SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 2005 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.)
1729 Montana Highway 35, Kalispell, Montana 59901
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (406) 751-5200
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. X
Aggregate market value of Common Stock held by non-affiliates of the
Registrant at March 31, 2005: $817,848. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 31, 2005: 72,762,836
Documents incorporated by reference.
This Form 10-K consists of 41 pages, which includes exhibits.
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4 - Submission of Matters to a Vote of Security Holders. . . . . . . . 9
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 5 - Market for the Registrant's Common Stock Equity and
Related Shareholder Matters. . . . . . . . . . . . . . . . . . .10
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . . . . . .13
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . .14
Item 7A- Quantitative and Qualitative Disclosures About Market Risk . . . .21
Item 8 - Financial Statements and Supplementary Data. . . . . . . . . . . .22
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . .22
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Item 10 - Directors and Executive Officers of the Registrant . . . . . . . .23
Item 11 - Executive Compensation . . . . . . . . . . . . . . . . . . . . . .24
Item 12 - Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Item 13 - Certain Relationships and Related Transactions . . . . . . . . . .27
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K .28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
PART I
ITEM 1. BUSINESS
Organization
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Earth Search Sciences, Inc. (the Company) was incorporated in 1984 under
the laws of the state of Utah.
Corporate Focus
- ----------------
Initially the Company was formed to engage in the mining industry. As
interests developed in exploration the Company began to look at the new types of
technology being used for that purpose. 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 the NASA operated Airborne
Visible and Infra-Red Imaging Spectrometer (AVIRIS), along with other less
advanced instruments, in locating geologic areas of interest in mineral
exploration. The results proved that remote sensing technology had a place in
mineral exploration and that a smaller, less expensive instrument than the NASA
AVIRIS could be gainfully applied in the mining industry. To achieve this goal,
the Company undertook the development of a miniaturized hyperspectral remote
sensing instrument, named Probe 1, which was designed to be used with cost
effective and easily available aircraft.
Hyperspectral remote sensing instruments measure reflected, visible, and
infrared sunlight from the earth's surface over a spectral range seven times
broader than the human eye can see. This collected data can then be digitally
analyzed using personal computers. The digitally analyzed imagery can provide
information useful to a wide range of industries such as, but not limited to,
natural resource development (including oil and mineral exploration, fisheries
and forestry), land use development, environmental remediation and monitoring,
agriculture (including vegetation stress analysis), disaster assessment, marine
sciences and military sciences.
Since 1997 the Company and the Probe 1 have served many customers from the
private sector, government and the military. This service has become known for
its accuracy, reliability, and cost effectiveness and with the addition of
geo-rectification capabilities and automated original processing steps continues
to be one of the most accurate and cost effective instruments in the airborne
remote sensing industry.
The Company's mission is to continue to use the science of remote sensing
in a variety of exploration, monitoring and exploitation industries around the
globe. The science of remote sensing includes acquiring, processing and
interpreting imagery of the earth captured from instruments deployed on aircraft
or satellites. The advantages of airborne and satellite remote sensing over
other methods of gathering visual information are that data can be collected
better, faster and cheaper over larger areas including sites inaccessible from
the ground. By collecting data at different times, changes can be detected that
may be due to significant natural or man-made processes. Detection of such
changes can assist in environmental/land use management
With the recent resurgence of the mining industry and the emphasis for new
sources of supply for oil & gas, there is a greater interest in using
exploration tools that are faster and more accurate. With its hyperspectral
technology the Company is taking an aggressive role in establishing itself as an
active participant in the discovery of new natural resources by creating wholly
owned subsidiary companies in key industries, initially mining and oil & gas.
These companies will seek joint ventures with partners who can provide
technologies, human and capital resources to synergize with the Company's assets
in order to build active exploration and development programs.
This strategy will produce two valuable results for ESSI shareholders:
1. Create more demand for ESSI's hyperspectral remote sensing services, hence
more revenue generation, and
2. Create equity positions with fast growth potential in multiple key industries
from new discoveries of rare natural resources.
Evidence of the interest in this successful strategy is seen in the
completion of the Company's first joint venture in the mining industry (with
subsidiary company Geo Probe, Inc.). Another is underway in the oil & gas
industry (with subsidiary company Petro Probe, Inc). Others that are in early
stage discussions focus on technology research and development centers, and
advanced modular, hyperspectral instrumentation utilizing nano technology.
Current Business Plan
- ---------------------
The Company's long-term strategic plan is to continue to create
partnerships, strategic alliances, mergers or acquisitions as the most
expeditious and cost-effective way to consolidate commercial hyperspectral
remote sensing collections and services. In the technology sector the Company
will complete the development of additional miniaturized remote sensing
instruments and test the integration of other advanced technology exploration
instruments;
The Company's near-term plans are to continue pursuing:
1. contracts that produce revenues from the application of remote sensing;
2. the development of promising mineral, oil and gas properties in which the
Company has an equity interest, identifying such properties by utilizing
its existing imagery database or acquiring such data; and
3. the marketing of ESSI archived raw data
The negative events of 2001, including the stock market decline and
September 11, 2001, left the Company in a tenuous highly leveraged position.
Recognizing that the economy and the general business climate was in a stage of
change, the Company made every effort to reduce overhead as quickly as possible,
even though that may have been detrimental to longer-term expansion plans in
some cases. Although cash flow was conserved the Company entered 2002 in an
undercapitalized state and sought assistance from a variety of sources including
some who indicated they could bring in necessary new investment into the
Company. None of the individual sources proved successful, however most
recommended a reorganization of the company in order to encourage migration of
capital into the company. The reorganization would also include bringing in
experienced directors and outsiders to fill the roles of senior management. In
2004, the Board of Directors acted on the recommendation of investor sources and
its own research and began to implement these actions. A formal re-structuring
of the company commenced in mid 2005 with filings to the SEC and was concluded
in October, 2005.
Fiscal 2005 Significant Projects - Update
- ----------------------------------------------
In fiscal 2004, the Company completed airborne hyperspectral surveys
primarily for local, state and federal governmental agencies. These projects
produced the majority of the Company's 2004 airborne revenue.
To date, terrabyte quantities of imagery have been collected by the
Company. Selected portions of these data tapes are being processed and the
imagery is being examined for the presence of mineral properties. The Company is
currently working to outsource the processing and interpretation of its archived
data in order to quickly expand its commercial offering.
Proposals are being developed to partner with private industry,
universities and state and federal agencies to develop, package and deliver
competitive advanced technology products and services. These are being
evaluated on a priority basis. The Company continues to respond to an ever
increasing volume of
requests for quotations. This demonstrates the growing demand for hyperspectral
services and gives reason for the Company to have a brighter outlook for the
near future.
Business Segment Information
- ------------------------------
Included in the attached financial statements is business segment
information and financial information about geographic areas for the Company.
Employees
- ---------
As of March 31, 2005 the Company had 4 full-time employees.
Available Information
- ----------------------
The Securities and Exchange Commission maintains an internet site at
http://www.sec.gov that contains reports and financial information filed by the
- ------------------
Company. The Company maintains an internet site at http://www.earthsearch.com
--------------------------
that contains information about the Company's business, markets and technology.
Seasonal Nature of Business
- ------------------------------
The Company experiences the highest demand for its collection services
April through October in the Northern Hemisphere and October through April in
the Southern Hemisphere.
Customers and Geographic Areas of Business
- -----------------------------------------------
In fiscal 2005, the Company operated its airborne hyperspectral sensors
under contracts with third parties in several areas around the United States.
In fiscal 2004, the Company's sensors were operated in the United States and
abroad. Contracts to operate the sensors in the United States as an ecological,
mining, agricultural, hydrocarbon, and target identification contributed
$220,625 and $258,843 to revenue in 2005 and 2004 respectively.
ITEM 2. PROPERTIES
The Company headquarters consist of approximately 1,500 square feet of
office space in Kalispell, Montana. All other office obligations have been
cancelled.
In addition, the Company owns working interests in seven (7) oil and gas
properties. (See Note 4 to the Notes to Consolidated Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
In November 2000, Applied Science and Image Technology, Inc. (ASIT) sued
the Company in the Circuit Court of Baltimore County, Third Judicial Circuit of
Maryland, alleging breach of contract and other related causes of action. ASIT
alleges that the Company was required to deliver 500,000 shares of ESSI common
stock to ASIT on demand pursuant to a written contract between ASIT and the
Company in which ASIT agreed to perform certain services for the Company.
In May 2002, the Company filed counterclaims against ASIT for breach of
contract and unjust enrichment on the grounds that, despite the Company having
paid approximately $300,000 and transferring 500,000 of the Company common stock
to ASIT, ASIT failed to provide the Company with the products and services it
was contractually obligated to provide the Company. On June 12, 2002, ASIT
moved to dismiss ESSI's counterclaims on the grounds that they were untimely.
The action has not been resolved and neither party is presently pursuing this
end.
In October of 2002, Terranet, Inc. a subsidiary company, received notice of
a judgment issued by the Supreme Court of British Columbia in regards to monies
owed resulting from a contract with plaintiff Cal Data Ltd., of Vancouver, B.C.
The plaintiff alleged that seventy-five thousand dollars was overdue from
invoices for services dating from January of 2002 to October, 2002. Terranet,
Inc. has no assets or operations and has not accrued any liability associated
with this demand in its financial statements.
Except as described above, to the knowledge of our executive officers and
directors, neither we nor our subsidiaries are party to any legal proceeding or
litigation and none of our property is the subject of a pending legal proceeding
and our executive officers and directors know of no other threatened or
contemplated legal proceedings or litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
- --------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Principal Market or Markets. The Company's common stock trades in the
over-the-counter market. The range of reported high and low bid
quotations for the Company's common stock, as set forth below, reflect
interdealer bid prices, without retail markups, markdowns,
commissions, or adjustments as reported in the NASDAQ "pink sheets"
and do not represent actual transactions.
Quarter Ended High Low
------------- ---- ----
June 30, 2003 .08 .08
September 30, 2003 .05 .05
December 31, 2003 .04 .03
March 31, 2004 .01 .01
June 30, 2004 .017 .015
September 30, 2004 .007 .006
December 31, 2004 .006 .004
March 31, 2005 .40 .30
(b) Approximate Number of Holders of Common Stock. The number of record
owners of the Company's $.001 par value common stock at March 31, 2005
was approximately 1,204. This does not include shareholders that hold
stock in their accounts at brokers/dealers.
(c) Dividends. Holders of the Company's common stock are entitled to
receive such dividends as may be declared by the Company's Board of
Directors. No dividends have been paid with respect to the Company's
common stock and no dividends are anticipated to be paid in the
foreseeable future.
(d) In the last three years, the Company has made the following sales of
unregistered securities, all of which sales were exempt from the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) or as otherwise indicated:
RECENT SALES OF UNREGISTERED SECURITIES (1)
AMOUNT PRICE TOTAL AMOUNT PRICE TOTAL
OF PER CASH OF PER CASH
SECURITIES SHARE PROCEEDS SECURITIES SHARE PROCEEDS
DATE SOLD ($) ($) DATE SOLD ($) ($)
- -------- ---------- ------ --------- ------------- ---------- ------ ---------
1/3/02 2,564,103 0.10 (1) 3/8/02 200,000 0.08 (2)
5/20/02 200,000 (4) 5/30/02 3,574,273 (1)
6/7/02 8,332,329 (2) 6/19/03 377,220 (1)
7/8/02 300,000 (2) 7/8/02 500,000 (1)
10/1/02 547,960 (1) 11/12/02 1,098,350 (1)
11/13/02 500,000 (5) 12/11/02 500,000 (5)
2/24/03 1,000,000 (1) 3/26/03 100,000 (1)
9/1/04 800,000 (3)
1/10/05 Reverse Split
1/21/05 3,000,000 (1) 1/27/05 100,000 (2)
2/3/05 100,000 (1) 2/10/05 285,323 (2)
2/11/05 27,500 (1) 2/11/05 473,000 (2)
2/17/05 119,895 (1) 3/7/05 359,154 (1)
3/7/05 59,048,200 (5) 3/28/05 161,888 (2)
(1) Consideration paid for the shares was employee and/or consulting
services.
(2) Shares issued for debt consideration.
(3) Consideration paid for Directorship.
(4) Shares issued as commissions for stock sales.
(5) Shares issued in exchange for Series A preferred stock.
Securities authorized for issuance under Equity Compensation Plans
- ------------------------------------------------------------------
The following table sets forth certain information on the Company's Equity
Compensation Plans. See Note 13 to the Notes to Consolidated Financial
Statements for additional information on equity compensation including material
terms of options granted that have not been approved by security holders.
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to be Weighted-average equity compensation
issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a)
- -------------------------- --------------------------- ---------------------- ------------------------
Equity compensation plans
approved by security
holders (1) - - -
Equity compensation plans
not approved by security
holders (2) 21,837,500 $ 1.07 -
Total 21,837,500 $ 1.07 -
(1) The Company's stock options and warrants have not been approved by
security holders
(2) Excludes options for 4,000,000 shares issued as part of the
acquisition of STDC
Securities authorized for private placement issuance under subsidiary companies
- -------------------------------------------------------------------------------
The subsidiary companies of Terranet, Inc. Petro Probe, Inc. and Eco Probe, Inc
have issued shares of common stock to private placement investors, all of which
were accredited investors as that term is defined under Regulation D. The
investors executed subscription agreements and acknowledged that the securities
to be issued have not been registered under the 1933 Securities Act, that the
investors understood the economic risk of an investment in the securities, and
that the investors had the opportunity to ask questions of and receive answers
from the Company's management concerning any and all matters related to
acquisition of the securities. No underwriter was involved in the transaction,
and no commissions or other remuneration were paid in connection with the offer
and sale of the securities. Eco Probe and Terranet currently have no assets or
operations
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. STDC was acquired by the Company on December 21, 1999. The results of
operations for 2003, 2002 and 2001 include the results of operation for STDC
from December 22, 1999 to March 31, 2003.
As of or for the fiscal year ended
2005 2004 2003 2002 2001
------------------------------------------------------------------------
Operating revenue $ 415,702 $ 516,490 $ 786,208 $ 5,044,498 $ 2,678,986
Net loss $ 5,185,527 (4,188,650) (5,354,184) (16,797,081) (6,636,480)
Net loss per common share $ (0.94) (8,62) (0.03) (0.11) (0.05)
Total assets $ 665,940 1,233,573 4,091,566 7,096,591 19,710,126
Long-term obligations $ 376,373 4,286,233 4,700,365 4,687,895 5,253,135
Stockholders' (deficit) equity $(17,303,576) (18,690,393) (14,879,965) (11,310,331) 2,346,846
Cash dividends declared - - - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial comparisons will be made between the fiscal years ended March 31,
2005 and 2004.
Results of Operations
- -----------------------
The Company recognized revenue of $415,702 in 2005 compared with $516,490
in 2004. In 2005, costs of services provided was $237,156 compared with
$670,009 in 2004.
Loss on impairment of fixed assets was $386,628 in 2005 compared with
$2,469,072 in 2004. General and administrative costs were $4,357,053 in 2005
compared with $1,162,706 in 2004.
Interest income in 2005 was $0 compared to $2,848 in 2004. In 2005 the
Company recognized interest expense of $659,180 compared to 686,092 in 2004.
The decrease in interest expense over the prior year is a result of the
Company's conversion of convertible notes to equity in the fourth quarter of
2005.
In 2005, the Company recorded minority interest in losses of consolidated
subsidiaries of $0 compared to $279,891 in 2004. ESSI Probe 1 LC minority
interest loss for a full year of operations was $0, $115,671 in 2005 and 2004.
The Company recognized a net loss of $5,185,527 in fiscal 2005 compared
with a net loss of $4,188,650 in 2004. The loss on a per share basis was $0.94
and $8.62 in fiscal 2005 and 2004.
Liquidity and Capital Resources
- ----------------------------------
Net cash used in operating activities was $38,872 in 2005. Net cash used
in operating activities was $575,331 in 2004, resulting primarily from payments
for salaries and services and changes in current assets and liabilities.
Capital expenditures for March 31, 2004 were primarily for purchases of
working capital interests in hydrocarbon properties.
At March 31, 2005 and 2004, the Company had cash of $9,175 and $11,753 and
a working deficit of $17,482,151 and $15,440,818, respectively.
The Company does not intend to pay cash dividends to the holders of its
common stock and intends to retain future earnings to finance the expansion and
development of its business.
Under the original agreement with the ONR, STDC needed to raise private
industry funds of approximately $125,000,000 in order to complete, launch and
operate the hyperspectral imaging satellite and instrument. Subsequent to March
31, 2002, STDC received notification from the ONR that it would not be giving
STDC an extension to its current agreement. The success of STDC and payment of
approximately $8,216,424 of STDC accounts payable due subcontractors and vendors
on the NEMO program, is dependent on the Company and ONR negotiating plans for
going forward and additional funds being identified either commercially or under
governmental programs to complete and launch the NEMO satellite and sensor. The
Company is examining its positions and will be making a decision to proceed with
recovery.
The Company believes that funds generated from its operations, together
with future borrowings and the equity line will be adequate to meet the
Company's anticipated cash needs during the immediate term.
There can be no assurance that additional capital beyond the amounts
currently forecasted by the Company will be required or that any such required
additional capital will be available on reasonable terms, at
such time or times as required by the Company. The Board of Directors has
appointed a management committee to examine the option of re-organizing and
re-structuring the company to ensure that a viable avenue is available for the
attraction of capital. The management committee will also recommend priority
new management appointments.
The total number of employees employed by the Company now numbers four
people.
Critical Accounting Policies
- ------------------------------
The Company uses the successful efforts method to account for its oil and
gas properties. Under this method, it capitalizes costs incurred for property
acquisition, exploration, and drilling related to its oil and gas properties.
Once the project is completed, and, if oil or gas is located, costs capitalized
to date on the specific project are amortized under the unit-of-production
method as revenue is recognized. Capitalized costs for unsuccessful projects
will be expensed when that determination is made.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of production
method.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluates long-lived assets to determine potential
impairment by comparing the carrying amount to the undiscounted estimated future
cash flows of the related assets.
Future Operations
- ------------------
The Company concluded a re-organization of its stock structure to ensure it
could continue operations and provide for the ability to continue its business
model and business strategy. New capital investment in the Company is being
sought. In order to achieve maximum results, the Board of Directors also
approved Board and Senior Management changes. These are being pursued in 2005.
The Company will continue to operate in the mineral and hydrocarbon
resource exploration areas where the Company will operate its remote sensing
instruments for its own use and secure equity interests in promising properties
identified from the remote sensing imagery.
Research & Development of next generation hyperspectral instrumentation is
continuing. The Company is pursuing the approval of nano-technology patents for
hyperspectral remote sensing instrumentation and processing in order to secure
its market position for the next decade of industry developments.
The Board of Directors will continue to seek outside directors to ensure
that its commitment to corporate governance improvements is implemented.
Additional Risk Factors That Could Affect Liquidity, Operating Results And
- --------------------------------------------------------------------------------
Market Price Of Stock
- ------------------------
Risks Related to Our Industry
- -----------------------------
Competitive pressures may adversely affect our operating revenues. The
Company has numerous competitors in the remote sensing services (airborne
hyperspectral services) and natural resource development industries.
Competition in the remote sensing industry comes from several primary sources,
including HyMap, CASI and GER, whose hyperspectral instruments operate within
the USA and Ekwan, a new entry from Canada. Our principal competitors in the
natural resource development industry include traditional exploration companies
using a variety of other technologies. Some of our competitors in both remote
sensing and natural resource development have substantially greater financial
and other resources than the Company. Competitive pressures in either industry
may materially adversely affect our operating revenues and in turn, our business
and financial condition.
The Company may need to expend significant capital to keep pace with
technological developments in our industry. The remote sensing industry, as
well as the computing industry's processing of the raw data, is constantly
undergoing development and change and it is likely that new technology, whether
embodied in new equipment or techniques, will be introduced in the future. In
order to keep pace with any new developments, the Company is planning to expend
significant capital to develop or acquire the next level of developments in new
remote sensing equipment and to train our employees in the new techniques. The
Company is pursuing financing to develop additional remote sensing instruments;
however, we may not be able to raise sufficient funds, and if the Company does
so, there is no guaranty that the new instruments will out perform instruments
used by our competitors. In addition, the Company's ability to raise needed
capital may be influenced by general economic conditions and the strength of
capital markets. To ensure its ability to continue operations the Company will
undergo a re-organization to include a stock re-structuring.
The Company may incur significant expenses to comply with new or more
stringent governmental regulation. The sale of our imagery is regulated by the
Department of Commerce. Although the Company (through its acquisition of STDC)
has acquired a Department of Commerce (DOC) Remote Sensing License that permits
the Company to market globally hyperspectral and panchromatic imagery, there is
no guarantee that the government will not; impose restrictions on sales if the
quality of our imagery increases with new technology that, for example, allows
increased resolution. Because our license was the first issued DOC Remote
Sensing License, the Company cannot anticipate how the DOC specifically will
treat our license or how the airborne remote sensing industry will be regulated
in the future.
Risks Related to Our Business
- ---------------------------------
The Company may not realize our anticipated return on capital commitments
made to expand our capabilities. The Company purchased an aircraft, additional
satellite and airborne hyperspectral instruments, as well as oil and gas
property rights. The aircraft and airborne hyperspectral instruments were
purchased to increase our capacity to conduct airborne surveys. If the Company
does not experience continued demand for our remote sensing services, the
Company may incur significant expense without generating corresponding revenues.
The oil and gas property rights were acquired in order to exploit suspected
natural resources located within certain properties. If these properties do not
contain sufficient natural resources to warrant exploitation, the Company may
incur significant expenses without generating corresponding revenues.
In addition, from time to time, the Company expects to make significant
capital expenditures to implement new processes and to increase both efficiency
and capacity. Some of these projects may require additional training for our
employees and not all projects may be implemented as anticipated. If any of
these projects do not achieve the anticipated increase in efficiency or
capacity, our returns on these capital expenditures may not be as expected.
Our ability to grow is dependent upon, and may be limited by, among other
things, our capital structure, the price of our stock and our existing financing
arrangements. If additional funding sources are needed, the Company may not be
able to obtain the additional capital necessary to pursue our internal growth
and acquisition strategy or, if the Company can obtain additional financing, the
additional financing may not be on financial terms that are satisfactory to us.
The Company's database of spectral information may not be marketable or may
not garner a price, which makes processing or analyzing the data economically
reasonable. The Company has a substantial archive of Probe 1 hyperspectral
imagery that was not gathered under contract with a client. The Company
continues to gather hyperspectral imagery without having sold the rights to that
data. The collection process requires variable as well as fixed expenditures
that must be recouped though marketing the collected data. Although we do not
carry the value of our existing Phase 1 hyperspectral archives as an asset on
our balance sheet, the future success of the Company depends to some extent upon
our ability to market this archived data.
Cancellations, reductions or delays in customer orders may adversely affect
our results of operations. Our overall operating results are affected by many
factors, including the timing of survey contracts from large clients, the timing
of capital expenditures to increase our capacity for gathering data in
anticipation of future sales of products and services, and the weather which can
affect whether or not a customers target of interest can be collected at a
certain stage of vegetal growth. Although a large portion of our expenses are
relatively fixed; a significant portion of our operational expenses vary with
the number of airborne surveys. Because several of our operating divisions and
subsidiaries are new businesses and have not obtained long-term commitments from
our clients, we must anticipate the future demand for our services based upon
our discussions with clients. Cancellations, reductions or delays in orders by
a client or group of clients could have a material adverse effect on our
business, financial condition and results of operations.
The unavailability of skilled personnel may have an adverse effect on our
operations. From time to time, the Company or some of our operating divisions
and subsidiaries may experience difficulties in attracting and retaining skilled
personnel to process and interpret the substantial volume of imagery data that
is already collected or is expected to be collected in the future. The
Company's ability to operate successfully could be jeopardized if we are unable
to attract and retain a sufficient number of skilled personnel to conduct our
business.
Outlook
- -------
This Report on Form 10-K, including the foregoing discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other reports hereafter filed by the Company with the
Securities and Exchange Commission may contain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact the Company makes in this Report on Form 10-K and such other
reports filed with the Securities and Exchange Commission are forward-looking.
In particular, statements regarding industry prospects, future OEM sales by the
Company, the adequacy of existing manufacturing resources, the Company's
continued expansion in foreign markets and the Company's future results of
operations or financial position are forward-looking statements. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates"
and similar expressions identify forward-looking statements. But the absence of
these words does not mean the statement is not forward-looking. The Company
cannot guarantee any of the forward-looking statements, which are subject to
risks, uncertainties and assumptions that are difficult to predict. Actual
results may differ materially from those the Company forecasts in
forward-looking statements due to a variety of factors, including those set
forth above under the heading "Additional Risk Factors that could Affect
Operating Results and Market Price of Stock" and elsewhere in this Report. The
Company does not intend to update any forward-looking statements due to new
information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are
included on pages F-1 to F-21 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer/Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the definition of
"disclosure controls and procedures" in Rule 13a-14(c). In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer/Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective at a reasonable assurance
level.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company for fiscal 2005 to the present.
NAME AGE POSITION
---- --- --------
Larry F. Vance 70 Chairman and Chief Executive Officer
Tami J Story 42 Director Secretary/Treasurer/Director
Larry F. Vance served as Chief Executive Officer of the Company from 1985
until April 8, 1995. Since April 8, 1995, Mr. Vance has served as Chairman of
the Company. Mr. Vance is also a director of the Company and has been a
full-time employee of the Company since 1985. Mr. Vance's training is in
business and marketing. He served in a management capacity for the 3M companies,
IBM, and Computer Usage Corporation prior to founding the Company.
Tami J. Story served in an administrative support capacity for the Company
from 1991 until April 1993. Since April 1993, Ms. Story has served as Secretary
and Treasurer of the Company. Ms. Story also serves as a director of the
Company. Ms. Story holds a degree with a major in Nursing and a minor in
Business Administration.
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 2003
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, 2003.
ITEM 11. EXECUTIVE COMPENSATION
Table below summarizes information on Executives and Directors compensation
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Stock Underlying LTIP All other
Name and Principal Fiscal Salary Bonus Compensation Award(s) Option options/ payouts Compensation
Position Year ($) ($) ($) ($) Grants SARS (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------
Larry Vance/Chairman (1) 2005 160,000 - - - - - - -
2004 160,000 - - - - - - -
2003 160,000 - - - - - - -
Tami J. Story/Secretary 2005 80,000 - - - - - - -
and Treasurer (1) 2004 80,000 - - - - - - -
2003 80,000 - - - - - - -
<FN>
(1) Salary was deferred unless cash flow allowed payment.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of securities Value of Unexercised In-the
underlying unexercised Money Options at
options at FY-End FY-End ($)
Shares
Acquired on Value
Name Exercise Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------- ----------- ------------ ------------------------- ----------------------------
Larry Vance - - 4,500,000/3,000,000 (1) 0/0
John Peel - - 4,500,000/3,000,000 (1) 0/0
Rory J. Stevens - - 375,000/1,500,000 (1) 0/0
Tami Story - - 750,000/3,000,000 (1) 0/0
<FN>
(1) Exercise prices range from $0.21 - $2.50 per share.
Employment Contracts
- ---------------------
In October 28, 2000, the Company entered into an employment agreement with
Mr. Larry Vance. Pursuant to the agreement, the Company will pay Mr. Vance an
annual salary of $160,000. In the event of termination of Mr. Vance without
cause or due to a change in control, the Company will pay Mr. Vance two years of
annual salary. Mr. Vance's options and vesting criteria are described above and
in Note 11 to the attached consolidated financial statements.
On October 28, 2000, the Company entered into an employment agreement with
Ms. Tami Story. Pursuant to the agreement, the Company will pay Ms. Story an
annual salary of $80,000. In the event of termination of Ms. Story without
cause or due to a change in control, the Company will pay Ms. Story two years of
annual salary. Ms. Story 's options and vesting criteria are described above
and in Note 11 to the attached consolidated financial statements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
the Company's Common Stock as of March 31, 2005 by each person known by the
Company to own beneficially more than five percent of the Common Stock and by
all directors and officers and as a group:
Amount and nature
Name and address of beneficial of beneficial Percent of
owner ownership (1) class
------------------------------ ------------------ -----------
Larry Vance 54,660,644 (2) 74 %
P.O. Box 763
Lakeside, MT 59922
Tami Story 12,069,714 16%
P.O. Box 763
Lakeside, MT 59901
All directors and officers 66,730,358 90%
___________________________
(1) All shares are held directly with sole voting and investment power unless
otherwise indicated.
(2) Includes 4,439 shares held by Universal Search Technology, a private
company owned by Mr. Vance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Malone & Bailey, PC, Certified Public Accountants, are the Company's
independent auditors to examine the financial statements of the Company for the
fiscal years ended March 31, 2004 and March 31, 2005. Malone & Bailey, PLLC has
performed the following services and has been paid the following fees for these
fiscal years.
Audit Fees
Malone & Bailey, PC was paid aggregate fees of approximately $37.500.00 for
the fiscal years ended March 31, 2004 and 2005 for professional services
rendered for the audit of the Company's annual financial statements and for the
reviews of the financial statements included in Company's quarterly reports on
Form 10-QSBduring these fiscal years.
Audit-Related Fees
Malone & Bailey, PLLC was not paid any additional fees for the fiscal year
ended March 31, 2004 and March 31, 2005 for assurance and related services
reasonably related to the performance of the audit or review of the Company's
financial statements.
Tax Fees
Malone & Bailey, PLLC was not paid any aggregate fees for the fiscal years
ended March 31, 2004 and March 31, 2005 for professional services rendered for
tax compliance, tax advice and tax planning.
Other Fees
Malone & Bailey, PLLC was paid no other fees for professional services
during the fiscal years ended March 31, 2004 and March 31, 2005.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements filed as part of this Report Page in this Report
Report of Independent Accountants F-1 - F-2
Consolidated Balance Sheet at March 31, 2004 and 2003 F-3
Consolidated Statement of Loss for the Years
Ended March 31, 2004, 2003 and 2002 F-4
Consolidated Statement of Redeemable Common Stock
And Nonredeemable Shareholders' Equity (Deficit) for
the Years Ended March 31, 2004, 2003 and 2002 F-5
Consolidated Statement of Cash Flows for the Years
Ended March 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 - F-25
(a)(2) Financial Statement Schedules None
(a)(3) Exhibits
2.1 Agreement and Plan of Merger by and among Earth Search Sciences, Inc.,
ESS Acquisition Corp., Space Technology Development Corporation and
the shareholders of Space Technology Development Corporation, dated
December 21, 1999 (Incorporated by reference to Exhibit 2.1 to the
Registrant's Form 10-K for fiscal year ended March 31, 2000).
3.1 Articles of Incorporation, as amended (Incorporated by reference to
Exhibit 3.1 to the Registrant's Forms 10-K for the fiscal years ended
March 31, 1995 and March 31, 1996).
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to the Registrants'
Form 10-K for the fiscal year ended March 31, 1995).
4.1 See exhibits 3.1 and 3.2.
10.1 Memorandum of Understanding between the Registrant and Applied Signal
and Imaging Technology, Inc. dated May 27, 1996 (Incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-K for fiscal
year ended March 31, 1996).
10.2 Contract of Sale and Leaseback dated June 10, 1997 between Registrant
and Accuprobe, Inc. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.3 Operating Agreement of ESSI Probe1 LC, dated June 3, 1997
(Incorporated by reference to Exhibit 10.3 to the Registrant's Form
10-K for fiscal year ended March 31, 2000).
10.4 Hyperspectral Technology License Agreement between Earth Search
Sciences, Inc. and Noranda Mining and Exploration, Inc. made as of
December 16, 1997 (Incorporated by reference to the Registrant's for
8-K filed on February 6, 1998).
10.5 Agreement between the Office of Naval Research and Space Technology
Development Corporation Agreement for NAVY EARTHMAP OBSERVER (NEMO)
dated December 10, 1997 (Incorporated by reference to Exhibit 10.5 to
the Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.6 Sales Contract between Science Applications International Corp. and
Space Technology Development Corp. Dated: 30 March 1998, Contract No.:
STDC-98-NEMO-0003 (Incorporated by reference to Exhibit 10.6 to the
Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.7 Sales Contract between Science Applications International Corp. and
Space Technology Development Corp. Dated: 30 March 1998, Contract No.:
STDC-98-NEMO-004 (Incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.8 Sales Contract between Space Systems/Loral (SS/L) and Space Technology
Development Corporation (STDC). Dated 21 January 1999, Contract
Number: STDC-98-NEMO-0001 (Incorporated by reference to Exhibit 10.8
to the Registrant's Form 10-K for fiscal year ended March 31, 2000).
10.9 Sales Contract between Litton Systems, Inc., Amecom Division (Litton
Amecom) and Space Technology Development Corp. (STDC). Date 29 October
1998, Contract Number: STDC-98-NEMO-0009 (Incorporated by reference to
Exhibit 10.9 to the Registrant's Form 10-K for fiscal year ended March
31, 2000).
10.10 Common Stock Purchase Agreement between Alpha Venture Capital, Inc.
and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001.
(Incorporated by reference to Exhibit 10.10 to the Registrant's Form
10-K for fiscal year ended March 31, 2001).
10.11 Registration Rights Agreement between Alpha Venture Capital, Inc. and
Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001. (Incorporated
by reference to Exhibit 10.11 to the Registrant's Form 10-K for fiscal
year ended March 31, 2001).
10.12 Common Stock Purchase Warrant A between Alpha Venture Capital, Inc.
and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001.
(Incorporated by reference to Exhibit 10.12 to the Registrant's Form
10-K for fiscal year ended March 31, 2001).
10.13 Common Stock Purchase Warrant B between Alpha Venture Capital, Inc.
and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001.
(Incorporated by reference to Exhibit 10.13 to the Registrant's Form
10-K for fiscal year ended March 31, 2001).
10.14 Larry F. Vance employment agreement (Incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
10.15 John W. Peel employment agreement (Incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
10.16 Rory J. Stevens employment agreement (Incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
10.17 Tami J. Story employment agreement (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-Q for fiscal quarter ended
December 31, 2000).
10.18 John J. Sciuto employment agreement (Incorporated by reference to
Exhibit 10.18 to the Registrant's Form 10-K for fiscal year ended
March 31, 2001).
16.1 Consent of Independent accountants re Registration Statement on Form
No. S-1 (No. 333-66100).
16.2 Statement under oath of Principal Executive Officer and Principal
Financial Officer regarding facts and circumstances relating to
exchange act filings.
16.3 Letter re change in certifying accountant (Incorporated by reference
to Exhibit 16.3 to the Registrant's form 8-K filed on May 25, 2001).
16.4 Letter re change in certifying accountant (Incorporated by reference
to Exhibit 16.3 to the Registrant's form 8-K filed on June 10, 2003).
21.1.1 List of Subsidiaries (Incorporated by reference to Exhibit 21.1.1 to
the Registrant's Form 10-K for fiscal year ended March 31, 2000)
(b) The Registrant filed the Following Reports on Form 8-K during the
quarter ended March 31, 2005:
Date of Report Item Reported
-------------- -------------
May 27, 2005 5
January 12, 2005 8.01
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EARTH SEARCH SCIENCES, INC.
By /s/ Larry F. Vance
Larry F. Vance
Chairman
Date: August 8, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title
/s/ Larry F Vance Chairman and Director
Larry F. Vance
Date: August 8, 2005
/s/ Tami Story Corporate Secretary and Treasurer and Director
Tami J. Story
Date: August 8, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Earth Search Sciences, Inc.
Kalispell, Montana
We have audited the accompanying consolidated balance sheet of Earth Search
Sciences, Inc. as of March 31, 2005, and the related statements of operations,
stockholders' deficit, and cash flows for the two years then ended. These
financial statements are the responsibility of Earth Search's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Earth Search Sciences, Inc., as
of March 31, 2005, and the results of its operations and its cash flows for the
periods described in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that Earth
Search will continue as a going concern. These factors, among others, as
discussed in note 2 to the financial statements, raise substantial doubt about
Earth Search's ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 13 to the financial statements, errors resulting in an
overstatement of assets, understatement of accounts payable and expenses were
discovered by management in 2005. Accordingly, adjustments have been made as of
March 31, 2004 and March 31, 2005 to correct the error.
MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
May 18, 2005
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2005
(Restated)
-------------
ASSETS
Current Assets
Cash $ 9,175
Accounts receivable, net of $0 allowance
for doubtful accounts 64,905
Loan costs, net of $6,514
accumulated amortization 36,912
-------------
Total Current Assets 110,992
-------------
Oil and gas properties, using successful
efforts accounting
Proved properties 255,422
Less accumulated depletion (213,242)
Property and equipment, net of $624,137
accumulated depreciation 512,768
-------------
TOTAL ASSETS $ 665,940
=============
LIABILITIES
Current Liabilities
Notes payable $ 1,051,054
Capital lease obligation 3,805,754
Accrued officers' compensation 667,986
Accounts payable 9,204,749
Accrued expenses 77,978
Due to related parties 1,012,055
Investor deposit 377,215
Shareholder loans 1,396,352
-------------
Total Current Liabilities 17,593,143
Long Term Liabilities
Notes payable less current portion 376,373
Total Liabilities 17,969,516
-------------
Commitments and contingencies -
STOCKHOLDERS' DEFICIT
Series A preferred stock; 200,000 shares
authorized, none issued and outstanding;
liquidation preference $1,000,000 -
Common stock, $.001 par value; 200,000,000
shares authorized; 72,762,836 shares
issued and outstanding 72,762
Additional paid in capital 42,518,196
Treasury stock (200,000)
Accumulated deficit (59,694,534)
-------------
Total Stockholders' Deficit (17,303,576)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 665,940
=============
See accompanying summary of accounting policies
and notes to financial statements
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 2005 and 2004
(Restated) (Restated)
2005 2004
------------ ------------
Revenue $ 415,702 $ 516,490
Cost of revenue (237,156) (670,008
------------ ------------
Gross margin 178,546 (153,518
------------ ------------
Expenses
General & administrative 4,357,053 1,162,706
Impairment 386,628 2,469,072
------------ ------------
Total Expenses 4,473,681 3,631,778
------------ ------------
Loss from operations (4,565,135) (3,785,296)
Other income (expenses)
Debt forgiveness 38,788 -
Interest income - 2,848
Interest expense (659,180) (686,092)
------------ ------------
Loss before minority interest (5,185,527) (4,468,540)
Minority interest in losses of
consolidated subsidiaries - 279,890
------------ ------------
Net loss $(5,185,527) $(4,188,650)
============ ============
Basic and diluted loss per share $ (0.93) $ (8.62)
Weighted average common
shares outstanding 5,545,079 485,764
See accompanying summary of accounting policies
and notes to financial statements
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Years Ended March 31, 2005 and 2004
Preferred Stock Common Stock
Shares Amount Shares Amount
---------------- --------------- ---------- -----------
Balance at March 31, 2003 - $ - 476,135 $ 476
Issuance of common stock for
services rendered - - 9,629 10
Stock option expense - - - -
Net loss - - - -
---------------- --------------- ---------- -----------
Balance at March 31, 2004 (restated) - - 485,764 486
Issuance of common stock for debt
to related parties 39,216 39
Issuance of common stock for debt - - 80,313 80
Issuance of common stock for
services rendered 2,604,907 2,605
Issuance of common stock for
accrued compensation - - 214,922 215
Issuance of preferred stock for
accrued compensation 2,761,928 2,762 - -
Issuance of common stock for
loan and interest conversion - - 4,191 4
Conversion of preferred stock to
common stock (2,761,928) (2,762) 69,048,200 69,048
Issuance of common stock for accrued
legal settlement - - 285,323 285
Related party release of debt - - - -
Net loss - - - -
---------------- --------------- ---------- -----------
Balance at March 31, 2005 (restated) - $ - 72,762,836 $ 72,762
================ =============== ========== ===========
See accompanying summary of accounting policies
and notes to financial statements
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Years Ended March 31, 2005 and 2004
Additional
Paid-in Accumulated Treasury
Capital Deficit Stock Total
-------------- ------------- -------------- -------------
Balances at March 31, 2003 $ 35,639,916 $(50,320,357) $ (200,000) $(14,879,965)
Issuance of common stock for
services rendered 46,212 - - 46,222
Stock option expense 3,880 - - 3,880
Net loss - (4,188,650) - (4,188,650)
-------------- ------------- -------------- -------------
Balance at March 31, 2004 (restated) 35,690,008 (54,509,007) (200,000) (19,018,513)
Issuance of common stock for debt
to related parties 19,961 - - 20,000
Issuance of common stock for debt 64,927 - - 65,007
Issuance of common stock for
services rendered 3,648,756 - - 3,651,361
Issuance of common stock for
accrued compensation 140,225 - - 140,440-
Issuance of preferred stock for
accrued compensation 1,032,961 - - 1,035,723
Issuance of common stock for
loan and interest conversion 2,301 - - 2,305
Conversion of preferred stock to
common stock (66,286) - - -
Issuance of common stock for accrued
legal settlement 327,836 - - 328,121
Related party release of debt 1,657,507 - - 1,657,507
Net loss - (5,185,527) - (5,185,527)
-------------- ------------- -------------- -------------
Balance at March 31, 2005 (restated) 42,518,196 (59,694,534) (200,000) (17,303,576)
============== ============= ============== =============
See accompanying summary of accounting policies
and notes to financial statements
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 2005 and 2004
(restated) (restated)
2005 2004
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,185,527) $(4,188,650)
Adjustments to reconcile net loss to
cash used in operating activities:
Employee stock option vesting expense - 3,879
Common stock issued for services
and interest expense 3,653,666 46,222
Common stock issued for legal settlement 328,121 -
Loss attributed to minority interest - (279,890)
Depreciation, amortization and depletion 151,038 369,324
Asset impairment 386,628 2,469,072
Forgiveness of debt 38,788
Changes in assets and liabilities:
Accounts receivable 44,337 59,941
Other current assets 39,007 (39,797)
Accounts payable and accrued expenses 13,459 420,824
Accrued interest 181,857 164,906
Accrued officers compensation 336,672 398,837
------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (38,872) (575,331)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (55,958) (336,474)
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (55,958) (336,474)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from shareholder loans, net 171,591 562,500
Proceeds from liquidation of escrow- - 90,000
Repayments on notes payable (79,339 (76,624)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 92,252 575,876
------------- ------------
NET CHANGE IN CASH (2,578) (335,929)
CASH AT BEGINNING OF PERIOD 11,753 347,682
------------- ------------
CASH AT END OF PERIOD $ 9,175 $ 11,753
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Cash flow information:
Interest paid $ - $ 199,827
Taxes paid- - -
Non-cash financing and investing activities:
Common Stock issued for accounts payable 65,007 -
Preferred stock issued for accrued payroll 41,219 -
Preferred stock issued for deferred officer's compensation 994,504 -
Common stock issued for accrued payroll 140,440 -
Contribution to capital from related party
release of debt 1,657,507 -
Shares issued for payment of related party loans 20,000 -
See accompanying summary of accounting policies
and notes to financial statements
SEARCH SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Earth Search Sciences, Inc. ("ESSI") collects high value hyperspectral imagery
of the earth's surface utilizing their proprietary hyperspectral imaging
sensors, principally in North America. This imagery is either sold to end users
via contracts to collect the information or collected for ESSI's own exploration
purposes. ESSI also performs a range of imagery processing services. Information
collected by the sensor has applications in natural resources development,
environmental monitoring and remediation, wildlife habitat monitoring,
hydrocarbon exploration and development, agricultural assessment and planning,
including weed species identification, land use planning, forestry monitoring
and planning, homeland security and target identification for defense
surveillance.
ESSI has four wholly-owned subsidiaries: Skywatch Exploration, Inc.,
Polyspectrum Imaging, Inc., Geoprobe, Inc., and STDC, Inc. ("STDC"). In
addition, there are five majority-owned consolidated subsidiaries: Earth Search
Resources, Inc., Eco Probe, Inc., ESSI Probe 1 LC, Petro Probe, Inc. and
Terranet, Inc. The 50% owned subsidiary ESSI Probe 1 LC was formed as a joint
venture to own and operate hyperspectral instruments.
All subsidiaries excepting Petro Probe became inactive during fiscal 2003.
The majority-owned Petro Probe, Inc. was formed to identify and develop
hydrocarbon properties by utilizing ESSI's hyperspectral instruments,
hydrocarbon geologists, and imagery processors. At March 31, 2005, Petro Probe,
Inc. holds interests in seven oil and gas projects.
In fiscal 2005 and 2004, ESSI operated its airborne hyperspectral sensors under
contracts with third parties in several areas around the United States.
Contracts to operate the sensors in the United States as an ecological,
agricultural, hydrocarbon, and target identification contributed approximately
$192,297 and $258,000 to revenue in fiscal 2005 and 2004 respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ESSI and its
subsidiaries. All significant intercompany transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
OIL AND GAS PROPERTIES
ESSI uses the successful efforts method to account for its oil and gas
properties. Costs incurred for property acquisition, exploration, and drilling
related to its oil and gas properties are capitalized. Once the project is
completed, and, if oil or gas is located, costs capitalized to date on the
specific project are amortized under the unit-of-production method as revenue is
recognized. Capitalized costs for unsuccessful projects are expensed when that
determination is made.
Based on the agreements for the working interests in oil and gas properties,
ESSI will proportionately share in future revenues as well as future operating
and drilling costs. Unproved oil and gas properties that are individually
significant are periodically assessed for impairment of value, and a loss is
recognized at the time of impairment by providing an impairment allowance. In
fiscal 2005 and 2004, $0 and $439,472 of prior year costs were impaired because
profitable production had not yet been obtained in the properties.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted by the unit-of-production method.
REVENUE RECOGNITION
ESSI recognizes revenue when persuasive evidence of an arrangement exists,
services have been rendered, the sales price is fixed or determinable, and
collectibility is reasonably assured. This typically happens when services are
rendered under contracts for airborne hyperspectral services and imaging
processing services.
ALLOWANCE FOR DOUBTFUL ACCOUNTS Bad debt expense is recognized based on
management's estimate of likely losses per year, based on past experience and an
estimate of current year uncollectible amounts. There was no allowance for
doubtful accounts as of March 31, 2005.
DEPRECIATION AND AMORTIZATION
ESSI recognizes depreciation on its property and equipment using the
straight-line method over estimated useful lives ranging from five years for
computers and software, vehicles and equipment to ten years for the two
hyperspectral sensors.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. ESSI evaluates long-lived assets to determine potential impairment
by comparing the carrying amount to the undiscounted estimated future cash flows
of the related assets. In fiscal 2004, ESSI incurred asset impairments of
$137,000 and abandoned construction in progress of $1,958,000 on the Probe, LC.
In fiscal 2005 and 2004, ESSI incurred unsuccessful oil and gas properties
write-offs of $386,628 and $439,472 respectively.
INCOME TAXES
ESSI recognizes deferred tax assets and liabilities based on differences between
the financial reporting and tax bases of assets and liabilities using the
enacted tax rates and laws that are expected to be in effect when the
differences are expected to be recovered. ESSI provides a valuation allowance
for deferred tax assets for which it does not consider realization of such
assets to be more likely than not.
MINORITY INTEREST
Losses from subsidiaries with minority interest are allocated to the minority
interest liability account based on the percentage of minority interest
ownership. Once losses applicable to the minority interest in the subsidiary
exceed the minority interest in the equity capital of the subsidiary, then no
additional losses will be allocated to the minority interest liability account.
NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted average number
of ESSI's common shares outstanding. Common stock equivalents have not been
considered in the diluted net loss per share calculation because their effect on
net loss per share is anti-dilutive.
STOCK OPTIONS AND WARRANTS
ESSI accounts for non-cash stock-based compensation issued to non-employees in
accordance with the provisions of SFAS No. 123 and EITF No. 96-18, Accounting
for Equity Investments That Are Issued to Non-Employees for Acquiring, or in
Conjunction with Selling Goods or Services. Common stock issued to non-employees
and consultants is based upon the value of the services received or the quoted
market price, whichever value is more readily determinable. ESSI accounts for
stock options and warrants issued to employees under the intrinsic value method.
Under this method, ESSI recognizes no compensation expense for stock options or
warrants granted when the number of underlying shares is known and the exercise
price of the option or warrant is greater than or equal to the fair market value
of the stock on the date of grant. The following table illustrates the effect on
net loss and net loss per share if ESSI had applied the fair value provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
There were no stock options or warrants granted during 2005 and 2004.
RECENTLY-ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No.123R, "Accounting for Stock-Based
Compensation" SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
value were required. SFAS No. 123R shall be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of this new accounting pronouncement is
not currently expected to have a material impact on the financial statements of
the Company during the calendar year 2006.
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, ESSI incurred recurring net
losses of $5,185,527 and $4,188,650 for fiscal 2005 and 2004, respectively, has
an accumulated deficit of $59,694,534 and a working capital deficit of
$17,482,151 of March 31, 2005. These conditions raise substantial doubt as to
ESSI's ability to continue as a going concern. Management is trying to raise
additional capital through sales of stock. The financial statements do not
include any adjustments that might be necessary if ESSI is unable to continue as
a going concern.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
Life 2005
------- ----------
Aircraft 10 $ 925,795
Equipment 5 211,111
----------
1,136,906
Less: accumulated depreciation (624,137)
----------
$ 512,768
==========
Depreciation expense totaled $112,658 and $339,116 in fiscal 2005 and 2004,
respectively.
NOTE 4 - OIL AND GAS INTERESTS
In fiscal 2005, ESSI paid $101,849 for drilling on two existing properties
and sold a portion of its interests to others on those two properties for
$15,947.
ESSI recognized approximately $223,000 and $257,000 in revenue from the
producing property in fiscal 2005 and 2004 respectively. Depletion was
$38,025 and $30,208 in fiscal 2005 and 2004 respectively.
In fiscal 2005 and 2004 ESSI wrote-off $386,628 and $439,472 of previously
capitalized costs on properties that were determined to be uneconomical
wells.
Supplemental information (unaudited)
Successful
Capitalized costs relating to oil and gas Efforts
producing activities at March 31, 2005 -----------
Proved oil and gas properties $ 255,422
Less accumulated depletion (213,242)
-----------
Net capitalized costs $ 42,180
===========
Costs incurred in oil and gas producing
activities for the years ended 2005 2004
March 31, 2005 and 2004 ---------- -----------
Property acquisition costs
Proved $ - $ 5,803
Unproved 55,958 330,671
Results of operations for oil and gas
producing activities for the years ended
March 31, 2005 and 2004
Oil and gas sales $ 223,405 $ 265,050
Development Costs - (7,403)
Depletion (38,025) (30,208)
Impairment (386,628) (439,472)
---------- -----------
Results of operations for oil and gas
producing activities (excluding corporate
overhead and financing costs) $ (201,248) $ (212,033)
========== ===========
The following estimates of proved and proved developed reserve quantities
and related standardized measure of discounted net cash flow are estimates
only, and do not purport to reflect realizable values or fair market values
of ESSI's reserves. ESSI emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than
those producing oil and gas properties. Accordingly, these estimates are
expected to change as future information becomes available. All of ESSI's
reserves are located in the United States.
Proved reserves are estimated reserves of crude oil (including condensate
and natural gas liquids) and natural gas that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year end prices of oil and gas (with consideration of price
changes only to the extent provided by contractual arrangements) to the
estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on year-end costs) to be incurred in developing
and producing the proved reserves, less estimated future income tax
expenses (based on year-end statutory tax rates, with consideration of
future tax rates already legislated) to be incurred on pretax net cash
flows less tax basis of the properties and available credits, and assuming
continuation of existing economic conditions. The estimated future net cash
flows are then discounted using a rate of 10 percent a year to reflect the
estimated timing of the future cash flows.
2005 2004
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
---------- ------------ ----------- -----------
Proved developed and undeveloped
Reserves
Beginning of year 13,356 5,271,000 18,283 9,700,000
Revisions of previous estimates (13,343) (5,181,709) - (2,655,220)
Production (13) (42,291) (4,927) (1,773,780)
---------- ------------ ----------- -----------
End of Year - 47,000 13,356 5,271,000
========== ============ =========== ===========
Proved developed reserves
Beginning of year 13,356 5,271,000 18,283 9,700,000
End of year - 47,000 13,356 5,271,000
Standardized measure of 2005 2004
discounted future net cash flows ------------ -----------
at March 31, 2005 and 2004
Future cash inflows $ 421,663 $ 547,905
Future production costs (13,414) (23,097)
Future development costs (27,824) (23,346)
10% annual discount for estimated
timing of cash flows (177,787) (79,799)
------------ -----------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves $ 202,638 $ 421,663
============ ===========
The following reconciles the change in the standardized measure of
discounted future net cash flows for fiscal 2005 and 2004
2005 2004
----------- -----------
Beginning of the year $ 421,663 $ 856,845
Sales of oil and gas, net of production
Costs (223,405) (257,647)
Net changes in prices and production
Costs 9,683 30,022
Development costs incurred during the
year which were previously estimated- - 7,403
Revisions of previous quantity estimates (9,761) (161,697)
Net change in future estimated
development costs 4,458 (53,263)
----------- -----------
End of year $ 202,638 $ 421,663
=========== ===========
NOTE 5 - NAVAL EARTHMAP OBSERVER (NEMO) PROJECT
In May 2002, ESSI received notification from the ONR indicating that the
performance period for the agreement governing the NEMO project had ended. The
related unpaid receivable of $814,895 as of March 31, 2003 has been fully
reserved and no payments have been received since that date.
Included in accounts payable as of March 31, 2005 is $8,216,424 in unpaid
accounts payable to NEMO subcontractors and vendors.
NOTE 6 - NOTES PAYABLE
Notes payable consists of the following:
2005
------------
Installment note payable with a balloon
due October 15, 2005, secured by airplane,
the hyperspectral sensor, and the
producing oil and gas property, with
interest at 15%, due in monthly
installments of $18,042 $ 1,022,975
Installment note payable secured by
producing oil and gas property, with
interest at 15%, due in monthly
installments of $6,929 399,421
Unsecured convertible promissory notes,
Due on demand, with interest at 12.5% 41,568
Other 3,033
Less: current portion (1,051,056)
------------
$ 415,941
============
Additionally, ESSI has an outstanding balance of approximately $3,805,000 in
unpaid principle and interest to an individual. As of March 31, 2005, a mutual
release of the debt had been signed. See Note 14 for details.
Additionally, ESSI has an outstanding balance of approximately $3,805,000 in
unpaid principle and interest to an individual. As of March 31, 2005, a mutual
release of the debt had been signed. See Note 14 for details.
NOTE 7 - SHAREHOLDER LOANS
ESSI has financed its operations in part by funds received from advances by
shareholders. These advances are in the form of unsecured promissory notes and
bear interest at rates ranging from 8% to 10%. As of March 31, 2005, interest
accrued on such advances aggregated $686,934.
NOTE 8 - ACCRUED OFFICERS' COMPENSATION
Accrued compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, Chief Executive Officer, Chief Financial Officer
and Secretary). ESSI recorded officer compensation, accrued payroll taxes and
accrued interest of $336,850 and $400,116 during fiscal 2005 and 2004, and
included these amounts in general and administrative expenses. ESSI is accruing
interest on the accrued compensation balances at a rate of 8.5%, compounded
quarterly. ESSI is making full salary payments to these officers as cash flow
allows.
On June 8, 2004, ESSI issued 2,652,011 shares of preferred stock for payment of
$994,504 deferred compensation. Additionally, 109,917 shares of preferred stock
were issued for payment of $41,219 in accrued compensation to other employees.
On March 7, 2005, two officers signed releases of deferred compensation and
accrued interest totaling $1,657,507. This transaction was considered a
contribution to capital.
NOTE 9 - BUSINESS SEGMENT INFORMATION
ESSI's major activities are broken down into an Airborne Hyperspectral Services
business segment, a Satellite Development business segment, an Oil and Gas
property business segment and an Other Industries business segment. The Airborne
Hyperspectral Services segment and Satellite Development segment will utilize
remote sensing instruments to earn revenue from the sale of hyperspectral
imagery. The current Satellite Development business segment revenue is from a
cost reimbursement contract with the U.S. Navy for the construction of the NEMO
project, which has been disbanded. Transactions between the business segments
are loans, interest, and management fees based on an allocation of incurred
costs for general and administrative expenses. As the consolidated group is
operating at a net loss position, no income tax expense or benefit is provided.
Business Segment Information for Fiscal Year 2005
Airborne
Hyperspectral Satellite Oil and Gas Other
Services Development Properties Industries Combined
--------------- -------------- ------------- ----------- -------------
Revenue $ 192,297 $ - $ 223,406 $ - $ 415,702
=============== ============== ============= =========== ==============
Operating Income (Loss) $ (4,331,129) $ (24,183) $ 208,357 $ (1,465) $ (4,545,134)
=============== ============== ============= =========== ==============
Debt forgiveness 38,788 - - - 38,788
Interest expense (659,181) - - - (659,181)
Loss from continuing
operations before income taxes
and minority interest (4,951,522) (24,183) 208,357 (1,465) (5,185,527)
Total Assets at 3/31/05 $ 578,082 $ 762 $ 84,488 2,608 $ 665,940
=============== ============== ============= =========== ==============
Depreciation and amortization
for the period ended 3/31/05 $ 112,658 $ - $ 38,025 - $ 150,683
=============== ============== ============= =========== ==============
Capital expenditures for the
period ended 3/31/05 $ - $ - $ 55,958 - $ 55,958
=============== ============== ============= =========== ==============
Business Segment Information for Fiscal Year 2004
Airborne
Hyperspectral Satellite Oil and Gas Other
Services Development Properties Industries Combined
--------------- -------------- ------------- ------------ ------------
Revenue $ 258,843 $ - $ 257,647 - $ 516,490
=============== ============== ============= ============ ============
Operating Income (Loss) $ (3,644,917) $ (1,676) $ (138,703) - $(3,785,296)
=============== ============== ============= ============ ============
Interest income 2,556 292 - - 2,848
Interest expense (686,080) (12) - - (686,092)
Loss from continuing
operations before income taxes
and minority interest - - - - (4,468,540)
Total Assets at 3/31/04 $ 735,067 $ 24,946 $ 473,560 - $ 1,233,573
=============== ============== ============= ============ ============
Depreciation and amortization
for the period ended 3/31/04 $ 339,116 $ - $ 30,208 - $ 369,324
=============== ============== ============= ============ ============
Capital expenditures for the
period ended 3/31/04 $ - $ - $ 336,474 - $ 336,474
=============== ============== ============= ============ ============
NOTE 10 - INCOME TAXES
ESSI recorded no provision for income taxes in fiscal 2005 and 2004 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,
2005 2004
-------------- -------------
Operating loss carryforwards $ 17,333,089 $ 15,364,448
Other deferred tax assets - 1,158,986
-------------- -------------
Deferred tax assets 17,333,089 16,523,434
Deferred tax assets valuation allowance (17,333,089) (16,523,434)
-------------- -------------
$ - $ -
============== =============
The deferred tax asset has been fully reserved because ESSI is unable to
anticipate future taxable income to realize the potential benefits of the gross
deferred tax asset.
Net operating loss carry forwards may be used to offset taxable income, if any,
in future years through their expiration in 2005 through 2025. The annual amount
of tax loss carryforward, which can be utilized, may be limited due to the
substantial changes in the Company's ownership as defined by section 382 of the
Internal Revenue Code, which may occur in the future. Such limitations could
result in the expiration of a part or all of the loss carryforwards before their
utilization.
NOTE 11 - OFFICER AND DIRECTOR STOCK OPTIONS
In August 1997, the Board of Directors granted performance based options to
ESSI's Chairman, President and Chief Executive Officer to each purchase 12,500
shares of ESSI's stock at exercise prices ranging from $200 per share to $1,000
per share and to ESSI's Secretary to purchase 2,500 shares of ESSI's stock at an
exercise price of $200 per share. All of these performance based stock options
are exercisable for a period of 24 months from the date of vesting. The options
will be deemed vested for each individual if that individual is employed by ESSI
on the first date on which the closing market price of ESSI's common stock
equals or exceeds the price per share performance targets for 30 consecutive
days. The specific vesting criteria for these options are described below:
When and if the closing market price of common stock equals or exceeds each of
the following prices $0.50, $1.00, $1.50, $2.00 and $2.50 per share for 30
consecutive days, each of the three individuals shall become fully vested with
an option to purchase 1,000,000 shares of common stock for each milestone at a
price equal to the milestone price of $0.50, $1.00, $1.50, $2.00 and $2.50 per
share, exercisable for a period of 24 months from the date of vesting.
During fiscal 2001, the Board of Directors approved performance based bonuses in
the form of options to ESSI's officers. The specific vesting criteria for these
options are described below:
10% of options shall be considered vested and bonused as paid in full shares for
past services to ESSI; 15% of all options shall become vested and paid in full
when ESSI is successful in obtaining a commitment from a strategic partner,
financial institution, reputable investment banker or other source in raising
capital sufficient to fund the NEMO program (shut down in 2002 - see Note 5);
20% vested and paid in full when successful in raising gross capital of at least
$6,000,000; 20% vested and paid in full when successful in raising gross capital
of at least $30,000,000; 20% vested and paid in full when successful in raising
gross capital of at least $100,000,000; and 15% vested and paid in full in the
event the NEMO program is successfully funded.
There were no warrants issued in fiscal 2005 and 2004.
The following table summarizes the employee stock option transactions described
above.
Shares
under Weighted-average
option exercise price
------------ ------------------
Balance, March 31,2003 57,845 $ 428
Options granted -- --
Options cancelled (2,313) (228)
Options exercised -- --
------------ ------------------
Balance, March 31, 2004 55,532 436
Options granted -- --
Options cancelled (939) (84)
Options exercised -- --
------------ ------------------
Balance, March 31, 2005 54,593 $ 442
============ ==================
Options outstanding and exercisable as of March 31, 2005:
- - Outstanding - - Exercisable
Number Remaining Number
Exercise Price of Shares life of Shares
- --------------- -------------- ------------ -----------
$ 20 625 1 year 625
28 375 2 years 375
56 906 .5 year 906
56 312 1 year 312
60 875 .5 year 875
84 12,500 1 year 12,500
140 875 .5 year 875
200 8,750 2 years 8,750
400 6,875 2 years 6,875
600 7,500 2 years 7,500
800 7,500 2 years 7,500
1,000 7,500 2 years 7,500
-------------- -----------
54,593 54,593
============== ===========
NOTE 12 - STOCK ISSUANCES
PREFERRED STOCK
On June 8, 2004, ESSI issued 2,761,928 shares of preferred stock for payment of
$1,035,723 deferred compensation. Each share of preferred stock was convertible
into 25 shares of common stock and maintained voting rights on a fully diluted
basis.
During the fourth quarter, all shares of preferred stock were converted into
69,048,200 shares of common stock.
COMMON STOCK
On June 2, 2004, ESSI authorized a 400:1 reverse split. The split did not effect
the par value of the common stock, and reduced the number of shares outstanding
to 476,135.
During the fourth quarter of fiscal 2005, ESSI issued:
- 2,609,098 shares of stock valued at $3,650,667 to various individuals
for services rendered.
- 80,313 shares of stock valued at $65,007 to various individuals for
accounts payable.
- 39,216 shares of stock valued at $20,000 to a majority shareholder for
partial payment of shareholder loans.
- 214,922 shares of stock valued at $140,440 to employees for accrued
salaries.
- 285,323 shares of stock valued at $328,121 for an accrued legal
settlement. See note 13 for details.
During the fourth quarter of fiscal 2005, two majority shareholders signed
releases of debt related to their accrued compensation through
March 31, 2004. The releases were for $1,657,507. The transaction has been
recorded as a contribution to capital. Additionally, two employees signed
releases of accrued compensation totaling $38,788. This has been recorded as
debt forgiveness income.
NOTE 13 - RESTATEMENT
The following summarizes the restatement of the balance sheet and income
statement for the related errors due primarily to the write-off of unproved well
costs and reclassifications of payables to related parties.
CONSOLIDATED BALANCE SHEET
March 31, 2005
Previously
Stated Change (Restated)
------------- ----------- -------------
ASSETS
Current Assets
Cash $ 9,175 - $ 9,175
Accounts receivable, net of $0 allowance
for doubtful accounts 64,905 - 64,905
Loan costs, net of $6,514
accumulated amortization 36,912 - 36,912
------------- ----------- -------------
Total Current Assets 110,992 - 110,992
------------- ----------- -------------
Oil and gas properties, using successful
efforts accounting
Proved properties 255,411 - 255,422
Unproved properties 416,573 (416,573) -
Less accumulated depletion (213,242) - (213,242)
Property and equipment, net of $624,137
accumulated depreciation 512,768 - 512,768
------------- ----------- -------------
TOTAL ASSETS $ 1,082,513 (416,573) $ 665,940
============= =========== =============
LIABILITIES
Current Liabilities
Notes payable $ 1,051,056 (2) $ 1,051,054
Capital lease obligation 3,805,754 3,805,754
Accrued officers' compensation 667,986 667,986
Accounts payable 9,554,805 (350,056) 9,204,749
Accrued expenses 77,978 77,978
Due to related parties 691,942 320,113 1,012,055
Investor deposit 377,215 377,215
Shareholder loans 1,356,784 39,568 1,396,352
------------- ----------- -------------
Total Current Liabilities 17,583,520 9,623 17,593,143
------------- ----------- -------------
Long Term Liabilities
Notes payable less current portion 415,941 (39,568) 376,373
------------- ----------- -------------
Total Liabilities 17,999,461 (39,568) 17,969,516
------------- ----------- -------------
Commitments and contingencies - - -
STOCKHOLDERS' DEFICIT
Series A preferred stock; 200,000 shares
authorized, none issued and outstanding;
liquidation preference $1,000,000
Common stock, $.001 par value; 200,000,000
shares authorized; 72,762,836 shares
issued and outstanding 72,762 72,762
Additional paid in capital 42,518,196 42,518,196
Treasury stock (200,000) (200,000)
Accumulated deficit (59,307,906) (386,628) (59,694,534)
------------- ----------- -------------
Total Stockholders' Deficit (16,916,948) (386,628) (17,303,576)
------------- ----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,082,513 (416,573) $ 665,940
============= =========== =============
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 2005 and 2004
Previously (Restated)
Stated Change 2005
------------ ----------- ------------
Revenue $ 415,702 $ 415,702
Cost of revenue (237,156) (237,156)
------------ ----------- ------------
Gross margin 178,546 (178,546)
------------ ----------- ------------
Expenses
General & administrative 4,357,053 4,357,053
Impairment - 386,628 386,628
------------ ----------- ------------
Total Expenses 4,357,053 386,628 4,473,681
------------ ----------- ------------
Loss from operations (4,178,507) (386,628) (4,565,135)
Other income (expenses)
Debt forgiveness 38,788 38,788
Interest income -
Interest expense (659,180) (659,180)
------------ ----------- ------------
Net loss $ 4,795,899) (386,628) $(5,185,527)
============ =========== ============
Basic and diluted loss per share $ (0.87) $ (0.93)
Weighted average common
shares outstanding 5,545,079 5,545,079
ESSI agreed to a legal settlement in July 2003. The settlement required ESSI to
issue a number of shares equal to an agreed upon amount of $328,121. ESSI did
not previously account for the settlement, therefore, the fiscal 2004 year's
accounts payable, general and administrative expense and retained earnings was
understated by $328,121. All amounts have been adjusted as if the transaction
was accounted for in July 2003.
During the fourth quarter of fiscal 2005, ESSI issued 285,323 shares to settle
the payable.
NOTE 14 - COMMITMENT AND CONTINGENCIES
OPERATING RENT
Future minimum rental payments as of March 31, 2005:
2005 $ 76,800
2006 25,600
------------
$ 102,400
============
Rental expense for office space included in operations for fiscal 2005 and 2004
is $76,800. In fiscal 2001, the Company entered into a lease for its office in
Kalispell, Montana. The lease is with two officers of ESSI and is for a term of
5 years with minimum monthly payments of $6,400.
LITIGATION
In November 2000, a lawsuit was filed against ESSI by a vendor. The vendor
alleged that ESSI did not issue them 500,000 shares of ESSI's common stock,
which it is owed pursuant to a written agreement between the vendor and ESSI in
which the vendor agreed to perform certain services for ESSI in return for cash
and ESSI's common stock. The relief sought by the vendor in the lawsuit includes
significant compensatory and punitive damages; however, ESSI believes that it
will be able to settle the lawsuit for less than the relief sought. ESSI has
recorded a contingency loss accrual of $185,000. It is management's opinion that
the loss accrual is their best estimate of the potential liability and
associated legal costs of the dispute. ESSI filed counterclaims in May 2002 and
there has been no activity since that date.
ESSI was in dispute with another party over a leaseback purchase agreement for a
Hyperspectral Probe. During the fourth quarter, both parties signed a mutual
release in which ESSI will return the Probe and ESSI will be released of amounts
owed to the other party as of the date the Probe is returned. ESSI agreed to
return the Probe at the end of August 2005, and in the event the probe is not
returned to the other party, the release is null and void.
NOTE 15 - SUBSEQUENT EVENTS
During April 2005, ESSI issued 513,710 shares of common stock valued at $174,992
to various parties for services.
During June 2005, ESSI issued 200,000 shares of common stock and 100,000
warrants to purchase common stock for $55,774 in debt. The shares were valued at
$42,000. The warrants had a fair value of $17,182, are exercisable at the
holder's option at any time for one year. 50,000 are exercisable at $0.50 and
50,000 are exercisable at $0.25.