MANAGEMENT'S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORPORATE
FOCUS
In
December, 1985 we acquired all of the outstanding shares of common stock of
a
privately held company known as Earth Search Sciences, Inc. (ESSI), a Utah
corporation formed on August 29, 1985. We issued 13,639,600 shares of
its common stock in exchange for ESSI's outstanding shares. This
merger was a reverse acquisition and accounted for as a pooling of
interests. Accordingly, the assets and liabilities of the two
companies were combined at their recorded net book values. ESSI's
principal assets were unpatented mining claims in Alaska that were acquired
from
ESSI's incorporators at a cost of $126,715. ESSI's operations were
the continuing operations of the Company, and ESSI was the entity which had
substance and control both before and after the merger.
We
have
four wholly-owned subsidiaries: Skywatch Exploration, Inc., Polyspectrum
Imaging, Inc., Geoprobe, Inc., and STDC, Inc. In addition, there are five
majority-owned consolidated subsidiaries: Earth Search Resources, Inc., Eco
Probe, Inc., ESSI Probe 1 LC, Petro Probe, Inc. and Terranet, Inc. All
subsidiaries except Petro Probe were inactive during fiscal 2006 and
2007.
The
Company utilizes 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.
In
the
fiscal years from 2004 to 2006 the Company's sensors were operated in the United
States and abroad. Contracts to operate the sensors in the United
States as an ecological, mining, agricultural, and hydrocarbon target
identification tool produced revenues of $302,901, $192,297 and $258,843, in
fiscal 2006, 2005, and 2004, respectively.
In
1997
we began a two-year contract with Noranda Minerals Inc. to provide hyperspectral
remote sensing data over multi-continents The agreements called for a series
of
flights for Noranda Mining and Exploration Inc. and its affiliates including
Falconbridge Limited (collectively, the "Noranda Group"). The agreements
provided the Noranda Group with an exclusive license to use the instruments
for
commercial mining exploration, as long as the Noranda Group continued to
purchase remote sensing services from the Company in certain specified
quantities. The Company was entitled to receive fees for services and
net smelter royalties or net profit interest royalties from certain discoveries
by the Noranda Group. The licensing agreement with the Noranda Group provided
a
$1,000,000 equity investment in ESSI by way of 200,000 preferred shares,
convertible into 1,000,000 shares of common stock and an option to purchase
1,000,000 shares of ESSI common stock at a price of $2.00 per share. Targets
were flown in Chile, Peru and the North West Territories in Canada.
Since
1997, the Company has also collected and holds a substantial archive of Probe
1
imagery from Kazakhstan, Australia, British Columbia, Ontario, Quebec, Chile,
Mexico, California, Nevada, Arizona, Idaho, Montana, and Utah. At the
present time the value of this data archive has not been independently appraised
nor is the value of this archive reflected in the financial
statements.
The
Company concluded a memorandum of agreement with Boeing that included the use
of
a unique Boeing aircraft possessing exceptional slow flight characteristics
to
be used in a variety of applications, the first being the flight over
Yellowstone National Park as part of a NASA/Yellowstone Ecosystems Studies
(Y.E.S.) project utilizing ESSI's Probe 1 hyperspectral imaging technology
to
collect one meter data to be utilized in addressing riparian
issues. Several test flights were performed during the period using
the Probe 1 technology onboard a Boeing heliocourier aircraft.
The
Company collected hyperspectral data for the Geosat Committee. The Geosat
committee was funded from contribution by major U.S. resource
companies. The Committee was operated by the University of Texas at
El Paso under Director, Dr. Rebecca Dodge. The project completed for
the Geosat's "Hyperspectal Group Shoot" provided Probe 1 hyperspectral imagery
to the oil and minerals exploration, environmental assessment, and agriculture
end-user community, for an evaluation by these communities of its application
potential.
The
Company teamed with the University of Idaho in a joint proposal to the Farm
Bureau and won a contract to overfly the Snake River Basin (Hell's
Canyon). The Company also collected hyperspectral data for the
control and eradication of noxious weed intrusion. The test results
were published and initial results proved that airborne hyperspectral imagery
is
a useful tool for control of weeds, as well as providing information regarding
economic indicators pertaining to forecasting crop yield.
The
Company collected hyperspectral data for Desert Research Institute ("DRI")
in
the Kelso Dunes area in southeastern California. The project
completed for DRI was to detect change in arid vegetation cover using
Hyperspectral data in the region known as the Providence
Mountains. Detection of disturbance in these regions would aid in
assessment of ecosystem status and global climate change. The remote sensing
data combined with ground measurements examined spectral changes occurring
concurrently with observed changes in percent green cover.
The
Company co-operated with the Dian Fossey Gorilla Fund International organization
to utilize hyperspectral remote sensing in a unique project to examine the
detail of vegetation in the gorillas' habitat in the jungles of
Rwanda. Hyperspectral imagery revealed the abundance and distribution
of the gorillas' principal foods in the Virungas. This information was used
to
determine the number of gorillas the habitat can support. National Geographic
Explorer chronicled the mission in a television documentary that was
subsequently played on numerous following dates.
In
1999
the company was approached by the US Navy to participate in a joint venture
to
acquire ownership of a proposed remote sensing satellite. Under the direction
of
Office of Naval Research's Naval Space Science and Technology Program Office,
the Naval EarthMap Observer (NEMO) satellite would be capable of meeting the
hyperspectral and panchromatic needs of many end users with timeliness and
spatial resolution improved over existing commercial systems. The Navy's
environmental models supporting operations in the littoral would be considerably
enhanced by hyperspectral imagery and data products provided by NEMO to improve
knowledge of the littoral environment with information on bathymetry, water
clarity and trafficability.
The
ONR
signed an Other Transaction with the Space Technology Development Corporation
(STDC) of Arlington, VA to develop NEMO in conjunction with the Defense Advanced
Research Projects Agency (DARPA) Dual Use Applications Program (DUAP). DUAP
is a
joint program of the Army, Navy, Air Force, DARPA, Director Defense Research
and
Engineering (DDR&E), and the Deputy Under Secretary of Defense for
International and Commercial Programs. Earth Search Sciences Inc.
subsequently acquired STDC and its prime contractor partner position with the
ONR. The project was to have a cost of approximately $150 million with the
private sector portion approximately one-half of that amount. Earth Search
Sciences Inc. undertook to meet the key funding milestone payments necessary
to
ensure progress of the project.
The
Hyperspectral Imager (HSI) would sample over a 30 km swath width with a 60
m
ground sample distance (GSD) with the option to go to 30 m GSD by utilizing
the
systems attitude control system to 'nod' (i.e. use a satellite pitch maneuver
to
slow down the ground track of the field of view). A 5m panchromatic imager
will
provide simultaneous high spatial resolution imagery (black & white
photography). A sun
synchronous
circular orbit of 600 km will allow continuous repeat coverage of the whole
earth in 7 days providing hyperspectral data over a 1,000,000 sq. km area each
day.
The
combined HSI and panchromatic images would satisfy a number of requirements
of
the commercial and science communities for moderate spatial and high spectral
resolution remote sensing data over land and water such as agriculture,
forestry, environmental monitoring , geology/mineralogy, hydrology and land
use.
Specific areas of interest for the Navy included bathymetry, water clarity,
currents, oil slicks, bottom type, atmospheric visibility, tides,
bioluminescence, beach characterization, underwater hazards, total column
atmospheric water vapor, and detection and mapping of subvisible
cirrus.
It
was
anticipated that NEMO would be launched in early 2002. Its subsequent data
flow
would be in the order of 56 gigabytes per day. Much of the commercial
information was to be marketed through Earth Search Sciences Inc. Under the
original agreement with the ONR, STDC needed to raise private industry funds
of
approximately $125,000,000 in order to complete, launch and operate the
hyperspectral imaging satellite and instrument. Subsequent to March 31, 2002,
STDC received notification from the ONR that it would not be giving STDC an
extension to the agreement. The payment of approximately $8,216,424 of STDC
accounts payable due subcontractors and vendors on the NEMO program is being
resolved.
These
examples and others indicated the world-wide interest in the technology and
a
bright future for the industry and Company. Unfortunately the advent of the
September 11, 2001 tragedy changed the approach of individual countries to
the
acceptance of data collection over their borders and an industry-wide slow
down
occurred as a result. The commercial interest in developing satellite technology
also changed as investors decided the risk level had dramatically increased
due
to international tensions.
CURRENT
BUSINESS
As
a
result of the changes in the market for geological remote sensing data, the
Company changed its strategy from operating as a service provider to
establishing a group of subsidiary companies focused on specific market
applications. Petro Probe, Inc. was a new subsidiary company formed for the
oil
& gas industry while Geo Probe, Inc. was formed for mineral
exploration.
The
resurgence of the mining industry and the emphasis for new sources of supply
for
oil and gas in recent years created a greater interest in using exploration
tools that were faster and more accurate. The new subsidiary companies would
seek joint ventures with partners who could provide technologies, human and
capital resources to synergize with the Company's assets. This strategy will
lead to the creation of more demand for ESSI's hyperspectral remote sensing
services while providing the company with prospects for more diversified revenue
generation.
The Company experiences the highest demand
for its collection services
April through October in the Northern
Hemisphere and October through April in
the Southern Hemisphere. Contracts are being
sought in the following market segments: mining, hydrocarbon, agriculture,
ecological and environmental monitoring. With the advent of the world-wide
recognition for control of global-warming issues the Company will commence
the
development of an environmentally focused marketing plan to portray the
advantages of airborne hyperspectral remote sensing to these market
segments.
SUBSIDIARY
COMPANIES
Petro
Probe, Inc.'s goal is to develop the competitive advantages of its resource
mapping capability, combine that with conventional hydrocarbon exploration
tools
and then apply newer value-added technologies to identify good oil and gas
properties.
Geo
Probe, Inc. will use the hyperspectral mapping technology to find new mineral
deposits and monitor the environmental impact of active and past-producing
mines, mills, smelters, refineries and pipelines. The Company’s
mapping agreement with Noranda Minerals provided the ability to develop and
prove these new approaches to mineral exploration.
Geo
Probe
has also attracted potential new alliance partners, Advanced Exploration
Inc. and Geological Business Inc., two Canadian companies, have
discussed the formation of new exploration and mine
development business with the Company. Further discussions are
forthcoming.
Eco
Probe, Inc. was formed to pursue hyperspectral remote sensing applications
in
the environmental industry. The Company has strived to take an
industrial leadership role in working with
U.S. government agencies such as the
Environmental Protection Agency, the Bureau of Land Management and the Office
of
Surface Mining on setting up applications for commercial monitoring of
mineral industries, forest inventory and health issues, slope stability
assessment and the spread of noxious weeds.
ESSI
and
Eco Probe, Inc. have performed important hyperspectral surveys and research
in
aquatic and vegetation-related projects. The environmental markets are vast,
however the Company's current lack of resources dictates continued priority
be
assigned to mineral and hydrocarbon exploration.
The
Company formed Terranet, Inc. to act as an imagery product distribution conduit
and perform as the Company’s e-commerce content provider.
Recognizing that
imagery collected today and yesterday could be
sold repeatedly to multiple end users the Company's subsidiary company,
Terranet, completed the copyright design and testing of a database and internet
centered marketing system. Terranet anticipates new joint venture partners
to be
available when the hyperspectral industry begins to grow again.
Of
the
other ESSI wholly-owned subsidiaries: Skywatch Exploration, Inc., Polyspectrum
Imaging, Inc., and Space Technology Development Corp.are inactive. Of the other
majority-owned consolidated subsidiaries: Earth Search Resources, Inc. and
ESSI
Probe 1 LC are inactive.
Historically
ESSI's core business has been focused on collecting and processing airborne
hyperspectral data for the production of detailed surface maps. These maps
indicate the exact chemical and physical characteristics of all the materials
exposed on the surface of the Earth. The Company was one of the early pioneers
in developing the technology globally and has now served a number of clients
in
various countries.
The
company realizes that opportunity exists in using the technology to discover
properties for mineral and hydrocarbon exploitation. It was a natural growth
step to create a strategy of developing subsidiary companies in key natural
resource markets wherein exploration discoveries could be maximized by
"in-house" development. The company is currently pursuing these avenues in
the
mineral and oil and gas industries.
RESULTS
OF OPERATIONS
Our
data
collection aircraft was grounded for repairs for FAA required maintenance in
2006 and was not operational during the first two fiscal quarters of
2008. However, we generated revenue from the sale of certain
prove-data previously gathered. As a result, our revenues for the
three and six months ended September 31, 2007 was $22,750 and $22,750,
respectively, compared to revenues of $43,250 and $91,429 for the same periods
of 2006.
Late
fees
related to a settlement agreement were $1,006,668 and $1,866,708 for the three
and six month periods ended September 30, 2007, compared to $529,687 and
$977,749 for the same periods in 2006. The late fee is based on a 5% cumulative
fee, which increases each quarter due to the compounding effect.
Depreciation
and amortization expense was $32,966 and $67,905 for the three and six month
periods ended September 30, 2007, compared to $51,925 and $51,925 for the same
periods of 2006.
General
and administrative expenses were $318,496 and $640,535 for the three and six
month periods ended September 30, 2007, compared to $273,353 and $1,064,432
for
the corresponding periods of 2006.
Interest
expense for the three and six month periods ended September 30, 2007 was
$110,354 and $222,656, compared to interest expense of $310,908 and $424,446
for
the corresponding period in 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash
used in operating activities was $329,967 for the six months ended September
30,
2007 compared to net cash provided by operating activities of $13,933 for the
six months ended September 30, 2006 resulting primarily from a net loss of
$2,760,005 during the six months ended September 30, 2007, net of certain
non-cash expenses.
Net
cash
provided by financing activities was $316,130 for the six months ended September
30, 2007 compared to cash used of $49,007 for the same period of
2006.
During
the six months ended September 30, 2007, two stockholders, who are also the
primary management of the Company, loaned us $336,500. In addition, we received
$250,000 of cash from a subscription receivable both of which accounted for
the
cash provided by financing activities.
We
are
experiencing working capital deficiencies because of operating losses. We have
operated with funds received from the sale of common stock, the issuance of
notes and limited operating revenue. Our ability to continue as a going concern
is dependent upon continued debt or equity financings until or unless we are
able to generate cash flows to sustain ongoing operations. We plan to increase
the number of revenue producing services through the 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.
FUTURE
OPERATIONS
The
Company is actively researching new exploration and exploitation technologies
to
complement and integrate with its hyperspectral capabilities.
General
Synfuels International, Inc., (GSI) a Nevada private company, owns the
world-wide proprietary rights, patent, technology, construction plans and
materials and operational capability for a gasification process recover the
oil
and gas from oil shale. Petro Probe, Inc. signed a non-exclusive license
agreement with GSI to obtain the use of these rights in a world-wide territory.
PPI will pay a license fee in the amount of Five Hundred Thousand United States
Dollars ($500,000) and shall issue to GSI 500,000 fully paid and non-assessable
shares of PPI Common Stock, $.001 par value per share. PPI also
agreed to assign to GSI an overriding net revenue interest of five and one-half
percent (5 %) of the hydrocarbonaceous products produced by PPI, payable
quarterly.
PPI
is
examining various oil shale sites in Colorado and Utah for a test plant. Five
acres of premium oil shale land is sought. The test plant is budgeted for
approximately $1.5 million as a first stage development cost. This will prove
the technology. The second and third stages will cost approximately $8 million
more at which time the plant could operate at full capacity. The time line
for
completion of all stages is one year.
In
its
search for new complementing technologies, PPI encouraged the creation of an
alliance with two other companies in oil shale R&D. Independent Energy
Partners, Inc. (IEP) and Phoenix Wyoming Inc., (PWI) both Colorado private
companies, have their own non-competitive interests in oil shale. IEP owns
the
exclusive rights to a broad, patented Geothermic Fuel CellTM (GFC) method,
(US
Patent No. 6,684,948 B1-Apparatus and Method For Heating Subterranean Formations
Using Fuel Cells), to economically produce oil and natural gas from
unconventional resources such as oil shale, while producing electricity as
a
byproduct. IEP also has acquired the mineral rights on property in
Rio Blanco County, Colorado on some of the richest "Mahogany Zone" oil shale
property in the world, holding an estimated 1.4-2.4 billion barrels of oil.
PWI
owns certain proprietary intellectual property and methods designed to bring
the
advantages of microwave technology to an oil shale borehole. This alliance
effort is being examined by the parties. Continuing its interest to maintain
an
industry leadership positioning hyperspectral work ESSI is developing a joint
venture with Intellisense Corporation to design and construct a third generation
hyperspectral instrument design. This design is proposed in patent pending
application #0050046822 which the Company is negotiating an LOI position for
purchase. The new instrumentation would allow for faster, less expensive and
more precise data collection.
The
capability to design and maintain new technologies is key to the Company's
success in future operations. It will be a vital component to allow continuing
exploration and exploitation of the Earth's natural resources.
The
Company has the knowledge and experience to build on the opportunities being
presented at this time.
Each
subsidiary will focus on a specific sector of commercial remote sensing and
have
a management team with relevant skills and expertise. The Company
will provide a license to use the Company's hyperspectral instruments and
processing support. This strategy creates a ready market for the Company, as
well as positioning the Company to receive a royalty from any resource
development that occurs as a result of the subsidiaries' use of the Company's
instruments and technology. Additional capital will be raised for each
subsidiary by means of private placements or public offerings.
The
Company's intent is to create partnerships, strategic alliances, mergers or
acquisitions for the subsidiaries as the most expeditious and cost-effective
way
to grow the commercial hyperspectral remote sensing market.
The
Company's near-term plans are to continue pursuing:
1. contracts
that produce revenues from the application of remote sensing;
2. the
development of additional miniaturized remote sensing instruments and newer
generation airborne instruments to replace the current PROBE-1
model;
3. the
integration of other advanced technology exploration instruments with
hyperspectral technology to offer clients a "one-stop" convenience;
4. the
development of promising mineral, oil and gas properties;
5. the
acquisition of licenses or options to new technologies for minerals or oil
and
gas production that can assist the company to become a resource developer and
producer as well as an exploration oriented business.
The
company will continue to develop a market for its securities under the new
trading symbol ESSE.
LITIGATION
We
entered into a civil law suit in the United States District Court for the
Eastern District of Virginia as a plaintiff along with our subsidiary company,
Space Technology Development Corporation. The Company charged that The Boeing
Company caused the plaintiffs substantial damages as a direct result of their
breach of the covenant of good faith and fair dealing.
We
were
in dispute with another party over a leaseback purchase agreement for a
Hyperspectral Probe. On March 23, 2005, ESSI entered into a
settlement agreement (2005 Settlement Agreement) with Accuprobe to return the
airborne hyperspectral sensor (Probe) and to settle the outstanding debt
obligations under the related capital lease. Under this agreement, ESSI was
required to return the Probe on or before August 31, 2005, and did so in January
2007. As the Probe was not returned by the August 2005 due date, ESSI
was charged a shipping, handling and disposition fee of
$250,000. Interest related to the $250,000 began accruing on
September 2, 2005 at an annual rate of prime plus 4%. In addition,
rent is being accrued at $250,000 per year beginning April 10,
2000. Interest on unpaid rent accrued at a rate of prime plus 2%
through August 31, 2005 and was due quarterly. After August 31, 2005, interest
related to the unpaid rent ceased and was replaced with a 5% late fee calculated
on the entire balance due at the end of each month.
We
returned the Probe in January 2007, however, we have been unable to reach a
final settlement and continue to accrue interest, rents and late fees under
the
2005 Settlement Agreement. Under the 2005 Settlement Agreement, we had accrued
$7,440,687 in rents, interest and late fees as of September 30,
2007.