SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
Commission File No. 0-19566
EARTH SEARCH SCIENCES, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Utah 87-0437723
(State or other Jurisdiction of (IRS Employer ID)
Incorporation or Organization)
502 North 3rd Street, #8 McCall, Idaho 83638
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (208) 634-7080
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 and 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
requirement for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of common
stock, as of the close of the period, covered by this report: 74,261,405 shares.
The registrant has only one class of common stock.
<PAGE>
EARTH SEARCH SCIENCES, INC.
FORM 10-Q
(Unaudited)
QUARTER ENDED SEPTEMBER 30, 1997
PART I
FINANCIAL INFORMATION
TABLE OF CONTENTS
Item 1. Consolidated Financial Statements Page
Consolidated Balance Sheet
as of September 30, 1997 and March 31, 1997. 3
Consolidated Statement of Operations for the
Three Months Ended September 30, 1997 and 1996. 4
Consolidated Statement of Cash Flows for the
Three Months Ended September 30, 1997 and 1996. 5
Selected Notes to Consolidated Financial
Statements. 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II
OTHER INFORMATION REQUIRED
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters of a Vote of
Security Holders 9
Item 5. Other information 9
Item 6. Exhibits and Reports on Form 8-K 9
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Balance Sheet
<S> <C> <C>
September 30, March 31,
1997 1997
------------- ---------
(unaudited)
Assets
Current Assets:
Cash $ 112,032 $ 51,666
Deposit 30,000 -
----------- -----------
Total Current Assets 142,032 51,666
Property and Equipment 4,235,460 3,840,460
Other long-term assets (Note 8) 715,288 59,788
----------- -----------
Total Assets $ 5,092,780 $ 3,951,914
=========== ============
Liabilities and Shareholders' Deficit
Current liabilities:
Notes payable (Note 2) $ 2,833,750 $ 203,250
Capital lease obligation-current (Note 3) 250,000 -
Payable to Probe 1 Joint Venture (Note 4) 500,000 -
Accounts payable 1,243,635 1,764,836
Accrued payroll taxes 73,903 64,733
Accrued interest (Note 5 and 6) 580,007 406,273
Advance deposit (Note 3) 10,125 3,082,125
----------- ----------
Total current liabilities 5,491,420 5,521,217
Long-term liabilities
Shareholder loans (Note 6) 37,090 37,090
Capital lease obligation-long term 1,819,854 -
Deferred officers' compensation (Note 3) 966,935 779,818
Minority interest (Note 4) 1,200,000 56,554
----------- ----------
Total liabilities 9,515,299 6,394,679
----------- ----------
Redeemable common stock, $.001 par value, 1,725,914 shares
issued and outstanding at September 30 and March 31, 1997. 517,845 517,845
----------- ----------
Nonredeemable shareholders' deficit:
Common stock $.001 par value; 200,000 shares
authorized 72,535,491 and 68,530,779 shares, respectively,
issued (excluding redeemable common stock) 72,535 68,531
Additional paid-in capital 6,055,042 5,204,061
Deficit accumulated during the development stage (11,067,941) (8,233,202)
----------- ----------
(4,940,364) (2,960,610)
----------- ----------
Total liabilities, redeemable common stock and
nonredeemable shareholders' deficit $ 5,092,780 $ 3,951,914
=========== ===========
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
Revenue: $ - $ - $ - $ -
Expenses:
Exploration 155,000 91,135 295,481 121,165
Depreciation and Amortization 7,500 7,000 15,000 12,000
General and Administrative 652,135 423,266 1,198,648 940,647
Debt extinguishment loss 0 0 1,000,000
------------ --------- -----------
Loss from operations (814,635) (521,401) (2,509,129) (1,073,812)
Interest expense (242,398) (21,602) 342,913 (40,536)
Other income 17,303 - 17,303 -
------------ --------- ----------- ----------
Net Loss $(1,039,730) $ (543,004) $(2,834,739) $(1,114,348)
========= ========= ========== =========
Loss Per Common Share $ (0.01) $ (0.01) $ (0.04) $ (0.02)
========== ============= ========== ==========
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<S> <C> <C>
For the Six Months
Ended September 30,
1997 1996
Cash flows from operating activities:
Net loss $(2,834,739) $(1,114,348)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services
and interest expense 215,990 92,597
Amortization of lease discount 185,296 -
Depreciation and amortization 15,000 12,000
Debt extinguishment loss 1,000,000 -
Change in deposit (30,000) -
Change in long term other assets (155,500) 52,051
Change in accounts payable and accrued liabilities (361,681) 1,112,372
------------ -----------
Net cash provided (used in) by operating activities (1,965,634) 154,672
------------ -----------
Cash flows used for investing activities
Capital expenditures - (928,032)
Advance deposit 310,000 -
----------- -----------
Net cash used in investing activities 310,000 (928,032)
----------- -----------
Cash flows provided (used in) financing activities:
Proceeds from notes payable 500,000 -
Repayment of notes payable (40,000) -
Proceeds from issuance of shareholder notes payable - 60,000
Repayment of shareholders loans - (56,929)
Repayment from issuance of subsidiary common stock - 145,995
Process from establishment of joint venture 1,200,000 -
Process from issuance of common stock 56,000 -
----------- -----------
Net cash provided from financing activities 1,716,000 149,066
------------ -----------
Net increase (decrease) in cash and cash equivalents 60,366 (624,294)
Cash and cash equivalents at beginning of year 51,666 670,325
----------- -----------
Cash and cash equivalents at end the six months $ 112,032 $ 46,031
=========== ===========
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC
A Development Stage Company
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (unaudited)
Note 1 - CONDENSED FINANCIAL STATEMENTS
The consolidated statement of financial position as of September 30,
1997, and the consolidated statements of operations and cash flow for the three
months ended September 30, 1997, and 1996, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) have been made that are necessary to present
fairly the financial position, results of operation, and cash flows at September
30, 1997 and 1996.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted. It is suggested that these financial
statements and notes thereto in the Company's form 10-K for March 31, 1997. The
results of operation for the three months ended September 30, 1997 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
Note 2 - NOTES PAYABLE
The Company obtained interim working capital by issuing promissory
notes with rights of conversion. The terms of these debts instruments are for an
initial period of ninety days but renewable every ninety days for one year, and
bear interest at 12.5% to 12.99%. Holders of the notes have the right to convert
the loan amount plus interest into restricted shares of the Companys common
stock, subject to the terms in the promissory notes. In addition, the Company
signed a promissory note for $2,200,000 to settle obligations for cash advances
of $1,200,000 received as deposits for a hyperspectral scanner. The note was due
on October 31, 1997 and bears interest at prime plus 2%. The Company is
presently preparing an offer to Accuprobe under its agreed buy back option to
retire the lease. The Company recognized a debt extinguishment loss of
$1,000,000 during the first quarter of fiscal 1998 as a result of the
settlement.
Note 3 - CAPITAL LEASE OBLIGATIONS
On June 10, 1997, the Company completed a sale/leaseback transaction of its
first airborne hyperspectral scanner "Probe 1." The instrument was sold for its
cost of $2,500,000. The terms of the leaseback are as follows: 1) the Company
will lease Probe 1 for $250,000 per year bearing interest of prime plus 2% for
three years; 2) at anytime during the above lease period but no later than April
10, 2000, the Company must repurchase the instrument for $3,500,000 net of any
lease payments; 3) at anytime prior to the repurchase, the lessor may convert
the remaining obligation into shares of Quasar Resources, Inc. common stock at a
conversion rate of 40% of the stock's then fair market value. In the event
Quasar is not the operator at the time of exercise of the option, the lessee
shall substitute comparable equity securities or other rights subject to
reasonable approval of lessor; 4) the Company issued to the lessor 1,000,000
unregistered shares of the Company's common stock and warrants to purchase an
additional 1,000,000 unregistered shares of the Company's common stock at an
exercise price of $2 per share; and 5) the lessor will receive certain royalty
rights to revenues generated from mineral sites identified by the instrument.
Accordingly, the Company has recorded a capital lease obligation of $2,125,000
(net of a debt discount of $1,375,000) and $375,000 in shareholders' deficit
related to the shares of common stock and stock purchase or warrants issued in
conjunction with the above transaction.
<PAGE>
Note 4 - PROBE 1 JOINT VENTURE
In the first quarter of 1998, the Company formed a new company, ESSI Probe
1 LC, to acquire the third Probe 1 instrument manufactured by Integrated
Spectronics Pty Ltd. of Australia. The new company is a joint venture managed by
Earth Search Sciences and owned 50% by Earth Search Sciences, who contributed
certain instrument rights, $500,000, and is obligated to contribute an
additional $500,000 and 50% by two shareholders, who contributed $1,200,000
million for their interest in the company. Under the terms of the joint venture
arrangement, Earth Search Sciences will use the Probe 1 instrument for the
identification and exploitation of minerals as well as environmental remediation
and other projects. The joint venture hopes to receive certain royalties on
minerals discovered and exploited through use of the instrument, as well as
other fees paid by third parties for data gathered by the instrument. This
instrument is scheduled for delivery between the third and fourth quarters of
1998. As ESSI controls the joint venture pursuant to the terms of the joint
venture agreement, the joint venture has been consolidated into the Company's
financial statements.
Note 5 - LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of shares
outstanding during each period. For period ended September 30, 1997 and 1996,
the weighted average number of these shares outstanding is 73,851,086 and
67,843,027, shares, respectively.
Note 6 - ADVANCE FROM SHAREHOLDERS
The company has continued in existence through the use of advances from
shareholders, primarily an officer and director of the Company and Universal
Search Technology owned by that same officer and director.
Note 7 - ISSUANCE OF COMMON STOCK
During the three months ended September 30, 1997, the Company sold
40,000 shares of common stock for $10,000 and issued 840,712 shares of common
stock for services.
In addition, the Company has repurchased the remaining 626,190 shares
of Quasar Resources, Inc. common stock outstanding by issuing 1,252,380 shares
of the Company's common stock, which resulted in a $56,554 decrease in minority
interest and increase in nonredeemable shareholders' deficit. As a result, the
Company now owns all of the outstanding stock of Quasar Resources, Inc.
Note 8 - OTHER LONG-TERM ASSETS
In the second quarter of fiscal year 1998, the Company through a series
of transactions, paid $105,000 for license rights for geological exploration of
gold, silver, and associated metals in Kazakstan.
<PAGE>
ITEM - 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
During the quarter ended September 30, 1997, the Company had no
operating revenues. In addition, the Company's obligations increased. The large
operating payables and short-term notes create a substantial working capital
deficiency.
Results of Operations
During the quarter ended September 30, 1997, the Company completed the
acquisition of its first Probe1 hyperspectral imaging scanner and closed the
related sale-leaseback transaction (see Note 3).
The Probe 1 instrument was delivered in time to participate in the
Department of Energy's Remote Sensing Mission to Kazakstan. The Mission's data
acquisition stage has been completed, and the data is currently being evaluated.
The Company continues to fund expenditures related to its interest in SEMTECH, a
Kazakstan joint stock company, and is seeking funding to complete the
acquisition of mineral exploration licenses and to fund initial exploration
expenditures. There can be no assurance that the Company will be successful in
raising the required funds, and failure to do so could result in loss of the
Company's Kazakstan concessions, which could have a material adverse affect on
the prospects of the Company.
The Company also formed ESSI Probe 1 LC to acquire the third Probe 1
instrument, which is scheduled for delivery in early 1998. Two shareholders of
the Company contributed $1,200,000 for a 50% interest in the new company, which
contributed significantly to the funding of the costs of the third instrument.
The terms of the agreement with those shareholders is described in Note 4.
The Company continues to explore funding alternatives to complete the
acquisition of the first three Probe 1's, to continue research and development
efforts on future generations of the instrument and to finance the working
capital necessary to develop the commercial and governmental applications for
the Probe 1's, which will result in conversion of the Company to a revenue
producing company. There can be no assurance that the Company will be successful
in raising the required capital, and failure to do so could result in loss of
the instruments, which could have a material adverse effect on the prospects of
the Company.
Raising the required capital has been made more difficult by the
allegations made by the State of Idaho in its ongoing lawsuit with the Company.
The Company continues to defend itself vigorously in the litigation, but the
existence of the litigation has damaged the Company's fund raising efforts. The
Company is hopeful of achieving a reasonable settlement of the State's lawsuit,
but there can be no assurance that the State will be willing, now or at anytime
prior to trial, to settle on terms acceptable to the Company.
Outlook
The Company has negotiated a non-binding letter of intent with a major
Canadian mining company which, when final documentation is executed, will
provide the Company with an expectation of revenue from use of the Company's
Probe 1 instruments for commercial mining purposes. As part of the transaction,
the Company will receive an equity investment from the mining company that will
help the Company fund its ongoing commitments. Subsequent to the quarter ended
September 30, 1997, both companies continue to negotiate in good faith, a final
contract, although there can be no assurances that the Company will conclude a
contract with the mining company.
<PAGE>
PART II
OTHER INFORMATION REQUIRED
Item 1. Legal Proceeding None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote
of Security Holder None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
Filed a Form 8-K on July 15, 1997
Filed a Form 8-K on August 14, 1997
Filed a Form 8-K/A on August 15, 1997
Filed a Form 8-K on August 29, 1997
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned.
EARTH SEARCH SCIENCES, INC.
Date: November 6, 1997 /s/ Larry F. Vance
Larry F. Vance
Chairman and Director
