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 September 30, 1997
__ TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to __________
Commission File Number: 0-6088
EARTH SCIENCES, INC.
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(Exact name of small business issuer as specified in its charter)
Colorado 84-0503749
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
910 12th Street, Golden, Colorado 80401
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(Address of principal executive offices) (Zip Code)
(303)279-7641
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reported 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:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of October 30, 1997: 10,351,726 Shares of Common Stock,
one cent par value.
Transitional Small Business Disclosure Format: Yes _____; No X
<PAGE>
FINANCIAL STATEMENTS
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, 1997
UNAUDITED
Assets (amounts in thousands)
Current assets:
Cash, and cash equivalents $ 317
Receivables 772
Inventories 733
Prepaid expenses and other 1,005
-----
Total current assets 2,827
Property, plant and equipment, at cost 20,088
Less accumulated depreciation and amortization (5,175)
------
Net property and equipment 14,913
Other assets 3,112
------
$ 20,852
======
Liabilities and Stockholders' Equity
Current liabilities:
Convertible debentures and notes payable $ 730
Accounts payable 275
Accrued expenses 129
-----
Total current liabilities 1,134
Long-term liabilities:
Extraction plant liability 9,382
Convertible debentures,
excluding current installments 7,184
Other liabilities 429
-----
16,995
Minority interest 157
Stockholders' equity
Common stock $.01 par value 97
Additional paid-in capital 10,982
Retained deficit (6,647)
Cumulative translation adjustments (1,865)
Treasury stock (1)
-----
Total stockholders' equity 2,566
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$ 20,852
======
See accompanying notes.
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996
UNAUDITED
1997 1996
Qtr. 9 Mos. Qtr. 9 Mos.
(amounts in thousands, except per
share and shares outstanding)
REVENUES:
Sales $ 591 826 - -
Royalty income - - 202 632
Other 11 102 42 73
--- --- --- ---
602 928 244 705
EXPENSES:
Cost of goods sold and
operating 1,004 1,446 121 298
Selling, general and
administrative 726 1,330 83 311
Interest expense 690 1,974 28 62
Depletion, depreciation
and amort. 121 247 59 176
----- ----- --- ---
2,541 4,997 291 847
Minority interest in loss of
subsidiary 95 143 - -
----- ----- --- ---
Net loss $(1,844) (3,926) (47) (142)
===== ===== === ===
Net loss per
common share $ (.21) (.45) (.01) (.02)
=== === === ===
Weighted average common
shares outstanding 8,896,000 8,732,000 7,607,000 6,671,000
========= ========= ========= =========
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Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Nine Months Ended September 30, 1997 and 1996
UNAUDITED
1997 1996
(amounts in thousands)
Retained deficit as of January 1 $ (2,721) (2,713)
Net loss for the period (3,926) (142)
----- -----
Retained deficit
as of September 30 $ (6,647) (2,855)
===== =====
See accompanying notes.
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
UNAUDITED
1997 1996
(amounts in thousands)
Cash flows from operating activities:
Net loss $(3,926) (142)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depletion, depreciation and amortization 247 176
Expenses paid with stock 23 -
Interest expense related to debt discount 1,801 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables (469) 70
Inventories (712) -
Other assets (843) (345)
Purchase of marketable securities - (714)
Sale of marketable securities 1,135 -
Increase (decrease) in:
Accounts payable 73 82
Other liabilities 34 -
----- ---
Net cash used by operating activities (2,637) (873)
Cash flows from investing activities:
Collection on notes receivable 50 22
Notes receivable funded (50) (70)
Excess of cash over net assets paid
in acquisition of subsidiary (1,503) -
Capital expenditures (2,857) (253)
----- ---
Net cash used in investing activities (4,360) (301)
Cash flow from financing activities:
Proceeds from issuance of common stock 42 1,089
Proceeds from convertible debentures 6,685 900
----- -----
Net cash provided by financing activities 6,727 1,989
Increase (Decrease) in cash (270) 815
Cash and cash equivalents at beginning of period 586 262
--- ---
Cash and equivalents at end of period $ 316 1,077
=== =====
See accompanying notes.
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1997
(1) General
The accompanying consolidated financial statements were prepared in accordance
with generally accepted accounting principles and reflect all adjustments
which are, in the opinion of management, necessary for fair representation of
the financial results for the interim periods shown. Such statements should
be considered in conjunction with Registrant's 1996 Form 10-KSB, as amended.
(2) Acquisition of ADA Environmental Solutions
On April 30, 1997, Registrant acquired a 51% interest in ADA Environmental
Solutions LLC ("ADA") through the purchase of an additional 46.2% interest
from ADA. Registrant had previously purchased a 4.8% interest in ADA in
February 1997 by payment to ADA of $400,000. The 46.2% interest was purchased
by payment to ADA of $500,000 and a non-interest bearing promissory note in
the amount of $1,600,000. As of September 30, 1997 the note has been reduced
to $895,000. Registrant also obtained an option to acquire the remaining 49%
interest in ADA exercisable for a six month period commencing May 1, 1998.
The option is exercisable by issuance of 1,715,600 shares of Registrant's
common stock in exchange for all the outstanding stock of ADA-ES, Inc., a
Colorado corporation, whose only asset is the remaining 49% interest in ADA.
The operating agreement of ADA provides that a member's percentage interest
for purposes of voting and ownership of assets is to be based on the ratio of
its capital contributions to the total capital contributions in ADA. In
accordance with such provisions, Registrant has an 83% voting and asset
ownership interest in ADA, but a 51% interest in ADA's net profits/losses.
The acquisition has been accounted for using the purchase method and the
accompanying consolidated financial statements include the results of ADA from
April 30, 1997. The following pro forma amounts show the results of
operations as if the above described acquisition had occurred on January 1,
1997. ADA had no significant operations for the 1st nine months of 1996.
Revenues $ 1,168,000
Net loss ($ 4,200,000)
Loss per share ($ .48)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Management believes that existing working capital and proceeds from recent
sales of convertible debentures are sufficient to fund the conclusion of start-
up activities and the achievement of routine production at the Calgary
purified phophate plant. In October, Registrant sold convertible debenture
totaling $2.1 million and exercised the option it held to restructure the
Extraction Plant Liability by payment of $1.15 million (the "Yankee Option").
The remaining funds will provide working capital for ADA and Calgary
operations. Positive cash flow from Registrant's planned consolidated
operations are anticipated to be achieved in by the end of the 4th quarter of
1997. The achievement of such positive cash flow is dependent upon several
factors including successful commercialization of the phosphate purification
<PAGE>
process in Calgary and ADA's flue gas conditioning technology, success in
marketing those products, and the effect of competition, any of which could
delay or frustrate such achievement. Additional funds may be required to meet
the further obligations associated with the ADA acquisition, further
exploration work on the Cerro Gordo property, and any expanded exploration
activities in Venezuela. Private placements of common stock, convertible
debentures and bank borrowings may be evaluated to fund such requirements.
Since the beginning of 1997, Registrant has issued $8,785,000 of convertible
debentures and received net proceeds of $7,906,000.
The Calgary facility is currently at the end of the start-up phase for the
production of purified phosphate products, and has demontrated the capability
of producing well above the planned initial annual production rate of 18,400
tons of product. Sales of products are increasing as market acceptance is
being achieved and product quality is improving.
ADA has received purchase orders for the first three full-scale commercial
applications of its proprietary air pollution control technology. Mississippi
Power and Wisconsin Power and Light have ordered units to be installed in the
November and December of this year. Based on the success of recent full-scale
demonstrations, several other utilities have requested bids. Contracts with
the above mentioned companies are expected to generate revenues of
approximately $3,000,000 in 1998.
Registrant is funding the majority of cash costs of the Venezuelan gold
exploration activities which have been minor thus far in 1997. Activities
planned on the existing contract and on those concessions expected to be
acquired in the future can be met through existing working capital. Registrant
plans to raise the additional capital, if and when needed, through further
private placements of stock, convertible debentures and/or joint venture
arrangements, if appropriate.
Cash flows from operations totaled a deficit of $2,637,000 for the first nine
months of 1997 as compared to a deficit of $ 873,000 for the same period in
1996. Cash flows from investing activities included funding of a note
receivable of $50,000, capital expenditures of $2,857,000, and payment in
excess of net assets associated with the ADA acquisition of $1,503,000. Cash
flows from financing activities include proceeds from issuance of common stock
of $42,000 and proceeds from convertible debentures of $6,685,000.
Results of Operations
Registrant recognized sales totaling $826,000 for the 1st nine months of 1997
from production at Calgary and ADA. No such amounts were recognized in 1996.
Registrant recognized $632,000 in revenue from the production and sale of gold
and silver from its royalty in the San Luis gold mine in the first nine months
of 1996. Production from the mine ended in November 1996. Other income
increased from $73,000 in the 1st nine months of 1996 to $102,000 in the same
period in 1997 and includes rental income, which increased slightly from 1996
due to increased charges to tenants, interest income earned from investment of
funds on hand, and $30,000 from settlement of a legal action.
Cost of goods sold and operating expenses as well as selling, general and
administrative expenses increased significantly in the 1st nine months of 1997
as compared to 1996 as the result of addition of ADA, increased staff and
activities related to the start-up of the Calgary facility and Registrant's
increased investor relations activity.
<PAGE>
Interest expense recognized in 1997 includes a $1,801,000 non-cash charge
representing the discount from market price the holders of certain convertible
debentures may recognize upon conversion of their debt to shares of
Registrant's common stock. An additional non-cash charge of $768,000 will be
recognized in the fourth quarter as a result of additional sales of
convertible debentures. Management of Registrant believes that the proceeds
received from the convertible debentures and the discount offered on
conversion of the debt is a fair representation of the net proceeds the
Registrant would otherwise expect to receive from an equity offering of a like
number of shares after consideration of all associated commissions, costs and
expenses.
As a result of exercising the Yankee Option, Registrant will recognize an
extraordinary gain of $3.3 million in the fourth quarter of 1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reported in Item 3 of Registrant's 1996 Form 10-KSB, as amended.
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) Exhibits - No change from Item 13 of Registrant's 1996 Form 10-KSB,
as amended and Item 7 of Registrant's April 30, 1997 Form 8-K.
Exhibit 27 - Financial Data Schedule (electronic filing only)
(b) Forms 8-K - Registrant filed a Form 8-K dated April 30, 1997
reporting the acquisition of an interest in ADA Environmental Solutions LLC
("ADA"). Included in that filing were the December 31, 1996 audited financial
statements of ADA.
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.
Earth Sciences, Inc.
Registrant
Date: November 11, 1997 /s/ Mark H. McKinnies
Mark H. McKinnies
President and Chief Financial
Officer
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