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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

o

TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                              to                             

Commission File Number 333-13287


EARTHSHELL CORPORATION
(Exact name of registrant as specified in its charter)


Delaware

 

77-0322379
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

       

800 Miramonte Drive,
Santa Barbara, California
  93109
(Address of principal executive office)   (Zip Code)

Registrant's telephone number, including area code: (805) 897-2248

        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  ý    No  o

        The number of shares outstanding of the registrant's common stock as of August 13, 2002 is 139,116,362.




EARTHSHELL CORPORATION

FORM 10-Q

For the Quarter Ended June 30, 2002

INDEX

                Page
Part I. Financial Information    

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

a)

 

Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001

 

1

 

 

 

 

b)

 

Statements of Operations for the three and six months ended June 30, 2002 and June 30, 2001 (unaudited) and for the period from November 1, 1992 (inception) through June 30, 2002 (unaudited)

 

2

 

 

 

 

c)

 

Statements of Stockholders' Equity (Deficit) for the period from November 1, 1992 (inception) to June 30, 2002 (unaudited)

 

3

 

 

 

 

d)

 

Statements of Cash Flows for the six months ended June 30, 2002 and June 30, 2001 (unaudited) and for the period from November 1, 1992 (inception) through June 30, 2002 (unaudited)

 

5

 

 

 

 

e)

 

Notes to Financial Statements (unaudited)

 

6

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

7

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

10

Part II. Other Information

 

 

 

 

Item 1.

 

Legal Proceedings

 

10

 

 

Item 2.

 

Changes in Securities

 

10

 

 

Item 3.

 

Defaults Upon Senior Securities

 

10

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

10

 

 

Item 5.

 

Other Information

 

10

 

 

Item 6

 

Exhibits and Reports on Form 8-K

 

10

 

 

Signature

 

12

EARTHSHELL CORPORATION
(A Development Stage Enterprise)
BALANCE SHEETS

 
  June 30,
2002

  December 31,
2001

 
 
  (Unaudited)

   
 
ASSETS              
CURRENT ASSETS:              
  Cash and cash equivalents   $ 180,401   $ 828,007  
  Prepaid expenses and other current assets     931,841     580,472  
   
 
 
    Total current assets     1,112,242     1,408,479  

RESTRICTED CASH

 

 

3,500,000

 

 

3,500,000

 

PROPERTY AND EQUIPMENT, NET

 

 

13,989,312

 

 

14,591,111

 

INVESTMENT IN JOINT VENTURE

 

 

356,275

 

 

386,275

 
   
 
 
TOTAL   $ 18,957,829   $ 19,885,865  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 
CURRENT LIABILITIES:              
  Accounts payable and accrued expenses   $ 7,754,161   $ 8,349,808  
  Note Payable to EKI     350,000      
   
 
 
    Total current liabilities     8,104,161     8,349,808  
   
 
 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 
  Preferred Stock, $.01 par value, 10,000,000 shares authorized; 9,170,000 Series A shares designated; no shares issued and outstanding as of June 30, 2002 and December 31, 2001          
  Common stock, $.01 par value, 200,000,000 shares authorized; 135,122,125 and 118,323,054 shares issued and outstanding as of June 30, 2002 and December 31, 2001     1,351,221     1,183,231  
  Additional paid-in common capital     283,117,190     266,595,422  
  Deficit accumulated during the development stage     (273,614,743 )   (256,242,596 )
   
 
 

Total stockholders' equity

 

 

10,853,668

 

 

11,536,057

 
   
 
 
TOTAL   $ 18,957,829   $ 19,885,865  
   
 
 

See notes to financial statements.

1


EARTHSHELL CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(Unaudited)

 
  For the
Three Months
Ended June 30,

  For the
Six Months
Ended June 30,

  November 1,
1992 (inception)
through June 30,

 
 
  2002
  2001
  2002
  2001
  2002
 
Expenses:                                
Related party research and development   $ 468,313   $ 367,694   $ 768,313   $ 691,142   $ 69,159,151  
Other research and development     3,809,063     4,007,152     10,476,222     8,430,443     119,352,008  
Related party general and administrative expenses                     2,240,502  
Other general and administrative expenses     2,116,286     3,893,262     4,587,649     6,078,168     57,371,853  
Depreciation and amortization     795,352     1,225,267     1,590,705     2,510,449     20,952,768  
Related party patent expenses                     8,693,105  
   
 
 
 
 
 
Total expenses     7,189,014     9,493,375     17,422,889     17,710,202     277,769,387  

Interest income

 

 

(20,977

)

 

(85,071

)

 

(42,914

)

 

(204,382

)

 

(10,718,156

)
Related party interest expense                     4,770,731  
Other interest expense     872         872         1,789,610  
Gain on Sale of Asset     (9,500 )       (9,500 )       (9,500 )
   
 
 
 
 
 
Loss Before Income Taxes     7,159,409     9,408,304     17,371,347     17,505,820     273,602,072  

Income Taxes

 

 


 

 


 

 

800

 

 


 

 

12,671

 
   
 
 
 
 
 
Net Loss     7,159,409     9,408,304     17,372,147     17,505,820     273,614,743  
Preferred Dividends                     9,926,703  
   
 
 
 
 
 
Net Loss Available To Common Stockholders   $ 7,159,409   $ 9,408,304   $ 17,372,147   $ 17,505,820   $ 283,541,446  
   
 
 
 
 
 
Basic And Diluted Loss Per Common Share   $ 0.05   $ 0.08   $ 0.13   $ 0.16   $ 3.04  
Weighted Average Number Of Common Shares     133,773,696     111,009,853     129,101,672     109,007,431     93,125,440  

See notes to financial statements.

2


EARTHSHELL CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)

 
  Cumulative
Convertible Preferred
Stock Series A

   
   
   
   
  Deficit
Accumulated
during
Development-
Stage

   
 
 
  Additional
Paid-In
Preferred
Capital

  Common Stock
  Additional
Paid-In
Common
Capital

   
 
 
  Shares
  Amount
  Shares
  Amount
  Total
 
ISSUANCE OF COMMON STOCK AT INCEPTION             82,530,000   $ 3,150   $ 6,850       $ 10,000  
Sale of preferred stock, net   6,988,850   $ 267   $ 24,472,734                   24,473,001  
Net loss                       $ (7,782,551 )   (7,782,551 )
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 1993   6,988,850     267     24,472,734   82,530,000     3,150     6,850     (7,782,551 )   16,700,450  
Net loss                         (16,582,080 )   (16,582,080 )
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 1994   6,988,850     267     24,472,734   82,530,000     3,150     6,850     (24,364,631 )   118,370  
Contribution to equity                     1,117,723         1,117,723  
Net loss                         (13,914,194 )   (13,914,194 )
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 1995   6,988,850     267     24,472,734   82,530,000     3,150     1,124,573     (38,278,825 )   (12,678,101 )
Contribution to equity                     650,000         650,000  
Issuance of stock warrants                     246,270         246,270  
Net loss                         (16,950,137 )   (16,950,137 )
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 1996   6,988,850     267     24,472,734   82,530,000     3,150     2,020,843     (55,228,962 )   (28,731,968 )
Compensation related to stock options, warrants and stock grants.                     3,156,659         3,156,659  
Net loss                         (18,992,023 )   (18,992,023 )
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 1997   6,988,850     267     24,472,734   82,530,000     3,150     5,177,502     (74,220,985 )   (44,567,332 )
262 to 1 stock split       69,621     (69,621 )     822,150     (822,150 )        
Conversion of preferred stock to common stock   (6,988,850 )   (69,888 )   (24,403,113 ) 6,988,850     69,888     24,403,113          
Issuance of common stock             10,526,316     105,263     205,883,493         205,988,756  
Preferred stock dividends                     (9,926,703 )       (9,926,703 )
Net loss                         (26,620,052 )   (26,620,052 )
   
 
 
 
 
 
 
 
 

3



BALANCE, DECEMBER 31, 1998

 


 

 


 

 


 

100,045,166

 

 

1,000,451

 

 

224,715,255

 

 

(100,841,037

)

 

124,874,669

 
Net loss                         (44,188,443 )   (44,188,443 )
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 1999             100,045,166     1,000,451     224,715,255     (145,029,480 )   80,686,226  
Net Loss                         (48,911,605 )   (48,911,605 )
Issuance of common stock             4,457,169     44,572     10,477,216         10,521,788  
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2000             104,502,335     1,045,023     235,192,471     (193,941,085 )   42,296,409  
Net Loss                         (62,301,511 )   (62,301,511 )
Compensation related to stock options, warrants and stock grants             300,000     3,000     984,119         987,119  
Issuance of common stock             13,520,719     135,208     30,418,832         30,554,040  
   
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2001                   118,323,054     1,183,231     266,595,422     (256,242,596 )   11,536,057  
Net Loss                         (17,372,147 )   (17,372,147 )
Issuance of common stock             16,799,071     167,990     16,521,768         16,689,758  
   
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2002             135,122,125   $ 1,351,221   $ 283,117,190   $ (273,614,743 ) $ 10,853,668  
   
 
 
 
 
 
 
 
 

See notes to financial statements

4


EARTHSHELL CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(Unaudited)

 
  For the
Six Months Ended
June 30,

  November 1, 1992
(inception)
through
June 30,

 
 
  2002
  2001
  2002
 
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Net loss   $ (17,372,147 ) $ (17,505,820 ) $ (273,614,743 )
Adjustments to reconcile net loss to net cash used in operating activities:                    
  Depreciation and amortization     1,590,705     2,510,449     20,952,768  
  Issuance of stock options to director, consultant and officer         515,398     4,848,641  
  Amortization of debt issue costs             271,277  
  (Gain) Loss on sale or disposal of property and equipment     (9,500 )       37,863,665  
  Loss from investment in joint venture     30,000     45,000     159,163  
  Net Loss on Sale of Investments             32,496  
  Accretion of Discounts on Investments             (410,084 )
Changes in operating assets and liabilities:                    
  Prepaid expense and other current assets     (351,369 )   (21,748 )   (931,841 )
  Accounts payable and accrued expenses     (595,647 )   (1,588,118 )   7,754,161  
  Trade payable to majority stockholder         (266,312 )    
   
 
 
 
    Net cash used in operating activities     (16,707,958 )   (16,311,151 )   (203,074,497 )
   
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 
Purchase of short-term investments             (52,419,820 )
Purchase of restricted time deposit             (3,500,000 )
Proceeds from sales and redemptions of investments             52,797,408  
Proceeds from sale of property and equipment     9,500         307,170  
Investment in joint venture             (515,438 )
Purchase of property and equipment     (988,906 )   (1,644,615 )   (73,984,650 )
   
 
 
 
    Net cash used in investing activities     (979,406 )   (1,644,615 )   (77,315,330 )
   
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 
Proceeds from issuance of notes payable to stockholders             14,270,000  
Proceeds from drawings on line of credit with bank             14,000,000  
Proceeds from issuance of common stock     16,689,758     14,947,940     278,828,222  
Proceeds from note payable to EKI     350,000           350,000  
Common stock issuance costs             (15,178,641 )
Preferred dividends paid             (9,926,703 )
Proceeds from issuance of preferred stock             25,675,000  
Preferred stock issuance costs             (1,201,999 )
Repayment of line of credit with bank             (14,000,000 )
Repayment of note payable             (12,245,651 )
   
 
 
 
    Net cash provided by financing activities     17,039,758     14,947,940     280,570,228  
   
 
 
 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     (647,606 )   (3,007,826 )   180,401  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

828,007

 

 

7,791,654

 

 


 
   
 
 
 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

180,401

 

$

4,783,828

 

 

180,401

 
   
 
 
 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 
Cash paid for:                    
  Income taxes     800       $ 11,871  
  Interest           $ 3,028,240  
Warrants issued with debt           $ 306,168  
Transfer of property from EKI           $ 28,745  
Conversion of preferred stock to common stock           $ 69,888  

See notes to financial statements.

5



EARTHSHELL CORPORATION

NOTES TO FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2002

Presentation of Financial Information

        The foregoing interim financial information is unaudited and has been prepared from the books and records of EarthShell Corporation (the "Company"). In the opinion of management, the financial information reflects all adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows of the Company in conformity with generally accepted accounting principles. All such adjustments were of a normal recurring nature for interim financial reporting. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation.

        The accompanying unaudited financial statements and these notes do not include certain information and footnote disclosures required by generally accepted accounting principles, which were included in the Company's financial statements for the year ended December 31, 2001. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-K.

        The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the period from November 1, 1992 (inception) to June 30, 2002, the Company has incurred a cumulative net loss of $273,614,743 and has a working capital deficit of $6,991,919 at June 30, 2002. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

        The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations from sources that are described in the notes to the financial statements

        Basic and diluted loss per common share is calculated based on the weighted average shares outstanding of 133,773,696 and 129,101,672 for the three and six months ended June 30, 2002, respectively and 111,009,853 and 109,007,431 for the three and six months ended June 30, 2001, respectively. Basic and diluted per share calculation is the same because common stock equivalents are anti-dilutive. Incremental dilutive shares which would be issuable using the treasury stock method would be 0 and 382,237 at June 30, 2002 and 2001, respectively.

Related Party Transactions

        For the three months ended June 30, 2002 and 2001, the Company paid or accrued $468,313 and $367,694 respectively, and $768,313 and $691,142 for the six months ended June 30, 2002 and 2001 for raw material purchases and payments related to a license agreement between E. Khashoggi Industries LLC and its wholly owned subsidiaries ("EKI") and the Company.

        During the six months ended June 30, 2002 the Company has from time to time received short term funding from EKI. At June 30, 2002 the Company had a Note Payable of $350,000 which is

6



payable to EKI. The Note Payable and accrued interest was paid in full to EKI during the first week of July 2002.

Commitments

        During 1998, EKI entered into certain agreements with an equipment manufacturer providing for the purchase by EKI of certain technology applicable to starch-based disposable packaging. EKI licenses such technology to the Company on a royalty-free basis pursuant to the License Agreement. In connection with the purchase, and pursuant to the terms of a letter agreement with EKI, the Company agreed to pay the seller of the technology $3,500,000 on or about December 31, 2003, which obligation is secured by a letter of credit. The Company's obligation to the seller of the technology will be reduced by 5% of the purchase price of any equipment purchased by EKI, the Company or its licensees or joint venture partners from the seller of the technology. The Company believes that once the line for the PolarCup EarthShell joint venture is operational, the equipment manufacturer will be able to bid on and supply manufacturing equipment to EarthShell licensees which will reduce the $3.5 million obligation. The Company believes that there will be a demand for more than $70 million in new equipment over the next 2 years, which will extinguish the obligation.

        In addition, the Company is required to pay $3,000,000 over the five-year period commencing January 1, 2004 if EKI, the Company or the Company's licensees or joint venture partners have not purchased, by December 31, 2003, at least $35,000,000 of equipment from the seller of the technology and EKI, the Company or the Company's licensees or joint venture partners make active use of the purchased technology. EKI has agreed to indemnify the Company to the extent the Company is required to pay any portion of this $3,000,000 obligation solely as a result of EKI's or its licensees' active use of such patents and related technology (other than use by the Company or its sublicensees).

Property and Equipment:

        The cost and accumulated depreciation of property and equipment at June 30, 2002 and December 31, 2001 consisted of the following:

 
  2002
  2001
 
Commercial Manufacturing Equipment              
  Owings Mills, Maryland   $ 10,000,000   $ 10,000,000  
  Goettingen, Germany     3,929,745     2,915,215  
  Other Construction in Progress     519,210     544,833  
   
 
 
      14,448,955     13,460,048  
Other Property and Equipment              
  Product Development Center     3,793,737     3,793,737  
  Office Furniture and Equipment     774,146     774,146  
  Leasehold improvements     571,361     571,361  
   
 
 
      5,139,244     5,139,244  
Total cost     19,588,199     18,599,292  

Less: accumulated depreciation and amortization

 

 

(5,598,887

)

 

(4,008,181

)
   
 
 
Property and equipment — net   $ 13,989,312   $ 14,591,111  
   
 
 


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

        Information contained in this Quarterly Report on Form 10-Q including "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

7



These statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," or "continue," or the negative thereof or other comparable terminology. Any one factor or combination of factors could cause the Company's actual operating performance or financial results to differ substantially from those anticipated by management that are described herein. Factors influencing the Company's operating performance and financial results include, but are not limited to, changes in the general economy, the availability of financing, governmental regulations concerning, but not limited to, environmental issues, and other risks and unforeseen circumstances affecting the Company's business and should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

Overview of Operations

        Organized in November 1992 as a Delaware corporation, EarthShell® Corporation (the "Company"), is engaged in the commercialization of composite material technology for the manufacture of foodservice disposable packaging designed with the environment in mind. EarthShell Packaging® is based on patented composite material technology (collectively, the "EarthShell Technology"), licensed on an exclusive, worldwide basis from EKI.

        The EarthShell Technology has been developed over many years in consultation with leading material scientists and environmental experts to reduce the environmental burdens of foodservice disposable packaging through the careful selection of raw materials, processes, and suppliers. EarthShell Packaging, including hinged-lid sandwich containers, plates, bowls, and cups, is primarily made from commonly available natural raw materials such as natural ground limestone and potato starch. The Company believes that EarthShell Packaging has comparable or superior performance characteristics and can be commercially produced and sold at prices that are competitive with comparable paper and plastic foodservice disposable packaging.

        Currently, the Company's strategic relationships include Sweetheart Cup Company Inc. ("Sweetheart") in Maryland, Huhtamäki Oyj, ("Huhtamäki") in Europe, Green Earth Packaging, Inc. ("GEP") in the U.S., and Green Packaging SDN BHD ("Green Packaging") in Malaysia, and E. I. DuPont de Nemours and Company ("DuPont") in the U.S. Although the Company is manufacturing and selling initial quantities of commercial product in cooperation with its strategic partners, the Company has not recorded any revenues from such sales since its inception, and proceeds from sales of hinged lid containers, plates, and bowls to date have been recorded as an offset to the cost of the manufacturing operations.

Comparison of the Three and Six Months Ended June 30, 2002, to the Three and Six Months June 30, 2001.

        Total Research and Development Expenses    Total research and development expenditures for the development of EarthShell Packaging increased $2.1 million to $11.2 million from $9.1 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, and decreased $.1 million to $4.3 million from $4.4 million for the three months ended June 30, 2002 compared to the three months ended June 30, 2001. The increase of $2.1 million for the six months ended June 30, 2002 compared to June 30, 2001 is primarily related to the operating costs of the Owings Mills facility.

        Total General and Administrative Expenses    Total general and administrative expenses decreased $1.5 million to $4.6 million from $6.1 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, respectively, and decreased $1.8 million to $2.1 million from $3.9 million for the three months ended June 30, 2002 compared to June 30 2001, respectively. For the six months ended June 30, 2002 compared to June 30, 2001 there was a $1.0 million decrease in salaries and related payroll expense, and a $.75 million decrease for legal expenses related to the settlement of the lawsuit with Novamont which occurred in the 2nd quarter of 2001. The Company

8



recognized cost increases of approximately $.25 million for such items as corporate insurance programs including major medical insurance and directors and officers insurance when comparing the six months ended June 30, 2002 to the six months ended June 30, 2001.

        Depreciation and Amortization Expense    Depreciation and amortization expense decreased $0.9 million to $1.6 million from $2.5 million for the six months ended June 30, 2002 compared with the six months ended June 30, 2001, and decreased $.4 million to $.8 million from $1.2 million when comparing the three months ended June 30, 2002 to June 30, 2001. The decrease in depreciation expense is attributable to the decrease in fixed assets as a result of write down of equipment to net realizable value during the fourth quarter of 2001.

Liquidity and Capital Resources at June 30, 2002

        Cash Flow.    The Company's principal use of cash for the six months ended June 30, 2002 was to fund operations for EarthShell Packaging. Net cash used in operations was $16.7 million for the six months ended June 30, 2002 and $16.3 million for the six months ended June 30, 2001. Net cash used in investing activities was $1.0 million and $1.6 million for the six months ended June 30, 2002 and 2001, respectively. Net cash provided by financing activities was $17.0 million and $14.9 million for the six months ended June 30, 2002 and 2001, respectively.

        Capital Requirements.    The Company expects to spend approximately $3.0 million in 2002 for capital expenditures related to manufacturing equipment for EarthShell Packaging. Through June 30, 2002 the Company has paid or accrued approximately $1.0 million in capital expenditures. The Company paid or accrued approximately $3.6 million in capital expenditures for the year ended December 31, 2001.

        Sources of Capital.    As part of the Company's initial public offering on March 27, 1998, the Company issued 10,526,316 shares of common stock, for which it received net proceeds of $206 million. On April 18, 2000 and January 4, 2001, the Company filed shelf registrations statements for 5 million and 15 million shares, respectively of the Company's common stock. During the years ended December 31, 2001 and December 31, 2000 the Company sold approximately 13.5 million and 4.5 million shares of common stock in negotiated transactions under such registration statements and received net proceeds from such sales of approximately $30.5 million and $10.5 million, respectively.

        In December of 2001 the Company filed a shelf registration statement that provides for the sale of up to $50 million of securities, including secured or unsecured debt securities, preferred stock, common stock, and warrants. These securities may be offered, separately or together, in distinct series, and in amounts, at prices and on terms to be set forth in the prospectus contained in the registration statement, and in subsequent supplements to the prospectus.

        From January 1, 2002 through June 30, 2002 the Company sold approximately 16.8 million shares of common stock in negotiated transactions under such registration statement and received net proceeds from such sales of approximately $16.7 million. During July 2002 the Company has raised an additional $2.9 million through sale of common stock.

        The Company's business plan calls for the transfer of operational and financial control of its manufacturing lines to its operating partners. The sale of equipment and machinery and related manufacturing assets may be a key source of funding for the Company in 2002. However, until the transfer of such assets occurs, the Company cannot be certain of the timing or amount, if any, it will realize from these transfers.

        Upon the successful transition of the manufacturing lines to its operating partners the Company expects to soon thereafter begin recognizing royalty revenues. Meanwhile, the Company is restructuring its operations to reflect the transfer of manufacturing and demonstration activities. This has resulted in

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a significant reduction in operating costs, which began to occur during the second quarter of 2002. The Company continues to sell equity in negotiated transactions using its shelf registration statements as it has in the past, and will continue to consider alternative financing opportunities to minimize the cost of capital to the Company. The Company believes that its existing cash, the financing provided through the sources of funding described, as well as new sources, will enable it to continue funding its operations over the remainder of the fiscal year. The Company cannot be certain, however, that funding commitments can be obtained on favorable terms, if at all.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

        Not applicable


Part II. Other Information

Item 1. Legal Proceedings

        Not applicable


Item 2. Changes in Securities

        Not applicable


Item 3. Defaults Upon Senior Securities

        Not applicable


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

        The Annual Meeting of Stockholders of the Company was held May 29th, 2002, and the following actions were taken:

        The Board of Directors was elected until the next Annual Meeting of Stockholders as follows: Essam Khashoggi, Simon K. Hodson, John Daoud, Layla Khashoggi, Howard J. Marsh, and George W. Roland.


Item 5. Other Information

        Not applicable


Item 6. Exhibits and Reports on Form 8-K

        (a)  Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto.

        (b)  The Company filed two reports on Form 8-K during the quarter ended June 30, 2002. Information regarding the items reported on is as follows:

Date

  Item Reported On
April 9, 2002   The Company announced the sale of over 4.0 million shares of stock through a financing transaction and the announcement of a Common stock purchase agreement with a select group of investors.

May 17, 2002

 

The Company entered into a Common Stock Purchase Agreement with private investors for the sale of 2,080,000 shares of the Company's common stock with aggregate proceeds to the Company of $1,040,000.

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Exhibit Index

 
   

10.52

 

Amendment #1 to Employment Agreement dated as of May 15th, 2002 by and between the Company and Vince Truant.

99.1

 

Certification of Chief Executive Officer

99.2

 

Certification of Chief Financial Officer

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Signature

        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.

    EARTHSHELL CORPORATION

Date: August 13, 2002

 

By:

 

/s/  
D. SCOTT HOUSTON      
D. Scott Houston
Chief Financial Officer

 

 

 

 

(Principal Financial and Accounting Officer and Duly Authorized Officer)

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QuickLinks

EARTHSHELL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K