SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
Commission File No. 0-19566
EARTH SEARCH SCIENCES, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Utah 87-0437723
(State or other Jurisdiction of (IRS Employer ID)
Incorporation or Organization)
502 North 3rd Street, #8 McCall, Idaho 83638
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (208) 634-7080
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of common
stock, as of the close of the period, covered by this report: 89,334,269 shares.
The registrant has only one class of common stock.
EARTH SEARCH SCIENCES, INC.
FORM 10-Q
(Unaudited)
QUARTER ENDED JUNE 30, 1998
PART I
FINANCIAL INFORMATION
TABLE OF CONTENTS
Item 1. Financial Statements Page
Consolidated Balance Sheet
as of June 30, 1998 and March 31, 1998. 3
Consolidated Statement of Operations for the
Three Months Ended June 30, 1998 and 1997. 4
Consolidated Statement of Cash Flows for the
Three Months Ended June 30, 1998. 5
Selected Notes to Consolidated Financial
Statements. 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II
OTHER INFORMATION REQUIRED
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters of a Vote of
Security Holders 11
Item 5. Other information 11
Item 6. Exhibits and Reports on Form 8-K 11
EARTH SEARCH SCIENCES, INC
(A Development Stage Company)
Consolidated Balance Sheet
June 30, March 31,
1998 1998
---------------- ----------------
Assets
Current assets:
Cash $ 53,562 $ 42,600
Accounts Receivable 100,270 675,648
Prepaid expenses & other assets 663,415 -
---------------- ----------------
Total current assets 817,247 718,248
Property and equipment 4,054,771 3,979,179
Other long-term assets 183,225 183,225
---------------- ----------------
Total assets $ 5,055,243 $ 4,880,652
================ ================
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders' Deficit
Current liabilities:
Notes payable $ 78,399 $ 89,080
Accounts payable (Note 2) 708,337 671,332
Accrued payroll taxes - 18,449
Accrued interest 288,918 281,750
Payable to Probe 1 Joint Venture (Note 4) 500,000 500,000
Unearned revenue 8,000 40,000
Cash advances and deposits - -
---------------- ----------------
Total current liabilities 1,583,654 1,600,611
Long-term liabilities:
Shareholder loans (Note 6) 262,090 104,090
Capital lease obligation 2,150,733 2,029,410
Deferred officers' compensation 1,500,338 1,387,461
Minority interests 2,247,000 2,247,000
---------------- ----------------
Total liabilities 7,743,815 7,368,572
---------------- ----------------
Commitments and contingencies
Redeemable common stock, $.001 par value, 1,725,914 shares
issued and outstanding at March 31, 1998 and 1997 517,845 517,845
---------------- ----------------
Nonredeemable shareholders' deficit:
Series A preferred stock; 200,000 shares
authorized, issued and outstanding at March 31, 1998 1,000,000 1,000,000
Common stock, $.001 par value; 200,000,000 shares
authorized; 87,608,355 and 84,792,576 shares, respectively,
issued and outstanding 87,608 84,792
Additional paid-in capital 10,367,064 9,827,644
Common stock subscribed - 165,000
Deficit accumulated during the development stage (14,661,089) (14,083,201)
---------------- ----------------
(3,206,417) (3,005,765)
---------------- ----------------
Total liabilities, redeemable common stock and
nonredeemable shareholders' deficit $ 5,055,243 $ 4,880,652
================ ================
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months
Ended June 30,
1998 1997
----------------- -----------------
Revenue: $ 250,270 $ -
Cost of services provided (141,448) -
----------------- -----------------
Gross margin 108,822 -
Expenses:
Exploration - 140,481
Depreciation and Amortization 6,431 7,500
General and Administrative 370,218 546,513
----------------- -----------------
376,649 694,494
Loss from operations (267,827) (694,494)
Interest income - -
Interest expense (177,596) (100,515)
Other income (expense) (17,442) -
----------------- -----------------
Loss before minority interest (462,865) (795,009)
Minority interest in losses of
consolidated subsidiaries - -
----------------- -----------------
Loss before extraordinary items (462,865) (795,009)
Extraordinary item (Debt
extinguishment loss) (115,023) (1,000,000)
----------------- -----------------
Net Loss $ (577,888) $ (1,795,009)
================= =================
Shares applicable to basic loss per share
and diluted loss per share 88,308,696 70,256,693
Basic and diluted loss per share $ (0.01) $ (0.03)
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended June 30,
1998 1997
----------------- -----------------
Cash flows from operating activities:
Net lncome $ (577,888) $ (1,795,009)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services
and interest expense 102,729 60,720
Extraordinary items 115,023 1,000,000
Depreciation 68,931 7,500
Amortization of lease discount 121,323
Changes in assets and liabilities:
Accounts receivable (100,270) -
Prepaid assets and deposits 39,399 (50,000)
Accounts payable (21,961) (697,713)
Accured liabilities (11,281) 108,914
Unearned revenue (32,000) -
Deferred officers compensation 112,877 91,697
----------------- -----------------
Net cash provided by operating activities (183,118) (1,273,891)
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (11,239) -
Advance deposits - 341,000
----------------- -----------------
Net cash used by investing activities (11,239) 341,000
----------------- -----------------
Cash flows from financing activities:
Repayment of notes payable (10,681) -
Proceeds from shareholder loans 191,500 -
Repayments of shareholder loans (33,500) -
Issuance of common stock 58,000 46,000
Proceeds from Probe 1 joint venture 0 1,200,000
----------------- -----------------
Net cash provided from financing activities 205,319 1,246,000
----------------- -----------------
Net increase (decrease) in cash 10,962 313,109
Cash at beginning of period 42,600 51,666
----------------- -----------------
=================
Cash at end of period $ 53,562 $ 364,775
================= =================
EARTH SEARCH SCIENCES, INC
A Development Stage Company
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 (unaudited)
Note 1 - CONDENSED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 30, 1998, and the
consolidated statements of operations and cash flow for the three months ended
June 30, 1998, and 1997, have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) have been made that are necessary to present fairly the financial
position, results of operation, and cash flows at June 30, 1998 and 1997.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted. It is suggested that these financial
statements and notes thereto in the Company's form 10-K for March 31, 1998. The
results of operation for the three months ended June 30, 1998 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
Note 2 - REVENUE AND ACCOUNTS RECEIVABLE
The company recognized $250,270 in revenue during the first quarter for
remote sensing services performed on behalf of the Noranda Group in Australia
and Mexico. The Company recorded $8,000 as unearned revenue when it received
payment from NASA-MSU Techlink for remote sensing services to begin early in the
second quarter of fiscal 1999.
Note 3 - NOTES PAYABLE
The Company obtained interim working capital in prior years by issuing
promissory notes with rights of conversion. The terms of these debts instruments
are for an initial period of ninety days but renewable every ninety days for one
year, and bear interest at 12.5% to 12.99%. Holders of the notes have the right
to convert the loan amount plus interest into restricted shares of the Companys
common stock, subject to the terms in the promissory notes. There were no
conversion during the first quarter of fiscal 1999.
The Notes Payable balance also includes financing for the insurance on
the Probe 1-1. As of June 30, 1998, $14,274 was still outstanding on this
balance.
Note 4 - Probe 1 JOINT VENTURE
Effective June 3, 1997, the Company formed a new company, ESSI Probe 1 LC,
to acquire the second Probe 1 instrument manufactured by Integrated Spectronics
Pty Ltd. of Australia. The new company is a joint venture managed by Earth
Search Sciences and owned 50 percent by Earth Search Sciences, which contributed
certain instrument rights and a promise to pay $500,000, and 50 percent by two
shareholders, who contributed $1,000,000 million for their interest in the 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. As ESSI controls the joint venture
pursuant to the terms of the joint venture agreement, the joint venture has been
consolidated into the Company's financial statements.
Note 5 - ADVANCES FROM SHAREHOLDERS
The Company has continued in existence through the use of advances from
shareholders. The company obtained $191,500 in shareholder loans this quarter
for use as working capital.
Note 6 - CAPITAL LEASE OBLIGATIONS
On June 10, 1997, the Company completed a sales/leaseback transaction of
its first airborne hyperspectral scanner "Probe 1." The instrument was sold for
its cost of $2,500,000. The terms of the leaseback are as follows: 1) the
Company will lease Probe 1 for $250,000 per year bearing interest of prime plus
2% for three years; 2) at anytime during the above lease period but no later
than April 10, 2000, the Company must repurchase the instrument for $3,500,000
net of any lease payments; 3) at anytime prior to the repurchase, the lessor may
convert the remaining obligation into shares of Quasar Resources, Inc. common
stock at a conversion rate of 40% of the stock's then fair market value. In the
event Quasar is not the operator at the time of exercise of the option, the
lessee shall substitute comparable equity securities or other rights subject to
reasonable approval of lessor; 4) the Company issued to the lessor 1,000,000
unregistered shares of the Company's common stock and warrants to purchase an
additional 1,000,000 unregistered shares of the Company's common stock at an
exercise price of $2 per share; and 5) the lessor will receive certain royalty
rights to revenues generated from mineral sites identified by the instrument.
Accordingly, the Company has recorded a capital lease obligation of $2,125,000
(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 or warrants issued in
conjunction with the above transaction. In January 1998, the Company settled the
$2,200,000 note plus accrued interest of $142,000 by issuing 8,076,800
restricted shares of the Company's common stock and a warrant to purchase
1,000,000 restricted shares of the Company's common stock at an exercise price
of $2 per share. No value was assigned to the warrant.
On January 5, 1998, 1,725,000 restricted shares of the Company's common
stock were issued in lieu of the first two lease payments due on April 10, 1998
and 1999. As further consideration, the Company agreed to issue an additional
1,000,000 restricted shares of the Company's common stock to retire the warrant
issued in conjunction with the sale/leaseback transaction mentioned above. These
shares wer not issued as of March 31, 1998; the value of these shares were shown
as common stock subscribed in the Company's financial statements at March 31,
1998 and were issued in the first quarter of fiscal 1999. The Company recognized
an extraordinary loss of $165,000 (basis and diluted loss per share of $0.002)
from the debt extinguishment during the forth quarter of fiscal 1998 as a result
of the settlement of the lease payments.
During the first quarter of fiscal 1999, an additional 547,727 shares were
issued to the lessor in relation to the two years of lease payments. According
to the agreement, the Company was to issue 1,000,000 free trading shares
however, in the forth quarter of fiscal 1998, the Company issued the lessor
restricted shares in lieu of the free trading shares. It was agreed in the first
quarter of fiscal 1999 to compensate for the discounted value of the restricted
shares, the additional 547,727 shares were issued. The value of these additional
shares issued does not reduce the capital lease obligation further, but rather,
represents the cost of extinguishing the initial two years of the probe lease
commitment. Accordingly, the $115,023 value of this transaction is recorded as
an extraordinary item loss of extinguishment of debt.
Note 7 - LOSS PER COMMON SHARES
Loss per common share is based on the weighted average number of shares
outstanding during each period. For period ended June 30, 1998 and 1997, the
weighted average number of these shares outstanding is 88,308,696 and
71,818,693, shares, respectively.
Note 8 - ISSUANCE OF COMMON STOCK
During the three months ended June 30, 1998, the Company issued 404,166
shares of common stock for $58,000 and issued 313,886 shares of common stock for
services. The Company issued 85,000 shares with a total value of $17,540 in lieu
of interest on shareholders debt. During the quarter 1,000,000 shares of common
stock was issued to Accuprobe in settlement of the Common Stock Subscribed that
was previously held.
In addition, the Company issued 465,000 restricted shares of common
stock in conjunction with the purchase of Skywatch Northern on behalf of
Skywatch Exploration (a Canadian company wholly owned by the Company) in
exchange for all the outstanding shares of Skywatch Northern. Skywatch
Exploration received assets primarily consisting of a 320 Cessna airplane and
assumed liabilities totaling $58,966 from Skywatch Northern.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
During the quarter ended June 30, 1998, the Company had limited
operating revenues. 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.
Results of Operations
During the fiscal year ended March 31, 1998, Earth Search Sciences,
Inc. signed a funding agreement with Swancorp Equities Inc. to provide over $15
million in funding. The funding agreement contemplates Swancorp in assisting
Earth Search in obtaining $5 million of capital in a direct private placement
with a potential additional $5 million through the exercise of attached
warrants. Swancorp is prepared to assist Earth Search through a combination of
shares and warrants offered in a private placement with varying exercise prices.
To date, Swancorp has positioned Earth Search in front of ten potential funding
sources. Of the initial ten qualified investment banking institutions or funding
sources interviewed, one, IBK Capital, has signed an engagement letter bringing
the total to two companies committed to assisting Earth Search in obtaining
sufficient capital to purchase additional instruments and to meet operating
requirements during the next fiscal year. Earth Search management has presented
the Company's plans for use of proceeds, along with the anticipated returns on
investment that can reasonably be expected from the addition of a second
instrument to the Company's fleet. As proposed, Earth Search expects to
recognize additional revenues beginning late in the third quarter of 1998 as the
result of providing additional services with the second instrument. The Company
is encouraged by its bookings for June through August and hopes that the trend
will continue into the next fiscal year. As the sun angle degrades during the
fall and winter months, the Canadian mapping conditions degrade and logistics
dictate the need to move south to the United States and South America in order
to take advantage of better sun angle and stable weather which are prerequisites
for hyperspectral imaging.
During the quarter ended June 30, 1998, three significant mapping
prospects have been identified, one is located in the U.S., one in Mexico, and
the other is located in South America. A contract vehicle is currently in place
between Earth Search and the customer to receive funds for mapping these sites.
The contract allows for a negotiated advance against the work plan which
contributes favorably toward covering the Company's cash flow requirements
during the period of time between initiation of work and submittal of invoices
for payment. The contract also provides for invoicing progress payments, further
enhancing cash flow. These new sites are in the advanced planning stages. The
Company plans to revisit Canada in late August before moving to the Southern
Hemisphere to take advantage of improved sun angle and weather conditions at the
two new sites.
The Company has completed mapping assignments in Australia and Mexico
in partial fulfillment of its contractual obligations to Noranda to map for
natural resources on a global scale. In addition to the revenues and fees the
Company has invoiced for these services, the Company references its SEC filing
of its Noranda contract in which it was previously disclosed that the Company
may receive either net smelter royalties or net profits interest on properties
not previously owned or controlled by Noranda upon which a discovery should
occur as the result of using the Company's Probe 1 technology to locate the
mineral resource. To date, gigabyte quantities of imagery have been collected by
Earth Search. These data tapes are being processed and the imagery is being
examined for the presence of mineral properties exhibiting the qualifications
necessary to establish them for candidacy as "Royalty Properties". While no
royalty properties have been recorded at this time, the Company is operating on
two continents targeted by the mining industry as exhibiting significant mineral
potential. A substantial backlog of collected imagery from these two continents
exists, and the evaluation process continues to move forward. Earth Search has
been able to benefit from good mapping weather and favorable flying conditions
from May through August. As the Company has moved from point A to point B in
fulfillment of its Noranda mapping contract, it has enjoyed during the quarter,
added mapping assignments from new customers for emerging growth areas,
including hydrocarbon exploration, and environmental damage assessments, land
use planning, and weed species identification from an airborne platform using
hyperspectral imagery from its Probe 1 instrument. These additional revenues
have enabled to the company to recognize improvements over the previous quarter
as it emerges from a development stage Company into an emerging growth business
entity.
During the quarter ended June 30, 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.
During the quarter ended June 30, 1998, 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.
During the quarter ended June 30, 1998, 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 in 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.
Several proposals have been developed to partner with private industry,
universities and state and Federal agencies to develop, package and deliver
competitive advanced technology products and services. This approach provides
solutions to critical environmental, agriculture, forestry, fisheries &
ecological issues. Defense and national security issues are also being addressed
in this proposal phase.
Outlook
The investment banking community is evaluating the potential impact of
recent orders for mapping services on the Company's financial outlook. These
results will be reflected in any decision to fund the private placement
currently in progress. There can be no assurance that the private placement will
be successful.
The Company's outlook contains forward-looking statements. These
statements are not intended to, nor should it be interpreted to constitute a
prediction of future events.
PART II
OTHER INFORMATION REQUIRED
Item 1. Legal Proceeding None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote
of Security Holder None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned.
EARTH SEARCH SCIENCES, INC.
Date: August 14, 1998 /s/ John W. Peel
John W. Peel
Chief Executive Officer and Director