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, 1998
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 89,495,698 shares.
The registrant has only one class of common stock.
<PAGE>
EARTH SEARCH SCIENCES, INC.
FORM 10-Q
(Unaudited)
QUARTER ENDED SEPTEMBER 30, 1998
PART I
FINANCIAL INFORMATION
TABLE OF CONTENTS
Item 1. Consolidated Financial Statements Page
Consolidated Balance Sheet
as of September 30, 1998 and March 31, 1998. 3
Consolidated Statement of Operations for the
Three Months Ended September 30, 1998 and 1997. 4
Consolidated Statement of Cash Flows for the
Three Months Ended September 30, 1998 and 1997. 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)
Consolidated Balance Sheet
September 31, March 31,
1998 1998
----------- ------------
Assets
Current assets:
Cash $ 74,696 $ 42,600
Accounts Receivable 95,803 675,648
Prepaid expenses & other assets 665,814 -
---------- -----------
Total current assets 836,313 718,248
Property and equipment 3,990,102 3,979,179
Other long-term assets 183,225 183,225
----------- -----------
Total assets $ 5,009,640 $ 4,880,652
=========== ===========
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders' Deficit
Current liabilities:
Notes payable $ 78,399 $ 89,080
Accounts payable 685,401 671,332
Accrued payroll taxes - 18,449
Accrued interest 282,041 281,750
Payable to Probe 1 Joint Venture 500,000 500,000
Unearned revenue 15,063 40,000
Cash advances and deposits 280,000 -
----------- -----------
Total current liabilities 1,840,904 1,600,611
Long-term liabilities:
Shareholder loans 202,350 104,090
Capital lease obligation 2,272,056 2,029,410
Deferred officers' compensation 1,560,845 1,387,461
Minority interests 2,248,000 2,247,000
----------- -----------
Total liabilities 8,124,155 7,368,572
----------- -----------
Commitments and contingencies
Redeemable common stock, $.001 par value,
1,725,914 shares issued and outstanding
at March 31, 1998 and 1997 517,845 517,845
----------- -----------
Nonredeemable shareholders' deficit:
Series A preferred stock; 200,000 shares
authorized, issued and outstanding at
March 31, 1998 1,000,000 1,000,000
Common stock, $.001 par value; 200,000,000
shares authorized; 89,495,698 and 84,792,576
shares, respectively, issued and outstanding 87,769 84,792
Additional paid-in capital 10,391,060 9,827,644
Common stock subscribed - 165,000
Deficit accumulated during the development
stage (15,111,189) (14,083,201)
------------ ------------
(3,632,360) (3,005,765)
------------ ------------
Total liabilities, redeemable common stock
and nonredeemable shareholders' deficit $ 5,009,640 $ 4,880,652
=========== ============
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenue: $ 213,384 $ - $ 463,654 $ -
Cost of services provided (137,184) - (278,632) -
---------- ------------ ------------- -------------
Gross margin 76,200 - 185,022 -
Expenses:
Exploration - 155,000 - 295,481
Depreciation and amortization 6,431 7,500 12,862 15,000
General and administrative 345,149 652,135 715,367 1,198,648
---------- ------------ ------------ -------------
351,580 814,635 728,229 1,509,129
Loss from operations (275,380) (814,635) (543,207) (1,509,129)
Interest income - - - -
Interest expense (174,631) (225,095) (352,227) (325,610)
Other income (expense) - (17,442) -
---------- ------------ ------------ -------------
Loss before minority interest (450,011) (1,039,730) (912,876) (1,834,739)
Minority interest in losses of
consolidated subsidiaries - - - -
---------- ------------ ------------ -------------
Loss before extraordinary items (450,011) (1,039,730) (912,876) (1,834,739)
Extraordinary item (Debt
Extinguishment loss) - - (115,023) (1,000,000)
---------- ------------ ------------ -------------
Net Loss $ (450,011) $ (1,039,730) $ (1,027,899) $ (2,834,739)
========== ============ ============ =============
Shares applicable to basic loss per
shares and diluted loss per share 88,470,125 74,261,405 89,495,698 68,531,779
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.01) $ (0.04)
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months
Ended September 30,
1998 1997
------------ ------------
Cash flows from operating activities:
Net Income $ (1,027,899) $ (2,834,739)
Adjustments to reconcile net loss to net
cash used in operating activities:
Issuance of common stock for services
and interest expense 122,887 215,990
Extraordinary items 115,023 1,000,000
Depreciation 137,862 15,000
Amortization of lease discount 242,647 185,296
Changes in assets and liabilities:
Accounts receivable (95,803) -
Prepaid assets and deposits 9,834 (30,000)
Accounts payable 14,069 (493,810)
Accrued liabilities (18,158) 132,129
Unearned revenue (24,937) -
Deferred officers compensation 173,384 (155,500)
------------ ------------
Net cash provided by operating activities (351,091) (1,965,634)
------------ ------------
Cash flows from investing activities:
Capital expenditures (47,392) -
Advance deposits 280,000 310,000
------------ ------------
Net cash used by investing activities 232,608 310,000
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 500,000
Repayment of notes payable (10,681) (40,000)
Proceeds from shareholder loans 191,500 -
Repayments of shareholder loans (93,240) -
Issuance of common stock 63,000 56,000
Proceeds from Probe 1 joint venture - 1,200,000
------------ ------------
Net cash provided from financing activities 150,579 1,716,000
------------ ------------
Net increase (decrease) in cash 32,096 60,366
Cash at beginning of period 42,600 51,666
------------ ------------
Cash at end of period $ 74,696 $ 112,032
============ ============
<PAGE>
EARTH SEARCH SCIENCES, INC.
A Development Stage Company
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
Note 1 - CONDENSED FINANCIAL STATEMENTS
The consolidated statement of financial position as of September 30,
1998, and the consolidated statements of operations and cash flow for the three
months ended September 30, 1998, and 1997, 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, 1998 and 1997.
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, 1998. The
results of operation for the three months ended September 30, 1998 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
Note 2 - REVENUE AND ACCOUNTS RECEIVABLE
The Company recognized $463,654 in revenue during the second quarter for remote
sensing services performed.
- --------------------------------------------------------------------------------
Comparison of Current Quarter's Revenues With Two Previous Quarters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$50,000 $250,000 $463,654
12/31/98 3/31/98 6/30/98
- --------------------------------------------------------------------------------
Note 3 - 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 Company's common
stock, subject to the terms in the promissory notes.
Note 4 - PROBE 1 JOINT VENTURE
Effective June 3, 1997, the Company formed a new company, ESSI Probe 1 LC,
to acquire the second 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 percent by Earth Search Sciences, which contributed
certain instrument rights and a promise to pay $500,000, and 50 percent by two
shareholders, who contributed $1,000,000 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
during fiscal 1999. 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, The Company obtained $280,000 in shareholder loans this quarter
for use as working capital.
<PAGE>
Note 7 - CAPITAL LEASE OBLIGATIONS
On June 10, 1997, the Company completed a sale/leaseback for 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. In
January 1998, the Company settled the $2,200,000 note plus accrued interest of
$142,000 by issuing 8,076,800 restricted shares of the Company's common stock
and a warrant to purchase 1,000,000 restricted shares of the Company's common
stock at an exercise price of $2 per share. No value was assigned to the
warrant.
On January 5, 1998, 1,725,000 restricted shares of the Company's
common stock were issued in lieu of the first two lease payments due on April
10, 1998 and 1999. As further consideration, the Company agreed to issue an
additional 1,000,000 restricted shares of the Company's common stock to retire
the warrant issued in conjunction with the sale/leaseback transaction mentioned
above. These shares were not issued as of March 31, 1998; the value of these
shares were shown as commons stock subscribed in the Company's financial
statements at March 31, 1998 and were issued in the first quarter of fiscal
1999. The Company recognized an extraordinary loss of $165,000 (basis and
diluted loss per share of $0.002) from the debt extinguishment during the forth
quarter of fiscal 1998 as a result of the settlement of the lease payments.
During the first quarter of fiscal 1999, an additional 547,727
shares were issued to the lessor in relation to the two years of lease payments.
According to the agreement, the Company was to issue 1,000,000 free trading
shares however, in the forth quarter of fiscal 1998, the Company issued the
lessor restricted shares in lieu of the free trading shares. It was agreed in
the first quarter of fiscal 1999 to compensate for the discounted value of the
restricted shares, the additional 547,727 shares were issued. The value of these
additional shares issued does not reduce the capital lease obligation further,
but rather, represents the costs of extinguishing the initial two years of the
probe lease commitment. Accordingly, the $115,023 value of this transaction is
recorded as an extraordinary item loss of extinguishment of debt.
Note 7 - LOSS PER COMMON SHARE
During the three months ended September 30, 1998, the Company issued
161,429 shares.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
During the quarter ended September 30, 1999, the Company recognized
$463,654 in revenue, an increase of $213,654 (see Note 2, above). However, the
Company's obligations increased. The large operating payables and short-term
notes create a substantial working capital deficiency.
Results of Operations
During the fiscal year ended March 31, 1998, Earth Search Sciences,
Inc. signed a funding agreement with Swancorp Equities Inc. to provide over $15
million in funding. The funding agreement contemplates Swancorp in assisting
Earth Search in obtaining $5 million of capital in a direct private placement
with a potential additional $5 million through the exercise of attached
warrants. Swancorp is prepared to assist Earth Search through a combination of
shares and warrants offered in a private placement with varying exercise prices.
To date, Swancorp has positioned Earth Search in front of ten potential funding
sources. IBK Capital has also been engaged and has introduced Earth Search to an
investment group that the Company is in serious negotiations with at the present
time. Earth Search management has presented the Company's plans for use of
proceeds, along with the anticipated returns on investment that can reasonably
be expected from the addition of a second instrument to the Company's fleet. As
proposed, Earth Search expects to recognize additional revenues beginning late
in the third quarter of 1998 as the result of providing additional services with
the second instrument. The Company is encouraged by its bookings for June
through August and hopes that the trend will continue into the next fiscal year.
As the sun angle degrades during the fall and winter months, the Canadian
mapping conditions degrade and logistics dictate the need to move south to the
United States and South America in order to take advantage of better sun angle
and stable weather which are prerequisites for hyperspectral imaging.
During the quarter ended September 30, 1998, the Company has mapped
several prospects including four significant prospects, one located in U.S., one
in Mexico, one in Canada and the other in South America. A contract vehicle is
currently in place between Earth Search and the customer to receive funds for
mapping these sites. The contract allows for a negotiated advance against the
work plan which contributes favorably toward covering the Company's cash flow
requirements during the period of time between initiation of work and submittal
of invoices for payment. The contract also provides for invoicing progress
payments, further enhancing cash flow.
The Company has completed mapping assignments in Australia, Mexico, and
Canada in partial fulfillment of its contractual obligations to Noranda to map
for natural resources on a global scale. In addition to the revenues and fees
the Company has invoiced for these services, the Company references its SEC
filing of its Noranda contract in which it was previously disclosed that the
Company may receive either net smelter royalties or net profits interest on
properties not previously owned or controlled by Noranda upon which a discovery
should occur as the result of using the Company's Probe 1 technology to locate
the mineral resource. To date, gigabyte quantities of imagery have been
collected by Earth Search. These data tapes are being processed and the imagery
is being examined for the presence of mineral properties exhibiting the
qualifications necessary to establish them for candidacy as "Royalty
Properties". While no royal properties have been recorded at this time, the
Company is operating on two continents targeted by the mining industry as
exhibiting significant mineral potential. A substantial backlog of collected
imagery from these two continents exists, and the evaluation process continues
to move forward. As the Company has moved from point A to point B in fulfillment
of its Noranda mapping contract, it has enjoyed during the quarter, added
mapping assignments from new customers from emerging growth areas, including
hydrocarbon exploration, and environmental damage assessments, land use planning
and weed species identification from an airborne platform using hyperspectal
imagery from its Probe 1 instrument. These additional revenues have enabled the
Company to recognize improvements over the previous quarter as it emerges from a
development stage company into an emerging growth business entity.
During the quarter ended September 30, 1998, the Company collected
hyperspectal data and delivered a report to NASA/Techlink, and Turner
Enterprises. The project completed was to collect data specific to the
restocking of the West Slope Cutthroat Trout (endangered species) and riparian
issues.
During the quarter ended September 30, 1998 the Company collected
hyperspectral data for the Geosat Committee. The Geosat Committee is funded from
contributions by major U.S. resource companies. The Committee is operated by the
University of Texas at El Paso and the Director is Dr. Rebecca Dodge. The
project completed for the Geosat's "Hyperspectral Group Shoot 1998" provided
Probe 1 hyperspectral imagery to the oil and mineral exploration, environmental
assessment, and agriculture end-user community, for an evaluation by these
communities of its applications potential.
The Company teamed with the University of Idaho on a joint proposal to
the Farm Bureau and won a contract to overfly the Snake River Basin (Hell's
Canyon) and during the quarter ended September 30, 1998, the Company collected
hyperspectral data for the control and eradication of noxious weed intrusion.
The test results are being published. Initial results provide a positive
indication that airborne hyperspectral imagery is a useful tool for control of
weeds, as well as providing information regarding economic indicators as they
pertain to forecasting crop yield.
Several proposals have been developed to partner with private industry,
universities and state and Federal agencies to develop, package and deliver
competitive advanced technology products and services. This approach provides
solutions to critical environmental, agriculture, forestry, fisheries &
ecological issues. Defense and national security issues are also being addressed
in the proposal phase.
Year 2000
The Company's plan is to address its significant Year 2000 issues prior to
being affected by them. Should the Company identify significant risks related
to its Year 2000 readiness or its progress deviates from the anticipated
timeline, the Company will develop contingency plans as deemed necessary at
that time. The Company is also in the process of reviewing and replacing, where
necessary, its other automated communications and manufacturing systems. The
Company estimates that it will also substantially complete this phase by the
second quarter of 1999.
Outlook
The Company's outlook contain forward-looking statements. These statements
are not intended to nor should it be interpreted to constitute a prediction of
future events
<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 None
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, 1998 /s/ Larry F. Vance
-----------------------
Larry F. Vance
Chairman and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE
COMPANY'S UNAUDITED FORM 10-Q, WHICH IS ATTACHED, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000752634
<NAME> EARTH SEARCH SCIENCES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 74,696
<SECURITIES> 0
<RECEIVABLES> 95,803
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 836,313
<PP&E> 3,990,102
<DEPRECIATION> 137,862
<TOTAL-ASSETS> 5,009,640
<CURRENT-LIABILITIES> 1,840,904
<BONDS> 0
0
1,000,000
<COMMON> 89,495,698
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,009,640
<SALES> 463,654
<TOTAL-REVENUES> 463,654
<CGS> 0
<TOTAL-COSTS> (543,207)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (352,227)
<INCOME-PRETAX> (1,027,899)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,027,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,027,899)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
