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, 1999
______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: 24,266,921 Shares of
Common Stock, one cent par value outstanding as of August 10, 1999.
Transitional Small Business Disclosure Format: Yes______ ; No___X___
<PAGE>
PART I
Item 1. FINANCIAL STATEMENTS
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1999
UNAUDITED
ASSETS (amounts in thousands)
CURRENT ASSETS:
Cash, and cash equivalents $ 11
Trade receivables, net of allowance for
doubtful accounts of $4 789
Inventories 580
Prepaid expenses and other 155
-----
Total current assets 1,535
PROPERTY, PLANT AND EQUIPMENT, at cost 20,935
Less accum. depreciation and amortization (5,486)
------
Net property and equipment 15,449
INTANGIBLE ASSETS, net of $586 in amortization 3,051
------
TOTAL ASSETS
$20,035
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable $ 1,178
Accrued expenses 534
Notes payable and line of credit 782
Other current liabilities 20
-----
Total current liabilities 2,514
LONG-TERM LIABILITIES:
Extraction plant liability 4,850
Note payable - related party 1,000
Other liabilities 611
-----
6,461
STOCKHOLDERS' EQUITY:
Common stock $.01 par value 241
Additional paid-in capital 25,598
Accumulated deficit (14,779)
------
Total stockholders' equity 11,060
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,035
======
See accompanying notes.
<PAGE> 1
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1999 and 1998
UNAUDITED
1999 1998
(amounts in thousands, except shares and per share amounts)
3 Months 6 Months 3 Months 6
Months
NET REVENUES:
Sales $1,111 2,235 1,501 3,088
Other 3 6 93 117
----- ----- ----- -----
Total revenues 1,113 2,241 1,594 3,205
COST AND EXPENSES:
Operating 1,170 2,136 1,484 3,218
General and administrative 723 1,390 985 1,827
Research & development 20 36 25 39
Depreciation and amortization 180 348 203 374
----- ----- ----- -----
Total expenses 2,093 3,910 2,697 5,458
----- ----- ----- -----
OPERATING LOSS (979) (1,669) (1,103) (2,253)
OTHER INCOME (EXPENSE):
Interest expense (167) (218) (31) (1,085)
Other, net 5 - 10 3
----- ----- ----- -----
(162) (218) (21) (1,082)
----- ----- ----- -----
NET LOSS $(1,141) (1,887) (1,124) (3,335)
====== ====== ====== ======
NET LOSS PER COMMON Share (Basic
and Diluted): $(.05) (.08) (.06) (.15)
==== ==== ==== ====
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
23,784,000 23,239,000 18,242,000 22,118,000
========== ========== ========== ==========
- ------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Six Months Ended June 30, 1999 and 1998
UNAUDITED
1999 1998
(amounts in
thousands)
Accumulated deficit as of January 1 $ (12,892) (7,452)
Net loss for the period (1,887) (3,335)
--------- --------
Accumulated deficit as of June 30 $ (14,779) (10,787)
====== ======
See accompanying notes.
<PAGE> 2
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
UNAUDITED
1999 1998
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,887) $ (3,335)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 348 374
Non-cash interest expense 114 1,027
Expenses paid with stock 44 53
Change in operating assets and liabilities 59 (260)
Net decrease in other assets and liabilities 236 315
----- -----
Net cash used by operating activities (1,322) (2,141)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (172) (817)
----- -----
Net cash used by investing activities (172) (817)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes and long-term debt - (500)
Proceeds from issuance of common stock 1,147 -
Proceeds from convertible debentures and
notes payable - 3,084
----- -----
Net cash provided by financing activities 1,147 2,584
Net decrease in cash and cash equivalents (111) (59)
Cash and cash equivalents at beginning of period 122 332
----- -----
Cash and equivalents at end of period $ 11 $ 273
===== =====
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 42 $ 27
===== =====
Conversion of notes payable and debentures $ 27 $ 9,188
===== =====
See accompanying notes.
<PAGE> 3
Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1999
(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 1998 Form 10-KSB.
(2) Business Segment Information (amounts in thousands)
Six Months ended June 30, 1999
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 1,080 $1,156 $ - $ 2,236
Intersegment revenues 187 96 - (283) -
Other revenues 5 - - - 5
--- ---- ---- ---- -----
Total revenue $ 192 $ 1,176 $1,156 $ (283) $ 2,241
==== ===== ===== ==== =====
Segment profit (loss) $(450)$ (901)$ (536) * $ (1,887)
Six Months ended June 30, 1998
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 1,193 $1,895 $ - $ 3,088
Intersegment revenues 139 - - (139) -
Other revenues 111 - 6 - 117
--- --- ----- ---- -----
Total revenue $ 255 $ 1,193 $1,901 $ (139) $ 3,205
==== ==== ===== ==== =====
Segment profit (loss)$(1,849)$(1,345)$ (141) * $(3,335)
* There were no profits on intersegment revenues.
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 1998 Form 10-KSB.
Liquidity and Capital Resources
Registrant had a working capital deficit of $979,000 at 6/30/99. This deficit
has increased during the first six months of this year in spite of proceeds
from the recent private placements, due to the operating losses incurred at
both ADA and the Calgary phosphate facility. Management is currently seeking
approximately $1.3 million in working capital to increase production at
Calgary to sustainable routine levels that are expected to yield positive cash
flow. Management also expects to reduce the deficit through negotiations with
suppliers and customers, negotiation of due dates on short-term indebtedness
and improving cash flow at ADA. However, there can be no assurances that such
negotiations will be successful or that the positive cash flow now achieved at
ADA will continue. Although the facility has demonstrated adequate capacity
and quality of production, and markets for its products are established,
management may suspend operations or take other cost cutting measures in
operations at Calgary until sufficient working capital becomes available to
allow the expected achievement of positive cash flow there. The achievement
of such positive cash flow is dependent upon several factors including
continued production of technical grade quality product, 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
continuation of positive cash flow is dependent upon the successful ongoing
operation of the units currently operating at APC in Wisconsin, at CLECO in
Louisiana, at MidAmerica in Iowa and at PGE in Oregon. Unsatisfactory
operations at any of the units operating could frustrate such continuation.
Planned capital expenditures to
<PAGE> 4
sustain and improve ongoing operations for 1999 are estimated at $400,000; of
that amount $172,000 has been spent thus far in 1999. Registrant has funded
and expects to fund these requirements out of existing working capital.
However, additional funds may be required to fund capital improvements,
expanded exploration activities in Venezuela and purchase equipment to produce
food-grade product in Calgary. Private placements of common stock, convertible
debentures and bank borrowings may be evaluated to fund such requirements.
Registrant received a net of $1.1 million from the sale of common stock in
the first quarter of 1999 and has received approval and funding of a revolving
credit facility from the Bank of Hongkong.
The credit facility from the Bank of Hongkong is a demand revolving loan
limited to the lesser of 85% of qualified receivables or $400,000, is secured
by accounts receivable of ESEC, and carries interest at the Bank's US base
rate (currently 8.5%) plus 1%. Interest is due monthly in arrears and the
loan is guaranteed by ESI. As of 6/30/99, $315,000 had been advanced under
the loan.
Based on current estimates, the Calgary facility may require as much as U.S.
$500,000 to initiate and finalize modification for the production of food
grade phosphoric acid. Registrant expects to finance those requirements from
bank borrowings, equipment leasing and/or existing working capital. The
timing of initiation of such modifications is uncertain and is not expected to
commence prior to the attainment of positive cash flow from existing
production capacity.
Registrant is funding the majority of cash costs of the Venezuelan gold
exploration activities, which for 1999 are expected to be only $60,000.
Activities planned on the existing SAMI contract and on those concessions
expected to be granted in the future can 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 $1,086,000 for the first six months of
1999 versus $1,826,000 for the same period in 1998. Such use has resulted
primarily from the operating losses less non-cash charges for interest. Cash
flow from investing activities for the first six months of 1999 includes a use
for capital expenditures of $172,000. Cash flow from financing activities
in 1999 consisted of proceeds from the issuance of common stock of $1,147,000.
Cash flow from investing activities for the first six months of 1998 included
a use for capital expenditures of $817,000. Cash flow from financing
activities in 1998 consisted of payments notes payable and long-term debt of
$500,000 and proceeds from the issuance of convertible debentures and notes
payable, net of $3,084,000.
Results of Operations
Revenues from sales totaled $2,235,000 in the first six months of 1999 versus
$3,088,000 in 1998. In 1999 $1,156,000 of that amount was generated by ADA and
$1,080,000 was generated from Calgary phosphate sales. Revenues for the period
from ADA decreased from $1,895,000 in 1998 due to the sale of three flue gas
conditioning units in 1998 vs. none in 1999 offset somewhat by increasing
chemical sales to a greater number of units operating in 1999. The additional
ADA units installed in 1999 have been under rental and lease arrangements
rather than direct sales. Phosphate sales from Calgary decreased slightly
from $1,193,000 in 1998 due primarily to lack of sufficient working capital to
allow increased production. Due to such lack, the facility elected to take a
maintenance shutdown during the month of May. ADA's revenues were less than
anticipated due to slower than expected additional sales related to
diminishing market concern over the recycled fly-ash issue that was resolved
with the introduction of a new chemical blend in the fall of 1998.
<PAGE> 5
Other income in 1998 includes rental income, which ceased in the fall of 1998
due to the sale of ESI office building in September 1998.
Operating expenses decreased significantly in the first six months of 1999 in
response to decreased sales and revenues and operating efficiencies. The
decrease related to both Calgary phosphate production ($516,000 of the
decrease) and ADA ($428,000 of the decrease). The Company experienced negative
gross margins at its Calgary operations in 1998 and 1999 primarily due to the
start up nature of the phosphate production and the product quality problem.
The Company expects such margins to improve in the second half of 1999 with
expected increased sales and lower raw material costs, assuming working
capital needs are met. ADA experienced positive gross margins in 1999 and
1998, but these were less than expected from routine operations and resulted
from ADA establishing its market acceptance and market share for its
technology. The Company's ultimate success will be dependent upon generating
greatly improved gross margins, which in turn are dependent upon increased
sales and market penetration. Consolidated research and development decreased
in the first six months of 1999 to $36,000 from $39,000 in 1998. Future
consolidated research and development expenses are expected to be
approximately $100,000 per year for the next several years. General and
administrative expenses decreased by a net of approximately $539,000 in the
first six months of 1999 primarily as a result decreased investor relations
Future investor relations expenses are expected to run between $100,000 and
$150,000 for the next several years
Registrant's interest expense totaled approximately $218,000 for the first six
months of 1999 and $1,085,000 for the same period in 1998. Interest expense
includes approximately $43,000 and $23,000 in 1999 and 1998, respectively,
from the consolidation of the Calgary and ADA results. Included in interest
expense for 1999 is $113,000 of non-cash charges related to additional stock
issued to certain 1999 private placement purchasers for delays in the
effectiveness of a registration statement covering their shares. In 1998,
interest expense includes $1,027,000 of non-cash charges representing the 25%
discount from market related to the convertible debentures issued and
convertible in the first six months of 1998.
Extraordinary gain from debt restructuring recognized in 1997 represents the
difference between the recorded liabilities at the time of settlement with
Yankee Companies of $9,382,000 and the settlement payments totaling
$1,250,000 plus the remaining recorded liability of $4,850,000, net of income
taxes of $985,000.
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written and
imbedded chips using two digits rather than four digits to define years. Any
of Registrant's computer programs 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 recent and ongoing assessments, Registrant has 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.
<PAGE> 6
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
disruption of which will cause Registrant to shut down its affected operations
until such service is restored. 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 material 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. In May 1999, Registrant sold 164,096
shares of its common stock to a director for $100,000, which represented the
average market price of the stock at that time. The stock was sold pursuant to
the exemption provided by section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - No change from Item 13 of Registrant's 1998 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: August 13, 1999 /s/ Mark H. McKinnies
----------------------
Mark H.
McKinnies
President
and Chief Financial Officer
<PAGE> 7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM REGISTRANT'S CONSOLIDATED FINANCIAL
STATEMENTS DATED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 789
<ALLOWANCES> 4
<INVENTORY> 580
<CURRENT-ASSETS> 1535
<PP&E> 20935
<DEPRECIATION> 5486
<TOTAL-ASSETS> 20035
<CURRENT-LIABILITIES> 2514
<BONDS> 1000
0
0
<COMMON> 241
<OTHER-SE> 11060
<TOTAL-LIABILITY-AND-EQUITY> 20035
<SALES> 2235
<TOTAL-REVENUES> 2241
<CGS> 2136
<TOTAL-COSTS> 3910
<OTHER-EXPENSES> 218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 218
<INCOME-PRETAX> (1887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1887)
<DISCONTINUED> 0
<EXTRAORDINARY> (1887)
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<NET-INCOME> (1887)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
