U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
____X____ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
______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 of (I.R.S.Employer Identification No.)
incorporation or organization)
8100 SouthPark Way, B-2, Littleton, Colorado 80120
(Address of principal executive offices) (Zip Code)
(303)734-1727
(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: 31,192,823 Shares of
Common Stock, one cent par value outstanding as of August 4, 2000.
Transitional Small Business Disclosure Format: Yes______ ; No ___X___
<PAGE> 1
PART I
Item 1. FINANCIAL STATEMENTS
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 2000
UNAUDITED
ASSETS (amounts in thousands)
CURRENT ASSETS:
Cash, and cash equivalents $ 123
Trade receivables, net of allowance
for doubtful accounts of $7 219
Factored receivables 290
Inventories 178
Prepaid expenses and other 81
-----
Total current assets 891
PROPERTY, PLANT AND EQUIPMENT, at cost 15,702
Less accumulated depreciation and amortization (4,651)
------
Net property and equipment 11,051
INTANGIBLE ASSETS, net of $978 in amortization 2,665
OTHER ASSETS 7
------
TOTAL ASSETS $ 14,614
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable $ 499
Notes payable:
Financial institution 378
Receivables sold with recourse 290
Related party 200
Equipment purchased from utility 10
Accrued expenses 223
Other current liabilities 57
-----
Total current liabilities 1,657
LONG-TERM LIABILITIES:
Extraction plant liability 4,850
Notes to related parties 1,075
Other liabilities 716
-----
6,641
STOCKHOLDERS' EQUITY:
Common stock $.01 par value 312
Additional paid-in capital 28,207
Foreign currency translation adjustment (1,837)
Accumulated deficit (20,366)
------
Total stockholders' equity 6,316
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,614
======
See accompanying notes.
<PAGE> 2
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands, except shares and per share amounts)
3 Months 6 Months 3 Months 6 Months
NET REVENUES $ 916 1,982 1,111 2,235
COST AND EXPENSES:
Operating 390 854 1,170 2,136
General and administrative 493 1,048 723 1,390
Research & development 36 61 20 36
Depreciation and amortization 292 581 180 348
----- ----- ----- -----
Total expenses 1,211 2,544 2,093 3,910
----- ----- ----- -----
OPERATING LOSS (295) (562) (982) (1,675)
OTHER INCOME (EXPENSE):
Interest expense (77) (162) (167) (218)
Writedown in carrying value of
mineral properties - - - (1,223)
Other, net 3 95 8 6
----- ----- ----- -----
(74) (67) (159) (1,435)
----- ----- ----- -----
NET LOSS $ (369) (629) (1,141) (3,110)
Stock resale rights applicable to
certain shareholders - - - (309)
----- ----- ----- -----
NET LOSS APPLICABLE TO OTHER
COMMON STOCKHOLDERS $ (369) (629) (1,141) (3,419)
====== ====== ====== ======
NET LOSS PER COMMON Share (Basic
and Diluted): $(.01) (.02) (.05) (.15)
==== ==== ==== ====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING: 29,688,000 28,225,000 23,784,000 23,239,000
========== ========== ========== ==========
------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Six Months Ended June 30, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands)
Accumulated deficit as of January 1 $ (19,737) (12,892)
Net loss for the period (629) (3,110)
-------- --------
Accumulated deficit as of June 30 $ (20,366) (16,002)
====== ======
See accompanying notes.
<PAGE> 3
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (629) $(3,110)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 581 348
Writedown of carrying value of mineral properties - 1,223
Non-cash interest expense - 114
Expenses paid with stock 107 44
Change in operating assets and liabilities (73) 59
Net decrease in other assets and liabilities (28) 235
----- -----
Net cash used by operating activities (42) (1,086)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of land 148 -
Capital expenditures (178) (172)
----- -----
Net cash used by investing activities (30) (172)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (133) -
Proceeds from issuance of common stock 42 1,147
Proceeds from notes payable 143 -
----- -----
Net cash provided by financing activities 52 1,147
----- -----
Net decrease in cash and cash equivalents (20) (111)
Cash and cash equivalents at beginning of period 143 122
----- -----
Cash and equivalents at end of period $ 123 $ 11
===== =====
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 158 $ 42
===== =====
Conversion of notes payable and debentures $ - $ 27
===== =====
See accompanying notes.
<PAGE> 4
Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000
(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 1999 Form 10-KSB.
(2) Business Segment Information
Corporate headquarter activities are part of the ESI operating segment. The
long-lived assets of the ESI and ADA segments are located in the US while the
assets of ESEC are located in Canada. All significant customers are US
companies.
(amounts in thousands)
Six months ended June 30, 2000
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ - $1,982 $ - $ 1,982
Intersegment revenues 7 - - (7) -
--- --- ----- ---- -----
Total revenue $ 7 $ - $1,982 $ (7) $ 1,982
==== === ===== ==== =====
Long lived assets $ 501 $14,418 $ 783 - $ 15,702
Segment profit (loss)$ (80)$ (480)$ (69) * $ (629)
Six months ended June 30, 1999
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 1,079 $1,156 $ - $ 2,235
Intersegment revenues 187 96 - (283) -
--- ---- ---- ---- -----
Total revenue $ 187 $ 1,175 $1,156 $ (283) $ 2,235
==== ===== ===== ==== =====
Long lived assets $ 1,067 $17,978 $ 667 - $ 19,712
Segment profit (loss)$(1,673)$ (901)$ (536) * $ (3,110)
* 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, 1999.
<PAGE> 5
Liquidity and Capital Resources
Registrant had a working capital deficit of $767,000 at 6/30/00. This deficit
increased during the six month period from a deficit of $631,000 at 12/31/99.
The increase in the deficit is primarily due to a scheduled increase of $100,000
in note payments to a related party that may be due upon written request, and
the purchase of equipment by ADA in the first six months. Management expects to
reduce the deficit through continued and improved cash flow at ADA. Management
is currently seeking as much as $5 million from an industry partner for working
capital and improvements to re-start and increase production at Calgary to
sustainable routine levels expected to yield positive cash flow. However, there
can be no assurances that investment funds for the Calgary plant will be found
or that cash flow will improve at ADA.
For ADA, the attainment and continuation of positive cash flow is dependent upon
the successful ongoing operation of the units currently in-place in Wisconsin,
Louisiana, Iowa, Nebraska and Oregon. Unsatisfactory operations at any of the
units operating could frustrate such cash flow. Planned capital expenditures
for ADA to sustain and improve ongoing operations for 2000 are estimated at
$300,000 of which $175,000 was committed in the first six months of 2000.
Registrant expects to fund these requirements out of existing working capital.
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
proprietary chemicals will be applicable to a broader range of customers with
problem flue gases. Although the award was made in September 1999, the contract
was not signed until January 2000. Work commenced under the grant at that time.
Revenue of $97,000 has been recognized under the contract through 6/30/00.
In effort to reduce cash flow deficits from the Calgary facility, as of August
31, 1999, management suspended production. Although, in the opinion of
management, the facility had demonstrated adequate capacity and quality of
production, and markets for its products were established, the suspension in
phosphate purification production at Calgary is expected to 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 and improving
margins on by-products, success in marketing phosphate products and meeting
competition in 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 US manufacturers at only slightly higher costs.
Based on current estimates, the Calgary facility may require as much as U.S.
$5,000,000 to re-start production and finalize modification for the production
of food grade phosphoric acid. Registrant is seeking to finance those
requirements from arrangements with industry partners. The timing of a re-start
of production and modification is uncertain and is not expected until an
arrangement can be reached with a third party. Discussions are continuing with
several interested parties, but all such discussions are in preliminary stages
at this time.
The credit facility from the Bank of Hongkong was a demand, revolving loan
limited to the lesser of 85% of qualified receivables or $400,000, and was
secured by accounts receivable of ESEC. The credit facility is currently in
default due to the suspension of production at ESEC. Interest continues to
accrue at the rate of the Bank's US base rate plus 1% (a combined rate of 11% at
6/30/00). The Bank has demanded the entire amount of the loan and interest. The
loan is guaranteed by ESI and discussions are ongoing to explore settlement
alternatives with the Bank. As of 6/30/00, a net of $379,000 had been advanced
under the loan, excluding accrued interest.
<PAGE> 6
Registrant is funding the majority of cash costs of the Venezuelan gold
exploration activities, which for 2000 are expected to be only $20,000. The
costs of planned activities are expected to be met through existing working
capital. Registrant has curtailed field and other activities in Venezuela to a
level required to maintain its established positions.
Cash flow used by operations totaled $(42,000) for the first six months of 2000
versus a use of $(1,086,000) for the same period in 1999. The use in 2000
resulted primarily from the consolidated operating losses plus non-cash charges
for depreciation and amortization. Cash flow from investing activities for first
six months of 2000 includes a use for capital expenditures of $178,000 and
proceeds from the sale of land of $148,000. Cash flow from financing activities
in the first six months of 2000 consisted of proceeds from the issuance of
common stock of $42,000, payments on notes payable of $133,000 and proceeds from
a note payable of $143,000. Cash flow from investing activities for the same
period in 1999 includes capital expenditures of $172,000. Cash flow from
financing activities in 1999 consisted of proceeds from the issuance of stock of
$1,147,000.
Results of Operations
Revenues from sales totaled $1,982,000 in the first six months of 2000 versus
$2,235,000 in the same period in 1999. In 2000, all of that amount was generated
by ADA, as operations are still suspended in Calgary. Revenues for the six
months from ADA increased 71% from $1,156,000 in 1999 due to increasing chemical
sales to a greater number of units operating in 2000 and the sale of two
permanent units to utilities where demonstration units were operating. Phosphate
sales from Calgary decreased to zero from $1,080,000 in 1999 as a result of the
suspension of production activities at the end of August 1999. ADA's revenues
were somewhat lower than anticipated due to maintenance downtimes at its utility
customers that reduced expected chemical sales.
Operating expenses decreased significantly in the first six months of 2000
primarily in response to the suspension of operations at ESEC. The decrease
consists of a decrease related Calgary phosphate production ($1,165,000 of the
decrease) net of an increase at ADA of $73,000 corresponding to the increase in
sales. The Company experienced negative gross margins at its Calgary operations
in 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 such margins improved in the second half of 1999 with
realization of anticipated increased sales and lower raw material costs, working
capital was not sufficient to sustain the level of production and sales needed
to generate positive cash flow. ADA has experienced positive and increasing
gross margins in 1999 and 2000 as ADA continues to establish market acceptance
and its market share for its technology. The Company's ultimate success will be
dependent upon continually improving gross margins, which in turn are dependent
upon increased sales and market penetration.
General and administrative expenses decreased by a net of approximately $342,000
in first six months of 2000 as compared to 1999 primarily as a result of
decreased activity in Calgary and consolidation of the Golden, Colorado office
with ADA's offices in Littleton in 2000.
Consolidated research and development increased in the first six months of 2000
to $61,000 from $36,000 in the same period in 1999 due primarily to work on the
recent DOE contract and bidding on new contracts in 2000. Future consolidated
research and development expenses, except for those anticipated to be funded by
DOE contract and others that may be awarded, are expected to be approximately
$50,000 per year for the next several years.
Depreciation and amortization increased from $348,000 in the first six months of
1999 to $581,000 in the first six months of 2000 as a result of the 15 year
straight line depreciation of the Calgary facility that has been provided while
the facility is idled versus the units of production method under which
depreciation was provided during production in 1999.
<PAGE> 7
Registrant's interest expense totaled approximately $162,000 for the first six
months of 2000 and $218,000 for same period in 1999. The amounts in 1999
included penalty interest accrued during the period of delay in the
effectiveness of a registration statement.
In the first six months of 1999, Registrant sold a total of 1,260,000 shares of
common stock and received net proceeds of $1,147,000. 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. Options were issued during 1999, exercisable only to the extent
of Registrant's previous obligation to issue such additional shares. A non-
charge of $309,000 (similar to a dividend) against net income is shown in the
accompanying statement of operations in fiscal 1999 for the obligation to issue
such additional shares.
Included in other income (expense) for the first six months of 1999 was a one-
time, non-cash charge of $1,223,000 representing the write down 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. Also included in
other income in the first six months of 2000 is a gain of $76,000 recognized
upon the sale of a depleted mineral property.
In the fourth quarter of 1999, Registrant adopted the American Institute of
Certified Public Accountants Statement of Position No.98-5, Reporting on the
Cost of Start-up Activities ("SOP 98-5"). SOP 98-5 requires that all start-up
costs be expensed as incurred and all start-up costs previously recorded be
accounted for as a cumulative effect of a change in accounting principle.
Registrant had previously capitalized certain costs in the 1980's associated
with the original start-up of the solvent extraction facility in Canada. Based
on SOP 98-5, Registrant expensed these costs, totaling approximately $2,603,000,
net of depreciation charges recognized in prior years, as a cumulative effect of
a change in accounting principle in that quarter.
PART II. OTHER INFORMATION
Item 2. Changes in Securities - During the first six months of 2000, Registrant
issued a total of 4,173,650 shares of its common stock upon the exercise of
certain stock options issued in 1999. Registrant received a total of $41,736
upon such exercise pursuant to the terms of the option agreements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - No change from Item 13 of Registrant's 1999 Form 10-KSB.
Exhibit 27 - Financial Data Schedule (electronic filing only)
(b) Forms 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Earth Sciences, Inc.
Registrant
Date: August 8, 2000 /s/ Mark H. McKinnies
---------------------
Mark H. McKinnies
President and Chief Financial Officer
<PAGE> 8
