UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarter ended
September 30,
2008
|
|
|
|
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from
_______to_______
|
Commission
File No.
000-19566
EARTH SEARCH SCIENCES,
INC.
(Exact
Name of Registrant as Specified in its Charter)
|
Nevada
|
87-0437723
|
|
(State
or other Jurisdiction of
|
(IRS
Employer
|
|
Incorporation
or Organization)
|
Identification
Number)
|
306 Stoner Loop Road,
Lakeside, MT 59922
(Address
of Principal Executive Offices, Including Zip Code)
Registrant's
telephone number, including area code:
(406) 751-5200
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
Indicate
by a check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
|
Large
accelerated filer
¨
|
Accelerated
filer
¨
|
|
Non-accelerated
filer
¨
|
Smaller
reporting company
x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
Number of
shares of common stock outstanding at November 14, 2008:
185,152,817
EARTH
SEARCH SCIENCES, INC.
TABLE
OF CONTENTS
FORM
10-Q
QUARTER
ENDED September 30, 2008
PART I
FINANCIAL
INFORMATION
|
Item
1. Consolidated Financial Statements (Unaudited)
|
Page
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2008 and March 31, 2008
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the three and six month periods
ended
September
30, 2008 and 2007
|
4
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the six month period ended
September
30, 2008 and 2007
|
5
|
|
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the six month period
ended September 30, 2008
|
6
|
|
|
|
|
|
|
Selected
notes to consolidated financial statements
|
7-9
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations
|
10-13
|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
13
|
|
|
|
|
Item
4T. Controls and Procedures
|
13
|
PART II
OTHER INFORMATION
REQUIRED
|
Item
1. Legal Proceedings
|
14
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
14
|
|
Item
3. Defaults Upon Senior Securities
|
15
|
|
Item
4. Submission of Matters of a Vote of Security Holders
|
15
|
|
Item
5. Other information
|
15
|
|
Item
6. Exhibits
|
15
|
EARTH
SEARCH SCIENCES, INC.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
|
September 30,
2008
2008
|
|
|
March 31,
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
11,039
|
|
|
$
|
8,821
|
|
|
Prepaid
expenses
|
|
|
86,960
|
|
|
|
-
|
|
|
Loan costs, net of accumulated
amortization of $
243,995
and $229,987,
respectively
|
|
|
31,575
|
|
|
|
45,583
|
|
|
Total current
assets
|
|
|
129,574
|
|
|
|
54,404
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
accumulated depreciation
of $9
95,256
and $936,332,
respectively
|
|
|
154,172
|
|
|
|
206,096
|
|
|
Intangible asset –
patent
|
|
|
5,300
|
|
|
|
-
|
|
|
Deposits
|
|
|
771,937
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,060,983
|
|
|
$
|
260,500
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,379,661
|
|
|
$
|
1,345,174
|
|
|
Accrued
expenses
|
|
|
2,179,089
|
|
|
|
2,189,269
|
|
|
Notes payable - current
portion
|
|
|
1,988,440
|
|
|
|
1,092,126
|
|
|
Settlement
obligation
|
|
|
8,686,824
|
|
|
|
8,686,824
|
|
|
Short-term
convertible
debt – related
parties
|
|
|
2,880,149
|
|
|
|
2,887,013
|
|
|
Total current
liabilities
|
|
|
17,114,163
|
|
|
|
16,200,406
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt less
current portion – related parties
|
|
|
1,500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
18,614,163
|
|
|
|
16,200,406
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
|
Preferred stock, 300,000,000
shares authorized,
none issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common stock, $.001 par value;
300,000,000 shares authorized;
181,417,267
and 106,969,733 shares issued and
outstanding, respectively
|
|
|
181,416
|
|
|
|
106,970
|
|
|
Additional paid-in
capital
|
|
|
52,618,044
|
|
|
|
47,
2
94,900
|
|
|
Accumulated
deficit
|
|
|
(
70,352,640
|
)
|
|
|
(63,341,776
|
)
|
|
Total stockholders’
deficit
|
|
|
(
17,553,180
|
)
|
|
|
(15,939,906
|
)
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
|
$
|
1,060,983
|
|
|
$
|
260,500
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated financial statements.
EARTH
SEARCH SCIENCES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
Three
months ended
September
30,
|
|
|
Six
months ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
22,750
|
|
|
$
|
-
|
|
|
$
|
22,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Late
fees related to settlement agreement
|
|
|
-
|
|
|
|
1,006,668
|
|
|
|
-
|
|
|
|
1,866,708
|
|
|
Depreciation
and amortization
|
|
|
25,962
|
|
|
|
32,966
|
|
|
|
51,924
|
|
|
|
67,905
|
|
|
General
and administrative
|
|
|
6,410,526
|
|
|
|
318,496
|
|
|
|
6,686,232
|
|
|
|
640,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
6,436,488
|
|
|
|
1,358,130
|
|
|
|
6,738,156
|
|
|
|
2,575,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(6,436,488
|
)
|
|
|
(1,335,380
|
)
|
|
|
(6,738,156
|
)
|
|
|
(2,552,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on settlement of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,049
|
|
|
Interest
expense
|
|
|
(153,129
|
)
|
|
|
(110,354
|
)
|
|
|
(272,708
|
)
|
|
|
(222,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income ( loss)
|
|
$
|
(6,589,617
|
)
|
|
$
|
(1,445,734
|
)
|
|
$
|
(7,010,864
|
)
|
|
$
|
(2,760,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
Weighted
average common shares outstanding
|
|
|
156,926,195
|
|
|
|
97,060,667
|
|
|
|
134,276,016
|
|
|
|
96,816,931
|
|
See
accompanying notes to unaudited consolidated financial statements.
EARTH
SEARCH SCIENCES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Six Months
Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(
7,010,864
|
)
|
|
$
|
(
2,760,005
|
)
|
|
Adjustments to reconcile net loss
to cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
51,924
|
|
|
|
67,905
|
|
|
Amortization of deferred finance
costs
|
|
|
14,008
|
|
|
|
-
|
|
|
Common stock issued for
services
|
|
|
843,004
|
|
|
|
231,164
|
|
|
Common stock issued
for services related to the
purchase of asset - General
Synfuels
International
|
|
|
2,994,700
|
|
|
|
-
|
|
|
Payable issued for services
related to the purchase of asset - General
Synfuels
International
|
|
|
2,500,000
|
|
|
|
-
|
|
|
Common stock issued for vendor
payable
|
|
|
129,969
|
|
|
|
-
|
|
|
Imputed
interest
|
|
|
61,117
|
|
|
|
22,357
|
|
|
Gain on settlement of
debt
|
|
|
-
|
|
|
|
(15,049)
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
and a
ccrued
expenses
|
|
|
(170,574
|
)
|
|
|
68,133
|
|
|
Accounts payable – related
party
|
|
|
60,199
|
|
|
|
(
48,150
)
|
|
|
Accrued interest – related
parties
|
|
|
18,478
|
|
|
|
-
|
|
|
Deposits
|
|
|
(652,056
|
)
|
|
|
-
|
|
|
Prepaid
expenses
|
|
|
(11,960
|
)
|
|
|
-
|
|
|
Account
receivable
|
|
|
-
|
|
|
|
(22,750)
|
|
|
Accrued settlement
liability
|
|
|
-
|
|
|
|
2,006,428
|
|
|
Accrued officers
compensation
|
|
|
|
|
|
|
120,000
|
|
|
NET CASH USED IN OPERATING
ACTIVITIES
|
|
|
(
1,172,055
|
)
|
|
|
(
329,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from stockholder loans,
net
|
|
|
3,000
|
|
|
|
33
6
,
5
00
|
|
|
Repayment on related party
debt
|
|
|
(
88,541
|
)
|
|
|
-
|
|
|
Proceeds from subscription
receivable
|
|
|
-
|
|
|
|
250,000
|
|
|
Financing
costs
|
|
|
-
|
|
|
|
(47,347
|
)
|
|
Proceeds from issuance of common
stock
|
|
|
1,363,500
|
|
|
|
-
|
|
|
Principal payments on short-term
debt
|
|
|
(
103,686
|
)
|
|
|
-
|
|
|
Principal payments on long-term
debt
|
|
|
-
|
|
|
|
(
223,023
|
)
|
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
|
1,174,273
|
|
|
|
3
16,130
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN
CASH
|
|
|
2,218
|
|
|
|
(13,837)
|
|
|
CASH AT BEGINNING OF
PERIOD
|
|
|
8,821
|
|
|
|
23,182
|
|
|
CASH AT END OF
PERIOD
|
|
$
|
11,039
|
|
|
$
|
9,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
169,192
|
|
|
$
|
35,100
|
|
|
Taxes paid
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing
activities:
|
|
|
|
|
|
|
|
|
|
Common stock issued for
asset
|
|
$
|
5,300
|
|
|
|
-
|
|
|
Deposit included in accounts
payable
|
|
$
|
119,881
|
|
|
|
-
|
|
|
Prepaid compensation in accounts
payable
|
|
$
|
75,000
|
|
|
|
-
|
|
|
Common stock issued for debt
repayment
|
|
$
|
-
|
|
|
$
|
26,000
|
|
See
accompanying notes to unaudited consolidated financial statements.
EARTH
SEARCH SCIENCES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
Six
months ended September 30, 2008
(Unaudited)
|
|
|
Common
Shares
|
|
|
Stock
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury
Stock
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
Balances at
March 31, 2008
|
|
|
106,969,733
|
|
|
$
|
106,970
|
|
|
$
|
47,494,900
|
|
|
$
|
(200,000
|
)
|
|
$
|
(63,341,776
|
)
|
|
$
|
(15,939,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for
stock
payable
|
|
|
1,708,890
|
|
|
|
1,708
|
|
|
|
128,261
|
|
|
|
|
|
|
|
|
|
|
|
129,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for
services
|
|
|
12,675,312
|
|
|
|
12,676
|
|
|
|
830,328
|
|
|
|
|
|
|
|
|
|
|
|
843,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock
for cash
|
|
|
26,729,999
|
|
|
|
26,729
|
|
|
|
1,336,771
|
|
|
|
|
|
|
|
|
|
|
|
1,363,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for
General
Synfuels
International
|
|
|
33,333,333
|
|
|
|
33,333
|
|
|
|
2,966,667
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Imputed
Interest
|
|
|
|
|
|
|
|
|
|
|
61,117
|
|
|
|
|
|
|
|
|
|
|
|
61,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
7,010,864
|
)
|
|
|
(
7,010,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
September 30, 2008
|
|
|
181,417,267
|
|
|
$
|
181,416
|
|
|
$
|
52,818,044
|
|
|
$
|
(200,000
|
)
|
|
$
|
(
70,352,640
|
)
|
|
$
|
(
17,553,180
|
)
|
See
accompanying notes to unaudited consolidated financial statements.
EARTH
SEARCH SCIENCES, INC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF
PRESENTATION
The accompanying unaudited interim
consolidated financial statements of Earth Search Sciences, Inc. ("ESSI") have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
("SEC"), and should be read in conjunction with the audited financial statements
and notes thereto contained in ESSI's Annual Report filed with the SEC on Form
10-KSB
for the fiscal year
ended March 31, 2008
.
In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein.
The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
Notes to the financial statements which
would substantially duplicate the disclosure contained in the audited
consolidat
ed financial
statements for 2008
as
reported in the 10-KSB have been omitted.
Certain prior period amounts have been
reclassified to conform to the current period presentation.
NOTE
2
- GOING CONCERN
As shown in the accompanying financial
statements, we incurred a net loss of $
7,010,864
for the
six
months ended
September 30, 2008
and had an accumulated deficit of
$
70,352,641
and a working capital deficit of
$16,984,590
as of the same period.
These conditions raise substantial doubt
as to ESSI's ability to continue as a going concern.
Management is trying to raise additional
capital through sales of stock and or loans to the Company.
The financial statements do not include
any adjustments that might be necessary if ESSI is unable to continue as a going
concern.
NOTE 3 –
ACQUISITION OF ASSET FROM ENTITY UNDER COMMON CONTROL
On August
15
th
of 2008 ESSI acquired all of the outstanding shares of General Synfuels
International, Inc. (GSI), an entity controlled by certain management and
directors of ESSI. This transaction was account for as an asset purchase due to
the fact that GSI was dormant, did not have customers or employees and only held
certain proprietary rights, patent, technology and construction plans for a
gasification process to recover the oil and gas from oil shale. In addition, the
asset was recorded at its historical cost due to the fact that this transaction
was between entities under common control. Prior to the acquisition, both
entities were controlled by certain members of management. The $5,494,700 value
in excess of the historical cost of the asset was recorded as compensation
expense.
ESSI paid
the individual GSI Shareholders $5,500,000: 33,333,333 shares of common stock
valued at $3,000,000 based on the closing price of ESSI’s stock on the date of
the transaction; and $2,500,000 in the form of promissory notes
payable
to the GSI shareholders
in five equal payments of $500,000,
commencing on the first business day of February 2009, and continuing on the
first business day of each sixth calendar month thereafter until paid.
At
ESSI’s election, each promissory note payable can be converted into ESSI common
stock at a 40% discount to the average trading price of ESSI common stock 5 days
prior to the emission of payment. Because this transaction was between entities
under common control, the patent asset was recorded at its historical cost of
$5,300
and the remaining value of
$5,494,700
was recorded as compensation expense
for the period ended September 30, 200, as the shareholders didn’t contribute
any additional assets, tangible or intangible of value.
In addition, ESSI evaluated the
conversion option of the promissory note under SFAS No. 133 and EITF 00-19 and
determined that the feature does not have characteristics of a liability because
the conversion is not at the note holder’s option.
On August 15, 2008, ESSI entered into
three
Consulting
Agreement
s
(the “Consulting Agreement”) with each
of the GSI Shareholders, Ken Danchuk,
Larry Vance, and
Ron McQueen.
Under the terms of the Mr. Danchuk’s
Consulting Agreement, he will perform services for a period of six months and
will receive a fee of
$125,000
, $50,000 of which was paid upon the
execution of the agreement. The remaining $75,000 was paid in the form of a note
payable for which the first payment of $25,000 is due on December 15, 2008. The
remaining two payments of $25,000 each are due on January 31, 2009 and March 31,
2009. The total consulting fee of $125,000 is recognized ratably over the term
of the agreement. As of September 30, 2008, ESSI recognized approximately
$42,000 in consulting expense related to this agreement. In addition, the
unearned balance of $83,000 is recorded
in prepaid
expenses
as of September 30, 2008.
Mr. Danchuk will advise ESSI on the corporate requirements structure of
GSI so as to integrate GSI into a successful ESSI subsidiary company as well as
the selection and implementation of a new internet website and corporate
communication system. Mr. Danchuk will also assist ESSI in the analysis,
planning and production of corporate executive planning documents.
Pursuant to the terms of the Consulting
Agreement, Mr. Vance
is to
be paid $250,000 on December 31, 2008. At ESSI’s election, ESSI may pay this
amount in shares of common stock
at a 40% discount to the average trading
price of ESSI common stock 5 days prior to the emission of payment
.
Mr. Vance will advise ESSI in a
variety of areas, such as; the direction and strategy for successful mineral and
hydrocarbon exploration and exploitation, implementation of the oil shale
gasification technology represented, selection and preparation of superior oil
and shale land sites, and the highest and best use of the hyperspectral remote
sensing technology. Mr. Vance will also act in an executive managerial capacity
as required and hold the position of chairman of the technical Advisory Board
for ESSI.
In August
2008, ESSI entered into a one year consulting agreement with Ron McQueen to
provide advice to ESSI in technical areas such as construction and installation
of the oil shale gasification technology. In consideration for services
rendered, Mr. McQueen received 1,420,455 shares of our common stock valued at
$127,841, which represents that market value on the date of grant. These shares
were issued effective as of the agreement date therefore we recorded expense the
of $127,841 during the quarter.
NOTE 4 – DEVELOPMENT OF OIL SHALE
GASIFCATION PROTOTYPE
During the quarter ended September 30,
2008, we recorded $
769,881
in deposits related to the development
of a prototype related to the oil shale gasification process acquired through
GSI.
Of this amount,
$650,000
was paid during the three months ended
September 30, 2008, with the balance of $119,881 recorded as accounts
payable.
NOTE
5
- EQUITY
During the
six
months ended
September 30
, 200
8
we issued:
|
·
|
10,050,312
shares of stock valued at
$
666,754
to various individuals for
consulting services. The value of the stock was based on the quoted market
price on the
measurement date, which was
primarily the
date of
grant.
|
|
·
|
2,625,000 shares of common stock
valued at $176,250 to new management as sign on bonuses. The value of the
stock was based on the quoted market price on the date of
grant.
|
|
·
|
1,708,890
shares of stock valued at
$
129,969
for
a
stock payable pursuant to a
consulting agreement.
|
|
·
|
26,729,999
shares of stock valued at
$
1,363,500
to various individuals for
cash.
|
|
·
|
33,333,333 shares of common stock
valued at $
3,000,000
in connection with the
acquisition of
assets from the
shareholders of
General Synfuels
International.
|
NOTE
6
–
SUBSEQUENT EVENTS
Subsequent
to September 30, 2008, we granted:
|
·
|
On October 6, 2008 we granted
1,397
,
773
shares of
our common
stock valued at $
83,866 or $0.06 per
share
to
manag
ements for
services preformed
.
The value of the stock was based
on the quoted market price on the date of
grant.
|
|
·
|
On November 5, 2008 we granted
1,226,666
shares of
our common
stock valued at
$
36,780 or
$0.03
per share to
various individuals for consulting services. The value of the stock was
based on the quoted market price on the date of
grant.
|
|
·
|
On November 5, 2008 we granted
1,111
,
111
shares of
our common
stock valued at $
33,333 or $0.03 per
share
to
manag
ement for
services preformed
.
The value of the stock was based
on the quoted market price on the date of
grant.
|
FORWARD-LOOKING
STATEMENTS
This Quarterly Report on Form 10-Q,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this Item 2 of Part I of this Quarterly Report include
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by forward-looking statements.
In some cases, you can identify
forward-looking statements by terminology such as "may," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"proposed," "intended," or "continue" or the negative of these terms or other
comparable terminology. You should read statements that contain these words
carefully, because they discuss our expectations about our future operating
results or our future financial condition or state other "forward-looking"
information. There may be events in the future that we are not able to
accurately predict or control. You should be aware that the occurrence of any of
the events described in this Quarterly Report could substantially harm our
business, results of operations and financial condition, and that upon the
occurrence of any of these events, the trading price of our securities. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, growth rates, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this Quarterly Report to conform
these statements to actual results.
MANAGEMENT'S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CORPORATE FOCUS
Earth Search Sciences, Inc.
(ESSI)
is a
Utah
corporation
.
We have
five
wholly-owned subsidiaries: Skywatch
Exploration, Inc., Polyspectrum Imaging, Inc., Geoprobe, Inc.,
STDC, Inc
and General Synfuels International
(GSI)
. In addition, there
are five majority-owned consolidated subsidiaries: Earth Search Resources, Inc.,
Eco Probe, Inc., ESSI Probe 1 LC, Petro Probe, Inc. and Terranet, Inc. All
subsidiaries except Petro Probe were inactive during fiscal 2006 and
2007.
We did
not generate any revenue during fiscal year 2008, have no current business
operations and are currently focused on two potential business
ventures.
Starting
in July 2008, Luis Lugo replaced Larry Vance as CEO of ESSI and joined the Board
of Directors. Mr. Vance will remain as Chairman of Board of ESSI. In
conjunction with Mr. Lugo becoming CEO, ESSI will redefine its business focus
over the next several months.
First, we
are working with certain investors to develop and employ technology in the
extraction of oil and gas from oil shale. During the third quarter ESSI acquired
General Synfuels International, Inc, owner of the world-wide proprietary rights,
patent, technology, construction plans and materials and operational capability
for a gasification process to recover the oil and gas from oil shale.
ESSI and GSI have begun to
refine the design and begin development of our proof of concept prototype.
However, the current state of the financial markets may negatively impact our
ability to raise the additional funds necessary to complete our prototype. Our
current plan is to complete a field test of this technology as early as Spring
2009 and subsequent commercial development as early as 2010.
Second,
we are seeking joint venture opportunities with private industry,
universities and state and federal agencies to develop, package and deliver,
through the application of our hyperspectral remote sensing solutions,
applications and associated technologies, superior airborne mapping products and
services. Our airborne hyperspectral remote sensing technology is designed to
identify specific surface substances and materials by measuring the reflectance
of light from their surface. Their first spectroscopic instrument, the PROBE 1,
was initially developed with the assistance of NASA and used a small aircraft as
the instrument platform to obtain data from high altitudes over many different
terrains. The information was precise enough to enable detailed analysis of a
dynamic environment or object in a manner previously unattainable, and can be
used for the discovery of certain natural resources.
Exploitation
of Oil and Gas from Oil Shale
On August
15
th
of 2008 ESSI acquired all of the outstanding shares of General Synfuels
International, Inc. (GSI), an entity controlled by certain management and
directors of ESSI. This transaction was account for as an asset purchase due to
the fact that GSI was dormant, did not have customers or employees and only held
certain proprietary rights, patent, technology and construction plans for a
gasification process to recover the oil and gas from oil shale. In addition, the
asset was recorded at its historical cost due to the fact that this transaction
was between entities under common control. Prior to the acquisition, both
entities were controlled by certain members of management. The $5,494,700 value
in excess of the historical cost of the asset was recorded as compensation
expense.
ESSI paid
the individual GSI Shareholders $5,500,000: 33,333,333 shares of common stock
valued at $3,000,000 based on the closing price of ESSI’s stock on the date of
the transaction; and $2,500,000 in the form of promissory notes
payable
to the GSI shareholders
in five equal payments of $500,000,
commencing on the first business day of February 2009, and continuing on the
first business day of each sixth calendar month thereafter until paid.
At
ESSI’s election, each promissory note payable can be converted into ESSI common
stock at a 40% discount to the average trading price of ESSI common stock 5 days
prior to the emission of payment. Because this transaction was between entities
under common control, the patent asset was recorded at its historical cost of
$5,300
and the remaining value of
$5,494,700
was recorded as compensation expense
for the period ended September 30, 200, as the shareholders didn’t contribute
any additional assets, tangible or intangible of value.
ESSI has also
entered into a Consulting Agreement with each of the GSI Shareholders. The GSI
Shareholders are Ken Danchuk, Ron McQueen and Larry Vance.
Mr.
Danchuk will advise ESSI on the corporate requirements structure of GSI so as to
integrate GSI into a successful ESSI subsidiary company as well as the selection
and implementation of a new internet website and corporate communication system.
Mr. Danchuk will also assist ESSI in the analysis, planning and production of
corporate executive planning documents.
Mr.
McQueen will advise ESSI in technical areas, such as; construction and
installation of the oil shale gasification technology provided by GSI, on high
temperature application of the technology and equipment as pertains to the
geology of selected test sites. Mr. McQueen will also assist ESSI in liaison
with engineering and environmental consultants regarding drilling and
environmental issues, and act as an assistant to the project manager(s) as
requested.
In
addition to this role as Chairman of the Board, Mr. Vance will advise ESSI in a
variety of areas, such as; the direction and strategy for successful mineral and
hydrocarbon exploration and exploitation, implementation of the oil shale
gasification technology represented, selection and preparation of superior oil
and shale land sites, and the highest and best use of the hyperspectral remote
sensing technology. Mr. Vance will also act in an executive managerial capacity
as required and hold the position of chairman of the technical Advisory Board
for ESSI.
GSI is
currently examining various oil shale sites in Colorado and Wyoming for a test
plant. The test plant is budgeted for approximately $5 million as a first stage
development cost. The purpose of this plant is to prove the
technology.
We have
engaged Industrial Systems, Inc. (ISI) as the primary engineering and
fabrication firm supporting our Oil Shale Recovery Project. ISI is strategically
located and has the growth potential needed to support our future commercial
developments. During the quarter ending September 30, 2008 we capitalized
approximately $772,000 in payments to ISI, in the form of deposits, related to
the development of our oil shale gasification prototype. The deposits were used
to fund design and construction costs incurred during the period ended September
30, 2008. Once the prototype is complete, further investment will be required
for commercial production.
Hyperspectral
Remote Sensing Solutions
In the
past, we have utilized an aircraft mounted hyperspectral remote sensing
instrument to gather precise geological data from the surface of the Earth.
Solar energy is reflected from surface materials and the instrument, called
"Probe-1", captures the data in digital form. The Probe-1 is a "whiskbroom
style" instrument that collects data in a cross-track direction by mechanical
scanning and in an along-track direction by movement of the airborne platform.
The instrument acts as an imaging spectrometer in the reflected solar region of
the electromagnetic spectrum (0.4 to 2.5 nm). In the VNIR and SWIR, the
at-sensor radiance is dispersed by four spectrographs onto four detector arrays.
Spectral coverage is nearly continuous in these regions with small gaps in the
middle of the 1.4 and 1.9 nm atmospheric water bands. In order to avoid
geometric distortions in the recorded imagery, the Probe-1 is mounted on a 3
axis, gyro-stabilized mount. Geolocation of nadir pixels is assisted by the
recording of aircraft GPS positional data and tagging each scan line with a time
that is referenced to the UTC time interrupts from the GPS
receiver.
The
spectral data is processed to identify unique spectra in the image. The captured
and processed spectra are compared to a library of known material spectra called
"digital fingerprints" and the output allows the identification of mineral,
compounds and organic matter and the determination of vegetative
conditions.
We are
actively seeking funding to engineer and manufacture a third generation probe
instrument, which will be capable of analyzing substantially more data inputs,
including chemical, light, pressure, vibration, and acceleration. The new design
will operate at extremely high speed with excellent resolution. We expect that
the combination of substantially improved analysis and higher resolution will
open up new markets.
We are
currently evaluating hyperspectral imagery collected to date so that we can
determine whether this archive of information can be used to locate mineral
properties.
Our
aircraft was grounded in 2006 for FAA required maintenance and repairs. As a
result, our hyperspectral remote sensing operations have ceased until such time
that we raise sufficient funding to repair our aircraft or purchase a new
aircraft.
RESULTS
OF OPERATIONS
Our data
collection aircraft was grounded for repairs for FAA required maintenance in
2006 and has not been operational since that time. As a result, we had no
revenues during the fiscal year ended March 31, 2008 and did not record any
revenues during the six months ended September 30, 2008.
We
incurred no late fees related to a settlement agreement for the six month period
ended September 30, 2008, compared to $1,866,708 for the same period in 2007. We
anticipate no further late fees will be incurred during the fiscal year ending
March 31, 2009.
Depreciation
and amortization expense was $51,924 for the six month period ended September
30, 2008, compared to $67,905 for the same period of 2007.
General
and administrative expenses were $6,686,232 for the six month period ended
September 30, 2008, compared to $640,535 for the corresponding period of 2007.
General and administrative expenses are higher primarily due to the purchase
of
General Synfuels International,
Inc.
from a related party.
In connection with the purchase, we recognized
$5,494,700
of compensation
expense.
Interest
expense for the six month period ended September 30, 2008, was $272,708 compared
to interest expense of $222,656 for the corresponding period in
2007.
LIQUIDITY AND CAPITAL
RESOURCES
Net cash used in operating activities
was $1,172,055 for the six month period ended September 30, 2008 compared to net
cash used by operating activities of $329,967 for the six month period ended
September 30, 2007. The increase in cash used in operations is primarily due to
deposits related to our oil shale recovery prototype and the payment of various
accounts payable.
Net cash provided by financing
activities was $1,174,273 for the six month period ended September 30, 2008
compared to cash provided of $316,130 for the same period of 2007. During the
six months ended September 30, 2008, we received $1,363,500 of cash from private
placements of our common stock which was offset by payments on related party
debt and short term debt totaling $192,227. This compared to proceeds from a
subscription receivable of $250,000 and cash from a private placement of
$336,500 for the similar period in 2007 that was offset by payments on debt and
financing costs of $270,370.
We are experiencing working capital
deficiencies because of operating losses. We have operated with funds received
from the sale of common stock, the issuance of notes and limited operating
revenue. Our ability to continue as a going concern is dependent upon continued
debt or equity financings until or unless we are able to generate cash flows to
sustain ongoing operations. We plan to increase the number of revenue producing
services through the development of our oil shale extraction technology and the
use of additional hyperspectral instruments and thereby continue as a going
concern. There can be no assurance that we can generate sufficient operating
cash flows or raise the necessary funds to continue as a going
concern.
ITEM 3.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, ESSI is
not required to provide disclosure under this Part I, Item
3.
ITEM 4T.
CONTROLS AND PROCEDU
RES
Disclosure Controls and
Procedures
Our management, principally our Chief
Executive Officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, our management concluded that our disclosure controls and procedures
as of the end of the period covered by this report were not effective such that
the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is (i.) recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and (ii)
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding disclosure. As part of our management’s assessment of internal
controls over financial reporting as of March 31, 2008 we identified material
weaknesses in our internal controls which we viewed as an integral part of our
disclosure controls and procedures. The material weaknesses are identified below
and as of September 30, 2008 have not been remediated.
There is an over-reliance upon
independent financial reporting consultants for review of critical accounting
areas and disclosures and material non-standard
transactions.
There is a lack of sufficient accounting
staff which results in a lack of segregation of duties necessary for a good
system of internal control.
Changes in
Internal Control Over Financial Reporting
On September 1, 2008 we hired
Charles
G
.
Bridge
as Chief Financial Officer.
Mr. Bridge has an extensive financial
background and experience as a Chief Financial Officer.
There have been no other changes in our
internal control over financial reporting that occurred during the period
covered by this report that ha
ve
materially affected, or that
are
reasonably likely to materially affect
our internal control over financial reporting.
PART
II
OTHER
INFORMATION REQUIRED
Item
1. Legal
proceedings
None
Item
2. Unregistered
sales of equity securities
During the three month period ended
September 30, 2008, we issued the following shares of unregistered equity
securities:
|
·
|
On July 7, 2008 we issued
2,000
,000 shares of
our common
stock valued at
$
120,000 or $0.06 per
share
to
manag
ement
a
sign on
bonuses.
The value of the stock was based
on the quoted market price on the date of
grant.
|
|
·
|
On July 7, 2008 we issued
7,500,000
shares of
our common
stock valued at
$
300,000 or $0.04 per
share
to various
individuals for cash.
|
|
·
|
On July 14, 2008 we issued
368,228
shares of
our common
stock valued at
$
27,617
or $0.07
5
per share to various individuals
for consulting services. The value of the stock was based on the quoted
market price on the date of
grant.
|
|
·
|
On July 14, 2008 we issued
1,250,000
shares of
our common
stock valued at
$
50,000 or $0.04 per
share
to various
individuals for cash.
|
|
·
|
On July 22, 2008 we issued
750,878
shares of
our common
stock valued at
$
37,544 or
$0.05
per share to
various individuals for consulting services. The value of the stock was
based on the quoted market price on the date of
grant.
|
|
·
|
On July 22, 2008 we issued
2,000,000
shares of
our common
stock valued at
$
100,000 or $0.05 per
share
to various
individuals for cash.
|
|
·
|
On July 29, 2008 we issued
6,779,999
shares of
our common
stock valued at
$
508,500 or $0.075
per share
to various
individuals for cash.
|
|
·
|
On August 8, 2008 we issued
1,200,000
shares of
our common
stock valued at
$
60,000 or $0.05 per
share
to
an individual
for
cash.
|
|
·
|
On August 8, 2008 we issued
625,000
shares of
our common
stock valued at
$
56,250 or $0.09 per
share
to various
employees and manag
e
ment as sign on
bonuses.
The value of the stock was based
on the quoted market price on the date of
grant.
|
|
·
|
On August 15,
2008 we acquired General Synfuels
International, Inc. (
“
GSI
”
), a
Nevada
private company, which owns the
world-wide proprietary rights, patent, technology, construction plans and
materials and operational capability for a gasification process to recover
the oil and gas from oil shale
. On August 15, 3008 we issued
33,333,333 shares of our common stock valued at $3,000,000 or $0.09 per
share
and
$2,500,000 in the
form of convertible promissory notes to the three stockholders of GSI,
including our director, Mr. Larry Vance.
At the election of ESSI, each
Promissory Note payable can be converted into ESSI common stock at a 40%
discount to the average
trading price of ESSI common
stock 5 days prior to the emission of
payment.
|
|
·
|
On August 15, 2008 we issued
1,420,455
shares of
our common
stock valued at
$
127,841
or $0.0
9 per share to
individual
for
consulting services. The value of the stock was based on the quoted market
price on the date of grant.
|
|
·
|
On September 26, 2008 we issued
2,693,578
shares of
our common
stock valued at
$
188,550
or $0.07 per share to various
individuals for consulting services. The value of the stock was based on
the quoted market price on the date of
grant.
|
The
issuance of these securities was exempt from registration under Section 4(2) of
the Securities Act. The purchasers were either (a) “accredited investors” within
the meaning of Rule 501 of Regulation D promulgated under the Securities Act or
(c) had a pre-existing or personal relationship with the Company. There was no
advertising or public solicitation in connection with these transactions by ESSI
or anyone acting on ESSI's behalf.
Item
3. Defaults
upon senior securities
None
Item
4. Submission
of matters to a vote of security holders
None
Item
5. Other
information
None
Item
6. Exhibits
|
Exhibit
Number
|
Description
|
|
|
|
|
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).
|
|
|
|
|
10.1
|
Purchase
and Sale of Business Agreement between Earth Search Sciences, Inc. and Ken
Danchuk, Ron McQueen and Larry Vance dated August 15, 2008 (Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8K
as filed September 9, 2008)
|
|
|
|
|
10.2
|
Promissory
Note of Earth Search Sciences, Inc. in favor of Ken Danchuk dated August
15, 2008 (Incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8K as filed September 9, 2008)
|
|
|
|
|
10.3
|
Promissory
Note of Earth Search Sciences, Inc. in favor of Ron McQueen dated August
15, 2008 (Incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8K as filed September 9, 2008)
|
|
|
|
|
10.4
|
Promissory
Note of Earth Search Sciences, Inc. in favor of Larry Vance dated August
15, 2008 (Incorporated by reference to Exhibit 10.4 to the Registrant’s
Current Report on Form 8K as filed September 9, 2008)
|
|
|
|
|
10.5
|
Agreement
for Consulting Services between Earth Search Sciences, Inc. and Ken
Danchuk dated August 15, 2008 (Incorporated by reference to Exhibit 10.5
to the Registrant’s Current Report on Form 8K as filed September 9,
2008)
|
|
|
|
|
10.6
|
Agreement
for Consulting Services between Earth Search Sciences, Inc. and Ron
McQueen dated August 15, 2008 (Incorporated by reference to Exhibit 10.6
to the Registrant’s Current Report on Form 8K as filed September 9,
2008)
|
|
|
|
|
10,7
|
Agreement
for Consulting Services between Earth Search Sciences, Inc. and Larry
Vance dated August 15, 2008 (Incorporated by reference to Exhibit 10.7 to
the Registrant’s Current Report on Form 8K as filed September 9,
2008)
|
|
|
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith)
|
|
|
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith)
|
|
|
|
|
32.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith)
|
|
|
|
|
32.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith)
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned.
|
|
EARTH
SEARCH SCIENCES, INC.
|
|
|
|
|
Date:
November 19, 2008
|
/s/ Luis F.
Lugo
|
|
|
Luis
F. Lugo
|
|
|
Principal
Executive Officer
|
|
|
|
|
Date:
November 19, 2008
|
/s/ Charles G.
Bridge
|
|
|
Charles
Bridge
|
|
|
Principal
Accounting Officer
|
17
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