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| ESSE.OB > SEC Filings for ESSE.OB > Form 10-K on 26-Jun-2009 | All Recent SEC Filings |
26-Jun-2009
Annual Report
Our MD&A is provided as a supplement to our audited financial statements to help provide an understanding of our financial condition, changes in financial condition and results of operations.
Results of Operations
Our aircraft was grounded in 2006 for required FAA repairs and maintenance and
remained grounded through the issuance of this report. As a result, we have not
generated any revenue from our Hyperspectral remote sensing in fiscal year 2009
and 2008.
General and administrative costs were $7,737,533 in fiscal year 2009 compared with $1,454,008 in 2008. This increase was primarily due to the acquisition of 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 GSI was dormant. The $5,494,700 value in excess of the historical cost of the asset was recorded as compensation expense.
Interest expense was $654,867 in fiscal year 2009 compared to $520,850 in 2008. Our interest expense primarily consists of interest from our notes payable and related party debt.
Late fees related to settlement agreement were zero in fiscal year 2009 compared to $3,043,230 in fiscal year 2008. On March 23, 2005, we entered into a settlement agreement (2005 Settlement Agreement) with Accuprobe to return an airborne hyperspectral sensor (Probe) and to settle the outstanding obligations under the related capital lease. Under the 2005 Settlement Agreement, we were required to return the Probe on or before August 31, 2005. Due to continuing disputes over various issues, the probe was not returned until 2007. As the Probe was not returned by the August 2005 due date, we were subject to a shipping, handling and disposition fee of $250,000. In addition, we were subject to interest charges that began accruing on September 2, 2005 at an annual rate of prime plus 4%; rent on the probe of $250,000 per year beginning April 10, 2000 with interest on any unpaid rent accruing at a rate of prime plus 2% through August 31, 2005. 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.
Because we were unable to reach Accuprobe and make arrangements for the return of the probe, in January 2007, we shipped the probe to an acquaintance of Accuprobe with instructions to hold the probe until Accuprobe provided further instructions. We obtained confirmation in December 2007 that Accuprobe had contacted the acquaintance and instructed them to begin certain repairs and calibrations on the probe. As a result of this confirmation, we discontinued accruing rent, interest and late fees on the probe.
The estimated settlement obligation did not increase as of March 31, 2009 compared to the March 31, 2008 balance. ESSI continues to work for a resolution to this obligation.
We recognized a net loss of $8,496,248 in fiscal year 2009 compared with a net loss of $5,106,887 in 2008. This significant change in income was due primarily to the acquisition cost of $5,494,700 for GSI in fiscal 2009, discussed in Liquidity and Capital Resources.
Liquidity and Capital Resources
At March 31, 2009, we had $70,618 of cash and cash equivalents and a working
capital deficit of $18,570,363. During fiscal year 2009, we used $832,476 in
operating activities, resulting primarily from payments for salaries,
services. Net cash used in operating activities was $452,202 in 2008
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, who were also shareholders and/or Directors. 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. ESSI is currently negotiating a restructuring of terms. At ESSI's election, each promissory note payable can be converted into ESSI common stock at a 40% discount to the average trading price of ESSI common stock 5 days prior to the emission of payment. Because this transaction was between related parties, the patent asset was recorded at its historical cost of $5,300 and the remaining value of $5,494,700 was recorded as compensation expense for the period ended September 30, 2008, as the shareholders didn't contribute any additional assets, tangible or intangible of value.
In addition, ESSI evaluated the conversion option of the promissory note under SFAS No. 133 and EITF 00-19 and determined that the feature does not have characteristics of a liability because the conversion is not at the note holder's option.
Net cash used by investing activities was $770,000 in 2009 as compared to $0 in 2008, the increase in cash used in investing is primarily due to deposit related to our oil shale recovery prototype .
Net cash provided by financing activities was $1,664,273 in 2009 as compared to $437,841 in 2008 with the increase due to increased cash from sales of our common stock totaling $1,363,500 as well as proceeds from convertible notes of $390,000.
We do not intend to pay cash dividends to the holders of its common stock and intends to retain future earnings to finance the expansion and development of its business.
As shown in the accompanying financial statements, we incurred losses from operations of $7,841,381 and $4,601,086 for the years ended March 31, 2009 and 2008, respectively and we have an accumulated deficit of $71,838,024 and negative working capital of $18,570,363 as of March 31, 2009. These conditions raise substantial doubt as to our ability to continue as a going concern. Management is trying to raise additional capital through sales of stock. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
There can be no assurance that additional capital beyond the amounts currently forecasted will be required or that any such required additional capital will be available on reasonable terms, at such time or times as required by the Company.
Critical Accounting Policies
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We evaluate long-lived assets to determine potential impairment by
comparing the carrying amount to the undiscounted estimated future cash flows of
the related assets.
We issue stock as compensation to employees and outside consultants for services provided to the company. Employee share-based awards are accounted for in accordance with SFAS 123(R), which requires us to measure the cost of employee services received based on the grant-date fair value of the award. We account for non-employee share-based awards in accordance with EITF No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquisition, or in Conjunction with Selling, Goods or Services."
Off Balance Sheet Arrangements
None.
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