SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2000
Commission File No. 0-19566
EARTH SEARCH SCIENCES, INC.
-----------------------------
(Exact Name of Registrant as Specified in its Charter)
Utah 87-0437723
(State or other Jurisdiction of (IRS Employer ID)
Incorporation or Organization)
1729 Montana Highway 35, Kalispell, MT 59901
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(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (406) 751-5200
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 31, 2000, covered by this report: 138,803,001 shares. The
registrant has only one class of common stock.
EARTH SEARCH SCIENCES, INC.
FORM 10-Q/A
QUARTER ENDED DECEMBER 31, 2000
PART I
FINANCIAL INFORMATION
TABLE OF CONTENTS
Item 1. Consolidated Financial Statements Page
Consolidated Balance Sheet
as of December 31, 2000 and March 31, 2000. 3
Consolidated Statement of Operations for the
Three and Nine Months Ended December 31, 2000 and 1999. 4
Consolidated Statement of Cash Flows for the
Nine Months Ended December 31, 2000 and 1999. 5
Selected Notes to Consolidated Financial Statements. 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II
OTHER INFORMATION REQUIRED
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters of a Vote of Security Holders 10
Item 5. Other information 10
Item 6. Exhibits and Reports on Form 8-K 10
Earth Search Sciences, Inc.
Consolidated Balance Sheet (unaudited)
- ----------------------------------------------------------------------------------------------------
December 31, March 31,
2000 2000
------------- ------------
Assets
Current Assets:
Cash $ 1,266,810 $ 6,119,562
Other current assets 619,086 803,682
------------- ------------
Total current assets 1,885,896 6,923,244
Property and Equipment 16,566,257 12,608,986
------------- ------------
Total Assets $ 18,452,153 $ 19,532,230
============= ============
Liabilities and Shareholders' Deficit
Current liabilities:
Notes payable $ 2,641,012 $ 2,687,212
Accounts payable and accrued expenses 6,927,807 6,287,548
Accrued interest 904,756 356,962
Capital lease obligation 3,000,000 3,000,000
------------- ------------
Total current liabilities 13,473,575 12,331,722
Long-term liabilities:
Shareholder loans 600,844 459,844
Deferred officers' compensation 2,124,861 2,037,846
Minority interest 2,218,853 2,017,428
============= ============
Total liabilities 18,418,133 16,846,840
============= ============
Commitments and contingencies
Redeemable common stock, $.001 par value, 134,160 shares
issued and outstanding at December 31 and March 31, 2000 21,734 21,734
============= ============
Nonredeemable shareholders' deficit
Series A preferred Stock; 200,000 shares authorized,
issued and outstanding at December 31 and March 31, 2000 1,000,000 1,000,000
Common stock, $.001 par value; 200,000,000 shares
authorized; 138,668,840 and 126,402,044 shares
respectively, issued and outstanding 138,669 126,402
Additional paid-in capital 26,771,906 22,906,866
Common stock subscribed - 363,000
Treasury Stock (200,000) (200,000)
Retained Deficit (27,698,289) (21,532,612)
------------- ------------
12,286 2,663,656
------------- ------------
Total liabilities and shareholders' equity $ 18,452,153 $ 19,532,230
============= ============
The accompanying notes are an integral part of these financial statements.
Earth Search Sciences, Inc.
Consolidated Statement of Operations (unaudited)
- ---------------------------------------------------------------------------------------------------------------------
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
----------- ------------ ------------ ------------
Revenue $ 1,159,048 $ 79,678 $ 1,881,925 $ 419,779
Costs of Services Provided (508,598) (141,925) (1,815,860) (441,321)
============ ============ ============ ============
Gross Margin 650,450 (62,247) 66,065 (21,542)
============ ============ ============ ============
Expenses:
General and administrative 3,873,239 902,789 5,776,845 1,749,265
------------ ------------ ------------ ------------
3,873,239 902,789 5,776,845 1,749,265
============ ============ ============ ============
Loss from operations (3,222,789) (965,036) (5,710,780) (1,770,807)
Interest income 15,653 - 93,433 -
Interest expense (363,137) (328,234) (756,906) (797,371)
------------ ------------ ------------ ------------
Loss before minority interest (3,570,273) (1,293,270) (6,374,253) (2,568,178)
Minority interest in losses of consolidated
subsidiaries 65,186 - 208,577 -
============ ============ ============ ============
Net loss $ (3,505,087) $ (1,293,270) $ (6,165,676) $ (2,568,178)
============ ============ ============ ============
Shares applicable to basic and
diluted loss per share 134,509,211 104,354,564 131,391,092 103,406,808
Basic and diluted loss per share $ (0.026) $ (0.012) $ (0.047) $ (0.025)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
Earth Search Sciences, Inc.
Consolidated Statement of Cash Flows (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
For the Nine Months
Ended December 31,
2000 1999
------------ ------------
Cash flows from operating activities:
Net Loss $ (6,165,676) $ (2,568,178)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services and interest expense 83,958 678,665
Issuance of stock for STDC stock - 510,000
Non-cash compensation expense 2,937,749 -
Loss attributed to minority interest (208,577) -
Depreciation 415,172 245,613
Amortization of lease discount - 363,726
Changes in assets and liabilities:
Other current assets 184,596 (291,318)
Accounts payable and accrued expenses 640,259 (21,660)
Accrued liabilities 547,794 56,429
Unearned revenue - (40,000)
Deferred officers compensation 87,015 337,830
============ ============
Net cash used in operating activities (1,477,710) (728,893)
------------ ------------
Cash flows from investing activities:
Capital expenditures (4,308,958) (199,616)
Advances to Related Party - (2,510,000)
------------ ------------
Net cash used in investing activities (4,308,958) (2,709,616)
------------ ------------
Cash flows from financing activities:
Repayment of notes payable (25,000) (391,500)
Proceeds from notes payable - 1,584,650
Proceeds from shareholder loans 141,000 1,785,412
Repayments of shareholder loans - (642,673)
Issuance of common stock 407,913 1,953,300
Proceeds from subsidiary stock sales 410,003 168,993
Stock issued for conversion of notes - 68,764
------------ ------------
Net cash provided by financing activities 933,916 4,526,946
------------ ------------
Net (decrease) increase in cash (4,852,752) 1,088,437
Cash at beginning of period 6,119,562 47,642
------------ ------------
Cash at end of period $ 1,266,810 $ 1,136,079
============ ============
The accompanying notes are an integral part of these financial statements.
EARTH SEARCH SCIENCES, INC
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 (unaudited)
Note 1 Summary of Operations and Significant Accounting Policies
The consolidated balance sheet as of December 31, 2000, and the consolidated
statements of operations and cash flows for the three and nine months ended
December 31, 2000, and 1999, have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) have been made that are necessary to present fairly the financial
position, results of operations, and cash flows at December 31, 2000 and 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principals
have been condensed or omitted. These financial statements and notes thereto
should be read in conjunction with the Company's Form 10-K for March 31, 2000.
The results of operations for the three and nine months ended December 31, 2000
are not necessarily indicative of the operating results to be expected for the
full fiscal year.
Going concern
The Company is experiencing working capital deficiencies because of operating
losses and capital expenditures. 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 sufficient
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.
New accounting pronouncements
In April 2000, Financial Accounting Standards Board Interpretation No. FIN 44,
"Accounting for Certain transactions involving stock compensation, an
interpretation of APB opinion No. 25", was issued. FIN 44 clarifies and modifies
APB opinion 25, "Accounting for stock issued to employees." FIN 44 was effective
for the Company in the second quarter of fiscal year 2001. The implementation of
the interpretation did not have a material impact on our financial condition or
results of operations.
Statement of Financial Accounting Standards No. 133 "Accounting for Certain
Derivate Instruments and Certain Hedging Activities, effective for the Company
during the first quarter of 2002, provides accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The implementation of the standard
is not expected to have a material impact on our financial condition or results
of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements". The SAB
summarizes certain staff views in applying generally accepted accounting
principles to revenue recognition in financial statements. Adoption is currently
required in fiscal 2002, and early adoption is permitted. The Company does not
expect this bulletin to have a material affect on its results of operations,
financial condition or cash flows.
Note 2 Commitments and Contingencies
In the third quarter of fiscal 2001, the Company recorded a contingency loss
accrual of $185,000 for a dispute with a vendor for products and services. It is
management's opinion that the loss accrual is their best estimate of the
potential liability and associated legal costs of the dispute.
In the third quarter of fiscal 2001, the Company acquired working interests in
two additional oil and gas properties. The Company paid $345,000 in cash for
their share of costs to date on the two properties. Based on the agreements for
the Company's oil and gas working interests, the Company will proportionately
share in future revenues as well as future exploration, drilling and operating
costs.
Note 3 Operating Segment and Geographic Information
Business Segment Information
Airborne
Hyperspectral Satellite Oil and Gas Other Industries
Services Development Properties Consolidated
---------------- ----------------- --------------- ---------------- -----------------
Revenue
Third quarter fiscal 2001 $ 871,378 $ - $ 287,670 $ - $ 1,159,048
First nine months of fiscal 2001 1,161,241 433,014 287,670 - 1,881,925
Income (loss) from operations
Third quarter fiscal 2001 (2,961,286) (288,303) 206,424 (179,624) (3,222,789)
First nine months of fiscal 2001 (4,134,149) (1,173,113) 65,854 (469,372) (5,710,780)
Total Assets
At December 31, 2000 $ 5,226,219 $ 11,486,796 $ 1,395,682 $ 343,456 $ 18,452,153
At September 30, 2000 5,670,539 11,847,655 689,416 7,178 18,214,788
For the first nine months of fiscal 2000, all revenues are from airborne hyperspectral services
Note 4 Non-Cash Compensation Expense
The Company recognized non-cash compensation expense of $2,926,000 in the third
quarter of 2001 from the issuance of 8,587,500 shares of stock to employees as a
bonus.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Included in the financial statements of the Company for the nine months ended
December 31, 2000 is Space Technology Development Corporation (STDC), which was
acquired on December 21, 1999.
STDC is developing a remote sensing satellite in cooperation with the U.S. Navy
and several corporate partners under the congressionally sanctioned Joint Dual
Use Applications Program (JDUAP). This joint development provides for a
long-term cooperative relationship with the U.S. Navy and substantial federal
funding for what will be a commercially owned and operated hyperspectral remote
sensing satellite called the Naval EarthMap Observer (NEMO).
The NEMO agreement with the U.S. Navy's Office of Naval Research obligates the
government to provide approximately $64 million in funding, of which
approximately $60 million has already been spent. STDC is required to raise
approximately $125 million the balance of funds needed to complete the satellite
and launch it, as well as to establish the commercial business to sell products
based on the imagery the satellite will collect. Work on the satellite is
proceeding as the Company and STDC raise funds to meet the industry commitment.
In the Airborne Hyperspectral Services business segment in the third quarter of
2001, the Company focused on surveying under contract for third parties,
surveying areas of interest for potential hydrocarbon and mineral exploration,
and surveying areas for marketing and sales purposes that may lead to future
revenue. Third party contracts for hyperspectral surveys included applications
in mineral and hydrocarbon exploration, gas and emission leak detection, vegetal
class mapping, and environmental base lining and monitoring. In the third
quarter of 2001, the Company successfully completed a significant mineral
exploration survey in South America. Also in the third quarter of 2001, the
Company focused on surveying and analyzing data over areas with environmental
issues that the Company anticipates will develop and expand its environmental
services market.
In the Oil and Gas Properties business segment in the third quarter of 2001, the
Company continued with its strategic plan of investing in projects that explore
and develop oil and gas.
The Company recognized revenue of $1,159,048 in the third quarter of 2001
compared with $79,678 in the third quarter of 2000. Included in the third
quarter of 2001 is $287,670 in revenue from Oil and Gas Properties and revenue
of $871,000 from a significant hyperspectral survey in South America. Revenue
recognized for the nine months ended December 31, 2000 was $1,881,925 compared
with $419,779 for the nine months ended December 31, 1999. Included in the nine
months ended December 31, 2000 is $433,014 in revenue from STDC.
The Company recognized cost of sales of $508,598 and $1,815,860 in the three and
nine months ended December 31, 2000 compared with $141,925 and $441,321 for the
three and nine months ended December 31, 1999. Included in the three and nine
months ended December 31, 2000 is the costs of a significant survey in South
America and STDC cost of sales of $1,090,093.
The Company recognized non-cash compensation expense of $2,926,000 in the third
quarter of 2001 from the issuance of 8,587,500 shares of stock to employees as a
bonus. Also included in general and administrative expenses for the three and
nine months ended December 31, 2000 is an $185,000 loss accrual for a dispute
with a vendor for products and services and a $288,000 charge to bad debt
expense. Included in general and administrative expenses for the three and nine
months ended December 31, 2000 is $227,959 and $638,845, respectively from STDC.
LIQUIDITY AND CAPITAL RESOURCES
Net cash decreased in the third quarter of 2001 due mainly to capital
expenditures and operating losses. Capital expenditures in 2001 were primarily
for purchase of an aircraft, additional expenditures for the Company's satellite
and airborne hyperspectral instruments, and additional expenditures on oil and
gas properties.
Net cash used in operating activities was $1,477,710 for the nine months ended
December 31, 2000, resulting primarily from a net loss of $6,165,676 net of
certain non-cash expenses. Net cash used in operating activities was $728,893
for the nine months ended December 31, 1999, resulting primarily from a net loss
of $2,568,178 net of certain non-cash expenses.
In the nine months ended December 31, 2000, the Company raised $410,003 by
selling stock in its subsidiaries Terranet, Inc., Petro Probe, Inc. and
Eco Probe, Inc.
The Company is experiencing working capital deficiencies because of operating
losses and capital expenditures. 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.
In the third quarter of 2001, the Company retained Houlihan Lokey Howard &
Zukin, investment bankers, to raise funds on a best efforts basis to expand the
Company's airborne hyperspectral services market and to complete and launch the
Company's satellite hyperspectral instrument.
FUTURE OPERATIONS
In the future, the Company intends to continue with its efforts in the
environmental market and oil and gas business segment as well as to pursue sales
of hyperspectral services, including surveying and processing, to third parties
in the mineral, hydrocarbon, forestry and environmental areas. In addition, the
Company intends to continue to perform remote sensing surveys for its own use
with applications in mineral and hydrocarbon exploration.
PART II
OTHER INFORMATION REQUIRED
Item 1. Legal proceedings
In November 2000, in connection with a lawsuit in
which the Company is involved, the Circuit Court of
Baltimore County, Third Judicial Circuit of Maryland
issued a ruling on certain matters. Among other
things, the Court denied the Company's motion for
summary judgment. The lawsuit was filed in May 2000
against the Company by Applied Signal and Image
Technologies, Inc. (ASIT). ASIT's complaint alleges
that the Company has not paid ASIT 500,000 shares of
the Company's stock, which it is owed pursuant to a
written contract between ASIT and the Company in which
ASIT agreed to perform certain services for the
Company in return for cash and Company stock. The
relief sought by ASIT in the lawsuit includes significant
compensatory and punitive damages; however, the
Company believes that it will be able to settle the
lawsuit with ASIT for less than the relief sought.
Item 2. Changes in securities None
Item 3. Defaults upon senior securities None
Item 4. Submission of matters to a vote of security holders None
Item 5. Other information None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1 Larry Vance Employment Agreement Previously Filed
10.2 John W. Peel, III Employment Agreement Previously Filed
10.3 Rory J. Stevens Employment Agreement Previously Filed
10.4 Tami Story Employment Agreement Previously Filed
(b) Reports of Form 8-K None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned.
EARTH SEARCH SCIENCES, INC.
Date: February 14, 2001 /s/ Larry F. Vance
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Larry F. Vance
Chairman of the Board