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, 1998 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 X No ___
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, 1998 $29,416,287. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 31, 1998: 86,518,490
This Form 10-K consists of 39 pages.
TABLE OF CONTENTS
Item of Form 10-K
Page
PART I ............................................................. 3
Item 1 - Business ............................................... 3-6
Item 2 - Properties ............................................ 6
Item 3 - Legal Proceedings ....................................... 7
Item 4 - Submission of Matters to a Vote of
Security Holders ......................................... 7
Item 4(a) Executive Officers of the Registrant..................... 7
PART II. .......................................................... 7
Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters ............... 7
Item 6 - Selected Financial Data ...... ......................... 8
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 8
Item 8 - Financial Statements and Supplementary Data ............ 10
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .............. 10
PART III .......................................................... 10
Item 10 - Directors and Executive Officers of the Registrant .. 10
Item 11 - Executive Compensation .............................. 10
Item 12 - Security Ownership of Certain Beneficial Owners and
Management ...................................... 10
Item 13 - Certain Relationships and Related Transactions ...... 11
PART IV .......................................................... 11
Item 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ........................................ 11
SIGNATURES ....................................................... 11
PART I
ITEM 1. BUSINESS
General
Earth Search Sciences, Inc. (formerly Turnabout Corporation) (the
"Registrant" or the "Company") was incorporated as a Utah corporation on May 15,
1984. The Company, up until 1985, had limited activity except for expenditures
for exploration and acquisition of mining claims in Alaska. On December 5, 1985,
the Registrant acquired all of the outstanding common stock of Earth Search
Sciences, Inc. ("ESSI"), in exchange for 13,639,600 shares of its previously
authorized, unissued $.001 par value common stock. On August 11, 1987, the
Registrant changed its name to Earth Search Sciences, Inc. and on November 19,
1987, the former subsidiary was dissolved.
The Company has been in a research and development stage since its
inception, and has reported immaterial revenues. The Company and its chairman,
Larry Vance, have spent the last ten years developing an airborne remote sensing
capability that can be economically configured into both governmental and
commercial projects. The Company initially sought to utilize United States
Government proprietary airborne remote sensing technology to identify sites with
potential economically recoverable mineral deposits. The Company intended to use
the remote sensing data as a means of limiting the universe of available mining
sites in a given region. The Company anticipated doing further investigative
work on the identified sites, taking a land or mineral interest in promising
sites and thereafter either developing the sites into mines independently or
seeking a joint venture partner or mining entity to develop the site.
The Company has developed a two-prong strategy to convert from a
research and development company to an operating company. With the experience of
Dr. John Peel, the Company's CEO, the Company has a strong base from which to
develop remote sensing business aimed at the United States Government sector of
customers, principally with respect to the use of remote sensing in identifying
environmental exposures and aiding the Government in designing economical
remediation programs.
Imagery Database
In the summer of 1987, the Company obtained airborne multi-spectral
scanner imagery over sites in Oregon, Arizona 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. The Company's
cost basis in this database includes imagery produced in photographic form (hard
copy) as well as the data on digital tape. This information was then interpreted
by a geologist having expertise in the ATM method. The initial interpretation
was completed by June, 1988 and produced approximately 500 anomalies that will
require exploration work to determine mineralization. In addition to
identification of potential mineralization, the database can be used for oil and
gas exploration, environmental exposure identification and other purposes for
which geology is a major consideration. The Company has fully depreciated the
cost of acquiring this database but still intends as financial resources become
available, to use the data base to focus ESR on promising target properties for
further remote sensing and exploration.
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" instrument) in locating geologic areas of interest in a test area in
Nevada with other less advanced instruments. The results of that program were
published in January 1993 in a study entitled "Developing the use of AVIRIS,
TIMS and TM Data to evaluate Hydrothermal alteration types as related to
geologic structures in the Cuprite, Nevada Region," Series VIP-002-93, Stennis
Space Center, Remote Sensing Technologies. As a result of participation in the
program the Company acquired a large amount of unprocessed data. The useful life
of this information is expected to be in the range of five to ten years.
The Company's data collected in 1987 and 1991 has been stored and can
be used many times interactively to determine the fine detail that go with the
use of remote sensing as an exploration tool for locating mineral prospects.
That same data can be used for other applications such as environmental issues,
resource management issues and corridor development.
The Company intends to structure its relationship with ESR so Earth
Search Sciences receives licensing fees for access to data and technology
available to the Company and overriding royalties on minerals ultimately
exploited by ESR or any of its customers. ESR is presently preparing with a
joint venture mining company partner to develop data packages based on the
imagery data the Company has acquired. The Company anticipates that the mining
partner will provide the capital necessary to exploit this very valuable asset.
As with ESR, the Company anticipates structuring its relationship with
its strategic alliance partners for the Government sector in a manner that
provides the Company with licensing fees for exclusive use of the seven meter
imagery on government programs, including but not limited to the U.S. Forest
Service, Bureau of Land Management, Environmental Protection Agency, Department
of Energy, Department of Agriculture, and Department of Defense. The Company
will reserve the rights to this imagery for the perpetual duration of the
licensing contract.
Original Business Plan
Based on the imagery database accumulated by the Company in 1987 and
1991, the Company procured mining patents and land leases and sought partners to
develop several prospective mining properties. The Company in fact entered into
several arrangements with mining entities for the development of some of the
Company's properties, but none of those arrangements resulted in development of
operating mines. Due to lack of capital to fund advance royalties and due
diligence requirements on the Company's mining properties and to changes in
mining laws which required increased and more timely due diligence expenditures,
the Company opted to release virtually all of its mining properties between 1991
and 1994. The new mining laws imposed a financial burden on the Company by
requiring a payment in advance of a flat fee per claim plus filing costs instead
of the prior arrangement under which the Company could perform general
assessment work prior to making a significant financial commitment.
As an adjunct to the business of developing mineral properties, the
Company recognized the need to refine the technology of remote sensing with the
ultimate goal of commercializing the technology. To achieve that goal, the
Company believes that a miniaturized hyperspectral remote sensing instrument
must be developed so that more economical aircraft can be utilized for the
airborne sensing. The Landsat sensor is configured with 11 channels of data in
comparison with a hyperspectral instrument (AVIRIS) that has 224 channels of
data. The difference is achieved by splitting the light spectrum 213 times more
than the Landsat sensor and by providing better resolution. The resulting
improvement in resolution enables the Company to be able to read the chemistry
of the spectra giving us more substantial information. The comparison between
the two instruments enables the user to identify what is there instead of merely
learning that something is there.
On April 12, 1991, the Company commenced entering into semiannual
agreements with NASA to participate in the VIP program to utilize the
specialized resources and sensing technology of NASA to the goal of
commercialization. The agreements allowed the Company access to NASA's
sophisticated facilities that are capable of a full range of remote sensing
activities. Pursuant to the agreement NASA supplied administrative and technical
support and the Company was responsible for the expenses and costs of the
project .The Company has gained several years experience in the hyperspectral
field under this agreement. The mission of JPL/NASA is to conduct high risk,
proof of principle investigations and release the findings to the general public
through programs such as the VIP and Space Act Agreement. Industry participants
must submit a scientific project of merit for evaluation by NASA. The non
proprietary, non exclusive data resulting from NASA's investigations can be
utilized by private industry in their own decision making process regarding the
development of commercial hyperspectral imaging technologies. Earth Search
Sciences, in its early stages of development utilized cost shared hyperspectral
image collections from the NASA/ JPL AVIRIS instrument to provide proof of
principle images to its managers and directors during the decision making
process over the issue of whether or not to proceed with the development of the
company's own proprietary, privately funded instrument, PROBE-1.
In July, 1993, the Company flew an EPA superfund site at Summitville,
Colorado, jointly with the EPA, USGS, Colorado DEQ, JPL and NASA to characterize
the extent of the environmental exposure at the site and to prove the Company's
remote sensing capabilities. The final report has been completed by the Company
and Analytical Imaging and Geophysics and the findings will be used for
environmental and mineral purposes. The Summitville flight provided the Company
with the opportunity to prove the value of remote sensing in a commercial and
governmental setting, and ultimately led to the development of the Company's
current business plan.
Current Business Plan
The Company believes that hyperspectral remote sensing technology, can
play a central role in a multitude of settings, and has application both in the
United States and abroad. The Company has identified applications in such
diverse markets as watershed analysis, pollution detection, pipeline easement
mapping and routing, plume analysis, vegetation stress analysis, agriculture,
disaster assessment, mineral exploration, forestry, fisheries, heat loss
detection, wetlands delineations, stormwater management, emergency planning and
evacuation route assessment, land use, prescription farming and unexploded
ordnance detection.
The key to accessing these market opportunities remains the
miniaturization of the remote sensing technology and usage of the technology on
an economical basis. The Company plans to continue its efforts to miniaturize
and downsize the technology with continued economic improvements in the
operation and maintenance of the sensor the ultimate objective.
Earth Search Sciences, Inc. and Integrated Spectronics Pty Ltd. have
jointly developed a remote sensing instrument, the ESSI PROBE-1, that spectrally
measures the reflectance of the sun from the earth and is considered one of the
most advanced hyperspectral instruments in the world. The Company and Integrated
Spectronics have signed a series of agreements to engineer, develop and
manufacture sensors as needed for each market that the Company contemplates
entering.
Earth Search Sciences has developed a financial strategy, and through
that strategy has acquired the necessary capital for the purchase of its own
miniaturized hyperspectral remote measurement instrument, ESSI PROBE-1. The
financial strategy is centered around the direct funding of the manufacture of
ESSI's own sensor design by existing qualified Earth Search Sciences
shareholders familiar with the company's business strategy. The manufacture of
the PROBE-1 sensor was accomplished through the strategic alliance that the
Company has been developing since 1994 between Integrated Spectronics Pty. Ltd.
ESSI believes it can offer territorial concessions to qualified
entities who fund the acquisition of PROBE-1s. The terms of these concessions
include ownership in a subsidiary that is licensed by the Company to use the
PROBE-1 in a specified location utilizing services provided by the Company or
ESR (data collection, processing, interpretation, technical data packages, and
management and marketing).
On June 1, 1997,the company took delivery of one of two PROBE-1
instruments currently on order. This instrument was installed in a Naval
Research Laboratory P-3 aircraft as part of a deployment to Kazakhstan in
Central Asia for a U.S. Government/ Earth Search Sciences cost shared scientific
mission sponsored by the U.S. Department of Energy, Battelle Pacific Northwest
National Laboratory (PNNL), The Remote Sensing Laboratory-Las Vegas, Nevada, and
Sandia National Laboratory. Economic development issues, including natural
resources mapping and environmental surveillance are being addressed as part of
the mission.
The mission occurred on June 19, 1997 to July 5, 1997. Earth Search
collected imagery with its PROBE-1 instrument that flew aboard the Naval
Research Laboratory's P-3 aircraft. The imagery will be utilized by Earth Search
and others for natural resources mapping. This represented the first deployment
of the PROBE-1 instrument for commercial purposes.
Subsequent to fiscal year ended March 31, 1998, the Company
relinquished both its direct and indirect interests in its current licenses on
mineral properties in the Republic of Kazakhstan in and around the area known as
the Polygon. In the absence of this relinquishment, Earth Search would have
required the expenditure in 1998 of more than $5,000,000(US) for drilling and
exploration activities in order to maintain the conditions of the licenses,
which require a minimum annual negotiated investment of several million dollars,
annually. The properties were relinquished to its partners in the
American-Kazakhstani Joint Stock Company, SEMTECH for settlement of significant
exploration and/or legal costs associated with licensing and exploring the sites
in question. In addition, the Company retained the option to bid its
hyperspectral imaging technology in future exploration activities planned in or
around the Polygon. The Company also retained the option to fund exploration
activities on those sites where the new owners may be unable to finance the
exploration activities required to maintain the licenses in accordance with the
terms of the Program of Works. Earth Search management's decision to relinquish
its current holdings was made as part of the Company's focused restructuring of
its operations in order that it may focus on its core business of remote imaging
from an airborne platform. The Company has discontinued its plans to participate
in the funding of advanced exploration initiatives requiring significant capital
outlays for drilling and field exploration, or the funding of advanced
activities including the siting, design, construction, and/or operation of
mineral mines. Management believes that its cash position for 1998 will improve
as a result of its decision to discontinue its plans to fund a five year program
of works in Central Asia that could have cost between $25,000,000 and
$50,000,000, overall. Several factors contributing to Earth Search management's
decision to relinquish its interests in Kazakhstan included: (1) the worsening
economic situation in Asia, and (2) the effects of extremely low metals prices
on major mining company's operations. Some mining companies even ceased
production at selected operating mines due to depressed metals prices. The
political and economic turmoil recorded in Russia (see The Economist, July 11,
1998), together with the continuing Asian economic crisis contributed to
management's decision to restrict Earth Search's capital investment in Asia. The
Company does plan to maintain a presence in Kazakhstan through an agreement with
its former Kazakhstani partner, the American-Kazakhstani Joint Stock Company,
SEMTECH, which includes language that will enable Earth Search to bid on
airborne remote sensing contracts to be offered in the region; as well as
language in the agreement that provides Earth Search and its shareholders the
opportunity to fund any program of works that SEMTECH or Polygon Resources might
be unable to fund. Under the terms of the agreement, Earth Search would have 90
days to fund an entire Program of Works (in cash) should any such property fall
into the status of having to be relinquished as the result of lack of funding by
the new owners. In essence, Earth Search will maintain a presence in the region
and the potential to invest in selected mineral properties under the specific
terms and conditions mentioned above, while precluding the necessity of having
to lay out significant sums of capital to fund each year's program of works for
multiple mineral properties. Earth Search originally withheld its Kazakhstan
territories from the initial Noranda agreement. However, as an added result of
the refocusing, Earth Search has revisited its agreement with Noranda and the
global exploration contract with the major mining company; and is working with
Noranda to revise the agreement between Earth Search and Noranda to include Net
Smelter Royalties and payment for mapping services for any discoveries made in
Kazakhstan as the direct result of Noranda exploration efforts utilizing the
Earth Search Sciences Probe-1 hyperspectral imaging technology. Although current
market conditions have precluded Noranda from undertaking any major exploration
activities in the region, the Earth Search agreement with Noranda when put into
effect (in regard to Kazakstan) will apply to any future Noranda exploration
initiative undertaken in Kazakstan while the contract between the two company's
remains in effect over the next three years, plus any option years exercised.
On January 16, 1997, the Company signed an agreement with California
Microwave Inc. (CMI) and Applied Signal and Image Technology Inc. (ASIT).
California Microwave is a leader in wireless and satellite communications. CMI
Airborne Systems Integration Division provided a dedicated aircraft for the
joint project, ASIT provided the software and hardware for the processing of all
data and ESSI provided the PROBE-1 sensor. The first mission displayed the
aircraft, software and hardware and the sensor at the Third International
Airborne Remote Sensing Conference and Exhibition in Copenhagen, Denmark, July
7-10, 1997. Earth Search understands that CMI is restructuring its remote
sensing operations. Earth Search is awaiting the outcome of this restructuring
prior to negotiating either an extension to any existing agreements, or any new
agreements with CMI.
The Company also believes that a merger with or acquisition of one or
more companies may be the most expeditious and cost-effective way to achieve the
goals of commercializing the remote sensing technology and converting the
Company to an operating, revenue-producing entity. A merger or acquisition would
provide the Company with a revenue base and with more immediate access to
prospective users of remote sensing technology. The Company would not rule out
the creation of a joint venture or "newco" as part of this strategy.
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 to undeveloped markets for other appropriate projects
involving a multitude of applications of the technology, (c) financing to fund
the development of miniaturized remote sensing instruments, and (d) development
of promising potential mineral properties in which the Company has an interest
or acquires an interest as a result of its existing database of geological
information.
The Company is not aware of any present commercial competition in the
field of hyperspectral spectroscopy. The only knowledge the Company has of any
other use of hyperspectral data today is in academic and federal research.
The Company is not aware of any environmental concerns associated with
remote sensing technology.
Employees
As of March 31, 1998, the Company had 5 full-time employees, which also
include the following Officers: Larry F. Vance, Chairman, John W. Peel, III,
Chief Executive Officer, Brian Savage, President, Tami J. Story, Company
Secretary/Treasurer. The Company also retains several independent contractors.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and all of the
furnishings from an unrelated third party, and has approximately 2,000 square
feet of office space in McCall, Idaho. The Company believes its offices are
adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On December 19, 1997 the Idaho Department of Finance announced that it
had resolved its differences with ESSI and the law suit (Civil No. CV OC
9700155D, in the District Court of the Fouth Judicial Circuit of the State of
Idaho in and for the County of Ada) was withdrawn. Under the terms of the
agreement, the Company and Chairman Larry Vance were not required to pay any
fines, penalties or costs to the State. In addition, the Company agreed to
proceed with a formal offer of rescission to persons who purchased stock
directly from the Company between November 1, 1992 and December 15, 1997 and who
were Idaho residents.
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 as of July 1, 1998.
Name Age Position
Larry Vance 63 Chairman
John W. Peel 52 Chief Executive Officer
Tami J. Story 35 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 a director of the Company. Mr.
Vance is a full-time employee of the Company and has been since 1985.
John W. Peel, III joined the Company as Chief Executive Officer in
April 1995. Prior to joining the Company, Dr. Peel served for the past 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.
Dr. Peel is a full-time employee of the Company and has been since 1995.
Tami J. Story joined the Company as Secretary and Treasurer in 1993.
Ms. Story has been with the Company for 6 years in an administrative support
capacity as an independent contractor. 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.
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 has in the
past traded in the over-the-counter market, based on inter dealer bid prices,
without markups, markdowns, commissions, or adjustments (which do not represent
actual transactions) as reported in the "pink sheets."
Quarter Ended High Low
June 30, 1995 $0.28 $0.24
September 30, 1995 $0.35 $0.30
December 31, 1995 $0.41 $0.38
March 31, 1996 $0.84 $0.81
June 30, 1996 $0.75 $0.68
September 30, 1996 $0.37 $0.34
December 31, 1996 $0.20 $0.17
March 28, 1997 $0.41 $0.38
June 30, 1997 $0.49 $0.46
September 30, 1997 $0.47 $0.42
December 31, 1997 $0.39 $0.31
March 31, 1998 $0.34 $0.30
(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, 1998, was
approximately 840. This does not include shareholders that hold stock in their
accounts at brokers/dealers.
(c) Dividends. Holders of 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.
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.
Cumulative
Amounts
During the
Development As of or for the fiscal year ended
Stage 1998 1997 1996 1995 1994
----------- --------- -------- --------- ---------- ----------
Operating
Revenue $ 76,332 $ 55,000 $ -0- $ 6,332 $ -0- $ -0-
Net Loss (14,083,201) (5,849,999) (2,549,823) (2,408,292) (1,122,541) (340,004)
Net Loss per
Common Share (0.08) (0.04) (0.05) (0.02) (0.01)
Total Assets 4,880,652 4,880,652 3,951,914 922,377 95,861 49,598
Long-term
Obligations 5,767,961 5,767,961 873,462 736,209 1,231,217 300,052
Stockholders'
Deficit (3,005,765) (3,005,765) (2,960,610) (1,295,908) (1,899,435) (843,440)
Cash Dividends
Declared 0 0 0 0 0 0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial comparisons will be made between the years ended March 31,
1998 and 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 1996, the Company had limited
operating revenues of $6,332 that derived from two consulting agreements for
time and material with Lockheed Martin Group. The Company obtained working
capital through the placement of its unissued common stock and the issuance of
short-term notes. Aggregate amount received was approximately $192,400 for stock
and $569,267 from the issuance of notes. In addition, the Company's operating
payables and accrued liabilities increased approximately $178.832.
During the fiscal year ended March 31, 1997, the Company had no
operating revenues. This does not reflect the working capital held back per the
ESSI agreement with ISPL discussed below in the section on Accuprobe, Inc. These
funds are accounted for separately in the financial section of this report as it
is considered a sales/leaseback transaction for accounting purposes. In
addition, the Company's operating payables and accrued liabilities increased.
The large operating payables and short-term notes create a substantial working
capital deficiency.
During the fiscal year ended March 31, 1998, the Company had limited
operating revenues from one contract for $55,000 from work invoiced against its
$5,750,000 (base) task order contract.
In 1997, the Company formed a new company, ESSI Probe 1 LC, to acquire
a second PROBE-1 instrument manufactured by Integrated Spectronics Pty Ltd. of
Australia. The new company is a joint venture managed by Earth Search Sciences
and owned 50% by Earth Search Sciences, who contributed $500,000 and certain
rights to its proprietary technology and 50% by two shareholders, who
contributed $1 million for their interest in the company. Under the terms of the
joint venture arrangement, Earth Search Sciences will use the PROBE-1 instrument
for the identification and exploitation of minerals as well as environmental
remediation and other projects. The joint venture hopes to receive certain
royalties on minerals discovered and exploited through use of the instrument, as
well as other fees paid by third parties for data gathered by the instrument.
This instrument is slated for delivery between the third and fourth quarters of
1998.
The Company signed a funding agreement with Swancorp Equities Inc. to
provide over $15 million in funding. The funding agreement contemplates Swancorp
assisting Earth Search in obtaining $5 million of capital in a direct private
placement with a potential additional $5 million through the exercise of
attached warrants. Swancorp is prepared to assist the Company with subsequent
funding of an additional $5 million, if desired by Earth Search through a
combination of shares and warrants offered in a private placement with varying
exercise prices.
The Company has engaged IBK Capital of Toronto, Canada to participate
in the placement of $10 million worth of equity capital plus warrants. IBK
Capital will be working close with Swancorp Equities Inc. and other investment
bankers to raise the capital. There can be no assurance that the private
placement will be successful or that Earth Search will be successful in raising
the necessary capital required to meet its financial needs.
The Company restructured the commitment from Accuprobe, Inc. to fund
two (2) sensors, in June 1997, by agreeing to sell to Accuprobe, Inc. one
PROBE-1 under a sale-leaseback arrangement with an option to repurchase the
instrument outright and by agreeing to a loan from Accuprobe, Inc. for a portion
of the proceeds to fund a second PROBE-1 secured by a pledge of the contract
with Integrated Spectronics Pty Ltd related to the manufacture of such second
PROBE-1. The loan has been retired with Earth Search Sciences, Inc. stock.
The Company has also signed an agreement with Applied Signal and
Imaging Technology Inc. ("ASIT"), pursuant to which ASIT will work with the
Company to develop a system to provide real time translation of remote sensing
data into usable information. The Company expects that this technical
advancement will significantly enhance the value of air-borne remote sensing in
a large variety of contexts, where the present delay in receiving usable
information of several months has been an impediment to the use of remote
sensing technology. This agreement has been converted to a service agreement and
now includes use of the entire OSP family of software products.
RESULTS OF OPERATIONS
The company recognized revenues from the Noranda Agreement of $55,000
for the year ended March 31, 1998 and incurred $132,083 in expenses to service
the Noranda Agreement. For the year ended March 31, 1998, the Company
experienced a net loss of $5,849,999 or $0.077 per share on a diluted basis.
JOINT VENTURE AND OPERATING ENTITY RELATIONSHIP
During the fiscal year ended March 31, 1998, the Company completed a
series of agreements with Noranda Mining and Exploration Inc. and its affiliates
including Falconbridge Limited (collectively, the "Noranda Group"). These
agreements provide the Noranda Group with an exclusive license to use the
PROBE-1's for commercial mining exploration, as long as the Noranda Group
continues to purchase remote sensing services from the Company in certain
specified quantities. The Company is entitled to receive fees for services and
net smelter royalties or net profit interest royalties from certain discoveries
by the Noranda Group using the PROBE-1's. The licensing agreement with the
Noranda Group provided a $1,000,000 equity investment in ESSI by way of 200,000
preferred shares, convertible into 1,000,000 shares of common stock and an
option to purchase 1,000,000 shares of ESSI common stock at a price of $2.00 per
share.
During the fiscal year ended March 31, 1998, the Company formed a
global partnership with EarthWatch Incorporated (a subsidiary of Ball Aerospace)
to acquire and market remote sensing information. This partnership included
signing of a data reseller agreement in which Earth Search Sciences will provide
the HyperView_Product Line of hyperspectral imagery through the EarthWatch
Digital Globe(R) Services for worldwide distribution.
Subsequent to fiscal year ended March 31, 1998, the Company signed a
Memorandum of Understanding (MOU) to fly Cherry Creek Drainage, in conjunction
with the Forest Wildlife Protection Agency, State of Montana and NASA/Techlink.
The purpose of the flight is to collect data specific to the restocking of the
West Slope Cutthroat Trout and riparian issues relating to the entire drainage
area.
Subsequent to fiscal year end, the Company made a decision to
participate in Geosat's "Hyperspectral Group Shoot 1998". The Company will
provide PROBE-1 hyperspectral imagery to the oil and minerals exploration,
environmental assessment, and agriculture end-user community, for an evaluation
by these communities of its applications potential.
Subsequent to fiscal year end, the Company collected hyperspectral data
for Desert Research Institute ("DRI") in the Kelso Dunes area in southeastern
California. The project completed for DRI was to detect change in arid
vegetation cover using Hyperspectral data in the region known as the Providence
Mountains. Detection of disturbance is these regions will aid in assessment of
ecosystem status and global climate change. The remote sensing data combined
with ground measurements will examine spectral changes occurring concurrently
with observed changes in percent green cover. Before and after disturbance
imagery will be collected coincident with ground assessments of vegetation
cover. Future collaboration is expected with DRI.
Dr. Larry Lass, University of Idaho teamed with Earth Search Sciences
on a joint proposal to the Farm Bureau and won a contract to overfly the Snake
River Basin (Hell's Canyon) to prove the use of hyperspectral imagery for
control and eradication of noxious weed intrusion. The results of which will
enable Earth Search to determine the applicability of PROBE-1 technology to this
potentially lucrative agricultural market.
During the fiscal year ended March 31, 1998, 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.
FUTURE OPERATIONS
The Company continues to increase its involvement in the mineral
exploration and environmental areas, using the results of its research and
development over the last five years in remote sensing. By attempting to obtain
equity funding, the Company anticipates developing instruments to include
hand-held, airborne and satellite spectrometers and to acquire revenue-producing
companies in the natural resources and environmental monitoring field.
Through teaming with other firms, the Company will identify possible
technology applications for remote sensing. Management intends to pursue
additional markets for its imagery databases, which would generate operating
revenues and adequate cash flows.
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-22 of this report.
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 1998 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, 1998.
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 1998 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 1998 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
Information with respect to certain relationships and related
transactions with management will be included under "Certain Transactions" in
the Company's definitive proxy statement for its 1998 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.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Consolidated Financial Statements Page in this Report
Reports of Independent Accountants F-1
Balance Sheet at March 31, 1998 and 1997 F-2
Statement of Loss for the Years
Ended March 31, 1998, 1997 and 1996 F-3
Statement of Changes in Shareholders'
Equity (Deficit) for the Years Ended
March 31, 1998, 1997 and 1996 F-4/F-5
Statement of Cash Flows for the Years
Ended March 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-8/F-22
(a)(2) Financial Data Schedules Electronically Filed
(b) Reports on Form 8-K. Electronically Filed
Filed a Form 8-K on April 9, 1997
Filed a Form 8-K on June 19, 1997
Filed a Form 8-K on July 9, 1997
Filed a Form 8-K on August 14, 1997
Filed a Form 8-K on August 26, 1997
Filed a Form 8-K on December 19, 1997
Filed a Form 8-K on January 23, 1998
Filed a Form 8-K on February 6, 1998
Filed a Form 8-K on March 31, 1998
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 and Chief Financial Officer
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 following capacities on July 15, 1998.
Signature Title
/s/ Larry F Vance Chairman and Chief Financial
Larry F. Vance Officer (Principal Executive and Financial Officer)
/s/ John W. Peel, III Chief Executive Officer
John W. Peel, III (Principal Executive Officer)
/s/ Tami Story Director
Tami J. Story
/s/ Rory J. Stevens Director
Rory J. Stevens
Report of Independent Accountants
To the Board of Directors and Shareholders of
Earth Search Sciences, Inc.
In our opinion, the accompanying consolidated balance sheet 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 (collectively, the Company, a development stage company) at March
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1998 and for the period
from inception (May 15, 1984) through March 31, 1998, in conformity with
generally accepted accounting principles. These consolidated 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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
consolidated financial statements, the Company is in the development stage and
has not generated significant operating revenues to date. In addition, the
Company has suffered recurring losses since its inception and, at March 31,
1998, has a deficit aggregating $14,083,201 accumulated during its development
stage and an excess of current liabilities over current assets of $882,363. Such
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
April 23, 1998
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
March 31,
1998 1997
----------- -----------
Assets
Current assets:
Cash $ 42,600 $ 51,666
Other current assets (Note 1) 675,648 -
----------- -----------
Total current assets 718,248 51,666
Property and equipment (Note 3) 3,979,179 3,840,460
Other long-term assets (Notes 1 and 11) 183,225 59,788
----------- -----------
Total assets $ 4,880,652 $ 3,951,914
=========== ===========
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders' Deficit
Current liabilities:
Notes payable (Note 5) $ 89,080 $ 203,250
Accounts payable 671,332 1,764,836
Accrued payroll taxes 18,449 64,733
Accrued interest (Notes 5 and 6) 281,750 406,273
Payable to Probe 1 Joint Venture (Note 1) 500,000 -
Unearned revenue (Note 1) 40,000 -
Cash advances and deposits (Note 5) - 3,082,125
----------- -----------
Total current liabilities 1,600,611 5,521,217
Long-term liabilities:
Shareholder loans (Note 6) 104,090 37,090
Capital lease obligation (Note 3) 2,029,410 -
Deferred officers' compensation (Note 4) 1,387,461 779,818
Minority interests (Note 10) 2,247,000 56,554
----------- -----------
Total liabilities 7,368,572 6,394,679
----------- -----------
Commitments and contingencies (Notes 10 and 12)
Redeemable common stock, $.001 par value,
1,725,914 shares issued and outstanding
at March 31, 1998 and 1997 (Note 10) 517,845 517,845
----------- -----------
Nonredeemable shareholders' deficit(Notes 1, 8, 9 and 10):
Series A preferred stock; 200,000 shares
authorized, issued and outstanding at
March 31, 1998 1,000,000 -
Common stock, $.001 par value; 200,000,000
shares authorized; 84,792,576 and 68,530,779
shares, respectively, issued and outstanding 84,792 68,531
Additional paid-in capital 9,827,644 5,204,061
Common stock subscribed 165,000 -
Deficit accumulated during the development
stage (14,083,201) (8,233,202)
----------- -----------
(3,005,765) (2,960,610)
Total liabilities, redeemable common stock
and nonredeemable shareholders' deficit $ 4,880,652 $ 3,951,914
=========== ===========
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Statement of Loss
- --------------------------------------------------------------------------------
From inception
(May 15, 1984)
through
March 31, For the year ended March 31,
1998 1998 1997 1996
-------------- -----------
Revenue $ 76,332 $ 55,000 $ - $ 6,332
Cost of services provided (132,083) (132,083) - -
------------- ----------- ----------- -----------
Gross margin (55,751) (77,083) - -
------------- ----------- ----------- -----------
Expenses:
Exploration (Note 1) 1,960,992 356,988 606,169 150,419
Depreciation 290,994 42,768 29,668 20,004
General and administrative 8,846,908 3,062,669 1,646,063 2,143,013
------------- ----------- ----------- -----------
11,098,894 3,462,425 2,281,900 2,313,436
------------- ----------- ----------- -----------
Loss from operations (11,154,645) (3,539,508) (2,281,900) (2,307,104)
Interest income 27,451 17,449 - 6,762
Interest expense (Notes 5 and 6) (1,434,041) (689,600) (305,297) (107,950)
Other expense (Note 10) (473,340) (473,340) - -
------------- ----------- ----------- -----------
Loss before minority interest (13,034,575) (4,684,999) (2,587,197) (2,408,292)
Minority interest in losses of
consolidated subsidiaries 37,374 - 37,374 -
------------- ----------- ----------- -----------
Loss before extraordinary item (12,997,201) (4,684,999) (2,549,823) (2,408,292)
Extraordinary items, net (Notes 3 and 5) (1,086,000) (1,165,000) - -
------------- ----------- ----------- -------------
Net loss $ (14,083,201) $(5,849,999) $(2,549,823) $(2,408,292)
============= =========== =========== ===========
Shares applicable to basic and diluted
loss per share 76,369,220 66,566,995 53,150,421
Basic and diluted loss per share $(0.077) $(0.038) $(0.045)
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 1 of 2
- ------------------------------------------------------------------------------------------------------------------------------------
Nonredeemable shareholder's equity (deficit)
----------------------------------------------------------------------------------
Deficit
accumulated
Redeemable during the
common stock Preferred stock Common stock developmenTreasury
Description Shares Amount Shares Amount Shares Amount APIC Subscribed stage stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at May 15, 1984
(date of inception) - $ - - - $ - - -
Issuance of common stock
to incorporators for cash
(Notes 1 and 9) 7,000,000 7,000 28,000 35,000
Net loss (604) (604)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1985 - - - - 7,000,000 7,000 28,000 (604) - 34,396
Issuance of common stock
in connection with public
offering net of offering costs
of $23,892 (Notes 1 and 9) 2,129,100 2,129 80,434 82,563
Issuance of common stock in
connection with merger
(Notes 1 and 9) 13,639,600 13,640 (12,640) 1,000
Net loss (27,451) (27,451)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1986 - - - - 22,768,700 22,769 95,794 (28,055) - 90,508
Net loss (47,625) (47,625)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1987 - - - - 22,768,700 22,769 95,794 (75,680) - 42,883
Acquisition of treasury
stock (Notes 1 and 9) (33,000) (33,000)
Net loss (102,616) (102,616)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1988 - - - - 22,768,700 22,769 95,794 (178,296) (33,000) (92,733)
Net loss (123,463) (123,463)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1989 22,768,700 22,769 95,794 (301,759) (33,000)(216,196)
Net loss (256,125) (256,125)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1990 - - - - 22,768,700 22,769 95,794 (557,884) (33,000)(472,321)
Issuance of common stock
in exchange for services rendered 1,944,977 1,945 56,655 58,600
Sale of treasury stock (Note 9) 98,500 26,000 124,500
Net loss (171,742) (171,742)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 1991 - - - - 24,713,677 24,714 250,949 (729,626) (7,000)(460,963)
Issuance of common stock
for cash 3,335,196 3,335 235,729 239,064
Issuance of common stock to
a director pursuant to stock option 1,000,000 1,000 9,000 10,000
Issuance of common stock
in exchange for services rendered 872,000 872 84,188 85,060
Issuance of common stock in
exchange for mineral properties
(Notes 1 and 2) 1,500,000 1,500 73,500 75,000
Issuance of common stock
in exchange for equipment 140,000 140 7,768 7,908
Sale of treasury stock
(Notes 1 and 9) 54,500 7,000 61,500
Net loss (749,259) (749,259)
----------------------------------------------------------------------------------------------------
Balance at March 31, 1992 - - - - 31,560,873 31,561 715,634 (1,478,885) - (731,690)
Issuance of common stock for cash 2,308,611 2,308 78,192 80,500
Issuance of common stock in exchange
for services rendered (Notes 1 and 9) 1,810,000 1,810 52,583 54,393
Issuance of common stock in exchange
for notes payable or accounts payable 2,404,697 2,405 98,968 101,373
Net loss (333,657) (333,657)
---------------------------------------------------------------------------------------------------
Balance at March 31, 1993 - - - - 38,084,181 38,084 945,377 (1,812,542) - (829,081)
Issuance of common stock for cash 2,043,904 2,044 67,456 69,500
Issuance of common stock in exchange
for services rendered (Note 1 and 9) 125,000 125 6,125 6,250
Issuance of common stock in exchange
for notes payable or accounts payable
(Notes 1 and 9) 8,405,094 8,405 241,490 249,895
Net loss (340,004) (340,004)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1994 - - - - 48,658,179 48,658 1,260,448 (2,152,546) - (843,440)
The accompanying notes are an integrated part of these financial statements
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 2 of 2
- ------------------------------------------------------------------------------------------------------------------------------------
Nonredeemable shareholder's equity (deficit)
----------------------------------------------------------------------------------
Deficit
accumulated
Redeemable during the
common stock Preferred stock Common stock developmenTreasury
Description Shares Amount Shares Amount Shares Amount APIC Subscribed stage stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 - - - - 48,658,179 48,658 1,260,448 (2,152,546) (843,440)
Issuance of common stock for cash 360,000 360 17,640 18,000
Issuance of common stock in exchange
for services rendered, excluding
treasury stock (Notes 1 and 9) 200,000 200 9,800 10,000
Conversion of debentures into shares
of common stock, excluding treasury
stock (Note 9) 531,821 532 20,696 21,228
Issuance of common stock in exchange
for equipment (Note 9) 250,000 250 12,250 12,500
Common stock relinquished to the
Company (Notes 6 and 9) (705,935) (705,935)
Sale of treasury stock (Note 9) 95,325 95,325
Issuance of treasury stock in exchange
for services rendered (Notes 2 and 9) 169,141 169,141
Conversion of debentures thorugh issuance
of treasury stock (Note 9) 273,787 273,787
Stock purchase warrants and options
issued (Notes 2 and 8) 172,500 172,500
Adjustment resulting from issuance of
treasury stock (Notes 1 and 9) (167,118) 167,118 -
Net loss (1,122,541) (1,122,541)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1995 - - - - 50,000,000 50,000 1,326,216 (3,275,087) (564) (1,899,435)
Issuance of common stock
for cash (Note 9) 1,058,880 1,059 191,341 192,400
Issuance of common stock in
exchange for services (Note 9) 1,379,355 1,379 271,497 272,876
Conversion of debentures into
shares of common stock (Note 9) 3,596,861 3,596 566,978 570,574
Liquidation of shareholders' loans
for shares of common stock (Note 9) 10,466,567 10,467 695,468 705,935
Adjustment to additional paid-in
capital related to sale of subsidiary
common stock (Note 9) 109,970 109,970
Stock purchase warrants and options
issued (Note 9) 1,150,000 1,150,000
Shares issued to a related party (Note 9) 50,000 50 8,450 8,500
Purchase of treasury stock (Note 9) (15,000) (15,000)
Adjustment resulting from issuance
of treasury stock 1,000 (1,000) -
Sale of treasury stock 16,564 16,564
Net loss (2,408,292) (2,408,292)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1996 - - - - 66,551,663 66,551 4,320,920 (5,683,379) - (1,295,908)
Issuance of common stock in
exchange for services
rendered (Note 9) 1,836,140 1,837 535,404 537,241
Issuance of common stock in
exchange for instrument 1,000,000 400,000 -
Conversion of debentures into
shares of common stock
(Note 9) 828,890 829 345,699 346,528
Issuance of common stock for
shares of subsidiary
common stock 40,000 40 2,960 10,000
Adjustment to additional paid-in
capital related to sale of
subsidiary common stock
(Note 9) 116,197 109,197
Common stock subject to
potential rescission
offering 725,914 117,845 (725,914) (726) (117,119) (117,845)
Net loss (2,549,823) (2,549,823)
---------------------------------------------------------------------------------------------------
Balance at March 31, 1997 1,725,914 517,845 - - 68,530,779 68,531 5,204,061 (8,233,202) - (2,960,610)
Issuance of common stock
in exchange for services
(Note 10) 1,286,476 1,286 350,329 351,615
Issuance of common stock
for cash 870,334 870 179,130 180,000
Shares issued in conjunction
with sale/leaseback for
purchase of Probe 1 (Note 3) 1,000,000 1,000 374,000 375,000
Issuance of common stock for
shares of subsidiary common
stock (Note 10) 1,252,000 1,252 55,302 56,554
Issuance of common stock for
shares of Skywatch common
stock (Note 10) 1,185,199 1,185 472,155 473,340
Conversion of debentures into
shares of common stock (Note 5) 865,988 866 160,197 161,063
Issuance of common stock in lieu
of future lease payments (Note 3) 1,725,000 1,725 498,275 500,000
Issuance of stock subscription
in lieu of future lease
payments (Note 3) 165,000 165,000
Issuance of common stock in lieu
of debt obligations (Note 5) 8,076,800 8,077 2,334,195 2,342,272
Issuance of warrant for cash proceeds
to minority holder in Probe 1 LC
(Note 10) 200,000 200,000
Conversion of note payable for
Series A preferred stock
(Notes 4 and 10) 100,000 500,000 500,000
Issuance of Series A preferred
stock for cash (Note 10) 100,000 500,000 500,000
Net loss (5,849,999) (5,849,999)
----------------------------------------------------------------------------------------------------
Balance at March 31, 1998 1,725,914 $517,845 200,000 $1,000,000 84,792,576 $84,792 $9,827,644 $165,000$(14,083,201) $- $(3,005,765)
========= ======= ======= ========= ========== ====== ========= ======= =========== = ==========
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
From inception
(May 15, 1984)
through
March 31, For the year ended March 31,
1998 1998 1997 1996
-------------- ----------- ----------- -----------
Cash flows from operating activities:
Net loss $(14,083,201) $(5,849,999) $(2,549,823) $(2,408,292)
Adjustments to reconcile net loss to net cash
used in operating activities:
Notes payable issued for services and
interest expense 36,892 - - -
Common stock issued for services and
interest expense 1,655,755 364,912 730,674 322,974
Common stock issued for Skywatch stock 473,340 473,340 - -
Treasury stock issued for services 169,141 - - -
Subsidiary common stock issued for compensation 1,000,000 1,000,000 - -
Expense resulting from issuance of warrants
and options to purchase common stock 1,322,500 - - 1,150,000
Charge-off of capitalized costs for
mineral properties 206,715 - - -
Extraordinary items 1,086,000 1,165,000 - -
Loss attributed to minority interest (37,374) - (37,374) -
Depreciation 415,994 167,768 29,668 20,004
Amortization of lease discount 404,410 404,410 - -
Loss(gain) on sale of equipment 997 - - (5,765)
Changes in assets and liabilities:
Other assets (158,873) (99,085) 69,988 (128,939)
Accounts payable 888,034 (893,504) 1,576,018 88,916
Accrued liabilities 520,666 20,105 129,593 89,916
Unearned revenue 40,000 40,000 - -
Deferred officers' compensation 1,387,461 607,643 187,258 240,320
------------ ----------- ----------- -----------
Net cash used for operating activities (4,671,543) (2,599,410) 136,002 (630,866)
------------ ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (4,061,927) (306,487) (3,347,852) (87,611)
Advance deposits 3,300,000 217,875 2,582,125 500,000
Proceeds from sale of property and equipment 33,527 - - 15,700
------------ ----------- ----------- -----------
Net cash used for investing activities (728,400) (88,612) (765,727) 428,089
------------ ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 1,919,705 524,956 - 569,267
Repayments on notes payable (250,451) (40,000) (95,500) (9,062)
Proceeds from shareholder loans 1,288,694 102,000 - -
Repayments of shareholder loans (942,852) (35,000) (59,429) (68,023)
Issuance of common stock 908,027 180,000 - 192,400
Issuance of subsidiary common stock 570,095 247,000 165,995 157,100
Purchase of treasury stock (48,000) - - (15,000)
Proceeds from sale of treasury stock 297,325 - - 16,000
Issuance of Series A preferred stock 500,000 500,000 - -
Proceeds from establishment of joint venture 1,000,000 1,000,000 - -
Issuance of warrant to purchase common stock 200,000 200,000 - -
------------ ----------- ----------- -----------
Net cash provided by financing activities 5,442,543 2,678,956 11,066 842,682
------------ ----------- ----------- -----------
Net increase (decrease) in cash 42,600 (9,066) (618,659) 639,905
Cash at beginning of period - 51,666 670,325 30,420
------------ ----------- ----------- -----------
Cash at end of period $ 42,600 $ 42,600 $ 51,666 $ 670,325
============ =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Operations
The Company was incorporated on May 15, 1984, pursuant to the laws of the
state of Utah, under the name Turnabout Corporation. In November 1984, the
Company commenced a public offering of its common stock.
In December 1985, the Company acquired all of the outstanding shares of
common stock of a privately held company known as Earth Search Sciences,
Inc. (ESSI), a Utah corporation formed on August 29, 1985. The Company
issued 13,639,600 shares of its common stock in exchange for ESSI's
outstanding shares. This merger was a reverse acquisition and was accounted
for as a pooling of interests. Accordingly, the assets and liabilities of
the two companies were combined at their recorded net book values. ESSI's
principal assets were unpatented mining claims in Alaska that were acquired
from ESSI's incorporators at a cost of $126,715. ESSI's operations were the
continuing operations of the Company, and ESSI was the entity which had
substance and control both before and after the merger. In August 1987, the
Company changed its name to Earth Search Sciences, Inc., and in November
1987, the former subsidiary was dissolved.
The Company has three subsidiaries: Earth Search Resources, Inc.; Bear
Creek Exploration, Inc. ("Bear Creek"); and Quasar Resources, Inc.
("Quasar"). As of March 31, 1996, these entities were not operational;
however, during the periods from February through April 1996 and from
October 1997 through February 1998, the Company sold 30 percent of Quasar
and approximately 10 percent of Earth Search Resources, Inc. in private
placement offerings. In the current fiscal year the Company repurchased all
outstanding Quasar common stock. See Note 10.
Effective June 3, 1997, the Company formed a new company, ESSI Probe 1 LC,
to acquire the second Probe 1 instrument manufactured by Integrated
Spectronics Pty Ltd. of Australia. The new Company is a joint venture
managed by Earth Search Sciences, Inc and owned 50 percent by Earth Search
Sciences, Inc. which contributed certain rights and a promise to pay
$500,000, and 50 percent by two shareholders who contributed $1 million for
their interest in the new company. Under the terms of the joint venture
arrangement, Earth Search Sciences, Inc. will use the Probe 1 instrument
for the identification and exploitation of minerals, as well as
environmental remediation and other projects. The joint venture hopes to
receive certain royalties on minerals discovered and exploited through use
of the instrument, as well as other fees paid by third parties for data
gathered by the instrument. This instrument is scheduled for delivery
during fiscal 1999.
The Company's remaining obligation to the joint venture includes payment of
$500,000. Such amount has not been paid as of year end and is reflected as
Payable to Probe 1 Joint Venture within the March 31, 1998 balance. Since
the accounts of the joint venture are consolidated with those of the
Company, the offsetting receivable to the joint venture is reflected in the
consolidated financial statements as a current asset.
The Company's activities have included the acquisition of the ATM imagery
database which can be utilized by the Company in mineral property
exploration activities or the development of information that can be sold
to third parties (see Note 3). In addition, the Company has acquired
mineral properties and has performed certain exploration work. Direct
exploration costs incurred to date have been principally geologists'
salaries and consulting fees.
In April 1991, the Company commenced entering into semiannual agreements
with the National Aeronautics and Space Administration (NASA) to
participate in the Visiting Investigator Program ("VIP") to utilize the
specialized resources and sensing technology of NASA to the goal of
commercialization. The agreements allow the Company access to NASA's
sophisticated facilities that are capable of a full range of remote sensing
activities. Pursuant to the agreement, NASA supplies administrative and
technical support and the Company is responsible for its expenses and costs
relating to its participation in VIP. Information and technology which may
be developed are to be shared between NASA and the Company.
In addition, the Company has established a non-exclusive agreement with the
University of Utah Research Institute ("UURI") and its center for remote
sensing to mutually conduct, on a project-by-project basis, research and
development activities relating to remote sensing. UURI is obligated to
provide technical support for mineral and petroleum exploration, related
environmental analysis, and laboratory and field training. The Company
provides geological personnel and funding for the projects.
Going concern
The Company is experiencing working capital deficiencies because it has
incurred operating losses and has not generated significant operating
revenues to date. In addition, the Company has been unable to meet some of
its financial obligations. 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.
Management expects to continue to raise capital through private placement
of unissued stock to meet its financial obligations and cash requirements.
In addition, management believes that the license and service agreements
with the Noranda Group (see Note 13) will allow the Company to generate
operating revenues and additional cash flow. However, there can be no
assurance that the Company will be able to raise such capital or to
generate operating revenues to sustain its operations.
Development stage enterprise
The Company is considered a development stage company. The Company's
planned principal operations have commenced, but have not resulted in any
significant revenue to date. Pursuant to the requirements of Financial
Accounting Standards Board Statement No. 7, the Company has included in the
accompanying financial statements its cumulative results of operations,
changes in shareholders' deficit and cash flows from the Company's
inception (May 15, 1984) through March 31, 1998.
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 interests
held by third parties in Earth Search Resources and ESSI Probe 1 LC.
Revenue recognition
Revenue generated and expenses incurred from the performance of remote
sensing activities are recognized as corresponding services are performed.
Revenues of $55,000 generated during fiscal 1998 were earned exclusively
from remote sensing services performed on behalf of the Noranda Group (see
Note 13).
Mineral properties and exploration costs
Cost incurred to acquire mineral properties are capitalized. Costs
associated with mineral properties determined to be impaired or to have
little or no value are expensed. Exploration costs are expensed in the
period incurred. The Company considers geologist salaries, studies of
geologic structures, mapping and incidental expenditures incurred in the
field to assess mineral deposits as exploration costs.
Property and equipment
Property and Equipment are stated at cost. The Company recognizes
depreciation on its property and equipment using the straight-line method
over estimated useful lives of five to ten years.
Depletion of mineral properties is calculated using the unit-of-production
method. There has been no mining activity performed by the Company on its
mineral properties to date; therefore, no depletion is reflected in the
accompanying financial statements.
Income taxes
Effective April 1, 1994, the Company adopted on a prospective basis
Statement of Financial Accounting Standards No. 109 ("FAS 109"), Accounting
for Income Taxes. FAS 109 requires the recognition of deferred tax assets
and liabilities for the expected tax effects from differences between the
financial reporting and tax bases of assets and liabilities. In estimating
future tax effects, FAS 109 generally considers all expected future events
other than enactments of changes in tax law or statutorily imposed rates.
The adoption of FAS 109 had no effect on loss or shareholders' deficit.
Common stock
Expenses and commissions incurred in connection with the Company's public
offering of its common stock and the subsequent sales of common stock for
cash have been recorded as reductions of proceeds received.
Common stock issued for other than cash consideration is reflected in the
accompanying financial statements at estimated fair value at the date of
issue, considering the restricted nature of such shares.
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.
Net loss per common share
Earth Search Sciences, Inc. adopted Statement of Financial Accounting
Standards No. 128 ("FAS 128"), Earnings Per Share, beginning with the
Company's third quarter of fiscal 1998. This statement requires the Company
to disclose "basic" and "diluted" loss per share and to restate all prior
periods presented for comparative purposes.
The computation of basic loss per share is computed using the weighted
average number of common stock shares outstanding. Diluted loss per share
is computed using the weighted average number of common stock shares
outstanding adjusted for the incremental shares attributed to outstanding
options and warrants to purchase common stock, unless the effect of such
incremental shares is anti-dilutive. Options and warrants to purchase
shares of common stock in fiscal 1998 and 1997, were not included in the
computation of diluted loss per common share because their effect was
anti-dilutive.
Changes in classification
Certain reclassifications have been made to the fiscal year 1996 and 1995
cumulative financial statements to conform with the financial statement
presentation for fiscal year 1997. Such reclassifications had no effect on
the Company's results of operations or shareholders' 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.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The adoption of both
statements is required for fiscal years beginning after December 15, 1997.
Under SFAS No. 130, companies are required to report in the financial
statements, in addition to net income (loss), comprehensive income (loss)
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt
and equity securities. SFAS No. 131 requires that companies report
separately, in the financial statements, certain financial and descriptive
information about operating segments, if applicable. The Company does not
expect the adoption of SFAS No. 130 or SFAS No. 131 to have any financial
impact on its consolidated financial statements and is currently assessing
the impact of the disclosure provisions of the new pronouncements.
2. Supplemental Cash Flow Information
Year ended March 31,
1998 1997
------------ ------------
Non-cash financing and investing activities:
Common stock issued in conjunction with sale/
lease 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) 2,740,038 346,528
Common stock issued in lieu of future lease
payments (Note 3) 500,000 -
Common stock subscription issued in lieu of future
lease payments (Note 3) 165,000 -
Common stock issued for subsidiary common
stock (Note 10) 56,554 3,000
Note payable converted into Series A
preferred stock (Note 10) 500,000 -
Redeemable common stock issued for
scanner (Note 10) - 400,000
3. Property and Equipment
Property and equipment consist of the following:
March 31,
1998 1997
----------- -----------
Mineral properties (A) $ 5,833 $ 5,833
ATM imagery database (B) 134,000 134,000
Computers and software 70,446 57,490
Vehicles and equipment 95,603 53,053
Fixed assets under capital lease (C) 2,500,000 -
Construction in progress (D) 1,520,000 3,770,000
----------- -----------
4,325,882 4,020,376
Accumulated depreciation (346,703) (179,910)
----------- -----------
$ 3,979,179 $ 3,840,460
=========== ============
(A) In December 1993, the Company acquired a 58% working interest in mineral
tracts aggregating 3,389 acres in Colorado. The mineral interest was
acquired through a joint venture with Emerald Operating Company located in
Denver, Colorado. Presently, management is evaluating the commercial
viability of the property and the Company has expended $15,000 in
geological exploration costs.
(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 a 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.
The cost of the ATM imagery database was fully depreciated as of March 31,
1994; however, the Company believes that it continues to have economic
value.
(C) During fiscal 1996, the Company entered into agreements to have an
Australian company manufacture three airborne hyperspectral scanners for
$2.5, $2.02 and $1.9 million, respectively. In June 10, 1997, the Company
completed a sales-leaseback transaction for the first scanner "Probe 1".
The instrument was sold for its cost of $2,500,000. The terms of the
leaseback are as follows: 1) the Company will lease Probe 1 for $250,000
per year bearing interest of prime plus 2% for three years; 2) at 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 Earth Search Sciences, Inc. common stock at a
conversion rate of 40% of the stock's then fair market value. In the event
Earth Search is not the operator at the time of exercise of the option, the
lessee shall substitute comparable equity securities or other rights
subject to reasonable approval of lessor; 4) the Company issued to the
lessor 1,000,000 unregistered shares of the Company's common stock and
warrants to purchase an additiona1 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' deficit related to the shares of common stock and
stock purchase warrants issued in conjunction with the above transaction.
On January 5, 1998, 1,725,000 restricted shares of the Company's common
stock were issued in lieu of the first two lease payments due on April 10,
1998 and 1999. As further consideration, the Company agreed to issue an
additional 1,000,000 restricted shares of the Company's common stock to
retire the warrant issued in conjunction with the sale/leaseback
transaction mentioned above. These shares were not issued as of March 31,
1998; the value of these shares is shown as common stock subscribed in the
Company's financial statements. The Company recognized an extraordinary
loss of $165,000 (basic and diluted loss per share of $0.002) from the debt
extinguishment during the fourth quarter of fiscal 1998 as a result of the
settlement of the lease payments.
The cost of equipment under capital leases at March 31, 1998 was $2,500,000
with related accumulated amortization of $125,000.
Total future minimum lease payments remaining under the non-cancelable
capital lease is $3,000,000. The total amount is due during fiscal 2001.
The interest portion of the remaining lease payment is $970,590. The
present value of the capital lease obligation is $2,029,410.
(D) The Company accepted delivery of the first scanner during fiscal 1998. The
Company has paid $1,520,000 to date on the second airborne hyperspectral
scanner, which is recorded as construction-in-process at March 31, 1998.
The Company has a commitment to pay the remaining $500,000 on the second
instrument upon its completion, expected to be in fiscal 1999. During
fiscal 1998, the Company violated payment terms for the third instrument
and will no longer receive delivery of this scanner.
4. Deferred Officers' Compensation
Deferred compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, Chief Executive Officer, President and
Secretary). Partial salaries have been paid to such officers since the
inception of the Company. The Company recorded deferred officer
compensation of $418,550, $187,258 and $240,520 during the years ended
March 31, 1998, 1997 and 1996, respectively. Interest on deferred officer
compensation is accrued at 8.5% annually. The Company accrued interest for
deferred officer compensation of $88,721, $63,534, and $35,224 for the
years ended March 31, 1998, 1997 and 1996, respectively. The Company and
certain officers have agreed that payment of the compensation will be
deferred until and unless the Company achieves adequate cash flow from
operations. Management has not and does not presently anticipate sufficient
cash flow from operations for the succeeding year; accordingly, the
deferred officers' compensation has been classified as a noncurrent
liability in the accompanying consolidated balance sheet at March 31, 1998
and 1997.
5. Notes Payable
During the years ended March 31, 1996 and 1995, the Company obtained
interim working capital by issuing 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 12.0% to 12.99%. Holders of the notes
have the right to convert the principal amount plus interest into
restricted shares of the Company common stock, subject to the terms in the
promissory notes. As of March 31, 1998 and 1997, the Company has various
convertible notes aggregating $89,080 and $203,250, respectively. Interest
paid on such notes during the years ended March 31, 1998, 1997 and 1996
aggregated $15,384, $11,801 and $2,500, respectively.
In fiscal 1998 and 1997, $161,063 and $346,528, respectively, of notes
outstanding plus accrued interest were converted into common stock at the
agreed upon conversion rates. In 1997, certain notes contained conversion
provisions at 50% of fair value at the date of conversion. As such, the
Company recognized $61,937 in additional interest expense due to the
conversions.
In June 1997, the Company signed a promissory note for $2,200,000 to settle
obligations for cash advances of $1,200,000 received as deposits for the
first hyperspectral scanner (see Note 3). The Company recognized an
extraordinary loss of $1,000,000 (basic and diluted loss per share of
$0.013) from debt extinguishment, during the first quarter of fiscal 1998
as a result of the settlement. In January 1998, the Company settled the
$2,200,000 note plus accrued interest of $142,000 by issuing 8,076,800
restricted shares of the Company's common stock and a warrant to purchase
1,000,000 restricted shares of the Company's common stock at an exercise
price of $2 per share. No value was assigned to the warrant.
In August 1997, the Company signed a promissory note for $500,000. The note
bore interest at 12 percent. During January 1998, the note was converted to
100,000 shares of the Company's Series A preferred stock.
6. Shareholder Loans
The Company has financed its development stage activities in part by funds
received from advances from shareholders, primarily an officer and director
of the Company. It is anticipated that these advances will be repaid when
and if the Company generates cash flow from operations and/or sales of
shares of its common stock.
Outstanding advances bear annual interest at 10%. As of March 31, 1998 and
1997, interest accrued on such advances, aggregating $231,289 and $224,385,
respectively, has been included in accrued interest in the accompanying
consolidated balance sheet.
7. Income Taxes
The Company recorded no provision for income taxes in fiscal 1998, 1997 and
1996 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,
1998 1997
----------- -----------
Net operating loss carryforwards $(4,080,747) $(2,981,354)
Accrued liabilities (705,172) (311,927)
----------- -----------
Gross deferred tax assets (4,785,919) (3,293,281)
Deferred tax assets valuation allowance 4,785,919 3,293,281
----------- -----------
$ - $ -
=========== ===========
The deferred tax asset has been fully reserved in accordance with FAS 109
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 an amount computed using the
statutory federal income tax rate as follows:
Year ended March 31,
1998 1997 1996
---------- ----------- ----------
Benefit from income taxes at statutory rate $2,340,000 $ 1,019,929 $ 963,317
Decrease in benefit resulting from:
Deferred tax valuation allowance (2,340,000) (1,019,929) (963,317)
---------- ----------- ---------
$ - $ - $ -
========== =========== =========
The Company has tax net operating loss carryforwards at March 31, 1998 of
$10,201,868. Such carry forwards may be used to offset taxable income, if
any, in future years through their expiration in 2000 to 2013. Future
expiration of tax loss carryforwards, if not utilized, are as follows:
2000, $604; 2001, $27,451; 2002, $47,625; 2003, $102,616; thereafter,
$10,023,572. 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 have occurred or may
occur in the future. Such limitations could result in the expiration of a
part of the carryforwards before their utilization.
8. Officer and Director Stock Options
At March 31, 1995, the Board of Directors awarded the Chairman of the Board
stock options to purchase 1,500,000 shares of restricted common stock as
part of his deferred compensation agreement.
In April 1995, the Board of Directors granted options through employment
agreements for the Company's President and Chairman of the Board to each
purchase 5,000,000 shares of the Company's common stock at an exercise
price of $0.21 per share. Fifty percent of the options are exercisable at
any time. The remaining fifty percent are deemed "Performance Options" and
are exercisable as follows: (I) one-third shall become exercisable if and
when the Company reports a positive net after tax profit for any fiscal
year commencing on or after March 31, 1995; (II) another one-third shall
become exercisable if and when the Company reports a net after tax profit
of greater than $1 million for any fiscal year commencing on or after March
31, 1996; (III) all of the options shall become exercisable if and when the
Company reports a net after tax profit of greater than $2 million for any
fiscal year commencing on or after March 31, 1996; and IV) any remaining
options which have not become exercisable as aforesaid shall become null
and void when the Company reports its net after tax profits or losses for
the fiscal year ending March 31, 1998. Any options remaining unexercised on
December 31, 2004 shall lapse and be deemed null and void. The Company
recognized $1,150,000 in compensation expense during 1996 related to the
granting of the above non performance stock options, which represents the
difference between fair value and the exercise price at the grant date.
Notwithstanding the foregoing, all Performance Options issued during March
and April 1995 to these employees become immediately exercisable if
employment is terminated by the Company without cause or by the employee
with cause. In the event of proposed dissolution or liquidation of the
Company or in the event of a transfer of more than 50% of the outstanding
shares of the Company, or the sale of all or substantially all of the
assets of the Company, to a person or persons who were not, as of April 8,
1995, shareholders or employees of the Company (a "Change in Control"), all
Performance Options become immediately exercisable.
In May 1995, the Board of Directors granted options for the Company's
Secretary/Treasurer to purchase 300,000 shares of common stock at an
exercise price of $0.21 per share exercisable upon grant. In addition,
options were granted to a director of the Company to purchase 1,000,000
shares of common stock of the Company at a purchase price of $0.21 per
share. The director's options are exercisable at any time within five years
after the individual becomes a full-time employee of the Company based on
certain mutually agreeable performance criteria.
In June 1996, the Board of Directors, through employment agreements,
granted to the Company's Chief Executive Officer options to purchase an
aggregate of 2,500,000 shares of the common stock of the Company at a
purchase price of fifty percent (50%) of the losing market price per share.
Fifty percent (50%) of the options are exercisable at any time. The
remaining fifty percent (50%) of the options are deemed Performance
Options, and may be exercised upon completion by the Officer of a financing
for the Company. Upon the Company reporting a net after tax profit of
greater than five million dollars for any fiscal year, the Officer will
receive a bonus equal to the number of options unexercised multiplied by
the purchase price per share grossed up for taxes. Any options remaining
unexercised on December 31, 2006 shall lapse and be deemed null and void.
On August 5, 1997, the Board of Directors granted to the Company's
Chairman, President, Chief Executive Officer and Secretary options to
purchase 1,000,000 shares of the Company's common stock at a price equal to
$0.50 per share 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 $0.50
per share for 30 consecutive days, and the options shall lapse and be null
and void if they have not become exercisable by July 31, 1999.
Also in August 1997, the Board of Directors granted to the Company's
Chairman, President and Chief Executive Officer options to purchase a total
of 4,000,000 shares each of the Company's common stock as follows:
1. When and if the closing market price of common stock equals or exceeds
$1.00 per share for 30 consecutive days, then each of the three
individuals shall become fully vested with an option to purchase
1,000,000 shares of common stock at a price equal to $1.00 per share
exercisable for a period of 24 months from the date of vesting.
2. When and if the closing market price of common stock equals or exceeds
$1.50 per share for 30 consecutive days, then each of the three
individuals shall become fully vested with an option to purchase
1,000,000 shares of common stock at a price equal to $1.50 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
$2.00 per share for 30 consecutive days, then each of the three
individuals shall become fully vested with an option to purchase
1,000,000 shares of common stock at a price equal to $2.00 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
$2.50 per share for 30 consecutive days, then each of the three
individuals shall become fully vested with an option to purchase
1,000,000 shares of common stock at a price equal to $2.50 per share
exercisable for a period of 24 months from the date of vesting.
The individual must be employed by the Company on the first date of which
the closing market price of the Company's common stock equals or exceeds
the relevant price for the options to vest. The options shall lapse and be
null and void if they have not become exercisable by July 31, 1999.
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 date of grant.
The Company adopted Statement of Financial Accounting Standards No. 123
("FAS 123"), Accounting for Stock-Based Compensation, in 1996. This
statement allows companies to choose whether to account for stock-based
compensation under the current intrinsic method as prescribed by Accounting
Principles Board Opinion No. 25 (APB 25) or 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.
The Company has determined that the pro forma effects of applying FAS 123
would have an immaterial effect on the results of operations for 1998, 1997
and 1996. This determination was made using the following weighted average
assumptions:
Fiscal Fiscal Fiscal
1998 1997 1996
------ ------ ------
Risk-free interest rate 6.05% 6.75% 6.75%
Expected dividend yield - - -
Expected lives 5.43 10 10
Expected volatility 87% 95% 75%
9. Stock Options
The following table summarizes the employee stock option transactions described
above.
Shares under Weighted average
option exercise price
---------- ----------------
Balance, March 31, 1995 1,500,000 $0.11
Options granted 10,300,000 $0.21
Options canceled - -
Options exercised - -
---------- ----------------
Balance, March 31, 1996 11,800,000 $0.19
Options granted - -
Options canceled - -
Options exercised - -
---------- ----------------
Balance, March 31, 1997 11,800,000 $0.19
Options granted 23,000,000 $0.18
Options canceled - -
Options exercised - -
---------- ----------------
Balance, March 31, 1998 34,800,000 $0.78
========== ================
The weighted average per share fair value of options granted during fiscal 1998
is $0.11.
The following table summarizes information about stock options outstanding at
March 31, 1998:
Options
Options outstanding exercisable
--------------------------------------- ----------------
Weighted
Number average Number
Exercise outstanding remaining exercisable
price at 3/31/98 contractual life at 3/31/98
------------- ---------------- ----------------- ----------------
(Years)
$0.10 1,500,000 7 1,500,000
0.21 11,300,000 5.9 5,300,000
0.25 750,000 2.7 750,000
0.50 8,750,000 2.5 1,500,000
0.75 250,000 3 0
1.00 3,250,000 1.45 0
1.50 3,000,000 1.33 0
2.00 3,000,000 1.33 0
2.50 3,000,000 1.33 0
----------
34,800,000
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
losing market price per share. These options lapse on December 31, 2006.
Fifty percent (50%) of these options are exercisable at 3/31/98.
10. Redeemable Common Stock and Nonredeemable Shareholders' Equity
Redeemable common stock
In 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 to the
airborne hyperspectral manufacturer. As part of the stock issuance, the
Company granted "put rights" that may require the Company to redeem
1,000,000 shares of its common stock at a redemption price of $.40 per
share. The redemption period began on January 28, 1997 and will continue
until the contract is completed and final payment is made. If such
shareholder does not place a redemption request during the redemption
period, the "put right" will expire when the above terms are met by the
Company.
The shares of common stock subject to the "put rights" are presented in the
accompanying consolidated balance sheet as redeemable common stock. Such
shares have been recorded at their approximate fair market value at the
date of issuance. Such fair market value equals the maximum redemption
amount.
Also included in redeemable common stock are amounts related to a potential
rescission offering related to certain shares sold in the state of Idaho,
(see Note 12).
Preferred stock
During the year ended March 31, 1998, the Company issued 200,000 shares of
Series A preferred stock: 100,000 of these shares were issued as a result
of the conversion of a note payable (Note 5). Each share of preferred stock
is convertible into five shares of the Company's common stock. 2,000,000
shares of the Company's common stock have been reserved for issuance upon
the conversion of the Series A preferred stock.
Common stock issued
During the years ended March 31, 1998, 1997 and 1996, the Company issued
shares of common stock in exchange for services rendered as follows:
1998 1997 1996
---------- --------- ---------
Consulting and other $ 351,615 $ 537,241(a) $ 273,440
========== ========= ==========
Number of shares issued, including
treasury stock 1,286,476 1,836,140(a) 1,374,355
========== ========== ==========
(a) Inclusive of shares issued in conjunction with the research and
development contract disclosed in Note 11.
During the fiscal years ended March 31, 1998, 1997 and 1996, the Company
issued 865,988, 828,890 and 3,596,861 shares of common stock (including
treasury stock) to satisfy $99,126, $146,231 and $521,040, respectively, of
principal and $61,937, $200,297 and $49,534, respectively, of interest
relating to convertible notes payable (see Note 5).
During fiscal 1998, the Company issued 1,185,199 restricted shares of the
Company's common stock in exchange for 1,185,199 shares of Skywatch
Exploration, Inc. As a result, the Company now owns 100 percent of Skywatch
Exploration, Inc. No value is attributed to the assets acquired;
accordingly the fair value of the shares issued, $473,340, is reflected in
other expense on the Consolidated Statement of Operations.
Common stock loans from shareholder
In fiscal 1995, a shareholder relinquished to the Company 10,466,567 shares
of common stock for the Company to use for additional issuances to outside
shareholders. The shareholder relinquished all ownership and voting rights;
however, the Company was obligated to reissue to the shareholder 10,466,576
replacement shares if and when the shareholders approved a proposed
increase in authorized shares from 50,000,000 to 200,000,000. These shares
were accounted for as treasury stock and the Company recorded a liability
of $705,935 due to shareholder for the fair value of the shares
relinquished. Such obligation was included in shareholder loans in the
accompanying consolidated balance sheet at March 31, 1995. The Company
received shareholder approval in 1996 to increase the number of shares
authorized, and as such, the above shares were reissued to the shareholder
in 1996.
Treasury stock
In May 1987, the Company acquired 3.3 million shares of its common stock
from three of its initial incorporators. The purchase price was $33,000, or
$.001 per share. Funding for the stock acquisition was obtained through
loans from certain shareholders of the Company.
During the year ended March 31, 1991, the Company sold 2,600,000 shares of
its treasury stock in eleven separate transactions, resulting in aggregate
proceeds of $124,500. Prices for the shares ranged from $.03 per share to
$.12 per share, with the average price approximating $.05 per share.
Selling expenses paid from the proceeds totaled $5,000.
During the fiscal year ended March 31, 1992, the Company sold the then
remaining 700,000 shares of its treasury stock in five separate
transactions aggregating $61,500. Prices ranged from $.05 to $.125 per
share.
In fiscal 1995, the Company issued 10,462,066 shares of its treasury stock
for cash, services and debt conversions. The excess cost of the treasury
stock issued over the amounts received aggregated $167,118 and has been
recorded as a reduction of additional paid-in capital.
Stock warrants
Warrants to purchase 1,500,000 shares of common stock at $.21 per share
were issued to an investment banker in connection with financial advisory
services provided. The estimated fair value of the warrants aggregated
$15,000. Such value was recorded as general and administrative expenses for
the year ended March 31, 1995, with a corresponding increase to additional
paid in capital as of March 31, 1995. The warrants expire on March 1, 2000.
At March 31, 1998, additional warrants to purchase 4,000,000 shares of the
Company's common stock are outstanding, with exercise prices ranging from
$1.30 to $2.00 per share.
Private placement of Quasar common stock
In 1997 and 1996, Quasar, a wholly owned subsidiary, issued 331,990 and
314,200 shares, respectively, of its common stock at $.50 per share, in a
private placement offering. As the Company owns a majority interest in
Quasar, the subsidiary's accounts are consolidated with those of the
Company. Accordingly, the Company recorded a minority interest of $49,798
and $47,130 relating to the outside investors' share of net equity in
Quasar. The difference between the stock proceeds of $165,995 and $157,100,
respectively, and the minority interest of $49,798 and $47,130,
respectively, has been recorded as an addition to paid in capital.
In 1997, the Company repurchased 20,000 shares of Quasar common stock by
issuing 40,000 shares of the Company's common stock. In 1998, the Company
repurchased the remaining 626,190 shares of Quasar common stock outstanding
by issuing 1,252,000 shares of the Company's common stock. As a result, the
Company now owns all of the outstanding stock of Quasar Resources, Inc.
Private placement of Earth Search Resources common stock During fiscal
1998, Earth Search Resources, a wholly owned subsidiary of Earth Search
Sciences, Inc., issued 2,494,000 shares of its common stock at $.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. As the Company owns a
majority interest in Earth Search Resources, the subsidiary's accounts are
consolidated with those of the Company. Accordingly, the Company has
recorded a minority interest of $247,000 relating to the third party
investors' share of net equity in Earth Search Resources.
11. Equity Investments
In fiscal 1996, the Company entered into an agreement to purchase twenty
percent of a Kazahstan "joint stock" company, SEMTECH. As of March 31,
1997, the Company has paid all of the $30,000 purchase price. An additional
$155,000 was invested in SEMTECH projects during fiscal year 1998. The
Company has recorded this additional investment as a long-term asset.
12. Commitments and Contingencies
Research and development contract
In fiscal 1997, the Company entered into a contract to receive certain
services related to future remote sensing projects and to have research and
development performed to develop the next generation of remote sensing
software. Total payments under the contract through January 1998 were
$260,000. All payments were recorded as research and development expenses.
In addition to the above cash consideration, the Company issued 1,000,000
shares of unregistered common stock with a fair value of $390,000 as part
of the agreement. This amount was recorded as research and development
expense during the year ended March 31, 1997. The contract was modified on
January 7, 1998. The revised contract allows for the Company to pay for
imaging services on a per project basis. As of March 31, 1998, no imaging
projects have been performed under the terms of the revised contract.
However, once such services begin, the Company will be obligated to make
minimum payments in the amount of $300,000, $500,000, and $900,000 for the
first, second and third years of service, respectively. Payments totaling
$30,000 have been made as of March 31, 1998 for the first year of service.
Airborne hyperspectral scanner commitments
As discussed in Note 3, pursuant to the manufacturing contract, in fiscal
1999 the Company will be required to pay the remaining $500,000 of the
contract as specified manufacturing "benchmarks" are met.
Litigation
On January 10, 1997, the Department of Finance filed suit against the
Company and its Chairman, Larry Vance, in the district Court of the Fourth
Judicial District of the State of Idaho, in and for the County of Ada,
Civil No. CV OC 9700155D. The Department's complaint set forth five counts,
alleging that the Company and Mr. Vance (1) sold unregistered securities to
Idaho and non-Idaho residents in violation of Idaho law, (2) acted as
broker-dealer or securities salesmen without having registered as such, (3)
made untrue statements of material facts in violation of the Idaho
antifraud law, (4) by making said untrue statements of material facts,
engaged in a practice which operates as a deceit upon persons, and (5)
distributed press releases and other written literature without filing same
with the Director of the Idaho Department of Finance in violation of the
Department's rules.
On January 10, 1997, the Company filed a declaratory relief against the
Idaho Department of Finance in the District court of the Fourth Judicial
District of the State of Idaho, in and for the County of Valley, Civil
No.CV 97000C. The Company's declaratory relief action seeks a declaration
from the court that the Company did not violate the Idaho Securities Act
with regard to certain transactions taking place subsequent to April 1,
1994. The Company's declaratory relief action was filed in response to
repeated threats by the Department that it would file suit against the
Company.
In December 1997, the Company settled its lawsuit with the Idaho
Department of Finance. As a result of the settlement, the Company agreed to
proceed with an offering of rescission to certain Idaho investors. In
addition, the Company has agreed not to rely on any exemptions under the
Idaho Securities Act for a period of five years without first obtaining the
permission of the Department of Finance.
The Company is preparing to offer approximately 19 Idaho residents offers
of rescission for certain convertible debt instruments and common stock
issued which, if accepted by all offerees, would cost the Company
approximately $143,545. In conjunction with the anticipated rescission
offering, $117,845 related to 725,914 shares of common stock has been
recorded in redeemable common stock as of March 31, 1997 and 1998.
13. Related Party Transactions
During fiscal 1998, the Company entered into various agreements with
Noranda Mining and Exploration, Inc. and its affiliates including
Falconbridge Limited (collectively, the "Noranda Group"). The Noranda Group
is a shareholder of the Company; additionally, a member of Noranda's
management team was appointed to the Company's Board of Directors during
fiscal 1998. The agreements executed between the Company and the Noranda
Group provide the Noranda Group with, under certain restrictions, an
exclusive license to use PROBE-1 for commercial mining purposes. The
licensing and services agreement grant the Noranda Group an exclusive
worldwide license (except Kazakhstan and the Company's Canadian claims) for
mining data gathered under the services agreement, allowing the Noranda
Group a 60 day window to determine if it wants to proceed with exploration
based on the hyperspectral data. 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. Furthermore, the agreement grants net
smelter royalties to the Company ranging from 1.5 percent to 2.5 percent of
revenues or net profit interests of 10 percent on any mineral discoveries
leading to production on land not currently owned or optioned by the
Noranda Group. 200,000 shares of the Company's Series A preferred stock
were issued to the Noranda Group for consideration equal to $1,000,000;
furthermore, the Noranda Group was granted options to purchase 1,000,000
shares of the Company's common stock at a price of $2.00 per share. During
fiscal 1998, the Company was paid $55,000 by the Noranda Group to perform
remote sensing services.