been conducting a bioremediation demonstration for the Department of Defense
at the U.S. Navy's Pt. Molate Fuel Depot in Richmond, California. This
technical demonstration represents the culmination of years of effort. The
demonstration was sponsored by the Bay Area Defense Conversion Action Team
(BADCAT), a public private partnership of: Bay Area Economic Forum (BAEF), Bay
Area Regional Technology Alliance (BARTA), California Environmental Protective
Agency (CAL EPA), Chevron Research and Technology Company, Engineering Field
Activity West, Naval Facilities Engineering Command (EFA West), Naval
Facilities Engineering Service Center (NFESC), San Francisco State University
Center for Public Environmental Oversight (CPEO) and the U.S. Environmental
Protection Agency (US EPA). The evaluation period, now completed, was
originally expected to be from five to six months after the demonstration
commenced, but was extended in order for the Department of Defense and others
to fully evaluate the results of the demonstration. The final evaluations
have deemed the remediation to be a success, and management hopes that the
Company's technology and process could become, given certain site
characteristics, the preferred method for reducing hydrocarbon contamination
in soil. However, the Company has not signed or been promised any contracts
as a result of the successful demonstration.
Corporate Expense. For the six months ended June 30, 2000 total operating
expenses were $473,174, consisting of general and administrative expenses of
$446,045 and depreciation and amortization expenses of $27,129, resulting in a
loss from operations of $489,341. For the six months ended June 30, 1999 total
operating expenses were $597,040, consisting of general and administrative
expenses of $547,512 and depreciation and amortization expenses of $49,528,
resulting in a loss from operations of $474,255. The operating expenses for
the six months ended June 30, 2000 represent a substantial reduction in
overall operating expenses (approximately 21%) compared to the Company's
operating expenses incurred for the six months ended June 30, 1999. The
reduction in operating expenses for the six months just ended is a result of
the efforts the Company has undertaken to reduce cash outflows in non-revenue
producing areas and the reduction in workforce to the minimum possible level.
Interest Expense. Interest expense for the six months ended June 30, 2000 was
$29,757, compared to $24,739 for the same period in the preceding year, which
is primarily attributed to the line-of-credit obtained from a related party.
At June 30, 2000, the Company issued 6,235,402 shares in satisfaction of the
principal and interest on the line-of-credit as part of the Agreement of
Merger described above.
Other Income and Expense. Other income for the six months ended June 30, 2000
was $22,205. Other income for the six months ended June 30, 1999 was $32,499,
of which, substantially all was represented by the balance of the income
derived from the one-year consulting agreement with ROP. As a result of the
Agreement of Merger, the Company recognized a one-time impairment of goodwill
expense of $379,981 (see Note 7 to the Financial Statements). Total other
expense for the current six month period was $387,533 compared to other income
of $7,875 for the prior period.
<PAGE> 19
Extraordinary Item. The Company had no extraordinary items of income or
expense during the six month period ended June 30, 1998. During the six months
ended June 30, 1999 the Company recognized income from the forgiveness of
$374,528 in debt by certain creditors of the Company. See Note 8 to the
Financial Statements.
For the six months ended June 30, 2000, the Company had a net comprehensive
loss of $880,356 and basic loss per share was $0.02. Including the
extraordinary item the Company had net comprehensive loss of $85,183 for the
six months ended June 30, 1999, and basic loss per share for the period was
$0.00.
Liquidity and Capital Resources
-------------------------------
Historically, the issuance of common stock has been utilized by the Company
for working capital, conversion of debt, payment of professional services, the
expansion capital required by ROP and for the continued development activities
of the Company. In the six month period ended June 30, 2000, the Company
raised a total of $550,480 through the sale of common stock and the exercise
of outstanding options. See PART II, ITEM 2, CHANGES IN SECURITIES.
The Company had a working capital deficit of $337,760. Cash used in
operations for the six month period was $(524,487)and was derived primarily
from cash received from the sale of shares. The Company's balance sheet
reflects cash and cash equivalents of $-0-, and a bank overdraft liability of
$2,485, as a net result of the consolidation of the Company's balance sheet
with the accounts of ROP North America, Inc., which took into account checks
entered into the general ledger but not yet mailed to vendors at period end.
Because the Company has an accumulated deficit of $(23,685,361), has a working
capital deficit and limited internal financial resources, the report of the
Company's auditor at December 31, 1999 contained a going concern modification
as to the ability of the Company to continue. During fiscal 1998, the Company
began to effect measures to reduce cash outflows and increase working capital
thru the issuance of additional shares of common stock for cash, services and
conversion of debt. The Company is aware of its ongoing cash requirements and
has implemented a cash flow plan, including continued reduction in its general
and administrative expenses. Subsequent to the period end, the Company
obtained a commitment from John P. Crowe to establish an additional credit
line up to $125,000, secured against EPC's equipment. Management intends to
rely on additional equity financing if required to sustain operations until
revenues are adequate to cover costs, either through the exercise of
outstanding options and warrants, or the sale of additional equity securities.
The Company has filed an S-1 Registration Statement to register on behalf of
certain shareholders, including John P. Crowe (collectively, the "Selling
Shareholders") shares and shares issuable on the exercise of warrants sold to
such individuals during the period from November 1999 through June 2000. The
Registration Statement is not yet effective. It is possible the Company could
receive proceeds from exercise of the warrants. However, the Company has not
received any commitments from the Selling Shareholders, nor has it begun any
exploration of the possible sale of additional securities.
At June 30, 2000, the Company has recorded $305,360 in accrued expenses
consisting primarily of accrued interest and unpaid payroll taxes,
unemployment taxes, sales taxes and gross receipts taxes due both the federal
and state taxing authorities, including reasonable interest and penalties for
delinquent filings. A settlement has been reached with the state of New
Mexico for the sales tax owed and the Company is current with the settlement
<PAGE> 20
arrangements as of June 30, 2000. During the year ended December 31, 1999 the
Company extended a preliminary settlement offer to the IRS on Form 433. The
settlement offer to the IRS was based on the Company's anticipated need to
raise additional working capital without exposing such capital to potential
seizure by the IRS. The terms of the preliminary settlement offer are based
on the trustee portion (the amount the Company withheld from its Employees' W-
2 wages) of tax due and contingent on the IRS finalizing its examination
confirming the financial condition of the Company and the financial condition
of those officers and directors of the Company during the time that the tax
liability arose (the "Responsible Parties"). The trustee portion due is
approximately $90,000 and will require the Company to make installment
payments to the IRS of approximately $5,000 per month over 24 months. Upon
payment in full of the settled amount the IRS will provide the Company and any
Responsible Parties with a full release from liability. Should the Company
fail to maintain the monthly payments to the IRS, the IRS will have the right
to collect from the individual Responsible Parties as well as the Company.
To finalize the settlement offer with the IRS, the Company has provided the
IRS with a narrative description of the Company's current plan of business
operations and a logical reason for the offer and compromise. In addition,
the IRS is conducting an investigation of the assets of the Responsible
Parties to determine whether or not the Responsible Parties have sufficient
liquid assets to satisfy the trustee portion of the tax due.
The Company has reserved and recorded possible contingent liabilities to
individuals who claim they are still owed money by the Company although the
Company has issued shares of its common stock to such individuals as payment
of such debts or because the Company is uncertain as the whether the creditors
are holding the Company responsible to certain debts incurred by former
officers and directors of the Company. At June 30, 1999, the Company has
recorded total contingent liabilities of $582,336, the same as at December 31,
1999.
Impact of Inflation
-------------------
The Company does not anticipate that inflation will have a material impact on
its current or proposed operations.
Seasonality
-----------
The Company's bioremediation business operations tend to have varying degrees
of seasonality. A majority of the Company's bioremediation jobs are done on
sites in and around Farmington, New Mexico, during the warm weather months.
Since many of the clean-up sites are located in rural areas and accessible
only over dirt or unimproved roads, the Company's ability to excavate and
remove contaminated soil can be restricted during inclement weather. In
addition, soil is difficult or impracticable to dig and turn when the ground
is frozen, the bioremediation process requires above freezing temperatures to
be effective.
<PAGE>
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. LEGAL PROCEEDINGS
The Company was involved in certain litigation during 1998 and 1999 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 contended that they had never ordered the product delivered and that
the distribution agreement was breached. On January 3, 2000, a judgment was
entered into ordering the Company to pay a total of $31,991 plus attorney fees
of approximately $12,000. This total amount has been included in accounts
payable as of at March 31, 2000 and December 31, 1999. The Company has been
making the required payments pursuant to the judgment and is current as of
March 31, 2000.
The Company is also involved in 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
$582,336 at June 30, 2000 and December 31, 1999). If Middlemarch proceeds
with its claim, the Company may be involved in litigation with regard to the
circumstances surrounding the creation of the claimed interest and the payment
of the debt.
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 Company claims that negotiations were never
consummated, and no contract was every signed. On August 6, 1999, the
Company's Canadian counsel was served with a statement of Claim filed in the
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.
The Company claims no agreement was ever reached and no written contract
signed, the Company believes that the action is without merit.
ITEM 2. CHANGES IN SECURITIES
During the six month period ended June 30, 2000, the Company issued 2,400,000
Units for cash at $0.0675 per Unit, each Unit consisting of one share of
common stock and one warrant to purchase one share of common stock at prices
ranging from $0.07 per share to $0.19 per share.
During the six month period ended June 30, 2000, the Company issued an
additional 2,700,000 Units for cash at $0.10 per Unit, each Unit consisting of
one share of common stock and two warrants to purchase one share of common
stock at prices ranging from $0.25 to $1.00 per share.
<PAGE>
<PAGE> 22
The Unit shares carry registration rights committing the Company, on a best
efforts basis, to file a registration statement on Form S-1 for the purpose of
registering the Units for resale by the holders as a selling shareholders,
with a concomitant reduction in the exercise period upon the effectiveness of
the registration. The Warrants are subject to a call provision which permits
the Company to require the exercise or forfeit of the warrants, within 10 days
of the call notice, if the ten day average closing price of the Company's
common stock exceeds the respective exercise prices of the warrants according
to the terms of the respective warrants. The call provision is only effective
if the shares subject to the call provision have been registered by the
Company under an effective Securities Act registration.
The sale of the above Units was made to accredited investors, pursuant to an
exemption from registration and the prospectus delivery requirements of the
Securities Act set forth in Regulation D, Rule 506.
During the six month period ended June 30, 2000, the Company issued a total of
484,000 shares through the exercise of previously issued options at a price of
$0.22 per share, and 75,000 shares through the exercise of previously issued
options at a price of $0.16 per share.
On June 30, 2000, the Company issued shares and options to JFJ Ecosystems, LLC
("JFJ"), the Company's joint venture partner, pursuant to an Agreement of
Merger. JFJ received a total of 17,107,408 shares of the Company's Common
Stock, plus an option to acquire an additional 2,261,334 shares of Common
Stock at an exercise price of $0.09 per share, the five day trailing average
of the Company's stock prior to the Effective Date.
In exchange for the shares and options:
1. The Company received all of JFJ's interest in the JV, and the resulting
wholly-owned subsidiary was merged into the Company;
2. JFJ converted its loan of $750,000 and accrued interest (advanced to the
Company in connection with the Rights Agreement); and
3. JFJ converted an additional $57,695 in principal and interest loaned to
the JV.
The Agreement of Merger also provided for the issuance of 1,592,522 shares to
John P. Crowe, an affiliate of the Company and a principal of JFJ, in
settlement of a total of $191,550 in principal and interest loaned to the JV.
Prior to the Agreement of Merger, the Company had 45,900,683 shares issued and
outstanding. Following the Effective Date the Company had 64,600,613 shares
issued and outstanding. The essential provisions of the transaction were
approved by the Company's shareholders at a Special Meeting of Shareholders
called for that purpose on April 19, 1999. Details of the Rights Agreement
and the provisions under which JFJ exercised its Sale Rights are included in
the Company's annual report on Form 10KSB for the period ended December 31,
1999, filed with the Securities and Exchange Commission on April 12, 2000.
The complete Agreement of Merger, which details the share and option issuances
outlined above, is included as an Exhibit to the Current Report on Form 8-K,
filed with the Commission on July 14, 2000.
<PAGE>
<PAGE> 23
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 AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
Current Report on Form 8-K, filed with the Commission on July 14, 2000.
Amendment to the Form 8-K, filed with the Commission on July 25, 2000.
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: August 14, 2000 By/S/Tom Jarnagin, President and
Director
