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, 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: 25,016,564 Shares of
Common Stock, one cent par value outstanding as of November 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
September 30, 1999
UNAUDITED
ASSETS
(amounts in thousands)
CURRENT ASSETS:
Cash, and cash equivalents $ 52
Trade receivables, net of allowance for
doubtful accounts of $4 708
Inventories 245
Prepaid expenses and other 158
-----
Total current assets 1,163
PROPERTY, PLANT AND EQUIPMENT, at cost 19,778
Less accum. depreciation and amortization (5,564)
------
Net property and equipment 14,214
INTANGIBLE AND OTHER ASSETS, net of $683 in amortization 2,961
------
TOTAL ASSETS $18,338
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable $ 1,003
Accrued compensation and benefits 452
Notes payable - related parties 1,275
Bank line of credit 390
Other current liabilities 245
-----
Total current liabilities 3,365
LONG-TERM LIABILITIES:
Extraction plant liability 4,850
Other liabilities 546
-----
5,396
STOCKHOLDERS' EQUITY:
Common stock $.01 par value 250
Additional paid-in capital 27,649
Foreign currency translation adjustment (1,837)
Accumulated deficit (16,484)
------
Total stockholders' equity 9,577
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,338
======
See accompanying notes.
<PAGE> 1
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998
UNAUDITED
1999 1998
(amounts in thousands, except shares and per share amounts)
3 Months 9 Months 3 Months 9 Months
NET REVENUES:
Sales $1,429 3,664 813 3,901
Other 17 23 6 65
----- ----- ----- -----
Total revenues 1,446 3,687 819 3,966
COST AND EXPENSES:
Operating 1,103 3,239 1,097 4,461
General and administrative 400 1,790 520 2,201
Research & development - 36 93 132
Writedown in carrying value of
Mineral properties - 1,223 - -
Depreciation and amortization 175 523 172 546
----- ----- ----- -----
Total expenses 1,678 6,811 1,882 7,340
----- ----- ----- -----
OPERATING LOSS (232) (3,124) (1,063) (3,374)
OTHER INCOME (EXPENSE):
Interest expense (250) (468) (53) (1,138)
Other - - 130 191
----- ----- ----- -----
(250) (468) 77 (947)
----- ----- ----- -----
NET LOSS $ (482) (3,592) (986) (4,321)
Stock resale rights applicable to
certain shareholders - (309) - -
----- ----- ----- -----
NET LOSS APPLICABLE TO OTHER
COMMON STOCKHOLDERS $ (482) (3,901) (986) (4,321)
====== ====== ====== ======
NET LOSS PER COMMON Share (Basic
and Diluted): $(.02) (.17) (.05) (.22)
==== ==== ==== ====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING: 24,012,000 23,499,000 21,844,000 19,456,000
========== ========== ========== ==========
- ------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Nine Months Ended September 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 (3,492) (4,321)
------- ------
Accumulated deficit as of September 30 $ (16,484) (11,773)
====== ======
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 $(3,492) $(4,321)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 523 546
Writedown of carrying value of mineral properties 1,223 -
Non-cash interest expense 284 1,063
Expenses paid with stock 67 218
Change in operating assets and liabilities 319 611
Net increase (decrease) in other assets
and liabilities 39 183
----- -----
Net cash used by operating activities (1,037) (1,700)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds, net of gain, from sale of building - 157
Capital expenditures (383) (922)
----- -----
Net cash used by investing activities (383) (765)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes and long-term debt (187) (500)
Proceeds from issuance of common stock 1,147 -
Proceeds from convertible debentures, notes
payable and line-of-credit 390 3,084
----- -----
Net cash provided by financing activities 1,350 2,584
----- -----
Net decrease in cash and cash equivalents (70) 119
Cash and cash equivalents at beginning of period 122 332
----- -----
Cash and equivalents at end of period $ 52 $ 451
===== =====
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 80 $ 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)
September 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, as amended.
2) Stock resale rights applicable to certain shareholders.
In January and February 1999, Registrant sold a total of 1,360,623 shares of
common stock and received net proceeds of $1,237,000. The shares were sold at
closing bid prices which ranged from $.55 to $.91 per share. As an inducement
to the sale, Registrant agreed to issue a limited number of additional shares
to the purchasing shareholders in the event that the average bid price on the
five trading days prior to the sale of the original shares is less than 125% of
their purchase price. Additional shares, if necessary, will be issued so that
the total shares held by each such shareholder times the 5-day average bid
price equals 125% of the amount paid for the common stock. A charge of
$309,000 against net income is shown in the accompanying financial statements
for the obligation to issue these additional shares.
(3) Deferred Exploration Costs.
The Company had followed the policy of capitalizing all direct costs, including
labor, related to the exploration of mineral properties held or controlled by
the Company, which, in the opinion of management, have a continuing value. In
the first quarter of 1999, the Company changed its method of accounting for such
costs to expensing such costs as incurred. Whereas in the past, the Company
would not charge to expense, but would capitalize as an asset, exploration costs
on those properties management considered to have continuing value, under the
new policy, such costs are expensed immediately and figure into the
determination of profit and loss for the period in which they are incurred. The
change in the method of accounting has resulted in a one-time, non-cash write-
off of $1,223,000 of exploration costs in the first quarter of 1999. This
write-off increased the net loss for the 1st quater from $1,055,000 to a loss of
$2,278,000, and the net loss per common share for the period from $.05 to $.10.
The change has been effected due to a change in estimates which cause the future
benefits of those costs to be doubtful. Furthermore, the Company believes
expensing such costs has become the preferred method of accounting. The effect
of the change in accounting principle is considered inseparable from the effect
of the change in accounting estimate.
(4) Business Segment Information. (amounts in thousands)
Corporate headquarter activities are included in the ESI operating segment.
The phosphate production assets of ESEC are located in Canada; the long-lived
assets associated with other lines of business are primarily located in
Colorado. Substantially all of the Company's customers are US companies.
Nine Months ended September 30, 1999
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 1,665 $1,999 $ - $ 3,664
Intersegment revenues 318 178 - (496) -
Other revenues 6 16 1 - 23
--- ---- ---- ---- -----
Total revenue $ 324 $ 1,859 $2,000 $ (496) $ 3,687
==== ===== ===== ==== =====
Long-lived assets $ 1,072 $18,034 $ 672 - $ 19,778
Segment profit (loss)$(1,926)$(1,184)$ (482) * $ (3,592)
<PAGE> 4
Nine Months ended September 30, 1998
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 1,473 $2,428 $ - $ 3,901
Intersegment revenues 250 198 - (448) -
Other revenues 63 2 - - 65
--- --- ----- ---- -----
Total revenue $ 313 $ 1,673 $2,428 $ (448) $ 3,966
==== ==== ===== ==== =====
Long-lived assets $ 2,609 $17,912 $ 595 - $21,116
Segment profit (loss)$(1,904)$(2,082)$ (335) * $(4,321)
* 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, as amended.
Liquidity and Capital Resources
Registrant had a working capital deficit of $1,202,000 at 9/30/99. This deficit
has increased during the first nine 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
a minimum of $2.4 million from an industry partner for working capital and
improvements to increase production at Calgary to sustainable routine levels
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 with related parties 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.
In effort to reduce cash flow deficits from the Calgary facility, as of August
31, 1999 management suspended operations there. Although, in the opinion of
management, the facility has demonstrated adequate capacity and quality of
production, and markets for its products are established, the suspension in
phosphate purification operations at Calgary will continue 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, but not limited to, the continued ability to produce
a technical grade quality product, upgrading the by-products, success in
marketing phosphate products and meeting competitionin the market place, the
failure in any of which could delay or frustrate such achievement. Chemical
blends for ADA that were produced by ESEC have been out-sourced to a US
manufacturer at only slightly higher costs.
For ADA, the continuation of positive cash flow is dependent upon the successful
ongoing operation of the units currently in-place 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 sustain and improve ongoing operations for
<PAGE> 5
1999 are estimated at $400,000; of that amount $383,000 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, if any, 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 9/30/99, $390,000 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
arrangements with an industry partner, 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.
In September 1999, ADA was awarded a $1 million Department of Energy grant to
develop an expanded line of flue gas conditioning agents. The grant extends
over a three-year period and will allow ADA to accelerate research and
development work it had planned for the future. If the development work is
successful, ADA's propietary chemical will be applicable to a braoder range of
customers with problem flue gases. Although the award was made in September 1999
the contract will not be signed until the current Federal budget is approved.
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. Registrant curtailed activities
in Venezuela to a minimum level sufficient to maintain the positions it has
already established.
Cash flow used in operations totaled $1,037,000 for the first nine months of
1999 versus $1,700,000 for the same period in 1998. Such use has resulted
primarily from the operating losses less non-cash charges for depreciation
and amortization, writedown of mineral properties and interest. Cash flow from
investing activities for the first nine months of 1999 includes a use for
capital expenditures of $383,000. Cash flow from financing activities in 1999
consisted of proceeds from the issuance of common stock of $1,147,000,
payments on notes payable of $187,000 and proceeds from a bank line-of-credit
of $390,000. Cash flow from investing activities for the first nine months of
1998 included a use for capital expenditures of $922,000 and a source from
proceeds from the sale of an office building, net of the related gain, of
$157,000. 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 $3,664,000 in the first nine months of 1999 versus
$3,901,000 in 1998. In 1999, $1,999,000 of that amount was generated by ADA and
$1,665,000 was generated from Calgary phosphate sales. Revenues for the period
from ADA decreased from $2,428,000 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 increased by $192,000
from $1,473,000 in 1998 in spite of the suspension of production activites at
the end of August due primarily to increased sales to Chemical Interchange Co.
Due to a lack of working capital earlier in the year, 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 nine months of 1999 in
response to decreased sales and revenues at ADA and operating efficiencies. The
decrease related to both Calgary phosphate production ($424,000 of the decrease)
and ADA ($746,000 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 operating at a level lower than necessary
to cover the fixed expenses of the facility. Although expects such margins
have improved in the second half of 1999 with realization of anticipated
increased sales and lower raw material costs, working capital has not been
sufficient to sustain the level of production and sales to generate positive
cash flow. 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 nine six
months of 1999 to $36,000 from $132,000 in 1998.
Future consolidated research and development expenses, except for those
anticipated to be funded by the recently awarded DOE contract, are expected to
be approximately $100,000 per year for the next several years.
General and administrative expenses decreased by a net of approximately
$411,000 in the first nine months of 1999 primarily as a result decreased
investor relations expenses. Future investor relations expenses are expected
to run between $100,000 and $150,000 for the next several years. Included in
costs and expenses for the first quarter of 1999 is a one-time, non-cash charge
of $1,223,000 representing the writedown of the carrying value of the Company's
mineral properties. The charge is the result of a change in accounting
principle from the capitalization of deferred exploration and development cost
to expensing such costs as they are incurred.
Registrant's interest expense totaled approximately $468,000 for the first nine
months of 1999 and $1,138,000 for the same period in 1998. Interest expense
includes approximately $90,000 and $33,000 in 1999 and 1998, respectively,
from the consolidation of combined Calgary and ADA results. Included in
interest expense for 1999 is $284,000 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.
Other non-operating income in 1998 includes a gain of $188,000 recognized upon
the sale of an office building.
<PAGE> 6
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.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits - No change from Item 6 of Registrant's March 31, 1999 Form
10-QSB, as amended.
(b) Forms 8-K - a report filed September 10, 1999 and dated September 2, 1999
set forth in Item 5 - Other Events a press release made by Registrant that
announced the suspension of activities in Calgary and Venezuela to concentrate
on the continued growth of ADA.
<PAGE> 7
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 9, 1999 /s/ Mark H. McKinnies
----------------------
Mark H. McKinnies
President and Chief Financial Officer
<PAGE> 8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM REGISTRANT'S CONSOLIDATED FINANCIAL
STATEMENTS DATED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 712
<ALLOWANCES> 4
<INVENTORY> 245
<CURRENT-ASSETS> 1163
<PP&E> 19778
<DEPRECIATION> 5564
<TOTAL-ASSETS> 18338
<CURRENT-LIABILITIES> 3365
<BONDS> 0
0
0
<COMMON> 250
<OTHER-SE> 9576
<TOTAL-LIABILITY-AND-EQUITY> 18338
<SALES> 3664
<TOTAL-REVENUES> 3687
<CGS> 3239
<TOTAL-COSTS> 6810
<OTHER-EXPENSES> 468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468
<INCOME-PRETAX> (3592)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3592)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3592)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
