Washington, D.C. 20549
EARTH SEARCH SCIENCES, INC.
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.
EARTH SEARCH SCIENCES, INC.
TABLE OF CONTENTS
FORM 10-Q
QUARTER ENDED December 31, 2009
PART I FINANCIAL INFORMATION |
| Item 1. Consolidated Financial Statements (Unaudited) | Page |
| | | |
| | Consolidated Balance Sheets as of December 31, 2009 and March 31, 2009 | 3 |
| | | |
| | Consolidated Statements of Expenses for the three and nine months ended December 31, 2009 and 2008 | 4 |
| | | |
| | Consolidated Statements of Cash Flows for the nine months ended December 31, 2009 and 2008 | 5 |
| | | |
| | Consolidated Statement of Changes in Stockholders’ Deficit for the nine months ended December 31, 2009 | 6 |
| | | |
| | Selected notes to consolidated unaudited financial statements | 7-8 |
| | | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 9-12 |
| | | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 12 |
| | |
| Item 4T. Controls and Procedures | 12 |
PART II OTHER INFORMATION REQUIRED |
| Item 1. Legal Proceedings | 13 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 13 |
| Item 3. Defaults Upon Senior Securities | 13 |
| Item 4. Submission of Matters of a Vote of Security Holders | 13 |
| Item 5. Other information | 13 |
| Item 6. Exhibits | 13 |
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | December 31, 2009 | | | March 31, 2009 | |
| | | | | | | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 110,263 | | | $ | 70,618 | |
| Prepaid expenses | | | 1,250 | | | | 13,448 | |
| Loan costs, net of accumulated amortization of $261,261 and $258,003, respectively | | | 14,309 | | | | 17,567 | |
| Total current assets | | | 125,822 | | | | 101,633 | |
| | | | | | | | | |
| Property and equipment, net accumulated depreciation of $1,117,790 and $1,040,180, respectively | | | 24,362 | | | | 102,247 | |
| Intangible asset – patent | | | 25,300 | | | | 25,300 | |
| Deposits | | | 887,076 | | | | 914,516 | |
| TOTAL ASSETS | | $ | 1,062,560 | | | $ | 1,143,696 | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 1,427,467 | | | $ | 1,513,631 | |
| Accounts Payable – related parties | | | 413,132 | | | | 389,968 | |
| Accrued expenses | | | 4,226,638 | | | | 3,395,875 | |
| Current portion of notes payable | | | 2,028,440 | | | | 2,128,440 | |
| Settlement obligation | | | 8,686,824 | | | | 8,686,824 | |
| Current portion of notes payable – related parties | | | 1,745,716 | | | | 2,557,258 | |
| Total current liabilities | | | 18,528,217 | | | | 18,671,996 | |
| | | | | | | | | |
| Long term portion of notes payable | | | - | | | | 500,000 | |
| Long term portion of notes payable – related parties | | | - | | | | 500,000 | |
| | | | | | | | | |
| Total liabilities | | | 18,528,217 | | | | 19,671,996 | |
| | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS’ DEFICIT | | | | | | | | |
| Preferred stock, 300,000,000 shares authorized, $.001 par value, 31,250,000 and 0 issued and outstanding, respectively or none issued and outstanding | | | 31,250 | | | | - | |
| Common stock, $.001 par value; 300,000,000 shares authorized; 199,487,890 and 194,655,705 shares issued and outstanding, respectively | | | 199,487 | | | | 194,654 | |
| Additional paid-in capital | | | 55,188,118 | | | | 53,315,070 | |
| Treasury Stock | | | (200,000) | | | | (200,000) | |
| Accumulated deficit | | | (72,684,512 | ) | | | (71,838,024 | ) |
| Total stockholders’ deficit | | | (17,465,657 | ) | | | (18,528,300 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | | $ | 1,062,560 | | | $ | 1,143,696 | |
| | | | | | | | | |
| | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF EXPENSES
(UNAUDITED)
| | | | |
| Three months ended December 31, | | Nine months ended December 31, |
| | 2009 | | 2008 | | 2009 | | 2008 |
| | | | | | | | | | | | |
| Revenues | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | |
| Depreciation and amortization | | 25,962 | | | 25,962 | | | 77,886 | | | 51,924 |
| General and administrative | | 382,208 | | | 6,410,526 | | | 1,121,375 | | | 6,686,232 |
| | | | | | | | | | | | |
| Total expenses | | 408,170 | | | 6,436,488 | | | 1,199,261 | | | 6,738,156 |
| | | | | | | | | | | | |
| Loss from operations | | (408,170) | | | (6,436,488) | | | (1,199,261) | | | (6,738,156) |
| | | | | | | | | | | | |
| Gain on conversion of debt | | - | | | | | | 781,250 | | | - |
| Interest expense | | (146,230) | | | (153,129) | | | (428,475) | | | (272,708) |
| | | | | | | | | | | | |
| Net loss | $ | (554,400) | | $ | (6,589,617) | | $ | (846,486) | | $ | (7,010,864) |
| | | | | | | | | | | | |
| Basic and diluted: | | | | | | | | | | | |
| Loss per common share | $ | (0.00) | | $ | (0.04) | | $ | (0.00) | | $ | (0.05) |
| Weighted average common shares outstanding - basic and diluted | | 199,487,890 | | | 156,926,195 | | | 199,487,890 | | | 134,276,016 |
See accompanying notes to unaudited consolidated financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Nine Months Ended | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (846,486) | | | $ | (7,010,864) | |
| Adjustments to reconcile net loss to cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 77,886 | | | | 51,924 | |
| Amortization of deferred finance costs | | | 3,258 | | | | 14,008 | |
| Gain on conversion of debt | | | (781,250) | | | | - | |
| Common stock issued for services | | | 96,644 | | | | 843,004 | |
| Common stock issued for vendor payable | | | - | | | | 129,969 | |
| 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 | |
| Imputed interest | | | 93,738 | | | | 61,117 | |
| | | | | | | | | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | | 715,214 | | | | (170,574) | |
| Accounts payable – related party | | | 25,583 | | | | 60,199 | |
| Accrued interest – related parties | | | 149,402 | | | | 18,478 | |
| Deposits | | | - | | | | (652,056) | |
| Prepaid expenses and other current asset | | | 12,198 | | | | (11,960) | |
| NET CASH USED IN OPERATING ACTIVITIES | | | (453,813) | | | | (519,999) | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Cash paid for equipment | | | (95,000) | | | | - | |
| Deposits | | | - | | | | (652,056) | |
| | | | | | | | | |
| NET CASH USED IN INVESTING ACTIVITIES | | | (95,000) | | | | (652,056) | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from stockholder loans, net | | | (61,542) | | | | 3,000 | |
| Repayment on related party debt | | | - | | | | (88,541) | |
| Proceeds from issuance of common stock | | | - | | | | 1,363,500 | |
| Proceeds from issuance of convertible notes | | | 650,000 | | | | - | |
| Principal payments on short-term debt | | | - | | | | (103,686) | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 588,458 | | | | 1,174,273 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH | | | 39,645 | | | | 2,218 | |
| CASH AT BEGINNING OF PERIOD | | | 70,618 | | | | 8,821 | |
| CASH AT END OF PERIOD | | $ | 110,263 | | | $ | 11,039 | |
| | | | | | | | | |
| | | | | | | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | |
| Interest paid | | $ | 56 | | | $ | 169,192 | |
| Taxes paid | | | - | | | | - | |
| | | | | | | | | |
| Non-cash financing and investing activities | | | | | | | | |
| Common stock issued for asset | | $ | - | | | $ | 5,300 | |
| Deposit included in account payable | | $ | 27,440 | | | $ | 119,881 | |
| Prepaid compensation in account payable | | $ | - | | | $ | 75,000 | |
| Preferred stock issued for convertible related party debt | | $ | 1,250,000 | | | $ | - | |
| | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements.
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
Nine months ended December 31, 2009
(Unaudited)
| | | | | | | | | | Additional | | | | | | |
| | Preferred | | Stock | | Common | | Stock | | Paid-in | | Treasury | | Retained | | |
| Description | Stock | | Amount | | Shares | | Amount | | Capital | | Stock | | Deficit | | Total |
| | | | | | | | | | | | | | | | |
| Balances at March 31. 2009 | - | | - | | 194,655,705 | | 194,654 | | 53,315,070 | | (200,000) | | (71,838,024) | | (18,528,300) |
| | | | | | | | | | | | | | | | |
| Imputed Interest | | | | | | | | | 93,736 | | | | | | 93,736 |
| Issue Preferred stock for convertible debt | 15,625,000 | | 15,625 | | | | | | 453,125 | | | | | | 468,750 |
| Issue Preferred stock for convertible related party debt | 15,625,000 | | 15,625 | | | | | | 1,234,375 | | | | | | 1,250,000 |
| Issue Common stock for services | | | | | 4,832,188 | | 4,832 | | 91,812 | | | | | | 7,001 |
| Net Loss | | | | | | | | | | | | | (846,486) | | (846,486) |
| Balances at December 31, 2009 | 31,250,000 | | 31,250 | | 199,487,893 | | 199,487 | | 55,188,118 | | (200,000) | | (72,684,510) | | (17,465,656) |
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-K for the fiscal year ended March 31, 2009. 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 2009 as reported in the 10-KSB 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 nine months ended December 31, 2009 and had an accumulated deficit and a working capital deficit as of December 31, 2009. 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 – 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 are 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 is settled with preferred stock and therefore do not meet the criteria for troubled debt restructuring or a modification of debt.
The preferred stock is convertible at $0.08 cents 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. The conversion feature was evaluated under FASB ASC 815 to determine whether it should be bifurcated and recorded as a derivative liability. Based on this evaluation, the embedded feature is clearly and closely related to the host contract and is therefore not bifurcated under the appropriate accounting guidance. As a result, there is no derivative liability.
NOTE 4 - EQUITY
On November 15, 2009, the Company issued 1,482,188 shares of common stock valued at $29,644 for consulting services. Also on November 15, 2009 the Company issued 3,000,000 shares of common stock valued at $60,000 for compensation expense. The value of the stock was based on the quoted market price on the measurement date, which was primarily the date of grant.
NOTE 5 - DEBT
On September 18, 2009 we issued $400,000 of 10% promissory notes.
On May 22, 2009 our subsidiary General Synfuels International issued $250,000 of 10% convertible promissory notes. These notes will automatically convert into GSI, at a price equal to 70% of the purchase price per share paid by equity investors, upon an equity financing in GSI of at least $3,000,000. The notes contain a change of control feature and become due and payable at 1.5 times the principal amount upon a change of control. We evaluated the conversion feature under FASB ASC 815 and determined that the conversion feature should not be bifurcated and therefore there is no derivative liability.
In connection with the notes, we issued a warrant that allows the debt holder to purchase $250,000 in GSI’s Series A Preferred Stock at fair market value. The warrants allow the note holder to purchase GSI Preferred stock at the fair market price. Consequently, there was no value assigned to the warrant.
NOTE 6 – SUBSEQUENT EVENTS
The Company evaluated subsequent events through February 16, 2010 and determined there were none requiring disclosure.
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 Petro Probe were inactive during fiscal 2007 and 2008. General Synfuels International became active during the quarter ending December 31, 2008.
We did not generate any revenue during fiscal year 2008, have no current business operations and are currently focused on two potential business ventures.
Effective December 14, 2009, Luis F. Lugo and Charles G. Bridge resigned as the Chief Executive Officer and Chief Financial Officer of Earth Search Sciences, Inc. (the “Company”) respectively. Both Mr. Lugo and Mr. Bridge will continue with their positions as President and CEO, and Chief Financial Officer of Earth Search Sciences wholly own subsidiary General Synfuels..
There were no disagreements between Mr. Lugo or Mr. Bridge and any officer or director of the Company.
Upon the resignation of Mr. Lugo, Mr. Larry Vance adopted the role of Chief Executive Officer of the Company effective December 14, 2009. Mr. Vance, along with The Board of Directors of the company, has initiated immediately the search for Mr. Lugo’s replacement by an individual with experience in the core business of Earth Search Sciences that is Hyperspectral technology as well as mineral discoveries.
Mr. Lugo and Mr. Bridge will focus on the continuous development of General Synfuels as it has increased substantially its business activities and requires full attention of these officers.
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 2009 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. 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 15th 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 cents 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 $8 million as a first stage development cost. The purpose of this plant is to prove certain operating variables.
During the quarter ended December 31, 2009, we held $887,076 in deposits related to the development of a plant related to the oil shale gasification process acquired through GSI. During the quarter, nothing was paid with the balance of $40,020 recorded as accounts payable. 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 nine months ended December 31, 2009 or 2008.
Depreciation and amortization expense was $77,886 for the nine month period ended December 31, 2009 and December 31, 2008.
General and administrative expenses were $1,121,375 for the nine month period ended December 31, 2009, compared to $6,686,232 for the corresponding period of 2008. General and administrative expenses are higher primarily for the nine month ended December 31, 2008 is due to the acquisition of General Synfuels International, Inc.
Interest expense for the nine month period ended December 31, 2009, was $428,475 compared to interest expense of $272,708 for the corresponding period in 2008.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $453,813 for the nine month period ended December 31, 2009 compared to net cash used by operating activities of $1,172,055 for the nine month period ended December 31, 2008. The decrease in cash used in operations is primarily due to compensation expense related to the acquisition of GSI.
Net cash used by investing activities was $95,000 for the nine month ended December 31, 2009 compared to $0 for the nine month period ended December 31, 2008. The increase in cash used in investing is entirely due to deposit related to our oil shale recovery plant.
Net cash provided by financing activities was $588,458 for the nine month period ended December 31, 2009 compared to cash provided of $1,174,273 for the same period of 2008. During the nine months ended December 31, 2009, we received $650,000 in debt financing. This compared to cash proceeds from a private placement of $1,363,500 and debt financing and shareholder loans of $243,000 for the similar period in 2008 that was offset by payments on debt and financing costs of $192,227.
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 December 31, 2009 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
On November 5, 2009, the Company issued 1,482,188 shares of common stock valued at $29,644 for consulting services and 3,000,000 shares of common stock valued at $60,000 for compensation expense. The value of the stock was based on the quoted market price on the measurement date, which was primarily the date of grant.
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) |
