UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended Commission file Number JUNE 31, 2011 0-9180 Thermal Energy Storage, Inc. (Exact name of registrant as specified in its charter.) Colorado 95-3333931 (State of incorporation) (IRS Employer Identification No.) 6362 Ferris Square, Suite C San Diego, CA 92121 (Address of principal executive offices) Registrant's telephone number: (619) 453-1395 Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report: Common Stock, $.001 Par Value - 58,931,289 shares CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Balance Sheets as of MARCH 31, 2011 and JUNE 31, 2011 1 Statements of Operations for the three months ended JUNE 31, 2011 2 Statements of Cash Flows for the three months ended JUNE 31, 2011 3 Notes to Financial Statements 4 ITEM 2. Management's Discussion and Analysis of Financial 5 Condition and Results of Operations ITEM 3. Quantitative and Qualitative Disclosures About 7 Market Risk SIGNATURE PAGE 9 TRANSMITTAL LETTER 10 ----------------------------------------------------------- PART I. - FINANCIAL INFORMATION ITEM 1. Financial Statements THERMAL ENERGY STORAGE, INC. BALANCE SHEETS (Unaudited) (Amounts in thousands, except per share data) MARCH 31, 2011 JUNE 31, 2011 ______________ _______________ ASSETS Current assets Cash $ 0 $ 0 Accounts receivable 0 0 Inventories 0 0 Prepaid expenses 0 0 ______ ______ Total current assets 0 0 Property and equipment less accumulated depreciation of $109,623 0 0 ______ ______ TOTAL ASSETS 0 0 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable $ 0 $ 0 Accrued payroll 0 0 Reserve for legal expenses 0 0 Payable to officers and affiliates 586 586 ______ ______ Total current liabilities 586 586 Stockholder's deficit Common stock par value $.001 per share Authorized 110,000,000 shares Issued and outstanding - 58,931,289 shares 59 59 Additional paid in capital 4,046 4,046 Accumulated deficit (4,839) (4,839) Current Profit (Loss) (10) (10) _______ _______ Total stockholders' deficit $ (744) $ (744) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT(1) $ 3 $ 3 (1) Numbers may not add due to rounding See Accompanying Notes to Financial Statements -1- ------------------------------------------------------------ THERMAL ENERGY STORAGE, INC. STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 31, 2011 AND 2010 (Unaudited) (Amounts in thousands, except per share data) JUNE 31, 2011 JUNE 31, 2010 Contract services $ 0 $ 0 Cost of revenues 0 0 ______ ______ Gross profit (loss) (0) (0) Operating Expenses Research and Development 0 0 Selling, general and administrative expenses 0 0 ______ ______ Operating profit (loss) (0) (0) Transfer fees 0 0 Other income 0 0 ______ ______ Net income (loss) (0) (0) Loss per share ($0.000) ($0.000) See Accompanying Notes to Financial Statement ---------------------------------------------------------------- THERMAL ENERGY STORAGE, INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 31, 2011 AND 2010 (Unaudited) (Amounts in thousands) JUNE 31, 2011 JUNE 31, 2010 ______________ Cash flow from operating activities: Income (loss) from operations $ (0) $ (0) _______ _______ Adjustments to reconcile net income to net cash provided by operating activities Depreciation 0 0 Decrease (increase) from changes: Receivables 0 0 Prepaid expenses 0 0 Increase (decrease) from changes: Accounts payable 0 0 Payable to officers & affiliates 0 0 _______ _______ Net provided by operating activities $ (0) $ (0) _______ _______ Net cash provided from financing activities $ 0 $ 0 _______ _______ Increase (Decrease) in cash (0) (0) Cash at beginning of period $ 0 $ 0 _______ _______ Cash at end of period (1) $ 0 $ 0 (1) Numbers may not add due to rounding See Accompanying Notes to Financial Statements -3- ----------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 31, 2011 (UNAUDITED) BASIS OF PRESENTATION FINANCIAL INFORMATION - The accompanying financial statements have been prepared assuming the Company will continue as a going concern; they do not include adjustments relating to the recoverability of recorded asset amounts and classification of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. The going concern basis might not be appropriate since the Company has required additional funds in the form of loans from the President's solely owned consulting company to sustain operations. As of JUNE 31, 2011 its current liabilities exceeded its current assets and total liabilities exceeded its total assets. The financial information has been prepared by Thermal Energy Storage, Inc., without audit, in accordance with the instructions to Form 10-Q and therefore does not include all information and footnotes necessary for a fair presentation of financial position, and results of operations and cash flows in accordance with generally accepted accounting principles. ACCOUNTING ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. UNAUDITED INTERIM FINANCIAL DATA - In the opinion of management, the unaudited consolidated financial statements for the interim periods presented reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position and results of operations as of and for such periods indicated. These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K (including items incorporated by reference therein) for the year ended December 31, 2010. Results for the interim period presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year. -4- ---------------------------------------------------------------------- THERMAL ENERGY STORAGE, INC. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations JUNE 31, 2011 RESULTS OF OPERATIONS As of JUNE 31, 2011 cash and cash equivalents amounted to $1,160.26 as compared to $741.14 as of MARCH 31, 2011. The increase since MARCH 31,2011 was primarily attributable to a net gain for the three months ended JUNE 31, 2011 of $419.12. As of JUNE 31, 2011 shareholders' deficit amounted to $(746,157) as compared to $(745,577) at MARCH 31, 2011. The increase in deficit since MARCH 31, 2011 was attributable to the net operating loss of $2,174 in the period. RESEARCH AND DEVELOPMENT Research and development expenses are included in costs of projects funded in part by a support agreement with the Bureau of Reclamation, and in part by loans from the President. These expenses were primarily for experiments to complete a major milestone, the operation of a scale model desalination system to produce desalinated water bettering the EPA salinity criterion for potable water. The experiments were conducted by an outside engineering firm, Innovative Engineering Solutions, Inc. and a consultant to the company. SALES AND MARKETING There were no sales and marketing expenses during the period. GENERAL AND ADMINISTRATIVE General and administrative expenses included the bookkeeping, accounting, and SEC report preparation expenses, and accrued management compensation due. The Company's President continues to support the company's projects without current compensation. LIQUIDITY AND CAPITAL RESOURCES Since inception, The Company has funded its operations primarily through the private sale of equity securities, borrowings from certain of its investors for bridge financing, bank borrowings, its initial public offering, which resulted in net proceeds to the Company of approximately $4 million. As of JUNE 31, 2011, The Company had approximately $3,170.71 in cash and cash equivalents. Net cash consumed by operating activities was approximately $1,160.26 for the three months ended JUNE 31, 2011. The increase in net cash used by operating activities for the period was attributable to the net gain for the period. -5- -------------------------------------------------------------------- The Company requires working capital to fund its business, particularly to finance research, development, and design activities. The Company's future capital requirements will depend on many factors, including the timing and extent of spending to support system development efforts and the development of sales, marketing and support; the timing of introductions of new products and enhancements to existing products; and overall industry conditions. The Company believes that it must and can obtain additional working capital to sustain operations and provide for the future expansion and development of its business over the next 12 months. YEAR 2000 READINESS The company has evaluated the computer systems used and upgraded them as required for year 2000 compliance. The shareholder database records are stored in a year 2000 compliant computer system, in a year 2000 compliant database using a format that records the date with the full century. The database is in the process of an upgrade to make its operation less labor intensive and that upgrade should be completed this year. SECURITIES MARKET & FINANCING ACTIVITIES Through the first quarter, the Common Shares of the Company were traded via an over-the-counter bulletin board (OTCBB) and quoted under the symbol "THES". TESI Common Shares are not currently quoted by the National Quotation Bureau. The Company acts as Transfer Agent for the Common Shares. There are approximately 3,000 shareholders of record of Common Shares. The Company has not, since inception, declared or paid a cash or other dividend with respect to the Common Shares. Management does not contemplate the payment of such dividend on the Common Shares in the foreseeable future. On June 26, 1984, the Company was removed from the NASDAQ automated reporting system as the Company was not in compliance with requirements of the NASD Bylaws because it no longer met the financial net worth standards set by NASDAQ. Delinquent filings and effects in market for securities The Company did not hold its annual meeting in 1989 or 1990 until November of each year, and did not hold an annual meeting in 1992, 1994, 1995, 1996, 1997, 1998 and 1999, and did not timely file all of the quarterly form 10-Q reports required to be filed under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, therefore, the Company failed during these periods to qualify for the use of Rule 144 under the Securities Act of 1933. By filing this 10-Q the company will be current in its reporting under the referenced provisions of the 1934 act. -6- ------------------------------------------------------------------- In 1998 the company failed to file the first of two required Y2K compliance reports and in 1999 the Securities and Exchange Commission cited the Company for violations of Section 17 (a)(3) and Section 17A (d) (1) of the Securities Exchange Act of 1934 and Rule 17Ad-18. In 1999 the company submitted the first and second of the required Y2K planning reports, and entered into a settlement agreement with the Securities and Exchange Commission ordering the firm to cease and desist from further such violations. The civil penalty was waived by the SEC because of the financial condition of the Company. Through the first quarter, the Common Shares of the Company were traded in the National Association of Securities Dealers Over-the- Counter Bulletin Board market under the symbol THES. In late JUNE the Company received a third-party notice that the Company was to be removed from the Bulletin Board until it came into compliance with SEC financial reporting requirements. The Company has not submitted audited financial statements in its 10-K annual reports since 1991 as a cost-saving measure. The management is unaware of any material deficiencies in the financial statements and has not had disagreements with the accountant, Donald McLean & Company, CPA, who prepared the Company's corporate tax returns. The management believes that until the company is in compliance with reporting requirements the Company's shares will be traded via "Pink Sheets" and market makers. During the first quarter the Company accepted a proposal for engineering services from Innovative Engineering Services, Inc. (IES) in which IES proposed that the services be paid either in cash or in stock, at the Company's option. The Board of Directors established a price of $0.03 per share as reasonable in light of the recent volatility in share price and IES accepted that price as the basis for the contract. The work was completed and the sale of 202,833 restricted common shares to IES via a private placement is anticipated in the second quarter to fund payment for the engineering services. Sales of restricted Common Shares under Rule 144 under the Securities Act of 1933 are available. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company has not prepared quantitative evaluations of market risks for its systems. In the recent past regulatory actions have made the use of the Company's clathrate formers impracticable, precluding the sale of the company's systems, both for thermal energy storage and for desalination. The research completed to date into alternative clathrate formers to find a suitable chemical that is safe, non-toxic, and commercially available at prices that result in competitive desalination systems has been encouraging. There is no assurance, however, that the Company will be able to find a suitable clathrate former for desalination or thermal -7- ------------------------------------------------------------------ storage systems, nor is there assurance that future regulatory actions will not have a similar adverse effect on the ability of the Company to market its systems. The Company's product and proposed products are subject to, or are affected directly and indirectly by various aspects of federal, state and local governmental regulations and tax laws. The federal excise tax imposed on R11, which made the Company's use of R11 impractical, is an example. After 2003 the clathrate former R141b will also be prohibited by EPA regulations. Residential and commercial use of the Company's thermal energy storage systems is also affected by various state and local building codes. Such regulations, while not directed specifically to thermal energy storage devices, can impact the use of systems in which the Company's energy storage units are used. There is growing interest and activity at all levels relating to government and industry regulation of alternate energy sources. Governmental entities could impose regulations applicable to the Company and its products, which might require the Company to submit its systems to various testing, certification and labeling programs. Management also expects that private industry associations will become more active in this area. In the future the Company may also be required to submit its products for testing and certification to independent organizations. Compliance with future regulatory or private industry standards could involve substantial costs and have a material impact on Company operations. -8- ------------------------------------------------------------------- THERMAL ENERGY STORAGE, INC. SIGNATURE PAGE Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly cause this report to be signed on its behalf by the undersigned thereunto duly authorized. THERMAL ENERGY STORAGE, INC. Registrant Date: JUNE 31, 2011 By: /s/ Richard A. McCormack ------------------------- Date Richard A. McCormack President -9- ------------------------------------------------------------------ THERMAL ENERGY STORAGE, INC. 6362 Ferris Square, Suite C San Diego, CA 92121 JUNE 31, 2011 Securities and Exchange Commission Washington, D.C. 20549 Gentlemen: Pursuant to the requirements of the Securities Exchange Act of 1934, we are transmitting herewith the attached Form 10-Q. Sincerely, THERMAL ENERGY STORAGE, INC. /s/ Richard A. McCormack -------------------------- Richard A. McCormack, President