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, 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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: 28,327,430 Shares of
Common Stock, one cent par value outstanding as of May 12, 2000.
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, 2000
UNAUDITED
ASSETS (amounts in thousands)
CURRENT ASSETS:
Cash, and cash equivalents $ 329
Trade receivables, net of allowance for
doubtful accounts of $7 175
Factored receivables 291
Inventories 193
Prepaid expenses and other 55
------
Total current assets 1,043
PROPERTY, PLANT AND EQUIPMENT, at cost 15,685
Less accum. depreciation and amortization (4,457)
------
Net property and equipment 11,228
INTANGIBLE ASSETS, net of $880 in amortization 2,760
OTHER ASSETS 7
------
TOTAL ASSETS $ 15,038
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable $ 546
Notes payable:
Financial institution 379
Receivables sold with recourse 291
Related party 200
Equipment purchased from utility 72
Accrued expenses 198
Other current liabilities 65
-----
Total current liabilities 1,751
LONG-TERM LIABILITIES:
Extraction plant liability 4,850
Notes to related parties 1,075
Other liabilities 769
-----
6,694
STOCKHOLDERS' EQUITY:
Common stock $.01 par value 270
Additional paid-in capital 28,157
Foreign currency translation adjustment (1,837)
Accumulated deficit (19,997)
------
Total stockholders' equity 6,593
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,038
======
See accompanying notes.
1
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands)
NET REVENUES $ 1,066 1,124
COST AND EXPENSES:
Operating 464 966
General and administrative 555 667
Research and development 25 16
Depreciation and amortization 289 168
----- -----
Total expenses 1,333 1,817
----- -----
OPERATING LOSS (267) (693)
OTHER INCOME (EXPENSE):
Mineral exploration costs capitalized in
prior years - (1,223)
Interest expense (85) (51)
Other, net 92 (2)
----- -----
7 (1,276)
----- -----
NET LOSS $ (260) (1,969)
STOCK RESALE RIGHTS APPLICABLE TO
CERTAIN SHAREHOLDERS - (309)
NET LOSS APPLICABLE TO OTHER COMMON ----- -----
STOCKHOLDERS $ (260) (2,278)
===== =====
NET LOSS PER COMMON SHARE $ (.01) (.10)
==== ====
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,762,000 22,689,000
========== ==========
- -------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Three Months Ended March 31, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands)
Accumulated deficit as of January 1 $(19,737) (12,892)
Net loss for the period (260) (1,969)
------ ------
Accumulated deficit as of March 31 $ (19,997) (14,861)
====== =====
See accompanying notes.
2
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (260) $ (1,969)
Adjustments to reconcile net loss to net
cash provided (used) in operations:
Depreciation and amortization 289 168
Expenses paid with stock 17 15
Mineral exploration costs previously
capitalized - 1,223
Gain on sale of land (76) -
Change in operating assets and liabilities 154 (493)
----- -----
Net cash provided (used) by operating
activities 124 (1,056)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of land 148 -
Capital expenditures (160) (70)
----- -----
Net cash used by investing activities (12) (70)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (71) -
Proceeds from note payable 143 -
Proceeds from issuance of common stock 2 1,137
----- -----
Net cash provided by financing activities 74 1,137
----- -----
Net increase in cash and cash equivalents 186 11
Cash and cash equivalents at beginning of
period 143 122
----- -----
Cash and equivalents at end of period $ 329 $ 133
==== ====
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 128 $ 36
==== ====
Conversion of notes payable $ - $ 27
==== ====
See accompanying notes.
3
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 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)
Quarter ended March 31, 2000
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ - $1,066 $ - $ 1,066
Intersegment revenues 7 - - (7) -
--- --- ----- ---- -----
Total revenue $ 7 $ - $1,066 $ (7) $ 1,066
==== === ===== ==== =====
Long lived assets $ 500 $14,418 $ 767 - $ 15,685
Segment profit (loss)$ (31)$ (267)$ 38 * $ (260)
Quarter ended March 31, 1999
ESI ESEC ADA Eliminating Entries Consolidated
Revenue from
external customers $ - $ 495 $ 629 $ - $ 1,124
Intersegment revenues 98 88 - (186) -
--- ---- ---- ---- -----
Total revenue $ 98 $ 583 $ 629 $ (186) $ 1,124
==== ===== ===== ==== =====
Long lived assets $ 1,059 $17,965 $ 603 - $ 19,627
Segment profit (loss)$(1,381)$ (420)$ (168) * $ (1,969)
* 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.
Liquidity and Capital Resources
Registrant had a working capital deficit of $708,000 at 3/31/00. This deficit
increased during the quarter from a deficit of $631,000 at 12/31/99 although
the Company achieved a positive cash flow from operations for the first quarter
of 2000. 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 quarter. Management
is currently seeking approximately $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. Management
expects to reduce the deficit through continued and improved cash flow at ADA.
However, there can be no assurances that investment funds for the Calgary plant
will be found or that the positive cash flow that has been achieved at ADA will
continue.
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.
4
<PAGE>
For ADA, the continuation of positive cash flow is dependent upon the
successful ongoing operation of the units currently in-place in Wisconsin,
Louisiana, Iowa and Oregon. Unsatisfactory operations at any of the units
operating could frustrate such continuation. ADA recently signed a contract for
installation of a fifth unit in Nebraska, which commenced operation in March
2000.
Planned capital expenditures for ADA to sustain and improve ongoing operations
for 2000 are estimated at $300,000 of which $160,000 was commited in the 1st
quarter of 2000. Registrant expects to fund these requirements out of existing
working capital.
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, 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 3/31/00). 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 3/31/00, a net of $379,000 had been advanced
under the loan.
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 have been initiated
with several interested parties, but all such discussions are at preliminary
stages at this time.
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.
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 provided by operations totaled $124,000 for the first quarter of 2000
versus a use of $(1,056,000) for the same period in 1999. The provision in 2000
resulted primarily from the operating profits in ADA plus non-cash charges for
depreciation and amortization. Cash flow from investing activities for first
quarter of 2000 includes a use for capital expenditures of $160,000 and
proceeds from the sale of land of $148,000. Cash flow from financing activities
in the first quarter of 2000 consisted of proceeds from the issuance of common
stock of $2,000, payments on notes payable of $71,000 and proceeds from a note
payable of $143,000. Cash flow from investing activities for the same period in
1999 includes capital expenditures of $70,000. Cash flow from financing
activities in 1999 consisted of proceeds from the issuance of stock of
$1,137,000.
5
<PAGE>
Results of Operations
Revenues from sales totaled $1,066,000 in the first quarter of 2000 versus
$1,124,000 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 quarter from ADA increased 70% from $629,000 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 $495,000 in 1999 as a
result of the suspension of production activities at the end of August 1999.
ADA's revenues were somewhat higher than anticipated due to greater than
expected chemical sales.
Operating expenses decreased significantly in the first quarter of 2000
primarily in response to the suspension of operations at ESEC. The decrease
consists of a decrease related Calgary phosphate production ($712,000 of the
decrease) net of an increase at ADA of $94,000 corresponding to the increase on
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
$113,000 in first quarter of 2000 as compared to 1999 primarily as a result of
decreased activity in Calgary.
Consolidated research and development increased in the first quarter of 2000
to $25,000 from $16,000 in the same period in 1999 due primarily to work on the
recent DOE contract. 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 $168,000 in the first quarter of
1999 to $289,000 in the first quarter of 2000 as a result of the 15 year
straight line depreciation of the Calgary facility that has been provided while
it is idled versus the units of production method under which depreciation was
provided during production in 1999.
Registrant's interest expense totaled approximately $85,000 for the first
quarter of 2000 and $51,000 for same period in 1999. The increase is due to an
increased amount of funds borrowed as compared to the same period in 1999 and
increased interest rates on those borrowed funds.
6
<PAGE>
In January and February 1999, Registrant sold a total of 1,260,000 shares of
common stock and received net proceeds of $1,137,000. 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 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 quarter 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 quarter 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 - None.
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: March 12, 2000 /s/ Mark H. McKinnies
---------------------
Mark H. McKinnies
President and Chief Financial Officer
<PAGE> 7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM REGISTRANT'S CONSOLIDATED FINANCIAL
STATEMENTS DATED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 329
<SECURITIES> 0
<RECEIVABLES> 473
<ALLOWANCES> 7
<INVENTORY> 193
<CURRENT-ASSETS> 1043
<PP&E> 15685
<DEPRECIATION> 4457
<TOTAL-ASSETS> 15038
<CURRENT-LIABILITIES> 1751
<BONDS> 0
0
0
<COMMON> 270
<OTHER-SE> 6593
<TOTAL-LIABILITY-AND-EQUITY> 15038
<SALES> 1066
<TOTAL-REVENUES> 1066
<CGS> 464
<TOTAL-COSTS> 1333
<OTHER-EXPENSES> (7)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (260)
<INCOME-TAX> 0
<INCOME-CONTINUING> (260)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (260)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
