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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 June 30, 2011
   
¨
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 Identification
Incorporation or Organization)
Number)
 
306 Stoner Loop Road, Lakeside, MT 59922
(Address of Principal Executive Offices, Including Zip Code)

Registrant's telephone number, including area code: (406) 751-7750


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 companyx

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 August 22, 2011: 201,792,060
 
 
 

 
EARTH SEARCH SCIENCES, INC.

TABLE OF CONTENTS

FORM 10-Q

QUARTER ENDED June 30, 2011

PART I

FINANCIAL INFORMATION


Item 1. Consolidated Financial Statements (Unaudited)
Page
     
 
Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011
3
     
 
Consolidated Statements of Expenses for the three months ended June 30, 2011 and 2010
4
     
 
Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010
5
     
     
 
Selected notes to consolidated unaudited financial statements
6-8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
9
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
11
   
Item 4T. Controls and Procedures
11


PART II

OTHER INFORMATION REQUIRED

Item 1. Legal Proceedings
12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
12
Item 3. Defaults Upon Senior Securities
12
Item 4. Submission of Matters of a Vote of Security Holders
12
Item 5. Other information
12
Item 6. Exhibits
12

 
 

 
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
June 30,
2011
   
March 31,
2011
 
             
ASSETS
           
Current assets:
           
Cash
 
  $ 687,813     $ 73,625  
Investment
    218,500       236,900  
Loan costs, net of accumulated amortization of $263,433 and $262,347 , respectively
    7,793       8,879  
Total current assets
    914,106       319,404  
                 
Intangible asset – trade name
    300       300  
TOTAL ASSETS
  $ 914,406     $ 319,704  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities:
               
Accounts payable
  $ 1,433,586     $ 1,431,274  
Accounts Payable – related parties
    408,656       408,656  
Accrued expenses
    5,509,849       5,291,347  
Current portion of notes payable
    1,628,440       1,628,440  
Derivative liability
    810,710       511,614  
Settlement obligation
    8,686,824       8,686,824  
Current portion of notes payable – related parties
    1,415,766       1,477,766  
Total current liabilities
    19,893,831       19,435,921  
                 
Convertible notes payable, net of discount of $777,442 and $725,858, respectively
    1,910,558       1,437,142  
                 
Total liabilities
    21,804,389       20,873,063  
              -  
                 
STOCKHOLDERS’ DEFICIT
               
Series C Convertible 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;
 201,792,060 and 200,687,890 shares issued and outstanding, respectively
    201,791       200,687  
Additional paid-in capital
    55,825,757       55,274,625  
Treasury Stock
    (200,000 )     (200,000  
Accumulated deficit
    (76,747,781 )     (75,859,921 )
Total stockholders’ deficit
    (20,889,983 )     (20,553,359 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 914,406     $ 319,704  
                 
See accompanying notes to unaudited consolidated financial statements.
 
 
-3-

 
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF EXPENSES
(UNAUDITED)

   
Three Months Ended June 30,
 
   
2011
   
2010
 
Operating expenses
           
Depreciation and amortization
  $ -     $ 262  
Research and Development expense
    -       100,000  
General and administrative
    484,875       466,925  
                 
Total expenses
    484,875       567,187  
                 
Loss from operations
    (484,875 )     (567,187 )
                 
Other income (expense)
               
Loss on change in market value of embedded derivative
    (109,603 )     249,316  
Unrealized loss on investment
    (18,400 )     -  
Interest expense
    (274,982 )     (173,012 )
                 
Net Loss
  $ (887,860 )   $ (490,833 )
                 
Basic and diluted:
               
Loss per share
  $ (0.00 )   $ (0.00 )
Weighted average common shares outstanding
    200,711,932       199,487,890  

See accompanying notes to unaudited consolidated financial statements.

 
 
-4-

 
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Three Months Ended
 
   
June 30,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(887,860)
     
(490,883)
 
Adjustments to reconcile net loss to cash used in operating activities:
               
Depreciation and amortization
   
-
     
262
 
Amortization of debt discount
   
137,909
     
49,325
 
Amortization of deferred finance costs
   
1,086
     
1,086
 
Change in fair value of embedded derivative
   
109,603
     
(249,316)
 
Common stock issued for services
   
40,000
     
54,000
 
Imputed interest
   
11,236
     
11,236
 
Unrealized loss on investment
   
18,400
     
-
 
                 
Changes in assets and liabilities:
               
Accounts payable and accrued expenses
   
180,470
     
112,647
 
Accrued interest – related parties
   
40,344
     
122,600
 
Prepaid expenses and other current asset
   
-
     
13,000
 
NET CASH USED IN OPERATING ACTIVITIES
   
(348,812)
     
(376,043)
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Repayment on related party debt
   
(62,000)
     
(45,500)
 
Proceeds from issuance of common stock
   
500,000
     
-
 
Proceeds from issuance of convertible notes
   
525,000
     
715,000
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
963,000
     
669,500
 
                 
NET INCREASE IN CASH
   
614,188
     
293,457
 
CASH AT BEGINNING OF PERIOD
   
73,625
     
89,789
 
CASH AT END OF PERIOD
 
$
687,813
   
$
383,246
 
                 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Interest paid
 
$
-
    $
-
 
Taxes paid
 
 $
      $
-
 
                 
Non-cash financing and investing activities:
               
Discount on notes payable from derivative liabilities
 
$
189,493
    $
-
 

See accompanying notes to unaudited consolidated financial statements.
 
 
-5-

 
 EARTH SEARCH SCIENCES, INC
NOTES TO CONSOLIDATED UNAUDITED 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, 2011. 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 2011 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 June 30, 2011 and had an accumulated deficit and a working capital deficit as of June 30, 2011. 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.

 
-6-

 
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 June 30, 2011 and March 31, 2011. As required by ASC 820, financial assets and liabilities are classified in their entity 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
June 30, 2011
 
 
Level 1
Level 2
 
Level 3
   
Total
 
Derivative liabilities
      $ 810,710     $ 810,710  
                     
 
March 31, 2011
 
 
Level 1
Level 2
 
Level 3
   
Total
 
Derivative liabilities
      $ 511,614     $ 511,614  
                     

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 3 fair value methodologies; that is, the Company’s pricing 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.

During 2010, we began investing in Silver Coins and we purchased 9,200 face at $19.43 per dollar. On the date of purchase, November 12, 2010 the coins were valued at $178,756. As of June 30, 2011 the value increased to $218,500.

Assets Measured at Fair Value on a Recurring Basis
June 30, 2011
 
 
Level 1
 
Level 2
   
Level 3
   
Total
 
Investment in silver coins
    $ 218,500           $ 218,500  
                         
 
March 31, 2011
 
 
Level 1
 
Level 2
   
Level 3
   
Total
 
Investment in silver coins
    $ 236,900       -     $ 236,500  
                           
The investments listed above are carried at fair value. The fair value amounts in current period earnings associated with the Company’s investments resulted from Level 2 fair value methodologies; that is, the Company is able to value the assets based on observable market data for similar instruments. This observable data includes the quoted vendor prices.

NOTE 5 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES

As of June 30, 2011, we had $2,688,000 in convertible notes payable, of which $525,000 was received during the three months ended June 30, 2011. 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 includes 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 $189,493 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. During the three months ended June 30, 2011 and 2010, $137,909 and $49,325, respectively, of the discount was amortized. At June 30, 2011, the valuation of the derivative liability was $810,710.

 
-7-

 
During the three months ended June 30, 2011, the Company recognized a loss on derivative liabilities of $109,603 as a result of the change in fair value of the derivative described above.

The following table summarizes the derivative liabilities included in the consolidated balance sheet:

Derivative Liabilities
     
Balance at March 31, 2011
  $ 511,614  
ASC 815-15 (EITF 00-19) Additions
    189,493  
Change in fair value
    109,603  
Balance at June 30, 2011
  $ 810,710  

The Company values its conversion option derivatives using the Black-Scholes option-pricing model. Assumptions used in valuing the derivative liability at June 30, 2011 include (1) 0.19% risk-free interest rate, (2) remaining contractual term of the respective convertible note agreements are the expected term, (3) expected volatility 250%, (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.

As of June 30, 2011, the outstanding balance, net of discount on these convertible notes was $1,910,558.

NOTE 6 - NOTES PAYABLE TO RELATED PARTIES

We financed our operations in part by funds received from shareholders. These advances are in the form of unsecured promissory notes and bear interest at rates ranging from 8% to 10%. Stockholder loans totaled $1,326,766 and $1,388,766 as of June 30, 2011 and March 31, 2011, respectively. The principal balance is included in notes to related parties, along with $89,000 convertible notes issued to related parties.

NOTE 7 - EQUITY

On May 26, 2011, the Company issued 1,000,000 common shares of ESSI valued at $40,000 using the grant-date quoted price of the stock.

On June 7, 2011, the Company issued 104,167 common shares of GSI valued at $500,000.

 
-8-

 
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 June 30, 2011.

We did not generate any revenue during fiscal year 2011, 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 during third quarter of 2011 and subsequent commercial development as early as 2012. 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.

 
-9-

 
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 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.

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.

 
-10-

 
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 June 30, 2011 or during 2010.

Depreciation and amortization expense was $0and $262 for the three month period ended June 30, 2011 and June 30, 2010 respectively.

General and administrative expenses were $484,875 for the three month period ended June 30, 2011, compared to $466,925 for the corresponding period of 2010. General and administrative expenses are higher primarily for the three month ended June 30, 2010 due to expenditures related to coring and analysis and travel.

Interest expense for the three month period ended June 30, 2011, was $274,982 compared to interest expense of $173,012 for the corresponding period in 2010.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $348,812 for the three month period ended June 30, 2011 compared to net cash used by operating activities of $376,043 for the three month period ended June 30, 2010. The increase in cash used in operations is primarily due to increased spending on drilling and coring and the start of operations in Wyoming.

Net cash provided by financing activities was $963,000 for the three month period ended June 30, 2011 compared to cash provided of $669,500 for the same period of 2010. During the three months ended June 30, 2011, we received $525,000 in debt financing, $500,000 in equity financing and paid $62,000 in shareholder loans. This compared to debt financing of $715,000 and the payment of shareholder loans of $45,500 for the similar period in 2010.

As of June 30, 2011, we held 9,200 face at $23.75. On the date of purchase, November 12, 2010 the coins were valued at $178,756. As of June 30, 2011 the value increased to $218,500.

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 PROCEDURES

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.
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.

 
-11-

 

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)
 
 
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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)

 
 
 
 
 
 
 

 
 
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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: August 22, 2011
/s/ Larry Vance
 
Larry Vance
 
Principal Executive Officer



Date: August 22, 2011
/s/ Tami Story
 
Tami Story
 
Principal Accounting Officer
 
 
 
 
 
 
 

 
 
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