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 June 30, 1998
__________TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-6088
EARTH SCIENCES, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-0503749
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
910 12th Street, Golden, Colorado 80401
(Address of principal executive offices) (Zip Code)
(303)279-7641
(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:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 21,890,144 Shares of
Common Stock, one cent par value outstanding as of August 10, 1998.
Transitional Small Business Disclosure Format: Yes______ ; No X
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FINANCIAL STATEMENTS
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1998
UNAUDITED
Assets (amounts in thousands)
Current assets:
Cash, and cash equivalents $ 273
Trade receivables, with no allowance for doubtful accounts 1,256
Inventories 827
Prepaid expenses and other 168
-----
Total current assets 2,524
Property, plant and equipment, at cost 22,255
Less accum. depreciation and amortization (5,537)
------
Net property and equipment 16,718
Excess of purchase price over fair value of assets acquired 2,437
------
Total Assets $21,679
======
Liabilities and Stockholders' Equity
Current liabilities:
Account payable $ 1,114
Accrued expenses 164
Billings in excess of costs on uncompleted contracts 77
Notes payable 277
Other current liabilities 260
-----
Total current liabilities 1,892
Long-term liabilities:
Extraction plant liability 4,850
Convertible debentures - related party 1,000
Other liabilities 594
-----
6,444
Stockholders' equity:
Common stock $.01 par value 218
Additional paid-in capital 23,912
Accumulated deficit (10,747)
Accumulated other comprehensive deficit (40)
------
Total stockholders' equity 13,343
------
Total Liabilities and Stockholders' Equity $21,679
======
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands, except shares and per share amounts)
3 Mos. 6 Mos. 3 Mos. 6 Mos.
NET REVENUES:
Sales $1,501 3,088 235 235
Other 93 117 51 91
----- ----- ---- ----
Total 1,594 3,205 286 326
COSTS AND EXPENSES:
Operating 1,484 3,218 316 442
General and administrative 971 1,826 467 604
Depreciation and amort. 203 374 87 126
----- ----- ---- ----
Total expenses 2,658 5,418 870 1,172
----- ----- ---- -----
OPERATING LOSS (1,064) (2,213) (584) (846)
OTHER INCOME (EXPENSE):
Interest expense (31) (1,085) (1,088) (1,284)
Minority interest in loss
of subsidiary 10 3 48 48
----- ----- ----- -----
(21) (1,082) (1,040) (1,236)
----- ----- ----- -----
NET LOSS (1,085) (3,295) (1,624) (2,082)
Other comprehensive loss, net
of tax - foreign currency
translation adjustment (39) (40) - -
----- ----- ----- -----
COMPREHENSIVE NET LOSS $(1,124) (3,335) (1,624) (2,082)
===== ===== ===== =====
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (.06) (.15) (.19) (.24)
===== ===== ===== =====
WEIGHT AVERAGE COMMON SHARES
OUTSTANDING 18,242,000 22,118,000 8,700,000 8,617,000
========== ========== ========= =========
- --------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Six Months Ended June 30, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands)
Accumulated deficit as of January 1 $ (7,452) (2,721)
Net loss for the period (3,295) (2,082)
Other comprehensive loss - foreign
currency translation adjustment (40) -
------- ------
Accumulated deficit as of June 30 $ (10,787) (4,803)
====== =====
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands)
Cash flows from operating activities:
Net loss $ (3,295) $ (2,082)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 374 126
Interest expense related to debt discount 1,027 1,232
Expenses paid with stock 118 23
Change in operating assets and liabilities (260) (340)
----- -----
Net cash used by operating activities (2,036) (1,041)
Cash flows from investing activities:
Collection on notes receivable - 50
Notes receivable funded - (50)
Capital expenditures (817) (2,350)
Purchase of investment in ADA - (400)
Net decrease (increase) in other assets
and liabilities 210 (1,040)
----- -----
Net cash used by investing activities (607) (3,790)
Cash flows from financing activities:
Payments on notes and long-term debt (500) -
Proceeds from issuance of common stock - 42
Proceeds from convertible debentures and
notes payable 3,084 4,695
----- -----
Net cash provided by financing activities 2,584 4,737
----- -----
Net decrease in cash and cash equivalents (59) (94)
Cash and cash equivalents at beginning of period 332 586
----- -----
Cash and equivalents at end of period $ 273 $ 492
===== =====
Supplemental Schedule of Cash Flow Information:
Cash payments for interest $ 27 $ 46
==== ====
Conversion of notes payable and debentures $ 9,188 $ 76
===== ====
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1998
(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 1997 Form 10-KSB.
(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. Registrant exercised its option to acquire the remaining 49%
interest in ADA on May 11, 1998 by issuance of 1,715,596 shares of Registrant's
common stock in exchange for all the outstanding stock of ADA-ES, Inc., a
Colorado corporation, whose only asset was the remaining 49% interest in ADA.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Actual events or results could
differ materially from those discussed in the forward-looking statements as a
result of various factors including those set forth below and in the
Registrant's 1997 Form 10-KSB.
Acquisition of ADA
A major purpose of Registrant's acquisition of ADA was to take advantage of what
management believes is that company's capability of capturing a significant
portion of the growing utility and industrial flue gas conditioning market. ADA
uses a non-toxic conditioner which offers both technical and economical
advantages over the hazardous chemicals currently being used. The process
utilizes purified phosphoric acid (PPA), which is produced at Registrant's
Calgary plant. Management research indicates that several hundred coal-fired
boilers may switch to low-sulfur coal by the year 2000 to conform to the 1990
Clean Air Act Amendments. Doing so creates the need to add new technology such
as that provided by ADA to remove the increased particulate emissions associated
with flue gases from low-sulfur coal.
Liquidity and Capital Resources
Registrant is seeking working capital and equipment financing in the amount of
approximately $1.5 million to fund increases in accounts receivable and
inventory, and equipment for improvements of quality in its phosphate products.
Discussions are underway with several asset-based lenders to provide such
financing. Such financing along with existing working capital are expected to
be sufficient to fund the planned growth in operations until positive cash flow
is achieved in Calgary and at ADA, which are both targeted for the end of 1998.
The achievement of positive cash flow at Calgary is dependent upon several
factors including continued improvement of product quality, success in marketing
phosphate products and meeting competition in the market place; the failure in
any of which could delay or frustrate such achievement. For ADA, the
achievement of positive cash flow is dependent upon the successful operation of
the unit currently installed at Wisconsin, resolution of treated ash usage in
cement and the air preheater blockage problems encountered at Mississippi, and
the signing of new contracts. Unsatisfactory operations at Wisconsin, poor test
results and/or failure to sign new contracts could likely delay or frustrate
such achievement.
5
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Lab tests and recent tests at a refinery have demonstrated the new product blend
ADA has recently introduced will, among other improvements, aid the use of
treated ash in cement, however, no full scale tests at a utility have yet been
conducted. Such a test is planned later in August. Additional funds may also
be required to fund expanded exploration activities in Venezuela. Along with
more traditional debt financing, Registrant is also evaluating private
placements of common stock and other equity placements to fund its current
requirements. Registrant received a net of $2.8 million from the issuance of
convertible debentures in the first quarter of 1998.
Registrant is funding the majority of cash costs of the Venezuelan diamond and
gold exploration activities. Exploration activities on CODSA 14 were terminated
when field work through June indicated that the diamond-bearing material present
on the concession was not sufficient to support a mechanized mining operation.
Registrant is in the process of applying for several concessions in Venezuela
which, at the earliest, are not expected to be granted until 1999 after the new
administration takes office. Exploration work on those concessions, if and when
they are granted, is anticipated to be met through existing working capital.
Registrant may raise the additional capital, if and when needed, through further
private placements of stock, convertible debentures and/or joint venture
arrangements, if appropriate.
Cash flow used in operations totaled $2,036,000 for the first six months of 1998
versus $1,041,000 for the same period in 1997. The increase is due to the start-
up nature of activities at both Calgary and ADA. Production at Calgary and
consolidation of ADA's results were both initiated after the first quarter of
1997. Cash flow from investing activities for the first six months of 1998
included capital expenditures of $817,000 and a net decrease inotherr asset and
liabilities of $210,000. Cash flow from financing activities in the first six
months of 1998 consisted of payments on notes payable and long-term debt of $500
,000 and proceeds from the issuance of convertible debentures and notes payable
of $3,084,000. Cash flow from investing activities for the same period in 1997
included collection and funding on notes receivable of $50,000, investment in
ADA of $400,000, a net increase in other assets and liabilities of $1,040,000
and capital expenditures of $2,350,000. Cash flow from financing activities for
the same period in 1997 included proceeds from the issuance of stock of $42,000
and proceeds from the issuance of convertible debentures of $4,695,000.
Results of Operations
Revenues from sales totaled $3,088,000 in the first six months of 1998 with
$1,895,000 of that amount from ADA and $1,193,000 from Calgary phosphate sales.
ADA's revenues were somewhat less than anticipated due to less than full-time
operation of the unit at Wisconsin, delay in the installation of the two units
at Mississippi and their only partial operation due to the treated ash usage and
air preheater problems noted above. Sales of phosphate products were also less
than targeted because of ADA's usage being less than expected and a less than
anticipated market share due to product quality levels that preclude sales in
certain significant markets. There were no significant phosphate chemical sales
or consolidated ADA sales in the first six months of 1997.
Operating expenses increased significantly in the first six months of 1998 as
compared to 1997 as significant expenses related to both Calgary phosphate
production ($1,828,000 of the increase) and ADA ($1,067,000 of the increase)
were not incurred in 1997. General and administrative expenses also rose
significantly in the first six months of 1998 as compared to 1997 as a result of
adding staff in Calgary for production ($372,000 of the increase), consolidation
of ADA's start up activities ($494,000 of the increase) and an increased
investor relations program ($350,000 of the increase).
Registrant's interest expense totaled approximately $1,084,000 for the first six
months of 1998 and $1,284,000 for the same period in 1997. Included in interest
expense for 1998 and 1997 are $1,027,000 and $1,232,000, respectively, in non-
cash charges representing the 25% discount from market related to the
convertible debentures issued in 1998 and 1997.
6
<PAGE>
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits to define years. Any of Registrant's computer
programs or imbedded hardware that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, Registrant determined that it will not be
necessary to modify or replace any significant portions of its equipment or
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Year 2000 Issue is not expected to have a material
impact on the operations of Registrant. Registrant does not expect to incur any
material expenses or costs related to the Year 2000 Issue.
Based on a review of the nature and quantity of transactions with significant
suppliers and large customers to determine the extent to which Registrant is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue, Registrant has concluded that it does not materially rely on third
parties' systems for the continuance of its operations. However, there can be
no guarantee that a failure to convert by another company, or a conversion that
is incompatible with Registrant's systems, would not have a material adverse
effect on Registrant. Registrant has determined that it has no exposure to
contingencies related to the Year 2000 Issue for products or services it has
sold.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities. See Items 1(a) of Registrant's 1997
Form 10-KSB for a description of the convertible debentures issued by Registrant
in January and February of 1998. The debentures were sold to a limited number
of accredited investors pursuant to the exemption provided by section 4(2) of
the Securities Act of 1933. As of June 30, 1998, $3,081,000 of such debentures
had been converted to 3,497,981 shares of Common stock of Registrant. Placement
fees totaling $246,000 in cash and 24,647 shares of stock were paid in
connection with the convertible debentures.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - No change from Item 13 of Registrant's 1997 Form 10-KSB.
Exhibit 27 - Financial Data Schedule (electronic filing only)
(b) Forms 8-K - A Form 8-K dated May 12, 1998 was filed reporting the
Registrant's acquisition of the remaining 49% interest in ADA Environmental
Solutions LLC through the issuance of approximately 1,715,000 of its common
shares.
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: August 13, 1998 /s/ Mark H. McKinnies
Mark H. McKinnies
President and Chief Financial Officer
7
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM REGISTRANT'S CONSOLIDATED FINANCIAL
STATEMENTS DATED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 273
<SECURITIES> 0
<RECEIVABLES> 1256
<ALLOWANCES> 0
<INVENTORY> 827
<CURRENT-ASSETS> 2524
<PP&E> 22255
<DEPRECIATION> 5537
<TOTAL-ASSETS> 21679
<CURRENT-LIABILITIES> 1892
<BONDS> 1000
0
0
<COMMON> 218
<OTHER-SE> 13343
<TOTAL-LIABILITY-AND-EQUITY> 21679
<SALES> 3088
<TOTAL-REVENUES> 3205
<CGS> 3218
<TOTAL-COSTS> 5418
<OTHER-EXPENSES> 1082
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1085
<INCOME-PRETAX> (3335)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3335)
<DISCONTINUED> 0
<EXTRAORDINARY> (3335)
<CHANGES> 0
<NET-INCOME> (3335)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
