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, 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: 21,893,739 Shares of
Common Stock, one cent par value outstanding as of November 6, 1998.
Transitional Small Business Disclosure Format: Yes______ ; No X
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FINANCIAL STATEMENTS
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, 1998
UNAUDITED
Assets (amounts in thousands)
Current assets:
Cash, and cash equivalents $ 451
Trade receivables, net of allowance for
doubtful accounts of $6 735
Inventories 655
Prepaid expenses and other 88
-----
Total current assets 1,929
Property, plant and equipment, at cost 21,116
Less accum. depreciation and amortization (5,355)
------
Net property and equipment 15,761
Other assets:
Goodwill, net of accum. amortization of $150 3,099
Other, net of accum. amortization of $1 68
------
Total other assets 3,167
------
Total Assets $20,857
======
Liabilities and Stockholders' Equity
Current liabilities:
Account payable and notes payable $ 1,026
Accrued salaries, wages and benefits 279
Other accrued liabilities 447
Billings in excess of costs on uncompleted contracts 123
Current portion of long-term debt 86
-----
Total current liabilities 1,961
Long-term liabilities:
Extraction plant liability 4,850
Convertible debentures - related party 1,000
Other liabilities 364
-----
6,214
Stockholders' equity:
Common stock $.01 par value 219
Additional paid-in capital 24,011
Accumulated deficit (11,773)
------
Total stockholders' equity 12,457
------
Total Liabilities and Stockholders' Equity $20,857
======
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands, except shares and per share amounts)
3 Mos. 9 Mos. 3 Mos. 9 Mos.
NET REVENUES:
Sales $ 813 3,901 591 826
Other 136 253 11 102
----- ----- ---- ----
Total 949 4,154 602 928
COSTS AND EXPENSES:
Operating 1,045 4,263 1,004 1,446
General and administrative 665 2,531 726 1,330
Depreciation and amort. 172 546 121 247
----- ----- ----- -----
Total expenses 1,882 7,340 1,851 3,023
----- ----- ----- -----
OPERATING LOSS ( 933) (3,186) (1,249) (2,095)
OTHER INCOME (EXPENSE):
Interest expense (53) (1,138) (690) (1,974)
Minority interest in loss
of subsidiary - 3 95 143
----- ----- ----- -----
(53) (1,135) (595) (1,831)
----- ----- ----- -----
NET LOSS $ ( 986) (4,321) (1,844) (3,926)
===== ===== ===== =====
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (.05) (.22) (.21) (.45)
===== ===== ===== =====
WEIGHT AVERAGE COMMON SHARES
OUTSTANDING 21,844,000 19,456,000 8,896,000 8,732,000
========== ========== ========= =========
- --------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Nine Months Ended September 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 (4,321) (3,926)
------- ------
Accumulated deficit as of September 30 $ (11,773) (6,647)
====== =====
See accompanying notes.
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Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
UNAUDITED
1998 1997
(amounts in thousands)
Cash flows from operating activities:
Net loss $ (4,321) $ (3,926)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 546 247
Interest expense related to debt discount 1,063 1,801
Expenses paid with stock 218 23
Gain on sale of building (188) -
Sale of marketable securities - 1,135
Change in operating assets and liabilities 611 (1,181)
----- -----
Net cash used by operating activities (2,071) (1,901)
Cash flows from investing activities:
Collection on notes receivable - 50
Notes receivable funded - (50)
Proceeds from sale of building 345 -
Capital expenditures (922) (2,857)
Purchase of investment in ADA - (1,503)
Net decrease (increase) in other assets
and liabilities 183 (736)
----- -----
Net cash used by investing activities (394) (5,096)
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 6,685
----- -----
Net cash provided by financing activities 2,584 6,727
----- -----
Net decrease in cash and cash equivalents 119 (270)
Cash and cash equivalents at beginning of period 332 586
----- -----
Cash and equivalents at end of period $ 451 $ 316
===== =====
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)
September 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 and others 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 first
quarter of 1999.
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 continued successful
operation of the unit 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, recent tests at a refinery and full scale use at the utility in
Wisconsin have demonstrated the new product blend ADA has recently intro-
duced will, among other improvements, aid the use of treated ash in cement.
Discussions with the utility in Mississippi are expected to result in the test
there of the new product before year end.
Registrant is funding the majority of cash costs of the Venezuelan diamond and
gold exploration activities. Exploration activities on CODSA 14 were terminated
when fieldwork through June indicated that the diamond-bearing material present
on the concession was not sufficient to support a mechanized mining operation.
Registrant has applied for a total of ten new concessions this year in Venezuela
which, at the earliest, are not expected to be granted until the spring of 1999
after the new administration takes office. Exploration work on those conces-
sions, if and when they are granted, is anticipated to be met through existing
working capital.
Additional funds may be required to fund expanded exploration activities in
Venezuela. 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. Along with more traditional debt
financing, Registrant may also evaluate private placements of common stock and
other equity placements to fund current requirements. Registrant received a net
of $2.8 million from the issuance of convertible debentures in the first quarter
of 1998.
Cash flow used in operations totaled $2,071,000 for the first nine months of
1998 versus $1,901,000 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 nine months of 1998
included net proceeds from the sale of a building of $345,000, capital expen-
ditures of $922,000 and a net decrease in other asset and liabilities of
$210,000. Cash flow from financing activities in the first nine 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 $1,503,000, a net increase in other assets and liabilities of $736,000
and capital expenditures of $2,857,000. 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 $6,685,000.
Results of Operations
Revenues from sales totaled $3,901,000 in the first nine months of 1998 with
$2,428,000 of that amount from ADA and $1,473,000 from Calgary phosphate sales.
ADA's revenues were 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 nine months of 1997.
Operating expenses increased significantly in the first nine months of 1998 as
compared to 1997 as significant expenses related to both Calgary phosphate
production ($2,595,000 of the increase) and ADA ($1,708,000 of the increase)
were not incurred in 1997. General and administrative expenses also rose
significantly in the first nine months of 1998 as compared to 1997 as a result
of adding staff in Calgary for production ($558,000 of the increase), consolida-
tion of ADA's start up activities ($680,000 of the increase) and an increased
investor relations program ($350,000 of the increase).
Registrant's interest expense totaled approximately $1,138,000 for the first
nine months of 1998 and $1,974,000 for the same period in 1997. Included in
interest expense for 1998 and 1997 are $1,063,000 and $1,801,000, 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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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 stand-alone operations of Registrant. Registrant does not expect
to incur any material expenses or costs related to the Year 2000 Issue to modify
systems.
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, except that Registrant
does rely on utilities supplied by municipalities and power companies, the dis-
ruption of which will cause Registrant to shut down its affected operations.
Extended disruption of utility services will have a material adverse effect on
Registrant. With regard to other third party systems, 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 September 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 - 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: November 12, 1998 /s/ Mark H. McKinnies
Mark H. McKinnies
President and Chief Financial Officer
7
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM REGISTRANT'S CONSOLIDATED FINANCIAL
STATEMENTS DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 451
<SECURITIES> 0
<RECEIVABLES> 735
<ALLOWANCES> 6
<INVENTORY> 655
<CURRENT-ASSETS> 1929
<PP&E> 21116
<DEPRECIATION> 5355
<TOTAL-ASSETS> 20857
<CURRENT-LIABILITIES> 1961
<BONDS> 1000
0
0
<COMMON> 219
<OTHER-SE> 12457
<TOTAL-LIABILITY-AND-EQUITY> 20857
<SALES> 3901
<TOTAL-REVENUES> 4154
<CGS> 4263
<TOTAL-COSTS> 7340
<OTHER-EXPENSES> 1135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1138
<INCOME-PRETAX> (4321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4321)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
