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: December 31, 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: 75,455,075 shares.
The registrant has only one class of common stock.
<PAGE>
EARTH SEARCH SCIENCES, INC.
FORM 10-Q
(Unaudited)
QUARTER ENDED DECEMBER 31, 1997
PART I
FINANCIAL INFORMATION
TABLE OF CONTENTS
Item 1. Consolidated Financial Statements Page
Consolidated Balance Sheet
as of December 31, 1997 and March 31, 1997. 3
Consolidated Statement of Operations for the
Three and Nine Months Ended December 31, 1997 and 1996. 4
Consolidated Statement of Cash Flows for the
Nine Months Ended December 31, 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 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters of a Vote of
Security Holders 10
Item 5. Other information 10
Item 6. Exhibits and Reports on Form 8-K 10
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Balance Sheet
December 31, March 31,
1997 1997
---- ----
(unaudited)
<TABLE>
<S> <C> <C>
Assets
Current Assets:
Cash $ - $ 51,666
Accounts Receivable 55,000 -
Deposit 30,000 -
----------- ---------
Total Current Assets 85,000 51,666
Property and Equipment 4,238,664 3,840,460
Other long-term assets (Note 4 & 7) 715,288 59,788
----------- ----------
Total Assets $ 5,038,952 $ 3,951,914
=========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Notes payable (Note 2) $ 2,874,576 $ 203,250
Capital lease obligation-current (Note 3) 250,000 -
Payable to Probe 1 joint venture (Note 4) 500,000 -
Accounts payable 1,300,616 1,764,836
Accrued payroll taxes 73,903 64,733
Accrued interest 645,220 406,273
Advance deposit 10,125 3,082,125
----------- -----------
Total current liabilities 5,654,440 5,521,217
Long-term liabilities
Shareholder loans (Note 5) 37,090 37,090
Capital lease obligation-long term (Note 3) 1,958,826 -
Deferred officers' compensation 1,062,719 779,818
Minority interest 1,300,000 56,554
----------- -----------
Total liabilities 10,013,075 6,394,679
----------- -----------
Redeemable common stock, $.001 par value,
1,725,914 shares Issued and outstanding
at December 31, 1997 and March 31, 1997 517,845 517,845
----------- -----------
Nonredeemable shareholders' deficit:
Common stock $.001 par value; 200,000,000
shares Authorized 75,455,075 and 68,530,779
shares, respectively, Issued (excluding
redeemable common stock) 73,596 68,531
Additional paid-in capital 6,399,776 5,204,061
Deficit accumulated during the development stage (11,965,340) (8,233,202)
------------ ------------
(5,491,968) (2,960,610)
------------ ------------
Total liabilities, redeemable common stock and
Nonredeemable shareholders' deficit $ 5,038,952 $ 3,951,914
=========== ===========
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
Revenue: $ 55,000 $ - $ 55,000 $ -
Expenses:
Exploration 38,210 1,749 333,691 122,914
Depreciation and Amortization 7,500 7,000 22,500 19,000
General and Administrative 456,373 358,158 1,655,021 1,298,805
Debt extinguishment loss - - 1,000,000 -
---------- ---------- ---------- ----------
Loss from operations (447,083) (366,907) (2,956,212) (1,440,719)
Interest expense (254,466) (19,946) (597,379) (60,482)
Other income (expense) (195,840) - (178,537) -
---------- ---------- ---------- ----------
Net Loss applicable to both basic
and diluted earnings per share $ (897,398) $ (386,853) $(3,732,128) $(1,501,201)
========== ========== ========== ==========
Shares applicable to basic loss
per share 75,111,460 68,004,720 73,685,199 67,909,244
Basic loss per share $ (0.01) $ (0.01) $ (0.05) $ (0.02)
========== ========== ========== ==========
Shares applicable to diluted loss
per share 80,945,456 74,181,799 79,784,379 74,781,197
Diluted loss per share $ (0.01) $ (0.01) $ (0.05) $ (0.02)
========== ========== ========= ==========
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows used in operating activities:
Net Loss $ (3,732,128) $(1,501,201)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services
and interest expense 524,830 105,724
Amortization of lease discount 283,826 -
Depreciation and amortization 22,500 19,000
Debt extinguishment loss 1,000,000 -
Change in accounts receivable (55,000) -
Change in deposits (30,000) -
Change in long term other assets (155,500) 27,038
Change in accounts payable and accrued liabilities 284,510 2,214,019
------------ ------------
Net cash used in operating activities (1,856,962) 864,580
----------- ------------
Cash flows used in investing activities:
Capital expenditures (420,704) (1,548,062)
Advance deposits 310,000 -
------------ -----------
Net cash used in investing activities (110,704) (1,548,062)
----------- -----------
Cash flows provided by financing activities:
Proceeds from notes payable 500,000 -
Repayment of notes payable (40,000) -
Proceeds from issuance of shareholder notes payable 100,000 60,000
Repayment of shareholder loans - (56,929)
Proceeds from issuance of common stock 56,000 -
Proceeds for issuance of subsidiary's common stock 100,000 155,995
Proceeds from establishment of joint venture 1,200,000 -
------------ ------------
Net cash provided by financing activities 1,916,000 159,006
------------ ------------
Net decrease in cash and cash equivalents (51,666) (524,416)
Cash and cash equivalents at beginning of year 51,666 670,325
------------ ------------
Cash and cash equivalents at end the nine month period $ - $ 145,909
------------ ============
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC
A Development Stage Company
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (unaudited)
Note 1 - CONDENSED FINANCIAL STATEMENTS
The consolidated balance sheet as of December 31, 1997, and
the consolidated statements of operations and cash flow for the three and nine
months ended December 31, 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 December
31, 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. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's form 10-K for the fiscal year ended
March 31, 1997. The results of operation for the three and nine months ended
December 31, 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 recognized
a debt extinguishment loss of $1,000,000 during the first quarter of fiscal 1998
as a result of the settlement. Subsequent to December 31, 1997, the Company
entered into an agreement with certain debtholders whereby the $2,200,000 note
plus accrued interest through the settlement date were converted into
approximately 8,000,000 shares of restricted ESSI common stock. In addition,
725,000 shares of common stock were issued in lieu of future interest payments.
Further, one million shares of the Company's common stock were issued to retire
certain warrants held by the debtholder. The debtholder also received one
million shares of preferred warrants with an exercise price of $2.00 per
warrant.
Note 3 - CAPITAL LEASE OBLIGATIONS
On June 10, 1997, the Company completed a sales/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 in early 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 - 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 6 - ISSUANCE OF COMMON STOCK
During the three months ended December 31, 1997, the Company issued
608,471 shares of common stock for Notes Payable and issued 150,000 shares of
common stock for services .
In addition, the Company has repurchased 435,199 shares of Skywatch
Exploration, Inc. common stock outstanding by issuing 435,199 shares of the
Company's common stock. As a result, the Company now owns 100% of Skywatch
Exploration, Inc. No value is attributed to the assets acquired and as such are
reflected in other expense on the Consolidated Statement of Operations.
Note 7 - 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.
Note 8 - CHANGE IN ACCOUNTING PRINICPLES-LOSS PER SHARE
Effective December 15, 1997, the Company adopted SFAS No. 128,
"EARNINGS PER SHARE". The statement establishes standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly held
common stock or potential common stock. This statement modifies the standards
for computing earnings per share previously found in APB Opinion No. 15,
"EARNINGS PER SHARE," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. In addition, EPS
figures for prior periods must by restated.
The difference between the denominator used to calculate basic loss per
share and diluted loss per share reflects options and warrants to purchase
13,300,000 shares of the Company's common stock at prices ranging form $0.105
per share to $0.21 per share. Options and warrants to purchase 27,500,000 shares
of common stock at prices ranging from $0.50 per share to $2.50 per share were
outstanding throughout the nine months ended December 31, 1997, but were not
included in the computation of diluted loss per share because the exercise price
was greater than the average market price of common shares.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
During the quarter ended December 31, 1997, the Company received its
first commercial order for mapping services using the Company's initial Probe 1
hyperspectral imaging spectrometer. The Company rendered an invoice for $55,000
for mapping services performed under that order prior to the expiration of the
quarter, thus providing the Company with its initial operating revenues.
With the commencement of commercial operations, the Company experienced
even greater than usual operating expenses. In addition, the Company's
obligations increased. Loss for operations increased by approximately $80,000
for the quarter ended December 31, 1997 over the comparable prior year quarter.
The Company's large operating payables and short-term notes create a substantial
working capital deficiency. Results of Operations
During the quarter ended December 31, 1997, the Company completed
testing of its first Probe 1 hyperspectral imaging spectrometer and commenced
commercial operations. The final testing of the Probe 1 instrument involved data
collection over Cuprite, Nevada, the "proving ground" for remote sensing
instruments, and several other sites in the western United States. Based on
feedback from scientists reviewing the data, the Company continues to believe
that Probe 1 has great commercial potential.
The Company's initial Probe 1 instrument was delivered in time to
participate in the Department of Energy's 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 complex mineral licenses and to fund initial exploration
expenditures. Subject to the availability of capital, the Company has committed
to its Kazakstani partners that it will commence exploration activities in
Kazakstan in the Spring and Summer of 1998. 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. The Company also desires to obtain capital sufficient to
conduct exploration activities in other parts of the world, so as to diversify
its exploration activities. 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.
The Company settled its lawsuit with the Idaho Department of Finance
during the quarter ended December 31, 1997. As a result of the settlement, the
Company has agreed to proceed with an offering of rescission to certain Idaho
investors. In addition, the Company has agreed not to rely on any exemptions
under the Idaho Securities Act for a period of five years without first
obtaining the permission of the Department of Finance. Neither the Company nor
its Chairman was required to pay a fine or any of the State's costs.
During the quarter ended December 31, 1997, the Company completed the
acquisition of all outstanding stock of Quasar Resources, Inc. and Skywatch
Exploration, Inc. These acquisitions were accomplished through the swapping of
Quasar and Skywatch shares for shares of the Company's common stock.
<PAGE>
OUTLOOK
Subsequent to the end of the quarter ended December 31, 1997, the
Company completed the negotiation and execution of a series of agreements with
Noranda Mining and Exploration, Inc. and its affiliates including Falconbridge
Limited (collectively, the "Noranda Group"). These agreements provide the
Noranda Group with an exclusive license to use the Probe 1's for commercial
mining exploration, as long as the Noranda Group continues to purchase remote
sensing services from the Company in certain specified quantities. Under the
arrangement, the Company maintains its right to use the Probe 1's for its own
exploration activities in Kazakstan and elsewhere, and the Company is entitled
to receive fees for services and net smelter royalties or net profit interest
royalties from certain discoveries by the Noranda Group using the Probe 1's.
In addition, the Noranda Group converted its $500,000 note into
convertible preferred stock of the Company and invested an additional $500,000
in shares of the Company's convertible preferred stock. The preferred stock is
convertible on a 1 to 5 basis into shares of the Company's common stock and the
Noranda Group also has warrants to purchase up to 1,000,000 additional shares of
the Company's common stock at an exercise price of $2.00 per share.
Also subsequent to December 31, 1997, the Company and the owner of the
first Probe 1, Accuprobe, Inc., restructured certain of their arrangements. As a
result of the restructuring, the Company and Accuprobe agreed to retire the $2.2
million note that was originally due October 31, 1997, to deem warrants to
purchase Company common stock fully paid and to eliminate rental payments
otherwise due under the sale-leaseback of the Probe 1 for a period of two years,
in exchange for the Company delivering to Accuprobe approximately 11 million
shares of the Company's common stock. In addition, certain other modifications
were made to the sale-leaseback documentation and the Company agreed to issue to
Accuprobe warrants to purchase one million shares of preferred stock of the
Company at an exercise price of $2.00 per share.
With the closing of the Noranda Group transaction and the restructuring
of the Accuprobe transaction now completed, the Company can turn its attention
to completing the acquisition of the two remaining Probe 1's and to fulfilling
its business plans. The Company has recently announced the additions to its
staff of Bob Stuart, Vice President--Geology and Ken Danchuk, Vice
President--Investor Relations. As revenues commence, the Company anticipates
hiring other personnel to establish a fully integrated professional team to
chart the Company's future course. Although capital continues to remain scarce,
management of the Company is very enthusiastic about the Company's prospects.
PART II
OTHER INFORMATION REQUIRED
Item 1. Legal Proceeding
The Company and the Idaho Department of Finance agreed on December 17,
1997, to settlement of the outstanding litigation by the Department of Finance,
styled State of Idaho Department of Finance v. Earth Search Sciences, Inc. and
Larry F. Vance, Civil No. CV OC 9700155D, in the District Court of the Fourth
Judicial Circuit of the State of Idaho, In and For the County of Ada. As part of
the settlement, the Company agreed to make an offering of rescission to certain
Idaho residents who lent money to the Company or purchased stock from the
Company during the period from November 1, 1992 through December 15, 1997. The
Company also agreed to issuance of a permanent injunction precluding violation
of the Idaho Securities Act and to refraining for a period of five years from
claiming the availability of an exemption from registration under the Idaho
Securities Act without the prior written consent of the Director of the
Department of Finance. As part of the settlement, all parties agreed to pay
their own costs and no fines were imposed on the Company or Mr. Vance.
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 12-19-97
<PAGE>
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: February 13, 1998 /s/ Larry F. Vance
Larry F. Vance
Chairman and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
COMPANY'S UNAUDITED FORM 10-Q, WHICH IS ATTACHED, AND IS QUALIFIED IN ITS
ENTIRETY BY THE REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000752634
<NAME> EARTH SEARCH SCIENCES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 55,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 85,000
<PP&E> 4,441,080
<DEPRECIATION> (202,416)
<TOTAL-ASSETS> 5,038,952
<CURRENT-LIABILITIES> 5,654,440
<BONDS> 0
0
0
<COMMON> 69,991,217
<OTHER-SE> (11,965,340)
<TOTAL-LIABILITY-AND-EQUITY> 5,038,952
<SALES> 55,000
<TOTAL-REVENUES> 55,000
<CGS> 0
<TOTAL-COSTS> (295,212)
<OTHER-EXPENSES> (178,537)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (597,379)
<INCOME-PRETAX> (3,732,128)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,732,128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,732,128)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
