U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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: 23,759,521 Shares of
Common Stock, one cent par value outstanding as of May 11, 1998.
Transitional Small Business Disclosure Format: Yes______ ; No X
<PAGE>
PART I
Item 1. FINANCIAL STATEMENTS
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 1999
UNAUDITED
ASSETS (amounts in thousands)
CURRENT ASSETS:
Cash, and cash equivalents $ 133
Trade receivables, net of allowance for
doubtful accounts of $4 732
Inventories 560
Prepaid expenses and other 156
-----
Total current assets 1,581
PROPERTY, PLANT AND EQUIPMENT, at cost 20,850
Less accum. depreciation and amortization (5,407)
------
Net property and equipment 15,443
INTANGIBLE ASSETS, net of $488 in amortization 3,140
------
TOTAL ASSETS $20,164
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable $ 805
Accrued expenses 257
Billings in excess of costs on uncompleted contracts 53
Notes payable 185
Other current liabilities 194
-----
Total current liabilities 1,494
LONG-TERM LIABILITIES:
Extraction plant liability 4,850
Note payable - related party 1,250
Other liabilities 598
-----
6,698
STOCKHOLDERS' EQUITY:
Common stock $.01 par value 236
Additional paid-in capital 25,374
Accumulated deficit (13,638)
------
Total stockholders' equity 11,972
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,164
======
See accompanying notes.
1
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998
UNAUDITED
1999 1998
(amounts in thousands, except per share amounts)
NET REVENUES:
Sales $ 1,124 1,587
Other 3 24
----- -----
Total revenues 1,127 1,611
COST AND EXPENSES:
Operating 966 1,734
General and administrative 667 844
Research and development 16 12
Depreciation and amortization 168 171
----- -----
Total expenses 1,817 2,761
----- -----
OPERATING LOSS (690) (1,150)
OTHER INCOME (EXPENSE)
Interest expense (51) (1,054)
Other, net (5) (7)
----- -----
(56) (1,061)
----- -----
NET LOSS AND COMPREHENSIVE LOSS $ (746) (2,211)
===== =====
NET LOSS PER COMMON SHARE $ (.03) (.14)
==== ====
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 22,689 15,335
====== ======
- --------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Three Months Ended March 31, 1999 and 1998
UNAUDITED
1999 1998
(amounts in thousands)
Accumulated deficit as of January 1 $(12,892) (7,452)
Net loss for the period (746) (2,211)
------ -----
Accumulated deficit as of March 31 $(13,638) (9,663)
====== =====
See accompanying notes.
2
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
UNAUDITED
1999 1998
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (746) $ (2,211)
Adjustments to reconcile net loss to
net cash used in operations:
Depreciation and amortization 168 171
Interest expense related to debt discount - 1,027
Expenses paid with stock 15 53
Change in operating assets and liabilities (493) 13
----- -----
Net cash used by operating activities (1,056) (947)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (70) (596)
Increase in other assets - (27)
------ ------
Net cash used by investing activities (70) (623)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes and long-term debt - (500)
Proceeds from issuance of common stock 1,137 -
Net proceeds from convertible debentures - 2,834
----- -----
Net cash provided by financing activities 1,137 2,334
Net increase in cash and cash equivalents 11 764
Cash and cash equivalents at beginning of period 122 332
---- ----
Cash and equivalents at end of period $ 133 $ 1,096
==== =====
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 36 $ 25
==== ====
Conversion of notes payable and debentures $ 27 $ 9,055
==== =====
See accompanying notes.
3
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 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)
Quarter ended March 31, 1999
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 495 $ 629 $ - $ 1,124
Intersegment revenues 98 88 - (186) -
Other revenues 3 - - - 3
--- ---- ---- ---- -----
Total revenue $ 101 $ 583 $ 629 $ (186) $ 1,127
==== ==== ==== ==== =====
Segment profit (loss) $(158)$ (420)$ (168) * $ (746)
Quarter ended March 31, 1998
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 481 $1,105 $ - $ 1,586
Intersegment revenues 55 - - (55) -
Other revenues 23 - 1 - 24
--- --- ----- ---- -----
Total revenue $ 78 $ 481 $1,106 $ (55) $ 1,610
==== ==== ===== ==== =====
Segment profit (loss) $(386)$(1,838)$ 13 * $(2,211)
* There were no profits on intersegment revenues.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 or under the heading
"Description of Business" contained in the Company's Annual Report on Form
10KSB for the year ended December 31, 1998.
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. 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, successful start-up and
operation of the unit to be installed in Louisiana under the recently signed
contract with CLECO, and the sale of at least one other unit 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. Additional funds may be required to fund expanded
exploration activities in Venezuela and to 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, subject to definitive
documentation, of a $400,000 credit facility from the Bank of Hongkong secured
by trade accounts receivable of ESEC.
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.
4
<PAGE>
Cash flow used in operations totaled $1,056,000 for the 1st quarter of 1999
versus $947,000 for the same period in 1998 and resulted primarily from the
operating losses less non-cash charges for depreciation and amortization plus
changes in operating assets and liabilities. Cash flow from investing
activities for 1999 includes capital expenditures of $70,000. Cash flow from
financing activities in 1999 consisted of proceeds from the issuance of stock
of $1,137,000. Cash flow from investing activities for 1998 included capital
expenditures of $596,000 and an increase in other assets of $27,000. Cash flow
from financing activities in 1998 consisted of payments on notes and long term
debt of $500,000 and net proceeds from the issuance of convertible debentures
of $2,834,000.
Results of Operations
Revenues from sales totaled $1,124,000 in the 1st quarter of 1999 versus
$1,587,000 for the same period in 1998. In 1999, $629,000 of that amount was
generated by ADA and $495,000 from Calgary phosphate sales. ADA's revenues
were less than anticipated due to failure to recommence continuing chemical
sales to two units installed in Mississippi and delays in signing new contracts.
Sales of phosphate products were also less than targeted because ADA's demand
was less than expected as described above, and limited working capital
restricted raw material purchases and inventory buildup. Other income recognized
in 1998 primarily represented rental income on a building sold in the fall of
1998.
Operating expenses decreased significantly in the 1st quarter of 1999 in
response to somewhat decreased sales and operating efficiencies. The Company
continues to experience negative gross margins at its Calgary operations in
1999 primarily due to the relatively high fixed costs of the phosphate pro-
duction. Such margins have improved in 1999 over the same period in 1998 but
are expected to remain negative until sales increase to approximately 1,000
tons per month of primary product. That level of sales is anticipated by the
third quarter of 1999. ADA has experienced positive gross margins in 1999, but
these were less than expected from routine operations and resulted from ADA
continuing efforts to establish 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 expenses
increased slightly in 1999 to $16,000 from $12,000 in 1998. General and
administrative expenses decreased by a net of approximately $177,000 in he
first quarter of 1999 as a result of decreased investor relations expenses and
operational efficiencies.
Registrant's interest expense totaled approximately $51,000 for the first
quarter of 1999 as compared to $1,054,000 for the same period in 1998. Included
in interest expense for 1998 was $1,027,000 of non-cash charges representing
the 25% discount from market related to the convertible debentures issued and
convertible in that year.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities. In February 1999, Registrant sold
1,260,623 shares of is common stock for cash consideration of $1,137,000 to a
limited number of accredited investors in reliance upon 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: May 12, 1999 /s/ Mark H. McKinnies
----------------------
Mark H. McKinnies
President and Chief Financial Officer
5
<PAGE>
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