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, 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 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 the latest practicable date: 21,705,185 Shares of Common
Stock, one cent par value outstanding as of May 11, 1998.
Transitional Small Business Disclosure Format: Yes______ ; No X
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FINANCIAL STATEMENTS
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 1998
UNAUDITED
Assets (amounts in thousands)
Current assets:
Cash, and cash equivalents $ 1,096
Trade receivables, with no allowance
for doubtful accounts 1,106
Inventories 627
Prepaid expenses and other 407
-----
Total current assets 3,236
Property, plant and equipment, at cost 21,072
Less accum. depreciation and amortization (5,394)
------
Net property and equipment 15,678
Excess of purchase price over fair value of assets
acquired 1,412
------
Total Assets $20,326
======
Liabilities and Stockholders' Equity
Current liabilities:
Account payable $ 761
Accrued expenses 115
Billings in excess of costs on uncompleted contracts 150
Notes payable 142
Other current liabilities 329
-----
Total current liabilities 1,497
Long-term liabilities:
Extraction plant liability 4,850
Convertible debentures:
Related party 1,000
Other 133
Other liabilities 607
-----
6,590
Minority interest in consolidated subsidiary 9
Stockholders' equity:
Common stock $.01 par value 199
Additional paid-in capital 21,694
Accumulated deficit (9,663)
------
Total stockholders' equity 12,230
------
Total Liabilities and Stockholders' Equity $20,326
======
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands)
Net Revenues:
Sales $ 1,587 -
Other 24 40
----- ---
Total revenues 1,611 40
Cost and Expenses:
Operating 1,734 126
General and administrative 856 137
Depreciation and amortization 171 39
----- ----
Total expenses 2,761 302
----- ----
Operating Loss (1,150) (262)
Other Income (Expense):
Interest expense (1,054) (196)
Minority interest in earnings
of subsidiary (7) -
----- ----
(1,061) (196)
----- ----
Net loss $ (2,211) (458)
===== ====
Net loss per common share $ (.14) (.05)
==== ====
Weighted average common
shares outstanding 15,335,000 8,537,000
========== =========
- ------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Three Months Ended March 31, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands)
Accumulated deficit as of January 1 $ (7,452) (2,721)
Net loss for the period (2,211) (458)
------ -----
Accumulated deficit as of March 31 $ (9,663) (3,179)
===== =====
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands)
Cash flows from operating activities:
Net loss $ (2,211) $ (458)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 171 39
Interest expense related to debt discount 1,027 188
Expenses paid with stock 53 -
Change in operating assets and liabilities 13 180
---- ----
Net cash used by operating activities (947) (51)
Cash flows from investing activities:
Notes receivable funded - (50)
Capital expenditures (596) (684)
Purchase of investment in ADA - (400)
Increase in other assets (27) (587)
---- -----
Net cash used by investing activities (623) (1,721)
Cash flows from financing activities:
Payments on notes and long-term debt (500) (2)
Proceeds from issuance of common stock - 42
Net proceeds from convertible debentures 2,834 2,309
----- -----
Net cash provided by financing activities 2,334 2,349
Net increase in cash and cash equivalents 764 577
Cash and cash equivalents at beginning of period 332 586
---- ----
Cash and equivalents at end of period $1,096 $1,163
===== =====
Supplemental Schedule of Cash Flow Information:
Cash payments for interest $ 25 $ 4
===== =====
Conversion of notes payable and debentures $9,055 $ 38
===== =====
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 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 also obtained an option to acquire the remaining 49%
interest in ADA exercisable for a six month period commencing May 1, 1998.
Notice of the option exercise was given on May 1, 1998 and the option was
exercised 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 is 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
Management believes that existing working capital and recent private placements
of convertible debentures are sufficient to fund the planned growth in
operations until positive cash flow is achieved in Calgary and at ADA, which are
both anticipated during 1998. The achievement of such positive cash flow is
dependent upon several factors including continued improvement of product
quality in Calgary, 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 ongoing operation of the three units currently
installed at Wisconsin and Mississippi; unsatisfactory operations at any of
which could delay or frustrate such achievement.. Additional funds may be
required to fund expanded exploration activities in Venezuela. Private
placements of common stock, convertible debentures and bank borrowings may be
evaluated to fund such requirements. Registrant received a net of $2.8 million
from the issuance of convertible debentures in the first quarter of 1998.
5
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Based on current estimates, the Calgary facility will require approximately CDN.
$500,000 (U.S. $350,000) to finalize modification for the production of food
grade phosphoric acid. Registrant expects to finance those requirements from
existing working capital and bank borrowings.
Registrant is funding the majority of cash costs of the Venezuelan diamond and
gold exploration activities. Activities planned on CODSA 14, the existing SAMI
contract and on those concessions expected to be acquired in the future are
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 $947,000 for the first quarter of 1998
versus $51,000 for the same period in 1997. The increase is due to production at
Calgary and consolidation of ADA's results which were both initiated after the
first quarter of 1997. Cash flow from investing activities for the first quarter
of 1998 included capital expenditures of $596,000. Cash flow from financing
activities in the first quarter of 1998 consisted of payments on notes payable
and long-term debt of $500,000 and net proceeds from the issuance of convertible
debentures of $2,834,000. Cash flow from investing activities for the same
period in 1997 included funding on notes receivable of $50,000, investment in
ADA of $400,000, increase in other assets of $587,000 and capital expenditures
of $684,000. Cash flow from financing activities for the same period in 1997
includes proceeds from the issuance of stock of $42,000 and proceeds from the
issuance of convertible debentures of $2,309,000.
Results of Operations
Revenues from sales totaled $1,587,000 in the first quarter of 1998 with
$1,105,000 of that amount from ADA and $481,000 from Calgary phosphate sales.
ADA's revenues were somewhat less than anticipated due to the partial operation
of the unit at Wisconsin and delay in the installation of the two units at
Mississippi. Sales of phosphate products were also less than targeted because of
the ADA delays and corrosion experienced in the Calgary facility that delayed
the routine production of acceptable technical grade PPA. There were no
phosphate chemical sales or consolidated ADA sales in the first quarter of 1997.
Operating expenses increased significantly in the first quarter of 1998 as
compared to 1997 as expenses related to both Calgary phosphate production
($826,000 of the increase) and ADA ($749,000 of the increase) were not incurred
in 1997. General and administrative expenses also rose significantly in the
first quarter of 1998 as compared to 1997 as a result of adding staff in Calgary
for production ($151,000 of the increase), consolidation of ADA's start up
activities ($301,000 of the increase) and an increased investor relations
program ($225,000 of the increase).
Registrant's interest expense totaled approximately $1,054,000 for the first
quarter of 1998 and only $196,000 for the same period in 1997. Interest expense
includes a total of approximately $11,000 in 1998 and $2,000 in 1997 from the
consolidation of the Canadian subsidiary's and ADA's results. Included in
interest expense for 1998 and 1997 are $1,027,000 and $188,000, respectively, in
non-cash charges representing the 25% discount from market related to the
convertible debentures issued in 1998 and 1997.
6
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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 March 31, 1998, $2,981,000 of such debentures
had been converted to 3,404,822 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 - None.
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: May 14, 1998 /s/ Mark H. McKinnies
--------------------------
Mark H. McKinnies
President and Chief Financial Officer
7
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