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, 1999
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: 109,408,250
shares. The registrant has only one class of common stock.
<PAGE>
EARTH SEARCH SCIENCES, INC.
FORM 10-Q
(Unaudited)
QUARTER ENDED DECEMBER 31, 1999
PART I
FINANCIAL INFORMATION
TABLE OF CONTENTS
Item 1. Consolidated Financial Statements Page
Consolidated Balance Sheet
as of December 31, 1999 and March 31, 1999. 3
Consolidated Statement of Operations for the
Three and Nine Months Ended December 31, 1999 and 1998. 4
Consolidated Statement of Cash Flows for the
Nine Months Ended December 31, 1999 and 1998. 5
Selected Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
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>
<TABLE>
<CAPTION>
Earth Search Sciences, Inc.
Consolidated Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
December 31, March 31,
1999 1999
-------------------- --------------------
Assets
Current Assets:
Cash $ 1,136,079 $ 47,642
Other current assets 412,313 120,995
-------------------- --------------------
Total Current Assets 1,548,392 168,637
Property and Equipment 3,777,600 3,823,596
Investment in and advances to subsidiary 2,510,000 -
-------------------- --------------------
Total Assets $ 7,835,992 $ 3,992,233
==================== ====================
Liabilities and Shareholders' Deficit
Current liabilities:
Notes payable $ 1,643,275 $ 450,125
Accounts payable and accrued expenses 530,401 552,061
Accrued interest 292,688 236,259
Unearned revenue - 40,000
-------------------- --------------------
Total current liablities 2,466,364 1,278,445
Long-term liabilities
Shareholder loans 1,515,601 372,322
Capital lease obligation 2,878,104 2,514,378
Deferred officers' compensation 2,045,210 1,707,380
Minority interest 2,168,993 2,000,000
-------------------- --------------------
Total liabilities 11,074,272 7,872,525
-------------------- --------------------
Commitments and contingencies
Redeemable common stock, $.001 par value, 725,914 shares
issued and outstanding at December 31 and March 31, 1999 117,845 117,845
-------------------- --------------------
Nonredeemable shareholders' deficit
Series A preferred Stock; 200,000 shares authorized,
issued and outstanding at March 31 and September 30, 1999 1,000,000 1,000,000
Common stock, $.001 par value; 200,000,000 shares
authorized; 109,408,250 and 97,411,367 shares
respectively, issued and outstanding 109,408
97,411
Additional paid-in capital 14,657,274 11,459,081
Common stock subscibed - -
Treasury Stock (200,000) (200,000)
Retained Deficit (18,922,807) (16,354,629)
-------------------- --------------------
(3,356,125) (3,998,137)
-------------------- --------------------
Total liabilities and shareholders' deficit $ 7,835,992 $ 3,992,233
=================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Earth Search Sciences, Inc.
Consolidated Statement of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Three Months For the Nine Month
Ended December 31, Ended December 31,
1999 1998 1999 1998
---------------- -------------- ----------------- ----------------
Revenue $ 79,678 $ 173,252 $ 419,779 $ 636,906
Costs of Services Provided (141,925) (154,895) (441,321) (433,527)
---------------- -------------- ----------------- ----------------
Gross Margin (62,247) 18,357 (21,542) 203,379
Expenses:
General and administrative 902,789 321,938 1,749,265 1,050,167
---------------- -------------- ----------------- ----------------
902,789 321,938 1,749,265 1,050,167
Loss from operations (965,036) (303,581) (1,770,807) (846,788)
Interest income - - - -
Interest expense (328,234) (161,211) (797,371) (513,438)
Other Expense - - (17,442)
-
---------------- -------------- ----------------- ----------------
Loss before minority interest (1,293,270) (464,792) (2,568,178) (1,377,668)
Loss before extraordinary item (1,293,270) (464,792) (2,568,178) (1,377,668)
Extraordinary item - - - (115,023)
---------------- -------------- ----------------- ----------------
Net loss $ (1,293,270) $ (464,792) $ (2,568,178) $ (1,492,691)
================ ============== ================= ================
Shares applicable to basic and
diluted loss per share 104,354,564 88,470,125 103,409,808 88,470,125
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.01) $ (0.01)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Earth Search Sciences, Inc.
Consolidated Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
For the Nine Months
Ended December 31,
1999 1998
------------------ -----------------
Cash flows from operating activities:
Net Income $ (2,568,178) $ (1,492,691)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services and interest expense 678,665 185,592
Issuance of stock for STDC stock 510,000 -
Extraordinary items - 115,023
Depreciation 245,613 207,011
Amortization of lease discount 363,726 363,970
Changes in assets and liabilities:
Other current assets (291,318) (254,930)
Accounts payable and accrued expenses (21,660) 3,549
Accrued liabilities 56,429 (9,532)
Unearned revenue (40,000) 120,063
Deferred officers compensation 337,830 242,321
Minority Interest 168,993 -
----------------- ----------------
Net cash provided by operating activities (559,900) (519,624)
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (199,616) (47,298)
Advance deposits - 430,000
Advances to Subsidiary (2,510,000) -
----------------- ----------------
Net cash used by investing activities (2,709,616) 382,702
----------------- ----------------
Cash flows from financing activities:
Repayment of notes payable (391,500) (10,681)
Proceeds from notes payable 1,584,650 -
Proceeds from shareholder loans 1,785,412 191,500
Repayments of shareholder loans (642,673) (118,240)
Issuance of common stock 1,953,300 63,000
Stock issued for conversion of notes 68,764 -
----------------- ----------------
Net cash provided from financing activities 4,357,953 125,579
----------------- ----------------
Net increase (decrease) in cash 1,088,437 (11,343)
Cash at beginning of period 47,642 42,600
----------------- ----------------
Cash at end of period $ 1,136,079 $ 31,257
================= ================
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (unaudited)
CONDENSED FINANCIAL STATEMENTS
The consolidated statement of financial position as of December 31,
1999 and the consolidated statements of operations for the three and nine months
ended December 31, 1999 and cash flow for the nine months ended December 31,
1999, and 1998, 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, 1999 and 1998.
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 be read in conjunction with the financial statements and notes
thereto in the Company's form 10-K for March 31, 1999. The results of operation
for the three and nine months ended December 31, 1999 are not necessarily
indicative of the operating results to be expected for the full fiscal year.
REVENUE
The Company recognized $79,678 in revenue during the third quarter for
remote sensing services performed.
NOTES AND ACCOUNTS PAYABLE
Notes payable consist of unsecured promissory notes with rights of
conversion. The terms of these debt instruments are typically for an initial
period of ninety days or one year and are renewable at maturity for one year.
The notes bear interest at rates ranging from 4.5% to 12.5%. Holders of the
notes have the right to convert the principal amount plus interest into
restricted shares of the Company common stock, subject to the terms in the
promissory notes.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of shares
outstanding during each period. For period ended December 31, 1999 and 1998, the
weighted average number of these shares outstanding is 104,354,564 and
88,470,125 shares, respectively.
ISSUANCE OF COMMON STOCK
During the three months ended December 31, 1999, the Company issued
10,108,286 shares of common stock.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in this MD&A
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements, including those
described below. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
MATERIAL CHANGES IN FINANCIAL CONDITION
During the quarter ended December 31, 1999, the Company recognized $
79,678 in revenue. However, the Company's obligations increased. The large
operating payables and short-term notes create a working capital deficiency.
RESULTS OF OPERATIONS
In December of 1999, ESSI acquired Space Technology Development
Corporation (STDC), of Alexandria, VA. ESSI acquired all the shares of STDC in
exchange for four million shares of ESSI common stock and the option to purchase
another four million shares at exercise prices ranging to five dollars.
STDC was established in 1993 for the purpose of commercializing
space-related technologies developed in government laboratories. STDC's primary
activity during the last two years has been the planning and implementation of
the Naval EarthMap Observer (NEMO) project. NEMO is a commercial hyperspectral
imaging satellite currently under construction at the Naval Research Laboratory
(NRL) in Washington, DC, scheduled for launch in 2001. The project is being
developed jointly with the Office of Naval Research (ONR) under a dual-use
application program in which 75% of the satellite's capacity is used for
commercial purposes and 25% is reserved for the Navy. Work on several components
of the project had stopped because of funding shortfalls prior to the
acquisition by ESSI. ESSI has secured a private placement of approximately $4
million to meet the commitment to the Navy for the completion of the NEMO
satellite, and is negotiating with ONR on the details of the restructure of the
program. ESSI is currently negotiating to bring in major equity partners into
STDC.
ESSI's management views the acquisition of STDC and the NEMO project as
a way to leapfrog its long-range strategic plan to become a vertically
integrated service provider for technical clients requiring precise
identification of materials on the earth's surface from satellite, airborne and
ground platform instruments.
ESSI has expanded its airborne instrument fleet to include two
instruments. One currently flies in Chile and the other one is currently flying
in the southern part of the Unites States. The company has increased its mineral
backlogs and revenues have increased as a result of this expansion.
The company has successfully mapped the habitat of the endangered
mountain gorilla in the Volcanoes National Park. The hyperspectral imagery
enables the characterization and identification of key vegetative food sources
in the park.
<PAGE>
The company continues to publish technical papers resulting from its
collection of 1-meter hyperspectral images over the fragile ecosystem of
Yellowstone National Park. Samples of the images were featured in the New York
Times science section and the National Geographic Magazine. This high-resolution
imagery is enhancing the scientific community's ability to understand key
ecosystems. This first of a kind mission was flown aboard the heliocourier
aircraft provided by the Boeing Company and a specially equipped helicopter.
ESSI is currently beta testing its e-commerce start-up division,
TerraNet, Inc., which will be the company's Web-based delivery system for its
data products featuring both broadband video distribution capability. The
company ordered its first broad band ground station to provide the capability to
receive and send voice, video, and data. Construction is scheduled to be
completed at the end of March of 2000 under the global Onsat contract.
Subsequent to the quarter ended December 31, 1999, the company hired
Mr. Rory J. Stevens as its Chief Financial Officer (CFO). Mr. Stevens has served
on Earth Search's board of directors since 1994, and brings 16 years of
accounting experiences and a proven track record in acquisitions and mergers and
financial and management reporting, tax planning and compliance, treasury
functions, corporate insurance and internal control for companies with $70
million in annual sales. Mr. Stevens has a BBA from the Boise State University
and a masters degree in professional accounting and MBA from the University of
Washington. For the past 11 years, Mr. Stevens worked as the controller for
Chiyoda.International Corporation, an international engineering and construction
company. Prior to that he was with Ernst & Young LLP.
Tremendous growth in Earth Search Sciences, Inc.'s hyperspectral
surveying capabilities during the third quarter was mirrored by a significantly
larger customer base and wider geographic scope in our survey operations.
Broader awareness and acceptance of PROBE 1 hyperspectral mapping has been
generated through research and pilot projects and presentations by researchers
at scientific meetings.
While the Company seeks to avoid forward-looking statements and
projections, it is factual to state that an agreement with Noranda, which is in
its second year calls for revenues of $2,000,000. While this amount is optional,
it is a condition for maintaining the license agreement. Earth Search management
has treated the agreement as central in its business planning and revenue
forecasting. The first years contract performance revenues were approximately
$750,000, which was consistent with the aforementioned agreement. Noranda is
finalizing plans for surveys on two continents to be undertaken in early 2000.
These surveys should meet the client's second year cash flow commitments under a
contract extension.
The Company continues to explore funding alternatives 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. This will result in the conversion of the
Company to a revenue producing company smoothly and effectively. There can be no
assurance that the Company will be successful in raising the required capital,
and failure to do so could have a material adverse effect on the prospects of
the Company.
<PAGE>
OUTLOOK
The Company continues to increase its involvement in the mineral
exploration and environmental areas, using the results of its research and
development over the last five years in remote sensing. By attempting to obtain
equity funding, the Company anticipates developing instruments to include
hand-held, airborne and satellite spectrometers and to acquire revenue-producing
companies in the natural resources and environmental monitoring field.
Through teaming with other firms, the Company will identify possible
technology applications for remote sensing. Management intends to pursue
additional markets for its imagery databases, which would generate operating
revenues and adequate cash flows.
<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
1. Financial Data Schedule
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 15, 2000 /s/ Larry F. Vance
-----------------------------
Larry F. Vance
Chairman of the Board
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATION OF THE
COMPANY'S 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> 3-MOS
<FISCAL-YEAR-END> Mar-30-2000
<PERIOD-START> Oct-1-1999
<PERIOD-END> Dec-31-1999
<CASH> 1,136,079
<SECURITIES> 0
<RECEIVABLES> 91,412
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,548,392
<PP&E> 4,647,352
<DEPRECIATION> 869,752
<TOTAL-ASSETS> 7,835,992
<CURRENT-LIABILITIES> 2,466,364
<BONDS> 0
0
1,000,000
<COMMON> 109,408,250
<OTHER-SE> 117,845
<TOTAL-LIABILITY-AND-EQUITY> 7,835,992
<SALES> 79,678
<TOTAL-REVENUES> 79,678
<CGS> (141,925)
<TOTAL-COSTS> (1,044,714)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (328,234)
<INCOME-PRETAX> (1,293,270)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,293,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,293,270)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
