U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
____X____ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 31,829,771 Shares of
Common Stock, one cent par value outstanding as of November 3, 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
September 30, 2000
UNAUDITED
ASSETS (amounts in thousands)
CURRENT ASSETS:
Cash, and cash equivalents $ 267
Trade receivables, net of allowance
for doubtful accounts of $7 288
Factored receivables 289
Inventories 99
Prepaid expenses and other 78
-----
Total current assets 1,021
PROPERTY, PLANT AND EQUIPMENT, at cost 12,850
Less accumulated depreciation and amortization (4,733)
------
Net property and equipment 8,117
INTANGIBLE ASSETS, net of $1,076 in amortization 2,567
OTHER ASSETS 7
------
TOTAL ASSETS $ 11,712
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable $ 301
Notes payable:
Financial institution 378
Receivables sold with recourse 289
Related party 200
Accrued expenses 209
Other current liabilities 57
-----
Total current liabilities 1,434
LONG-TERM LIABILITIES:
Contingent net profits royalty on Calgary plant 4,850
Notes to related parties 1,075
Other liabilities 875
-----
6,800
STOCKHOLDERS' EQUITY:
Common stock $.01 par value 312
Additional paid-in capital 28,291
Foreign currency translation adjustment (1,837)
Accumulated deficit (23,288)
------
Total stockholders' equity 3,478
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,712
======
See accompanying notes.
<PAGE> 2
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands, except shares and per share amounts)
3 Months 9 Months 3 Months 9 Months
NET REVENUES $1,187 3,169 1,429 3,664
COST AND EXPENSES:
Operating 387 1,241 1,103 3,239
General and administrative 526 1,574 400 1,790
Research & development 26 87 - 36
Impairment of Calgary plant 2,922 2,922 - -
Depreciation and amortization 179 761 175 523
----- ----- ----- -----
Total expenses 4,040 6,585 1,678 5,588
----- ----- ----- -----
OPERATING LOSS (2,853) (3,416) (249) (1,924)
OTHER INCOME (EXPENSE):
Interest expense (72) (234) (250) (468)
Writedown in carrying value of
mineral properties - - - (1,223)
Other, net 4 99 17 23
----- ----- ----- -----
(68) (135) (233) (1,668)
----- ----- ----- -----
NET LOSS $(2,921) (3,551) (482) (3,592)
Stock resale rights applicable to
certain shareholders - - - (309)
----- ----- ----- -----
NET LOSS APPLICABLE TO OTHER
COMMON STOCKHOLDERS $(2,921) (3,551) (482) (3,901)
====== ====== ====== ======
NET LOSS PER COMMON Share (Basic
and Diluted): $(.09) (.12) (.02) (.17)
==== ==== ==== ====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING: 31,193,000 29,221,000 24,012,000 23,499,000
========== ========== ========== ==========
------------------------------------------------------------------------------
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Accumulated Deficit
Nine Months Ended September 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 (3,551) (3,592)
-------- --------
Accumulated deficit as of September 30 $ (23,288) (16,484)
====== ======
See accompanying notes.
<PAGE> 3
Earth Sciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
UNAUDITED
2000 1999
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,551) $(3,592)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 761 523
Impairment and write down of assets 2,922 1,223
Non-cash interest expense - 284
Expenses paid with stock 159 67
Change in operating assets and liabilities (266) 419
Net increase in other assets and liabilities 86 39
----- -----
Net cash provided (used) by operating activities 111 (1,037)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of land 148 -
Capital expenditures (187) (383)
----- -----
Net cash used by investing activities (39) (383)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (143) (187)
Proceeds from issuance of common stock 42 1,147
Proceeds from notes payable 153 390
----- -----
Net cash provided by financing activities 52 1,350
----- -----
Net decrease in cash and cash equivalents 124 (70)
Cash and cash equivalents at beginning of period 143 122
----- -----
Cash and equivalents at end of period $ 267 $ 52
===== =====
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 158 $ 42
===== =====
Conversion of notes payable and debentures $ - $ 27
===== =====
See accompanying notes.
Earth Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 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) Impairment of Calgary Plant
In the 3rd quarter of 2000, the Company recorded a non-cash write down of the
carrying value of the Calgary facility in the amount of $2,922,000. Production
at the facility was suspended in August 1999 in an effort to reduce cash flow
deficits there. Discussions were initiated with a number of groups to provide
the capital and industry strength considered necessary to successfully operate
the facility for production of purified phosphate products and/or other uses.
Although numerous discussions continue for a variety of activities at the
facility, none of the negotiations for production of purified phosphates have
yielded positive results in a timely manner. The write down is in recognition
of the fact that certain past costs are not expected to be recovered out of
future operations. The write down reduces the net asset carrying value to a
level that management believes will be recoverable from anticipated future
operations at the facility.
(3) Business Segment Information
Corporate headquarter activities are part of the ESI operating segment. The
long-lived assets of the ESI and ADA-ES segments are located in the US while
the assets of ESEC are located in Canada. All significant customers are US
companies.
(amounts in thousands)
Nine months ended September 30, 2000
Eliminating
ESI ESEC ADA-ES Entries Consolidated
Revenue from
external customers $ - $ - $3,169 $ - $ 3,169
Intersegment revenues 7 - - (7) -
--- --- ----- ---- -----
Total revenue $ 7 $ - $3,169 $ (7) $ 3,169
==== === ===== ==== =====
Long lived assets $ 501 $11,455 $ 794 - $ 12,750
Segment profit (loss) $(124) $(3,509) $ 82 * $ (3,551)
Nine months ended September 30, 1999
Eliminating
ESI ESEC ADA-ES Entries Consolidated
Revenue from
external customers $ - $ 1,665 $1,999 $ - $ 3,664
Intersegment revenues 318 178 - (496) -
--- ---- ---- ---- -----
Total revenue $ 318 $ 1,843 $1,999 $ (496) $ 3,664
==== ===== ===== ==== =====
Long lived assets $ 1,072 $18,034 $ 672 - $ 19,778
Segment profit (loss)$(1,926) $(1,184) $ (482) * $ (3,592)
* 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 $313,000 at 9/30/00. This deficit
decreased during the nine month period from a deficit of $631,000 at 12/31/99.
The decrease in the deficit is primarily due to positive cash flow from ADA-ES'
operations during the period and transfer to a long-term note of an account
payable. Management expects to further reduce the deficit through ongoing and
improved cash flow at ADA-ES. Management continues to seek an industry partner
to provide marketing strength and working capital to re-start activities 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 positive cash flow will continue at ADA-ES.
For ADA-ES, the maintenance of positive cash flow is dependent upon the
successful ongoing operation of the four flue gas conditioning units currently
in-place and continued work under government contracts. Unsatisfactory
operations at any of the units operating or an unanticipated cessation of
government funding could frustrate such cash flow. Planned capital
expenditures for ADA-ES to sustain and improve ongoing operations for 2000 are
estimated at $250,000 of which $187,000 was committed in the first nine months
of 2000. Registrant expects to fund these requirements out of existing working
capital.
In September 2000, ADA-ES was awarded a $6.7 million Department of Energy grant
to test technologies for reducing mercury emissions at coal burning power
plants. The grant extends over a three-year period and includes $2.3 million of
industry cost share. ADA-ES will be leading a group of utility companies to
conduct full-scale tests of available technologies. Work under the contract
commenced in October and is expected to add significantly to revenues and
operating income as existing personnel will be used to perform the majority of
the scheduled work.
In an 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 limited markets for its products were established, the Company
lacked adequate working capital to make further modifications and build
inventories considered necessary to achieve positive cash flow there. Efforts to
date to attract an industry partner for purified phosphate production have been
unsuccessful. In the opinion of management, it is unlikely that the facility
will be placed back into production for that purpose. Chemical blends for ADA-ES
that were produced by ESEC have been out-sourced to US manufacturers at only
slightly higher costs.
A letter of intent has been executed with Fireside Minerals Ltd. to use a
portion of the facility in a joint effort for the production of phosphate based
animal feed. Fireside is attempting to raise the required capital, estimated
at $5 million Canadian, for that activity. Subject to the funding, a formal
agreement between the parties may be executed by year-end. ESEC is also in
discussion with several other groups for other activities at the facility, but
all such discussions are in preliminary stages at this time. The Company
recorded a non-cash write down in the carrying value of the assets in Calgary
during the 3rd quarter of 2000 as further discussed in the notes to the
financial statements above and in the Results of Operations below.
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
9/30/00). 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 9/30/00, a net of $379,000 had been advanced
under the loan.
In September 2000, Registrant renegotiated the terms of a convertible debenture
in the amount of $1,000,000 (the "Debenture") and a note in the amount of
$250,000 (the "Note") both payable to Tectonic Construction Co. ("TCC"). Mr.
Lowdermilk, a director of Registrant, is the president and majority shareholder
of TCC. The Debenture is convertible into a maximum of 1,000,000 shares of
Common Stock at the lesser of $.21 per share or the then current market price.
Both the Note and the Debenture are payable no later than September 2003 and
TCC may request principle payments of not more than $100,000 per calendar
quarter. The Debenture and the Note bear interest at the greater of prime plus
two points or 10% which interest is payable quarterly, and are collateralized
by certain assets of ADA-ES, ESEC and Registrant.
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 $111,000 for the first nine months of
2000 versus a use of $(1,037,000) for the same period in 1999. The provision in
2000 resulted primarily from the consolidated operating losses plus non-cash
charges for depreciation, amortization and the write down of assets in Calgary.
Cash flow from investing activities for the first nine months of 2000 includes a
use for capital expenditures of $187,000 and proceeds from the sale of land of
$148,000. Cash flow from financing activities in the first nine months of 2000
consisted of proceeds from the issuance of common stock of $42,000, payments on
notes payable of $143,000 and proceeds from notes payable of $356,000. Cash flow
from investing activities for the same period in 1999 includes capital
expenditures of $383,000. Cash flow from financing activities in 1999 consisted
of payments on notes payable of $187,000, proceeds from the issuance of stock of
$1,147,000, and proceeds from notes payable of $390,000.
Results of Operations
Revenues from sales totaled $3,169,000 in the first nine months of 2000 versus
$3,664,000 in the same period in 1999. In 2000, all of that amount was generated
by ADA-ES, as operations are suspended in Calgary. Revenues for the nine
months from ADA-ES increased 59% from $1,999,000 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 $1,665,000 in 1999 as a
result of the suspension of production activities at the end of August 1999.
ADA-ES' revenues were somewhat lower than anticipated due to fewer than expected
new customers and maintenance downtimes at existing utility customers that
reduced projected chemical sales.
Operating expenses decreased significantly in the first nine months of 2000
primarily in response to the suspension of operations at ESEC. The decrease
consists of a decrease related to Calgary phosphate production ($1,916,000 of
the decrease) net of an increase at ADA-ES of $175,000 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-ES has experienced positive and
increasing gross margins in 1999 and 2000 as ADA-ES continues to establish
market acceptance and its market share for its technology. The Company's
ultimate success will be dependent upon increased sales and market penetration.
General and administrative expenses decreased by a net of approximately $216,000
in first nine 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-ES' offices in Littleton in 2000.
Consolidated research and development expenses increased in the first nine
months of 2000 to $87,000 from $36,000 in the same period in 1999 due primarily
to work related to the recent government contracts 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.
In the 3rd quarter of 2000, the Company recorded a non-cash write down of the
carrying value of the Calgary facility in the amount of $2,922,000. The impair-
ment is in recognition of the fact that certain past costs are not expected to
be recovered out of future operations. The write down reduces the net asset
carrying value to a level that management believes will be recoverable from
anticipated future operations at the facility.
Depreciation and amortization increased from $523,000 in the first nine months
of 1999 to $761,000 in the first nine months of 2000 as a result of the 15 year
straight line depreciation of the Calgary facility that has been provided
through June 2000 while the facility is idled versus the units of production
method under which depreciation was provided during production in 1999. As a
result of the write down, future depreciation charges of the Calgary facility
will be lower.
Registrant's interest expense totaled approximately $234,000 for the first nine
months of 2000 and $468,000 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 nine 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 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 nine 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 nine months of 2000 is a gain of $76,000 recognized
upon the sale of a depleted mineral property.
PART II. OTHER INFORMATION
Item 2. Changes in Securities - During the first nine 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: November 10, 2000 /s/ Mark H. McKinnies
---------------------
Mark H. McKinnies
President and Chief Financial Officer
