EARTH SEARCH SCIENCES, INC.
TABLE OF CONTENTS
FORM 10-Q
QUARTER ENDED September 30, 2010
PART I
FINANCIAL INFORMATION
|
Item 1. Consolidated Financial Statements (Unaudited)
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Page
|
|
|
|
|
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Consolidated Balance Sheets as of September 30, 2010 and March 31, 2010
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3
|
|
|
|
|
|
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Consolidated Statements of Expenses for the three months ended September 30, 2010 and 2009
|
4
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the three months ended
September 30, 2010 and 2009
|
5
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|
|
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Selected notes to consolidated unaudited financial statements
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7-8
|
|
|
|
|
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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9-12
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|
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
|
12
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Item 4T. Controls and Procedures
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12
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PART II
OTHER INFORMATION REQUIRED
|
Item 1. Legal Proceedings
|
13
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
13
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Item 3. Defaults Upon Senior Securities
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13
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Item 4. Submission of Matters of a Vote of Security Holders
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13
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Item 5. Other information
|
13
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Item 6. Exhibits
|
13
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EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
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Current assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
479,071
|
|
|
$
|
89,789
|
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
13,000
|
|
|
Loan costs, net of accumulated amortization of $266,691 and $262,347, respectively
|
|
|
11,051
|
|
|
|
13,223
|
|
|
Total current assets
|
|
|
490,121
|
|
|
|
116,012
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net accumulated depreciation of $1,141,900 and $1,141,652, respectively
|
|
|
251
|
|
|
|
775
|
|
|
Intangible asset – patent
|
|
|
25,300
|
|
|
|
25,300
|
|
|
TOTAL ASSETS
|
|
$
|
515,673
|
|
|
$
|
142,087
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,416,434
|
|
|
$
|
1,416,298
|
|
|
Accounts Payable – related parties
|
|
|
408,656
|
|
|
|
408,656
|
|
|
Accrued expenses
|
|
|
4,857,209
|
|
|
|
4,410,788
|
|
|
Current portion of notes payable
|
|
|
1,628,440
|
|
|
|
2,291,440
|
|
|
Derivative liability
|
|
|
544,742
|
|
|
|
30,924
|
|
|
Settlement obligation
|
|
|
8,686,824
|
|
|
|
8,686,824
|
|
|
Current portion of notes payable – related parties
|
|
|
1,588,942
|
|
|
|
1,698,922
|
|
|
Total current liabilities
|
|
|
19,131,387
|
|
|
|
18,943,852
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of discount of $815,262
|
|
|
947,739
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,079,126
|
|
|
|
18,943,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
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Preferred stock, 300,000,000 shares authorized, $.001 par value, 31,250,000 issued and outstanding.or none issued and outstanding
|
|
|
31,250
|
|
|
|
31,250
|
|
|
Common stock, $.001 par value; 300,000,000 shares authorized; 200,687,890 and 199,487,890 shares issued and outstanding, respectively.
|
|
|
200,687
|
|
|
|
199,487
|
|
|
Additional paid-in capital
|
|
|
55,252,153
|
|
|
|
55,176,881
|
|
|
Treasury Stock
|
|
|
(200,000)
|
|
|
|
(200,000)
|
|
|
Accumulated deficit
|
|
|
(74,847,542)
|
|
|
|
(74,009,383)
|
|
|
Total stockholders’ deficit
|
|
|
(19,563,454)
|
|
|
|
(18,801,765)
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
515,673
|
|
|
$
|
142,087
|
|
See accompanying notes to unaudited consolidated financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF EXPENSES
(UNAUDITED)
|
|
Six months ended
|
|
Three months ended
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
2009
|
|
2010
|
2009
|
|
(Restated)
|
|
(Restated)
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
$ 524
|
|
$ 51,924
|
|
$ 262
|
|
$ 25,962
|
|
|
Research and development expense
|
150,020
|
|
-
|
|
50,020
|
|
-
|
|
|
General and administrative
|
803,182
|
|
689,606
|
|
237538
|
|
324,764
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
953,726
|
|
741,530
|
|
287,820
|
|
350,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
(953,726)
|
|
(741,530)
|
|
(287,820)
|
|
(350,726)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
393,704
|
|
(283,102)
|
|
220,692
|
|
(101,510)
|
|
|
Gain on derivative liabilities
|
(410,551)
|
|
-
|
|
(161,235)
|
|
|
|
|
Gain on conversion of debt
|
-
|
|
781,250
|
|
-
|
|
781,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
(838,159)
|
|
(243,382)
|
|
(228,363)
|
|
329,014
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
($0.00)
|
|
($0.00)
|
|
($0.00)
|
|
$0.00
|
|
|
Weighted average common shares outstanding
|
200,687,890
|
|
194,726,470
|
|
200,687,890
|
|
194,796,466
|
|
See accompanying notes to unaudited consolidated financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Six Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009 (Restated)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(838,159)
|
|
|
$
|
(243,382)
|
|
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
524
|
|
|
|
51,924
|
|
|
Amortization of debt discount
|
|
|
140,032
|
|
|
|
-
|
|
|
Amortization of deferred finance costs
|
|
|
2,172
|
|
|
|
2,172
|
|
|
Change in fair value of derivative liabilities
|
|
|
(410,551)
|
|
|
|
-
|
|
|
Stock based compensation
|
|
|
54,000
|
|
|
|
-
|
|
|
Imputed interest
|
|
|
22,472
|
|
|
|
82,500
|
|
|
Gain on conversion of debt
|
|
|
-
|
|
|
|
(781,250)
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
279,423
|
|
|
|
428,676
|
|
|
Accounts payable – related party
|
|
|
-
|
|
|
|
25,583
|
|
|
Accrued interest – related parties
|
|
|
167,273
|
|
|
|
100,441
|
|
|
Deposits
|
|
|
-
|
|
|
|
-
|
|
|
Prepaid expenses and other current asset
|
|
|
13,000
|
|
|
|
8,448
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(669,814)
|
|
|
|
(317,888)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from stockholder loans, net
|
|
|
-
|
|
|
|
3,800
|
|
|
Repayment on related party debt
|
|
|
(109,980)
|
|
|
|
-
|
|
|
Proceeds from issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from issuance of convertible notes
|
|
|
1,069,077
|
|
|
|
250,000
|
|
|
Principal payments on short-term debt
|
|
|
-
|
|
|
|
-
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
959,097
|
|
|
|
253,800
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
389,282
|
|
|
|
(64,088)
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
89,789
|
|
|
|
70,618
|
|
|
CASH AT END OF PERIOD
|
|
$
|
479,071
|
|
|
$
|
6,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
56
|
|
|
Taxes paid
|
|
|
-
|
|
|
|
-
|
|
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, 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-K for the fiscal year ended March 31, 2010. 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 consolidated financial statements for 2010 as reported in the 10-K have been omitted.
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, we incurred a net loss for the three months ended September 30, 2010 and had an accumulated deficit and a working capital deficit as of September 30, 2010. 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 – FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The following tables set forth assets and liabilities measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as of September 30, 2010 and March 31, 2010. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
|
Liabilities Measured at Fair Value on a Recurring Basis
|
|
September 30, 2010
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Derivative liabilities
|
|
-
|
-
|
$ 544,742
|
$ 544,742
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Derivative liabilities
|
|
-
|
-
|
|
$ 30,924
|
|
|
|
|
|
|
|
The derivatives listed above are carried at fair value. The fair value amounts in current period earnings associated with the Company’s derivatives resulted from Level 2 fair value methodologies; that is, the Company is able to value the liabilities based on observable market data for similar instruments. This observable data includes the quoted market prices and estimated volatility factors.
NOTE 4 – CONVERSION OF DEBT TO PREFERRED STOCK
On July 9, 2009, we issued 31,250,000 shares of Series C Convertible Preferred Stock in exchange for $2,500,000 of convertible debt outstanding at that time. Each preferred share is convertible into one share of common at the holder’s option until July 9, 2014, at which time the preferred shares will be automatically converted to common stock provided that the company is in compliance with certain terms. Holders of preferred shares have voting rights equal to the equivalent number of common shares and participate in any cash dividends declared by the Board of Directors. In addition, holders of the preferred shares have a preferential right over other classes of stock in the event of liquidation. Based on its characteristics, the preferred shares are reported as equity.
We evaluated the notes conversion features under FASB ASC 470 and determined that the convertible notes were settled with preferred stock and therefore do not meet the criteria for troubled debt restructuring or a modification of debt.
The Series C Convertible Preferred shares contain dividend participation and voting rights on an as converted basis. In addition, the Series C Convertible Preferred shareholders have preferential rights over other classes of stock in the event of liquidation.
The conversion feature was evaluated under FASB ASC 815 and because the embedded feature is clearly and closely related to the host contract, it is therefore not bifurcated under the appropriate accounting guidance. As a result, there is no derivative liability.
NOTE 5 – CONVERTIBLE NOTES PAYABLE
As of September 30, 2010, we finalized agreements on $1,763,000 in convertible notes payable, of which $1,100,000 which was received during the six months. These notes have a two year term and bear interest at 5%. The conversion option allows for a conversion price of $0.08 per common share and include a reset provision that would lower the conversion rate to 80% of the price received for a share of common stock in any future qualified financing. ESSI evaluated the conversion option for derivative accounting consideration under ASC 815-15 and determined that the embedded conversion options should be classified as a liability and recorded at their fair value due to the above noted reset provision. The derivative liabilities were valued using the Black-Scholes Option Pricing Model and at the respective date of issuances were valued at $905,968 which was recorded as a discount against the convertible note payable and will be amortized into interest expense using the effective interest rate method over the terms of the notes. At September 30, 2010, the valuation of the derivative liability was $544,742.
NOTE 6 – DERIVATIVE LIABILITY
The Company values its conversion option derivatives using the Black-Scholes option-pricing model. Assumptions used in valuing the derivative liability at September 30, 2010 include (1) 0.61% risk-free interest rate, (2) remaining contractual term of the respective convertible note agreements are the expected term, (3) expected volatility 255%, (4) zero expected dividends (5) exercise price of $0.08 per share, (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.
NOTE 7 - EQUITY
On April 7, 2010, the Company granted 1,200,000 common shares valued at $54,000 as compensation for director services.
NOTE 8 – RESTATEMENT
The September 30, 2009 comparative financial statements included herein have been restated due to the identification of an error. The error related to the capitalization of the costs for our Prototype development. Starting with the quarter ended September 30, 2008, we capitalized all costs associated with the development of our prototype in the belief it should be treated as the construction of equipment. Upon re-examination we believe it should have been treated as research and development and expensed when occurred.
The following tables reflect the adjustment and restated amounts:
|
June 30, 2009
|
|
As Reported
|
|
Adjustment
|
|
As Restated
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
Deposits
|
$
|
887,076
|
$
|
(887,076)
|
$
|
-
|
|
TOTAL ASSETS
|
|
1,082,240
|
|
(887,076)
|
|
195,164
|
|
Accumulated deficit
|
|
(72,437,860)
|
|
(887,076)
|
|
(73,324,936)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
(19,053,136)
|
|
(887,076)
|
|
(19,940,212)
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
1,082,240
|
|
(887,076)
|
|
195,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended June 30, 2009
|
|
As Reported
|
|
Adjustment
|
|
As Restated
|
|
Consolidated Statement of Expenses
|
|
|
|
|
|
|
|
General and administrative
|
$
|
392,282
|
$
|
(27,440)
|
$
|
364,842
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
418,244
|
|
(27,440)
|
|
390,804
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(418,244)
|
|
27,440
|
|
(390,804)
|
|
Net loss
|
|
(599,836)
|
|
27,440
|
|
(572,396)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2009
|
|
As Reported
|
|
Adjustment
|
|
As Restated
|
|
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
203,951
|
$
|
(35,000)
|
$
|
168,951
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
(222,018)
|
|
(35,000)
|
|
(257,018)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Cash paid for prototype
|
|
(35,000)
|
|
35,000
|
|
-
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
(35,000)
|
|
35,000
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2010
|
|
As Reported
|
|
Adjustment
|
|
As Restated
|
|
Consolidated Statement of Changes in Stockholders' deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2009
|
$
|
(71,838,024)
|
$
|
(914,516)
|
$
|
(72,752,540)
|
|
Net Loss
|
|
(270,822)
|
|
27,440
|
|
(243,382)
|
|
Accumulated deficit
|
|
(72,437,860)
|
|
(887,076)
|
|
(73,324,936)
|
|
Total stockholders’ deficit
|
|
(19,053,136)
|
|
(887,076)
|
|
(19,940,212)
|
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 Nevada 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 GSI were inactive during the quarter ending September 30, 2010.
We did not generate any revenue during fiscal year 2010, have no current business operations and are currently focused on two potential business ventures.
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 of 2008 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.
GSI has refined the design and begun development of our first plant. However, the current state of the financial markets has negatively impacted our ability to raise the additional funds necessary to complete our plant. Our current plan is to complete a field test of this technology as early as the fourth quarter of 2010 and subsequent commercial development as early as 2011. Additionally we have secured oil shale land in both Wyoming and Colorado.
GSI continues to develop additional patents related to our technology and as part of that process we are exploring a tar sands application. We anticipate the tar sands application to be used internationally.
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. The 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 accounted 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. On July 9, 2009, the holders of our $2.5 million convertible promissory notes that were issued in connection with the purchase of GSI agreed to exchange their convertible notes for convertible preferred stock with an equal face value. The preferred stock is convertible at $0.08 per share and the entire $2.5 million is convertible into an aggregate 31,250,000 shares of series C preferred shares.
The Series C Convertible Preferred shares contain dividend participation and voting rights on an as converted basis. In addition, the Series C Convertible Preferred shareholders have preferential rights over other classes of stock in the event of liquidation. The Series C Convertible Preferred shares contain a mandatory conversion feature which is triggered on the fifth anniversary of the closing date, or July 8, 2014. These preferred shares are convertible into an aggregate of 31,250,000 common shares.
GSI is currently examining various private oil shale sites in Colorado and Wyoming for a test plant as well as starting the process of applying for a Bureau of Land Management R&D oil shale lease. The first plant is budgeted for approximately $10 million as a first stage development cost. The purpose of this plant is to prove certain operating variables.
During the fiscal quarter ended June 30, 2010, we held $1,003,684 in deposits related to the development of a plant related to the oil shale gasification process acquired through GSI.
Once the plant 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 three months ended September 30, 2010 or 2009.
Depreciation and amortization expense was $524 and $51,924 for the six month period ended September 30, 2010 and September 30, 2009 respectively.
General and administrative expenses were $803,182 for the six month period ended September 30, 2010, compared to $689,606 for the corresponding period of 2009. General and administrative expenses are higher primarily for the six month ended September 30, 210 due to expenditures related to coring and analysis and travel.
Interest expense for the three month period ended September 30, 2010, was $393,704 compared to interest expense of $283,102 for the corresponding period in 2009.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $669,814 for the six month period ended September 30, 2010 compared to net cash used by operating activities of $317,888 for the six month period ended September 30, 2009. The increase in cash used in operations is primarily due to changes in the fair value of our derivative liabilities.
Net cash provided by financing activities was $959,097 for the six month period ended September 30, 2010 compared to cash provided of $253,800 for the same period of 2009. During the six months ended September 30, 2010, we received $959,097in debt financing and paid $109,980 in shareholder loans. This compared to debt financing and shareholder loans of $253,800 for the similar period in 2009.
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 no 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, 2009 we identified material weaknesses in our internal controls which we viewed as an integral part of our disclosure controls and procedures. The material weakness is identified below and as of June 30, 2010 have been partially 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
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have 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
None.
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)
|
|
|
|
|
10.8
|
Agreement for Debt Settlement between Earth Search Sciences, Inc. and Larry Vance dated July 9
,
2009
|
|
|
|
|
10.9
|
Agreement for Debt Settlement between Earth Search Sciences, Inc. and Ken Danchuk dated July 9
,
2009
|
|
|
|
|
11.1
|
Agreement for Debt Settlement between Earth Search Sciences, Inc. and Ron McQueen dated July 9
,
2009
|
|
|
|
|
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)
|