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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended March 31, 2003
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.
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(Exact name of registrant as specified in its charter)
Utah 87-0437723
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1729 Montana Highway 35, Kalispell, Montana 59901
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(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, 2003: $1,769,865. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at July 14, 2003: 190,435,918.
Documents incorporated by reference.
This Form 10-K consists of 49 pages, which includes exhibits.
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TABLE OF CONTENTS
PART I.........................................................................3
Item 1 - Business ........................................................3
Item 2 - Properties .....................................................9
Item 3 - Legal Proceedings................................................9
Item 4 - Submission of Matters to a Vote of Security Holders.............10
PART II.......................................................................10
Item 5 - Market for the Registrant's Common Stock Equity and
Related Shareholder Matters....................................10
Item 6 - Selected Financial Data.........................................12
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................13
Item 7A- Quantitative and Qualitative Disclosures About Market Risk......20
Item 8 - Financial Statements and Supplementary Data.....................20
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................20
PART III......................................................................20
Item 10 - Directors and Executive Officers of the Registrant..............20
Item 11 - Executive Compensation..........................................22
Item 12 - Security Ownership of Certain Beneficial Owners and
Management.....................................................23
Item 13 - Certain Relationships and Related Transactions..................24
PART IV.......................................................................25
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.......................................................25
SIGNATURES....................................................................28
2
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
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The Company's mission is to commercially exploit the science of
remote sensing in a wide variety of industries around the globe. The science of
remote sensing includes acquiring, processing and interpreting imagery of the
earth captured from instruments deployed on aircraft or satellites. The
advantages of airborne and satellite remote sensing over other methods of
gathering visual information are that data can be collected better, faster and
cheaper over larger areas including sites inaccessible from the ground. By
collecting data at different times, changes can be detected that may be due to
significant natural or man-made processes. Detection of such changes can assist
in environmental/land use management. Remote sensing instruments measure
reflected, visible and infrared sunlight from the earth's surface over a
spectral range seven times broader than the human eye can see. This collected
data can then be digitally analyzed using personal computers. The digitally
analyzed imagery can provide information useful to a wide range of industries
such as, but not limited to, natural resource development (including oil and
mineral exploration, fisheries and forestry), land use development,
environmental remediation and monitoring, agriculture (including vegetation
stress analysis), disaster assessment, marine sciences and military sciences.
Development of Core Technology
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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 a test area in Nevada. The results of that program
were published in January 1993. As a result of its participation in the program,
the Company acquired a large amount of unprocessed imagery data and recognized
the need to refine existing remote sensing technology in order to improve the
economics of commercial remote sensing applications. To achieve its goal, the
Company undertook the development of a miniaturized hyperspectral remote sensing
instrument, Probe 1, which is designed to be used with cost effective and easily
available aircraft. This instrument 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 remote sensing industry.
Current Business Plan
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The Company is evolving from a mineral exploration and research and
development organization into a leading provider of remote sensing services.
Data is provided for clients as well as for the Company's own mineral and
hydrocarbon exploration purposes. It is also accumulated for future resale to a
variety of users. On June 1, 1997, the Company took
3
delivery of the first Probe 1 instrument. In its first full year of commercial
operation, the Company developed markets and generated revenue from multiple
clients. In August of 1999, the Company took delivery of its second Probe 1
instrument. Since June 1, 1997, the Company has collected and currently owns a
substantial archive of Probe 1 hyperspectral imagery from Kazakhstan, Australia,
British Columbia, Ontario, Quebec, Chile, Peru, Mexico, California, Nevada,
Arizona, Idaho, Montana, Wyoming, Texas, Louisiana, Florida and Utah. At the
present time, the value of this data archive has not been independently
appraised and its value is not reflected in the Company's financial statements.
The Company believes cost effective hyperspectral remote sensing and
imagery processing has tremendous potential in various global applications and
markets. The current ASPRS/NASA Ten-Year Industry Forecast
(HTTP://WWW.ASPRS.ORG/NEWS.HTML) validates this position and indicates that the
remote sensing market has been growing at a rate of 13% per year, with the
hyperspectral portion of that market growing to12% of the total by 2006 and
worth approximately $440 million. As well as reorganizing it's marketing
strategy, the Company is ensuring its maximum exposure to this market by
continuing to establish subsidiary companies to focus on hyperspectral remote
sensing applications in key industries. Each subsidiary will focus on a specific
sector of commercial remote sensing and have a management team with relevant
skills and expertise. The Company will provide an exclusivity license for each
one, the Company's hyperspectral technology intellectual property, processing
support, marketing and management assistance. With the establishment and growth
of the subsidiaries this strategy is gradually creating a ready market for the
Company, as well situating the Company to receive royalties from any resource
development that occurs as a result of the use of the Company's instruments and
technology. One of the subsidiary companies, Petro Probe, Inc, the oil & gas
spin-off, is already producing a steady cash flow from operations. Another
advantage is that required capital will be raised by the subsidiary separate
from the parent company.
To complement its Probe 1 technology, the Company in fiscal 2000
acquired Space Technology Development Corporation (STDC) and its ownership of
satellite based imagery technology. STDC had acquired ownership of a difficult
to obtain commercial satellite license and hyperspectral data stream from the
proposed space based instrument, NEMO, and this was something ESSI desired. The
strategy the Company sought to develop was joint use of satellite and airborne
remote sensing instruments. The economical large area imagery collection by the
satellite instrument could be complemented and value-added-to by the
high-resolution imagery collection of specific target areas provided by the
airborne instruments.
As attractive as the proposition was, the financial markets were not
willing to invest in new satellite ventures at the time. Thus, the Company has
been unable to complete funding of the NEMO project based on the risks of a
launch and the unproven potential for revenues from a hyperspectral satellite.
In May 2002, the Company received notification from the Office of
Naval Research (ONR) indicating that the performance period for the agreement
with the Navy for the NEMO project had ended and that is was time to initiate
close-out procedures, account for the distribution of Federal funds under the
agreement and to account for and dispose of all real property and equipment
acquired under the agreement. Further, the Navy requested an audited record of
all distributions of Federal Funds made under this agreement, including those
from the period when STDC was owned and operated prior to its acquisition by
ESSI. Until the audit was completed and reviewed the ONR decided not to
reimburse STDC (and hence ESSI) for certain
4
invoices for subcontract and vendor costs on the NEMO program even though these
costs were approved by the Naval Research Laboratory and the ONR for payment
with government funds. As of March 31, 2002, the Company had $1,105,995 of
receivables on its balance sheet from the ONR, of which $808,401 are outstanding
as of the date of this filing. The Company believes that the ONR will make
payment of the remaining receivables. Further, the Company is attempting to meet
with the ONR to discuss options for going forward and its investment to date in
the NEMO program.
SFAS 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of, and APB Opinion 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
is the applicable accounting guidance for potential impairment of long-lived
assets. Based on the guidance of SFAS 121 and since the Company was not able to
receive any written confirmation from the ONR re: the matter, the Company had
effectively no ability to value future oriented negotiated settlement on the
NEMO program. Without such documentation of value, the Company provided in 2002
a loss from impairment of $13,010,364, the amount the Company was carrying in
construction in progress for the NEMO program (see Notes 5 and 6 to the
financial statements.)
Management firmly believes that the ONR will honor their informal
representations to the Company to discuss future options and negotiate with the
Company for its investment to date, security in space segment hardware, and
critical remote sensing license.
Regardless of the situation with NEMO and the ONR, ESSI is moving
forward in its plan to capture leadership in the airborne remote sensing
industry. The Company recognizes the fragmented nature of the remote sensing
industry and its composition by a majority of very small companies. The
Company's long-term strategic plan is 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.
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 additional miniaturized remote sensing
instruments;
(3) the integration of other advanced technology exploration
instruments;
(4) 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
(5) the marketing of ESSI archived raw data and other remote sensing
data through Terranet Inc.
The negative events of 2001, including the stock market decline and
the events of September 11, 2001, left the Company in a tenuous highly leveraged
position. Recognizing that the economy and the general business climate was
declining rapidly, 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. The Company
continued to operate by minimizing overhead and making cash flow a priority. In
early 2003, The Board of Directors
5
recognized the need to address this situation and change it. New policies have
been initiated to attract new directors and retain them, place new management
talent within the organization and appoint committees to examine refinancing and
restructuring issues.
Subsidiary Companies
Formation of Intellisphere Technologies, Inc.
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The Company created Intellisphere Technologies, Inc. as a potential
holding company for investors into STDC and the NEMO project. This company is
inactive.
Formation of Petro Probe, Inc.
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The Company formed Petro Probe, Inc. to identify and develop
potential hydrocarbon properties by utilizing Probe 1 surface imagery integrated
with other sub-surface exploration techniques. Petro Probe, Inc.'s strategy will
entail capturing data over areas of interest that the Company may later take an
equity interest in, as well as the sale of hyperspectral imagery and processing
services to oil and gas properties owned by third party customers. A primary
objective in evaluating a potential hydrocarbon resource project is to provide
geologic mapping of outcrop lithology and surface structure. The Probe 1
instrument is an excellent tool to obtain this mapping. Probe 1 imagery can
identify subtle features due to topographic offset, vegetation change and/or
soil alteration that play a major role in forming hydrocarbon traps.
Hyperspectral imagery can also aid in petroleum exploration by detecting surface
indicators of potential petroleum reserves such as micro seepage.
Petro Probe, Inc.'s goal is to develop the competitive advantages of
Probe 1 resource mapping capability, combining this with conventional
hydrocarbon exploration tools and then applying newer value-added technology,
such as 3D seismic to identify and acquire equity positions in oil and gas
properties. 3D seismic is the technology of measuring explosions to map
subsurface geologic structures.
From it's inception in 2000 through March 31, 2003, Petro Probe,
Inc. has acquired working interests in seven oil and gas projects in the U.S.
The first project acquired was the Louisiana West Scott Field Prospect, where an
oil well has been drilled and logged based on data from Probe 1 as well as other
exploration measurements.
In fiscal 2002, wells were drilled on three of Petro Probe, Inc.'s
projects and were determined to be unsuccessful. Petro Probe, Inc.'s working
interests in its seven (7) oil and gas projects offer them the right to
participate in drilling additional wells on the project lease acreage. Petro
Probe Inc. will determine whether or not to participate in additional drilling
efforts on a case by case basis. In fiscal 2004, Petro Probe expects to
participate in the drilling efforts on four of the oil and gas projects in West
Scott, SpindleTop and Lost Soldier.
In prior years, Petro Probe, Inc. has surveyed targets for
hydrocarbon exploration in the oil and gas basins of Greater Green River Basin,
Wyoming, Paradox Basin, Utah, Texas, Montana, Louisiana and the Australian Basin
and is proceeding to further evaluation.
Because of the national need for new hydrocarbon discoveries, Petro
Probe, Inc. is actively seeking petroleum based companies to either joint
venture with, or merge with, and is in
6
excellent position to move forward in this direction.
Formation of Geo Probe, Inc.
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The Company formed Geo Probe, Inc. to pursue geologically tailored
hyperspectral imaging services to mineral exploration companies and develop new
markets in geological applications. The same indicators that can be used to find
mineral deposits can also be used to monitor the environmental impact of active
and past-producing mines, mills, smelters, refineries and pipelines. Mineral
deposits are part of larger geological systems that typically have mineralogical
zonations that are mappable using Probe 1 imagery. In vegetated areas, the
subtle effects that bedrock geology has on plants can be measured to identify
hidden minerals. The Company's mapping agreement with Noranda in 1998-2000
provided the ability to develop and prove new approaches to mineral exploration.
The experience gained from this application still remains a rare and valuable
intellectual property today. Therefore, Geo Probe, Inc's business focus will be
to use the Company's remote sensing instruments to globally survey any areas
that have promise for the location of minerals either for its own use, or for
third party customers, and to sell hyperspectral collection and processing
services in the geological hazards and environmental geology sectors.
As in the hydrocarbon industry sector there is a build-up of new
demand for mineral exploration beginning to occur and Geo Probe, Inc. is
actively seeking companies to either joint venture with or merge with in order
to position itself well for the upturn in global mining activity.
Formation of Eco Probe, Inc.
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The Company formed Eco Probe, Inc. to pursue hyperspectral remote
sensing applications in the environmental industry. The Company has taken an
industrial leadership role in working with U.S. government agencies such as the
Environmental Protection Agency, the Bureau of Land Management and the Office of
Surface Mining on setting up applications for commercial monitoring of
industries, forest inventory and health issues, slope stability assessment and
the spread of noxious weeds.
ESSI and Eco Probe, Inc. have performed important hyperspectral
surveys and research in numerous vegetation-related projects. With results from
these projects, Eco Probe, Inc. will demonstrate the commercial applicability of
hyperspectral remote sensing in the agricultural and environmental markets. Eco
Probe, Inc. expects that environmental problems caused by the spread of
non-native noxious weeds such as loss of wildlife habitat, soil erosion,
diminished water quality, loss of fish habitat, and reduced crop production will
support a commercial demand for the use of Probe 1 hyperspectral data. Other
important future markets lie in the application of hyperspectral remote sensing
technology to the certification of organically grown food crops, the monitoring
of potable water reservoirs, and endangered species food chain stress.
Formation of Terranet, Inc.
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The Company formed Terranet, Inc. to act as a imagery product
distribution conduit and perform as the Company's e-commerce content provider
through a unique internet imagery distribution system. Imagery collected today
and yesterday can be sold repeatedly to multiple end users. In addition to
selling the Company's own imagery, Terranet, Inc. will pursue the resale of
imagery obtained from third parties. Terranet has completed the design and
7
testing of the software and is now actively seeking joint venture partners and
or contract data suppliers.
Fiscal 2003 Significant Projects
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In fiscal 2002, the Company completed airborne hyperspectral surveys
primarily for local, state and federal governmental agencies. These projects
produced the majority of the Company's 2002 airborne revenue. These projects are
in emerging growth areas such as hydrocarbon exploration, environmental damage
assessments, land use planning and noxious weed species detection. The Company's
agreement with the ONR produced all the Satellite Development business segment
revenue (see note 10 to the financial statements.)
To date, gigabyte quantities of imagery have been collected by
the Company. These data tapes are being processed and the imagery is being
examined for the presence of mineral properties exhibiting the qualifications
necessary to establish them for candidacy as "royalty properties" under the
agreement with Noranda, a major mining company. A substantial backlog of
collected imagery exists, and the evaluation process continues to move forward.
These additional imagery data collections continue to expand and improve the
commercial applications of the Company's remote sensing library.
Several proposals have been developed to partner with private
industry, universities and state and federal agencies to develop, package and
deliver competitive advanced technology products and services. These are being
evaluated on a priority basis.
Business Segment Information
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Included in the attached financial statements is business segment
information and financial information about geographic areas for the Company.
Employees
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As of March 31, 2003 the Company had 4 full-time employees.
Available Information
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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
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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.
8
Customers and Geographic Areas of Business
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In fiscal 2003, the Company operated its airborne hyperspectral
sensors under contracts with third parties in several areas around the United
States. In fiscal 2003 and 2002, 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 approximately $384,212, $460,000 and $81,000 to revenue in 2003,
2002, and 2001, respectively. STDC's contract with the Office of Naval Research
to design, build, and operate a hyperspectral sensor mounted on a satellite
contributed approximately $6,459, $4,235,000 and $1,094,000, to revenue in 2003,
2002 and 2001. In fiscal 2003, projects with four clients accounted for
approximately 76% of total revenue. In fiscal 2002, projects with one client
accounted for approximately 84% of total revenue. In fiscal 2001, projects with
three clients accounted for approximately 68% of total revenue
ITEM 2. PROPERTIES
The Company leases its corporate headquarters from two officers of
the Company. Its headquarters consist of approximately 6,400 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. That motion is presently pending before the Court.
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.is examining its position and has not accrued any liability
associated with this demand in its financial statements.
In May of 2003, the Company received notice of a civil action
commenced against it from Stern & Co. Communications LLC d/ba Stern & Co.
registered in the United States District Court, Southern District of New York.
The plaintiffs allege that the Company has not completely
9
paid for services rendered and owes $92,048.22, nor forwarded stock options for
1,500,000 shares exercisable for three years at the price of $1.50 per share.
The Company has responded with a counter-claim alleging it has never
received the promised services, and as such, will defend its position vigorously
as it believes it will prevail and, accordingly, has not accrued any liability
associated with this case in the accompanying audited consolidated financial
statement.
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
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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
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June 30, 2001 .41 .19
September 30, 2001 .23 .09
December 31, 2001 .17 .11
March 31, 2002 .20 .07
June 30, 2002 .08 .08
September 30, 2002 .05 .05
December 31, 2002 .04 .03
March 31, 2003 .01 .01
(b) Approximate Number of Holders of Common Stock. The number of record
owners of the Company's $.001 par value common stock at March 31,
2003 was approximately 1122. This does not include shareholders that
hold stock in their accounts at brokers/dealers.
(c) Dividends. Holders of the Company's common stock are entitled to
receive such dividends as may be declared by the Company's Board of
Directors. No dividends have been paid with respect to the Company's
common stock and no
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dividends are anticipated to be paid in the foreseeable future.
(d) In the last three years, the Company has made the following sales of
unregistered securities, all of which sales were exempt from the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) or as otherwise indicated:
Recent Sales of Unregistered Securities (1)
Price Price
Amount of per Amount of per
Securities Share Total Cash Securities Share Total Cash
Date Sold ($) Proceeds ($) Date Sold ($) Proceeds ($)
---- ---- --- ------------ ---- ---- --- ------------
4/10/00 200,000 0.25 49,985 (1) 4/11/00 167,066 0.38 (6)
4/13/00 75,000 0.45 33,750 (3) 4/18/00 22,222 (5)
4/26/00 500,000 0.50 250,000 (3) 4/26/00 26,315 0.38 10,000 (3)
4/26/00 50,000 0.38 19,000 (3) 4/26/00 50,000 0.38 19,000 (3)
4/28/00 12,004 0.83 10,000 (3) 4/28/00 34,212 0.75 (1)
5/4/00 600,000 0.50 300,000 (3) 5/4/00 8,333 0.72 6,000 (3)
5/4/00 5,451 0.20 (4) 5/8/00 50,000 0.20 10,180 (1)
5/11/00 500,000 0.25 (1) 5/11/00 3,940 0.20 (4)
6/6/00 818,501 0.05 (4) 6/6/00 65,789 0.38 25,000 (3)
6/6/00 100,000 0.38 38,000 (3) 6/22/00 300,000 (5)
8/24/00 9,383 0.75 (1) 12/12/00 81,081 0.37 (2)
1/4/01 29,126 0.26 (1) 1/11/01 9,980,667 0.14 (4)
1/16/01 100,000 0.56 (3) 1/17/01 8,587,000 0.34 (1)
2/26/01 5,289,315 0.26 (4) 7/10/01 50,000 0.21 (1)
8/28/01 50,000 0.16 (1) 9/25/01 850,340 0.16 (6)
11/13/01 160,000 0.15 (2) 12/11/01 243,026 0.13 (1)
12/13/01 146,667 0.13 (1) 12/13/01 120,824 0.13 (1)
1/3/02 2,564,103 0.10 (1) 3/8/02 200,000 0.08 (2)
5/20/02 200,000 (5) 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 (7) 12/11/02 500,000 (7)
2/24/03 1,000,000 (1) 3/26/03 100,000 (1)
(1) Consideration paid for the shares was employee and/or consulting
services.
(2) Shares issued for debt consideration.
(3) Sales of securities exempt from registration under Regulation D
Rule 506.
(4) Shares exchanged pursuant to debt conversion.
(5) Shares issued as commissions for stock sales.
(6) Shares issued in exchange for interest in oil and gas properties.
(7) Shares issued in exchange for Series A preferred stock.
Securities authorized for issuance under Equity Compensation Plans
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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.
11
(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) 23,138,000 $1.07 --
Total 23,138,000 $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
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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.
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
2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------
Operating revenue $ 786,208 $ 5,044,498 $ 2,678,986 $ 1,526,446 $ 881,006
Net loss (5,354,184) (16,797,081) (6,636,480) (5,177,983) (2,271,428)
Net loss per common share (0.03) (0.11) (0.05) (0.03) (0.03)
Total assets 4,091,566 7,096,591 19,710,126 19,532,230 3,992,233
Long-term obligations 4,700,365 4,687,895 5,253,135 4,515,118 6,594,080
Stockholders' (deficit) equity (14,879,965) (11,310,331) 2,346,846 2,663,656 (3,998,137)
Cash dividends declared -- -- -- -- --
12
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, 2003 and 2002 and 2001.
Results of Operations
- ---------------------
The Company recognized revenue of $786,208 in 2003 compared with
$5,044,498 and $2,678,986 in 2002 and 2001, respectively. The decrease in
revenue in 2003 compared to 2002 is a decrease in activity cost reimbursements
from the U.S. Navy for the NEMO project. The increase in revenue in 2001 was the
beginning of revenue on the oil and gas properties of approximately $417,000 and
a significant hyperspectral survey in Peru that resulted in approximately
$860,000 in revenue in 2001. In 2003, costs of services provided was $328,104
compared with $4,652,935 and $1,777,437 in 2002 and 2001, respectively. Cost of
services provided increased in 2002 compared to 2001 primarily due to an
increase in activity cost reimbursements from the U.S. Navy for the NEMO
project.
Provision for loss on impairment of fixed assets was $2,168,997 in
2003 compared with $13,010,364 and $0 in 2002 and 2001. This loss in 2003 is due
to $543,877 is due to recognition of an impairment of the NEMO project, $616,786
on unsuccessful oil and gas properties, $900,000 on the Polyspectrum abandoned
construction in progress and $108,334 on Terranet computer equipment. The loss
in 2002 was due to recognition of an impairment of the NEMO asset previously
carried in the construction in progress account. Exploration costs in 2003 were
$0 compared with $0 in 2002 and $95,540 and in 2001. The increase in exploration
costs in 2001 is primarily a result of the Company's focus on utilization of the
Probe for the Company's own exploration projects in 2001, while in 2002 the
Company didn't pursue exploration projects for its own purposes. General and
administrative costs were $3,138,442 in 2003 compared with $3,053,024 and
$3,854,000 in 2002 and 2001, respectively. The reduction in costs in 2002
compared with 2001, reflects cost reductions and staff reductions in 2002
compared with 2001.
During 2001, the Board of Directors approved the issuance of
8,587,000 shares against options as a performance based stock bonus. The
issuance of these shares resulted in non-cash compensation expense of
$2,926,781. Of this amount, $1,593,600 relates to performance options issued to
officers of the Company in 1997. At the time these options were granted, the
officer's salaries was deferred and the Company's common stock price was
approximately $0.48. These options allow the officers to purchase restricted
shares in the Company at exercise prices ranging from $.50 per share to $2.50
per share, for up to 24 months after vesting. The vesting of these options is
dependent on the Company's stock price reaching certain prices and maintaining
that level for a specified number of days. In 2000, 3,000,000 of options met the
performance criteria and resulted in the recording of $1,593,600 of compensation
expense. In 2003 and 2002, no options met the performance criteria and thus no
compensation expense was recorded.
Interest income in 2003 was $627 compared to $4,813 and $98,436 in
2002 and 2001, respectively. The decrease in 2003 compared with 2002 reflects
smaller outstanding interest earning cash balances. In 2003, the Company
recognized interest expense of $730,719 compared to $760,730and $1,035,856 in
2002 and 2001, respectively. 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 2001.
13
In 2003, the Company recorded minority interest in losses of
consolidated subsidiaries of $239,867 compared to $335,333 and $290,336 in 2002
and 2001. ESSI Probe 1 LC minority interest loss for a full year of operations
was $233,353, 308,738 and $270,252 in 2003, 2002 and 2001, respectively.
The Company recognized a net loss of $5,354,184 in fiscal 2003
compared with a net loss of $16,797,081 and $6,636,480 in 2002 and 2001,
respectively. The loss on a per share basis was $0.03, $0.11 and $0.05 in fiscal
2003, 2002, and 2001, respectively. Included in the loss in 2003, 2002 and 2001
is a loss of $1,778,336, $14,251,858 and $1,822,434 or $0.01, $0.09 and $0.01
per share, respectively, from the operations of STDC. The operations of STDC in
2002 reflect a $13,010,364 provision for loss on NEMO fixed asset.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its activities to date with a combination
of cash flow from operations and the use of equity securities and promissory
notes. During 2002, the Company signed a definitive agreement with an investor
for an equity line of up to $10,000,000 for one year with an extension option
for a second year. The terms of the equity line are that the Company, after the
effectiveness of a registration statement, at its option can sell its registered
shares of common stock to the investor on a monthly basis. The maximum amount of
funds that can be raised in any month is $1,500,000 limited by a calculation
based on the average volume of the stock for the preceding month and the price
of the stock. The stock will be sold at 88% of the average of the lowest five
(5) trading days over the ten (10) days of trading immediately proceeding the
sale date. Subsequent to March 31, 2003, the Company made its second on the
equity line and raised $150,000 from the sale of its common stock.
Net cash used in operating activities was $282,167 in 2003,
resulting primarily from payments for salaries and services and changes in
current assets and liabilities. Net cash used in operating activities was
$492,063 in 2002, resulting primarily from payments for salaries and services
and changes in current assets and liabilities. Of the $16,797,081 net loss in
2002, approximately $14,675,423 was non cash items. Net cash used in operating
activities was $1,525,414 in 2001, resulting primarily from payments for
salaries and services and changes in current assets and liabilities. Of the
$6,636,480 net loss in 2001, approximately $4,373,473 was non cash items.
Capital expenditures for March 31, 2003 were primarily for purchases
of new computer equipment, purchases of working interests in hydrocarbon
properties and payments on a subsidiary's satellite hyperspectral instrument.
Capital expenditures for March 31, 2002 were primarily for purchases
of new computer equipment, purchases of working interests in mineral properties
and payments on a subsidiary's satellite hyperspectral instrument.
At March 31, 2003 and 2002, the Company had cash of $347,682 and
$66,681 and a working deficit of $13,700,198 and $12,295,035, 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.
14
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. After the audit
of the Federal funds expended on the NEMO program, STDC and the ONR have agreed
to meet to discuss options for going forward. 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
ONR is conducting its own audit to determine how to proceed and the Company
expects to meet with the ONR to determine the future of the NEMO program.
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.
15
Significant 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. In fiscal 2003 and 2002, based on such review,
the Company incurred asset impairments of $543,877 and $13,010,364 on the NEMO
project, $616,786 and $690,048 on unsuccessful oil and gas properties in fiscal
2003 and 2002, respectively, $900,000 on the Polyspectrum abandoned construction
in progress in fiscal 2003, and $108,334 on Terranet computer equipment in
fiscal 2003.
In fiscal 2002, the Company changed its method of accounting for the
sales of stock by its subsidiaries to account for these sales as increases in
additional paid-in capital instead of as an increase to minority interest in the
accompanying consolidated financial statements. Management believes that because
of the developing nature of operations of the subsidiaries with minority
interest, the new method of accounting will provide more meaningful information
concerning sales of stock by its subsidiaries and, correspondingly, the minority
interest liability account. The Company recognized an increase in additional
paid-in capital of $1,707,868, as a cumulative effect on prior years of this
change in account principles.
Future Operations
- -----------------
The Company will establish a new marketing plan for remote sensing
services by verification of its current business model and business targets. In
order to achieve maximum results, the Board of Directors has recommended the
Company establish a new marketing department staffed by proven talent.
In addition, 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. Further, previously
collected imagery will be analyzed and processed to aid in the Company's
decisions to take new or additional equity interests in prospective properties.
Management believes that a significant market opportunity exists for
a company that can
16
combine satellite and airborne hyperspectral remote sensing data and custom
design the best and most efficient solutions to geological, environmental,
defense, and surveillance problems. It is this belief that led the Company to
acquire STDC. The Company believes that the opportunity still exists for a
successful negotiation with a data supplier with access to satellite data.
The Company has entered into an agreement to use an Inertial
Measurement Unit (IMU) provided by The Boeing Corporation. Use of the IMU
enables the Company to more accurately geoposition its Probe 1 hyperspectral
data and assist in the insertion of its data into a customer's Geographical
Information System (GIS) database. In addition, collection of field spectra
using the Company's field spectrometer provides customers both ground and
airborne spectral information that can be incorporated into a customer's GIS to
provide a custom, leading edge information product. These enhancements allow the
Company to offer its customers quality data.
Research & Development of next generation hyperspectral
instrumentation is continuing.
The Board of Directors have also established a committee to seek
joint venture opportunities that will offer additional markets for its imagery
databases, generate operating revenues and provide avenues for new capital
investment.
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. 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 instrumental in processing 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 may need to expend
significant capital to develop or purchase new equipment or 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.
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
17
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 loss of our key customers could have a material adverse effect
on us. In prior years, mining company exploration contributed a significant
amount of revenue to the Company. In 2002, the depressed condition of mineral
prices has severely curtailed mining company budgets and thus their use of the
Company's hyperspectral technology for exploration. In 2002, revenue recorded on
cost reimbursements for the NEMO project accounted for approximately 84% of
revenue. The Company is pursuing contracts that produce revenues from additional
applications of hyperspectral remote sensing technology and are discussing
additional options for the NEMO project with the ONR. In the future, however,
the Company may not receive significant contracts, and options with the ONR may
not materialize. Our results of operations may be materially adversely affected.
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.
The Company may need additional financing for working capital,
acquisitions and capital expenditures, and such financing may not be available
on terms acceptable to us. A key element of our strategy has been, and continues
to be, internal growth and growth through the acquisition of other companies
engaged in commercial hyperspectral remote sensing. In order to grow internally,
the Company may need to make significant capital expenditures and may need to
obtain additional capital to do so. 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 continued involvement on the NEMO Project and
successful negotiations with the ONR may not materialize. Although the Company
is trying to
18
pursue restructuring options with the ONR and the Company firmly believes the
ONR will negotiate at a minimum, a data stream, and tasking on the NEMO
instrument, the Company cannot guarantee that future options with the ONR will
be worked out or that the Company will receive anything for its investment in
the NEMO project. The Company cannot guarantee that the satellite will be
properly completed, launched and set into orbit. Although the satellite has an
expected lifetime of five years, the Company cannot guarantee that the satellite
will not be rendered inoperable sooner.
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. A large portion of our operating expenses are
relatively fixed; however, a significant portion of our expenses relating to
airborne surveys are variable. 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-
19
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
On June 10, 2003, the Board of Directors of the Company dismissed
the Company's accountants, Grant Thornton, LLP. Grant Thornton LLP served as the
Company's auditor beginning with the fiscal year ended March 31, 2001. The Board
of Directors has appointed Malone & Bailey, PLLC as the Company's auditor for
the year ended March 31, 2003. Malone & Bailey's office is located at 5444
Westheimer, Suite 2080 Houston, TX 77056.
The report of Grant Thornton LLP on the financial statements for
year ended March 31, 2003 contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principle except for the inclusion in the report of an explanatory paragraph
regarding the Company's ability to continue as a going concern.
During the fiscal year ended March 31, 2003, and through June 10,
2003, there have been no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).
The Company has requested that Grant Thornton, LLP furnish it with a
letter addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated June 10, 2003, was filed as Exhibit
16.1 the Company's Form 8-K filed June 10, 2003.
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
20
the Company for fiscal 2000 to the present.
Name Age Position
---- --- --------
Larry F. Vance 68 Chairman and Chief Executive Officer
Tami J Story 40 Secretary/Treasurer/Director
Kenneth E Danchuk 61 Director
Rory J. Stevens 45 Former Chief Financial Officer
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.
Kenneth E. Danchuk has served as a senior consultant contractor with
the Company since 1996 performing investor relations and organization
development roles. Prior to joining the Company, Mr. Danchuk was involved in
Economic Development work for governments and international agencies, where he
assisted start-up companies. Prior to that period, he was employed in executive
management positions within the oil and gas, and transportation industries. He
holds a Bachelor of Commerce degree from the University of British Columbia and
is an active member of the National Institute of Investor Relations in
Washington, D.C. Mr. Danchuk received the Professional Mgr. Designation from the
Canadian Institute of Management in 1972.
Rory J. Stevens, a certified public accountant (CPA), became a
director of the Company in 1994 and joined the Company as Chief Financial
Officer in January 2000. Prior to joining the Company, Mr. Stevens was employed
by Chiyoda International Corporation, an engineering and construction company,
for eleven years, the last six years as corporate controller. Mr. Stevens holds
a Bachelor of Business Administration from Boise State University and a Master
of Business Administration and Masters of Professional Accounting from the
University of Washington. On November 15, 2002, Mr. Stevens resigned from his
officer and director position with the Company and its subsidiaries.
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.
21
ITEM 11. EXECUTIVE COMPENSATION
Table below summarizes information on Executives and Directors compensation
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------------------
Securities
Other Annual Restricted Stock underlying All other
Fiscal Compensation Stock Option options/ LTIP pay Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($) Award(s)($) Grants SARS (#) -outs ($) ($)
- ----------------------------- ------ -----------------------------------------------------------------------------------------------
Larry Vance/Chairman (1) 2003 160,000 - - - - - - -
2002 160,000 - - - - - - -
2001 160,000 - - 875,000 (2) - - - -
Tami J. Story/Secretary 2003 80,000 - - - - - - -
and Treasurer (1) 2002 80,000 - - - - - - -
2001 80,000 - - 437,500 (2) - - - -
Rory J. Stevens/CFO (1)(3) 2003 125,000 - - - - - - -
2002 125,000 - - - - - - -
2001 125,000 - - 218,750 (2) - - - -
(1) Salary was deferred unless cash flow allowed payment.
(2) In 2001, the Board of Directors approved the issuance of 6,875,000
restrictive shares to officers as a stock bonus. Outstanding officer
options were reduced by 6,875,000.
(3) On November 15, 2002, Mr. Stevens resigned from his officer and director
position with the Company and its subsidiaries.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of securities Value of Unexercised In-the
underlying unexercised Money Options at
Shares options at FY-End FY-End ($)
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
(1) Exercise prices range from $0.21 - $2.50 per share.
22
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 13 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 13 to the attached consolidated financial statements.
On October 28, 2000, the Company entered into an employment
agreement with Mr. Rory Stevens. Pursuant to the agreement, the Company will pay
Mr. Stevens an annual salary of $125,000. In the event of termination of Mr.
Stevens without cause or due to a change in control, the Company will pay Mr.
Stevens two years of annual salary. Mr. Stevens 's options and vesting criteria
are described above and in Note 13 to the attached annual financial statements.
On November 15, 2002, Mr. Stevens resigned from his officer and director
position with the Company and its subsidiaries.
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 June 15, 2003 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 Percent
of beneficial owner ownership (1) of class
------------------- ------------- --------
Larry Vance 14,765,003 (2)(3)(4) 7.57%
P.O. Box 763
Lakeside, MT 59922
Tami Story 2,365,169 (5) 1.21%
P.O. Box 763
Lakeside, MT 59901
Kenneth Danchuk 1,000,000 .50%
2333 Silver Place
Kelowna, BC V1V2L5
Dr. Jan Arnett 9,150,830 (4) 4.69%
42-07 30th Avenue
Astoria, MT 11103
All directors and officers 18,130,172 9.29%
- ---------------------------
(1) All shares are held directly with sole voting and investment power unless
otherwise indicated.
23
(2) Includes 1,775,000 shares held by Universal Search Technology, a private
company owned by Mr. Vance.
(3) Includes 4,500,000 options, which are exercisable on March 31, 2002.
(4) Excludes 17,663,842 shares held by Accuprobe. General Petroleum, Inc.
(GPI), a company previously wholly-owned by Mr. Vance, and Accuprobe, a
company previously wholly-owned by Dr. Arnett, have entered into an
agreement whereby Dr. Arnett has exchanged his 100% ownership of Accuprobe
for a percentage of the shares of GPI. Currently, all requirements of the
transaction have not been met, but even if the transaction is completed,
Mr. Vance will own 25% of the outstanding capital stock of GPI and Dr.
Arnett will own 33% of the outstanding stock of GPI and neither Mr. Vance
nor Dr. Arnett will likely have control over the disposition or voting
power of the Earth Search shares owned by Accuprobe.
(5) Includes 750,000 options, which are exercisable on March 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 2002, General Petroleum, Inc. (GPI) a company
previously wholly-owned by an officer and director of the Company entered into
an agreement with Accuprobe, lessor to the Company of a hyperspectral instrument
(see Note 5 to the consolidated financial statements). The agreement requires
the former sole shareholder of Accuprobe to transfer 100% of his equity in
Accuprobe to GPI in exchange for equity in GPI. Presently, not all of the
requirements of the agreement have been met. Also during fiscal 2002, GPI
exchanged a portion of its equity for the 50% interest in the ESSI 1 LC owned by
an outside party. It is the intention of ESSI and GPI to finalize an agreement
in fiscal 2004 to allow ESSI to purchase and own 100% of both hyperspectral
instruments.
In fiscal 2001, the Company entered into a lease for its office in
Kalispell, Montana. The lease is with two officers of the Company and is for a
term of 5 years with minimum monthly payments of $6,400.
24
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page in
(a)(1) Financial Statements filed as part of this Report this Report
Report of Independent Accountants F-1 - F-2
Consolidated Balance Sheet at March 31, 2003 and 2002 F-3
Consolidated Statement of Loss for the Years
Ended March 31, 2003, 2002 and 2001 F-4
Consolidated Statement of Redeemable Common Stock
And Nonredeemable Shareholders' Equity (Deficit) for
the Years Ended March 31, 2003, 2002 and 2001 F-5
Consolidated Statement of Cash Flows for the Years
Ended March 31, 2003, 2002 and 2001 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).
25
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).
26
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)
31 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350
32 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to Section 302
(b) The Registrant filed the Following Reports on Form 8-K during the
quarter ended March 31, 2003:
Date of Report Item Reported
-------------- -------------
June 10, 2003 4
27
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: September 12, 2003
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: September 12, 2003
/s/ Tami Story Corporate Secretary and Treasurer and
- -------------------------------- Director
Tami J. Story
Date: September 12, 2003
28
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS
- ------
Current Assets
Cash $ 347,682 $ 66,681
Accounts receivable, net 169,184 1,205,175
Other current assets 36,121 134,155
------------ ------------
Total Current Assets 552,987 1,406,011
Property and equipment, net 3,538,579 5,690,580
------------ ------------
Total Assets $ 4,091,566 $ 7,096,591
============ ============
LIABILITIES
- -----------
Current Liabilities
Current portion of notes payable $ 108,417 $ 440,387
Capital lease obligation 3,458,991 3,277,415
Deferred officers' compensation 231,250 461,141
Accounts payable 9,446,740 8,620,402
Accrued expenses 171,997 212,773
Accrued interest 458,575 498,928
Investor deposit 377,215 190,000
------------ ------------
Total Current Liabilities 14,253,185 13,701,046
Long Term Liabilities
Deferred officers' compensation 2,353,238 2,177,594
Notes payable less current portion 995,043 1,033,698
Shareholder loans 1,072,193 1,256,844
Minority interest 279,891 219,759
------------ ------------
Total liabilities 18,953,550 18,388,941
Commitments and contingencies
Redeemable common stock, $.001 par value 17,981 17,981
Series A preferred stock; 200,000 shares
authorized, issued and outstanding;
liquidation preference $1,000,000 -- 1,000,000
Common stock, $.001 par value; 200,000,000
shares authorized; 190,453,918 and
158,775,576 shares, respectively,
issued and outstanding 190,454 158,776
Additional paid in capital 35,449,938 32,697,066
Treasury stock (200,000) (200,000)
Accumulated deficit (50,320,357) (44,966,173)
------------ ------------
(14,879,965) (11,310,331)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,091,566 $ 7,096,591
============ ============
See accompanying summary of accounting
policies and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2003, 2002, and 2001
2003 2002 2001
------------ ------------ ------------
Revenue $ 786,208 $ 5,044,498 $ 2,678,986
Cost of revenue 328,104 4,652,935 1,777,437
------------ ------------ ------------
Gross margin (loss) 458,104 391,563 901,549
Expenses
Asset impairment 2,168,997 13,700,412 --
General & administrative 3,138,442 3,053,024 3,854,000
Non-cash compensation 14,624 14,624 2,941,405
Exploration -- -- 95,540
------------ ------------ ------------
Total Expenses 5,322,063 16,768,060 6,890,945
------------ ------------ ------------
Loss from operations (4,863,959) (16,376,497) (5,989,396)
Other income (expenses)
Interest income 627 4,813 98,436
Interest expense (730,719) (760,730) (1,035,856)
------------ ------------ ------------
Loss before minority interest (5,594,051) (17,132,414) (6,926,816)
Minority interest in losses of
consolidated subsidiaries 239,867 335,333 290,336
------------ ------------ ------------
Net loss $ (5,354,184) $(16,797,081) $ (6,636,480)
============ ============ ============
Basic and diluted loss per share $ (.03) $ (.11) $ (.05)
Weighted average common
shares outstanding 175,327,436 155,553,912 135,941,012
See accompanying summary of accounting
policies and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Period from March 31, 2000 Through March 31, 2003
REDEEMABLE
COMMON STOCK PREFERRED STOCK COMMON STOCK
-------------------------- -------------------------- -------------------------
SHARES $ SHARES $ SHARES $
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2000 134,160 $ 21,734 200,000 $ 1,000,000 126,402,044 $ 126,402
Issuance of common stock for
services rendered -- -- -- -- 576,024 576
Issuance of common stock for cash -- -- -- -- 2,037,441 2,037
Issuance of shares for loan and
interest conversions -- -- -- -- 16,097,874 16,099
Issuance of shares for interest in
mineral properties -- -- -- -- 167,066 167
Issuance of common stock for
exercise of options -- -- -- -- 200,000 200
Non-cash compensation expense -- -- -- -- -- --
Shares no longer subject to redemption (23,167) (3,753) -- -- 23,167 23
Issuance of stock for bonus -- -- -- -- 8,587,000 8,587
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2001 110,993 17,981 200,000 1,000,000 154,090,616 154,091
----------- ----------- ----------- ----------- ----------- -----------
Cummulative effect on prior years of
change in accounting for sales
of stock by subsidiaries -- -- -- -- -- --
Issuance of common stock for
services rendered -- -- -- -- 3,474,620 3,475
Issuance of shares for loan extension -- -- -- -- 360,000 360
Issuance of shares for interests in
mineral properties -- -- -- -- 850,340 850
Allocation of investor deposits to
subsidiary stock -- -- -- -- -- --
Non-cash compensation expense -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2002 110,993 17,981 200,000 1,000,000 158,775,576 158,776
----------- ----------- ----------- ----------- ----------- -----------
Issuance of common stock for cash -- -- -- -- 15,148,210 15,149
Issuance of common stock for
services rendered -- -- -- -- 3,323,530 3,323
Issuance of common stock for
deferred compensation -- -- -- -- 3,574,273 3,574
Issuance of common stock for loan and
interest conversion -- -- -- -- 8,332,329 8,332
Conversion of preferred stock for
common stock -- -- (200,000) (1,000,000) 1,000,000 1,000
Issuance of shares for loan extension -- -- -- -- 300,000 300
Non-cash compensation expense -- -- -- -- -- --
Partial redemption -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2003 110,993 $ 17,981 -- $ -- 190,453,918 $ 190,454
=========== =========== =========== =========== =========== ===========
See accompanying summary of accounting
policies and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Period from March 31, 2000 Through March 31, 2003
ADDITIONAL COMMON
PAID-IN STOCK ACCUMULATED TREASURY
CAPITAL SUBSCRIBED DEFICIT STOCK TOTAL
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2000 $ 22,906,866 $ 363,000 $(21,532,612) $ (200,000) $ 2,663,656
Issuance of common stock for
services rendered 125,701 -- -- -- 126,277
Issuance of common stock for cash 718,892 (363,000) -- -- 357,929
Issuance of shares for loan and
interest conversions 2,760,737 -- -- -- 2,776,836
Issuance of shares for interest in
mineral properties 63,318 -- -- -- 63,485
Issuance of common stock for
exercise of options 49,785 -- -- -- 49,985
Employee options vesting expense 14,624 -- -- -- 14,624
Shares no longer subject to redemption 3,730 -- -- -- 3,753
Issuance of stock for bonus 2,918,194 -- -- -- 2,926,781
Net loss -- -- (6,636,480) -- (6,636,480)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2001 29,561,847 -- (28,169,092) (200,000) 2,346,846
------------ ------------ ------------ ------------ ------------
Cumulative effect on prior years of
change in accounting for sales
of stock by subsidiaries 1,707,868 -- -- -- 1,707,868
Issuance of common stock for
services rendered 371,801 -- -- -- 375,276
Issuance of shares for loan extension 55,640 -- -- -- 56,000
Issuance of shares for interests in
mineral properties 249,150 -- -- -- 250,000
Allocation of investor deposits to
subsidiary stock 736,136 -- -- -- 736,136
Employee options vesting expense 14,624 -- -- -- 14,624
Net loss -- -- (16,797,081) -- (16,797,081)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2002 32,697,066 -- (44,966,173) (200,000) (11,310,331)
------------ ------------ ------------ ------------ ------------
Issuance of common stock for cash 425,836 -- -- -- 440,985
Issuance of common stock for
services rendered 141,497 -- -- -- 144,820
Issuance of common stock for deferred
compensation 437,304 -- -- -- 440,878
Issuance of common stock for loan and
interest conversion 724,901 -- -- -- 733,233
Conversion of preferred stock to
common stock 999,000 -- -- -- --
Issuance of shares for loan extension 26,700 -- -- -- 27,000
Employee options vesting expense 14,624 -- -- -- 14,624
Partial redemption (16,990) (16,990)
Net loss -- -- (5,354,184) -- (5,354,184)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2003 $ 35,449,938 $ -- $(50,320,357) $ (200,000) $(14,879,965)
============ ============ ============ ============ ============
See accompanying summary of accounting
policies and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2003, 2002, and 2001
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,354,184) $(16,797,081) $ (6,636,480)
Adjustments to reconcile net loss to
cash used by operating activities:
Employee options vesting expense 14,624 14,624 2,941,405
Common stock issued for services and
interest expense 171,820 431,276 568,347
Loss attributed to minority interest (239,867) (335,333) (290,336)
Depreciation, amortization and depletion 594,646 529,111 576,350
Write off capitalized costs on oil and
gas properties 616,786 690,048 --
Asset impairment 1,552,211 13,010,364 --
Bad debt expense 814,895 -- 287,371
Changes in assets and liabilities:
Accounts receivable 221,096 (304,644) (754,193)
Other current assets 98,038 (60,747) 296,565
Accounts payable and accrued expenses 241,684 1,509,022 1,036,605
Accrued interest 299,455 360,757 308,603
Deferred officers compensation 386,631 460,540 140,349
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (582,167) (492,063) (1,525,414)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (180,550) (1,361,818) (6,272,164)
Proceeds from sale of interests in
mineral properties 112,785 -- --
Deposit on sale of fixed assets 187,215 -- --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 119,450 (1,361,818) (6,272,164)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 440,985 -- 407,914
Proceeds from sale of common stock
of subsidiaries 300,000 -- 522,004
Proceeds from shareholder loans, net 23,363 431,000 141,000
Repayments on notes payable (20,630) (32,032) (25,000)
Proceeds from notes payable -- 1,153,692 250,000
Payment of investor deposit -- -- 1,000,000
Repayment on capital lease obligation -- -- (250,000)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 743,718 1,552,660 2,045,918
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 281,001 (301,221) (5,751,660)
CASH AT BEGINNING OF PERIOD 66,681 367,902 6,119,562
------------ ------------ ------------
CASH AT END OF PERIOD $ 347,682 $ 66,681 $ 367,902
============ ============ ============
See accompanying summary of accounting
policies and notes to financial statements.
EARTH SEARCH SCIENCES, INC.
NOTES TO 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 partially-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. Terranet, Inc. was formed
in 2000 to operate ESSI's internet-based global information and imagery
distribution system. Polyspectrum Imaging, Inc. was formed to develop, design,
engineer, explore the feasibility of and construct additional airborne
instruments. STDC joined the Department of the Navy in developing a
remote-sensing instrument to be mounted on a satellite, Naval EarthMap Observer
(NEMO).
As of March 31, 2003, Skywatch Exploration, Polyspectrum, Geoprobe, Earth Search
Resources, Eco Probe, ESSI Probe 1, and Terranet are inactive.
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, 2003, Petro Probe,
Inc. holds interests in seven oil and gas projects.
In fiscal 2003 and 2002, ESSI operated its airborne hyperspectral sensors under
contracts with third parties in several areas around the United States. In
fiscal 2001, ESSI's sensors were also operated in foreign countries. Contracts
to operate the sensors abroad for major mining companies contributed $1,087,000
to revenue in 2001. Contracts to operate the sensors in the United States as an
ecological, agricultural, hydrocarbon, and target identification contributed
approximately $384,000, $460,000 and $81,000 to revenue in fiscal 2003, 2002,
and 2001, respectively. STDC's contract with the Office of Naval Research to
design, build, and operate a hyperspectral sensor mounted on a satellite
contributed approximately $6,000, $4,235,000, and $1,094,000 to revenue in 2003,
2002 and 2001. In fiscal 2002, projects with one client accounted for
approximately 84% of total revenue. In fiscal 2001, projects with three clients
accounted for approximately 68% of total revenue.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ESSI and its
subsidiaries. All significant intercompany transactions have been eliminated.
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 2003, $617,000 of prior year costs was impaired because profitable
production had not yet been obtained in 5 of 7 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 and costs as services are rendered under contract for
airborne hyperspectral services and imaging processing services.
In fiscal 2002, STDC received funds in the form of grants from the U.S. Navy to
construct its satellite and to manage the NEMO program. The grants were
considered cost-reimbursement instruments under Office of Management and Budget
(OMB) circulars. As allowable government-reimbursable costs were incurred, STDC
recognized a proportionate share of revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Most of ESSI's accounts receivable is $815,000 due from the ONR which has been
fully reserved.
RESEARCH AND DEVELOPMENT COSTS AND EXPLORATION COSTS
Research and development costs and exploration costs from using hyperspectral
instruments to map areas of interest to ESSI are expensed as incurred.
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 2003 and 2002, ESSI incurred asset impairments
of $543,877 and $13,010,364 on the NEMO project, $616,786 and $690,048 on
unsuccessful oil and gas properties in fiscal 2003 and 2002, $900,000 on the
Polyspectrum abandoned construction in progress in fiscal 2003, and $108,334 on
Terranet computer equipment in fiscal 2003.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates applicable
to the period in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
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. Exercisable stock option and warrant shares
outstanding as of March 31, 2003, 2002 and 2001 totaled 13,325,000, 19,575,000
and 19,575,000, respectively.
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.
2003 2002 2001
------------ ------------ ------------
Net loss as reported $ (5,354,184) $(16,797,081) $ (6,636,480)
Less: stock based compensation
determined under fair value-
based method 0 0 986,000
------------ ------------ ------------
Pro forma net loss $ (5,354,184) $(16,797,081) $ (7,622,480)
============ ============ ============
Basic and diluted net loss
per common share:
As reported $ (.03) $ (.11) $ (.05)
Pro forma (.03) (.11) (.06)
The weighted average fair value of the stock options granted during 2003, 2002
and 2001 was $.25, $.50 and $.25, respectively. Variables used in the
Black-Scholes option-pricing model include (1) 4.0%, n/a and 5.6% risk-free
interest rate in 2003, 2002 and 2001, respectively, (2) expected option life is
the actual remaining life of the options as of each year end, (3) expected
volatility is 0%, n/a and 131% in 2003, 2002 and 2001, respectively, and (4)
zero expected dividends.
CHANGES IN CLASSIFICATION
Certain reclassifications have been made to the fiscal 2002 and 2001 financial
statements to conform with the financial statement presentation for fiscal 2003.
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.
RECENTLY-ISSUED ACCOUNTING STANDARDS
In July 2003, FASB Statement No. 150, Accounting for Financial Instruments with
Characteristics of both Liabilities and Equity was issued, effective July 1,
2003. This statement requires any equity securities that are mandatorily
redeemable by the holders to be classified as liabilities. ESSI currently
classifies this stock as mezzanine, or in between a liability and equity. The
effect will be to add the total obligation of $17,981 to liabilities.
NOTE 2 - GOING CONCERN
ESSI is experiencing severe working capital deficiencies because it has incurred
substantial operating losses. ESSI has operated with funds received from the
sale of its common stock and the issuance of notes. ESSI's ability to continue
as a going concern is dependent upon continued debt or equity financings until
or unless ESSI is able to generate operating revenues to sustain ongoing
operations. There can be no assurance that ESSI can raise the necessary funds to
continue as a going concern.
NOTE 3 - CHANGES IN ACCOUNTING FOR SALES OF STOCK BY SUBSIDIARIES
In fiscal 2002, ESSI changed its method of accounting for the sales of stock by
its subsidiaries to account for these sales as increases in additional paid-in
capital instead of as an increase to minority interest in the accompanying
consolidated financial statements. Management believes that because of the
developing nature of operations of the subsidiaries with minority interest, the
new method of accounting will provide more meaningful information concerning
sales of stock by its subsidiaries and, correspondingly, the minority interest
liability account. ESSI recognized an increase in additional paid-in capital of
$1,707,868, as a cumulative effect on prior years of this change in accounting
principles.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED MARCH 31,
----------------------------------------
2003 2002 2001
---------- ---------- ----------
Supplemental cash flow information:
Interest paid $ 157,688 $ 148,389 $ 4,818
Non-cash financing and investing activities:
Notes payable and interest converted
into common stock $ 733,233 $ -- $2,776,836
Interest accrued on construction in progress 543,877 -- --
Issuance of shares for deferred compensation 440,878 -- --
Issuance of shares for mineral properties -- 250,000 63,485
Allocation of investor deposit to:
Subsidiary stock -- 736,136 --
Minority interest -- 13,864 --
Mineral property -- 60,000 --
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31,
------------------------------
2003 2002
------------ ------------
Mineral properties (A) $ 692,090 $ 1,293,746
ATM imagery database 134,000 134,000
Computers and software 186,788 303,784
Vehicles and equipment 1,144,536 1,089,270
Hyperspectral instruments (B) 4,058,000 4,058,000
Construction in progress (C) -- 900,000
------------ ------------
6,215,414 7,778,800
Accumulated depreciation,
amortization and depletion (2,676,835) (2,088,220)
------------ ------------
$ 3,538,579 $ 5,690,580
============ ============
(A) In fiscal 2001, ESSI acquired working interests in two additional oil and
gas properties for $555,000 and the issuance of 167,066 shares of its common
stock valued at $63,485. In fiscal 2002, ESSI paid $680,000 on existing
properties and one new property by issuing 850,340 shares of stock valued at
$250,000 and paid $430,000, and sold a portion of its interest in one property
for $60,000. In fiscal 2003, ESSI paid $150,000 for drilling on two existing
properties and sold a portion of its interests to others on those two properties
for $112,785.
In fiscal 2001, one of the oil and gas properties with capitalized costs of
about $250,000 began production. ESSI recognized $384,000, $349,000 and $417,000
in revenue from that property in fiscal 2003, 2002 and 2001, respectively.
Depletion was $51,760, $58,614 and $34,633 in fiscal 2003, 2002 and 2001,
respectively.
In fiscal 2003 and 2002, ESSI wrote-off $616,786 and $690,048, respectively, of
previously capitalized costs on five properties that were determined to be
uneconomical wells.
Based on an outside engineering study dated May 2001, the current producing well
had initial estimated reserves of 20.1 billion cubic feet of natural gas and
17,000 barrels of oil. The well has produced 10.4 billion cubic feet of natural
gas and 24,404 barrels of oil as of March 31, 2003. ESSI's interest in the
discounted net cash flows from this well is estimated to be $1,282,251 as of
March 31, 2003 based on prices for natural gas and oil as of March 31, 2003.
The 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.
Reserve estimates are inherently imprecise and estimates of new discoveries are
more imprecise that those of producing oil and gas properties. Accordingly,
these estimates are expected to change as future information becomes available.
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 the future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing well,
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.
(B) This category is two hyperspectral instruments which cost $4,058,000. The
first instrument cost $2,100,000 and was the object of a sale-leaseback in 1997.
The instrument was sold for $2,500,000 and leased back under the following
terms: 1) ESSI will lease the instrument for $250,000 per year bearing interest
at the prime rate plus 2% through June 2007; 2) the lessor may convert the
remaining obligation into shares of ESSI's subsidiary's common stock at a
conversion rate of 40% of the stock's then fair market value, or other
comparable equity securities if ESSI is not the operator at the time of exercise
of the option, 3) ESSI issued to lessor 1,000,000 unregistered shares of its
common stock and warrants to purchase an additional 1,000,000 unregistered
shares of its common stock at an exercise price of $2 per share; and 4) the
lessor will receive certain royalty rights to revenues generated from mineral
sites identified by the instrument. ESSI recorded a capital lease obligation of
$3,500,000 (net of a debt discount of $1,375,000) and $375,000 in shareholders'
equity related to the shares of common stock and stock purchase warrants issued
in conjunction with the above transaction.
In fiscal 2001, ESSI issued a promissory note for $250,000 for the third lease
payment due on April 2001. This note was later converted to common stock per the
terms of the note.
The cost of the equipment under capital leases is $2,100,000 with related
accumulated depreciation of $1,155,000, $945,000 and $875,000 at March 31, 2003,
2002 and 2001, respectively.
The related capital lease balance as of March 31, 2003 is $3,458,991 and
includes $708,990 of accrued interest. No lease payments have been made since
June 2000, and the entire balance due is shown as a current liability.
In fiscal 2000, ESSI purchased its second hyperspectral instrument for
$1,958,000, with accumulated depreciation of $685,300, 489,500 and $233,700 as
of March 31, 2003, 2002 and 2001, respectively.
(C) Fiscal 2001 construction costs related to the development of a remote
sensing instrument and satellite. In fiscal 2002, ESSI's agreement with the ONR
for the satellite was terminated and ESSI impaired $13,010,364 in such
development costs. The $900,000 balance representing development costs of the
second generation hyperspectral instrument was impaired in fiscal 2003.
NOTE 6 - 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 because ONR has not yet indicated how much if any it will pay.
Included in accounts payable as of March 31, 2003 is $8,216,424 in unpaid
accounts payable to NEMO subcontractors and vendors.
NOTE 7 - NOTES PAYABLE
Notes payable consists of the following:
2003 2002
---------- ----------
Installment note payable with a balloon due
June 15, 2004, secured by airplane, the
hyperspectral sensor, and the producing oil
and gas property, with interest at 15%, due
in monthly installments of $18,011 $1,058,859 $1,077,968
Unsecured convertible promissory notes,
delinquent, with interest at 12.5% 41,568 391,568
Other 3,033 4,549
Less: current portion (108,417) (440,387)
---------- ----------
$ 995,043 $1,033,698
========== ==========
In fiscal 2003 and 2001, $733,233 and $2,776,836, respectively, of notes
outstanding plus accrued interest were converted into common stock at the agreed
upon conversion rates.
NOTE 8 - 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, 2003 and 2002,
interest accrued on such advances aggregated $448,965 and $400,186,
respectively, and has been included in accrued interest.
NOTE 9 - DEFERRED OFFICERS' COMPENSATION
Deferred compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, Chief Executive Officer, Chief Financial Officer
and Secretary). ESSI recorded net deferred officer compensation, accrued payroll
taxes and accrued interest of $(54,247), $460,541, and $140,349 during the
fiscal years ended March 31, 2003, 2002 and 2001, respectively, and included
these amounts in general and administrative expenses. ESSI is accruing interest
on the deferred compensation balances at a rate of 8.5%, compounded quarterly.
ESSI is making full salary payments to the Chairman and CEO and
Secretary/Treasurer as cash flow allows.
NOTE 10 - 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 2003
AIRBORNE
HYPERSPECTRAL SATELLITE OIL AND GAS OTHER
SERVICES DEVELOPMENT PROPERTIES INDUSTRIES COMBINED
------------ ------------ ------------ ------------ ------------
Revenue $ 384,212 $ 6,459 $ 395,537 -- $ 786,208
============ ============ ============ ============ ============
Operating Income (Loss) $ (2,751,201) $ (1,652,556) $ (460,202) -- $ (4,863,959)
============ ============ ============ ============ ============
Interest income 17 610 -- -- 627
Interest expense (421,119) (309,600) -- -- (730,719)
Loss from continuing operations
before income taxes and
minority interest -- -- -- -- (5,594,051)
Total Assets at 3/31/03 $ 3,077,410 $ 345,939 $ 668,217 -- $ 4,091,566
============ ============ ============ ============ ============
Depreciation and amortization
for the period ended 3/31/03 $ 539,646 $ 3,447 $ 57,760 -- $ 594,646
============ ============ ============ ============ ============
Capital expenditures for the
period ended 3/31/03 $ 74,635 $ -- $ 105,915 -- $ 180,550
============ ============ ============ ============ ============
BUSINESS SEGMENT INFORMATION FOR FISCAL YEAR 2002
AIRBORNE
HYPERSPECTRAL SATELLITE OIL AND GAS OTHER
SERVICES DEVELOPMENT PROPERTIES INDUSTRIES COMBINED
------------ ------------ ------------ ------------ ------------
Revenue $ 460,306 $ 4,235,319 $ 348,873 $ -- $ 5,044,498
============ ============ ============ ============ ============
Operating Income (Loss) $ (450,835) $(14,728,729) $ (733,424) $ (463,509) $(16,376,497)
============ ============ ============ ============ ============
Interest income 2,129 2,684 -- -- 4,813
Interest expense (281,175) (479,555) -- -- (760,730)
Income from continuing operations
before income taxes and
minority interest -- -- -- -- (17,132,414)
Total Assets at 3/31/02 $ 4,557,206 $ 1,176,938 $ 1,251,374 $ 111,073 $ 7,096,591
============ ============ ============ ============ ============
Depreciation and amortization
for the period ended 3/31/02 $ 468,774 $ -- $ 58,615 $ 1,723 $ 529,112
============ ============ ============ ============ ============
Capital expenditures for the
period ended 3/31/02 $ 40,946 $ 890,863 $ 680,009 $ -- $ 1,611,818
============ ============ ============ ============ ============
BUSINESS SEGMENT INFORMATION FOR FISCAL YEAR 2001
AIRBORNE
HYPERSPECTRAL SATELLITE OIL AND GAS OTHER
SERVICES DEVELOPMENT PROPERTIES INDUSTRIES COMBINED
------------ ------------ ------------ ------------ ------------
Revenue $ 1,167,741 $ 1,093,926 $ 417,319 $ -- $ 2,678,986
============ ============ ============ ============ ============
Operating Income (Loss) $ (4,166,052) $ (1,324,622) $ 39,064 $ (537,786) $ (5,989,396)
============ ============ ============ ============ ============
Interest income 24,715 73,721 -- -- 98,436
Interest expense (464,323) (571,533) -- -- (1,035,856)
Income from continuing operations
before income taxes and
minority interest -- -- -- -- (6,926,816)
Total Assets at 3/31/01 $ 4,934,159 $ 13,091,253 $ 1,570,357 $ 114,357 $ 19,710,126
============ ============ ============ ============ ============
Depreciation and amortization
for the period ended 3/31/01 $ 538,419 $ 1,575 $ 34,633 $ 1,723 $ 576,350
============ ============ ============ ============ ============
Capital expenditures for the
period ended 3/31/01 $ 1,624,647 $ 3,666,100 $ 939,153 $ 105,750 $ 6,335,650
============ ============ ============ ============ ============
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED):
FISCAL 2003
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------- ------------- ------------- -------------
Revenue $ 80,779 $ 351,420 $ 219,116 $ 134,893
Gross margin 21,370 87,950 61,300 287,484
Loss before minority interest (750,357) (694,158) (628,139) (3,521,397)
Net loss $ (687,609) $ (617,654) $ (558,513) $ (3,490,407)
Shares applicable to basic and
diluted loss per share 164,597,057 175,824,623 177,343,925 175,327,436
Basic and diluted loss per share $ (0.00) $ (0.00) $ (0.00) $ (0.03)
FISCAL 2002
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------- ------------- ------------- -------------
Revenue $ 1,522,069 $ 977,679 $ 1,603,999 $ 940,751
Gross margin (353,857) 114,267 160,774 470,379
Loss before minority interest (1,199,779) (1,152,276) (750,494) (14,029,865)
Net loss $ (1,085,520) $ (1,076,308) $ (674,003) $ (13,961,250)
Shares applicable to basic and
diluted loss per share 154,201,609 154,219,439 155,142,599 158,560,321
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.00) $ (0.09)
FISCAL 2001
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------- ------------- ------------- -------------
Revenue $ 463,014 $ 259,863 $ 1,159,048 $ 797,061
Gross margin (518,350) (66,035) 650,450 835,484
Loss before minority interest (1,507,523) (1,296,457) (3,570,273) (552,563)
Net loss $ (1,435,247) $ (1,225,342) $ (3,505,087) $ (470,804)
Shares applicable to basic and
diluted loss per share 128,179,335 130,112,623 134,509,211 146,471,805
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.00)
NOTE 12 - INCOME TAXES
The Company recorded no provision for income taxes in fiscal 2003, 2002, and
2001 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,
-----------------------------
2003 2002
------------ ------------
Net operating loss carryforwards $ 14,808,515 $ 13,445,538
Other net deferred tax assets 1,158,986 1,158,986
------------ ------------
Gross deferred tax assets 15,967,501 14,604,524
Deferred tax assets valuation allowance (15,967,501) (14,604,524)
------------ ------------
$ -- $ --
============ ============
The deferred tax asset has been fully reserved because ESSI cannot anticipate
future taxable income to realize the potential benefits of the gross deferred
tax asset.
The Company has net tax operating loss carryforwards at March 31, 2003 of
approximately $45,000,000. Such carry forwards may be used to offset taxable
income, if any, in future years through their expiration in 2003 through 2022.
Future expiration of tax loss carryforwards, if not utilized, are as follows:
2003, $105,000; 2004, $176,000; 2005, $226,000; 2006, $144,000; 2007, $715,000
and thereafter, $43,634,000. 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 13 - 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
5,000,000 shares of ESSI's stock at exercise prices ranging from $0.50 per share
to $2.50 per share and to ESSI's Secretary to purchase 1,000,000 shares of
ESSI's stock at an exercise price of $0.50 per share. All of these performance
based stock options are exercisable for a period of 24 months from the date of
vesting. The options will be deemed vested for each individual if that
individual is employed by 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 2000, the Board of Directors issued options to a new employee to
purchase 650,000 shares of ESSI's common stock with an exercise price below fair
value. In fiscal 2003, 2002 and 2001, ESSI recognized $14,624 in each year of
non-cash compensation expense related to these options.
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 6);
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.
During fiscal 2001, the Board of Directors approved the issuance of 8,587,000
shares against options as a stock bonus. ESSI reduced options outstanding by
8,587,000 and recorded non-cash compensation expense of $2,926,781.
ESSI has adopted the disclosure requirements of Statement of Financial
Accounting Standard No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation. This statement allows companies to choose whether to account for
stock-based compensation under the intrinsic method as prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25") or to use a fair value method
described in FAS 123. ESSI continues to follow the provisions of APB 25. No
compensation cost has been recognized on ESSI's stock option grants except as
described previously, as the options include an exercise price equal to or
exceeding the fair value on the date of grant.
Prior to fiscal 2002, ESSI granted two individuals a combined total of 1,687,500
stock options, which vest after certain pre-established performance criteria
have been met. As of March 31, 2003, the Board had not determined the criteria.
Therefore, these options are considered to be non-vested.
In fiscal 2003, 700,000 were granted. In fiscal 2002, no stock options were
granted. ESSI has determined that the pro forma effects of applying FAS 123 in
2002 is immaterial. The proforma effect in 2001 would increase the net loss by
approximately $986,000. The fair value was determined using the Black-Scholes
option pricing model using the following weighted-average assumptions:
Fiscal Fiscal Fiscal
2003 2002 2001
---- ---- ----
Risk-free interest rate 4.0% N/A 5.6%
Expected dividend yield -- N/A --
Expected lives 2.3 N/A 2.5
Expected volatility 0% N/A 131%
The following table summarizes the employee stock option transactions described
above.
SHARES WEIGHTED-AVERAGE
UNDER OPTION EXERCISE PRICE
----------- -----------
Balance, March 31,2000 34,350,000 $ 0.83
Options granted 4,750,000 0.49
Options cancelled (4,500,000) 0.46
Options exercised (8,787,000) 0.27
----------- -----------
Balance, March 31,2001 25,813,000 1.01
Options granted -- --
Options cancelled (1,875,000) 0.50
Options exercised -- --
----------- -----------
Balance, March 31,2002 23,938,000 1.05
Options granted 700,000 0.25
Options cancelled (1,500,000) 0.30
Options exercised -- --
----------- -----------
Balance, March 31, 2003 23,138,000 $ 1.07
=========== ===========
The weighted average per share fair value of options granted during fiscal years
2003 and 2001 was $0.25 and $0.31, respectively.
The following table summarizes information about employee stock options and the
options issued as part of the acquisition of STDC outstanding at March 31, 2003.
OPTIONS OUTSTANDING
----------------------------------------------------------------------
WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
-------- ------------ ---------------- ----------------
(Years)
0.07 150,000 2.67 150,000
0.14 487,500 1.50 487,500
0.15 350,000 2.34 0
0.21 5,375,000 2.69 5,375,000
0.35 350,000 2.34 0
0.50 4,475,000 2.70 2,787,500
0.75 250,000 0.76 250,000
0.84 112,500 0.16 112,500
1.00 3,537,500 3.47 3,537,500
1.50 3,550,000 3.67 500,000
2.00 4,250,000 3.68 1,250,000
2.50 3,000,000 3.76 --
3.00 750,000 3.50 750,000
4.00 250,000 3.50 250,000
5.00 250,000 3.50 250,000
----------- -----------
27,137,500 15,700,000
=========== ===========
In 2000, ESSI issued 4,000,000 shares of its common stock and options to
purchase another 4,000,000 shares at exercise prices ranging from $.50 - $5.00
per share to purchase its subsidiary, STDC.
NOTE 14 - REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
REDEEMABLE COMMON STOCK
Included in redeemable common stock are amounts related to a potential
rescission offer related to certain shares sold in the state of Idaho (see note
14). During fiscal 2001, 23,167 shares of redeemable stock were re-sold by the
original investors and thus reclassified as common stock and additional paid in
capital.
PREFERRED STOCK
During fiscal 1998, ESSI issued 200,000 shares of its Series A preferred stock;
100,000 of these shares were issued as a result of the conversion of a note
payable. Each share of ESSI's Series A preferred stock is convertible into five
shares of ESSI's common stock. The preferred stock has liquidation preference in
the amount of $5.00 per share or $1,000,000. The preferred stock is redeemable
by ESSI and has no voting rights. In addition, the recipient of the preferred
stock was granted warrants as discussed below to purchase an additional
1,000,000 shares of ESSI's common stock. In fiscal 2003, the preferred stock was
converted to common stock and the warrants were exercised.
TREASURY STOCK
In fiscal 1999, ESSI received into treasury 1,000,000 shares of redeemable
common stock previously issued to a vendor as payment for a hyperspectral
instrument contract that was subsequently cancelled. ESSI subsequently reissued
500,000 of these shares to a third party during fiscal 1999.
STOCK WARRANTS
During fiscal 1998, warrants to purchase 3,000,000 shares of ESSI's common stock
were granted to investors with exercise prices ranging from $1.30 to $2.00 per
share and expire 3 to 5 years after issuance. In fiscal 2003, 2,000,000 were
exercised and in fiscal 2001, 1,000,000 of these warrants expired.
In conjunction with the equity line, ESSI issued warrants to the investor to
purchase 1,500,000 shares of ESSI's common stock for 5 years at a price equal to
the lesser of 95% of an average stock price after the definitive documents were
signed or 95% of the market price at the date of effectiveness of the
registration statement. ESSI determined the estimated fair value of these
warrants to be immaterial, and, as such, did not record the deferred financing
cost asset. Additional warrants up to 1,500,000 will be issued pro rata as the
equity line is used. The price of these additional warrants will be based on the
market price immediately following sale to the investor.
PRIVATE PLACEMENT OF PETRO PROBE, INC. COMMON STOCK
In fiscal 2001 and 2000, Petro Probe, Inc. issued 22,332 and 10,166 shares,
respectively, of its common stock at approximately $3.00 per share. This
transaction increased minority interest by $67,000 and $30,500, respectively
(see note 3). In fiscal 2002, 250,000 shares of Petro Probe stock were allocated
against investor deposit. This transaction increased minority interest by
$13,864 and additional paid-in capital by $736,136.
PRIVATE PLACEMENT OF ECO PROBE, INC. COMMON STOCK
In fiscal 2001, Eco Probe, Inc., issued 151,667 shares of its common stock at
approximately $3.00 per share. This transaction increased minority interest by
$445,004 (see note 3).
In fiscal 2000, warrants to purchase 100,000 shares of either Petro Probe or
Terranet at $3.00 per share for two years and 100,000 shares of either Petro
Probe or Terranet at $5.00 per share for five years were issued to a consultant.
In fiscal 2002, 100,000 of these warrants expired.
EQUITY LINE
In fiscal 2002, ESSI signed an agreement with an investor for an equity line of
up to $10,000,000 for one year with an extension option for another year. Under
this equity line, ESSI sold 15,148,210 shares to the investor for $440,985 in
fiscal 2003. No additional sales are anticipated.
NOTE 15 - COMMITMENT AND CONTINGENCIES
OPERATING RENT
Future minimum rental payments and sublease rental income to be received under
non-cancelable leases with initial terms in excess of one year are as follows at
March 31, 2003:
2004 $ 76,800
2005 76,800
2006 25,600
------------
$ 179,200
============
Rental expense for office space included in operations for fiscal 2003, 2002,
and 2001 is $76,800, $167,290, and $132,529, respectively. 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 fiscal 1997, ESSI settled its lawsuit with the Idaho Department of Finance.
As a result of the settlement, ESSI agreed to proceed with a rescission offer to
certain Idaho residents who invested in ESSI at $0.16 to $0.18 per share at
which they originally purchased the Company's common stock. In fiscal 2001,
23,167 shares of ESSI's common stock subject to rescission were sold by such
Idaho investors. In conjunction with the rescission settlement, $17,981 related
to 110,993 shares of common stock have been recorded in redeemable common stock
since that time. No additional rescission requests have been made since fiscal
2001.
In November 2000, a lawsuit was filed against ESSI by a vendor. The vendor
alleges that ESSI has not paid them 500,000 shares of ESSI's stock, which it is
owed pursuant to a written contract between the vendor and ESSI in which the
vendor agreed to perform certain services for the Company 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.
NOTE 16 - RELATED PARTY TRANSACTIONS
During fiscal 2002, General Petroleum, Inc. (GPI) a company previously
wholly-owned by an ESSI officer and director entered into an agreement with
Accuprobe, lessor to ESSI of a hyperspectral instrument (see note 5). The
agreement requires the former sole shareholder of Accuprobe to transfer 100% of
his equity in Accuprobe to GPI in exchange for equity in GPI. Presently, not all
of the requirements of the agreement have been met. Also during fiscal 2002, GPI
exchanged a portion of its equity for the 50% interest in the ESSI 1 LC owned by
an outside party. It is ESSI's and GPI's intention to maintain the same
leaseback terms on both hyperspectral instruments.
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Earth Search Sciences, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Earth Search Sciences, Inc.
as of March 31, 2003, and the related statements of expenses, stockholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of ESSI's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 audit provides 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, 2003, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that ESSI will
continue as a going concern. As shown in the financial statements, ESSI's gross
revenues dropped from $5,044,000 to $786,000 from fiscal 2002 to fiscal 2003,
ESSI incurred a net loss of $5,354,184 during fiscal 2003, and as of March 31,
2003, ESSI's current liabilities exceeded its current assets by $13,700,198.
These factors, among others, as discussed in note 2 to the financial statements,
raise substantial doubt about ESSI'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.
MALONE & BAILEY, PLLC
Houston, Texas
www.malone-bailey.com
July 1, 2003
INDEPENDENT AUDITORS REPORT
Board of Directors and Shareholders
Earth Search Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Earth Search
Sciences, Inc. (the Company) as of March 31, 2002 and the related consolidated
statements of operations, redeemable common stock and changes in nonredeemable
shareholders' (deficit) equity, and cash flows for the years then ended March
31, 2002 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 consolidated financial position of Earth Search
Sciences, Inc. as of March 31, 2002, and the consolidated results of its
operations and its consolidated cash flows for the years then ended March 31,
2002 and 2001, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $16,797,081 during the year ended March 31,
2002, and, as of that date, the Company's current liabilities exceeded its
current assets by $12,295,035. In addition, the Company is uncertain as to the
future of a subsidiary's joint satellite development project with a governmental
agency (note 6). These factors, among others, as discussed in note 2 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in note 2, the Company changed its method in accounting for sales
of stock by its subsidiaries.
/s/ GRANT THORNTON LLP
Seattle, Washington
June 5, 2002