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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, 2004 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.
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(Exact name of registrant as specified in its charter)
Utah 87-0437723
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1729 Montana Highway 35, Kalispell, Montana 59901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (406) 751-5200
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. X
Aggregate market value of Common Stock held by non-affiliates of the
Registrant at March 31, 2004: $5,270,266. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 31, 2004: 194,305,708
Documents incorporated by reference.
This Form 10-K consists of 43 pages, which includes exhibits.
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TABLE OF CONTENTS
PART I....................................................................... 3
Item 1 - Business ...................................................... 3
Item 2 - Properties ................................................... 8
Item 3 - Legal Proceedings.............................................. 8
Item 4 - Submission of Matters to a Vote of Security Holders............ 9
PART II...................................................................... 9
Item 5 - Market for the Registrant's Common Stock Equity and
Related Shareholder Matters................................... 9
Item 6 - Selected Financial Data........................................ 11
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 7A- Quantitative and Qualitative Disclosures About Market Risk..... 17
Item 8 - Financial Statements and Supplementary Data.................... 17
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 17
PART III..................................................................... 18
Item 10 - Directors and Executive Officers of the Registrant............. 18
Item 11 - Executive Compensation......................................... 19
Item 12 - Security Ownership of Certain Beneficial Owners and
Management.................................................... 20
Item 13 - Certain Relationships and Related Transactions................. 20
PART IV...................................................................... 21
Item 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................... 21
SIGNATURES................................................................... 24
2
PART I
ITEM 1. BUSINESS
Organization
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Earth Search Sciences, Inc. (the Company) was incorporated in 1984 under
the laws of the state of Utah.
Corporate Focus
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The Company's mission is to commercially exploit the science of remote
sensing in a wide variety of industries around the globe. The science of remote
sensing includes acquiring, processing and interpreting imagery of the earth
captured from instruments deployed on aircraft or satellites. The advantages of
airborne and satellite remote sensing over other methods of gathering visual
information are that data can be collected better, faster and cheaper over
larger areas including sites inaccessible from the ground. By collecting data at
different times, changes can be detected that may be due to significant natural
or man-made processes. Detection of such changes can assist in
environmental/land use management. Remote sensing instruments measure reflected,
visible and infrared sunlight from the earth's surface over a spectral range
seven times broader than the human eye can see. This collected data can then be
digitally analyzed using personal computers. The digitally analyzed imagery can
provide information useful to a wide range of industries such as, but not
limited to, natural resource development (including oil and mineral exploration,
fisheries and forestry), land use development, environmental remediation and
monitoring, agriculture (including vegetation stress analysis), disaster
assessment, marine sciences and military sciences.
Development of Core Technology
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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 the NASA operated Airborne Visible and Infra-Red Imaging
Spectrometer (AVIRIS), along with other less advanced instruments, in locating
geologic areas of interest in a test area in Nevada. The results of that program
were published in January 1993. As a result of its participation in the program,
the Company recognized the need to refine existing remote sensing technology in
order to improve the economics of commercial remote sensing applications. To
achieve its goal, the Company undertook the development of a miniaturized
hyperspectral remote sensing instrument, Probe 1, which designed to be used with
cost effective and easily available aircraft. This instrument has become known
for its accuracy, reliability, and cost effectiveness and with the addition of
geo-rectification capabilities and automated original processing steps continues
to be one of the most accurate and cost effective instruments in the airborne
remote sensing industry.
Current Business Plan
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The Company is evolving from a mineral exploration and research and
development organization into a leading provider of remote sensing services.
Data is provided for clients as well as for the Company's own mineral and
hydrocarbon exploration purposes. It is also accumulated for future resale to a
variety of users. On June 1, 1997, the Company took delivery of the first Probe
1 instrument. In August of 1999, the Company took delivery of its second Probe 1
instrument. Since June 1, 1997, the Company has collected and currently owns a
substantial archive of Probe 1 hyperspectral imagery from Kazakhstan, Australia,
British Columbia, Ontario, Quebec, Chile, Peru, Mexico, California, Nevada,
Arizona, Idaho, Montana, Wyoming, Texas, Louisiana, Florida and Utah. At the
present time, the value of this data archive has not been independently
appraised and its value is not reflected in the Company's
3
financial statements, although recent announcements from Noranda Mining and
Exploration Inc., a customer, indicate that their Probe 1 data from Chile and
Peru has revealed new potential major mineral deposits.
The Company believes cost effective hyperspectral remote sensing and
imagery processing has tremendous potential in various global applications and
markets. The ASPRS/NASA TEN-YEAR INDUSTRY FORECAST
(http://www.asprs.org/news.html) published in 2003 validates this position and
indicates that the remote sensing market has been growing at a rate of 13% per
year, with the hyperspectral portion of that market growing to12% of the total
by 2006 and worth approximately $440 million. The Company is ensuring its
maximum exposure to this market by continuing a business model that is
establishing subsidiary companies to focus on hyperspectral remote sensing
applications in key industries. Each subsidiary will focus on a specific sector
of commercial remote sensing and have a management team with relevant skills and
expertise. The Company will provide an exclusivity license for each one, the
Company's hyperspectral technology intellectual property, processing support,
marketing and management assistance. With the establishment and growth of the
subsidiaries this strategy will gradually create a ready market for the Company,
as well situate the Company to receive royalties from any resource development
that occurs as a result of the use of the Company's instruments and technology.
Another advantage is that any required capital will be raised by the subsidiary
separate from the parent company. One of the subsidiary companies, Petro Probe,
Inc, the oil & gas spin-off, is already producing a steady cash flow from
operations.
To complement its Probe 1 technology, in fiscal 2000 the Company in
acquired Space Technology Development Corporation (STDC) and its ownership of
satellite based imagery technology. STDC had acquired ownership of a difficult
to obtain commercial satellite license and the accompanying hyperspectral data
stream from the proposed space based instrument, NEMO, a very desirable asset.
The strategy the Company sought to develop was joint use of satellite and
airborne remote sensing instruments to capture a strong market position. The
economical large area imagery collection by the satellite instrument could
complement and add value to the high-resolution imagery collection of specific
target areas provided by the airborne instruments.
As attractive as the proposition was, the financial markets were not
willing to invest in new satellite ventures at the time. Thus, the Company has
been unable to complete funding of the NEMO project based on the risks of a
launch and the unproven potential for revenues from a hyperspectral satellite.
In May 2002, the Company received notification from the Office of Naval
Research (ONR) indicating that the performance period for the agreement with the
Navy for the NEMO project had ended and that is was time to initiate close-out
procedures, account for the distribution of Federal funds under the agreement
and to account for and dispose of all real property and equipment acquired under
the agreement. Further, the Navy requested an audited record of all
distributions of Federal Funds made under this agreement, including those from
the period when STDC was owned and operated prior to its acquisition by ESSI.
Until the audit was completed and reviewed the ONR decided not to reimburse STDC
(and hence ESSI) for certain invoices for subcontract and vendor costs on the
NEMO program even though these costs were approved by the Naval Research
Laboratory and the ONR for payment with government funds. As of March 31, 2002,
the Company has $1,105,995 of receivables on its balance sheet from the ONR, of
which $808,401 are outstanding as of the date of this filing. The Company
believes that the ONR will make payment of the remaining receivables.
SFAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED
ASSETS TO BE DISPOSED OF, and APB Opinion 30, REPORTING THE RESULTS OF
OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, is
the applicable accounting guidance for potential impairment of long-lived
assets. Based
4
on the guidance of SFAS 121 and since the Company was not able to receive any
written confirmation from the ONR re: the matter, the Company had effectively no
ability to value future oriented negotiated settlement on the NEMO program.
Without such documentation of value, the Company provided in 2002 a loss from
impairment of $13,010,364, the amount the Company was carrying in construction
in progress for the NEMO program (see Notes 4 and 5 to the financial
statements.) Although the situation with NEMO and the ONR financially damaged
the Company, ESSI is moving forward in its plan to capture leadership in the
airborne remote sensing industry. The Company recognizes the fragmented nature
of the remote sensing industry and its composition by a majority of very small
companies. The Company's long-term strategic plan is to create partnerships,
strategic alliances, mergers or acquisitions as the most expeditious and
cost-effective way to consolidate commercial hyperspectral remote sensing
collections and services.
The Company's near-term plans are to continue pursuing:
(1) contracts that produce revenues from the application of remote sensing;
(2) the development of additional miniaturized remote sensing instruments;
(3) the integration of other advanced technology exploration instruments;
(4) the development of promising mineral, oil and gas properties in which
the Company has an equity interest, identifying such properties by
utilizing its existing imagery database or acquiring such data; and
(5) the marketing of ESSI archived raw data
The negative events of 2001, including the stock market decline and
September 11, 2001, left the Company in a tenuous highly leveraged position.
Recognizing that the economy and the general business climate was declining
rapidly, the Company made every effort to reduce overhead as quickly as
possible, even though that may have been detrimental to longer-term expansion
plans in some cases. Although cash flow was conserved the Company entered 2002
in an undercapitalized state and sought assistance from a variety of sources
including some who indicated they could bring in necessary new investment into
the Company. None of the individual sources proved successful, however all of
those sources highly recommended a reorganization of the company in order to
encourage migration of capital into the company. The reorganization would also
include bringing in experienced directors and outsiders to fill the roles of
senior management. In early 2004, the Board of Directors acted on the
recommendation of investor sources and its own research and began to implement
these actions.
Subsidiary Companies
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Formation of Petro Probe, Inc.
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The Company formed Petro Probe, Inc. to identify and develop potential
hydrocarbon properties by utilizing Probe 1 surface imagery integrated with
other sub-surface exploration techniques. Petro Probe, Inc.'s strategy will
entail capturing data over areas of interest that the Company may later take an
equity interest in, as well as the sale of hyperspectral imagery and processing
services to oil and gas properties owned by third party customers. A primary
objective in evaluating a potential hydrocarbon resource project is to provide
geologic mapping of outcrop lithology and surface structure. The Probe 1
instrument is an excellent tool to obtain this mapping. Probe 1 imagery can
identify subtle features due to topographic offset, vegetation change and/or
soil alteration that play a major role in forming hydrocarbon traps.
Hyperspectral imagery can also aid in petroleum exploration by detecting surface
indicators of potential petroleum reserves such as micro seepage.
Petro Probe, Inc.'s goal is to develop the competitive advantages of Probe
1 resource mapping capability, combining this with conventional hydrocarbon
exploration tools and then applying newer value-added technology, such as 3D
seismic to identify and acquire equity positions in oil and gas properties. 3D
seismic is the technology of measuring underground explosions to map subsurface
geologic structures.
5
From it's inception in 2000 through March 31, 2002, Petro Probe, Inc. has
acquired working interests in seven oil and gas projects in the U.S. The first
project acquired was the Louisiana West Scott Field Prospect, where an oil well
has been drilled and logged based on data from Probe 1 as well as other
exploration measurements.
Petro Probe, Inc.'s working interests in its seven (7) oil and gas projects
offer them the right to participate in drilling additional wells on the project
lease acreage. Petro Probe Inc. will determine whether or not to participate in
additional drilling efforts on a case by case basis. Besides the West Scott
field project, Petro Probe has interests in the well known fields of SpindleTop
and Lost Soldier and has data and interests in the Green River Basin, Paradox
Basin, and the Australian Basin.
Because of the national need for new hydrocarbon discoveries, Petro Probe,
Inc. is actively seeking petroleum based companies to either joint venture with,
or merge with, and is in excellent position to move forward in this direction.
Formation of Geo Probe, Inc.
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The Company formed Geo Probe, Inc. to pursue geologically tailored
hyperspectral imaging services to mineral exploration companies and develop new
markets in geological applications. The same indicators that can be used to find
mineral deposits can also be used to monitor the environmental impact of active
and past-producing mines, mills, smelters, refineries and pipelines. Mineral
deposits are part of larger geological systems that typically have mineralogical
characteristics that are mappable using Probe 1 imagery. In vegetated areas, the
subtle effects that bedrock geology has on plants can be measured to identify
hidden minerals. The Company's mapping agreement with Noranda in 1998-2000
provided the ability to develop and prove new approaches to mineral exploration.
The experience gained from this application still remains a rare and valuable
intellectual property today, evidenced by the discovery of 145 mineral targets
in Chile by Noranda . Therefore, Geo Probe's business focus will be to use the
Company's remote sensing instruments to globally survey any areas that have
promise for the location of minerals either for its own use, or for third party
customers, and to sell hyperspectral collection and processing services in the
geological hazards and environmental geology sectors.
As in the hydrocarbon industry sector there is a build-up of new demand for
mineral exploration beginning to occur and Geo Probe, Inc. is actively seeking
companies to either joint venture with or merge with in order to position itself
well for the upturn in global mining activity. The company has recently signed a
Memo of Understanding with a Canadian mineral exploration company to move
forward in the creation of such a joint venture.
Formation of Eco Probe, Inc.
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The Company formed Eco Probe, Inc. to pursue hyperspectral remote sensing
applications in the environmental industry. The Company has taken an industrial
leadership role in working with U.S. government agencies such as the
Environmental Protection Agency, the Bureau of Land Management and the Office of
Surface Mining on setting up applications for commercial monitoring of
industries, forest inventory and health issues, slope stability assessment and
the spread of noxious weeds.
ESSI and Eco Probe, Inc. have performed important hyperspectral surveys and
research in aquatic and vegetation-related projects. The environmental markets
are vast, however, and the Company's current lack of resources dictates
continued priorities to mineral and hydrocarbon exploration with its more mature
background of data and experience.
6
Formation of Terranet, Inc.
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The Company formed Terranet, Inc. to act as a imagery product distribution
conduit and perform as the Company's e-commerce content provider through a
unique internet imagery distribution system. Imagery collected today and
yesterday could be sold repeatedly to multiple end users. In addition to selling
the Company's own imagery, Terranet, Inc. would pursue the resale of imagery
obtained from third parties. Terranet completed the design and testing of the
software and is anticipating development and expansion of the remote sensing
market will provide opportunities for joint venture partners and or contract
data suppliers. The unique design features are protected by copyright.
Fiscal 2004 Significant Projects
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In fiscal 2004, the Company completed airborne hyperspectral surveys
primarily for local, state and federal governmental agencies. These projects
produced the majority of the Company's 2004 airborne revenue. The Company's
agreement with the ONR produced all the Satellite Development business segment
revenue (see note 10 to the financial statements.)
To date, gigabyte quantities of imagery have been collected by the Company.
Selected portions of these data tapes are being processed and the imagery is
being examined for the presence of mineral properties. The Company is currently
working to outsource the processing and interpretation of its archived data in
order to quickly expand its commercial offering.
Proposals are being developed to partner with private industry,
universities and state and federal agencies to develop, package and deliver
competitive advanced technology products and services. These are being evaluated
on a priority basis. The Company continues to respond to an ever increasing
volume of requests for quotations. This demonstrates the growing demand for
hyperspectral services and gives reason for the Company to have a brighter
outlook for the near future.
Business Segment Information
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Included in the attached financial statements is business segment
information and financial information about geographic areas for the Company.
Employees
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As of March 31, 2004 the Company had 4 full-time employees.
Available Information
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The Securities and Exchange Commission maintains an internet site at
http://www.sec.gov that contains reports and financial information filed by the
Company. The Company maintains an internet site at http://www.earthsearch.com
that contains information about the Company's business, markets and technology.
Seasonal Nature of Business
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The Company experiences the highest demand for its collection services
April through October in the Northern Hemisphere and October through April in
the Southern Hemisphere.
7
Customers and Geographic Areas of Business
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In fiscal 2004, the Company operated its airborne hyperspectral sensors
under contracts with third parties in several areas around the United States. In
fiscal 2004 and 2003, the Company's sensors were operated in the United States
and abroad. Contracts to operate the sensors in the United States as an
ecological, mining, agricultural, hydrocarbon, and target identification
contributed approximately $258,843, $384,212 and $460,000, to revenue in 2004,
2003, and 2002, respectively. STDC's contract with the Office of Naval Research
to design, build, and operate a hyperspectral sensor mounted on a satellite
contributed approximately $0, $6,459 and $4,235,000, to revenue in 2004, 2003
and 2002. In fiscal 2003, projects with four clients accounted for approximately
76% of total revenue. In fiscal 2002, projects with one client accounted for
approximately 84% of total revenue
ITEM 2. PROPERTIES
The Company leases its corporate headquarters from two officers of the
Company. Its headquarters consist of approximately 6,400 square feet of office
space in Kalispell, Montana. All other office obligations have been cancelled.
In addition, the Company owns working interests in seven (7) oil and gas
properties. (See Note 4 to the Notes to Consolidated Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
In November 2000, Applied Science and Image Technology, Inc. (ASIT) sued
the Company in the Circuit Court of Baltimore County, Third Judicial Circuit of
Maryland, alleging breach of contract and other related causes of action. ASIT
alleges that the Company was required to deliver 500,000 shares of ESSI common
stock to ASIT on demand pursuant to a written contract between ASIT and the
Company in which ASIT agreed to perform certain services for the Company.
In May 2002, the Company filed counterclaims against ASIT for breach of
contract and unjust enrichment on the grounds that, despite the Company having
paid approximately $300,000 and transferring 500,000 of the Company common stock
to ASIT, ASIT failed to provide the Company with the products and services it
was contractually obligated to provide the Company. On June 12, 2002, ASIT moved
to dismiss ESSI's counterclaims on the grounds that they were untimely. The
action has not been resolved and neither party is presently pursuing this end.
In October of 2002, Terranet, Inc. a subsidiary company, received notice of
a judgment issued by the Supreme Court of British Columbia in regards to monies
owed resulting from a contract with plaintiff Cal Data Ltd., of Vancouver, B.C.
The plaintiff alleged that seventy-five thousand dollars was overdue from
invoices for services dating from January of 2002 to October, 2002. Terranet,
Inc.is examining its position and has not accrued any liability associated with
this demand in its financial statements.
In May of 2003, the Company received notice of a civil action commenced
against it from Stern & Co. Communications LLC d/ba Stern & Co. registered in
the United States District Court, Southern District of New York. The plaintiffs
allege that the Company has not completely paid for services rendered and owes
$92,048.22, nor forwarded stock options for 1,500,000 shares exercisable for
three years at the price of $1.50 per share. The Company responded with a
counter-claim alleging it never received the promised services. This matter has
been resolved out of court.
8
In January of 2004, the Company received notice of a complaint over
deferred expenses owed to Mr. Brian Soliday. The Company disagreed with the
amount and is working toward a settlement and/or an agreed amount.
Except as described above, to the knowledge of our executive officers and
directors, neither we nor our subsidiaries are party to any legal proceeding or
litigation and none of our property is the subject of a pending legal proceeding
and our executive officers and directors know of no other threatened or
contemplated legal proceedings or litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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 trades in the
over-the-counter market. The range of reported high and low bid
quotations for the Company's common stock, as set forth below, reflect
interdealer bid prices, without retail markups, markdowns,
commissions, or adjustments as reported in the NASDAQ "pink sheets"
and do not represent actual transactions.
Quarter Ended High Low
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June 30, 2002 .08 .08
September 30, 2002 .05 .05
December 31, 2002 .04 .03
March 31, 2003 .01 .01
June 30, 2003 .01 .01
September 30, 2003 .01 .01
December 31, 2003 .01 .01
March 31, 2004 .03 .025
(b) Approximate Number of Holders of Common Stock. The number of record
owners of the Company's $.001 par value common stock at March 31, 2004
was approximately 1,204. This does not include shareholders that hold
stock in their accounts at brokers/dealers.
(c) Dividends. Holders of the Company's common stock are entitled to
receive such dividends as may be declared by the Company's Board of
Directors. No dividends have been paid with respect to the Company's
common stock and no dividends are anticipated to be paid in the
foreseeable future.
(d) In the last three years, the Company has made the following sales of
unregistered securities, all of which sales were exempt from the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) or as otherwise indicated:
9
RECENT SALES OF UNREGISTERED SECURITIES (1)
AMOUNT OF PRICE AMOUNT OF PRICE
SECURITIES PER TOTAL CASH SECURITIES PER TOTAL CASH
DATE SOLD SHARE($) PROCEEDS($) DATE SOLD SHARE($) PROCEEDS($)
- ---------------------------------------------- -----------------------------------------------
4/10/00 200,000 0.25 49,985 (1) 4/11/00 167,066 0.38 (6)
4/13/00 75,000 0.45 33,750 (3) 4/18/00 22,222 (5)
4/26/00 500,000 0.50 250,000 (3) 4/26/00 26,315 0.38 10,000 (3)
4/26/00 50,000 0.38 19,000 (3) 4/26/00 50,000 0.38 19,000 (3)
4/28/00 12,004 0.83 10,000 (3) 4/28/00 34,212 0.75 (1)
5/4/00 600,000 0.50 300,000 (3) 5/4/00 8,333 0.72 6,000 (3)
5/4/00 5,451 0.20 (4) 5/8/00 50,000 0.20 10,180 (1)
5/11/00 500,000 0.25 (1) 5/11/00 3,940 0.20 (4)
6/6/00 818,501 0.05 (4) 6/6/00 65,789 0.38 25,000 (3)
6/6/00 100,000 0.38 38,000 (3) 6/22/00 300,000 (5)
8/24/00 9,383 0.75 (1) 12/12/00 81,081 0.37 (2)
1/4/01 29,126 0.26 (1) 1/11/01 9,980,667 0.14 (4)
1/16/01 100,000 0.56 (3) 1/17/01 8,587,000 0.34 (1)
2/26/01 5,289,315 0.26 (4) 7/10/01 50,000 0.21 (1)
8/28/01 50,000 0.16 (1) 9/25/01 850,340 0.16 (6)
11/13/01 160,000 0.15 (2) 12/11/01 243,026 0.13 (1)
12/13/01 146,667 0.13 (1) 12/13/01 120,824 0.13 (1)
1/3/02 2,564,103 0.10 (1) 3/8/02 200,000 0.08 (2)
5/20/02 200,000 (5) 5/30/02 3,574,273 (1)
6/7/02 8,332,329 (2) 6/19/03 377,220 (1)
7/8/02 300,000 (2) 7/8/02 500,000 (1)
10/1/02 547,960 (1) 11/12/02 1,098,350 (1)
11/13/02 500,000 (7) 12/11/02 500,000 (7)
2/24/03 1,000,000 (1) 3/26/03 100,000 (1)
(1) Consideration paid for the shares was employee and/or consulting services.
(2) Shares issued for debt consideration.
(3) Sales of securities exempt from registration under Regulation D Rule 506.
(4) Shares exchanged pursuant to debt conversion.
(5) Shares issued as commissions for stock sales.
(6) Shares issued in exchange for interest in oil and gas properties.
(7) Shares issued in exchange for Series A preferred stock.
Securities authorized for issuance under Equity Compensation Plans
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The following table sets forth certain information on the Company's Equity
Compensation Plans. See Note 13 to the Notes to Consolidated Financial
Statements for additional information on equity compensation including material
terms of options granted that have not been approved by security holders.
10
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to be Weighted-average equity compensation
issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected
Plan category warrants and rights warrants and rights in column (a)
- -------------------------- -------------------------- -------------------- -----------------------
Equity compensation plans
approved by security
holders (1) - - -
Equity compensation plans
not approved by security
holders (2) 23,138,000 $1.07 -
Total 23,138,000 $1.07 -
(1) The Company's stock options and warrants have not been approved by
security holders
(2) Excludes options for 4,000,000 shares issued as part of the
acquisition of STDC
Securities authorized for private placement issuance under subsidiary companies
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The subsidiary companies of Terranet, Inc. Petro Probe, Inc. and Eco Probe, Inc
have issued shares of common stock to private placement investors, all of which
were accredited investors as that term is defined under Regulation D. The
investors executed subscription agreements and acknowledged that the securities
to be issued have not been registered under the 1933 Securities Act, that the
investors understood the economic risk of an investment in the securities, and
that the investors had the opportunity to ask questions of and receive answers
from the Company's management concerning any and all matters related to
acquisition of the securities. No underwriter was involved in the transaction,
and no commissions or other remuneration were paid in connection with the offer
and sale of the securities.
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. STDC was acquired by the Company on December 21, 1999. The results of
operations for 2003, 2002 and 2001 include the results of operation for STDC
from December 22, 1999 to March 31, 2003.
As of or for the fiscal year ended
2004 2003 2002 2001 2000
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Operating revenue $ 516,490 $ 786,208 $ 5,044,498 $ 2,678,986 $ 1,526,446
Net loss (3,860,529) (5,354,184) (16,797,081) (6,636,480) (5,177,983)
Net loss per common share (0.02) (0.03) (0.11) (0.05) (0.03)
Total assets 1,233,573 4,091,566 7,096,591 19,710,126 19,532,230
Long-term obligations 4,286,233 4,700,365 4,687,895 5,253,135 4,515,118
Stockholders' (deficit) equity (18,690,393) (14,879,965) (11,310,331) 2,346,846 2,663,656
Cash dividends declared - - - - -
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial comparisons will be made between the fiscal years ended March 31,
2004 and 2003 and 2002.
Results of Operations
- ---------------------
The Company recognized revenue of $516,490 in 2004 compared with $786,208
and $5,044,498 in 2003 and 2002, respectively. In 2004, costs of services
provided was $25,551 compared with $328,104 and $5,342,983 in 2003 and 2002,
respectively.
Provision for loss on impairment of fixed assets was $2,469,672 in 2004
compared with $2,168,997 and $13,010,364 in 2003 and 2002. This loss in 2002 is
due recognition of an impairment of the NEMO asset previously carried in the
construction in progress account. Exploration costs in 2004 were $0 compared
with $0 in 2003 and 2002. General and administrative costs were $351,520 in 2004
compared with $3,138,442 and $3,053,024 in 2003 and 2002, respectively.
During 2001, the Board of Directors approved the issuance of 8,587,000
shares against options as a performance based stock bonus. The issuance of these
shares resulted in non-cash compensation expense of $2,926,781. In 2000, the
Company recognized non-cash compensation expense of $1,608,001 for the vesting
of options. Of this amount, $1,593,600 relates to performance options issued to
officers of the Company in 1997. At the time these options were granted, the
officer's salaries was deferred and the Company's common stock price was
approximately $0.48 These options allow the officers to purchase restricted
shares in the Company at exercise prices ranging from $.50 per share to $2.50
per share, for up to 24 months after vesting. The vesting of these options is
dependent on the Company's stock price reaching certain prices and maintaining
that level for a specified number of days. In 2000, 3,000,000 of options met the
performance criteria and resulted in the recording of $1,593,600 of compensation
expense. In 2003 and 2002, no options met the performance criteria and thus no
compensation expense was recorded.
Interest income in 2004 was $2,848 compared to $627 and $4,813 in 2003 and
2002, respectively. In 2004, the Company recognized interest expense of $686,092
compared to $730,719 and $760,730 in 2003 and 2002, respectively. The decrease
in interest expense over the prior year is a result of the Company's conversion
of convertible notes to equity in the fourth quarter of 2001.
In 2004, the Company recorded minority interest in losses of consolidated
subsidiaries of $279,891 compared to $239,867 and $335,333 in 2003 and 2002.
ESSI Probe 1 LC minority interest loss for a full year of operations was
$115,671, $233,353 and 308,738 in 2004, 2003 and 2002, respectively.
The Company recognized a net loss of $3,860,529 in fiscal 2004 compared
with a net loss of $5,354,184 and $16,797,081 in 2003 and 2002, respectively.
The loss on a per share basis was $0.02, $0.03 and $0.11 in fiscal 2004, 2003,
and 2002, respectively. Included in the loss in 2004, 2003 and 2002 is a loss of
$1,396, $1,778,336 and $14,251,858 and $1,822,434 or $0.01, $0.09 and $0.01 per
share, respectively, from the operations of STDC. The operations of STDC in 2002
reflect a $13,010,364 provision for loss on NEMO fixed asset.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its activities to date with a combination of cash
flow from operations and the use of equity securities and promissory notes.
During 2002, the Company signed a definitive
12
agreement with an investor for an equity line of up to $10,000,000 for one year
with an extension option for a second year. The terms of the equity line are
that the Company, after the effectiveness of a registration statement, at its
option can sell its registered shares of common stock to the investor on a
monthly basis. The maximum amount of funds that can be raised in any month is
$1,500,000 limited by a calculation based on the average volume of the stock for
the preceding month and the price of the stock. The stock will be sold at 88% of
the average of the lowest five (5) trading days over the ten (10) days of
trading immediately proceeding the sale date. Subsequent to March 31, 2002, the
Company made its first drawdown on the equity line and raised $150,000 from the
sale of its common stock.
Net cash used in operating activities was $575,331 in 2004, resulting
primarily from payments for salaries and services and changes in current assets
and liabilities. Net cash used in operating activities was $282,167 in 2003,
resulting primarily from payments for salaries and services and changes in
current assets and liabilities. Net cash used in operating activities was
$492,063 in 2002, resulting primarily from payments for salaries and services
and changes in current assets and liabilities. Of the $16,797,081 net loss in
2002, approximately $14,675,423 was non cash items.
Capital expenditures for March 31, 2004 were primarily for purchases of
working interests in hydrocarbon properties.
Capital expenditures for March 31, 2003 were primarily for purchases of new
computer equipment, purchases of working interests in mineral properties and
payments on a subsidiary's satellite hyperspectral instrument.
At March 31, 2004 and 2003, the Company had cash of $11,753 and $347,682
and a working deficit of $15,440,818 and $13,700,198, respectively.
The Company does not intend to pay cash dividends to the holders of its
common stock and intends to retain future earnings to finance the expansion and
development of its business.
Under the original agreement with the ONR, STDC needed to raise private
industry funds of approximately $125,000,000 in order to complete, launch and
operate the hyperspectral imaging satellite and instrument. Subsequent to March
31, 2002, STDC received notification from the ONR that it would not be giving
STDC an extension to its current agreement. The success of STDC and payment of
approximately $8,216,424 of STDC accounts payable due subcontractors and vendors
on the NEMO program, is dependent on the Company and ONR negotiating plans for
going forward and additional funds being identified either commercially or under
governmental programs to complete and launch the NEMO satellite and sensor.
The Company believes that funds generated from its operations, together
with future borrowings and the equity line 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 be required or that any such required
additional capital will be available on reasonable terms, at such time or times
as required by the Company. The Board of Directors has appointed a management
committee to examine the option of re-organizing and re-structuring the company
to ensure that a viable avenue is available for the attraction of capital. The
management committee will also recommend priority new management appointments.
The total number of employees employed by the Company now numbers four
people.
13
Significant Accounting Policies
- -------------------------------
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 (SFAS 144), ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS 144 supersedes SFAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF, and APB Opinion 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING
THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL
AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for segments of a business
to be disposed of. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the potential effect of
the initial application of SFAS 144 on its consolidated financial statements.
The Company uses the successful efforts method to account for its oil and
gas properties. Under this method, it capitalizes costs incurred for property
acquisition, exploration, and drilling related to its oil and gas properties.
Once the project is completed, and, if oil or gas is located, costs capitalized
to date on the specific project are amortized under the unit-of-production
method as revenue is recognized. Capitalized costs for unsuccessful projects
will be expensed when that determination is made.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of production
method.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluates long-lived assets to determine potential
impairment by comparing the carrying amount to the undiscounted estimated future
cash flows of the related assets. In fiscal 2002, based on such review, the
Company established a provision for loss on the NEMO program of $13,010,364 (see
Note 6 to attached financial statements.)
In fiscal 2002, the Company changed its method of accounting for the sales
of stock by its subsidiaries to account for these sales as increases in
additional paid-in capital instead of as an increase to minority interest in the
accompanying consolidated financial statements. Management believes that because
of the developing nature of operations of the subsidiaries with minority
interest, the new method of accounting will provide more meaningful information
concerning sales of stock by its subsidiaries and, correspondingly, the minority
interest liability account. The Company recognized an increase in additional
paid-in capital of $1,707,868, as a cumulative effect on prior years of this
change in account principles.
Future Operations
- -----------------
The Company will undergo a re-organization of its stock structure to ensure
that it can establish and provide for the ability to continue its business model
and business strategy. In order to achieve maximum results, the Board of
Directors has approved the Company's re-organization include necessary Board and
Senior Management changes
In addition, the Company will continue to operate in the mineral and
hydrocarbon resource exploration areas where the Company will operate its remote
sensing instruments for its own use and secure equity interests in promising
properties identified from the remote sensing imagery. Further, previously
collected imagery will be analyzed and processed to aid in the Company's
decisions to take new or additional equity interests in prospective properties.
14
Management believes that a significant market opportunity exists for a
company that can combine satellite and airborne hyperspectral remote sensing
data and custom design the best and most efficient solutions to geological,
environmental, defense, and surveillance problems. It is this belief that led
the Company to acquire STDC. The Company believes that the opportunity still
exists for a successful negotiation with a data supplier with access to
satellite data.
Research & Development of next generation hyperspectral instrumentation is
continuing. The Company is pursuing the approval of nano-technology patent
pendings for hyperspectral remote sensing instrumentation and processing in
order to secure its market position for the next decade of industry
developments.
The Board of Directors will continue to seek outside directors to ensure
that its commitment to corporate governance improvements is implemented.
Additional Risk Factors That Could Affect Liquidity, Operating Results And
- --------------------------------------------------------------------------
Market Price Of Stock
- ---------------------
Risks Related to Our Industry
- -----------------------------
Competitive pressures may adversely affect our operating revenues. The Company
has numerous competitors in the remote sensing services (airborne hyperspectral
services) and natural resource development industries. Competition in the remote
sensing industry comes from several primary sources, including HyMap, CASI and
GER, whose hyperspectral instruments operate within the USA. Our principal
competitors in the natural resource development industry include traditional
exploration companies using a variety of other technologies. Some of our
competitors in both remote sensing and natural resource development have
substantially greater financial and other resources than the Company.
Competitive pressures in either industry may materially adversely affect our
operating revenues and in turn, our business and financial condition.
The Company may need to expend significant capital to keep pace with
technological developments in our industry. The remote sensing industry, as well
as the computing industry's processing of the raw data, is constantly undergoing
development and change and it is likely that new technology, whether embodied in
new equipment or techniques, will be introduced in the future. In order to keep
pace with any new developments, the Company is planning to expend significant
capital to develop or acquire the next level of developments in new remote
sensing equipment and to train our employees in the new techniques. The Company
is pursuing financing to develop additional remote sensing instruments; however,
we may not be able to raise sufficient funds, and if the Company does so, there
is no guaranty that the new instruments will out perform instruments used by our
competitors. In addition, the Company's ability to raise needed capital may be
influenced by general economic conditions and the strength of capital markets.
To ensure its ability to continue operations the Company will undergo a
re-organization to include a stock re-structuring.
The Company may incur significant expenses to comply with new or more
stringent governmental regulation. The sale of our imagery is regulated by the
Department of Commerce. Although the Company (through its acquisition of STDC)
has acquired a Department of Commerce (DOC) Remote Sensing License that permits
the Company to market globally hyperspectral and panchromatic imagery, there is
no guarantee that the government will not; impose restrictions on sales if the
quality of our imagery increases with new technology that, for example, allows
increased resolution. Because our license was the first issued DOC Remote
Sensing License, the Company cannot anticipate how the DOC specifically will
treat our license or how the airborne remote sensing industry will be regulated
in the future.
15
Risks Related to Our Business
- -----------------------------
The loss of our key customers could have a material adverse effect on us.
In prior years, mining company exploration contributed a significant amount of
revenue to the Company. In 2002, the depressed condition of mineral prices has
severely curtailed mining company budgets and thus their use of the Company's
hyperspectral technology for exploration. In 2002, revenue recorded on cost
reimbursements for the NEMO project accounted for approximately 84% of revenue.
The Company is now pursuing contracts that represent a smaller and wider variety
of customers. This will reduce the Company's exposure to the higher risk level
associated in dealing with single large clients. The Company may not realize our
anticipated return on capital commitments made to expand our capabilities. The
Company purchased an aircraft, additional satellite and airborne hyperspectral
instruments, as well as oil and gas property rights. The aircraft and airborne
hyperspectral instruments were purchased to increase our capacity to conduct
airborne surveys. If the Company does not experience continued demand for our
remote sensing services, the Company may incur significant expense without
generating corresponding revenues. The oil and gas property rights were acquired
in order to exploit suspected natural resources located within certain
properties. If these properties do not contain sufficient natural resources to
warrant exploitation, the Company may incur significant expenses without
generating corresponding revenues.
In addition, from time to time, the Company expects to make significant
capital expenditures to implement new processes and to increase both efficiency
and capacity. Some of these projects may require additional training for our
employees and not all projects may be implemented as anticipated. If any of
these projects do not achieve the anticipated increase in efficiency or
capacity, our returns on these capital expenditures may not be as expected.
Our ability to grow is dependent upon, and may be limited by, among other
things, our capital structure, the price of our stock and our existing financing
arrangements. If additional funding sources are needed, the Company may not be
able to obtain the additional capital necessary to pursue our internal growth
and acquisition strategy or, if the Company can obtain additional financing, the
additional financing may not be on financial terms that are satisfactory to us.
The Company's continued involvement on the NEMO Project and successful
negotiations with the ONR may not materialize.
The Company's database of spectral information may not be marketable or may
not garner a price, which makes processing or analyzing the data economically
reasonable. The Company has a substantial archive of Probe 1 hyperspectral
imagery that was not gathered under contract with a client. The Company
continues to gather hyperspectral imagery without having sold the rights to that
data. The collection process requires variable as well as fixed expenditures
that must be recouped though marketing the collected data. Although we do not
carry the value of our existing Phase 1 hyperspectral archives as an asset on
our balance sheet, the future success of the Company depends to some extent upon
our ability to market this archived data.
Cancellations, reductions or delays in customer orders may adversely affect
our results of operations. Our overall operating results are affected by many
factors, including the timing of survey contracts from large clients, the timing
of capital expenditures to increase our capacity for gathering data in
anticipation of future sales of products and services, and the weather which can
affect whether or not a customers target of interest can be collected at a
certain stage of vegetal growth. Although a large portion of our expenses are
relatively fixed; a significant portion of our operational expenses vary with
the number of airborne surveys. Because several of our operating divisions and
subsidiaries are new businesses and have not obtained long-term commitments from
our clients, we must anticipate the future demand for our services based upon
our discussions with clients. Cancellations, reductions or delays in
16
orders by a client or group of clients could have a material adverse effect on
our business, financial condition and results of operations.
The unavailability of skilled personnel may have an adverse effect on our
operations. From time to time, the Company or some of our operating divisions
and subsidiaries may experience difficulties in attracting and retaining skilled
personnel to process and interpret the substantial volume of imagery data that
is already collected or is expected to be collected in the future. The Company's
ability to operate successfully could be jeopardized if we are unable to attract
and retain a sufficient number of skilled personnel to conduct our business.
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 above 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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-21 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 10, 2003, the Board of Directors of the Company dismissed the
Company's accountants, Grant Thornton, LLP. Grant Thornton LLP served as the
Company's auditor beginning with the fiscal year ended March 31, 2001. The Board
of Directors has appointed Malone & Bailey, PLLC as the Company's auditor for
the year ended March 31, 2003. Malone & Bailey's office is located at 5444
Westheimer, Suite 2080 Houston, TX 77056.
17
The report of Grant Thornton LLP on the financial statements for year ended
2003 contained no adverse opinion or disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope or accounting principle except for
the inclusion in the report of an explanatory paragraph regarding the Company's
ability to continue as a going concern.
During the fiscal year ended March 31, 2003, and through June 10, 2003,
there have been no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).
The Company has requested that Grant Thornton, LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above statements.
A copy of such letter, dated June 10, 2003, was filed as Exhibit 16.1 the
Company's Form 8-K filed June 10, 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company for fiscal 2001 to the present.
NAME AGE POSITION
---- --- --------
Larry F. Vance 69 Chairman and Chief Executive Officer
David Grant 53 Director
Tami J Story 41 Director Secretary/Treasurer/Director
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 also a director of the Company and has been a
full-time employee of the Company 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 the Company.
David Grant has served as a senior consultant contractor with the Company
since January 2004. Mr. Grant has an extensive and varied background spanning
more than twenty years that includes business development, operations and
technical marketing support, project management in both domestic and
international venue. Included is time spent in high tech industry as well a
underground utilities design and installation. Mr. Grant holds a Bachelors
Degree in Biological Sciences from the University of Wyoming.
Tami J. Story served in an administrative support capacity for the Company
from 1991 until April 1993. Since April 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.
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 2003
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
18
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, 2003.
ITEM 11. EXECUTIVE COMPENSATION
Table below summarizes information on Executives and Directors compensation
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------------------------------
Securities
Restricted Stock underlying All other
Name and Principal Salary Bonus Other Annual Stock Option options/SARS LTIP pay- Compensation
Position Fiscal Year ($) ($) Compensation($) Award(s)($) Grants (#) outs($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Larry Vance/Chairman (1) 2004 160,000 - - - - - - -
2003 160,000 - - - - - - -
2002 160,000 - - - - - - -
Tami J. Story/Secretary 2004 80,000 - - - - - - -
and Treasurer (1)
2003 80,000 - - - - - - -
2002 80,000 - - - - - - -
(1) Salary was deferred unless cash flow allowed payment.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of securities Value of Unexercised In-the
underlying unexercised Money Options at
Shares options at FY-End FY-End($)
Acquired on Value
Name Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------- ----------- ----------- ------------------------- ---------------------------
Larry Vance - - 4,500,000/3,000,000(1) 0/0
John Peel - - 4,500,000/3,000,000(1) 0/0
Rory J. Stevens - - 375,000/1,500,000(1) 0/0
Tami Story - - 750,000/3,000,000(1) 0/0
(1) Exercise prices range from $0.21 - $2.50 per share.
Employment Contracts
- --------------------
In October 28, 2000, the Company entered into an employment agreement with
Mr. Larry Vance. Pursuant to the agreement, the Company will pay Mr. Vance an
annual salary of $160,000. In the event of termination of Mr. Vance without
cause or due to a change in control, the Company will pay Mr. Vance two years of
annual salary. Mr. Vance's options and vesting criteria are described above and
in Note 11 to the attached consolidated financial statements.
On October 28, 2000, the Company entered into an employment agreement with
Ms. Tami Story. Pursuant to the agreement, the Company will pay Ms. Story an
annual salary of $80,000. In the event of termination of Ms. Story without cause
or due to a change in control, the Company will pay Ms. Story two years of
annual salary. Ms. Story 's options and vesting criteria are described above and
in Note 11 to the attached consolidated financial statements.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
the Company's Common Stock as of June 15, 2003 by each person known by the
Company to own beneficially more than five percent of the Common Stock and by
all directors and officers and as a group:
Name and address of Amount and nature of
beneficial owner beneficial ownership(1) Percent of class
----------------------------- ----------------------- ----------------
Larry Vance 14,765,003(2)(3)(4) 7.57%
P.O. Box 763
Lakeside, MT 59922
Tami Story 2,365,169(5) 1.21%
P.O. Box 763
Lakeside, MT 59901
Dr. Jan Arnett 9,150,830(4) 4.69%
42-07 30th Avenue
Astoria, MT 11103
All directors and officers 18,130,172 9.29%
- --------------------------------
(1) All shares are held directly with sole voting and investment power
unless otherwise indicated.
(2) Includes 1,775,000 shares held by Universal Search Technology, a
private company owned by Mr. Vance.
(3) Includes 4,500,000 options, which are exercisable on March 31, 2002.
(4) Excludes 17,663,842 shares held by Accuprobe. General Petroleum, Inc.
(GPI), a company previously wholly-owned by Mr. Vance, and Accuprobe,
a company previously wholly-owned by Dr. Arnett, have entered into an
agreement whereby Dr. Arnett has exchanged his 100% ownership of
Accuprobe for a percentage of the shares of GPI. Currently, all
requirements of the transaction have not been met, but even if the
transaction is completed, Mr. Vance will own 25% of the outstanding
capital stock of GPI and Dr. Arnett will own 33% of the outstanding
stock of GPI and neither Mr. Vance nor Dr. Arnett will likely have
control over the disposition or voting power of the Earth Search
shares owned by Accuprobe.
(5) Includes 750,000 options, which are exercisable on March 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 2002, General Petroleum, Inc. (GPI) a company previously
wholly-owned by an officer and director of the Company entered into an agreement
with Accuprobe, lessor to the Company of a hyperspectral instrument (see Note 5
to the consolidated financial statements). The agreement requires the former
sole shareholder of Accuprobe to transfer 100% of his equity in Accuprobe to GPI
in exchange for equity in GPI. Presently, not all of the requirements of the
agreement have been met. Also during fiscal 2002, GPI exchanged a portion of its
equity for the 50% interest in the ESSI 1 LC owned by an outside party. It is
the intention of ESSI and GPI to finalize an agreement in fiscal 2004 to allow
ESSI to purchase and own 100% of both hyperspectral instruments.
In fiscal 2001, the Company entered into a lease for its office in
Kalispell, Montana. The lease is with two officers of the Company and is for a
term of 5 years with minimum monthly payments of $6,400.
20
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page in
(a)(1) Financial Statements filed as part of this Report this Report
Report of Independent Accountants F-1 - F-2
Consolidated Balance Sheet at March 31, 2004 and 2003 F-3
Consolidated Statement of Loss for the Years
Ended March 31, 2004, 2003 and 2002 F-4
Consolidated Statement of Redeemable Common Stock
And Nonredeemable Shareholders' Equity (Deficit) for
the Years Ended March 31, 2004, 2003 and 2002 F-5
Consolidated Statement of Cash Flows for the Years
Ended March 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 - F-25
(a)(2) Financial Statement Schedules None
(a)(3) Exhibits
2.1 Agreement and Plan of Merger by and among Earth Search Sciences,
Inc., ESS Acquisition Corp., Space Technology Development Corporation
and the shareholders of Space Technology Development Corporation,
dated December 21, 1999 (Incorporated by reference to Exhibit 2.1 to
the Registrant's Form 10-K for fiscal year ended March 31, 2000).
3.1 Articles of Incorporation, as amended (Incorporated by reference to
Exhibit 3.1 to the Registrant's Forms 10-K for the fiscal years ended
March 31, 1995 and March 31, 1996).
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to the Registrants'
Form 10-K for the fiscal year ended March 31, 1995).
4.1 See exhibits 3.1 and 3.2.
10.1 Memorandum of Understanding between the Registrant and Applied Signal
and Imaging Technology, Inc. dated May 27, 1996 (Incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-K for fiscal
year ended March 31, 1996).
10.2 Contract of Sale and Leaseback dated June 10, 1997 between Registrant
and Accuprobe, Inc. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.3 Operating Agreement of ESSI Probe1 LC, dated June 3, 1997
(Incorporated by reference to Exhibit 10.3 to the Registrant's Form
10-K for fiscal year ended March 31, 2000).
10.4 Hyperspectral Technology License Agreement between Earth Search
Sciences, Inc. and Noranda Mining and Exploration, Inc. made as of
December 16, 1997 (Incorporated by reference to the Registrant's for
8-K filed on February 6, 1998).
21
10.5 Agreement between the Office of Naval Research and Space Technology
Development Corporation Agreement for NAVY EARTHMAP OBSERVER (NEMO)
dated December 10, 1997 (Incorporated by reference to Exhibit 10.5 to
the Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.6 Sales Contract between Science Applications International Corp. and
Space Technology Development Corp. Dated: 30 March 1998, Contract
No.: STDC-98-NEMO-0003 (Incorporated by reference to Exhibit 10.6 to
the Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.7 Sales Contract between Science Applications International Corp. and
Space Technology Development Corp. Dated: 30 March 1998, Contract
No.: STDC-98-NEMO-004 (Incorporated by reference to Exhibit 10.7 to
the Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.8 Sales Contract between Space Systems/Loral (SS/L) and Space
Technology Development Corporation (STDC). Dated 21 January 1999,
Contract Number: STDC-98-NEMO-0001 (Incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K for fiscal year ended
March 31, 2000).
10.9 Sales Contract between Litton Systems, Inc., Amecom Division (Litton
Amecom) and Space Technology Development Corp. (STDC). Date 29
October 1998, Contract Number: STDC-98-NEMO-0009 (Incorporated by
reference to Exhibit 10.9 to the Registrant's Form 10-K for fiscal
year ended March 31, 2000).
10.10 Common Stock Purchase Agreement between Alpha Venture Capital, Inc.
and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001.
(Incorporated by reference to Exhibit 10.10 to the Registrant's Form
10-K for fiscal year ended March 31, 2001).
10.11 Registration Rights Agreement between Alpha Venture Capital, Inc. and
Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001. (Incorporated
by reference to Exhibit 10.11 to the Registrant's Form 10-K for
fiscal year ended March 31, 2001).
10.12 Common Stock Purchase Warrant A between Alpha Venture Capital, Inc.
and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001.
(Incorporated by reference to Exhibit 10.12 to the Registrant's Form
10-K for fiscal year ended March 31, 2001).
10.13 Common Stock Purchase Warrant B between Alpha Venture Capital, Inc.
and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001.
(Incorporated by reference to Exhibit 10.13 to the Registrant's Form
10-K for fiscal year ended March 31, 2001).
10.14 Larry F. Vance employment agreement (Incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
10.15 John W. Peel employment agreement (Incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
10.16 Rory J. Stevens employment agreement (Incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
10.17 Tami J. Story employment agreement (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
22
10.18 John J. Sciuto employment agreement (Incorporated by reference to
Exhibit 10.18 to the Registrant's Form 10-K for fiscal year ended
March 31, 2001).
16.1 Consent of Independent accountants re Registration Statement on Form
No. S-1 (No. 333-66100).
16.2 Statement under oath of Principal Executive Officer and Principal
Financial Officer regarding facts and circumstances relating to
exchange act filings.
16.3 Letter re change in certifying accountant (Incorporated by reference
to Exhibit 16.3 to the Registrant's form 8-K filed on May 25, 2001).
16.4 Letter re change in certifying accountant (Incorporated by reference
to Exhibit 16.3 to the Registrant's form 8-K filed on June 10, 2003).
21.1.1 List of Subsidiaries (Incorporated by reference to Exhibit 21.1.1
to the Registrant's Form 10-K for fiscal year ended March 31, 2000)
(b) The Registrant filed the Following Reports on Form 8-K during the
quarter ended March 31, 2004:
Date of Report Item Reported
-------------- -------------
December 3, 2003 5
23
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
Date: July 12, 2004
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 capacities and on the dates indicated.
Signature Title
- --------- -----
/s/ Larry F Vance Chairman and Director
- -------------------------
Larry F. Vance
Date: July 12, 2004
/s/ Tami Story Corporate Secretary and Treasurer and Director
- -------------------------
Tami J. Story
Date: July 12, 2003
24
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2004
ASSETS
- ------
Current Assets
Cash $ 11,754
Accounts receivable, net 109,243
Other current assets 75,918
------------
Total Current Assets 196,915
------------
Oil and gas properties, using successful
efforts accounting
Proved properties 255,422
Unproved properties 330,671
------------
586,093
Less accumulated depletion (175,217)
------------
Net oil and gas properties 410,876
------------
Other property and equipment, net 625,782
------------
TOTAL ASSETS $ 1,233,573
============
LIABILITIES
- -----------
Current Liabilities
Current portion of notes payable $ 1,208,622
Capital lease obligation 3,623,897
Deferred officers' compensation 240,000
Accounts payable 9,378,440
Accrued expenses 254,181
Due to related parties 555,378
Investor deposit 377,215
------------
Total Current Liabilities 15,637,733
Long Term Liabilities
Deferred officers' compensation 2,743,326
Notes payable less current portion 337,714
Shareholder loans 1,205,193
------------
Total liabilities 19,923,966
Commitments and contingencies --
STOCKHOLDERS' DEFICIT
- ---------------------
Series A preferred stock; 200,000 shares
authorized, issued and outstanding;
liquidation preference $1,000,000 --
Common stock, $.001 par value; 200,000,000
shares authorized; 194,305,708 shares
issued and outstanding 194,306
Additional paid in capital 35,496,187
Treasury stock (200,000)
Accumulated deficit (54,180,886)
------------
(18,690,393)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,233,573
============
See accompanying summary of accounting policies
and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2004 AND 2003
2004 2003
------------ ------------
Revenue $ 516,490 $ 786,208
Cost of revenue (670,008) 888,758
------------ ------------
Gross margin (153,518) (102,550)
------------ ------------
Expenses
Asset impairment 2,469,072 2,168,997
General & administrative 537,365 2,592,412
Loss on debt renegotiations 297,221 --
------------ ------------
Total Expenses 3,303,658 4,761,409
------------ ------------
Loss from operations (3,457,176) (4,863,959)
Other income (expenses)
Interest income 2,848 627
Interest expense (686,092) (730,719)
------------ ------------
Loss before minority interest (4,140,420) (5,594,051)
Minority interest in losses of
consolidated subsidiaries 279,891 239,867
------------ ------------
Net loss $ (3,860,529) $ (5,354,184)
============ ============
Basic and diluted loss per share $ (.02) $ (.03)
Weighted average common shares
outstanding 194,305,708 175,327,436
See accompanying summary of accounting policies
and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED MARCH 31, 2004 AND 2003
Preferred Stock Common Stock
---------------------------------- ----------------------------------
Shares $ Shares $
------------ ------------ ------------ ------------
Balance at March 31, 2002 200,000 $ 1,000,000 158,775,576 $ 158,776
Issuance of common stock for cash -- -- 15,148,210 15,149
Issuance of common stock for
services rendered -- -- 3,323,530 3,323
Issuance of common stock for
deferred compensation -- -- 3,574,273 3,574
Issuance of common stock for loan
and interest conversion -- -- 8,332,329 8,332
Conversion of preferred stock for
common stock (200,000) (1,000,000) 1,000,000 1,000
Issuance of shares for loan extension -- 300,000 300
Non-cash compensation expense -- -- -- --
Partial redemption -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 2003 -- -- 190,453,918 190,454
Issuance of common stock for
services rendered -- -- 3,851,790 3,852
Stock option expense -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 2004 -- $ -- 194,305,708 $ 194,306
============ ============ ============ ============
See accompanying summary of accounting policies
and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED MARCH 31, 2004 AND 2003
Additional
Paid-in Accumulated Treasury
Capital Deficit Stock Total
------------ ------------ ------------ ------------
Balance at March 31, 2002 $ 32,697,066 $(44,966,173) (200,000) (11,310,331)
Issuance of common stock for cash 425,836 -- -- 440,985
Issuance of common stock for services
rendered 141,497 -- -- 144,820
Issuance of common stock for deferred
compensation 437,304 -- -- 440,878
Issuance of common stock for loan and
interest conversion 724,901 -- -- 733,233
Conversion of preferred stock to
common stock 999,000 -- -- --
Issuance of shares for loan extension 26,700 -- -- 27,000
Employee options vesting expense 14,624 -- -- 14,624
Partial redemption (16,990) (16,990)
Net loss -- (5,354,184) -- (5,354,184)
------------ ------------ ------------ ------------
Balance at March 31, 2003 35,449,938 (50,320,357) (200,000) (14,879,965)
Issuance of common stock for services
rendered 42,370 -- -- 46,222
Stock option expenses 3,879 -- -- 3,879
Net loss -- (3,860,529) -- (3,860,529)
------------ ------------ ------------ ------------
Balance at March 31, 2004 $ 35,496,187 $(54,180,886) (200,000) (18,690,393)
============ ============ ============ ============
See accompanying summary of accounting policies
and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,860,529) $ (5,354,184)
Adjustments to reconcile net loss to
cash used by operating activities:
Employee options vesting expense 3,879 14,624
Common stock issued for services
and interest expense 46,222 171,820
Loss attributed to minority interest (279,891) (239,867)
Depreciation, amortization and depletion 369,324 594,646
Write off capitalized costs on oil
and gas properties -- 616,784
Asset impairment 2,469,072 1,552,211
Bad debt expense -- 814,895
Changes in assets and liabilities:
Accounts receivable 59,941 221,096
Other current assets (39,797) 98,038
Accounts payable and accrued expenses 92,705 241,684
Accrued interest 164,906 299,455
Deferred officers compensation 398,837 386,631
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (575,331) (582,167)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (336,474) (180,550)
Proceeds from sale of interests in
mineral properties -- 112,785
Deposit on sale of fixed assets -- 187,215
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (336,474) 119,450
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock -- 440,985
Proceeds from sale of common stock
of subsidiaries -- 300,000
Proceeds from shareholder loans, net 562,500 23,363
Proceeds from liquidation of escrow 90,000
Repayments on notes payable (76,624) (20,630)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 575,876 743,718
------------ ------------
NET INCREASE (DECREASE) IN CASH (335,929) 281,001
CASH AT BEGINNING OF PERIOD 347,682 66,681
------------ ------------
CASH AT END OF PERIOD $ 11,753 $ 347,682
============ ============
See accompanying summary of accounting policies
and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004 AND 2003
SUPPLEMENTAL CASH FLOW INFORMATION
Year ended March 31,
----------------------------------
2004 2003
------------ ------------
Supplemental Cash flow information:
Interest paid $ 199,827 $ 157,688
Non-cash financing and investing activities:
Notes payable and interest converted into
common stock -- 733,233
Interest accrued on construction in
progress -- 543,877
Issuance of shares for deferred
compensation -- 440,878
See accompanying summary of accounting policies
and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Earth Search Sciences, Inc. ("ESSI") collects high value hyperspectral imagery
of the earth's surface utilizing their proprietary hyperspectral imaging
sensors, principally in North America. This imagery is either sold to end users
via contracts to collect the information or collected for ESSI's own exploration
purposes. ESSI also performs a range of imagery processing services. Information
collected by the sensor has applications in natural resources development,
environmental monitoring and remediation, wildlife habitat monitoring,
hydrocarbon exploration and development, agricultural assessment and planning,
including weed species identification, land use planning, forestry monitoring
and planning, homeland security and target identification for defense
surveillance.
ESSI has four wholly-owned subsidiaries: Skywatch Exploration, Inc.,
Polyspectrum Imaging, Inc., Geoprobe, Inc., and STDC, Inc. ("STDC"). In
addition, there are five partially-owned consolidated subsidiaries: Earth Search
Resources, Inc., Eco Probe, Inc., ESSI Probe 1 LC, Petro Probe, Inc. and
Terranet, Inc. The 50% owned subsidiary ESSI Probe 1 LC was formed as a joint
venture to own and operate hyperspectral instruments.
All subsidiaries excepting Petro Probe became inactive during fiscal 2003.
The majority-owned Petro Probe, Inc. was formed to identify and develop
hydrocarbon properties by utilizing ESSI's hyperspectral instruments,
hydrocarbon geologists, and imagery processors. At March 31, 2004, Petro Probe,
Inc. holds interests in seven oil and gas projects.
In fiscal 2004 and 2003, ESSI operated its airborne hyperspectral sensors under
contracts with third parties in several areas around the United States.
Contracts to operate the sensors in the United States as an ecological,
agricultural, hydrocarbon, and target identification contributed approximately
$258,000 and $384,000 to revenue in fiscal 2004 and 2003 respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ESSI and its
subsidiaries. All significant intercompany transactions have been eliminated.
OIL AND GAS PROPERTIES
ESSI uses the successful efforts method to account for its oil and gas
properties. Costs incurred for property acquisition, exploration, and drilling
related to its oil and gas properties are capitalized. Once the project is
completed, and, if oil or gas is located, costs capitalized to date on the
specific project are amortized under the unit-of-production method as revenue is
recognized. Capitalized costs for unsuccessful projects are expensed when that
determination is made.
Based on the agreements for the working interests in oil and gas properties,
ESSI will proportionately share in future revenues as well as future operating
and drilling costs. Unproved oil and gas properties that are individually
significant are periodically assessed for impairment of value, and a loss is
recognized at the time of impairment by providing an impairment allowance. In
fiscal 2004 and 2003, $439,000 and $617,000 of prior year
costs were impaired because profitable production had not yet been obtained in 5
of 7 properties.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted by the unit-of-production method.
REVENUE RECOGNITION
ESSI recognizes revenue and costs as services are rendered under contract for
airborne hyperspectral services and imaging processing services.
DEPRECIATION AND AMORTIZATION
ESSI recognizes depreciation on its property and equipment using the
straight-line method over estimated useful lives ranging from five years for
computers and software, vehicles and equipment to ten years for the two
hyperspectral sensors.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. ESSI evaluates long-lived assets to determine potential impairment
by comparing the carrying amount to the undiscounted estimated future cash flows
of the related assets. In fiscal 2004 and 2003, ESSI incurred asset impairments
of $137,000 and $543,877, $439,000 and $617,000 on unsuccessful oil and gas
properties in fiscal 2004 and 2003, $1,958,000 on the Probe, LC abandoned
construction in progress in fiscal 2004, $900,000 on the Polyspectrum abandoned
construction in progress in fiscal 2003, and $108,334 on Terranet computer
equipment in fiscal 2003.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax basis 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.
MINORITY INTEREST
Losses from subsidiaries with minority interest are allocated to the minority
interest liability account based on the percentage of minority interest
ownership. Once losses applicable to the minority interest in the subsidiary
exceed the minority interest in the equity capital of the subsidiary, then no
additional losses will be allocated to the minority interest liability account.
NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted average number
of ESSI's common shares outstanding. Common stock equivalents have not been
considered in the diluted net loss per share calculation because their effect on
net loss per share is anti-dilutive.
STOCK OPTIONS AND WARRANTS
ESSI accounts for non-cash stock-based compensation issued to non-employees in
accordance with the provisions of SFAS No. 123 and EITF No. 96-18, Accounting
for Equity Investments That Are Issued to Non-Employees for Acquiring, or in
Conjunction with Selling Goods or Services. Common stock issued to non-employees
and consultants is based upon the value of the services received or the quoted
market price, whichever value is more readily
determinable. ESSI accounts for stock options and warrants issued to employees
under the intrinsic value method. Under this method, ESSI recognizes no
compensation expense for stock options or warrants granted when the number of
underlying shares is known and the exercise price of the option or warrant is
greater than or equal to the fair market value of the stock on the date of
grant. The following table illustrates the effect on net loss and net loss per
share if ESSI had applied the fair value provisions of FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee compensation.
2004 2003
------------ ------------
Net loss as reported $ (3,095,627) $ (5,354,184)
Less: stock based compensation
determined under fair value-
based method 0 0
------------ ------------
Pro forma net loss $ (3,095,627) $ (5,534,184)
============ ============
Basic and diluted net loss
per common share:
As reported $ (.02) $ (.03)
Pro forma (.02) (.03)
The weighted average fair value of the stock options granted during 2003 and
2003 was $.25. Variables used in the Black-Scholes option-pricing model include
(1) 4.0% interest rate in 2003, (2) expected option life is the actual remaining
life of the options as of each year end, (3) expected volatility is 0% in 2003,
and (4) zero expected dividends.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
RECENTLY-ISSUED ACCOUNTING STANDARDS
ESSI does not expect the adoption of recently issued accounting pronouncements
to have a significant impact on their financial position, results of operations
or cash flow.
NOTE 2 - GOING CONCERN
ESSI is experiencing severe working capital deficiencies because it has incurred
substantial operating losses. ESSI has operated with funds received from the
sale of its common stock and the issuance of notes. ESSI's ability to continue
as a going concern is dependent upon continued debt or equity financings until
or unless ESSI is able to generate operating revenues to sustain ongoing
operations. There can be no assurance that ESSI can raise the necessary funds to
continue as a going concern.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
---------------------------------
2004 2003
------------ ------------
Mineral properties (A) $ 586,093 $ 692,090
ATM imagery database -- 134,000
Computers and software -- 186,788
Vehicles and equipment 1,144,536 1,144,536
Hyperspectral instruments (B) -- 4,058,000
Construction in progress (C) -- -
------------ ------------
1,730,629 6,215,414
Accumulated depreciation,
amortization and depletion (693,972) (2,676,835)
------------ ------------
$ 1,036,657 $ 3,538,579
============ ============
(A) In fiscal 2003, ESSI paid $150,000 for drilling on two existing
properties and sold a portion of its interests to others on those two
properties for $112,785.
In fiscal 2001, one of the oil and gas properties with capitalized
costs of about $250,000 began production. ESSI recognized $257,000 and
$348,000 in revenue from that property in fiscal 2004 and 2003
respectively. Depletion was $30,208 and $51,760 in fiscal 2004 and 2003
respectively.
In fiscal 2004 and 2003, ESSI wrote-off $ 439,732 and $616,786
respectively, of previously capitalized costs on properties that were
determined to be uneconomical wells.
(B) This category is three hyperspectral instruments which originally cost
$3,958,235. All instruments were fully impaired in fiscal 2003.
The related debt as of March 31, 2004 is $3,623,896 and includes
$873,896 of accrued interest. No lease payments have been made since
June 2000, and the entire balance due is shown as a current liability.
(C) Fiscal 2001 construction costs related to the development of a remote
sensing instrument and satellite. In fiscal 2002, ESSI's agreement with
the ONR for the satellite was terminated and ESSI impaired $13,010,364
in such development costs. The $900,000 balance representing
development costs of the second generation hyperspectral instrument was
impaired in fiscal 2003.
NOTE 4 - OIL AND GAS INTERESTS
Supplemental information (unaudited)
Successful
Capitalized costs relating to oil and gas Efforts
producing activities at March 31, 2004 ------------
Unproved oil and gas properties $ 330,671
Proved oil and gas properties 255,422
Less accumulated depletion (175,217)
------------
Net capitalized costs $ 410,876
============
Costs incurred in oil and gas producing
activities for the years ended
March 31, 2004 and 2003 2004 2003
------------ ------------
Property acquisition costs
Proved $ 5,803 --
Unproved 330,671 439,472
Results of operations for oil and gas
producing activities for the years ended
March 31, 2004 and 2003
Oil and gas sales $ 265,050 $ 395,536
Development Costs (7,403) (23,355)
Depletion (30,208) (51,760)
Impairment (439,472) (646,545)
------------ ------------
Results of operations for oil and gas
producing activities (excluding corporate
overhead and financing costs) $ (212,033) $ (326,124)
============ ============
The following estimates of proved and proved developed reserve quantities and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values or fair market values of ESSI's
reserves. ESSI emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those producing oil
and gas properties. Accordingly, these estimates are expected to change as
future information becomes available. All of ESSI's reserves are located in the
United States.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less tax basis of the properties and available
credits, and assuming
continuation of existing economic conditions. The estimated future net cash
flows are then discounted using a rate of 10 percent a year to reflect the
estimated timing of the future cash flows.
2004 2003
--------------------------------- ---------------------------------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
------------ ------------ ------------ ------------
Proved developed and undeveloped reserves 18,283 9,700,000 17,000 20,100,000
Revisions of previous estimates -- (2,655,220) 25,687 --
Production (4,927) (1,773,780) (24,404) (10,400,000)
------------ ------------ ------------ ------------
End of Year 13,356 5,271,000 18,283 9,700,000
Proved developed reserves
Beginning of year 18,283 9,700,000 17,000 20,100,000
End of year 13,356 5,271,000 18,283 9,700,000
Standardized measure of 2004 2003
discounted future net cash flows ------------ ------------
at March 31, 2004 and 2003 $ 547,905 $ 1,260,247
Future production costs (23,097) (53,119)
Future development costs (23,346) (76,609)
10% annual discount for estimated
timing of cash flows (79,799) (273,674)
------------ ------------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves $ 421,663 $ 856,845
============ ============
The following reconciles the change in the standardized measure of
discounted future net cash flows for fiscal 2004 and 2003
2004 2003
------------ ------------
Beginning of the year $ 856,845 $ 1,146,553
Sales of oil and gas, net of production
Costs (257,647) (372,180)
Net changes in prices and production
Costs 30,022 17,960
Development costs incurred during the
year which were previously estimated 7,403 23,355
Revisions of previous quantity estimates (161,697) 67,059
Net change in future estimated
development costs (53,263) (25,902)
------------ ------------
End of year $ 421,663 $ 856,845
============ ============
NOTE 5 - NAVAL EARTHMAP OBSERVER (NEMO) PROJECT
In May 2002, ESSI received notification from the ONR indicating that the
performance period for the agreement governing the NEMO project had ended. The
related unpaid receivable of $814,895 as of March 31, 2003 has been fully
reserved and no payments have been received since that date.
Included in accounts payable as of March 31, 2004 is $8,216,424 in unpaid
accounts payable to NEMO subcontractors and vendors.
NOTE 6 - NOTES PAYABLE
Notes payable consists of the following:
2004 2003
------------ ------------
Installment note payable with a balloon
due June 15, 2004, secured by airplane,
the hyperspectral sensor, and the
producing oil and gas property, with
interest at 15%, due in monthly
installments of $18,011 $ 1,080,870 $ 1,058,859
Installment note payable secured by
producing oil and gas property, with
interest at 15%, due in monthly
installments of $6,929 420,866 --
Unsecured convertible promissory notes,
delinquent, with interest at 12.5% 41,568 41,568
Other 3,033 3,033
Less: current portion (1,208,622) (108,417)
------------ ------------
$ 337,715 $ 995,043
============ ============
In fiscal 2003, $733,233 of notes outstanding plus accrued interest were
converted into common stock at the agreed upon conversion rates.
NOTE 7 - SHAREHOLDER LOANS
ESSI has financed its operations in part by funds received from advances by
shareholders. These advances are in the form of unsecured promissory notes and
bear interest at rates ranging from 8% to 10%. As of March 31, 2004 and 2003,
interest accrued on such advances aggregated $555,378 and $448,965 respectively,
and has been included in accrued interest.
NOTE 8 - DEFERRED OFFICERS' COMPENSATION
Deferred compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, Chief Executive Officer, Chief Financial Officer
and Secretary). ESSI recorded net deferred officer compensation, accrued payroll
taxes and accrued interest of $400,116 and $(54,247) during fiscal 2004 and
2003, and included these amounts in general and administrative expenses. ESSI is
accruing interest on the deferred compensation balances at a rate of 8.5%,
compounded quarterly. ESSI is making full salary payments to the Chairman and
CEO and Secretary/Treasurer as cash flow allows.
NOTE 9 - BUSINESS SEGMENT INFORMATION
ESSI's major activities are broken down into an Airborne Hyperspectral Services
business segment, a Satellite Development business segment, an Oil and Gas
property business segment and an Other Industries business segment. The Airborne
Hyperspectral Services segment and Satellite Development segment will utilize
remote sensing instruments to earn revenue from the sale of hyperspectral
imagery. The current Satellite Development business segment revenue is from a
cost reimbursement contract with the U.S. Navy for the construction of the NEMO
project, which has been disbanded. Transactions between the business segments
are loans, interest, and management fees based on an allocation of incurred
costs for general and administrative expenses. As the consolidated group is
operating at a net loss position, no income tax expense or benefit is provided.
Business Segment Information for Fiscal Year 2004
Airborne
Hyperspectral Satellite Oil and Gas Other
Services Development Properties Industries Combined
------------ ------------ ------------ ------------ ------------
Revenue $ 258,843 $ -- $ 257,647 -- $ 516,490
============ ============ ============ ============ ============
Operating Income (Loss) $ (3,316,796) $ (1,676) $ (138,703) -- $ (3,457,657)
============ ============ ============ ============ ============
Interest income 2,556 292 -- -- 2,848
Interest expense (686,080) (12) -- -- (686,092)
Loss from continuing operations
before income taxes and
minority interest -- -- -- -- (4,140,420)
Total Assets at 3/31/04 $ 735,067 $ 24,946 $ 473,560 -- $ 1,233,573
============ ============ ============ ============ ============
Depreciation and amortization
for the period ended 3/31/04 $ 339,116 $ -- $ 30,208 -- $ 369,324
============ ============ ============ ============ ============
Capital expenditures for the
period ended 3/31/04 $ -- $ -- $ 336,474 -- $ 336,474
============ ============ ============ ============ ============
Business Segment Information for Fiscal Year 2003
Airborne
Hyperspectral Satellite Oil and Gas Other
Services Development Properties Industries Combined
------------ ------------ ------------ ------------ ------------
Revenue $ 384,212 $ 6,459 $ 395,537 -- $ 786,208
============ ============ ============ ============ ============
Operating Income (Loss) $ (2,751,201) $ (1,652,556) $ (460,202) -- $ (4,863,959)
============ ============ ============ ============ ============
Interest income 17 610 -- -- 627
Interest expense (421,119) (309,600) -- -- (730,719)
Loss from continuing operations
before income taxes and
minority interest -- -- -- -- (5,594,051)
Total Assets at 3/31/03 $ 3,077,410 $ 345,939 $ 668,217 -- $ 4,091,566
============ ============ ============ ============ ============
Depreciation and amortization
for the period ended 3/31/03 $ 539,646 $ 3,447 $ 57,760 -- $ 594,646
============ ============ ============ ============ ============
Capital expenditures for the
period ended 3/31/03 $ 74,635 $ -- $ 105,915 -- $ 180,550
============ ============ ============ ============ ============
NOTE 10 - INCOME TAXES
The Company recorded no provision for income taxes in fiscal 2004 and 2003 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,
------------------------------
2004 2003
------------ ------------
Net operating loss carryforwards $ 15,364,448 $ 13,445,538
Other net deferred tax assets 1,158,986 1,158,986
------------ ------------
Gross deferred tax assets 16,523,434 14,604,524
Deferred tax assets valuation allowance (16,523,434) (14,604,524)
------------ ------------
$ -- $ --
============ ============
The deferred tax asset has been fully reserved because ESSI cannot anticipate
future taxable income to realize the potential benefits of the gross deferred
tax asset.
The Company has net tax operating loss carryforwards at March 31, 2004 of
approximately $47,000,000. Such carry forwards may be used to offset taxable
income, if any, in future years through their expiration in 2003 through 2022.
The annual amount of tax loss carryforward, which can be utilized, may be
limited due to the substantial changes in the Company's ownership as defined by
section 382 of the Internal Revenue Code, which may occur in the future. Such
limitations could result in the expiration of a part or all of the loss
carryforwards before their utilization.
NOTE 11 - OFFICER AND DIRECTOR STOCK OPTIONS
In August 1997, the Board of Directors granted performance based options to
ESSI's Chairman, President and Chief Executive Officer to each purchase
5,000,000 shares of ESSI's stock at exercise prices ranging from $0.50 per share
to $2.50 per share and to ESSI's Secretary to purchase 1,000,000 shares of
ESSI's stock at an exercise price of $0.50 per share. All of these performance
based stock options are 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 ESSI on the first date on which the closing market
price of ESSI's common stock equals or exceeds the price per share performance
targets for 30 consecutive days. The specific vesting criteria for these options
are described below:
When and if the closing market price of common stock equals or exceeds each of
the following prices $0.50, $1.00, $1.50, $2.00 and $2.50 per share for 30
consecutive days, each of the three individuals shall become fully vested with
an option to purchase 1,000,000 shares of common stock for each milestone at a
price equal to the milestone price of $0.50, $1.00, $1.50, $2.00 and $2.50 per
share, exercisable for a period of 24 months from the date of vesting.
During fiscal 2000, the Board of Directors issued options to a new employee to
purchase 650,000 shares of ESSI's common stock with an exercise price below fair
value. In fiscal 2003, 2002 and 2001, ESSI recognized $14,624 in
each year of non-cash compensation expense related to these options.
During fiscal 2001, the Board of Directors approved performance based bonuses in
the form of options to ESSI's officers. The specific vesting criteria for these
options are described below:
10% of options shall be considered vested and bonused as paid in full shares for
past services to ESSI; 15% of all options shall become vested and paid in full
when ESSI is successful in obtaining a commitment from a strategic partner,
financial institution, reputable investment banker or other source in raising
capital sufficient to fund the NEMO program (shut down in 2002 - see Note 6);
20% vested and paid in full when successful in raising gross capital of at least
$6,000,000; 20% vested and paid in full when successful in raising gross capital
of at least $30,000,000; 20% vested and paid in full when successful in raising
gross capital of at least $100,000,000; and 15% vested and paid in full in the
event the NEMO program is successfully funded.
During fiscal 2001, the Board of Directors approved the issuance of 8,587,000
shares against options as a stock bonus. ESSI reduced options outstanding by
8,587,000 and recorded non-cash compensation expense of $2,926,781.
ESSI has adopted the disclosure requirements of Statement of Financial
Accounting Standard No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation. 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 25") or to use a fair value method
described in FAS 123. ESSI continues to follow the provisions of APB 25. No
compensation cost has been recognized on ESSI's stock option grants except as
described previously, as the options include an exercise price equal to or
exceeding the fair value on the date of grant.
Prior to fiscal 2002, ESSI granted two individuals a combined total of 1,687,500
stock options, which vest after certain pre-established performance criteria
have been met. As of March 31, 2004, the Board had not determined the criteria.
Therefore, these options are considered to be non-vested.
In fiscal 2003, 700,000 were granted. In fiscal 2002, no stock options were
granted. ESSI has determined that the pro forma effects of applying FAS 123 in
2002 is immaterial. The fair value was determined using the Black-Scholes option
pricing model using the following weighted-average assumptions:
Fiscal Fiscal Fiscal
2003 2002 2001
---- ---- ----
Risk-free interest rate 4.0% N/A 5.6%
Expected dividend yield -- N/A --
Expected lives 2.3 N/A 2.5
Expected volatility 0% N/A 131%
The following table summarizes the employee stock option transactions described
above.
Shares
under Weighted-average
option exercise price
----------- ----------
Balance, March 31,2000 34,350,000 $ 0.83
Options granted 4,750,000 0.49
Options cancelled (4,500,000) 0.46
Options exercised (8,787,000) 0.27
----------- ----------
Balance, March 31,2001 25,813,000 1.01
Options granted -- --
Options cancelled (1,875,000) 0.50
Options exercised -- --
----------- ----------
Balance, March 31,2002 23,938,000 1.05
Options granted 700,000 0.25
Options cancelled (1,500,000) 0.30
Options exercised -- --
----------- ----------
Balance, March 31, 2003 23,138,000 1.07
Options granted -- --
Options cancelled (1,162,500) 0.57
Options exercised -- --
----------- ----------
Balance, March 31, 2004 21,975,500 1.07
=========== ==========
The weighted average per share fair value of options granted during fiscal years
2003 was $0.25.
NOTE 12 - SHAREHOLDERS' EQUITY
PREFERRED STOCK
During fiscal 1998, ESSI issued 200,000 shares of its Series A preferred stock;
100,000 of these shares were issued as a result of the conversion of a note
payable. Each share of ESSI's Series A preferred stock is convertible into five
shares of ESSI's common stock. The preferred stock has liquidation preference in
the amount of $5.00 per share or $1,000,000. The preferred stock is redeemable
by ESSI and has no voting rights. In addition, the recipient of the preferred
stock was granted warrants as discussed below to purchase an additional
1,000,000 shares of ESSI's common stock. In fiscal 2003, the preferred stock was
converted to common stock and the warrants were exercised.
TREASURY STOCK
In fiscal 1999, ESSI 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. ESSI subsequently reissued
500,000 of these shares to a third party during fiscal 1999.
PRIVATE PLACEMENT OF PETRO PROBE, INC. COMMON STOCK
In fiscal 2001 and 2000, Petro Probe, Inc. issued 22,332 and 10,166 shares,
respectively, of its common stock at approximately $3.00 per share. This
transaction increased minority interest by $67,000 and $30,500, respectively
(see note 3). In fiscal 2002, 250,000 shares of Petro Probe stock were allocated
against investor deposit. This transaction increased minority interest by
$13,864 and additional paid-in capital by $736,136.
PRIVATE PLACEMENT OF ECO PROBE, INC. COMMON STOCK
In fiscal 2001, Eco Probe, Inc., issued 151,667 shares of its common stock at
approximately $3.00 per share. This transaction increased minority interest by
$445,004 (see note 3).
In fiscal 2000, warrants to purchase 100,000 shares of either Petro Probe or
Terranet at $3.00 per share for two years and 100,000 shares of either Petro
Probe or Terranet at $5.00 per share for five years were issued to a consultant.
In fiscal 2002, 100,000 of these warrants expired.
EQUITY LINE
In fiscal 2002, ESSI signed an agreement with an investor for an equity line of
up to $10,000,000 for one year with an extension option for another year. Under
this equity line, ESSI sold 15,148,210 shares to the investor for $440,985 in
fiscal 2003. No additional sales are anticipated.
NOTE 13 - WARRANTS
STOCK WARRANTS
In conjunction with the equity line, ESSI issued warrants in fiscal 2002 to the
investor to purchase 1,500,000 shares of ESSI's common stock for 5 years at a
price equal to the lesser of 95% of an average stock price after the definitive
documents were signed or 95% of the market price at the date of effectiveness of
the registration statement. ESSI determined the estimated fair value of these
warrants to be immaterial, and, as such, did not record the deferred financing
cost asset. Additional warrants up to 1,500,000 will be issued pro rata as the
equity line is used. The price of these additional warrants will be based on the
market price immediately following sale to the investor. There has been no
additional activity for fiscal 2004.
NOTE 14 - COMMITMENT AND CONTINGENCIES
OPERATING RENT
Future minimum rental payments and sublease rental income to be received under
non-cancelable leases with initial terms in excess of one year are as follows at
March 31, 2004:
2005 $ 76,800
2006 25,600
----------
$ 102,400
==========
Rental expense for office space included in operations for fiscal 2004 and 2003
is $76,800. In fiscal 2001, the Company entered into a lease for its office in
Kalispell, Montana. The lease is with two officers of ESSI and is for a term of
5 years with minimum monthly payments of $6,400.
LITIGATION
In November 2000, a lawsuit was filed against ESSI by a vendor. The vendor
alleges that ESSI has not paid them 500,000 shares of ESSI's stock, which it is
owed pursuant to a written contract between the vendor and ESSI in which the
vendor agreed to perform certain services for the Company in return for cash and
ESSI's common stock. The relief sought by the vendor in the lawsuit includes
significant compensatory and punitive damages; however, ESSI believes that it
will be able to settle the lawsuit for less than the relief sought. ESSI has
recorded a contingency loss accrual of $185,000. It is management's opinion that
the loss accrual is their best estimate of the potential liability and
associated legal costs of the dispute. ESSI filed counterclaims in May 2002 and
there has been no activity since that date.
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Earth Search Sciences, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Earth Search Sciences, Inc.
as of March 31, 2004, and the related statements of expenses, stockholders'
deficit, and cash flows for each of the years ended March 31, 2004 and 2003.
These financial statements are the responsibility of ESSI's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Earth Search Sciences, Inc., as
of March 31, 2004, and the results of its operations and its cash flows for the
years ended March 31, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that ESSI will
continue as a going concern. As shown in the financial statements, ESSI's gross
revenues dropped from $786,000 to $516,490 from fiscal 2003 to fiscal 2004, ESSI
incurred a net loss of $3,095,627 during fiscal 2004, and as of March 31, 2004,
ESSI's current liabilities exceeded its current assets by $15,411,835. These
factors, among others, as discussed in note 2 to the financial statements, raise
substantial doubt about ESSI's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MALONE & BAILEY, PLLC
Houston, Texas
www.malone-bailey.com
July 12, 2004