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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
exchange Act of 1934 For the transition period from ______ to ______
Commission file number 0-19566
EARTH SEARCH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0437723
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
502 North 3rd Street, #8 McCall, Idaho 83638
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 634-7080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 31, 1999 $10,850,101. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 31, 1999: 98,637,281
This Form 10-K consists of 33 pages.
TABLE OF CONTENTS
PART I................................................................... 3
Item 1 - Business ................................................... 3
Item 2 - Properties ................................................ 4
Item 3 - Legal Proceedings........................................... 4
Item 4 - Submission of Matters to a Vote of Security Holders......... 4
Item 4(a) Executive Officers of the Registrant........................ 5
PART II.................................................................. 6
Item 5 - Market for the Registrant's Common Stock
Equity and Related Shareholder Matters..................... 6
Item 6 - Selected Financial Data..................................... 7
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 7
Item 8 - Financial Statements and Supplementary Data................. 12
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 12
PART III................................................................. 13
Item 10 - Directors and Executive Officers of the Registrant.......... 13
Item 11 - Executive Compensation...................................... 13
Item 12 - Security Ownership of Certain Beneficial Owners and
Management................................................. 13
Item 13 - Certain Relationships and Related Transactions.............. 13
PART IV.................................................................. 14
Item 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 14
SIGNATURES............................................................... 15
PART I
ITEM 1. BUSINESS
ORIGINAL BUSINESS PLAN
Based on the imagery database accumulated by the Company in 1987 and
1991, the Company procured mining patents and land leases and sought partners to
develop several prospective mining properties. The Company in fact entered into
several arrangements with mining entities for the development of some of the
Company's properties, but none of those arrangements resulted in development of
operating mines. Due to lack of capital to fund advance royalties and due
diligence requirements on the Company's mining properties and to changes in
mining laws which required increased and more timely due diligence expenditures,
the Company opted to release virtually all of its mining properties between 1991
and 1994.
As an adjunct to the business of developing mineral properties, the
Company recognized the need to refine the technology of remote sensing with the
ultimate goal of commercializing the technology. To achieve that goal, the
Company believed that a miniaturized hyperspectral remote sensing instrument
must be developed so that more economical aircraft could be utilized.
CURRENT BUSINESS PLAN
The Company believes cost effective hyperspectral remote sensing can
play a central role in multiple applications globally. Research has identified
applications in such diverse markets as watershed analysis, pollution detection,
pipeline easement mapping and routing, plume analysis, vegetation stress
analysis, agriculture, disaster assessment, mineral exploration, forestry,
fisheries, heat loss detection, wetlands delineations, stormwater management,
emergency planning and evacuation route assessment, land use, prescription
farming and unexploded ordnance detection.
Since 1994, Earth Search Sciences, Inc. and Integrated Spectronics Pty
Ltd. jointly developed a remote sensing instrument, the ESSI Probe 1.
GENERAL
The Company is emerging from a mineral exploration / research and
development organization into a leading edge remote sensing provider. On June 1,
1997, the Company took delivery of the first Probe 1 instrument. In its first
full year of commercial operation the Company developed markets and generated
revenue from multiple clients. The Company and its chairman, Larry Vance, have
spent over a decade developing an airborne remote sensing capability that can be
economically configured into both governmental and commercial projects. The
Company initially sought to utilize United States Government proprietary
airborne remote sensing technology to identify sites with potential economically
recoverable mineral deposits. The Company intended to use the remote sensing
data to locate and prioritize mineral exploration opportunities. The Company
anticipated doing further investigative work on the identified sites, taking a
land or mineral interest in promising sites and thereafter either developing the
sites into mines independently or seeking a joint venture partner or mining
entity to develop the site.
Mergers and acquisitions may be the most expeditious and cost-effective
way to consolidate commercial hyperspectral remote sensing. The Company intends
over the next year to continue pursuing (a) acquisitions that aid in the
commercialization of hyperspectral remote sensing technology, (b) contracts that
produce revenues from the application of remote sensing to the existing markets
in environmental remediation and mineral identification and to undeveloped
markets for other appropriate projects involving a multitude of applications of
the technology, (c) financing to fund the development of miniaturized remote
sensing instruments, and (d) development of promising potential mineral
properties in which the Company has an interest or acquires an interest as a
result of its existing database of geological information.
The Company is not aware of any environmental concerns associated with
remote sensing technology.
IMAGERY DATABASE
In 1991, the Company was invited to participate in the Visiting
Investigator Program (VIP) sponsored by the National Aeronautics and Space
Administration (NASA). In the VIP program, the Company sought to compare the
benefits of using an Airborne Visible and Infra-Red Imaging Spectrometer
(AVIRIS) in locating geologic areas of interest in a test area in Nevada with
other less advanced instruments. The results of that program were published in
January 1993. As a result of participation in the program the Company acquired a
large amount of unprocessed data.
Since June 1997, the Company has collected and owns a substantial
archive of Probe 1 imagery from Kazakhstan, Australia, British Columbia,
Ontario, Quebec, Chile, Mexico, California, Nevada, Arizona, Idaho, Montana, and
Utah. At the present time the value of this data archive has not been
independently appraised. The value of this archive is not reflected in the
financial statements.
EMPLOYEES
As of March 31, 1999, the Company had 5 full-time employees, which also
includes the following Officers: Larry F. Vance, Chairman, John W. Peel, III,
Chief Executive Officer and Tami J. Story, Corporate Secretary and Treasurer.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and all of the
furnishings from an unrelated third party, which is approximately 2,000 square
feet of office space in McCall, Idaho. The Company believes its offices are
adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On December 19, 1997, the Idaho Department of Finance announced that it
had resolved its differences with Earth Search Sciences Inc. and the lawsuit
(Civil No. CV OC 9700155D, in the District Court of the Fourth Judicial Circuit
of the State of Idaho in and for the County of Ada) was withdrawn. Under the
terms of the agreement, the Company and Chairman Larry Vance were not required
to pay any fines, penalties or costs to the State. In addition, the Company
agreed to proceed with a formal offer of rescission to person who purchased
stock directly from the Company between November 1, 1992 and December 15, 1997
and who were Idaho residents.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company for fiscal 1999 to present.
Name Age Position
------------- ----- -----------------------
Larry Vance 64 Chairman
John W. Peel 53 Chief Executive Officer
Tami J. Story 36 Secretary/Treasurer
Larry F. Vance served as Chief Executive Officer of the Company from
1985 until April 8, 1995. Since April 8, 1995, Mr. Vance has served as Chairman
of the Company. Mr. Vance is a director of the Company. Mr. Vance is a
full-time employee of the Company and has been since 1985. Mr. Vance's training
is in business and marketing. He served in a management capacity for the 3M
companies, IBM, and Computer Usage Corporation prior to founding Earth Search
Sciences, Inc.
John W. Peel, III joined the Company as Chief Executive Officer in
April 1995. Prior to joining the Company, Dr. Peel served six and one-half years
as Senior Vice President of Tetra Tech, Inc., a major publicly held
environmental remediation consulting firm. Dr. Peel holds a Bachelor of Sciences
in Biology from Millsaps College, a Master of Sciences in Parasitology and
Invertebrate Zoology from the University of Mississippi and a Ph.D. in
Environmental Health/Health Physics from Purdue University.
Dr. Peel is a full-time employee of the Company and has been since 1995.
Tami J. Story served as an administrative support capacity for the
Company from 1991 until April 1993. Since April 5,1993, Ms. Story has served as
Secretary and Treasurer of the Company. Ms. Story also serves as a director of
the Company. Ms. Story holds a degree with a major in Nursing and a minor in
Business Administration.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Principal Market or Markets. The Company's Common Stock has in
the past traded in the over-the-counter market, based on inter
dealer bid prices, without markups, markdowns, commissions, or
adjustments (which do not represent actual transactions) as
reported in the "pink sheets."
Quarter Ended High Low
June 30, 1996 .75 .68
September 30, 1996 .37 .34
December 31, 1996 .20 .17
March 28, 1997 .41 .38
June 30, 1997 .49 .46
September 30, 1997 .47 .42
December 31, 1997 .39 .31
March 31, 1998 .34 .30
June 30, 1998 .37 .25
September 30, 1998 .32 .10
December 31, 1998 .13 .07
March 31, 1999 .14 .08
(b) Approximate Number of Holders of Common Stock. The number of
record owners of the Company's $.001 par value common stock at
March 31, 1999, was approximately 810. This does not include
shareholders that hold stock in their accounts at
brokers/dealers.
(c) Dividends. Holders of common stock are entitled to receive
such dividends as may be declared by the Company's Board of
Directors. No dividends have been paid with respect to the
Company's common stock and no dividends are anticipated to be
paid in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for each
of the last five fiscal years with respect to the Company and is qualified in
its entirety by reference to the Company's audited financial statements and
notes thereto.
As of or for the fiscal year ended
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
Operating revenue $ 881,006 $ 55,000 $ - $ 6,332 $ -
Net loss (2,271,428) (5,849,999) (2,549,823) (2,408,292) (1,122,541)
Net loss per common share (0.03) (0.08) (0.04) (0.05) (0.02)
Total assets 3,992,233 4,880,652 3,951,914 922,377 95,861
Long-term obligations 6,594,080 5,767,961 873,462 736,209 1,231,217
Stockholders' deficit (3,998,137) (3,005,765) (2,960,610) (1,295,908) (1,899,435)
Cash dividends declared - - - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial comparisons will be made between the years ended March 31,
1999 and 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities to date with a combination of
cash flow from operations (primarily in fiscal year 1999) and use of equity
securities for services.
Net cash used in operating activities was $374,023 in 1999, resulting
primarily from a net loss of $2,271,428, and payments for salaries, services and
depreciation. Cash used in operations was $2,599,410 in 1998, resulting
primarily from a net loss of $5,849,999, and payments for salaries, services and
depreciation. Cash used in operations was $136,002 in 1997, resulting primarily
from a net loss of $2,549,823, and payments for salaries, services and
depreciation.
Capital expenditures for March 31, 1999 were primarily for payments on
hyperspectral instruments and purchases of new computer equipment.
At March 31, 1999, the Company had cash and cash equivalents of $47,642
and working capital of $(1,109,808).
The Company does not intend to pay cash dividends to the holders of
common stock and intends to retain future earning to finance the expansion and
development of its business.
The Company believes that funds generated from its operations, together
with future borrowings will be adequate to meet the Company's anticipated cash
needs during the immediate term. There can be no assurance that additional
capital beyond the amounts currently forecasted by the Company will not be
required nor that any such required additional capital will be available on
reasonable terms, at such time or times as required by the Company.
RESULTS OF OPERATIONS
The Company recognized revenues from the Noranda Agreement of $810,000
for the year ended March 31, 1999. For the year ended March 31, 1999 the Company
experienced a net loss of $2,271,428 or $0.025 per share on a diluted basis.
The Company has completed mapping assignments in Australia, Mexico,
Canada and Chile in partial fulfillment of its contractual obligations to
Noranda to map for natural resources on a global scale. In addition to the
revenues and fees the Company has invoiced for these services, the Company may
receive either net smelter royalties or net profits interest on properties not
previously owned or controlled by Noranda upon which a discovery should occur as
the result of using the Company's Probe 1 technology to locate the mineral
resource. To date, gigabyte quantities of imagery have been collected by Earth
Search. These data tapes are being processed and the imagery is being examined
for the presence of mineral properties exhibiting the qualifications necessary
to establish them for candidacy as "Royalty Properties". While no royal
properties have been recorded at this time, the Company is operating on two
continents targeted by the mining industry as exhibiting significant mineral
potential. A substantial backlog of collected imagery from these two continents
exists, and the evaluation process continues to move forward. As the Company
progresses to fulfill its Noranda mapping contract, it has enjoyed during the
fiscal year ended 1999, added mapping assignments from new customers from
emerging growth areas, including hydrocarbon exploration, and environmental
damage assessments, land use planning and weed species identification from an
airborne platform using hyperspectal imagery from its Probe 1 instrument. These
additional revenues have enabled the Company to recognize improvements over the
previous quarter as it emerges from a development stage company into an emerging
growth business entity.
During the fiscal year ended March 31, 1999, the Company increased its
contract backlog through the award of government contracts with present
expectations of contract backlog for a period of five years. While the projected
period of performance of the contracts has been specified, because of the task
order nature of the work, the precise revenue amounts the company will recognize
cannot be quantified at this time. The awards are significant in that they
represent a new customer and expanding base for Earth Search in commercial and
government work. Earth Search expects to increase its technical staffing level
as a result of the awards. Work to date has been confined to scientific studies.
Actual flying is not scheduled to commence until April through August 1999 when
vegetation growing seasons produce more robust vegetation than currently found
among winter habitats.
During fiscal 1999, the Company relinquished both its direct and
indirect interests in its current licenses on mineral properties in the Republic
of Kazakhstan in and around the area known as the Polygon. The properties were
relinquished to its partners in the American-Kazakhstani Joint Stock Company,
SEMTECH for settlement of significant exploration and/or legal costs associated
with licensing and exploring the sites in question. In addition, the Company
retained the option to bid its hyperspectral imaging technology in future
exploration activities planned in or around the Polygon. In essence, Earth
Search will maintain a presence in the region and the potential to invest in
selected mineral properties under the specific terms and conditions mentioned
above, while precluding the necessity of having to lay out significant sums of
capital to fund each year's program of works for multiple mineral properties.
Earth Search originally withheld its Kazakhstan territories from the initial
Noranda agreement. However, as an added result of the refocusing, Earth Search
has revisited its working with Noranda to revise the agreement between Earth
Search and Noranda to include Net Smelter Royalties and payment for mapping
services for any discoveries made in Kazakhstan as the direct result of Noranda
exploration efforts utilizing the Earth Search Sciences Probe-1 hyperspectral
imaging technology. To date, market conditions have precluded organizations from
undertaking any major exploration activities in the region.
JOINT VENTURE AND OPERATING ENTITY RELATIONSHIP
As of and for the year ended March 31, 1999, the following
relationships and/or projects were formed/completed:
The Company collected hyperspectral data and delivered a report to
NASA/Techlink, Forest Wildlife Protection Agency, State of Montana and Turner
Enterprises. The project completed was to collect data specific to the
restocking of the West Slope Cutthroat Trout (endangered species) and riparian
issues.
The Company initiated work on its EOCAP contract with NASA to map
Yellowstone National Park. Earth Search is a subcontractor to Yellowstone
Ecosystems Studies (Y.E.S.). Earth Search management attended a kick-off meeting
following contract award for purposes of planning the upcoming mission to map
riparian habitat. NASA reported previously that its high altitude mapping in
prior years indicated the potential for utilizing hyperspectral imagery to
distinguish between various tree species and vegetation types important in the
food chain of Yellowstone's wildlife. Earth Search will collect imagery at lower
altitudes which means higher resolution imagery can be collected. It is
anticipated that with the increased resolution obtained utilizing the Earth
Search Probe 1 technology that Yellowstone's scientists responsible for tracking
seasonal variability of plant species and, hence, food supplies will be able to
gain increased insight into environmental conditions affecting the health and
well being of the Park's wildlife. The ability of the Probe 1 technology to
differentiate between tree and plant species suggests a new and more economical
method for characterizing habitat.
The Company concluded a memorandum of agreement with Boeing that
included the use of a unique Boeing aircraft possessing exceptional slow flight
characteristics to be used in a variety of applications, the first being the
flight over Yellowstone National Park as part of a NASA/Yellowstone Ecosystems
Studies (Y.E.S.) project utilizing ESSI's Probe I hyperspectral imaging
technology to collect one meter data to be utilized in addressing riparian
issues. Several test flights were performed during the period using the Probe
technology onboard the Boeing heliocourier aircraft. More missions are planned,
including a revisit of the park in August.
The Company concluded a memorandum of understanding with Booze-Allen &
Hamilton aimed at the collection, marketing, and distribution of Probe I data on
a global basis.
The Company collected hyperspectral data for the Geosat Committee. The
Geosat committee is funded from contribution by major U.S. resource companies.
The Committee is operated by the University of Texas at El Paso and the Director
is Dr. Rebecca Dodge. The project completed for the Geosat's "Hyperspectal Group
Shoot 1998" provided Probe 1 hyperspectral imagery to the oil and minerals
exploration, environmental assessment, and agriculture end-user community, for
an evaluation by these communities of its application potential.
The Company teamed with the University of Idaho in a joint proposal to
the Farm Bureau and won a contract to overfly the Snake River Basin (Hell's
Canyon). The Company also collected hyperspectral data for the control and
eradication of noxious weed intrusion. The test results are being published.
Initial results provide a positive indication that airborne hyperspectral
imagery is a useful tool for control of weeds, as well as providing information
regarding economic indicators as they pertain to forecasting crop yield. Some of
the data was introduced at a hearing conducted by Senator Larry Craig regarding
noxious weed eradication in the West. Probe I technology can be utilized to
demonstrate weed intrusion sites so that they can be treated by land based
teams.
The Company collected hyperspectral data for Desert Research Institute
("DRI") in the Kelso Dunes area in southeastern California. The project
completed for DRI was to detect change in arid vegetation cover using
Hyperspectral data in the region known as the Providence Mountains. Detection of
disturbance in these regions will aid in assessment of ecosystem status and
global climate change. The remote sensing data combined with ground measurements
will examine spectral changes occurring concurrently with observed changes in
percent green cover. Future collaboration in expected with DRI.
Several proposals have been developed to partner with private industry,
universities and state and Federal agencies to develop, package and deliver
competitive advanced technology products and services. This approach provides
solutions to critical environmental restoration and waste management problems,
while furthering national business and technology goals.
The Company formed a global partnership with EarthWatch Incorporated (a
subsidiary of Ball Aerospace) to acquire and market remote sensing information.
This partnership included signing of a data reseller agreement in which Earth
Search Sciences will provide the HyperView_Product Line of hyperspectral imagery
through the EarthWatch Digital Globe_Services for worldwide distribution.
The Company completed a series of agreements with Noranda Mining and
Exploration Inc. and its affiliates including Falconbridge Limited
(collectively, the "Noranda Group"). These agreements provide the Noranda Group
with and exclusive license to use the PROBE-1's for commercial mining
exploration, as long as the Noranda Group continues to purchase remote sensing
services from the Company in certain specified quantities. The Company is
entitled to receive fees for services and net smelter royalties or net profit
interest royalties from certain discoveries by the Noranda Group using the
PROBE-1's. The licensing agreement with the Noranda Group provided a $1,000,000
equity investment in ESSI by way of 200,000 preferred shares, convertible into
1,000,000 shares of common stock and an option to purchase 1,000,000 shares of
ESSI common stock at a price of $2.00 per share.
FUTURE OPERATIONS
Earth Search plans to use the Internet and a broad band imagery
distribution system to market its imagery. The Company has collected and
continues to collect imagery from around the globe. This imagery represents an
asset that can be sold over and over to multiple end users. The Company is
preparing for a mid-1999 launch of a direct channel, multi-media imagery
supermarket on the Internet that will have the capability to individually
customize data packages for customers. The e-commerce content provider will be
called TerraNet, Inc., and will be a wholly owned subsidiary of Earth Search
Sciences, Inc. Its site on the world wide web will be www.general-imaging.com.
The Company continues to increase its involvement in the mineral
exploration and environmental areas, using the results of its research and
development over the last five years in remote sensing. By attempting to obtain
equity funding, the Company anticipates developing instruments to include
hand-held, airborne and satellite spectrometers and to acquire revenue-producing
companies in the natural resources and environmental monitoring field.
Through teaming with other firms, the Company will identify possible
technology applications for remote sensing. Management intends to pursue
additional markets for its imagery databases, which would generate operating
revenues and adequate cash flows.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from computer programs written using two,
rather than four, digits to define the applicable year. These computer programs
may recognize a date using "00" as the year 1900 instead of 2000 and cause
system failures or miscalculations, material disruptions of business operations,
including, among other things, a temporary inability to process transactions,
send invoice, or engage in similar normal business operations. If Earth Search,
its significant customers, suppliers, service providers and other related third
parties fail to take the necessary steps to correct or replace these problematic
computer programs, the Year 2000 issue could have a material adverse effect on
Earth Search. Earth Search cannot, however, quantify the impact at this time.
Management believes it has completed the review and assessment phase of
affected systems within Earth Search and those which are external to Earth
Search. This assessment indicated that most of Earth Search's significant
internal information systems could be affected by the Year 2000 issue, and that
Earth Search may be negatively impacted by non-compliance of related third
parties.
Earth Search has begun the remediation phase of Earth Search's internal
information technology systems and has set September 1999 as the target for Year
2000 compliance of all of Earth Search's internal information technology
systems. Earth Search's internal information technology systems include Earth
Search's finance systems and those systems used in the research and development
of Earth Search's products.
Earth Search is currently in the process of creating contingency plans
for its internal information technology systems. These contingency plans are
expected to be in place by September 30, 1999. In the event Earth Search's
information technology systems are not Year 2000 compliant by September 30,
1999, Earth Search will decide at that time whether to implement the necessary
contingency plan(s).
Concurrent to performing the above steps, Earth Search will make
certain investments in systems and applications to address Year 2000 issues.
Earth Search has not tracked internal resources dedicated to the resolution of
the Year 2000 issue and, therefore, is unable to quantify internal costs
incurred to date that are associated with the Year 2000 issue. Identifiable
expenditures for these investments were approximately $15,000 through March 31,
1999. Additional expenditures in calendar year 1999 will total approximately
$10,000. Investments to address the Year 2000 issue have been, and are expected
to be, funded through cash generated from operations.
Earth Search's plans to complete the Year 2000 modifications are based
upon management's best estimates, which were derived utilizing numerous
assumptions of future events, including continued availability of certain
resources, and other factors. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
plans. Specific factors that might cause such material differences included the
availability and cost of personnel trained in this area and the ability to
locate and correct all relevant computer codes.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE
OF STOCK
As discussed earlier in this Report, the following factors are among
those that may cause actual results to vary from those the Company forecasts in
forward-looking statements included in this Report and other reports it files
with the Securities and Exchange Commission.
THE COMPANY MAY NEED TO ACCESS ADDITIONAL FUNDS TO FINANCE ONGOING OPERATIONS
As of July 15, 1999, the Company believes that available funds and
those generated through its operations will be adequate to meet its anticipated
cash needs for the next several periods. However, there can be no assurance that
additional capital beyond the amounts currently forecast by the Company will not
be required nor that any such required additional capital will be available on
reasonable terms, if at all, at such time or times as required by the Company.
Additional financing may involve public or private offerings of debt or equity
securities, and may include bank debt. Debt financing may increase the Company's
leveraged position, require the Company to devote significant cash to service
debt and limit funds available for working capital, capital expenditures, and
general corporate purposes, all of which could increase the Company's
vulnerability to adverse economic and industry conditions and competitive
pressures. Equity financing may cause additional dilution to purchasers of the
Company's common stock.
OUTLOOK
This report on Form 10-K, including the foregoing discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other reports hereafter filed by the Company with the
Securities and Exchange Commission may contain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact the Company makes in this Report on Form 10-K and such other
reports filed with the Securities and Exchange Commission are forward-looking.
In particular, statements regarding industry prospects, future OEM sales by the
Company, the adequacy of existing manufacturing resources, the Company's
continued expansion in foreign markets and the Company's future results of
operations or financial position are forward-looking statements. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates"
and similar expressions identify forward-looking statements. But the absence of
these words does not mean the statement is not forward-looking. The Company
cannot guarantee any of the forward-looking statements, which are subject to
risks, uncertainties and assumptions that are difficult to predict. Actual
results may differ materially from those the Company forecasts in
forward-looking statements due to a variety of factors, including those set
forth below under the heading "Additional Risk Factors that could Affect
Operating Results and Market Price of Stock" and elsewhere in this Report. The
Company does not intend to update any forward-looking statements due to new
information, future events or otherwise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item
are included on pages F-1 to F-19 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included
under "Election of Directors" in the Company's definitive proxy statement for
its 1999 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this Report.
Based solely on a review of copies of reports received by the Company
from persons required to file reports of ownership and changes on ownership
pursuant to Section 16(a) of the Securities Exchange Act of 1934, the Company
believes that all of its executive officers and directors complied with
applicable filing requirements for the fiscal year ended March 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included
under "Executive Compensation" in the Company's definitive proxy statement for
its 1999 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management will be included under "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1999 annual meeting of shareholders filed or to be filed not later than
120 days after the end of the fiscal year covered by this Report and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions with management will be included under "Certain Transactions" in
the Company's definitive proxy statement for its 1999 annual meeting of
shareholders to be filed not later than 120 days after the end of the fiscal
year covered by this Report and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1)Financial Statements Page in this Report
Report of Independent Accountants F-1
Consolidated Balance Sheet at March 31, 1999
and 1998 F-2
Consolidated Statement of Loss for the Years
Ended March 31, 1999, 1998 and 1997 F-3
Consolidated Statement of Redeemable Common Stock
And Nonredeemable Shareholders' Equity (Deficit) for
the Years Ended March 31, 1999, 1998 and 1996 F-4
Consolidated Statement of Cash Flows for the Years
Ended March 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6 - F-19
(a)(2)Financial Data Schedules Electronically Filed
(b) Report on Form 8-K Electronically Filed
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EARTH SEARCH SCIENCES, INC.
By /s/ Larry F. Vance
Larry F. Vance
Chairman and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on June 29, 1999.
Signature Title
/s/ Larry F Vance Chairman and Chief Financial Officer
Larry F. Vance (Principal Executive and Financial Officer)
/s/ John W. Peel, III Chief Executive Officer
John W. Peel, III (Principal Executive Officer)
/s/ Tami Story Director
Tami J. Story
/s/ Rory J. Stevens Director
Rory J. Stevens
Report OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Earth Search Sciences, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of loss, of redeemable common stock and nonredeemable
shareholders' equity deficit and of cash flows present fairly, in all material
respects, the financial position of Earth Search Sciences, Inc. and its
subsidiaries at March 31, 1999 and March 31, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Portland, Oregon
July 8, 1999
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
March 31,
1999 1998
----------- ------------
Assets
Current assets:
Cash $ 47,642 $ 42,600
Other current assets 120,995 175,648
------------ -----------
Total current assets 168,637 218,248
Property and equipment (Note 3) 3,823,596 3,979,179
Other long-term assets - 183,225
------------ ------------
Total assets $ 3,992,233 $ 4,380,652
============ ============
Liabilities and shareholders' deficit Current liabilities:
Notes payable (Note 5) $ 450,125 $ 64,125
Accounts payable and accrued expenses 552,061 714,736
Accrued interest (Note 5 and 6) 236,259 281,750
Unearned revenue (Note 1) 40,000 40,000
------------ ------------
Total current liabilities 1,278,445 1,100,611
Long-term liabilities:
Shareholder loans (Note 6) 372,322 104,090
Capital lease obligation (Note 3) 2,514,378 2,029,410
Deferred officers' compensation (Note 4) 1,707,380 1,387,461
Minority interest (Note 9) 2,000,000 2,247,000
------------ ------------
Total liabilities 7,872,525 6,868,572
------------ ------------
Commitments and contingencies
Redeemable common stock, $.001 par value, 725,914 and
1,725,914 shares issued and outstanding at March 31, 1999 and
1998, respectively (Note 9) 117,845 517,845
------------ ------------
Nonredeemable shareholders' deficit (Notes 1, 8, 9 and 10):
Series A preferred stock; 200,000 shares authorized,
issued and outstanding at March 31, 1999 and 1998 1,000,000 1,000,000
Common stock, $.001 par value; 200,000,000 shares
authorized; 97,411,367 and 84,792,576 shares
respectively, issued and outstanding 97,411 84,792
Additional paid-in capital 11,459,081 9,827,644
Common stock subscribed - 165,000
Treasury stock (200,000) -
Accumulated deficit (16,354,629) (14,083,201)
------------ ------------
(3,998,137 (3,005,765)
------------ ------------
Total liabilities and shareholders' deficit $ 3,992,233 $ 4,380,652
============ ============
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF LOSS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
March 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenue $ 881,006 $ 55,000 $ -
Costs of services provided (767,570) (132,083) -
----------- ----------- -----------
Gross margin (deficit) 113,436 (77,083) -
Expenses:
Research and development and exploration 68,229 356,988 606,169
General and administrative 1,417,514 3,105,437 1,675,731
----------- ----------- -----------
1,485,743 3,462,425 2,281,900
Loss from operations (1,372,307) (3,539,508) (2,281,900)
Interest income - 17,449 -
Interest expense (Note 5 and 6) (773,288) (689,600) (305,297)
Other expense (10,810) (473,340) -
----------- ----------- -----------
Loss before minority interest (2,156,405) (4,684,999) (2,587,197)
Minority interest in losses of consolidated subsidiaries - - 37,374
----------- ----------- -----------
Loss before extraordinary item (2,156,405) (4,684,999) (2,549,823)
Extraordinary item (Note 3) (115,023) (1,165,000) -
------------ ----------- -----------
Net loss $ (2,271,428) $(5,849,999) $(2,549,823)
============ =========== ===========
Shares applicable to basic and diluted loss per share 90,388,446 76,369,220 66,566,995
Basic and diluted loss per share $ (0.025) $ (0.077) $ (0.038)
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
MARCH 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable
Common Stock Preferred Stock Common Stock
Description Shares Amount Shares Amount Shares Amount
- --------------------------------------------------------- --------- --------- -------- -------- ---------- ---------
Balance of March 31, 1996: - $ - - $ - 66,551,663 $ 66,551
Issuance of common stock for services rendered (Note 9) 1,836,140 1,837
Issuance of common stock in exchange for instrument (Note 9) 1,000,000 $ 400,000
Conversion of debentures into shares of common stock (Note 9) 828,890 829
Issuance of common stock for shares of subsidiary common stock 40,000 40
Adjustment to additional paid-in-capital related to sale of
subsidiary common stock (Note 9)
Common stock subject to potential recission offering (Note 11) 725,914 117,845 (725,914) (726)
Net Loss
---------- --------- ------- ---------- ---------- ---------
Balance March 31, 1997: 1,725,914 517,845 - - 68,530,779 68,531
Issuance of common stock for services rendered (Note 9) 1,286,476 1,286
Issuance of common stock for cash 870,334 870
Shares issued in conjunction with sale/leaseback for purchase
of Probe 1 (Note 3) 1,000,000 1,000
Issuance of common stock for shares of subsidiary common
stock (Note 9) 1,252,000 1,252
Issuance of common stock for shares of Skywatch common
stock (Note 9) 1,185,199 1,185
Conversion of debentures into shares of common stock (Note 5) 865,988 866
Issuance of common stock in lieu of future lease payments (Note 3) 1,725,000 1,725
Issuance of stock subscription in lieu of future lease
payments (Note 3)
Issuance of common stock in lieu of debt obligations (Note 5) 8,076,800 8,077
Issuance of warrant for cash proceeds to minority holder in
Probe 1 LC (Note 9)
Conversion of note payable for Series A preferred stock
(Notes 4 and 9) 100,000 500,000
Issuance of Series A preferred stock for cash (Note 9) 100,000 500,000
Net Loss
---------- --------- ------- --------- ---------- ---------
Balance at March 31, 1998: 1,725,914 517,845 200,000 1,000,000 84,792,576 84,792
Issuance of common stock for services rendered (Note 9) 3,104,414 3,104
Issuance of common stock for cash 1,924,166 1,924
Issuance of common stock on behalf of Skywatch Exploration
for purchase of Skywatch Northern 465,000 465
Issuance of common stock previously subscribed 1,000,000 1,000
Issuance of common stock in lieu of future lease
payments (Note 3) 547,727 548
Shares issued as incentive for new debt obligation 1,585,000 1,585
Issuance of shares in lieu of interest payment 70,817 71
Issuance of shares as bonus 275,000 275
Issuance of shares in exchange for minority owned shares
of subsidiary 2,646,667 2,647
Redeemable shares received back into Treasury (1,000,000) (400,000) 1,000,000 1,000
Treasury Stock Sold
Net Loss
---------- --------- ------- ---------- ---------- ---------
Balance at March 31, 1999: 725,914 $ 117,845 200,000 $1,000,000 97,411,367 $ 97,411
========== ========= ======= ========== ========== =========
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
MARCH 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Additional
paid-in Treasury Retained
Description capital Subscribed stock Deficit Total
- --------------------------------------------------------- ----------- ---------- -------- ------------ -------------
Balance of March 31, 1996: $ 4,320,920 $ - $ - $ (5,683,379) $(1,295,908)
Issuance of common stock for services rendered (Note 9) 535,404 537,241
Issuance of common stock in exchange for instrument (Note 9) 0
Conversion of debentures into shares of common stock (Note 9) 345,699 346,528
Issuance of common stock for shares of subsidiary common stock 2,960 10,000
Adjustment to additional paid-in-capital related to sale of
subsidiary common stock (Note 9) 116,197 109,197
Common stock subject to potential recission offering (Note 11) (117,119) (117,845)
Net Loss (2,549,823) (2,549,823)
----------- ---------- --------- ------------- ------------
Balance March 31, 1997: 5,204,061 - - (8,233,202) (2,960,610)
Issuance of common stock for services rendered (Note 9) 350,329 351,615
Issuance of common stock for cash 179,130 180,000
Shares issued in conjunction with sale/leaseback for purchase
of Probe 1 (Note 3) 374,000 375,000
Issuance of common stock for shares of subsidiary common
stock (Note 9) 55,302 56,554
Issuance of common stock for shares of Skywatch common
stock (Note 9) 472,155 473,340
Conversion of debentures into shares of common stock (Note 5) 160,197 161,063
Issuance of common stock in lieu of future lease payments (Note 3) 498,275 500,000
Issuance of stock subscription in lieu of future lease
payments (Note 3) 165,000 165,000
Issuance of common stock in lieu of debt obligations (Note 5) 2,334,195 2,342,272
Issuance of warrant for cash proceeds to minority holder in
Probe 1 LC (Note 9) 200,000 200,000
Conversion of note payable for Series A preferred stock
(Notes 4 and 9) 500,000
Issuance of Series A preferred stock for cash (Note 9) 500,000
Net Loss (5,849,999) (5,849,999)
----------- ---------- --------- ------------ -----------
Balance at March 31, 1998: 9,827,644 165,000 - (14,083,201) (3,005,765)
Issuance of common stock for services rendered (Note 9) 272,197 275,301
Issuance of common stock for cash 204,076 206,000
Issuance of common stock on behalf of Skywatch Exploration
for purchase of Skywatch Northern 101,019 101,484
Issuance of common stock previously subscribed 164,000 (165,000) 0
Issuance of common stock in lieu of future lease payments (Note 3) 114,475 115,023
Shares issued as incentive for new debt obligation 192,290 193,875
Issuance of shares in lieu of interest payment 10,552 10,623
Issuance of shares as bonus 18,475 18,750
Issuance of shares in exchange for minority owned shares
of subsidiary 245,353 248,000
Redeemable shares received back into Treasury 399,000 400,000 400,000
Treasury Stock Sold (90,000) (200,000) (290,000)
Net Loss (2,271,428) (2,271,428)
----------- ---------- --------- ------------ -----------
Balance at March 31, 1999: 11,459,081 $ - $ 200,000 $(16,354,629) $(3,998,137)
=========== ========== ========= ============ ===========
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 1999, 1998 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ -------------
Cash flows from operating activities:
Net loss $ (2,271,428) $ (5,849,999) $ (2,549,823)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Common stock issued for service and interest expense 462,549 364,912 730,674
Common stock issued for Skywatch stock 101,484 473,340 -
Subsidiary common stock issued for compensation - 1,000,000 -
Extraordinary item 115,023 1,165,000 -
Loss attributed to minority interest - - (37,374)
Depreciation 279,212 167,768 29,668
Amortization of lease discount 484,968 404,410 -
Loss on sale of equipment 79,584 - -
Changes in assets and liabilities:
Other assets 237,877 (99,085) 69,988
Accounts payable and accrued expenses (137,720) (873,399) 1,705,611
Accrued interest (45,491) - -
Unearned revenue - 40,000 -
Deferred officers compensation 319,919 607,643 187,258
------------ ------------ ------------
Net cash (used in) provided by operating activities (374,023) (2,599,410) 136,002
------------ ------------ ------------
Cash flow from investing activities:
Capital expenditures (660,558) (306,487) (3,347,852)
Advance deposits - 217,875 2,582,125
Proceeds from sale of property and equipment 58,346 - -
------------ ------------ -------------
Net cash used in investing activities (602,212) (88,612) (765,727)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from notes payable 386,000 524,956 -
Repayments on notes payable (24,955) (40,000) (95,500)
Proceeds from shareholder loans 476,317 102,000 -
Repayments of shareholder loans (208,085) (35,000) (59,429)
Issuance of common stock 242,000 180,000 -
Issuance of subsidiary common stock - 247,000 165,995
Proceeds from sale of treasury stock 110,000 - -
Issuance of Series A preferred stock - 500,000 -
Proceeds from establishment of joint venture - 1,000,000 -
Issuance of warrant to purchase common stock - 200,000 -
------------ ------------ ------------
Net cash provided by financing activities 981,277 2,678,956 11,066
------------ ------------ ------------
Net increase (decrease) in cash 5,042 (9,066) (618,659)
Cash at beginning of period 42,600 51,666 670,325
------------ ------------ ------------
Cash at end of period $ 47,642 $ 42,600 $ 51,666
============ ============ ============
Interest paid $ 61,363 $ 15,384 $ 11,801
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Earth Search Sciences, Inc. ("the Company") business is the collection for
resale of high value imagery about the earth's surface utilizing the
Company's proprietary hyperspectral imaging instrument. Information
collected by the instrument includes natural resources data, environmental
data including wildlife habitat information, hydrocarbon data, agricultural
information including weed species identification, land use planning, and
defense applications. The principal application involves the preparation of
global mineral deposit information on an exclusive basis for a Toronto
based international major mining company.
The Company has three wholly owned subsidiaries: Bear Creek Exploration,
Inc. ("Bear Creek"), Quasar Resources, Inc. ("Quasar") and Skywatch
Exploration Inc. In addition, there are two majority owned consolidated
subsidiaries Earth Search Resources, Inc. and ESSI Probe 1 LC. As of
March 31, 1999, Earth Search Resources, Inc., Bear Creek Exploration, Inc,
and Quasar Resources, Inc. are not operational. Skywatch Exploration
performs aircraft flight services primarily for ESSI. The 50% owned
subsidiary ESSI Probe LC was formed as a joint venture to own and operate
hyperspectral instruments.
In 1999, the Company operated its hyperspectral instrument under contract
with third parties in several areas around the world. Contracts to operate
the hyperspectral instrument overseas for a major mining company with the
objective of identifying potential mineral deposits contributed $810,000
(see note 11) in revenue in 1999. Contracts to operate Probe 1 in the U.S.
as an ecological, agricultural, hydrocarbon, and fisheries application
contributed $14,000, $14,000, $28,000, and $15,000, respectively, to
revenue in 1999.
GOING CONCERN
The Company is experiencing working capital deficiencies because it has
incurred operating losses. The Company has operated with funds received
from the sale of its common stock and the issuance of notes. The ability of
the Company to continue as a going concern is dependent upon continued debt
or equity financings until or unless the Company is able to generate
operating revenues to sustain ongoing operations. The Company plans to
discontinue its going concern status in the future by increasing the number
of revenue producing services through the use of additional hyperspectral
instruments.
DEVELOPMENT STAGE ENTERPRISE
In prior years the Company was considered a development stage company. In
fiscal year 1999, the company commenced principal operations resulting in
the recognition of approximately $881,000 in revenue and no longer is
considered to be operating as a development stage company.
PRINCIPLES OF CONSOLIDATION
The consolidation financial statements include the accounts of Earth Search
Sciences, Inc. and its subsidiaries. All significant intercompany
transactions have been eliminated. The Company's financial statements
reflect minority interests in subsidiaries for non-controlling interest
held by third parties in Earth Search Resources and ESSI Probe 1 LC.
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue and costs as services are rendered under
contract. The unearned revenue of $40,000 represents a deposit for services
not yet performed at year-end.
RESEARCH AND DEVELOPMENT COSTS AND EXPLORATION COSTS
Research and development costs and exploration costs from using
hyperspectral instruments to map areas of interest to the Company are
expensed as incurred.
DEPRECIATION
The Company recognizes depreciation on its property and equipment using the
straight-line method over estimated useful lives ranging from five years
for computers and software and vehicles and equipment to ten years for the
fixed asset under capital lease (Probe 1). The Probes included in
construction in progress will begin depreciating at the time they are
placed into service. The ATM imagery database is fully depreciated.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory
tax rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the
change during the period in net deferred tax assets and liabilities.
COMMON STOCK
Common stock issued for other than cash consideration is reflected in the
accompanying financial statements at estimated fair value at the date of
issue, considering the restricted nature of such shares.
Dividends
The Company has not paid any dividends and does not expect to pay dividends
in the foreseeable future.
TREASURY STOCK
Treasury stock is recorded at cost. Sales of treasury stock at amounts in
excess of or below cost, net of selling expenses, have been recorded as
increases/decreases in additional paid-in capital.
CASH EQUIVALENTS
Cash in banks and short-term investments with maturity of 3 months or less
are considered cash equivalents.
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted average
number of the Company's common shares outstanding. Common stock equivalents
have not been considered in the diluted net loss per share calculation
because the effect on net loss per share is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". In accordance with this pronouncement, the
Company adopted the new standard for periods ending after December 15,
1997. The adoption of this pronouncement did not have a significant effect
on reported earnings per share information.
CHANGES IN CLASSIFICATION
Certain reclassifications have been made to the fiscal 1998 and 1997
financial statements to conform with the financial statement presentation
for fiscal 1999. Such reclassifications had no effect on the Company's
results of operations or shareholders' deficit.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS
The Company records financial instruments at cost, which approximates fair
value, unless otherwise stated.
2. SUPPLEMENTAL CASH FLOW INFORMATION
1999 1998 1997
--------- ----------- ------------
Common stock issued in conjunction with sale/lease of Probe 1 (Note 3) $ - $ 375,000 $ -
Notes payable issued to settle advance deposits - 2,200,000 -
Notes payable converted into common stock (Notes 5 and 9) - 2,740,038 345,528
Common stock issued in lieu of future lease payments (Note 3) - 500,000 -
Common stock subscription issued in lieu of future lease payments (Note 3) - 165,000 -
Common stock subscription for subsidiary common stock (Note 9) - 56,554 3,000
Note payable converted into Series A preferred stock - 500,000 -
Common stock issued for purchase of subsidiary - - -
Redeemable common stock issued for scanner (Note 9) - 56,554 400,000
Issuance of shares in exchange for minority interest in subsidiary 248,000 - -
Reduction of fixed assets for redeemable stock returned (400,000) - -
Redeemable shares received into Treasury 400,000 - -
Issuance of common stock previously subscribed 165,000 - -
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
1999 1998
----------- -----------
Mineral properties $ - $ 5,833
ATM imagery database(A) 134,000 134,000
Computers and software 123,289 95,603
Vehicles and equipment 70,446 70,446
Fixed assets under capital leases(B) 2,500,000 2,500,000
Construction in progress(C) 1,620,000 1,520,000
----------- -----------
4,447,735 4,325,882
Accumulated depreciation (624,139) (346,703)
----------- -----------
$ 3,823,596 $ 3,979,179
=========== ===========
(A) In the summer of 1987, the Company obtained a database providing
airborne multispectral scanner imagery over sites in Oregon and Nevada.
The imagery, gathered by an airplane using a thematic mapper scanner,
was recorded on high-density digital tape and later decompressed into
computer compatible data. This database includes imagery produced in
photographic form (hard copy) as well as the data on digital tape. Such
imagery was then interpreted by a geologist having expertise in the ATM
method. The initial interpretation was completed in June 1988 and
produced approximately 500 anomalies that necessitate exploration work
to determine mineralization. This asset has been fully depreciated.
The Company capitalized the costs of acquiring this database. The
database can be used for identification of potential mineralization as
well as for oil and gas exploration and other purposes for which
geology is a major consideration. The Company intends to utilize this
imagery database for potential sale of information to third parties,
such a large mining companies that desire to investigate mineralization
of large areas over a short period of time, and for use in the
Company's own mineral exploration activities.
(B) The Company entered into a sale-leaseback of a hyperspectral instrument
in 1997. The instrument was sold for $2,500,000 and leased back under
the following terms: 1) the Company will lease the instrument for
$250,000 per year bearing interest of prime plus 2% for three years;
2) at any time during the above lease period but no later than
April 10, 2000, the Company must repurchase the instrument for
$3,500,000 net of any lease payments; 3) at any time prior to the
repurchase, the lessor may convert the remaining obligation into shares
of Earth Search Sciences, Inc. common stock at a conversion rate of 40%
of the stock's then fair market value. In the event Earth Search is not
the operator at the time of exercise of the option, the lessee shall
substitute comparable equity securities or other rights subject to
reasonable approval of lessor; 4) the Company issued to lessor
1,000,000 unregistered shares of the Company's common stock and
warrants to purchase an additional 1,000,000 unregistered shares of the
Company's common stock at an exercise price of $2 per share; and 5) the
lessor will receive certain royalty rights to revenues generated from
mineral sites identified by the instrument. The Company recorded a
capital lease obligation of $3,500,000 (net of a debt discount of
$1,375,000) and $375,000 in shareholders' deficit related to the
shares of common stock and stock purchase warrants issued in
conjunction with the above transaction.
3. PROPERTY AND EQUIPMENT (CONTINUED)
In 1999 and 1998, 547,727 and 1,725,000 restricted shares of the
Company's common stock were issued in lieu of the first two lease
payments due on April 10, 1998 and 1999. The Company recognized an
extraordinary loss of $115,000 and $1,165,000 in 1999 and 1998,
respectively, from the debt extinguishment as a result of the
settlement of the lease payments. As further consideration, the Company
agreed to issue an additional 1,000,000 restricted shares of the
Company's common stock to retire the warrant issued in conjunction with
the sale/leaseback transaction mentioned above. These shares were
issued as of March 31, 1999 and the value of these shares is shown as
common stock subscribed in the Company's financial statements as of
March 31, 1998.
The cost of the equipment under capital leases at March 31, 1999 was
$2,500,000 with related accumulated depreciation of $375,000.
Total future minimum lease payments remaining under the non-cancelable
capital lease is $3,000,000. The total amount is due during fiscal
2001. The interest portion of the remaining lease payment is $485,622.
The present value of the capital lease obligation is $2,514,378.
(C) The cost of acquiring and improving the technological capabilities of
hyperspectral instruments are capitalized while the instrument is under
fabrication and are included above in construction in progress. During
fiscal 1997, the Company made a payment of $400,000 in redeemable
common stock (1,000,000 shares) towards the development of a
hypespectral instrument. The contract for this instrument was cancelled
in 1999 and the shares were returned at no cost to the Company with a
corresponding reduction to construction in progress.
4. DEFERRED OFFICERS' COMPENSATION
Deferred compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, CEO, President and Secretary). The Company
recorded deferred officer compensation, accrued payroll taxes and accrued
interest of $744,134, $507,271 and $250,792 during the years ended March
31, 1999, 1998 and 1997, respectively, and included these amounts in
general and administrative expenses. In addition, the Company is accruing
interest on the deferred compensation balances at a rate of 8.5%,
compounded quarterly. The Company and the officers have agreed that payment
of the compensation will be deferred until and unless the Company achieves
adequate cash flow from operations. Management has not and does not
presently anticipate sufficient cash flow from operations for the
succeeding year; accordingly, the deferred officers' compensation has been
classified as a noncurrent liability in the accompanying consolidated
balance sheet at March 31, 1999 and 1998.
4. DEFERRED OFFICERS' COMPENSATION (CONTINUED)
In 1999 the employment agreement with the Company's President was
terminated. The amount due to the former president, resulting from the
termination agreement including deferred compensation is approximately
$157,000 and is included in accounts payable and accrued expenses as it
will be paid in fiscal 2000.
5. NOTES PAYABLE
Notes payable consist of unsecured promissory notes with rights of
conversion. The terms of these debt instruments are typically for an
initial period of ninety days or one year and are renewable at maturity for
one year. The notes bear interest at rates ranging from 4.5% to 12.5%.
Holders of the notes have the right to convert the principal amount plus
interest into restricted shares of the Company common stock, subject to the
terms in the promissory notes.
In fiscal 1998 and 1997, $161,063 and $346,528 of notes outstanding plus
accrued interest were converted into common stock at the agreed upon
conversion rates. In 1997, certain notes contained conversion provisions at
50% of fair value at the date of conversion. As such, the Company
recognized $61,937 in additional interest expense due to the conversions
during 1997.
6. SHAREHOLDER LOANS
The Company has financed its operations in part by funds received from
advances by shareholders. These advances are evidenced by unsecured
promissory notes and bear interest at rates ranging from 8% to 11.5%. As of
March 31, 1999 and 1998, interest accrued on such advances aggregated
$197,113 and $231,289, respectively, and has been included in accrued
interest in the accompanying consolidated balance sheet.
Shareholder loans are reflected as a noncurrent liability in the
accompanying consolidated financial statements due to: a) the undefined
terms of repayments, b) the inability of the Company to repay the advances
unless and until it achieves positive cash flow, and c) the possibility
that the obligations will be satisfied through the issuance of shares of
the Company's common stock.
7. INCOME TAXES
The Company recorded no provision for income taxes in fiscal 1999, 1998 and
1997 due to the operating losses incurred from inception to date.
The tax effect of temporary differences between financial reporting and the
tax bases of assets and liabilities relate to the following:
March 31,
1999 1998
------------ ------------
Net operating loss carryforwards $ (4,945,499) $ (4,080,747)
Accrued liabilities (833,206) (705,172)
------------ ------------
Gross deferred tax assets (5,778,705) (4,785,919)
Deferred tax assets valuation allowance 5,778,705 4,785,919
------------ -----------
$ - $ -
============ ===========
The deferred tax asset has been fully reserved because the Company cannot
anticipate future taxable income to realize the potential benefits of the
gross deferred tax asset.
The benefit for income taxes differs from an amount computed using the
statutory federal income tax rate as follows:
Year ended March 31,
1999 1998 1997
--------- ----------- ---------
Benefit from income taxes at statutory rate $ 908,571 $ 2,340,000 $ 1,019,929
Decrease in benefit resulting from:
Deferred tax valuation allowance (908,571) (2,340,000) (1,019,929)
--------- ---------- -----------
$ - $ - $ -
========= ========== ===========
The Company has tax net operating loss carryforwards at March 31, 1999 of
$12,363,747. Such carry forwards may be used to offset taxable income, if
any, in future years through their expiration in 2000-2017. Future
expiration of tax loss carryforwards, if not utilized, are as follows:
2000, $0; 2001, $80,975; 2002, $47,625; 2003, $104,696, 2004, $176,084;
thereafter $11,954,367. The annual amount of tax loss carryforward, which
can be utilized, may be limited due to the substantial changes in the
Company's ownership which have occurred or may occur in the future. Such
limitations could result in the expiration of a part of the carryforwards
before their utilization.
8. OFFICER AND DIRECTOR STOCK OPTIONS
In April 1995, the Board of Directors granted options through employment
agreements for the Company's Chief Executive Officer and Chairman to each
purchase 5,000,000 shares of the Company's common stock at an exercise
price of $0.21 per share. As half of the options became null and void when
the Company did not reach profitability by March 31, 1998, 5,000,000
options expired on April 1, 1998.
In addition, 500,000 options that were granted to a non-employee in March
of 1996 expired when their term ended at the end of fiscal 1998.
In August 1997, the Board of Directors granted to each of the Company's
Chairman, President and Chief Executive Officer and Secretary option to
purchase 1,000,000 shares of the Company's common stock at a price equal to
$0.50 per share exercisable for a period of 24 months from the date of
vesting. The options will be deemed vested for each individual if that
individual is employed by the Company on the first date on which the
closing market price of the Company's stock equals or exceeds $0.50 per
share for 30 consecutive days, and the options shall lapse and be null and
void if they have not become exercisable by July 31, 1999.
In August 1997, the Board of Directors granted to each of the Company's
Chairman, President and Chief Executive Officer options to purchase a total
of 4,000,000 shares of the Company's common stock as follows:
1. When and if the closing market price of common stock equal or exceeds $1.00
per shares for 30 consecutive days, then each of the three individuals
shall become fully vested with an option to purchase 1,000,000 shares of
common stock as a price equal to $1.00 per share exercisable for a period
of 24 months from the date of vesting.
2. When and if the closing market price of common stock equal or exceeds $1.50
per shares for 30 consecutive days, then each of the three individuals
shall become fully vested with an option to purchase 1,000,000 shares of
common stock as a price equal to $1.50 per share exercisable for a period
of 24 months from the date of vesting.
2. When and if the closing market price of common stock equal or exceeds $2.00
per shares for 30 consecutive days, then each of the three individuals
shall become fully vested with an option to purchase 1,000,000 shares of
common stock as a price equal to $2.00 per share exercisable for a period
of 24 months from the date of vesting.
3. When and if the closing market price of common stock equal or exceeds $2.50
per shares for 30 consecutive days, then each of the three individuals
shall become fully vested with an option to purchase 1,000,000 shares of
common stock as a price equal to $2.50 per share exercisable for a period
of 24 months from the date of vesting.
8. OFFICER AND DIRECTOR STOCK OPTIONS (CONTINUED)
The individual must be employed by the Company on the first date of which
the closing market price of the Company's common stock equals or exceeds
the relevant price for the options to vest. The options shall lapse and be
null and void if they have not become exercisable by July 31, 1999.
During fiscal 1998, the Board of Directors issued option to various new
employees to purchase a total of 7,000,000 shares of the Company's common
stock. The exercise prices for these options range from $0.25 to $1.00 per
share. The options generally expire three (3) years from date of grant.
During fiscal 1999, the Board of Directors issued options to a new employee
to purchase 200,000 shares of the Company common stock. The exercise price
for these options is $0.07 per share and expire two years from the date of
grant. In addition, the Board of Directors issued options to a new
independent contractor to purchase 2,000,000 shares of the Company's common
stock at an exercise price of $0.30, which also expire two years from the
date of grant. The total valuation of this issuance to a non-employee using
the Black-Scholes model is $32,000, of which the related annual
compensation expense is $16,000.
In 1999, the President left the Company and thus forfeited 5,000,000
options. The Board of Directors subsequently reissued 4,000,000 of the
options to the Corporate Secretary under the same terms as listed above for
the August 1997 issuance to the Chairman, Chief Executive Officer and
President.
The Company adopted Statement of Financial Accounting Standard No. 123
("FAS 123"), Accounting for Stock-Based Compensation, during 1996. This
statement allows companies to choose whether to account for stock-based
compensation under the intrinsic method as prescribed by Accounting
Principles Board Opinion No. 25 (APB) or to use a fair value method
described in FAS 123. The Company continues to follow the provisions of APB
25. No compensation cost has been recognized on the Company's stock option
grants except as described above, as the options include an exercise price
equal to or exceeding the fair value on the date of grant.
The Company has determined that the pro forma effects of applying FAS 123
would have an immaterial effect on the results of operations for 1999, 1998
and 1997. The determination was made using the following weighted average
assumptions:
Fiscal Fiscal Fiscal
1999 1998 1997
------ ------ ------
Risk-free interest rate 5.62% 6.05% 6.75%
Expected dividend yield - - -
Expected lives 4.23 5.43 10
Expected volatility 82.5% 86.7% 95.0%
8. OFFICER AND DIRECTOR STOCK OPTIONS (CONTINUED)
The following table summarizes the employee stock option transactions
described above.
Shares Weighted
under average
option exercise price
----------- --------------
Balance, March 31, 1996 and 1997 11,800,000 $ .19
Options granted 23,000,000 .18
Options cancelled - -
Options exercised - -
----------- -------------
Balance, March 31, 1998 34,800,000 .78
Options granted 6,200,000 1.23
Options cancelled (10,500,000) .83
Options exercised - -
----------- -------------
Balance, March 31, 1999 30,500,000 $ .90
=========== =============
The weighted average per share fair value of options granted during fiscal
1999 is $0.001. In addition to the above options, the Company also granted
options to purchase 2,500,000 shares at a purchase price of fifty percent
(50%) of the closing market price per share. These options were granted to
the president, and therefore, were forfeited when he left the Company in
fiscal 1999.
The following table summarizes information about stock options outstanding
at March 31, 1999.
Options
Options Outstanding exercisable
-----------------------------------------------------------
Weighted
Number average Number
Exercise outstanding remaining exercisable
Price at 3/31/99 contractual life at 3/31/99
---------- ------------ ----------------- --------------
(Years)
.07 200,000 1.75 200,000
0.10 1,500,000 6 1,500,000
0.21 6,300,000 4.9 5,300,000
0.25 250,000 1.7 250,000
0.30 2,000,000 1.75 2,000,000
0.50 7,750,000 1.5 1,500,000
0.75 250,000 3 -
1.00 3,250,000 .45 -
1.50 3,000,000 .33 -
2.00 3,000,000 .33 -
2.50 3,000,000 .33 -
------------
30,500,000
9. REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDER'S EQUITY
REDEEMABLE COMMON STOCK
In 1997, the Company issued to a vendor 1,000,000 unregistered shares of
common stock valued at $400,000 for partial payment of amounts owed for the
an airborne hyperspectral instrument (Note 3). The shares of common stock,
which were subject to certain "put rights" and, accordingly were presented
in the accompanying balance sheets as redeemable common stock. Such shares
were recorded at their approximate fair market value at the date of
issuance, where the fair market value equaled the maximum redemption
amount. During 1999 the contract with the manufacturer was cancelled and
these redeemable shares were returned at no cost to the Company.
Also included in redeemable common stock are amounts related to a potential
rescission offering related to certain shares sold in the state of Idaho
(Note 10).
PREFERRED STOCK
During the year ended March 31, 1998 the Company issued 200,000 shares of
Series A preferred stock: 100,000 of these shares were issued as a result
of the conversion of a note payable (Note 5). Each share of preferred stock
is convertible into five shares of the Company's common stock. As such,
2,000,000 shares of the Company's common stock have been reserved for
issuance upon the conversion of the Series A preferred stock. In addition,
the recipient of the preferred stock was granted warrants to purchase
1,000,000 shares of the Company's common stock.
COMMON STOCK
During the fiscal year ended March 31, 1998 and 1997, the Company issued
865,988, and 828,890, shares of common stock (including treasury stock) to
satisfy $99,126, and $146,231, respectively, of principal and $61,937 and
$200,297, respectively, of interest relating to convertible notes payable
(see Note 5). No common stock was issued in 1999 relating to the conversion
of notes payable.
TREASURY STOCK
In 1999, the Company received into treasury 1,000,000 shares of redeemable
common stock previously issued to a vendor as payment for a hyperspectral
instrument contract that was subsequently cancelled. The Company
subsequently reissued 500,000 of these shares during 1999.
STOCK WARRANTS
During fiscal 1998, warrants to purchase 4,000,000 shares of the Company
common stock were granted, with exercise prices ranging from $1.30 to $2.00
per share. These warrants were issued to investors of the Company and
expire 3-5 years after issuance.
9. REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDER'S EQUITY (CONTINUED)
PRIVATE PLACEMENT OF QUASAR COMMON STOCK
In 1997, Quasar, a wholly owned subsidiary, issued 331,990 shares of its
common stock, at $.50 per share of its common stock, in a private placement
offering. As the Company owns a majority interest in Quasar, the
subsidiary's financial statements are consolidated into the parent.
Accordingly, the Company has recorded a minority interest of $49,798
relating to the outside investors share of net equity in Quasar. The
difference between the stock proceeds of $165,995 and the minority interest
of $49,798 has been recorded as an addition to paid-in-capital.
In 1997, the Company repurchased 20,000 shares of Quasar common stock by
issuing 40,000 shares of the Company's common stock, which resulted in a
$3,000 decrease in minority interest and decrease in nonredeemable
shareholders' deficit. In 1998, the Company repurchased the remaining
626,190 shares of Quasar common stock outstanding by issuing 1,252,380
shares of the Company's common stock, which resulted in a $56,554 decrease
in minority interest and decrease in nonredeemable shareholders' deficit.
As a result, the Company now owns all of the outstanding stock of Quasar
Resources, Inc.
PRIVATE PLACEMENT OF EARTH SEARCH RESOURCES COMMON STOCK
During fiscal 1998, Earth Search Resources, a wholly owned subsidiary of
Earth Search Sciences, Inc., issued 2,494,000 shares of its common stock at
$.50 per share. Two million of the shares were issued to certain officers
and directors of the Company as compensation for services rendered.
Accordingly, the costs of these shares are included in general and
administrative expenses within the statement of loss in 1998. In 1999, the
Company exchanged 2,646,667 shares of its owned stock for Earth Search
Resources not previously owned. This transaction reduced minority interest
by $248,000.
10. COMMITMENTS AND CONTINGENCIES
CONTRACTUAL COMMITMENTS
The Company has outstanding purchase orders, commitments, and contracts
with future milestone payments totaling $1,750,000. In addition, during
fiscal 1999, the Company entered into a 36-month sales-leaseback
transaction of the aircraft previously owned by its subsidiary Skywatch
Exploration Inc. In accordance with the terms of the agreement, the Company
has committed to pay for a minimum of 15 hours of flight time per month at
a rate of $425 per hour. As the plane is not used every month for the
minimum hours, the Company is exposed to an adverse purchase commitment not
to exceed $76,500 per year. The Company's plan is to utilize the plane up
to or in excess of the minimum monthly commitment.
LITIGATION
In 1997 the Company settled its lawsuit with the Idaho Department of
Finance. As a result of the settlement, the Company agreed to proceed with
an offering of rescission to certain Idaho investors. The Company
anticipates making a formal offer of rescission in fiscal year 2000. In
conjunction with the rescission offering, $117,845 related to 725,914
shares of common stock has been recorded in redeemable common stock as of
March 31, 1999 and 1998.
11. RELATED PARTY TRANSACTIONS
During fiscal 1998, the Company entered into various agreements with a
major mining company. The agreements executed between the Company and the
mining company provide, under certain restrictions, an exclusive license to
use Probe 1 for commercial mining purposes. The agreements have a
three-year term, with an automatic three-year renewal unless the agreements
are terminated by either party at the end of the initial three-year period.
Under the terms of the agreements, the Company is guaranteed minimum
services work of $750,000 in year one, $2,000,000 in year two, $3,000,000
in year three, and $3,000,000 in each subsequent year. In year one, the
Company earned $810,000 in revenue with related costs of $652,000 on
missions flown under this contract. Furthermore, the agreement grants net
smelter royalties to the Company ranging from 1.5 percent to 2.5 percent of
revenues or currently owned or optioned by the mining company. 200,000
shares of the Company's Series A preferred stock were issued to the mining
company for consideration equal to $1,000,000; furthermore, the mining
company was granted options to purchase 1,000,000 shares of the Company's
common stock at a price of $2.00 per share.
12. SUBSEQUENT EVENTS
The Company launched the startup and funding of it's internet based global
information and imagery distribution system, Terranet, Inc., which is a
wholly-owned subsidiary. The system will provide high value added data
packages, tailored for end users that can be downloaded over the Company's
high-speed delivery system. It is through the use of this high-speed
delivery system that information can be provided to a wide customer base
using high-speed broad band delivery of imagery and video.