U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

_____________________________________________

FORM 10-QSB

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2004

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

Commission File Number 0-12914

_________________________________________________

ENVIRONMENTAL ENERGY SERVICES, INC.

(Exact name of small business issuer as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)
43-1953030

(IRS Employer Identification No.)

205 S. Bickford Avenue, El Reno, Oklahoma 73036

(Address of Principal Executive Offices)

(405) 262-0800

(Issuer's telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 __
APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: as of May 14, 2004, the Registrant had outstanding 354,083,631 shares of its Common Stock, $0.001 par value, which excludes certain shares issued pursuant to the Nikko Action which have not been recognized as valid by the Registrant. See "Part I, Item 1, Notes to Financial Statements, Note 5."

 
**Environmental Energy Services, Inc. and Subsidiaries

FORM 10-QSB REPORT INDEX**
 
Page No.
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
 
Consolidated Balance Sheet as of March 31, 2004
3
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
4
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
5
 
Notes to Unaudited Consolidated Financial Statements for the Three Months Ended March 31, 2004
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
10
Item 3. Controls and Procedures
11
PART II. OTHER INFORMATION
11
Item 1. Legal Proceedings
11
Item 2. Changes in Securities
11
Item 3. Defaults on Senior Securities
11
Item 4. Submission of Matters to a Vote of Security Holders
11
Item 5. Other Information
12
Item 6. Exhibits and Reports on Form 8-K
12
Signatures
12**PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Environmental Energy Services, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEET

As of March 31, 2004 (Unaudited)**

ASSETS
 
Current Assets:
 
Cash
2,650
Total current assets
2,650
 
 
Fixed Assets:
 
Total property, plant and equipment
0
 
 
Other Assets:
 
Marketable securities
528,062
Investment in Private Companies
90,000
Investment in Royalty Agreement, net of amortization
119,235
Investment - Gas and Oil Leases
550,000
 
 
Total other assets
1,287,297
 
 
Total assets
$ 1,289,947
 
 
LIABILITIES AND STOCKHOLDERS EQUITY
 
 
 
Current liabilities:
 
Accounts payable, accrued interest, and other liabilities
$ 108,829
Total current liabilities
108,829
 
 
Long-term debt and deferred items
0
 
 
Stockholders' equity:
 
Common stock, $0.001 par value; 500,000,000 shares authorized; 354,083,631shares issued and outstanding
354,084
Additional paid-in capital
90,404,766
Unrealized gain/loss on marketable securities
(522,279)
Accumulated Deficit
(89,055,453)
Total Stockholders' Equity
1,181,118
 
 
Total Liabilities and Stockholders' Equity
$ 1,289,947

 

 

The accompanying notes are an integral part of these financial statements.
** 

Environmental Energy Services, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2004 and 2003

(Unaudited)**

 **Three Months ended March 31
 **2004**2003
 
 
 
Revenues
$ 214,640
$ 0
 
 
 
Expenses
 
 
Selling, general and administrative
192,075
223,768
Amortization
15,556
15,556
Total Expenses:
207,631
239,324
 
 
 
Loss from operations
7,009
(239,324)
 
 
 
Other income (expense)
 
 
Interest expense, net
0
(19,335)
Issuance of Warrants
0
7,107
 
 
 
Total other income (expense)
0
67,772 
 
 
 
Net Income (Loss)
7,009
(171,552)
 
 
 
Unrealized Gain (Loss)
(43,333)
60,964
 
 
 
Comprehensive Income (loss)
($ 36,324)
($ 110,588)
 
 
 
Earnings per share:
 
 
Basic
0.00
0.00
Diluted
0.00
0.00
 
 
 
Weighted average number of common shares outstanding:
 
 
Basic
354,083,631
291,579,631
Diluted
529,564,631
N/A

The accompanying notes are an integral part of these financial statements.
**Environmental Energy Services, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2004 and 2003

(Unaudited)**
**INCREASE (DECREASE) IN CASH**2004**2003
 
 
 
Cash flow from operating activities:
 
 
Net income (loss)
(36,324)
(110,588)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization
15,556
15,556
Stock issued in lieu of cash payment
0
200
Unrealized (gain) loss on marketable securities
43,333
(87,107)
Changes in assets and liabilities:
 
 
Accts payable, accrued interest and other liabilities
36,824
242,871
 
 
 
Net cash provided by (used in) operating activities
59,389
(32)
 
 
 
Cash flow from investing activities
 
 
Investment in marketable securities
(60,000)
0
 
 
 
Net cash provided by (used in) investing activities
(60,000)
0
 
 
 
Cash flows from financing activities:
 
 
Repayment of debt
(50,000)
0
 
 
 
Net cash provided by (used in) financing activities:
(50,000)
0
 
 
 
Net increase (decrease) in cash
(50,611)
(32)
 
 
 
Cash and cash equivalents at beginning of period
53,261
89
 
 
 
Cash and cash equivalents at end of period
2,650
57
 
 
 
Cash paid for interest
0 
0

 

The accompanying notes are an integral part of these financial statements.
**Environmental Energy Services, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2004 and 2003

(Unaudited)**
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS

 **2004**2003
Common stock issued for services and settlements
$ 0
$ 200** 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements
**Environmental Energy Services, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004 (Unaudited)
Basis of Presentation

The accompanying unaudited financial statements have been prepared by Environmental Energy Services, Inc. (the "Company") pursuant to the rules and regulations of the U. S. Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. This Form 10-QSB Report should be read in conjunction with the Form 10-KSB Report of Environmental Energy Services, Inc. for the fiscal year ended December 31, 2003, as filed with the U. S. Securities and Exchange Commission.
The results of operations for the period ended March 31, 2004 are not indicative of the results that may be expected for the full year. 
Summary of Significant Accounting Policies

Nature of Operations. Since June 2001, the Company has not conducted active operations, but has announced its intention to enter the business of acquiring, developing and operating coal, gas and other energy related assets in Alaska. As of March 31, 2004, the Company has not begun active operations in these industries.

Amortization. Amortization was calculated by the straight-line method based on the following useful lives:

Royalty agreement - 
6 years

Depreciation and amortization expense for the quarters ended March 31, 2004 and 2003 was $15,556 and $15,556, respectively. 

Concentration of Credit Risk. The only remaining assets of the Company are illiquid investments in Startec, Inc., Wastech, Inc., investments in illiquid private companies and an interest in a royalty agreement. The Company has not received its certificates representing the investment in Startec, Inc. and may be forced to take legal action for performance.

Use of 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

Liquidity. As shown in the accompanying financial statements, the Company incurred net operating income (losses) of $7,009 and ($171,552) during the quarters ended March 31, 2004 and 2003, respectively. As of March 31, 2004, the Company's assets exceed its liabilities by $1,181,118. However, a majority of the net assets are in the form of illiquid investments.

As of March 31, 2004 the Company had no active operations. However, the Company receives quarterly royalty payments in an amount that is sufficient to satisfy routine managerial, accounting and legal services, as well as miscellaneous general and administrative expenses.

Earnings Per Share. The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," specifying the computation, presentation and disclosure requirements of earnings per share information. Basic earnings per share has been calculated based upon the weighted average number of common shares outstanding. Diluted net income per share is calculated based on the weighted average number of common shares and common stock equivalents outstanding during the year. 

Advertising. The Company expenses advertising costs as incurred. There was no advertising expense for the quarters ended March 31, 2004 and 2003.

Marketable Securities. The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement requires securities, which are available for sale to be carried at fair value, with changes in fair value recognized as a separate component of stockholders' equity. As a result of disputes surrounding the Company's investment in Startec, Inc., as well as trading restrictions and thin trading activity on shares of Startec, Inc. and Wastech, Inc., the Company has classified the securities as long-term assets.

Comprehensive Income. The Company has adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The effect of SFAS 130 is reflected in these financial statements. 
Accounts Payable, Accrued Interest and Other Liabilities

Accounts payable, accrued interest and other liabilities at March 31, 2004, consist of the following:

Trade payables
81,829
Interest
27,000
 
$ 108,829Long-Term Debt and Convertible Debentures

Esquire Trade and Finance, Inc. and Stonestreet, L.P. sued the Company in the Supreme Court of New York to recover judgment as a result of the Company's default under its 10% Senior Secured Convertible Debentures, and received judgments in the amount $384,250 and $192,125, respectively. The Company did not defend the action, and default judgments for $384,250 and $192,125 were entered in favor of Esquire and Stonestreet, respectively. The default judgments provide that each judgment bears interest at the post judgment rate in New York, which is 9% per annum. In 2003, Company entered into an amended satisfaction agreement to settle and compromise the Company's obligation under the judgments for $250,000, payable $100,000 at the time of execution of the agreement, and three installments of $50,000 payable in August 2003, November 2003 and February 2004. In February 2004, the Company made the final payment under the satisfaction agreement, and as a result the plaintiffs have provided the Company with a satisfaction of the judgment.
Commitments and Contingencies

Pursuant to an Agreement dated June 27, 2002, the Company agreed to issue an investor an additional 25,000,000 shares common stock in the event the Company was not able to raise an additional $950,000 by August 31, 2002 in order to make a final payment on the Company's purchase of certain gas leases. The Company failed to raise the funds, and did not made the final payment. The Company agreed to issue the shares in the second quarter of 2004.

Global Convertible Notes

The Company is obligated to issue shares of its common stock on certain notes in the original principle amount of $1,590,000 originally issued by Global Eco-Logical Services, Inc., although the Company is not obligated to pay the debt itself. The conversion price is the market price of the Company's common stock at the time of conversion, subject to a minimum conversion price of $0.10 per share, which is significantly greater than the current market price of the common stock at this time. 

Nikko Action and Series A and B Debentures. 

The Company is the successor in a holding company reorganization effected by WasteMasters, Inc. ("WasteMasters") in 2001. Prior to the holding company reorganization, WasteMasters was indebted on its Series A and Series B Convertible Debentures (the "Debentures"), which had an outstanding principle balance of $2,986,000 at December 31, 1997, plus accrued interest of approximately $323,116. In January 1998, WasteMasters was sued by four corporations purporting to be the holders of the Debentures to recover judgment on the amount due on the Debentures. The lawsuit was styled Nikko Trading of American Corporation, et al. v. Environmental Energy Services, Inc., pending in the United States District Court for the Northern District of Texas, Dallas Division, Civil Action No. 3-98CV0048-D (the "Nikko Action"). Prior to filing an answer, WasteMasters and the plaintiffs entered into a Compromise Settlement Agreement (the "Settlement Agreement"), which was entered as a Consent Judgment and filed February 5, 1998 in the with the Court in the Nikko Action. Pursuant to the Settlement Agreement, WasteMasters issued approximately 63,000,000 shares of restricted Common Stock in exchange for cancellation of the Debentures, accrued interest and penalties. The Debenture holders also received warrants for the purchase of up to 100,000,000 restricted shares of WasteMasters' common stock exercisable in specified quantities and time periods over the next two to five years at an average price in excess of $1.50 per share. 

On December 16, 1998, Stewart Rahr, a shareholder of WasteMasters, filed a motion to intervene in the Nikko Action. Mr. Rahr requested that the Consent Judgment entered in Nikko Action be vacated, and that Mr. Rahr be granted leave to defend the action derivatively on behalf of WasteMasters. On February 28, 2000, the Honorable A. Joe Fish, entered findings of fact and conclusions of law in support of two preliminary injunction orders from April 5, 1999 and April 8, 1999. Subsequently, on March 14, 2000, Judge Fish entered an Order setting aside the Consent Judgment and dismissing the Nikko Action for lack of subject matter jurisdiction. The court's ruling was based on findings that the Consent Judgment was procured as a result of fraud and collusion between Sterritt (who was the Company's chairman and chief executive officer at the time), the plaintiffs in the Nikko Action (who the Court found were secretly controlled by Sterritt and his family) and Edward Roush (counsel for the plaintiffs in the Nikko Action, and attorney for the Sterritt family). Because of the Court's March 14, 2000 ruling, WasteMasters does not consider any shares issued pursuant to the Consent Judgment as valid. The ruling effects 63,165,066 shares of WasteMasters' outstanding common stock purportedly issued upon conversion of the debentures and 3,800,000 shares of common stock issued purportedly upon the exercise of warrants issued pursuant to the Consent Judgment.

The Company has not assumed liability under the Debentures. However, pursuant to the holding company reorganization effected in June 2001, the Debentures are convertible into shares of the Company's common stock on the same basis that they were formerly convertible into shares of common stock of WasteMasters. Therefore, the Company was contingently liable to issue shares of its common stock upon conversion of the Debentures. In addition, to the extent any shares issued pursuant to the Consent Judgment are held to be valid, the Company would be obligated to recognize those shares as outstanding shares of the Company pursuant to the terms of the holding company reorganization.

On August 8, 2000, Continental filed an adversary proceeding in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, against the original plaintiffs in the Nikko Action. In the adversary proceeding, Continental obtained a declaratory judgment that it was the owner of the Debentures and any shares of common stock of WasteMasters issued in conversion or settlement of the Debentures. By a Transfer and Assignment dated July 30, 2002, Continental transferred to a third party any interest it had in the Debentures, and any shares of common stock issued or issuable on conversion of the Debentures, including any rights Continental held under the declaratory judgment described above. The third party then transferred to the Company any interest in the Debentures, the shares issued or issuable on conversion of the Debentures and the declaratory judgment. Therefore, the Company is no longer contingently liable to issue shares of common stock upon conversion of the Debentures, and the Company's only contingent liability with respect to the Debentures is with respect to any shares originally issued pursuant to the Consent Judgment that are held by bona fide purchasers for value. The Company believes that from 10 to 14 million shares are held by person who would qualify as bona fide purchasers for value. 
Issuance of Common Stock and Warrants

At December 31, 2003, the Company's authorized capital stock was 495,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share. On that date, the Company had outstanding 354,083,631 shares of Common Stock and no shares of Preferred Stock. 

During the first quarter of 2004, the Company did not issue any of its common shares.
Related Party Transactions

In 2003, the Company entered into an agreement with GD Management Services, Inc., an Oklahoma corporation, to pay $50,000 per quarter for certain management and overhead services. The Company's obligation to GD Management Services, Inc. is secured by the Company's interest in a technology royalty. GD Management Services, Inc. is owned by Greg Holsted, the Company's chief executive officer, A. Leon Blaser, the Company's chief executive officer, and Douglas Holsted, who performs accounting services for the Company. All of the owners of GD Management Services, Inc. are directors of the Company. In 2004, the Company amended the agreement to increase the management fee to $100,000 per quarter, and to add the services to the Douglas Holsted to the services provided by GD Management Services, Inc. under the agreement. 
**Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.**
Results of Operations

The Company's revenues in the three months ended March 31, 2004 were $214,640 as compared to $0 in the prior year's quarter. The Company's revenues results from payments due under a royalty agreement that lasts through the first quarter of 2008. 

The Company reported a loss from operations during the three months ended March 31, 2004 of ($36,324) as compared to a loss from operations of ($110,588) for the three months ended March 31, 2003. The Company reported a smaller net operating loss as compared to the prior period as a result of royalty income that it began receiving in the second quarter of 2003.

During the three months ended March 31, 2004, the Company had a net income of $7,009, as compared to a net loss of ($171,552) in the three months ended March 31, 2003. The turnaround in the current quarter was the result primarily of royalty income not previously received. 

Liquidity and Sources of Capital

The Company's consolidated balance sheet as of March 31, 2003 reflects cash and current assets of $2,650 and a working capital deficit of ($106,179). The Company's liabilities consist primarily of accounts payable that will be paid out of the second quarter's royalty payment. 

As of March 31, 2004, the Company had no active operations. However, its royalty provides it with sufficient cash to meet its general and administrative expenses for the foreseeable future.
**Item 3. Controls and Procedures.**
The Company believes that it has sufficient internal controls and procedures for a company that is not engaged in active operations. When and if the Company acquires or commences active operations, the Company anticipates instituting internal controls and procedures sufficient for the nature and scale of operations at that time. 
**PART II. OTHER INFORMATION.

Item 1. Legal Proceedings.**
The Company is a party to legal proceedings that are discussed in Item 3 of its Annual Report on Form 10-KSB for the year ended December 31, 2003, which is hereby incorporated by reference. 

W.T. "Skip" Leake and Kathy Leake v. WasteMasters, Inc. and Securities Transfer Corporation: On or about September 20, 2000, the plaintiffs filed a declaratory judgment suit against the Company and, Securities Transfer Corp., the Company's transfer agent, in the District Court of Tarrant County, Texas. The suit alleges that the plaintiffs are the rightful owners of 4,000 shares of Company common stock, which the plaintiffs allege they obtained in payment of legal services. The Company considered the shares cancelled since they were originally issued pursuant to the Nikko Action. However, because of the decline in the Company's stock price, the Company determined that the amount in controversy did not warrant the cost of defending the action, and notified its transfer agent that it should consider the shares valid and permit their transfer under Rule 144(k). The plaintiffs amended the action to also seek declaratory relief as to an additional 8,333,080 shares that one of the plaintiffs had seized to satisfy a judgment against Edward W. Roush, Jr. Although the shares were not titled in Mr. Roush's name, Mr. Roush contended that he owned the shares. The Company also considered those shares cancelled since they were originally issued pursuant to the Nikko Action. On March 22, 2004, the court announced that it would issue a summary judgment in favor of the plaintiffs on its claim for declaratory relief as to those shares. The Company believes the court's decision was incorrect, and plans to move for reconsideration or appeal the court's ruling.
**Item 2. Changes in Securities.**
None
**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) Furnish the exhibits required by Item 601 of Regulation S-B.

Exhibit Number
Description and Incorporation by Reference
31.1
Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer
31.2
Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.

None.
**SIGNATURES**
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
ENVIRONMENTAL ENERGY SERVICES, INC.
Date: May 14, 2004
/s/ Greg Holsted
 
By: Greg Holsted, Chief Financial Officer********************