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, 2000 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.
(Exact name of registrant as specified in its charter)
Utah 87-0437723
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
502 North 3rd Street, #8 McCall, Idaho 83638
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 634-7080
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 No X
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.
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 31, 2000: $201,966,936. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 31, 2000: 126,536,204
This Form 10-K consists of 40 pages.
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TABLE OF CONTENTS
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PART I.................................................................................................... 3
Item 1 - Business ................................................................................. 3
Item 2 - Properties .............................................................................. 9
Item 3 - Legal Proceedings.........................................................................10
Item 4 - Submission of Matters to a Vote of Security Holders.......................................10
Item 4(a) Executive Officers of the Registrant......................................................10
PART II...................................................................................................11
Item 5 - Market for the Registrant's Common Stock
Equity and Related Shareholder Matters.............................................11
Item 6 - Selected Financial Data...................................................................12
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................15
Item 8 - Financial Statements and Supplementary Data...............................................15
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................................16
PART III..................................................................................................16
Item 10 - Directors and Executive Officers of the Registrant........................................16
Item 11 - Executive Compensation....................................................................16
Item 12 - Security Ownership of Certain Beneficial Owners and
Management.........................................................................16
Item 13 - Certain Relationships and Related Transactions............................................16
PART IV...................................................................................................17
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................17
SIGNATURES................................................................................................19
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PART I
ITEM 1. BUSINESS
Organization
EarthSearch Sciences, Inc. (the Company) was incorporated in 1984
under the laws of the state of Utah.
Corporate Focus
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 and fertilizer
treatment), disaster assessment, marine sciences and military sciences.
Original Business Plan
The Company acquired an imagery database obtained from the utilization
of remote sensing instruments owned and operated by third parties in 1987 and
1991 for the purpose of mineral exploration. Based on an analysis of obtained
imagery, the Company procured mining patents and land leases and sought partners
to develop several prospective mining properties. The Company entered into
several arrangements with mining entities for the development of some of the
Company's properties, but none of those arrangements resulted in the development
of operating mines. Due to the lack of capital to fund advance royalties, due
diligence requirements associated with the Company's mining properties and
changes in mining laws which required increased and more timely due diligence
expenditures, the Company opted to release virtually all of its mining
properties starting in 1991. The Company completed this divesture in 1994.
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 an 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
acquired a large amount of unprocessed imagery data.
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The Company recognized the need to refine existing remote sensing
technology in order to improve the economics of commercial remote sensing
applications. The Company decided to use hyperspectral remote sensing
instruments which expands the image resolution and, thus, the usefulness of
acquired imagery. To achieve its goal, the Company undertook the development of
a miniaturized hyperspectral remote sensing instrument, Probe 1, which is
designed to be used with cost effective and easily available aircraft.
Current Business Plan
The Company is evolving from a mineral exploration and research and
development organization into a leading provider of remote sensing services. On
June 1, 1997, the Company took delivery of the first Probe 1 instrument. In its
first full year of commercial operation, the Company developed markets and
generated revenue from multiple clients. 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,
Mexico, California, Nevada, Arizona, Idaho, Montana 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 financial statements.
The Company believes cost effective hyperspectral remote sensing and
imagery processing has tremendous potential in various global applications and
markets. The Company is establishing subsidiaries to focus on hyperspectral
remote sensing applications, marketing, and distribution in various industries.
Each subsidiary will focus on a specific segment of commercial remote sensing.
The Company, if applicable, will provide an exclusivity license for each
subsidiary, provide use of the Company's hyperspectral instruments, provide
processing support, and provide marketing and management support to each
subsidiary. In addition, the Company will receive a royalty from any resource
development that occurs as a result of the subsidiaries' use of the Company's
instruments and technology. Until the successful launch and deployment of the
Naval Earth Map Observer (NEMO) satellite described below, the subsidiaries will
utilize the Company's airborne hyperspectral instruments. After the successful
launch of the NEMO satellite and depending on the application both the airborne
and satellite hyperspectral instruments will be made available to the
subsidiaries. Following the launch, the subsidiaries expect to use the NEMO
satellite's instrument in addition to the airborne instrument. Additional
capital will be raised for each subsidiary by means of private placements or
public offerings.
To complement its Probe 1 technology, the Company recently acquired
Space Technology Development Corporation and its ownership in satellite based
imagery technology (discussed below). The combination of a high-resolution
airborne Probe system and the lower resolution larger area coverage achieved by
satellite based imagery will provide a powerful and unrivaled capability. The
use of aircraft to collect large areas of remote sensing imagery throughout the
world is an expensive and time-consuming task. Satellite gathered data will
allow remote sensing customers to gather imagery from any large area around the
world, including those areas which currently are inaccessible due to
restrictions by foreign governments. This imagery can then be processed to
determine if a closer look using the Company's airborne instruments is necessary
or desirable. The joint use of satellite and airborne remote sensing instruments
will combine economical large area imagery collection by the satellite
instrument and high-resolution imagery collection of target areas by the
airborne instruments. All collected imagery can be processed by the Company's
imagery processors.
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The Company also plans to pursue mergers and acquisitions as the most
expeditious and cost-effective way to consolidate commercial hyperspectral
remote sensing. The Company intends over the next year to continue pursuing (a)
acquisitions that aid in the commercialization of hyperspectral remote sensing
technology, (b) contracts that produce revenues from the application of remote
sensing to the existing markets in environmental remediation and mineral
identification and the undeveloped markets for other appropriate projects
involving a multitude of applications of the technology, (c) financing the
development of additional miniaturized remote sensing instruments, and (d)
development of promising mineral, oil and gas properties in which the Company
has or acquires an interest, identifying such properties by utilizing its
existing imagery database or acquiring such data.
Acquisition of Space Technology Development Corporation
In fiscal 2000, the Company acquired Space Technology Development
Corporation (STDC) of Alexandria, Virginia. The Company acquired all the
outstanding shares of STDC in exchange for four million shares of the Company's
common stock and the option to purchase another four million shares at exercise
prices ranging from $0.50 to $5.00 per share. The Company's management views the
acquisition of STDC and the NEMO project (discussed below) as a way to advance
its long-range strategic plan to become a vertically integrated service provider
for clients requiring precise identification of materials on the earth's surface
from satellite, airborne and ground platform instruments.
In early 1997, the Navy issued a broad agency announcement that it
would conduct a competition on several "dual-use" projects, including the
development of hyperspectral remote sensing technology in space. STDC bid on the
project, which developed into NEMO. STDC signed an agreement with the Office of
Naval Research in December of 1997 for the development, operation and launch of
NEMO as a dual use project. Under the rules of the dual use program, the U.S.
government will fund half or less of the program cost, while STDC and its
industrial partners provide funding or in-kind contributions for the remaining
costs of the program. The dual use program is administered by the Defense
Advanced Research Projects Agency (DARPA) in the Office of the Secretary of
Defense. Dual-use projects are designed so that both the armed services and
private companies contribute to the projects and share in the benefits. DARPA
works with the Army, the Navy and the Air Force to design a number of advanced
technology projects that might qualify as dual-use projects worthy of special
funding.
The agreement between the Navy and STDC states its goals as to the
successful launch of the NEMO satellite and the acquisition of image data of
interest to the U.S. government. An additional goal is to form the basis for a
commercially viable enterprise that will continue to provide imagery data to the
U.S. Government for the life of the satellite.
The principal partner of STDC for the NEMO project is the Naval
Research Laboratory (NRL), which operates under the direction of the Chief of
the Office of Naval Research. The NRL will modify, assemble and test the
satellite and prepare it for launch.
Industrial partners of STDC include Space Systems/Loral ("SS/L") of
Palo Alto, California; Science Applications International Corporation ("SAIC")
of La Jolla, California; AlliedSignal Technical Services Corporation ("ATSC") of
Columbia, Maryland (which recently merged with Honeywell); and Litton Advanced
Systems ("Litton") of College Park, Maryland. SS/L provided the basic satellite,
a Globalstar(R) bus. ATSC will manage satellite operations and collect the
imagery data transmitted from the satellite and Litton is producing the NEMO
spacecraft controller.
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Through launch and the first 60 days of orbit, the NEMO program will
cost approximately $250 million. This figure includes the space segment
(satellite, sensor and other electronics), the launch and the commercial
business segment - imagery processing, product development, marketing and
administration. Of this amount, the government has committed to fund
approximately $63 million, and STDC and its industry partners are expected to
contribute the balance.
The NEMO satellite is the core of STDC's strategic plan to become the
dominant provider of satellite gathered hyperspectral global imagery and related
processing services. STDC has attained the required Department of Commerce
Remote Sensing License that permits hyperspectral and panchromatic imagery to be
sold commercially to a global market. This is the first license ever granted for
a space-based hyperspectral system.
NEMO is a high performance, highly sensitive imaging and information
generating satellite that leverages the U.S. government's state of the art
hyperspectral technology R&D programs. NEMO is designed to collect large volumes
of 30 or 60-meter resolution hyperspectral data to spectrally identify and
characterize objects and collected 5-meter resolution panchromatic data for
precise visual interpretation of the imagery. NEMO provides the potential for
mapping all of the earth's landmass with 5-m panchromatic, 30-m and/or 60-m
hyperspectral data over its three-year mission life. NEMO has a design life of 5
years. The Navy desires the imagery data NEMO will collect, but without the
expense of satellite ownership. STDC will own and operate the satellite,
providing the Navy with the imagery it needs and ensuring the commercial
success of the venture through the sale of processed imagery.
Of keen interest to the Navy and commercial clients is NEMO's unique
ability to characterize the littoral regions of the world (i.e., water and
coastline areas within 50 km of shore). Specific areas of interest to the
Navy include bathymetry, water clarity, currents, oil slicks, bottom type,
atmospheric visibility, tides, bioluminescence, beach characterization,
underwater hazards, total column atmospheric water vapor and detection and
mapping of sub-visible cirrus.
A key technology developed for NEMO by NRL is an extraction and data
compression software algorithm called the Optical Real-Time Spectral
Identification System (ORASIS(TM)). ORASIS(TM) offers automated and adaptive
signature recognition capability, improving the operational efficiency to
analyze both military and commercial data sets. ORASIS(TM) is a high-speed
processing system that identifies the spectral signatures corresponding to
physical objects an area without supervision or prior knowledge. It will
minimize subsequent ground processing for data exploitation and maps. In
essence, ORASIS(TM) enables the on-board production of data products and results
in a greater than tenfold data compression, relieving hyperspectral data
bottlenecks of on-board data storage and transmission to the ground.
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Formation of Petro Probe, Inc.
The Company formed Petro Probe, Inc. to identify and develop
potential hydrocarbon properties by utilizing Probe 1 imagery and the Company's
hydrocarbon geologists and imagery processors. Petro Probe Inc.'s strategy will
entail flying 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 for 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 concept is to develop the competitive advantages of
Probe 1 resource mapping capability, combining this with conventional
hydrocarbon exploration information and then applying newer value-added
technology such as 3D seismic to acquire equity positions in oil and gas
properties. 3D seismic is the technology of measuring explosions to map
subsurface geologic structures. In fiscal 2000, Petro Probe, Inc. acquired
working interests in four oil and gas properties in the U.S. The Probe 1
instrument played a key role in the selection of these properties for Petro
Probe, Inc. The first property 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. This well is expected to be a
revenue producing natural gas property in the second quarter of 2001.
In addition, in fiscal 2000 Petro Probe, Inc. has surveyed targets for
hydrocarbon exploration in the oil & gas basins of Greater Green River Basin,
Wyoming, Paradox Basin, Utah and Australian Basin and is ready to proceed to
further evaluation.
Formation of Geoprobe, Inc.
The Company formed Geoprobe, Inc. to pursue remote sensing applications
in the mineral exploration industry. Mineral deposits are part of larger
geological systems that typically have mineralogical zonations 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. As permitted
by the Company's agreement with Noranda that gives Noranda exclusive rights to
certain geological areas for certain types of mineral exploration and
development, Geoprobe, Inc. will use the Company's remote sensing instruments to
survey areas that have promise for the location of minerals either for its own
use or for third party customers.
Formation of Ecoprobe, Inc.
The Company formed Ecoprobe, Inc. to pursue remote sensing applications
in the environmental industry. 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. 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. Ecoprobe, Inc. will continue such
activities.
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Formation of Terranet, Inc.
The Company formed Terranet, Inc. as the Company's e-commerce content
provider to globally market and distribute its airborne and satellite imagery
over its internet and broadband imagery distribution system. This imagery can
be sold repeatedly to multiple end users. In addition to selling the Company's
own imagery, Terranet, Inc. will pursue the resale of imagery obtained from
third parties. Terranet is preparing for a late-2000 launch of a portal design,
multi-media imagery "supermarket" on the internet that will have the capability
to individually customize data packages for customers. A proprietary software
application service available on line will allow simple data acquisition and
processing with a "pay as you go" billing system. Its site on the world wide web
will be Earthmap.net website. Terranet, Inc. has engaged Hewlett-Packard to
provide the business case consulting and system architecture design for
Earthmap.net. An agreement has also been signed with OnSat Network
Communications of Salt Lake City, Utah to provide global broadband wireless
internet connectivity for major Earthmap.net users.
Fiscal 2000 Significant Projects
The Company has completed mapping assignments in Canada, Chile and
Argentina in partial fulfillment of the contractual requirements with Noranda, a
major mining company, to map for natural resources on a global scale. In
addition to the fees the Company has received for these services, the Company
earns either net smelter royalties or net profits interest on properties not
previously owned or controlled by Noranda upon which a discovery of mineral
resources occurs as the result of using the Company's Probe 1 technology. To
date, gigabyte quantities of imagery have been collected by the Company. 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 royalty
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
continued to perform under its Noranda mapping contract in fiscal 2000,
additional mapping assignments have come from new customers in emerging growth
areas such as hydrocarbon exploration, environmental damage assessments, land
use planning and weed species. These additional imagery data collections
continue to expand and improve the commercial applications of the Company's
remote sensing library.
The Company cooperated with the Dian Fossey Gorilla Fund International
organization to utilize hyperspectral remote sensing to examine the detail of
vegetation in gorillas' habitat in the jungles of Rwanda. The imagery captured
revealed the abundance and location of the gorillas' principal foods in the
Virungas National Park. This information will be used to determine the number of
gorillas the habitat can support. National Geographic Explorer chronicled the
mission in a television documentary that was broadcast on several occassions.
The Company completed work on its EOCAP contract with NASA to map
Yellowstone National Park that began in fiscal 1999. The Company collected
imagery at lower altitudes, which meant higher resolution imagery was collected.
It was anticipated that, with the increased resolution obtained utilizing Probe
1, Yellowstone's scientists responsible for tracking seasonal variability
of plant species and, hence, food supplies, will be able to gain insight into
environmental conditions affecting the Park's wildlife. The ability of the Probe
1 technology to differentiate between tree and plant species suggests a new and
economical method for characterizing habitat. To date, 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 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 accomplished using Probe 1 in conjunction with a heliocourier aircraft
provided by the Boeing Company and a specially equipped helicopter.
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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 restoration and waste management problems,
while furthering national business and technology goals.
In the Canadian province of Nova Scotia, the Company assembled
twenty-six exclusive mineral exploration licenses covering approximately 70,000
acres on 1,756 claims. The Company will conduct Probe 1 remote sensing and other
mineral exploration techniques to locate and quantify under-developed mineral
potential where numerous quartz vein related gold and some copper have been
discovered. There have been seven past producing gold properties in the
Company's license area as well as two past producing sandstone copper
properties.
The Company completed a new corporate website, Earthsearch.com,
featuring "flash" technology for animation and streaming video for personal and
mission presentations. The website's objective will be to contain comprehensive
information about hyperspectral remote sensing technology as well as to provide
an interactive forum for the Company's business around the world.
Business Segment Information
Included in the attached financial statements is business segment
information for the Company.
Employees
As of March 31, 2000, the Company had 8 full-time employees.
Available Information
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.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and all of the
furnishings from an unrelated third party. Its headquarters consist of
approximately 2,000 square feet of office space in McCall, Idaho. In addition, a
wholly owned subsidiary leases office space in Alexandria, Virginia from an
unrelated third party. The Company believes its offices are adequate to meet its
needs for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company for fiscal 1999 to the present.
Name Age Position
Larry F. Vance 65 Chairman
John W. Peel, III 54 Chief Executive Officer
Rory J. Stevens 42 Chief Financial Officer
Tami J. Story 37 Secretary/Treasurer
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.
John W. Peel, III joined the Company as Chief Executive Officer in
April 1995 and has been a director of the Company since 1995. Prior to joining
the Company, Dr. Peel served six and-one-half years as Senior Vice President of
Tetra Tech, Inc., a major publicly held environmental remediation-consulting
firm. Dr. Peel holds a Bachelor of Sciences in Biology from Millsaps College, a
Master of Sciences in Parasitology and Invertebrate Zoology from the University
of Mississippi and a Ph.D. in Environmental Health/Health Physics from Purdue
University.
Rory J. Stevens, CPA, a certified public accountant became a director
of the Company in 1994 and joined the Company as Chief Financial Officer in
January 2000. Prior to joining the Company, Mr. Stevens was employed by Chiyoda
International Corporation, an engineering and construction company, for eleven
years, the last six years as corporate controller. Mr. Stevens holds a Bachelor
of Business Administration from Boise State University and a Master of Business
Administration and Masters of Professional Accounting from the University of
Washington.
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.
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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
June 30, 1998 .37 .25
September 30, 1998 .32 .10
December 31, 1998 .13 .07
March 31, 1999 .14 .08
June 30, 1999 .21 .19
September 30, 1999 .15 .13
December 31, 1999 1.32 1.25
March 31, 2000 1.81 1.70
(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, 2000 was approximately 877. 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.
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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. Space Technology Development Corporation (STDC) was acquired by
the Company on December 21, 1999. The results of operations for 2000 include the
results of operation for STDC from December 22, 1999 to March 31, 2000.
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As of or for the fiscal year ended
2000 1999 1998 1997 1996
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Operating revenue $ 1,526,446 $ 881,006 $ 55,000 $ - $ 6,332
Net loss (5,177,983) (2,271,428) (5,849,999) (2,549,823) (2,408,292)
Net loss per common share (0.033) (0.03) (0.08) (0.04) (0.05)
Total assets 19,532,230 3,992,233 4,880,652 3,951,914 922,377
Long-term obligations 7,515,118 6,594,080 5,767,961 873,462 736,209
Stockholders' equity (deficit) 2,663,656 (3,998,137) (3,005,765) (2,960,610) (1,295,908)
Cash dividends declared - - - - -
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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, 2000 and 1999 and 1998.
RESULTS OF OPERATIONS
The company recognized revenue of $1,526,446 in 2000 compared with
$881,006 and 55,000 in 1999 and 1998 respectively. Included in 2000 revenue is
$662,791 from STDC. In 2000, costs of services provided was $1,796,412 compared
with $767,570 and $132,083 in 1999 and 1998, respectively. STDC costs of
services provided included in 2000 is $1,078,990.
Exploration costs in 2000 were $6,282 compared with $68,229 and
$399,756 in 1999 and 1998, respectively. The decrease in exploration costs from
1998 to 2000 is primarily a result of the Company's focus on utilization of the
Probe for revenue producing projects. General and administrative costs were
$2,397,484 in 2000 compared with $1,417,514 and $3,062,669 in 1999 and 1998,
respectively. Included in 2000 general and administrative costs is $233,397 from
STDC.
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, officer's salary 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. As of March 31, 2000 none of these options have been
exercised.
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Interest income in 2000 was $38,821 compared to $17,449 in 1998. In
2000, the Company recognized interest expense of $1,136,995 compared to $773,228
and $689,600 in 1999 and 1998. Included in 2000 interest expense is $70,846 for
STDC. The increase in interest expense over prior years is a result of the
Company's increase in borrowings to fund operations. Other expense was $641,
$10,810, and $473,340 in 2000, 1999, and 1998 respectively.
In 2000, the company recorded minority interest in losses of
consolidated subsidiaries of $202,565. In 2000, ESSI Probe 1 LC, a consolidated
subsidiary with a 50% minority interest took delivery of the second Probe
instrument and started operations. ESSI Probe 1 LC minority interest loss in
2000 was $201,298.
The company recognized a net loss of $5,177,983 in fiscal 2000 compare
with a net loss of $2,271,428 and $5,849,999 in 1999 and 1998. The loss on a per
share basis was $0.048, $0.025, and $0.077 is fiscal 2000, 1999, and 1998,
respectively. Included in the loss in 2000 is a loss of $879,250 or $.008 per
share from the operations of STDC.
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.
Net cash used in operating activities was $(3,343,109) in 2000,
resulting primarily from a net loss of $(3,569,982), and payment for salaries,
services and depreciation. Cash used in operating activities was $374,023 in
1999, resulting primarily from a net loss of $2,271,428, and payments for
salaries, services and depreciation. Cash used in operations was $2,599,410 in
1998, resulting primarily from a net loss of $5,849,999, and payments for
salaries, services and depreciation.
Capital expenditures for March 31, 2000 were primarily for payments on
airborne hyperspectral instruments and purchases of new computer equipment,
purchases of working interests in mining properties, and payments on a
subsidiary's satellite hyperspectral instrument.
At March 31, 2000, the Company had cash and cash equivalents of
$6,119,562 and working capital of $(2,384,930).
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.
The Company believes that funds generated from its operations, together
with future borrowings, will be adequate to meet the Company's anticipated cash
needs during the immediate term. In addition, the Company plans to raise
approximately $3,250,000 to pursue engineering, design, feasibility, and
construction of additional airborne instruments.
STDC will need to raise private industry funds of approximately
$125,000,000 in order to complete, launch and operate the hyperspectral imaging
satellite and instrument.
There can be no assurance that additional capital beyond the amounts
currently forecasted by the Company will not be required nor that any such
required additional capital will be available on reasonable terms, at such time
or times as required by the Company.
<PAGE>
Additions to the permanent staff of the Company saw Rory Stevens take
on the role of Chief Financial Officer, Joe Zamudio become the Vice-President of
Technical Operations, and Laurel Gordner move to Director of Image Processing.
The total number of employees now numbers eight people plus numerous specialty
area contractors.
FUTURE OPERATIONS
The Company will focus on expanding its markets for remote sensing
services by marketing its remote sensing imagery collection services and value
added imagery processing. In addition, in the mineral and hydrocarbon resource
exploration areas 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. The Company under its subsidiary STDC will continue
to focus on raising capital to finish construction of NEMO in expectation of a
launch in 2002. Further, the Company will continue to look for equity funding to
develop additional instruments including hand-held, as well as airborne
spectrometers. Lastly, the Company will seek to acquire revenue-producing
companies in the natural resources and environmental monitoring field.
Through teaming with other firms, the Company will identify additional
technology applications for remote sensing. Management intends to pursue
additional markets for its imagery databases, which would generate operating
revenues and improve cash flows.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET
PRICE OF STOCK
As of June 29, 2000, the Company believes that available funds and
those generated through its operations will be adequate to meet its anticipated
cash needs for the next fiscal year. However, there can be no assurance that
additional capital beyond the amounts currently forecast by the Company will not
be required nor that any such required additional capital will be available on
reasonable terms, if at all, at such time or times as required by the Company.
Additional financing may involve public or private offerings of debt or equity
securities, and may include bank debt. Debt financing may increase the Company's
leveraged position, require the Company to devote significant cash to service
debt and limit funds available for working capital, capital expenditures, and
general corporate purposes, all of which could increase the Company's
vulnerability to adverse economic and industry conditions and competitive
pressures. Equity financing may cause additional dilution to purchasers of the
Company's common stock.
The Company believes other commercially available current and planned
remote sensing instruments pose competitive pressures. While the Company's plan
is to develop better hyperspectral airborne and satellite instruments to
maintain the Company's competitive position, there can be no assurance that the
Company's new instrument developments will be commercially or financially
successful.
<PAGE>
The current prices of oil and natural gas has intensified efforts to
locate new reserves and use new technologies for exploration such as remote
sensing. Fluctuations in the prices of oil and gas could negatively impact the
commercial applications for the Company's instruments in the oil and gas
exploration area as well as any revenue on its interests in oil and gas
properties.
Lower prices for minerals could negatively impact the Company's
commercial prospects for marketing its remote sensing instruments and its
strategy to earn revenue by identifying minerals for its own exploration and
development.
The STDC agreement with the Office of Naval Research to develop and
deploy NEMO requires STDC to raise additional industry funds of approximately
$125,000,000 to complete the project. There can be no assurances that the STDC
will be able to raise funds necessary to complete the project.
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.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included
under "Election of Directors" in the Company's definitive proxy statement for
its 2000 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 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, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included
under "Executive Compensation" in the Company's definitive proxy statement for
its 2000 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management will be included under "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 2000 annual meeting of shareholders, filed or 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a)(1) Financial Statements filed as part of this Report Page in this Report
Report of Independent Accountants F-1
Consolidated Balance Sheet at March 31, 2000 and 1999 F-2
Consolidated Statement of Loss for the Years
Ended March 31, 2000, 1999 and 1998 F-3
Consolidated Statement of Redeemable Common Stock
And Nonredeemable Shareholders' Equity (Deficit) for
the Years Ended March 31, 2000, 1999 and 1998 F-4
Consolidated Statement of Cash Flows for the Years
Ended March 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - F-21
(a)(2) Financial Statement Schedules None
(a)(3) Exhibits
</TABLE>
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
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
Registrant's 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 10.6 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.
10.3 Operating Agreement of ESSI Probe1 LC, dated June 3, 1997
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).
<PAGE>
10.5 Agreement between the Office of Naval Research and Space
Technology Development Corporation Agreement for NAVY EARTHMAP
OBSERVER (NEMO) dated December 10, 1997
10.6 Sales Contract between Science Applications International Corp.
and Space Technology Development Corp. Dated: 30 March 1998,
Contract No.: STDC-98-NEMO-0003
10.7 Sales Contract between Science Applications International Corp.
and Space Technology Development Corp. Dated: 30 March 1998,
Contract No.: STDC-98-NEMO-004
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
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-NEMO-98-0009
21.1.1 List of Subsidiaries
27.1 Financial Data Schedule
(b) The Registrant filed the Following Reports on Form 8-K during
the quarter ended March 31, 2000:
DATE OF REPORT ITEM REPORTED
February 18, 2000 5
February 2, 2000 5
<PAGE>
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 13, 2000
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 13, 2000
/s/ John W. Peel, III Chief Executive Officer and Director
John W. Peel, III
Date:July 13, 2000
/s/ Rory J. Stevens Chief Financial Officer and Director
Rory J. Stevens
Date:July 13, 2000
/s/ Tami Story Corporate Secretary and Treasurer and Director
Tami J. Story
Date:July 13, 2000
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Earth Search Sciences, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of loss, of redeemable common stock and nonredeemable
shareholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of Earth Search Sciences, Inc. and its
subsidiaries at March 31, 2000 and March 31, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000 in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Portland, Oregon
June 9, 2000
<PAGE>
<TABLE>
<CAPTION>
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
2000 1999
-------------- -------------
Assets
Current assets:
Cash $ 6,119,562 $ 47,642
Other current assets 803,682 120,995
-------------- -------------
Total current assets 6,923,244 168,637
Property and equipment, net 12,608,986 3,823,596
============== =============
Total assets $ 19,532,230 $ 3,992,233
============== =============
Liabilities and Shareholders' Deficit
Current liabilities:
Notes payable $ 2,687,212 $ 450,125
Accounts payable and accrued expenses 6,287,548 552,061
Accrued interest 356,962 236,259
Unearned revenue - 40,000
-------------- -------------
Total current liabilities 9,331,722 1,278,445
Long-term liabilities
Shareholder loans 459,844 372,322
Capital lease obligation 3,000,000 2,514,378
Deferred officers' compensation 2,037,846 1,707,380
Minority interest 2,017,428 2,000,000
-------------- -------------
Total liabilities 16,846,840 7,872,525
============== =============
Commitments and contingencies
Redeemable common stock, $.001 par value, 134,160 and 725,914
shares issued and outstanding at March 31, 2000 and 1999,
respectively 21,734 117,845
-------------- -------------
Nonredeemable shareholders' equity (deficit):
Series A preferred Stock; 200,000 shares authorized,
issued and outstanding at March 31, 2000 and 1999 1,000,000 1,000,000
Common stock, $.001 par value; 200,000,000 shares
authorized; 126,402,044 and 97,411,367 shares
respectively, issued and outstanding 126,402 97,411
Additional paid-in capital 22,906,866 11,459,081
Common stock subscribed 363,000 -
Treasury stock (200,000) (200,000)
Retained deficit (21,532,612) (16,354,629)
-------------- -------------
2,663,656 (3,998,137)
-------------- -------------
Total liabilities and shareholders' equity (deficit) $ 19,532,230 $ 3,992,233
============== =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
------------ ------------ ------------
Revenue $ 1,526,446 $ 881,006 $ 55,000
Costs of services provided (1,796,412) (767,570) (132,083)
------------ ------------ ------------
Gross (deficit) margin (296,966) 113,436 (77,083)
------------ ------------ ------------
Expenses:
Exploration 6,282 68,229 399,756
General and administrative 2,397,484 1,417,514 3,062,669
Non-cash compensation expense 1,608,001 - -
------------ ------------ ------------
4,011,767 1,485,743 3,462,425
------------ ------------ ------------
Loss from operations (4,281,733) (1,372,307) (3,539,508)
Interest income 38,821 - 17,449
Interest expense (1,136,995) (773,288) (689,600)
Other expense (641) (10,810) (473,340)
------------ ------------ ------------
Loss before minority interest (5,380,548) (2,156,405) (4,684,999)
Minority interest in losses of consolidated subsidiaries 202,565 - -
------------ ------------ ------------
Loss before extraordinary item (5,177,985) (2,156,405) (4,684,999)
Extraordinary item - (115,023) (1,165,000)
------------ ------------ ------------
Net loss $ (5,177,983) $ (2,271,428) $ (5,849,999)
============ ============ ============
Shares applicable to basic and diluted loss per share 107,778,285 90,388,446 76,369,220
Basic and diluted loss per share $ (0.048) $ (0.025) $ (0.077)
Basic and diluted extraordinary loss per share $ - $ (0.001) $ (0.015)
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------------------------------------------------------------
Redeemable
Common Stock Preferred Stock Common Stock
Description Shares Amount Shares Amount Shares Amount
--------------------------------------------------------- --------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance March 31, 1997: 1,725,914 517,845 - - 68,530,779 68,531
Issuance of common stock for services rendered 1,286,476 1,286
Issuance of common stock for cash 870,334 870
Shares issued in conjunction with sale/leaseback for purchase
of Probe 1 1,000,000 1,000
Issuance of common stock for shares of subsidiary common stock 1,252,000 1,252
Issuance of common stock for shares of Skywatch common stock 1,185,199 1,185
Conversion of debentures into shares of common stock 865,988 866
Issuance of common stock in lieu of future lease payments 1,725,000 1,725
Issuance of stock subscription in lieu of future lease payments
Issuance of common stock in lieu of debt obligations 8,076,800 8,077
Issuance of warrant for cash proceeds to minority holder in
Probe 1 LC
Conversion of note payable for Series A preferred stock 100,000 500,000
Issuance of Series A preferred stock for cash 100,000 500,000
Net Loss
---------- --------- ------- --------- ------------ ---------
Balance at March 31, 1998: 1,725,914 517,845 200,000 1,000,000 84,792,576 84,792
Issuance of common stock for services rendered 3,104,414 3,104
Issuance of common stock for cash 1,924,166 1,924
Issuance of common stock on behalf of Skywatch Exploration
for purchase of Skywatch Northern 465,000 465
Issuance of common stock previously subscribed 1,000,000 1,000
Issuance of common stock in lieu of future lease payments 547,727 548
Shares issued in conjunction with note for cash 300,000 300
Shares issued as incentive for new debt obligation 1,285,000 1,285
Issuance of shares in lieu of interest payment 70,817 71
Issuance of shares as bonus 275,000 275
Issuance of shares in exchange for minority owned shares
of subsidiary 2,646,667 2,647
Redeemable shares received back into Treasury (1,000,000) (400,000) 1,000,000 1,000
Treasury Stock Sold
Net Loss
---------- --------- ------- ---------- ------------ ---------
Balance at March 31, 1999: 725,914 $ 117,845 200,000 $1,000,000 97,411,367 $ 97,411
Issuance of common stock for services rendered 3,344,687 3,345
Issuance of common stock for cash 17,708,175 17,708
Issuance of stock subscription
Issuance of shares in lieu of interest payment 1,900,000 1,900
Issuance of shares for loan conversions 849,663 850
Issuance of shares for acquisition of STDC 4,000,000 4,000
Issuance of shares for interests in oil and gas properties 596,398 596
Shares no longer subject to redeemtion (591,754) 96,111 591,754 592
Non cash compensation expense
Net Loss
---------- --------- ------- ---------- ------------ ---------
Balance at March 31, 2000: 134,160 $ 21,734 200,000 $1,000,000 126,402,044 $126,402
========== ========= ======= ========== ============ =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------------------------------------------------------------
Additional
paid-in Treasury Retained
Description capital Subscribed stock Deficit Total
--------------------------------------------------------- ----------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance March 31, 1997: $ 5,204,061 - - $ (8,233,202) $ (2,960,610)
Issuance of common stock for services rendered 350,329 351,615
Issuance of common stock for cash 179,130 180,000
Shares issued in conjunction with sale/leaseback for purchase
of Probe 1 374,000 375,000
Issuance of common stock for shares of subsidiary common stock 55,302 56,554
Issuance of common stock for shares of Skywatch common stock 472,155 473,340
Conversion of debentures into shares of common stock 160,197 161,063
Issuance of common stock in lieu of future lease payments 498,275 500,000
Issuance of stock subscription in lieu of future lease payments $ 165,000 165,000
Issuance of common stock in lieu of debt obligations 2,334,195 2,342,272
Issuance of warrant for cash proceeds to minority holder in
Probe 1 LC 200,000 200,000
Conversion of note payable for Series A preferred stock 500,000
Issuance of Series A preferred stock for cash 500,000
Net Loss (5,849,999) (5,849,999)
----------- --------- --------- ------------ ------------
Balance at March 31, 1998: 9,827,644 165,000 - (14,083,201) (3,005,765)
Issuance of common stock for services rendered 272,197 275,301
Issuance of common stock for cash 204,076 206,000
Issuance of common stock on behalf of Skywatch Exploration
for purchase of Skywatch Northern 101,019 101,484
Issuance of common stock previously subscribed 164,000 (165,000) 0
Issuance of common stock in lieu of future lease payments 114,475 115,023
Shares issued in conjunction with note for cash 55,950 56,250
Shares issued as incentive for new debt obligation 136,340 137,625
Issuance of shares in lieu of interest payment 10,552 10,623
Issuance of shares as bonus 18,475 18,750
Issuance of shares in exchange for minority owned shares
of subsidiary 245,353 248,000
Redeemable shares received back into Treasury 399,000 $ 400,000 400,000
Treasury Stock Sold (90,000) (200,000) (290,000)
Net Loss (2,271,428) (2,271,428)
----------- --------- --------- ------------ ------------
Balance at March 31, 1999: 11,459,081 $ - 200,000 $(16,354,629) $ (3,998,137)
Issuance of common stock for services rendered 466,129 469,474
Issuance of common stock for cash 6,767,718 6,785,426
Issuance of stock subscription 363,000 363,000
Issuance of shares in lieu of interest payment 271,850 273,750
Issuance of shares for loan conversions 88,328 89,178
Issuance of shares for acquisition of STDC 1,924,203 1,928,203
Issuance of shares for interests in oil and gas properties 226,036 226,632
Shares no longer subject to redeemtion 95,520 96,112
Non cash compensation expense 1,608,001 1,608,001
Net Loss (5,177,983) (5,177,983)
----------- --------- --------- ------------ ------------
Balance at March 31, 2000: $22,906,866 $ 363,000 $ 200,000 $(21,532,612) $ 2,663,656
=========== ========= ========= ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 2000, 1999 AND 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
------------- ------------- ------------
Cash flows from operating activities:
Net loss $ (5,177,983) $ (2,271,428) $ (5,849,999)
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash compensation expense 1,608,001 - -
Common stock issued for services 743,224 462,549 364,912
Common stock issued for Skywatch stock - 101,484 473,340
Subsidiary common stock issued for compensation - - 1,000,000
Extraordinary items - 115,023 1,165,000
Loss attributed to minority interest (202,565) - -
Depreciation 356,364 279,212 167,768
Amortization of lease discount 485,622 484,968 404,410
Allowance for doubtful accounts 33,912 - -
Loss on sale of equipment - 79,584 -
Changes in operating assets and liabilities,
excluding balances acquired
Other assets (673,222) 237,877 (99,085)
Accounts payable and accrued expenses (829,394) (137,720) (873,399)
Accrued interest 104,452 (45,491) -
Unearned revenue (121,986) - 40,000
Deferred officers compensation 330,466 319,919 607,643
------------ ------------ -----------
Net cash used in operating activities (3,343,109) (374,023) (2,599,410)
------------ ------------ -----------
Cash flow from investing activities:
Capital expenditures (456,545) (660,558) (306,487)
Net cash from acquisition of STDC 168,046 - -
Advance deposits - - 217,875
Proceeds from sale of property and equipment - 58,346 -
------------ ------------ -----------
Net cash used in investing activities (288,499) (602,212) (88,612)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from notes payable 2,324,983 386,000 524,956
Repayments on notes payable (10,593) (24,955) (40,000)
Proceeds from shareholder loans 333,602 476,317 102,000
Repayments of shareholder loans (312,883) (208,085) (35,000)
Issuance of common stock for cash 6,785,426 242,000 180,000
Issuance of subsidiary common stock - - 247,000
Proceeds from common stock subscribed 363,000 - -
Proceeds from minority interest 219,993 - -
Proceeds from sale of treasury stock - 110,000 -
Issuance of Series A preferred stock - - 500,000
Proceeds from establishment of joint venture - - 1,000,000
Issuance of warrant to purchase common stock - - 200,000
------------ ------------ -----------
Net cash provided by financing activities 9,703,528 981,277 2,678,956
------------ ------------ -----------
Net increase (decrease) in cash 6,071,920 5,042 (9,066)
Cash at beginning of period 47,642 42,600 51,666
------------ ------------ -----------
Cash at end of period $ 6,119,562 $ 47,642 $ 42,600
============ ============ ===========
Interest paid $ 22,798 $ 61,363 $ 15,384
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
1. Summary of Operations and Significant Accounting Policies
The business of Earth Search Sciences, Inc. ("the Company") is the collections
of high value imagery of the earth's surface utilizing the Company's proprietary
hyperspectral imaging instruments. This imagery is either sold to end users via
contracts to collect the information, collected for the Company's own
exploration purposes, or to be sold to third parties through its web based
e-commerce site. The Company also performs a range of imagery processing
services. Information collected by the instrument 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 and defense surveillance. The current
principal application involves the preparation of global mineral deposit
information on an exclusive basis for a Toronto based international mining
company.
The Company has five wholly owned subsidiaries: Quasar Resources, Inc.
("Quasar"), Skywatch Exploration, Inc., Polyspectrum Imaging, Inc., Geoprobe
Inc., and Space Technology Development Corporation ("STDC"). In addition, there
are four majority owned consolidated subsidiaries: Earth Search Resources, Inc.,
ESSI Probe 1 LC, Petro Probe Inc. and Terranet, Inc. As of March 31, 2000, Earth
Search Resources, Inc., Skywatch Exploration Inc., Geoprobe Inc., and Quasar
Resources, Inc. are inactive. The 50% owned subsidiary ESSI Probe 1 LC was
formed as a joint venture to own and operate hyperspectral instruments.
Polyspectrum Imaging Inc. was formed to develop design, engineer, explore
feasibility of and construct additional airborne instruments.
The majority owned Petro Probe, Inc. was formed to identify and develop
hydrocarbon properties by utilizing the Company's hyperspectral instruments,
hydrocarbon geologists, and imagery processors.
In fiscal 2000, Terranet, Inc. was launched as the Company's internet based
global information and imagery distribution system. The system will provide high
value added data packages, tailored for end users that can be downloaded over
the Company's high-speed delivery system. It is through the use of this
high-speed delivery system that information can be provided to a wide customer
base using high-speed broad band delivery of imagery and video.
The Company entered into an Agreement and Plan of Merger ("Agreement") with STDC
dated November 15, 1999. Under the Agreement, the Company exchanged 4,000,000
shares of its common stock and options to purchase an additional 4,000,000
shares of its common stock at exercise prices ranging from $0.50 to $5.00 per
share for all of the shares of common stock of STDC. The merger was finalized as
of December 21, 1999 and was accounted for under the purchase method of
accounting at a cost of $1,928,203. The excess of the cost of STDC over the
historical cost of STDC net assets is allocated to the value of a satellite
included in construction in progress. STDC results of operation for the period
December 22, 1999 through March 31, 2000 are included in the Company's results
of operations for the year ended March 31, 2000. Included in the footnotes are
the pro forma results of operation for the Company and STDC for the periods
ended March 31, 2000 and 1999.
STDC, in cooperation with the U.S. Navy and several commercial partners, is
developing a remote-sensing instrument to be mounted on a satellite, Naval
EarthMap Observer (NEMO), that will, after launch and deployment, provide
imagery for 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 and defense
surveillance markets throughout the world.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
In fiscal 2000, the Company operated its hyperspectral instruments under
contracts with third parties in several areas around the world. Contracts to
operate the hyperspectral instrument overseas for major mining companies with
the objective of identifying potential mineral deposits contributed
approximately $720,000 (see note 14) in revenue in 2000. Contracts to operate
Probe 1, the Company's airborne hyperspectral scanner, in the U.S. as an
ecological, agricultural, hydrocarbon, and fisheries application contributed
approximately $143,000 to revenue in 2000.
Going concern
The Company is experiencing working capital deficiencies because it has incurred
operating losses. The Company has operated with funds received from the sale of
its common stock and the issuance of notes. The ability of the Company to
continue as a going concern is dependent upon continued debt or equity
financings until or unless the Company is able to generate operating revenues to
sustain ongoing operations. The Company plans to increase the number of revenue
producing services through the use of additional hyperspectral instruments and
thereby continue as a going concern.
Development stage enterprise
In fiscal 1998, the Company was considered a development stage company. In
fiscal year 1999, the Company commenced principal operations and no longer is
considered to be operating as a development stage company.
Principles of consolidation
The consolidated financial statements include the accounts of Earth Search
Sciences, Inc. and its subsidiaries. All significant intercompany transactions
have been eliminated. The Company's financial statements reflect minority
interests in subsidiaries for non-controlling interest held by third parties in
Earth Search Resources, Inc., ESSI Probe 1 LC, Petro Probe, Inc. and Terranet,
Inc.
Revenue recognition
The Company recognizes revenue and costs as services are rendered under contract
for airborne hyperspectral services and imaging processing services.
STDC receives funds in the form of grants from the U.S. Navy to construct its
satellite and to manage the NEMO program. The grants are considered
cost-reimbursement instruments under Office of Management and Budget (OMB)
circulars. Therefore, STDC recognizes a proportionate share of revenue as
allowable, government-reimbursable costs are incurred. Government funds received
in excess of government-reimbursable costs are deferred until reimbursable costs
are incurred.
Research and development costs and exploration costs
Research and development costs and exploration costs from using hyperspectral
instruments to map areas of interest to the Company are expensed as incurred.
Depreciation
The Company 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 hyperspectral
instruments (Probe 1). The Probes included in construction in progress will be
depreciated from the time they are placed into service. The ATM imagery database
is fully depreciated. Satellite construction in progress represents only the
Company's direct investment in the construction of the satellite and an
allocation of the excess of the purchase price of STDC over the net book value
of STDC assets. Upon successful launch and deployment of the satellite, the
total costs incurred will be depreciated over a five year period, which is the
expected life of the satellite.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
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. Income tax expense is the tax
payable for the period and the change during the period in net deferred tax
assets and liabilities.
Common stock
Common stock issued for other than cash consideration is reflected in the
accompanying financial statements at estimated fair value on the date of issue.
Dividends
The Company has not paid any dividends and does not expect to pay dividends in
the foreseeable future.
Treasury stock
Treasury stock is recorded at cost. Sales of treasury stock at amounts in excess
of or below cost, net of selling expenses, have been recorded as
increases/decreases in additional paid-in capital.
Cash Equivalents
Cash in banks and short-term investments with original maturities of three
months or less are considered cash equivalents.
Net loss per common share
Net loss per common share has been computed based on the weighted average number
of the Company'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.
Changes in classification
Certain reclassifications have been made to the fiscal 1999 and 1998 financial
statements to conform with the financial statement presentation for fiscal 2000.
Such reclassifications had no effect on the Company's results of operations or
shareholders' equity (deficit).
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Financial instruments
The Company records financial instruments at cost, which approximates fair
value, unless otherwise stated.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
2. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended March 31,
2000 1999 1998
--------- --------- ----------
Common stock issued in conjunction with sale/leaseback of Probe 1
(Note 3) - - 375,000
Notes payable issued to settle advance deposits - - 2,200,000
Notes payable converted into common stock (Notes 5 and 10) 89,178 - 2,740,038
Common stock issued in lieu of interest payments 273,750 - -
Common stock issued in lieu of future lease payments (Note 3) - - 500,000
Common stock subscription issued in lieu of future lease payments - - 165,000
Common stock subscription for subsidiary common stock (Note 10) - - 56,554
Note payable converted into Series A preferred stock - - 500,000
Redeemable common stock issued for scanner (Note 10) - - 56,554
Issuance of shares in exchange for minority interest in subsidiary - 248,000 -
Reduction of fixed assets for redeemable stock returned - (400,000) -
Redeemable shares received into Treasury - 400,000 -
Issuance of common stock previously subscribed - 165,000 -
Issuance of shares for mineral properties 226,632 - -
Issuance of shares for acquisition of STDC 1,928,203 - -
</TABLE>
3. Property and Equipment
Property and equipment consist of the following:
March 31,
2000 1999
------------ -------------
Mineral properties (A) $ 424,632 $ -
ATM imagery database (B) 134,000 134,000
Computers and software 157,698 123,289
Vehicles and equipment 114,012 70,446
Hyperspectral instruments (C) 4,058,000 2,500,000
Construction in progress (D) 8,703,401 1,620,000
------------ -----------
13,591,743 4,447,735
Accumulated depreciation (E) (982,757) (624,139)
------------ -----------
$ 12,608,986 $ 3,823,596
============ ===========
(A) In fiscal 2000, the Company acquired working interests in three oil
and gas properties. One property was acquired for $195,000 in cash.
The other two properties were purchased by exchanging 596,398 shares
of the Company's stock valued at $226,632. Based on the agreements for
the working interests, the Company will proportionately share in
future revenues as well as future operating and drilling costs.
Subsequent to fiscal year-end, the Company paid an additional $107,000
for its share of operating and drilling costs on the properties. No
revenue has been received from the properties as of fiscal year-end.
In fiscal 2000, the Company purchased mineral leases in Nova Scotia
with the intention of surveying the properties and exploring mineral
exploration possibilities for its own purposes.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
(B) In the summer of 1987, the Company obtained a database providing
airborne multispectral scanner imagery over sites in Oregon and
Nevada. The imagery, gathered by an airplane using a thematic mapper
scanner, was recorded on high-density digital tape and later
decompressed into computer compatible data. This database includes
imagery produced in photographic form (hard copy) as well as the data
on digital tape. Such imagery was then interpreted by a geologist
having expertise in the ATM method. The initial interpretation was
completed in June 1988 and produced approximately 500 anomalies that
necessitate exploration work to determine mineralization.
The Company capitalized the costs of acquiring this database. The
database can be used for identification of potential mineralization as
well as for oil and gas exploration and other purposes for which
geology is a major consideration. The Company intends to utilize this
imagery database for potential sale of information to third parties,
such as large mining companies that desire to investigate
mineralization of large areas over a short period of time, and for use
in the Company's own mineral exploration activities. This asset has
been fully depreciated.
(C) The Company entered into a sale-leaseback of a hyperspectral
instrument in 1997. The instrument was sold for $2,500,000 and leased
back under the following terms: 1) the Company will lease the
instrument for $250,000 per year bearing interest at prime plus 2% for
three years; 2) at any time 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 any time prior to the
repurchase, the lessor may convert the remaining obligation into
shares of the Company's common stock at a conversion rate of 40% of
the stock's then fair market value. In the event the Company 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 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. The Company
recorded a capital lease obligation of $3,500,000 (net of a debt
discount of $1,375,000) and $375,000 in shareholders' equity (deficit)
related to the shares of common stock and stock purchase warrants
issued in conjunction with the above transaction.
In fiscal 1999 and 1998, 547,727 and 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, respectively. The Company
recognized an extraordinary loss of $115,000 and $1,165,000 in 1999
and 1998, respectively, from the debt extinguishment as a result of
the settlement of the lease payments. 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 discussed above. These shares were
issued as of March 31, 1999 and their value is shown as common stock
subscribed for in the Company's financial statements as of March 31,
1998.
The cost of the equipment under capital leases at March 31, 2000 and
1999 was $2,500,000 with related accumulated depreciation of $625,000
and $375,000 as of March 31, 2000 and 1999, respectively.
Total future minimum lease payments remaining under the non-cancelable
capital lease at March 31, 2000 are $3,000,000. The total amount is
due during fiscal 2001. The present value of the capital lease
obligation is $3,000,000.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
In fiscal 2000, the Company completed purchase and received its second
hyperspectral instrument. The capitalized cost of the instrument was
$1,558,000.
(D) The costs of acquiring and improving the technological capabilities of
hyperspectral instruments are capitalized while the instruments are
under fabrication and are included in construction in progress. During
fiscal 1997, the Company made a payment of $400,000 in redeemable
common stock (1,000,000 shares) towards the development of a
hyperspectral instrument. The contract for this instrument was
cancelled in 1999 and the shares were returned at no cost to the
Company with a corresponding reduction to construction in progress.
Included in construction in progress is $8,429,853 of costs and
allocated purchase price related to the development of a remote
sensing instrument and satellite. The satellite is scheduled for
completion and launch in the fourth quarter of calendar year 2001.
Upon launch and deployment of the satellite, the total capitalized
costs will be depreciated over a five year period, which is the
expected life of the satellite.
(E) Fixed assets are depreciated over their assigned useful livesfes
ranging from 3 to 10 years under the straight line method of
depreciation.
4. Deferred Officers' Compensation
Deferred compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, Chief Executive Officer, President and
Secretary). The Company recorded deferred officer compensation, accrued
payroll taxes and accrued interest of $425,104, $744,134, and $507,271
during the fiscal years ended March 31, 2000, 1999 and 1998, respectively,
and included these amounts in general and administrative expenses. The
Company is accruing interest on the deferred compensation balances at a
rate of 8.5%, compounded quarterly. In the fourth quarter of 2000, the
Company started making full salary payments to the Chairman, Chief
Executive Officer, and Secretary.
In 1999, the employment agreement with the Company's former President was
terminated. The approximately $157,000 due as a result of terminating this
agreement was charged to expense in fiscal 1999 and is included in accounts
payable at March 31, 1999. This amount was paid in its entirety in fiscal
2000.
5. Notes 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 of the promissory notes.
In fiscal 2000, $89,178 of notes outstanding plus accrued interest were
converted into common stock at the agreed upon conversion rates.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
6. Shareholder Loans
The Company 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, 2000 and 1999, interest accrued on such advances aggregated
$218,133 and $197,113, respectively, and has been included in accrued
interest in the accompanying consolidated balance sheet.
Shareholder loans are reflected as a noncurrent liability in the
accompanying consolidated financial statements due to: a) the undefined
terms of repayments, b) the inability of the Company to repay the advances
unless and until it achieves positive cash flow, and c) the possibility
that the obligations will be satisfied through the issuance of shares of
the Company's common stock.
7. Unaudited Pro Forma Results of Operations
The operations of STDC from the acquisition date of STDC, December 21,
2000, to March 31, 2000 are included in the results of operations for
fiscal 2000. The following pro forma information is the combined results of
operation for the years ended March 31, 2000 and March 31, 1999 as if the
companies had been combined at the beginning of the period.
<TABLE>
<CAPTION>
Unaudited Pro Forma Results of Operations
Period ending March 31, 2000
<S> <C> <C> <C>
ESSI and other
subsidiaries STDC Combined
----------------- ----------------- --------------------
Revenue $ 863,655 $ 7,022,680 $ 7,886,335
Loss before extraordinary items (4,298,733) (1,463,815) (5,744,479)
Net loss (4,298,733) (1,463,815) (5,744,479)
Loss per share (0.04) (0.014) (0.053)
Unaudited Pro Forma Results of Operations
Period ending March 31, 1999
ESSI and other
subsidiaries STDC Combined
----------------- ----------------- --------------------
Revenue $ 881,006 $ 19,619,052 $ 20,500,058
Loss before extraordinary items (2,156,405) (444,826) (2,601,231)
Net loss (2,271,428) (444,826) (2,716,254)
Loss per share (0.025) (0.005) (0.03)
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
8. Business Segment Information
The major activities of the Company and its subsidiaries are broken down into an
Airborne Hyperspectral Services business segment, a Satellite Development
business segment, and an Other Industries business segment. While the Airborne
Hyperspectral Services segment and Satellite Development segment will utilize
remote sensing instruments to earn revenue from the sale of hyperspectral
imagery, the Satellite Development segment will share responsibilities for
tasking the satellite instrument with the Office of Navy Research and is not
scheduled to begin operations until the fourth quarter of 2001. Currently, the
Airborne Hyperspectral business segment revenue is primarily from one external
customer, an international mining company. The Satellite Development business
segment revenue is from a contract with the U.S. Navy. Transactions between the
business segments are loans, interest, and management fees based on an
allocation of incurred costs for general and administrative expenses. All three
business segments are operating at a net loss position; therefore, no income tax
expense or benefit is provided. Prior to fiscal 2000, the Company's activities
were focused in the Airborne Hyperspectral Services segment
<TABLE>
<CAPTION>
Business Segment Information
<S> <C> <C> <C> <C> <C>
Airborne Adjustments
Hyperspectral Satellite Other and
Services Development Industries Eliminations Combined
-------------- ------------- ----------- ------------ ------------
Revenue $ 863,655 $ 662,791 $ - $ - $ 1,526,446
============== ============= =========== ============ ============
Operating Loss $ (2,901,504) $ (740,392) $ (549,041) $ (90,796) $ (4,281,733)
============== ============= =========== ============ ============
Interest income 15,396 23,425 - - 38,821
Other expense - (641) - - (641)
------------
Interest expense (1,066,149) (161,642) - 90,796 (1,136,995)
------------
Loss from continuing operations before
income taxes and minority interests (3,952,257) (879,250) (549,041) - (5,380,548)
============
Identifiable assets at March 31, 2000 $ 7,235,170 $ 11,825,838 $ 471,312 $ - $ 19,532,320
============== ============ =========== ============ ============
Depreciation and amortization for the
period ended March 31, 2000 $ 841,124 $ - $ 862 $ - $ 841,986
============== ============ =========== ============ ============
Capital expenditures for the period
ended March 31, 2000 $ 250,084 $ 2,595,677 $ 433,248 $ - $ 3,279,009
============== ============= =========== ============ ============
</TABLE>
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
9. Income Taxes
The Company recorded no provision for income taxes in fiscal 2000, 1999 and
1998 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,
2000 1999
-------------- -------------
Net operating loss carryforwards $ 5,934,544 $ 4,945,499
Other net deferred tax assets 1,841,648 833,206
-------------- -------------
Gross deferred tax assets 7,776,192 5,778,705
Deferred tax assets valuation allowance (7,776,192) (5,778,705)
-------------- --------------
$ - $ -
============== ==============
The deferred tax asset has been fully reserved because the Company cannot
anticipate future taxable income to realize the potential benefits of the
gross deferred tax asset.
The benefit for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended March 31,
<S> <C> <C> <C>
2000 1999 1998
------------- ------------- ------------
Income tax benefits at statutory rate $ 2,058,593 $ 908,571 $ 2,340,000
Decrease in benefit resulting from:
Deferred tax valuation allowance (2,058,593) (908,571) (2,340,000)
------------- ------------- ------------
$ - $ - $ -
============= ============= ============
</TABLE>
The Company has net tax operating loss carryforwards at March 31, 2000 of
$14,836,361. Such carry forwards may be used to offset taxable income, if
any, in future years through their expiration in 2001-2017. Future
expiration of tax loss carryforwards, if not utilized, are as follows:
2001, $80,975; 2002, $47,625; 2003, $104,696, 2004, $176,084, 2005,
$225,957; and thereafter, $14,201,024. The annual amount of tax loss
carryforward, which can be utilized, may be limited due to the substantial
changes in the Company's ownership which may occur in the future. Such
limitations could result in the expiration of a part of the loss
carryforwards before their utilization.
10. Officer and Director Stock Options
In April 1995, the Board of Directors granted, through employment
agreements, options to the Company's Chief Executive Officer and Chairman
to each purchase 5,000,000 shares of the Company's common stock at an
exercise price of $0.21 per share. Because half of these options vested
only if the Company reached profitability by March 31, 1998, 5,000,000 of
these options expired on April 1, 1998 as a result of the failure of the
Company to reach profitability.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
In August 1997, the Board of Directors granted performance based options to
the Company's Chairman, President and Chief Executive Officer to each
purchase 5,000,000 shares of the Company's restricted stock at exercise
prices ranging from $0.50 per share to $2.50 per share and to the Company's
Secretary to purchase 1,000,000 shares of the Company's restricted 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 the Company on the first date on which the closing market price
of the Company's common stock equals or exceeds the price per share
performance targets for 30 consecutive days. At the time the performance
based options were granted, each officer's salary was being deferred and
the Company's common stock price was $0.48 per share. In fiscal 1999, the
former President left the Company and thus forfeited options to purchase
5,000,000 shares of the Company's common stock. The Board of Directors
subsequently reissued 4,000,000 of the options to the Secretary under the
same terms as listed above for the August 1997 issuance to the Chairman,
Chief Executive Officer and President. These options, which were to expire
on July 31, 1999, were extended for an additional three years by the Board
of Directors.
The specific vesting criteria for these options are described below:
1. When and if the closing market price of common stock equals or exceeds
$0.50 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 as a price equal to $0.50 per share, exercisable for a
period of 24 months from the date of vesting. These options are fully
vested and exercisable.
2. When and if the closing market price of common stock equals or exceeds
$1.00 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 as a price equal to $1.00 per share, exercisable for a
period of 24 months from the date of vesting.
3. When and if the closing market price of common stock equals or exceeds
$1.50 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 as a price equal to $1.50 per share, exercisable for a
period of 24 months from the date of vesting.
4. When and if the closing market price of common stock equals or exceeds
$2.00 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 as a price equal to $2.00 per share, exercisable for a
period of 24 months from the date of vesting.
5. When and if the closing market price of common stock equals or exceeds
$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 as a price equal to $2.50 per share, exercisable for a
period of 24 months from the date of vesting.
In fiscal 2000, the Company's common stock maintained a price that resulted
in the vesting of the above options with the $1.00 exercise price. As a
result of the vesting of these options, the Company recognized non-cash
compensation expense of $1,593,600 in fiscal 2000. As of March 31, 2000,
none of these options have been exercised.
During fiscal 1998, the Board of Directors issued options to various new
employees to purchase a total of 7,000,000 shares of the Company's common
stock. The exercise prices for these options range from $0.25 to $1.00 per
share. The options generally expire three (3) years from the date of grant.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
During fiscal 1999, the Board of Directors issued options to a new employee
to purchase 200,000 shares of the Company's common stock. The exercise
price for these options is $0.07 per share and the options expire two years
from the date of grant. In addition, the Board of Directors issued options
to a new independent contractor to purchase 2,000,000 shares of the
Company's common stock at an exercise price of $0.30 per share. These
options also expire two years from the date of grant. The total valuation
of this issuance to a non-employee using the Black-Scholes model is
$32,000, of which the related annual compensation expense is $16,000.
During fiscal 2000, the Board of Directors issued options to a new employee
to purchase 650,000 shares of the Company's common stock. The exercise
price for these options is $0.14 per share. These options expire on various
dates ranging from 3 years to 7 years from the date of grant. In fiscal
2000, the Company recognized $14,401 of non-cash compensation expense
related to these options.
During fiscal 2000, the Board of Directors issued options to the Chairman
and Chief Executive Officer to each purchase 2,500,000 shares of the
Company's common stock. The exercise price for these options is $0.21 per
share and the options expire in 2005.
The Company adopted Statement of Financial Accounting Standard No. 123
("FAS 123"), Accounting for Stock-Based Compensation, during 1996. 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. The Company continues to follow the provisions of APB
25. No compensation cost has been recognized on the Company's stock option
grants except as described above, as the options include an exercise price
equal to or exceeding the fair value on the date of grant.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
The Company has determined that the pro forma effects of applying FAS 123
would increase the net loss in 2000 by approximately $1,044,000 and would
have had an immaterial effect on the results of operation in 1999 and 1998,
respectively. The determination was made using the following weighted
average assumptions:
Fiscal Fiscal Fiscal
2000 1999 1998
------------ ------------ ------------
Risk-free interest rate 5.63% 5.62% 6.05%
Expected dividend yield - - -
Expected lives 4.78 4.23 5.43
Expected volatility 127.97% 82.5% 86.7%
The following table summarizes the employee stock option transactions
described above.
Shares Weighted
under average
option exercise price
------------ --------------
Balance, March 31,1997 11,800,000 $ 0.19
Options granted 23,000,000 0.18
Options cancelled - -
Options exercised - -
----------- --------------
Balance, March 31,1998 34,800,000 0.78
Options granted 6,200,000 1.23
Options cancelled (10,500,000) 0.83
Options exercised - -
----------- --------------
Balance, March 31,1999 30,500,000 0.90
Options granted 5,650,000 0.20
Options cancelled - -
Options exercised (1,800,000) 0.12
----------- --------------
Balance, March 31,2000 34,350,000 $ 0.83
=========== ==============
The weighted average per share fair value of options granted during fiscal
year 1999 is $0.11. In addition to the above options, the Company also
granted options to purchase 2,500,000 shares at a purchase price of fifty
percent (50%) of the closing market price per share. These options were
granted to the President, and were forfeited when he left the Company in
fiscal 1999.
In fiscal 2000, the Company exchanged 4,000,000 shares of its common stock
and options to purchase an additional 4,000,000 shares of its common stock,
at exercise prices ranging from $0.50 to $5.00 per share, for all of the
shares of common stock of STDC.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
The following table summarizes information about employee stock options and
the options issued as part of the acquisition of STDC outstanding at March
31, 2000.
Options
Options Outstanding exercisable
------------------------------------------------------------
Weighted
average
Exercise Number remaining Number
Price outstanding contractual life exercisable
---------- ------------ ---------------- --------------
(Years)
0.07 200,000 0.80 200,000
0.14 650,000 4.1 150,000
0.21 11,000,000 5 11,000,000
0.25 250,000 0.7 250,000
0.30 2,000,000 0.8 2,000,000
0.50 8,250,000 0.7 8,250,000
0.75 250,000 2 250,000
1.00 3,750,000 2.8 3,750,000
1.50 3,500,000 2.9 500,000
2.00 4,250,000 2.7 1,250,000
2.50 3,000,000 2.7 -
3.00 750,000 3.8 750,000
4.00 250,000 3.8 250,000
5.00 250,000 3.8 250,000
-----------
38,350,000
===========
11. Redeemable Common Stock and Nonredeemable Shareholder's Equity
Redeemable common stock
In fiscal 1997, the Company issued to a vendor 1,000,000 unregistered
shares of common stock valued at $400,000 for partial payment of amounts
owed for an airborne hyperspectral instrument (Note 3). The shares of
common stock were subject to certain "put rights" and, accordingly were
presented in the accompanying balance sheets as redeemable common stock.
Such shares were recorded at their approximate fair market value at the
date of issuance, where the fair market value equaled the maximum
redemption amount. During 1999, the contract with the manufacturer was
cancelled and these redeemable shares were returned at no cost to the
Company.
Also included in redeemable common stock are amounts related to a potential
rescission offer related to certain shares sold in the state of Idaho (see
Note 10). During fiscal 2000, 591,754 shares of redeemable stock were sold
and thus reclassified as common stock and additional paid in capital.
Preferred stock
During the year ended March 31, 1998, the Company 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 (see Note 5). Each share of the
Company's Series A preferred stock is convertible into five shares of the
Company's common stock. In addition, the recipient of the preferred stock
was granted warrants to purchase an additional 1,000,000 shares of the
Company's common stock. As such, 2,000,000 shares of the Company's common
stock have been reserved for issuance upon the conversion of the Series A
preferred stock and exercise of the warrants.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
Common stock
During the fiscal years ended March 31, 2000 and 1998, the Company issued
849,663 and 865,988 shares of common stock (including treasury stock),
respectively, to satisfy $75,500, and $99,126, respectively, of principal
and $13,678 and $61,937, respectively, of interest relating to convertible
notes payable (see Note 5). No common stock was issued in fiscal 1999
relating to the conversion of notes payable.
Common Stock Subscribed
In fiscal 2000, the Company received $363,000 for purchases of common
stock. The shares were issued subsequent to fiscal year-end.
Treasury stock
In fiscal 1999, the Company 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. The
Company subsequently reissued 500,000 of these shares to a third party
during fiscal 1999.
Stock Warrants
During fiscal 1998, warrants to purchase 4,000,000 shares of the Company's
common stock were granted, with exercise prices ranging from $1.30 to $2.00
per share. These warrants were issued to investors of the Company and
expire 3-5 years after issuance.
Private placement of Quasar Resources, Inc. common stock
In fiscal 1997, Quasar Resources, Inc., a wholly owned subsidiary of the
Company, issued 331,990 shares of its common stock, at $0.50 per share in a
private placement offering. As the Company owns a majority interest in
Quasar Resources, Inc., its financial statements are consolidated into the
Company's. Accordingly, the Company has recorded a minority interest of
$49,798 relating to the outside investors' share of net equity in Quasar.
Resources, Inc. The difference between the stock proceeds of $165,995 and
the minority interest of $49,798 has been recorded as an addition to
paid-in-capital.
In fiscal 1997, the Company repurchased 20,000 shares of Quasar Resources,
Inc. common stock by issuing 40,000 shares of the Company's common stock,
which resulted in a $3,000 decrease in minority interest and decrease in
nonredeemable shareholders' deficit. In fiscal 1998, the Company
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
decrease in nonredeemable shareholders' deficit. As a result, the Company
now owns all of the outstanding stock of Quasar Resources, Inc.
Private placement of Earth Search Resources, Inc. common stock
During fiscal 1998, Earth Search Resources, Inc., a wholly owned subsidiary
of the Company, issued 2,494,000 shares of its common stock at $0.50 per
share. Two million of the shares were issued to certain officers and
directors of the Company as compensation for services rendered.
Accordingly, the costs of these shares are included in general and
administrative expenses within the statement of loss in 1998. In fiscal
1999, the Company exchanged 2,646,667 shares of its owned stock for Earth
Search Resources, Inc. stock not previously owned. This transaction reduced
minority interest by $248,000.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
Private placement of Terranet, Inc. common stock
In fiscal 2000, Terranet, Inc., a wholly owned subsidiary of the Company,
issued 62,965 shares of its common stock at approximately $3.00 per share.
This transaction increased minority interest by $189,493.
Private placement of Petro Probe, Inc. common stock
In fiscal 2000, Petro Probe, Inc., a wholly owned subsidiary of the
Company, issued 10,166 shares of its common stock at approximately $3.00
per share. This transaction increased minority interest by $30,500.
12. Commitments and Contingencies
Contractual Commitments
The Company has outstanding purchase orders, commitments, and contracts
with future milestone payments totaling $3,250,000. In addition, during
fiscal 1999, the Company entered into a 36-month sales-leaseback
transaction of the aircraft previously owned by its subsidiary Skywatch
Exploration Inc. In accordance with the terms of the agreement, the Company
has committed to pay for a minimum of 15 hours of flight time per month at
a rate of $425 per hour. In fiscal 2000, due to scheduling problems with
the aircraft, the agreement was terminated without cost to the Company.
Operating Rent
Future minimum rental payments and sublease rental income under
non-cancelable leases with initial terms in excess of one year are as
follows at March 31, 2000:
Year ending Total Sublease
March 31 Commitments Rental Income Net Rent
------------- ----------- --------------- ------------
2001 $ 93,108 $ (23,543) $ 69,565
2002 93,868 (23,184) 70,684
2003 79,435 (19,253) 60,183
2004 24,225 (5,834) 18,391
Thereafter - - -
----------- --------------- ------------
$ 290,636 $ (71,814) $ 218,823
=========== ============== ============
Rental expense for office space is included in operations for the fiscal
years ended March 31, 2000, 1999 and 1998 and is $30,341, $19,200, and
$19,200, respectively.
Litigation
In fiscal 1997, the Company settled its lawsuit with the Idaho Department
of Finance. As a result of the settlement, the Company agreed to proceed
with a rescission offer to certain Idaho residents who invested in the
Company at the $0.16 to $0.18 per share at which they originally purchased
the Company's common stock. In fiscal 2000, 591,754 shares of the Company's
common stock subject to rescission were sold by such Idaho investors. The
Company anticipates making a formal offer of rescission for the remaining
shares in fiscal 2001. In conjunction with the rescission offer, $21,734
and $117,845, related to 134,160 and 725,914 shares of common stock,
respectively, have been recorded in redeemable common stock as of March 31,
2000 and 1999.
<PAGE>
EARTH SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
13. Related Party Transactions
During fiscal 1998, the Company entered into various agreements with an
international mining company. The agreements executed between the Company
and the mining company provide, under certain restrictions, an exclusive
license to use Probe 1 for commercial mining purposes. The agreements have
a three-year term, with an automatic three-year renewal unless the
agreements are terminated by either party at the end of the initial
three-year period. Under the terms of the agreements, the Company is
guaranteed minimum services work of $750,000 in year one, $2,000,000 in
year two, $3,000,000 in year three, and $3,000,000 in each subsequent year.
While the second year milestone has not been met, the Company anticipates
that the deficiency will be made up in subsequent years. In year one, the
Company earned $810,000 in revenue with related costs of $652,000 on
missions flown under this contract. In year 2, the Company earned $511,000
in revenue with direct costs of $331,000 on missions flown under this
contract. Furthermore, the agreement grants the Company net smelter
royalties ranging from 1.5 percent to 2.5 percent of revenues on properties
subsequently owned or optioned by the mining company. 200,000 shares of the
Company's Series A preferred stock were issued to the mining company and an
affiliate for consideration equal to $1,000,000; furthermore, the mining
company and affiliate were granted warrants to purchase 1,000,000 shares of
the Company's common stock at a price of $2.00 per share.
14. Subsequent Events
Subsequent to the end of fiscal 2000, the Company purchased a Turbo
Commander aircraft to be used for its aerial surveys for approximately
$950,000 in cash.
<PAGE>
