LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity have been proceeds generated by the sale of our common stock, convertible debentures, and preferred stock to private investors, and sales of noncontrolling interests in limited partnerships. During the three months ended March 31, 2008, our cash decreased by $241,478 to $263,540. Of the decrease in cash, substantially all was used by operating activities.
Operating Activities
Cash flows from operating activities resulted in deficit cash flows of $240,366 for the three months ended March 31, 2008, as compared with deficit cash flows of $1,479,156 for the three months ended March 31, 2007.
For the three months ended March 31, 2008, cash flows from operating activities resulted in deficit cash flows of primarily due to a net loss of $897,256, plus non-cash charges of $604,045, an increase in liabilities of $178,920, and a decrease in accounts payable of $722,606. The most significant drivers behind the decrease in our non-cash working capital were charges for common stock issued for services of $101,250, and $484,623 in write-offs of oil and gas properties.
For the three months ended March 31, 2007, cash flows from operating activities resulted in deficit cash flows of primarily due to a net loss of $735,616, plus non-cash credits of $32,748, a decrease in prepaid expenses of $27,764, an increase in current assets of $15,950, and a decrease in accounts payable of $722,606.
Investing Activities
Cash used for investing activities was $0 for the three months ended March 31, 2008. Cash used in investing activities was $8,326 for the three months ended March 31, 2007 relating to an increase in oil and gas properties.
Depending on our available funds and other business needs, it is our intention to (i) engage in fee for service activities, (ii) engage in a farm-in strategy during the next twelve months in which we make small investments in the exploration projects of others, and (ii) to complete land acquisition relating to the West Deweyville Prospect and to farm-out such prospect. There is no assurance we will have the financing to pursue this strategy or if pursued that it will be successful in developing reserves of hydrocarbons.
Financing Activities
For the three months ended March 31, 2008, cash used by financing activities was $1,112, related to the repayment of loan. For the three months ended March 31, 2007, cash provided by financing activities was $449,963 comprised of a private placement of equity securities and warrants to an investor totaling $100,000, proceeds from noncontrolling interest in limited partnership of $329,963, and a loan from officer of $20,000. In April 2008, we were successful in raising $500,000 through the sale of equity.
Future Needs
Our management has concerns as to the ability of our company to continue as a going concern in the absence of raising additional equity capital, debt financing or obtaining significant new fee for service business. We believe that our available cash is inadequate to support our month-to-month obligations for the next twelve months. Establishing ownership or other interests in natural resource exploration projects will require significant capital resources.
Our current business plan for 2008 calls for us to farm-in to eight to twelve prospects and farm-out the West Deweyville Prospect we have been developing. This business plan calls on our company to raise $4 to $6 million dollars. If we are unable to raise such funding, we will not be able to act on this business plan. To the extent we raise a lesser amount, we will only be able to act on a portion of our business plan.
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Pursuant to our licensing agreement and a services agreement with the Institute, we are required to pay the Institute minimum annual fees of at least $600,000. In December 2007, we entered into an agreement with the Institute, pursuant to which the annual license fees due in connection with calendar year were waived. Commencing in 2009, subject to certain financial criteria, the annual license fee is payable a rate of no more than $300,000 per year.
The annual fees to the Institute represent a significant continuing obligation. In 2009 and future years, we intend to fund such payment obligations from revenues generated by operations or making alternative arrangements for payment. If our operating activities do not generate enough revenues to finance the minimum annual fees, we will need to use our available working capital to pay such minimum annual fees. If we lack sufficient working capital, we intend to fund such payment obligations in the future through proceeds from the sales of securities or debt or bank financing. Alternatively, we would seek to obtain a waiver or deferral of payment obligations from the Institute. In the event that we become unable to pay the minimum annual fees or to obtain a waiver or deferral of payment obligations from the Institute, we would be in default of our agreements with the Institute and our business will be
irreparably impaired, as most of our mapping and analytic services are performed with the use of technology and services obtained from the Institute.
It is our intention to sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. While we have raised capital to meet our working capital and financing needs in the past, additional financing is required in order to meet our current and projected cash flow deficits from operations and development of oil and gas properties. We are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital. At March 31, 2008, we had no commitments for financing, other than for the $500,000 in equity securities, which was completed in April 2008. We are in the process of discussions with several investment banks and venture capital funds to obtain bridge and long term debt or equity funding, but there is no guarantee that we will be successful in consummating
any transaction.
There can be no assurance that we will be successful in obtaining such funding or, in the event it is successful, the terms of such funding will be on terms advantageous to us. Any additional equity financing may be dilutive to shareholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing authorized shares of common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. However, if we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this will have a material adverse effect on our business, results of operations, liquidity and financial condition, and we will have to delay our planned or proposed operations and
development and continue to conduct activities on a limited scale.
AUDITOR’S OPINION EXPRESSES DOUBT ABOUT THE COMPANY’S ABILITY TO CONTINUE AS A “GOING CONCERN”
The reports of the independent registered public accounting firm on our December 31, 2007 and 2006 financial statements included in our Annual Reports for the years ended December 31, 2007 and 2006 stated that our recurring losses from operations and net capital deficiency, raise substantial doubt about our ability to continue as a going concern. If we are unable to raise new investment capital, we will have to discontinue operations or cease to exist, which would be detrimental to the value of our common and preferred stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.
We have a working capital deficiency as a result of our large operational losses. We have been and are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital. There is no guarantee that we will be successful in consummating a financing transaction. Further, in the event we obtain an offer of private or public funding, there is no assurance that such funding would be on terms favorable to us. The failure to obtain such funding will threaten our ability to continue as a going concern.
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PLAN OF OPERATIONS
Addressing the Going Concern Issues
Our ability to continue as a going concern is subject to our ability to develop profitable operations, and, in the absence of revenues from operations, to our ability to raise additional equity or debt capital and to develop profitable operations. We are devoting substantially all of our efforts to developing our business and raising capital. We continue to experience net operating losses. During 2007, we focused on restructuring our operations to reduce operating costs and in seeking capital.
The primary issues management will focus on in the immediate future to address the going concern issues include: seeking institutional investors for debt or equity investments in our Company, and initiating negotiations to secure short term financing through promissory notes or other debt instruments on an as needed basis.
To improve our liquidity, our management is actively pursing additional financing through discussions with investment bankers, financial institutions and private investors. There can be no assurance that we will be successful in our effort to secure additional financing.
Since 2007, we focused on obtaining additional investment capital to restart our service and exploration efforts, and to create case studies demonstrating the value of the STeP technology. We plan to continue such efforts during the next twelve months. We intend to demonstrate the value of our licensed technology by pursuing (i) a fee for service business model with exploration companies, which may include seeking royalties on the exploration project and (ii) a farm-in strategy of investing in drilling projects when our STeP technology concurs with the available seismic studies on the projects. Our goal is to demonstrate a success rate which is better than industry averages and thereby establish the value of our technology while generating hydrocarbon reserves and internally generating cash flow to support our cost of operations.
Our goal continues to be to enter into agreements whereby we provide our services, such as providing site locations and depth locations, to natural resource exploration companies in exchange for royalties or ownership rights, and fees, with regard to a specific natural resource exploration property. We may also seek to finance or otherwise participate in the efforts to recover natural resources from such properties. Our intent, in the event our cash flow permits, is to finish the land acquisition in connection with the West Deweyville Prospect and farm-out the project to obtain financing for the drilling program on this prospect.
While we have oil exploration experience, we need substantial additional capital to conduct oil exploration activities alone. We continue to seek joint ventures to develop our operations, including examining, drilling, operating and financing such activities. We will determine our plan for our existing leases and for future leases we acquire based on our ability to fund such projects.
Product Research and Development
Under our past business model, we do not anticipate incurring significant research and development expenditures during the next twelve months. We are changing our business model to focus on utilizing our licensed technology in connection with the acquisition of royalties, ownership rights or land rights for purposes of oil or mineral exploration, and such exploration may involve significant development expenditures.
Acquisition or Disposition of Plan and Equipment
We do not anticipate the sale of any significant property, plant or equipment during the next twelve months. Depending on our future business prospects and the growth of our business, and the need for additional employees, we may seek to lease new executive office facilities or to open another office location in Texas.
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Acquisition of Oil and Gas Properties
We are seeking to raise $4 to $6 million to pursue development efforts during the next twelve months. We plan to use this money to complete development efforts of the West Deweyville Prospect and to engage in several farm-in projects.
Employees
As of March 31, 2008, we had five employees. We also utilize the services of consultants in connection with certain projects. Our employment plans are uncertain given our working capital deficit and our inability to plan future development efforts until funding is achieved. In 2007, we substantially reduced our payroll, ceasing to pay salaries to employees from March 2007 to December 2007 and reducing the number of employees. In January 2008, we began paying salaries to two employees.
INFLATION
We do not expect inflation to have a significant impact on our business in the future.
SEASONALITY
We do not expect seasonal aspects to have a significant impact on our business in the future.
OFF-BALANCE SHEET ARRANGEMENT
To date, we do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.
TRENDS, RISKS AND UNCERTAINTIES
We anticipate that high oil prices this year may cause natural resources exploration companies to conduct more drilling activities and investigate the potential of previously undiscovered oil reserves, and if oil prices remain high, we anticipate that our services will be in higher demand. However, that may create a short supply of drilling rigs and other equipment needed for exploration activities, which may drive up the costs of exploration activities.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161"). SFAS 161 gives financial statement users better information about an entity's hedges by providing for qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with earlier application encouraged. The Company does not expect the adoption of SFAS 161 to have a material effect on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries and for the deconsolidation of a subsidiary and also amends certain consolidation procedures for consistency with SFAS 141R. Under SFAS 160, noncontrolling interests in consolidated subsidiaries (formerly known as “minority interests”) are reported in the consolidated statement of financial position as a separate component within shareholders’ equity. Net earnings and comprehensive income attributable to the controlling and noncontrolling interests are to be shown separately in the consolidated statements of earnings and comprehensive income. Any changes in ownership interests of a noncontrolling interest where the
parent retains a controlling financial interest in the subsidiary are to be reported as equity transactions. SFAS 160 is
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effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. When adopted, SFAS 160 is to be applied prospectively at the beginning of the year, except that the presentation and disclosure requirements are to be applied retrospectively for all periods presented. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. In addition, SFAS 141(R) requires expensing of acquisition-related and restructure-related costs, remeasurement of earn out provisions at fair value, measurement of equity securities issued for purchase at the date of close of the transaction and non-expensing of in-process
research and development related intangibles. SFAS 141(R) is effective for the Company’s business combinations for which the acquisition date is on or after July 1, 2009. The Company is currently evaluating the impact of adopting SFAS 141(R).
ITEM 4.
CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period ended March 31, 2008. Based on such evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed in this report has been recorded, processed, summarized and reported, on a timely basis, as of the end of the period covered by this report, and that our disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports we file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2008 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
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PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
On March 4, 2008, the parties to a lawsuit, Baker Hughes Oilfield Operations Inc. v. Tierra Nevada Exploration Partners, LP and Terra Resources, Inc., before the Supreme Court of the State of New York, Case No. 603274/07, settled the lawsuit, pursuant to a settlement agreement whereby the Company delivered one million shares of its common stock, which were returned to the Company for cancellation in exchange for a promissory note due July 31, 2009 in the amount of $178,920 together with 12% interest from October 4, 2007.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Each of the issuance and sale of securities described below was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. No advertising or general solicitation was employed in offering the securities. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.
On March 27, 2008, we entered into a
consulting agreement with Wall Street Edge Investor Relations, dated as of March 10, 2008.
The term is for a period of up to twelve months ending February 28, 2009, and after May
31, 2008 is on a month-to-month basis. We paid the consultant $6,000 upon execution of the
agreement, and issued 675,000 unregistered shares of our common stock to the consultant as
payment for the first month of services. The consulting agreement provides that we are to
issue 75,000 unregistered shares of our common stock per month for each month of such
services after the first month of the consulting term.
ITEM 5.
OTHER INFORMATION
On April 30, 2008, New Found Oil Partners, LP filed a certificate of cancellation with the State of Delaware.
ITEM 6.
EXHIBITS
The following exhibits are filed with this report:
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Exhibit
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Description of Exhibit
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10.1
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Employment Agreement with Dmitry Vilbaum (incorporated by reference to Exhibit 10.1 of Form 8-K, filed on April 28, 2008)
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11*
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Statement re: computation of per share earnings is hereby incorporated by reference to “Financial Statements” of Part I - Financial Information, Item 1 – Financial Statements, contained in this Form 10-Q.
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31.1*
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Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
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31.2*
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Certification of Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
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32.1*
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
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32.2*
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Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
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_____
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.
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Dated: May 19, 2008
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By:
/s/ Dmitry Vilbaum
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Dmitry Vilbaum
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Chief Executive Officer
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Dated: May 19, 2008
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By:
/s/ Dan Brecher
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Dan Brecher
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Principal Financial Officer
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