U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment #1 to Items 1, 6 and 12
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 0-6088
Earth Sciences, Inc.
(Name of small business issuer in its charter)
Colorado 84-0503749
(State of incorporation) (IRS Employer Identification No.)
910 12th Street, Golden, Colorado 80401
(Address of principal executive offices, including Zip Code)
(Registrant's telephone number, including area code): (303) 279-7641
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, one cent par value
Title of class
Check whether the issuer (1) has 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. [X] Yes [ ]
No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $ 4,893,000
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. As of March 12, 1999 was $18,490,000.
Number of shares outstanding of registrant's Common Stock, one cent par value
as of March 12, 1999 - 23,554,362.
DOCUMENTS INCORPORATED BY REFERENCE :
None
Transitional Small Business Disclosure Format: Yes __ No X
<PAGE>
PART I
Item 1. Description of Business
This Annual Report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. In particular, such forward-looking
statements may be found in this section under "Description of Business" and
below in Item 6. under "Management's Discussion and Analysis of Financial
Condition and Results of Operations." 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 or under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." .
(a) Business Development.
Earth Sciences, Inc. ("ESI" or "Registrant", which term includes its wholly-
owned subsidiaries unless otherwise indicated)
is chemical processing, air pollution control and mineral exploration company.
Production of purified phosphate products in Calgary commenced in June 1997.
ESI was incorporated under the name of Colorado Central Mines, Inc. in Colorado
in 1957. The major activities of the Company include the operation of its
solvent extraction facility in Calgary, Alberta for production of purified
phosphate products; flue gas conditioning technology for coal-fired boilers and
other applications provided through ADA Environmental Solutions LLC ("ADA"), a
wholly-owned subsidiary; and continued exploration activities for diamond and
gold resources in Venezuela.
During 1998, ESI (1) acquired the remaining equity interest in ADA and through
ADA (a) received 2 patents for its flue-gas conditioning technology, (b)
developed new products to resolve treated ash use in cement, (c) was awarded
several contracts to demonstrate various technologies, and (d) successfully
completed the warranty period for its installation in Wisconsin; (2) continued
and improved production of purified phosphate products at its solvent
extraction facility in Calgary, Alberta, Canada; (3) applied for 15 mineral
concessions in Venezuela covering over 30,000 acres and continued exploration
activities for diamond and gold resources in Venezuela; (4) issued $3,081,000
in convertible debentures to fund its activities; and (5) maintained its
position in several mineral resources and prospects in the Western US.
Thus far in 1999, ESI has (a) signed a letter of intent with Chemical
Interchange Company ("CIC") to sell 6,000-8,000 tons per year of purified
phosphoric acid ("PPA") for distribution in the US primarily east of the Rocky
Mountains; (b) been awarded a third patent for advanced flue-gas conditioning
technology; and (c) won additional commitments for demonstration of several
technologies related to air pollution control. These activities and those in
the preceding paragraph are described in the succeeding paragraphs of this Item
1(a) and below in Item 1(b).
In May 1998, ESI acquired the remaining 49% interest in ADA through the
issuance of approximately 1,716,000 of its common shares. ESI's initial 51%
interest was purchased in 1997 by payments to ADA totaling $2,500,000. At that
time ESI obtained the option to acquire the remaining 49%. In December 1997,
ADA delivered its first three commercial units; one to Alliant Power Company
("APC") and two to Mississippi Power Co. ("MPC"), in accordance with contract
terms. Initial injection of chemical was suspended earlier in the year after
concerns arose from the results of co-injection of other chemicals. ADA-34, a
new chemical blend, was developed during the summer of 1998 in response to
those concerns. Injection of ADA-34, commenced in September 1998 at the APC
installation. The APC unit has been operating successfully since that time
and has completed its three-month warranty period in December 1998. One unit
at MPC commenced injection in the first half of March 1998, while the second
unit commenced operation in May after completion by MPC of necessary electrical
and piping connections. Injection at both these units was suspended when the
treated fly ash collected lengthened the set time in cement where it was being
recycled as a filler. ADA-34 addresses that concern and has proven acceptable
in tests of the treated fly ash generated at the APC unit. MPC has elected a
major capital conversion for both of its systems and other modifications that
will alleviate the current need for ADA's flue-gas conditioning technology.
Although ADA-34 continues to perform well at the installations where it is in
use, the parameters and mechanisms that determine its effectiveness are complex
and dependent on several factors outside the control of ADA. There can be no
assurances that any of the units will continue to perform as anticipated.
During 1998, ADA also installed a flue gas conditioning system at Portland Gas
and Electric's ("PGE") Boardman, Oregon plant. ADA was awarded the contract in
a competitive bidding process and completed the installation in the fall of
1998. The Oregon unit successfully passed its warranty test in February of
1999.
ESI's solvent extraction facility in Calgary, Alberta, recovered uranium from
phosphoric acid during the period from 1983 through 1987. Uranium oxide
production was suspended in the fall of 1987 when the adjacent fertilizer plant
from which the facility received its feed stock suspended operations. The
contract under which the uranium was sold was modified in 1990 to allow
unrestricted alternative use of the facility. Revamp of the facility to allow
production of purified phosphate products was completed in 1997. The Calgary
facility is routinely producing technical grade phosphoric acid and evaluations
are in process to select equipment for production of food grade product
targeted for completion in 1999. Production and sales of products have been
increasing monthly as ESI establishes and expands its market position. ESI also
intends to pursue the recovery of other valuable elements in the feed stock
once sufficient levels of routine production and cash flow are achieved.
Initial investigation of such production recovery potential and the equipment
required to produce food grade material are estimated at a combined cost
between $200,000-$500,000. Such amounts are expected to be funded from
equipment leasing opportunities and internally generated cash flow. There can
be no assurances that Registrant will be able to achieve its anticipated goals.
During 1998, through ESI's Venezuelan company, VENESI, ESI continued gold
exploration and development activities in Venezuela. ESI also owns 83% of
another company, Minera Antabari C.A. ("Antabari"), which received a contract
on a 1200 acre site on the Guyana Shield in March 1992. VENESI is discussing
further exploration work at this contract area with third parties. Three other
contracts were filed for in 1994 and refiled in 1995 with the Venezuelan
Ministry of Energy and Mines ("MEM"). VENESI is awaiting response from MEM on
these filings. Several other sites with existing MEM concessions are being
evaluated, and VENESI is negotiating with the current concession holders to
obtain rights to further explore these areas. In 1998 VENESI filed for 15
concessions covering approximately 30,000 acres with prospective interests for
diamonds and gold. In 1999 VENESI expects to conduct surface exploration on
the concessions, currently filed for, when they are granted, and file
applications in other areas of interest.
In January and February 1998, ESI issued $3,080,845 of 4% convertible
debentures (the "1998 Debentures") for which ESI received net proceeds of
approximately $2,830,000. Interest was payable quarterly. The 1998 Debentures
were convertible at any time following 45 days after the issuance thereof and
mature on January 31, 1999. The Debentures were convertible into shares of
common stock based on a 25% discount from the market price of the common stock
at the time of conversion, but not in excess of $2.00 per share. All such
debentures were converted to a total of 3,497,981 shares of common stock during
1998.
In February 1999, ESI sold 1,260,623 shares of common stock and received net
proceeds of $1,137,000. Such shares are restricted from sale until after a
registration statement becomes effective covering their subsequent sale or 90
days after the sale which ever occurs later. ESI has committed to file such a
registration statement no later then April 11, 1999 and has an obligation to
issue additional shares in the event the market price at the time of sale is
less than 125% of the purchase price. Such additional shares are limited to
two and one half times the number of shares originally issued.
(b) Business of Issuer.
Registrant is a chemical processing, air pollution control and mineral
exploration company. Registrant owns a processing facility in Calgary,
Alberta, Canada which recovered uranium oxide from phosphoric acid and for
which the production of purified phosphate products commenced in June 1997; a
100% interest in ADA which provides air pollution control technologies and
services; alunite properties which contain alumina, sulfur and potash; other
domestic properties containing gold, vanadium and phosphate; and controls
prospects containing copper, molybdenum, silver, lead and zinc.
Registrant, through its 100% ownership of Recursos Minerales VENESI C.A.
("VENESI"), 83% ownership in Minera Antabari C.A. ("Antabari") and its 67%
ownership in Recursos Minerales ESIGEO C.A. ("ESIGEO") is exploring,
evaluating, acquiring and plans to develop diamond and gold resources in
Venezuela.
Calgary Solvent Extraction Facility
In 1997, ESI commenced production of purified phosphate products at the
facility. The facility currently produces purified phosphoric acid ("PPA") and
by-products. Earth Sciences Extraction Company ("ESEC"), a wholly-owned
Canadian limited partnership of ESI, operates the solvent extraction facility
in Calgary, Alberta.
ESEC's Facility
The phosphoric acid treatment facility was maintained on a standby basis since
its uranium recovery operations were suspended in 1987 when the adjacent
fertilizer plant, which had supplied feedstock, suspended operations. Certain
contractual restraints and lower uranium prices have made the stand-alone
recovery of uranium from other feedstock sources uneconomic. ESEC modified the
facility to purify superphosphoric acid ("SPA") to produce a technical grade
PPA and by-products. The growth and profitability of operations at the Calgary
plant is dependent upon, among other things, the availability of sufficient raw
materials at reasonable prices. Purchases of SPA are made from three US
suppliers. ESEC generally receives a discount from listed market price from two
of those suppliers, while we have been purchasing at an annual fixed price from
the third. ESEC has been able to acquire sufficient quantities to supply our
estimated requirements of SPA, but it has no long-term contracts for supply and
other suppliers of SPA may not be available. There can be no assurances that we
will be able to obtain sufficient quantities of SPA at reasonable prices in the
future. In the future it is anticipated that phosphate rock from an open pit
mineral resource owned by ESI in Idaho may be processed to provide feedstock
for the Calgary plant. (See Item 2(a) below).
Market for Purified Phosphoric Acid
Phosphorus in the form of purified phosphoric acid, H3PO4 (PPA), is a basic
commercial chemical essential to a broad variety of industrial and consumer
applications. PPA is an important inorganic acid used in foods, cola beverages,
cleaning solutions, fertilizers, fire retardants and metal treatments, among
other uses. ESEC competes with four North American PPA producers in the
estimated 1.3 million tons PPA industrial market where an estimated 370,000
tons of direct consumption PPA is sold. ESEC is the sole producer in Canada
and the only producer in western North America. ESEC's targeted market
segments include those where growth is 10% or more per year, where the
predominate users are in ESEC's freight advantage area, and the large
Minneapolis/Chicago area market. ESEC is marketing PPA by attempting to match
other producers' quality but with lower prices and improved service. In 1998
ESEC recognized 29% of its revenues from sales to HCI Holchem Inc., 15% to Ag
Chem Companies and 13% to Chemical Interchange Co.
If and when routine levels of production are achieved, it is anticipated that
cost advantages will be realized from the use of less expensive purification
through solvent extraction and lower freight costs. By-products are being sold
in local fertilizer markets. All of the facility's production is being
marketed through an agreement dated January 1, 1997 with Twin-Kem
International, Inc., a Colorado corporation ("TKI") whose principals have over
60 years of combined experience in the marketing and distribution of industrial
and agricultural chemicals. The agreement is for an automatically renewing one-
year term where TKI receives a commission of between $2.00-$5.00 per ton of
product sold. A prepayment of $100,000 toward such commission was made in
1997, consisting of 50% cash and 50% stock. As additional compensation, the
Company issued 50,000 shares and 80,000 shares of common stock to TKI in 1998
and 1999, respectively. There can be no assurances that actual sales recognized
by ESEC will equal the anticipated volumes.
The growth and profitability of operations at the ESEC facility in Calgary are
dependent upon, among other things, the sale of purified phosphate products to
chemical distributors and customers. ESEC signed a letter of intent with
Chemical Interchange Company ("CIC") to sell 6,000-8,000 tons per year of PPA
for distribution in the US primarily east of the Rocky Mountains and is
presently negotiating a similar contract with another group. However,
Registrant has limited experience in marketing industrial chemicals and is
relying on consultants and others to initiate and maintain other sales
contacts. PPA is not typically sold under long-term contracts, and Registrant
does not have any other significant long-term commitments to purchase its
products. There can be no assurances that Registrant will be successful in its
future sales efforts.
Solvent Extraction Process
The facility produces PPA using an environmentally clean solvent extraction
process employing tributyl phosphate. The basic process is well established in
the industry and believed by ESEC to be free of patent conflicts. The ESEC
process was verified for several feedstocks by numerous laboratory bench tests
and continuous recycle pilot plant runs. The studies show that a competitive
PPA can be produced from most fertilizer grade phosphoric acid feedstock with
extraction efficiencies of 70 to 90%. The remaining material is sold in local
markets for its contained phosphate values. ESEC believes that no significant
waste will be generated at the ESEC facility. However, the ESEC process has
not been proven on a continuing, long-term commercial basis at the Calgary
plant. Although ESI has performed numerous bench-scale and pilot plant test of
the process, and has operated the facility on a continuing basis since June of
1997, there can be no assurances that the process will yield satisfactory
results when employed on a long-term continuous commercial scale.
Geographic Expansion
The growth and profitability of operations at the solvent extraction facility
in Calgary will be dependent upon, among other things, the ability to become
the predominate supplier of PPA in the geographic region surrounding Calgary
and on the US West Coast, and to sell on an increasing basis to the
Minneapolis/Chicago area. Although the contract with CIC will move products
into the Midwest, there can be no assurance that ESEC's efforts to expand sales
can be accomplished on a profitable basis.
Competition
ESEC's purified phosphate products will be sold in markets that are highly
competitive. The principal competitive factors include product quality, price
and distribution capabilities. There can be no assurances that ESEC will be
able to compete successfully against current and future competitors based on
these factors. ESEC is in competition with several domestic and international
producers, many of whom have substantially greater financial, production,
distribution and marketing resources than ESEC. As ESEC increases its market
share, further competition could result in price reductions, reduced margins
and loss of market share, all of which could have a material adverse affect on
the ESEC business, financial condition and results of operations.
If there is no demand, or the demand is less than projected, for ADA's services
for flue gas conditioning agents using phosphoric acid, Registrant will not
recognize the synergies expected from its acquisition, because ADA will not be
able to utilize Registrant's purified phosphate products.
ADA Environmental Solutions
In 1997, ESI acquired a majority equity position in ADA Environmental Solutions
LLC ("ADA") through a combination of stock and cash. The acquisition agreement,
signed April 30, 1997 provided for (i) an immediate cash payment of $400,000
for a 4.8% equity interest, (ii) a combination of $500,000 in cash and $1.6
million in notes to be paid at the scheduled closing, for the acquisition of an
additional 46.2% interest in ADA, and (iii) an option to acquire the remaining
equity interests (49%) in ADA. In May 1998 ESI exercised such option,
acquiring a 100% interest in ADA, by issuance of 1,716,000 shares of stock.
The acquisition was prompted by synergism involving products produced by the
solvent extraction facility in Calgary. ADA utilizes product from the Calgary
facility and other sources in a new proprietary technology designed to reduce
particulate emissions from plants burning low-sulfur coal.
ADA's Technology and Services
ADA has developed a technology for conditioning flue gas streams from
combustion sources that allows existing air pollution control devices to
operate more efficiently. ADA, through various suppliers and contractors,
manufactures engineered skids for each individual application. The skids mix,
pump and monitor the feed of a proprietary chemical blend. The chemical blend
is applied to the flue gas stream by a pressurized system of specially designed
lances and nozzles. Such treatment of the flue gas stream alters the physical
properties of the fly ash particles contained therein by decreasing particle
resistivity and increasing particle cohesion. These alterations allow the
existing electrostatic precipitator (ESP) or baghouse to more effectively
collect such fly ash particles that would otherwise escape into the atmosphere.
ADA also offers consulting services to assist utilities in planning and
implementing strategies to meet new government emission standards requiring
reductions in both sulfur dioxide and nitrogen dioxide. ADA's technology also
has application in the cement and petroleum industries where particulate
emissions are being or need to be controlled.
Market for ADA Services
It is expected that the 1990 Clean Air Act Amendments will result in as many as
600 coal-fired utility boilers switching to low-sulfur coal by the year 2000 to
meet the more stringent sulfur dioxide emission standards. Utilities that
switch to low-sulfur coals will generally require flue gas conditioning to meet
the federal standards unless they make costly equipment changes. The market for
ADA's services was determined based on the evaluation of several commercially
available data bases, in particular Fieldston Publications "Guide to Phase I
and Phase II Units." ADA has entered this market with its proprietary non-
toxic chemical conditioner that offers both technical and economic advantages
over the hazardous chemicals currently being used. In 1998 ADA recognized 30%
of its revenue from MPC, 30% from APC and 21% from PGE. ADA's own sales staff
markets its technology through trade shows, mailings and direct contact with
potential customers.
ADA Competition
ADA's primary competition is the conventional flue gas conditioning technology
using either sulfur trioxide or a combination of sulfur trioxide and ammonia.
This technology has been available commercially since the 1970's and can be
obtained from a variety of suppliers and in a variety of forms. Conditioning
of fly ash by injecting small amounts of sulfur trioxide into the flue gas is a
well proven technique for improving performance of the ESP. Such sulfur
trioxide conditioning loses its effectiveness in application with temperatures
over 350 degrees F. The capital cost of conventional flue gas conditioning
technology can range between $4 -13 million. A typical ADA system can cost
between $300,000-600,000. The competitive advantages of ADA's conditioning
technology include an effective temperature range of 375 degrees F to 900
degrees F; a simple injection system; a non-toxic conditioner that will not
become a secondary pollutant; and chemicals that are safer and easier to handle
on site.
ADA Patents
ADA has received three patents related to different aspects of its technology.
Although important to protect its continuing business, ADA does not consider
any of such patents to be critical to the ongoing conduct of its business.
(See also the discussion below under the heading Patents, Licenses and
Franchises.)
Venezuelan Gold Activities
ESI commenced initial exploration activities in Venezuela in the fall of 1988.
No proven commercially viable reserves have been discovered on the properties
discussed.
The decree which empowered the Corporacion Venezolana de Guyana ("CVG") to
issue land contracts in the Guyana Shield has been determined to be illegal by
the Venezuelan courts. The Ministry of Energy and Mines ("MEM") is expected to
issue concessions to replace the over 450 existing CVG contracts after a study
commissioned to evaluate the existing contracts' status is complete and final
legislative action annuls the rights granted CVG. The SAMI land contract is
included in this category and it is anticipated that its terms will improve as
the new concession terms will be more favorable. The three applications for
new land contracts discussed below are included with some 300 other unacted-
upon requests that have accumulated with CVG since March 1994, when CVG stopped
signing contracts. New applications to MEM have been made for these three
areas and assurances have been obtained that they will receive priority when
they are ultimately considered. Due to political complexities of coordinating
land use between MEM and designated regions and states, it is uncertain when
these new applications will be acted upon. In 1998, an additional 15
applications were made to MEM covering approximately 30,000 acres in
southeastern Venezuelan, chiefly of interest for their diamond and gold
potential. These applications were filed for areas where previous concessions
had been granted but had lapsed. ESI expects MEM to give consideration to
these applications on a more timely basis since the areas requested underwent a
level of scrutiny in the past. The pending nature of the MEM approval process
has delayed, indefinitely, further exploration activities on those areas where
applications have been filed, but has not, and is not expected to delay any
planned activities on the SAMI contract area.
SAMI Area Contract
Antabari was formed in 1991, a Venezuelan company of which ESI owns 83%. In
November 1991, Antabari filed for a contract with CVG for 488 hectares to be
explored and exploited for gold. The area, called SAMI for San Miguel, is
located southeast of the town of Upata, Bolivar state, Venezuela in the open
country of the savannas, and is readily accessible from established roads. The
contract, which was issued in March 1992, provides a two year period for
exploration work and to prepare a plan for exploitation. An extension has been
granted to complete further exploration work. The contract requires certain
financial guarantees with regard to exploration and reclamation, and requires
that the area be reduced by one-half at the end of the exploration period.
Antabari has performed geologic mapping, geochemistry of drainages, soils and
old workings, and trenching of several mineralized zones. One such zone has a
continuity of over 600 feet with a width of 40 feet and has yielded values of
up to 1.6 ounces per ton of gold. Additional sampling and analysis from
extensive pitting show a large (8 acre) anomalous gold area, clearly open to
the north and east. Drilling and further sampling will be necessary to
determine the potential of the area. ESI is evaluating this next phase and/or
a sale to third parties at this time.
Pending Applications
In 1994, formal applications were made to CVG, which in 1995 have been renewed
in applications to MEM, to acquire exclusive mineral exploration rights on
three new land areas located in the Bolivar state in southeastern Venezuela.
ESI has been advised that the filings establish priority for the areas sought.
The Company is very optimistic about the potential these areas hold for further
gold exploration and exploitation. The areas were first identified as
potential targets through regional geochemistry that defined anomalous
occurrences of gold and associated minerals, and legends of past production by
primitive methods which have historically been key to exploration in remote
areas. Queries of natives and sampling of stream sediments has allowed
selection of the best targets from a 130 square km area that was investigated.
Each of the three application areas cover 500 hectares (approx. 1200 acres).
The first concession area is known as Apicharai, located about 165 km from the
town of La Paragua on a small tributary to the Antabari river with a history of
panning and small scale hydraulic mining. The second concession area, known as
Man-cai, is located in a remote area near the Brazilian border accessible by
boat from the La Paragua river. The third concession area, known as Manaima,
is located 50 km from the town of La Paragua. Although specific work programs
have been formalized for initial detailed exploration of the above mentioned
areas, such programs are on hold until the Venezuelan government grants the
applied for concessions.
From May through December 1998, VENESI filed for 15 concessions ranging in size
from 200 to 4,228 hectares (approx. 480 to 10,150 acres) all located in the
Bolivar state in southeastern Venezuela. The location of the filings primarly
centers in two areas, one near the Brazil border and the other south of the
town of La Paragua. Both of these areas have historical diamond production
from alluvial materials. ESI believes that there is growing body of geologic
evidence to support the existence of kimberlitic sources for such diamonds in
Venezuela and is targeting its exploration effort to acquire concessions with a
likelihood for such sources. Thus far VENESI has not confirmed the existence
of any kimberlites in Venezuela and there can be no assurances that its
exploration efforts will be successful in the future.
The primary objectives of the 1999 plans are to determine as quickly as
possible the nature and extent of diamond and gold mineralization on the
anticipated new land concessions, if and when they are granted, and to continue
to define those additional areas where future filings will be made. Activities
may include pitting, surface geochemistry, geologic mapping and trenching.
Mineral Properties and Other Business Matters
During 1998 Registrant maintained its ownership position in the several mineral
interests it holds. The mineral interests maintained by Registrant include
significant resource interests in alumina, gold, vanadium, potash and sulfur,
and prospects for copper/molybdenum and silver (see Item 2 below).
Raw Materials. Raw materials, as the term is generally used, are not essential
to Registrant's mineral acquisition and development activities performed for
its own account. However, Registrant's commercialization of its properties is
dependent upon securing adequate supplies of energy and water. Continued
production of PPA at the Calgary facility will require adequate supplies of SPA
feedstock. Adequate supplies of this material are currently available in the
required quantities and at reasonable prices. There can be no assurance that
such availability will continue in the future.
Patents, Licenses and Franchises (See also the discussion above under the
heading "ADA Patents.") Registrant holds no patents, licenses, franchises or
land contract which it considers material in light of its other assets.
However, Registrant holds for itself, and in association with others, Federal
Potassium Prospecting Permits, State Potash and Alunite Leases, Federal
Potassium Preference Right Leases and Applications, Federal Phosphate
Prospecting Permits, Federal Phosphate Leases, State Phosphate Leases, fee
mineral rights and other exploration and mineral interests which are the basis
for Registrant to explore and develop the properties subject thereto. In
certain instances such mineral interests give preferential leasing rights to
Registrant upon location and demonstration to the US Geological Survey
Conservation Division that the deposit is a "valuable, workable deposit in
commercial quantities".
Competition and Scarcity of Mineral Lands. Many companies and individuals are
engaged in mineral exploration and development, including large, established
mining companies with substantial capabilities and long earnings records.
There is a limited amount of desirable mineral lands available for claim
staking, lease or other acquisition in the United States ("US"), Venezuela and
other areas where ESI contemplates conducting exploration activities. ESI may
be at a competitive disadvantage in acquiring mineral properties since it must
compete with these individuals and companies, many of which have greater
financial resources and larger technical staffs than ESI. From time to time,
specific properties or areas which would otherwise be attractive to ESI for
exploration or acquisition are unavailable due to their previous acquisition by
other companies.
Fluctuation in the Price of Minerals. The market price of minerals is
extremely volatile and beyond the control of ESI. Gold prices are generally
influenced by basic supply/demand fundamentals. The market dynamics of
supply/demand can be heavily influenced by economic policy, i.e., central banks
sales/purchases, political unrest, conflicts between nations, and general
perceptions about inflation. Fluctuating metal prices may have a significant
impact on ESI's results of operations and operating cash flow. Furthermore, if
the price of a mineral should drop dramatically, the value of ESI's properties
which are being explored or developed for that mineral could also drop
dramatically, and ESI might not be able to recover its investment in those
properties. The decision to put a mine into production, and the commitment of
the funds necessary for that purpose, must be made long before the first
revenues from production will be received. During the last five years, the
average annual market price of gold has fluctuated between $285 per ounce and
$384 per ounce. Price fluctuations between the time that such a decision is
made and the commencement of production can change completely the economics of
the mine. Although it is possible to protect against price fluctuations by
hedging in certain circumstances, the volatility of mineral prices represents a
substantial risk in the mining industry generally which no amount of planning
or technical expertise can eliminate. ESI is not involved in, nor does it
expect to enter into any hedging activities
Environmental Controls. Compliance with environmental quality requirements and
reclamation laws imposed by federal, state, provincial, and local governmental
authorities may necessitate significant capital outlays, may materially affect
the economics of a given property, or may cause material changes or delays in
ESI's intended activities. The Secretary of the Interior has directed the BLM
to propose amendments to surface management regulations that impose more
stringent reclamation and environmental protection requirements on mining
operations. The extent of the changes, if any, which may be made by the BLM is
not presently known, and the potential impact on ESI as a result of future
regulatory action is difficult to predict. New or different environmental
standards imposed by any governmental authority in the future may adversely
affect the ESI's activities.
United States Federal and state environmental laws and regulations potentially
applicable to mining exploration, development and operations of Registrant
include: (a) the assessment of environmental impacts pursuant to the National
Environmental Policy Act and its state counterparts; (b) the Endangered Species
Act and any comparable state laws; (c) water quality laws and regulations which
address impacts on waters of the United States or a state; (d) solid, and
possibly hazardous, waste laws and regulations to the extent that waste is
generated as a result of activities on the property; (e) air quality laws and
regulations if air emissions result from site operations; and (f) mined land
operational and reclamation requirements. In addition to the imposition of
requirements which may impact operations, a number of these environmental laws
and regulations impose permitting requirements related both to the initiation
of certain mining activities as well as to the ongoing operation once mining
commences. Local regulations in the US typically are land use related rather
than environmental. Although environmental regulatory costs to date and those
expected in 1999 are not significant, they may become substantial in the
future. Such costs are considered a part of the ordinary costs of Registrant's
business.
Uncertainty of Title. Several of the ESI's mining properties which are in the
United States are unpatented mining claims to which ESI, or those under which
ESI holds its rights, has only possessory title. Because title to unpatented
mining claims is subject to inherent uncertainties, it is difficult to
determine conclusively ownership of such claims. Since a substantial portion
of all mineral exploration, development and mining in the United States now
occurs on unpatented mining claims, this uncertainty is inherent in the mining
industry. In addition, in order to retain title to an unpatented mining claim,
a claim holder must have met annual assessment work requirements ($100 per
claim) through September 1, 1992 and must have complied with stringent state
and federal regulations pertaining to the filing of assessment work affidavits.
Moreover, after September 1, 1992, the right to locate or maintain a claim
generally is conditional upon payment to the United States of a rental fee of
$100 per claim per year for each assessment year instead of performing
assessment work. State law may, in some instances, still require performance
of assessment work.
The present status of the ESI's properties as unpatented mining claims located
on public lands of the U.S. allows the claimant the exclusive right to mine and
remove valuable minerals, such as precious and base metals and industrial
minerals, found therein, and also to use the surface of the land solely for
purposes related to mining and processing the mineral-bearing ores. However,
legal ownership of the land remains with the U.S. Accordingly, with an
unpatented claim, the U.S. retains many of the incidents of ownership of land,
the U.S. regulates use of the surface, and ESI remains at risk that the claims
may be forfeited either to the U.S. or to rival private claimants due to
failure to comply with statutory requirements as to locations and maintenance
of the claims. If there exists a valuable deposit of locatable minerals (which
is the requirement for the unpatented claim to be valid in the first place),
and provided certain levels of work and improvements have been performed on an
unpatented mining claim, the Mining Law of 1872 authorizes claimants to then
seek to purchase the full title to the claim, thereby causing the claim to
become the private property of the claimant. Such full ownership expands the
claimant's permissible uses of the property (to any use authorized for private
property) and eliminates the need to comply with maintenance and reporting
requirements necessary to protect rights in an unpatented claim. At present
there is a statutory moratorium in effect prohibiting the Department of
Interior from accepting and processing new applications for purchase of fee
title to mining claims. The moratorium is likely to continue indefinitely but
does not affect the ability to hold and develop valuable deposits by means of
unpatented mining claims.
Proposed Legislation Affecting the Mining Industry. For the last several
Congressional sessions, bills have been repeatedly introduced in the U.S.
Congress which would supplant or radically alter the provisions of the Mining
Law of 1872. As of December 31, 1998, no such bills have passed, although a
number of differing and sometimes conflicting bills are now pending. If
enacted, such legislation could substantially increase the cost of holding
unpatented mining claims and could impair the ability of companies to develop
mineral resources on unpatented mining claims. Under the terms of certain
proposed legislation, the ability of companies to obtain a patent on unpatented
mining claims would be nullified or substantially impaired. Moreover, certain
forms of such proposed legislation contain provisions for the payment of
royalties to the federal government in respect of production from unpatented
mining claims, which could adversely affect the potential for development of
such claims and the economics of operating existing mines on federal unpatented
mining claims. ESI's financial performance could therefore be affected
adversely by passage of such legislation. It is impossible to predict at this
point what any legislated royalties might be, but a potential three to four
percent gross royalty, assuming a gold price of $300 per ounce, would have an
approximated $9 to $12 per ounce impact on ESI's costs of any production from
unpatented mining claims.
Uncertainty of Funding for Exploration. ESI has funded much of its exploration
and acquisition activities through joint venture arrangements, which minimize
the cost of such activities to ESI and allow it to explore and acquire a
greater number of properties than it would otherwise be able to explore or
acquire on its own. ESI has also funded a portion of its exploration
activities without joint venture participation, resulting in increased costs to
ESI. ESI has been successful in raising such funds for its exploration
activities. Additional funding from existing partners or third parties,
however, may be necessary to conduct detailed and thorough evaluations of, and
to develop certain properties. ESI's ability to obtain this financing will
depend upon, among other things, the price of gold and the industry's
perception of its future price. Therefore, availability of funding is
dependent largely upon factors outside of ESI's control, and cannot be
accurately predicted. ESI does not know from what sources it will derive any
required funding. If ESI is not able to raise additional funds (as to which
there can be no assurance), it will not be able to fund certain exploration
activities on its own.
Uncertainty of Development and Operating Property Economics and Ore Grades at
Development Properties. Decisions as to whether any of the mineral development
properties which ESI now holds or which it may acquire in the future contain
commercially minable deposits, and whether such properties should therefore be
sold or brought into production, depend upon the results of exploration
programs and/or feasibility analyses and the recommendations of duly qualified
engineers or geologists. Such decisions involve consideration and evaluation
of several significant factors, including, but not limited to, the (a) costs of
bringing a property into production, including exploration and development
work, preparation of production feasibility studies and construction of
production facilities, (b) availability and costs of financing, (c) ongoing
costs of production, (d) market prices for the mineral to be produced, and (e)
the amount and grades of reserves or mineralized material. There can be no
assurance that any of the development properties now held by ESI, or which may
be acquired by ESI, contains a commercially minable mineral deposit, and
therefore no assurance that ESI will ever generate a positive cash flow from
the sale of or production operations on such properties. In addition, once a
property is sold with a retained royalty or placed into production, risks still
exist that the amount and grade of its reserves will not actually be as
predicted. To the extent that lower amounts and/or grades of reserves are
experienced, costs per unit produced and profitability can be adversely
affected. Depending upon the extent of such an effect in any of ESI's
properties, ESI could incur a writedown on its investment in any such property.
Seasonality of Activities. The activities of Registrant performed for its own
account are not seasonal, although winter weather may limit certain activities.
Dependence on Major Customers. (See also the discussions above under the
headings "Market for Purified Phosphoric Acid" and "Market for ADA Services"
and Note 14 to the Consolidated Financial Statement submitted in response to
Item 7 below.) Registrant's mineral exploration and property acquisition
activities are not dependent upon one or a few major customers. The search for
and commercialization of economic mineral deposits is highly competitive.
Large companies having greater financial resources than Registrant and many
small mining companies are active in acquiring, evaluating and developing
mineral resource prospects in the western United States and Venezuela.
Research and Development Activities. Registrant spent approximately $19,000 and
$98,000 on research and development activities related to the Calgary
extraction facility during 1998 and 1997, respectively. ADA spent
approximately $62,000 and $127,000 on research and development activities
related to further development of its technology during 1998 and 1997,
respectively.
Employees. As of December 31, 1998 Registrant employed 5 personnel at its
Golden, Colorado, offices and 25 full-time at the Calgary facility. ADA
employs 12 people at its offices in Littleton, Colorado and 2 others at
locations in Alabama and New Hampshire. In addition, other personnel were
employed on a contract basis for specific project tasks.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Annual Report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. In particular such forward-looking
statements may be found in this section and under the heading "Description of
Business." 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 or under the heading "Description of Business."
Liquidity and Capital Resources
Management believes that existing working capital, a recently approved credit
facility and recent private placements of common stock 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 1999. Registrant had a
working capital deficit of $762,000 at year end. This deficit has been
significantly reduced with proceeds from the recent private placements.
Management expects to further reduce the remaining deficit through
renegotiation of due dates on short-term indebtedness and improving cash flow,
although there can be no assurances that such negotiations will be successful
or that positive cash flow will be achieved. 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 achievement of positive cash
flow is dependent upon the successful ongoing operation of the units currently
operating at APC and in Oregon, and the sale of at least two other units to any
of a number of utilities where proposals have been issued. Significant delay
in signing new contracts or unsatisfactory operations at the units operating
could delay or frustrate such achievement. Planned capital expenditures to
sustain and improve ongoing operations for 1999 are estimated at $400,000.
Registrant 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 (see Item 1(b) above) 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 (see Item 1(a) above) and has
received approval, subject to definitive documentation, 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.
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.
Registrant is funding the majority of cash costs of the Venezuelan gold
exploration activities. 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 $2,688,000 for 1998 versus $3,178,000 for
1997 and resulted primarily from the operating losses less non-cash charges for
interest related to convertible debentures. Cash flow from investing
activities for 1998 includes proceeds from sale of building of $337,000 and
capital expenditures of $729,000. Cash flow from financing activities in 1998
consisted of payments on notes payable and long-term debt of $500,000, proceeds
from the issuance of stock of $167,000 and proceeds from the issuance of
convertible debentures and notes payable, net of $3,203,000. Cash flow from
investing activities for 1997 included funding and collections on notes
receivable of $50,000, and capital expenditures of $3,154,000 and the purchase
of investment in ADA of $417,000. Cash flow from financing activities in 1997
consisted of payments on restructuring of extraction plant liability of
$1,250,000, payments on notes payable and long-term debt of $886,000, proceeds
from the issuance of stock of $42,000 and proceeds from the issuance of
convertible debentures and notes payable, net of $8,586,000.
Results of Operations
Revenues from sales totaled $4,686,000 in 1998 versus $1,468,000 in 1997. In
1998 $2,818,000 of that amount was generated by ADA and $1,868,000 from
Calgary phosphate sales. Revenues from ADA increased from $945,000 in 1997 due
to the sale of three flue gas conditioning units in 1998 vs. one in 1997 and
increasing chemical sales to a greater number of units operating in 1998.
Phosphates sales from Calgary increased from $514,000 in 1997 due to expanding
markets and improving product quality. ADA's revenues were less than
anticipated due to (1) delays in the installation of units at Wisconsin and
Mississippi, (2) cessation of chemical injection at MPC when the treated fly-
ash prolonged the set time of cement into which it was being recycled, and (3)
less than expected additional sales due to market concern over the recycled
fly-ash issue. Chemical sales to MPC in 1998 totaled approximately $281,000
which will not be received in future periods due to MPC no longer purchasing
chemicals from us as a result of a capital conversion of their units.
In the summer of 1998, ADA developed a new chemical blend that has alleviated
the cement set time problem and has improved overall performance in the several
units where it has been utilized. (See discussion of ADA's Technology and
Services above in Item 1.b.) Sales of phosphate products were also less than
targeted because (1) ADA's demand was less than expected as described above,
and (2) product quality problems reduced margins and market acceptance,
restricting sales. Additional filtering and other process changes instituted in
the fourth quarter of 1998 have thus far solved the product quality issue, and
the facility has been routinely been producing acceptable technical grade
material since that time. Rental income included in other income decreased
slightly in 1998 due to the sale of ESI office building in September 1998. Also
included in other income for 1998 is gain on the sale of that building of
$158,000. Other income in 1997 includes interest income earned from investment
of funds on hand and a legal settlement in the amount of $30,000.
Operating expenses increased significantly in 1998 in response to increased
sales and revenues related to both Calgary phosphate production ($1,663,000 of
the increase) and ADA ($1,157,000 of the increase). The Company experienced
negative gross margins at its Calgary operations in 1997 and 1998 primarily due
to the start up nature of the phosphate production and the product quality
problem mentioned above. The Company expects such margins to improve in 1999
with expected increased sales. ADA experienced positive gross margins in 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 1998 to
$81,000 from $225,000 in 1997. 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 $500,000 in 1998 as a result of increases in Calgary related to
increased production (an increase of $254,000), ADA's increased activities (an
increase of $686,000), decreased investor relations expenses (a decrease of
$1,227,000), and adoption of a sabbatical leave policy during 1997 not
incurred in 1998 ($200,000 of the decrease). Future investor relations expenses
are expected to run between $100,000 and $150,000 for the next several years.
In 1997 ESI's Board of Directors adopted a sabbatical leave policy and $200,000
was accrued in that year for the estimated prior service costs associated with
the policy. Approximately $65,000 of that accrued liability was reduced in
1998 as a result of one employee taking a sabbatical leave. The ongoing annual
costs of the policy are estimated at approximately $15,000.
Registrant's interest expense totaled approximately $1,264,000 for 1998 and
$3,062,000 for 1997. Interest expense includes approximately $84,000 and
$20,000 in 1998 and 1997, respectively, from the consolidation of the Canadian
subsidiary's and ADA's results. Included in interest expense for 1998 and
1997 is $1,027,000 and $2,595,000, respectively of non-cash charges
representing the 25% discount from market related to the convertible debentures
issued and convertible in those years.
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.
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.
Item 12. Certain Relationships and Related Transactions.
(a) During 1997, Dr. Bisque borrowed a total of $50,000 from Registrant at an
interest rate of 8%. The loan was paid back to Registrant prior to year end.
The amount borrowed was collateralized by amounts owing to Dr. Bisque by
Registrant and was made available from funds that would have otherwise only
earned Registrant approximately 5%.
In 1991, the Registrant converted a total of $366,000 of deferred salaries
payable to Mssrs. Bisque, Bloom and McKinnies to notes payable bearing interest
at 9%, payable on demand, and granted them rights to convert such notes payable
to shares of common stock at the then current market price of $.54 per share.
The notes were collateralized by a mining property. As of December 31, 1997,
$70,000 was outstanding under such notes. All of that amount was converted to
common stock during the year ended December 31, 1998.
In 1997, Registrant issued a convertible debenture in the amount of $1,000,000
(the "Debenture") to Tectonic Construction Co. ("TCC") and borrowed $500,000
from TCC under a short-term note (the "1997 Note"). Mr. Lowdermilk, a director
of Registrant, is the president and majority shareholder of TCC. These amounts
were collateralized by a mining property, and buildings, equipment, receivables
and inventory in Calgary. The Debenture and the 1997 Note bear interest at the
greater of prime plus two points or 10% which interest is payable quarterly.
The Debenture, if not converted, is due March 31, 2000. The Debenture is
convertible at any time after November 30, 1997 into shares of common stock at
a weighted average rate of $3.12. The 1997 Note was repaid in full in
February, 1998. In May 1998 Registrant borrowed $250,000 from TCC under a
short-term note (the "1998 Note") due March 31, 1999. The 1998 Note is
collateralized by receivables and inventory in Calgary. The 1998 Note bears
interest at the greater of prime plus two points or 10% which interest is
payable quarterly.
In the fall of 1998, Registrant sold an office building in Golden , Colorado to
a son of an officer and director. The sales price of $350,000 was based on an
independent appraisal of the property. Registrant continues to rent a portion
of the building on a month-to-month basis.
During February 1999, Registrant sold a total of 267,245 shares of its common
stock to a son and two sons-in-law of its officers and directors. The shares
were sold at the then current market prices ranging from $.81 to $.91 per share
and on the same terms and conditions as to unaffiliated third parties who also
purchased shares at that time. Further details of the sales are included above
in Items 1(b) and 5(d) and in Note 9 to the Consolidated Financial Statements
submitted in response to Item 7.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Earth Sciences, Inc.
- --------------------
(Registrant)
By /s/ Mark H. McKinnies /s/ Duane N. Bloom
--------------------- ------------------
Mark H. McKinnies, President Duane N. Bloom, Member of
and Principal Financial Officer Executive Committee
Date: July 9, 1999 July 9, 1999
------------- -------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Ramon E. Bisque /s/ Robert H. Lowdermilk
- ------------------- ------------------------
Ramon E. Bisque Robert H. Lowdermilk
Chairman of The Board of Directors Director
July 9, 1999 July 9, 1999
- ------------ ------------
Date Date
/s/Duane N. Bloom /s/ Michael D. Durham
- ------------------ ---------------------
Duane N. Bloom, Director Michael D. Durham, Director
July 9, 1999 July 9, 1999
- ------------ ------------
Date Date
/s/ Mark H. McKinnies
- ---------------------
Mark H. McKinnies, Director
July 9, 1999
- ------------
Date
