UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
or
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ___________.
Commission file number:
333-90272
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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE
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56-1940918
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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99 Park Avenue, 16th Floor, New York, NY
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10016
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(Address of principal executive offices)
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(Zip Code)
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(212) 286-9197
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(Registrant's telephone number, including area code)
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Not applicable
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(Former name, former address and former fiscal year, if changed since last report)
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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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorted period that the registrant was required to submit and post such files).
o
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
As of May 14, 2010, we had 121,365,797 shares of common stock issued and outstanding.
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I – FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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3
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Consolidated Balance Sheets
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as of March 31, 2010 (Unaudited) and December 31, 2009
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3
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Consolidated Statements of Operations
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for the Three Months Ended March 31, 2010 and 2009 (Unaudited)
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4
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Consolidated Statements of Cash Flows
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for the Three Months Ended March 31, 2010 and 2009 (Unaudited)
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5
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Notes to Consolidated Financial Statements
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6
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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10
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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16
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Item 4.
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Controls and Procedures
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16
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PART II – OTHER INFORMATION
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Item 1.
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Legal Proceedings
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17
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Item 1A.
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Risk Factors
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17
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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17
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Item 3.
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Defaults Upon Senior Securities
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17
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Item 4.
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(Removed and Reserved)
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17
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Item 5.
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Other Information
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17
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Item 6.
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Exhibits
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18
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Signatures
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19
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31,
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December 31,
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2010
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2009
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ASSETS
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CURRENT ASSETS
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Cash
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$
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24,854
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$
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17,942
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Accounts Receivable, net
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62,560
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5,706
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Prepaid Expenses and Other Current Assets
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8,316
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112
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TOTAL CURRENT ASSETS
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95,730
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23,760
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OTHER ASSETS
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Property and Equipment, Net of Accumulated Depreciation
of $25,448 and $18,951, respectively
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54,512
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60,259
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Other Assets
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3,046
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3,164
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TOTAL OTHER ASSETS
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57,558
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63,423
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TOTAL ASSETS
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$
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153,288
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$
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87,183
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LIABILITIES AND SHAREHOLDERS’ DEFICIT
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CURRENT LIABILITIES
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Accounts Payable and Accrued Expenses
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$
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809,270
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$
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591,493
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Promissory Notes Payable
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387,401
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222,110
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Loans Payable - Related Parties
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105,251
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386,265
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TOTAL CURRENT LIABILITIES
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1,301,922
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1,199,868
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SHAREHOLDERS’ DEFICIT
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Preferred Stock: $.0001 Par Value,
Shares Authorized 25,000,000
Shares Issued and Outstanding: 0 and 5,000,000 at
December 31, 2009 and 2008, respectively
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–
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–
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Common Stock; $.0001 Par Value
Shares Authorized 250,000,000
Shares Issued and Outstanding: 113,505,949 and 102,943,338 at
March 31, 2010 and December 31, 2009, respectively
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11,351
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10,295
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Additional Paid In Capital
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23,319,174
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22,541,820
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Accumulated Deficit
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(24,479,159
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)
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(23,664,800
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)
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TOTAL SHAREHOLDERS’ DEFICIT
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(1,148,634
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)
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(1,112,685
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)
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TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
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$
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153,288
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$
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87,183
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See notes to consolidated financial statements.
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
March 31,
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2010
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2009
(Restated)
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REVENUES
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$
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84,975
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$
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2,000,000
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COST OF REVENUES
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3,768
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1,355,000
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GROSS PROFIT
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81,207
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645,000
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OPERATING EXPENSES
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Compensation Expense
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570,255
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472,296
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Selling, General and Administrative
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321,349
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216,548
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TOTAL OPERATING EXPENSES
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891,604
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688,844
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OPERATING LOSS
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(810,397
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)
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(43,844
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)
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OTHER INCOME (EXPENSE)
:
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Interest Expense
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(4,318
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)
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–
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Interest Income
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–
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–
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Other Income
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356
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–
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TOTAL OTHER EXPENSE
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(3,962
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)
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–
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NET LOSS
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$
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(814,359
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)
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$
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(43,844
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)
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NET LOSS PER COMMON SHARE – BASIC AND DILUTED
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$
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(0.01
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)
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$
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(0.00
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)
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WEIGHTED AVERAGE PER COMMON SHARES OUTSTANDING – BASIC
AND DILUTED
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108,019,774
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60,302,782
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See notes to consolidated financial statements.
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended
March 31,
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2010
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2009
(Restated)
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NET LOSS
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$
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(814,359
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)
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$
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(43,844
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)
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ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
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Non Cash Items:
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Depreciation
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6,497
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12,469
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Stock Based Compensation
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491,422
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451,698
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Stock for Services
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6,000
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20,598
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Changes in operating assets and liabilities:
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Accounts Receivable
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(56,854
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)
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(544,100
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)
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Deferred Costs
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–
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600,000
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Prepaid Expenses and Other Current Assets
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(8,086
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)
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–
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Other Assets
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–
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(27,122
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)
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Increase (Decrease) in Liabilities:
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Accounts Payable and Accrued Expenses
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38,455
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265,197
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Deferred Revenues
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–
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(1,455,900
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)
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NET CASH USED IN OPERATING ACTIVITES
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(336,925
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)
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(721,004
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)
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Cash paid for purchase of fixed assets
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(750
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)
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–
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NET CASH FROM FINANCING ACTIVITIES:
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Issuance of Common Stock for cash, net of offering costs
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460,310
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500,000
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Repayments to Third Parties
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(70,000
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)
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–
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Repayments to Related Parties
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(45,723
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)
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–
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NET CASH PROVIDED BY FINANCING ACTIVITIES
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344,587
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500,000
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NET CHANGE IN CASH
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6,912
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(221,004
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)
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CASH - BEGINNING OF YEAR
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|
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17,942
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|
|
|
700,001
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CASH – END OF PERIOD
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$
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24,854
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$
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478,997
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
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Cash paid for interest
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$
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–
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$
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–
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Cash paid for income taxes
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$
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–
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$
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–
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|
|
|
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See notes to consolidated financial statements.
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION
Unaudited Interim Financial Information
The consolidated balance sheet of Terra Energy & Resource Technologies, Inc. (“Terra”), a Delaware corporation, and Subsidiaries (collectively, the “Company”), and the related statements of operations and cash flows have been prepared by the Company, without audit, with the exception of the consolidated balance sheet dated as of December 31, 2009, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the Company's financial position and results of operations. The results of operations for the three ended March 31, 2010 are not necessarily indicative of the results of operations for the full year or any other interim period. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, filed on April 14, 2010.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred substantial losses from operations, sustained substantial cash outflows from operating activities, and has both a significant working capital deficiency and accumulated deficit at March 31, 2010. The above factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence depends on its ability to obtain additional equity and/or debt financing to fund its operations and ultimately to achieve profitable operations. The Company is attempting to raise additional financing and has initiated a cost reduction strategy. Given the Company’s tight cash position, its ability to continue as a going concern is dependent on the Company (1) raising additional equity or debt financing or (2) the Company obtaining sufficient fee revenue from service business to support the operations of the Company. There can be no assurance that the Company will be successful in either effort.
3
.
SALES OF COMMON STOCK
In the three months ended March 31, 2010, the Company sold fifty two units of the Company’s securities, with each unit consisting of 200,000 common shares and warrants, exercisable for five years at $0.05 per share, to purchase another 200,000 common shares, for gross proceeds of $520,000. In connection with the sale of forty six units, for each unit sold, the Company paid the placement agent fees of 8% of the unit purchase price and warrants, exercisable for three years at $0.05 per share, to purchase 10,000 common shares.
During the three months ended March 31, 2010, the Company paid $59,690 in offering costs in connection with the transactions.
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
STOCK BASED COMPENSATION
In accordance with the standard “Share-based Payment,” codified within ASC 718, the Company has accounted for its employee stock options and other stock options issued to outside consultants under the “modified prospective“ method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of the standard for all share-based payments granted after the effective date and (b) based on the requirements of the standard for all awards granted to employees prior to the effective date of the standard that remain unvested on the effective date. Accordingly, the fair market value for these options was estimated at the date of grant using a Black-Scholes option-pricing model based on the following assumptions:
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March 31,
2010
|
|
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Risk-free rate
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1.24%
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Dividend yield
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0.00%
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Volatility factor
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258%-265%
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Expected term
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3-5 years
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Where applicable, the Company utilizes the simplified method from SEC Staff Accounting Bulletin 107 for calculation of the expected term.
The Company grants stock options and warrants to employees and outside consultants. The following tables summarize information about the stock option and warrant transactions, including warrants issued pursuant to financing transactions, for the indicated periods.
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Number of
Options/Warrants
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Weighted
Average
Exercise Price
|
|
|
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Balance outstanding at December 31, 2009
|
|
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98,265,000
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$
|
0.09
|
|
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Granted
|
|
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13,795,000
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|
|
|
0.06
|
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Exercised
|
|
|
–
|
|
|
|
–
|
|
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Cancelled/forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
Balance outstanding at March 31, 2010
|
|
|
112,060,000
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|
|
$
|
0.08
|
|
The stock options and warrants outstanding and exercisable at March 31, 2010 and 2009 were in the following exercise price ranges:
|
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|
|
At March 31, 2010
|
|
|
|
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Outstanding
|
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Exercisable
|
|
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Range of
Exercise
Prices
|
|
Number of
Options/Warrants
|
|
Weighted
Average
Remaining
Years of
Contractual
Life
|
|
Weighted
Average
Exercise
Price
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|
Number of
Options/Warrants
|
|
Weighted
Average
Exercise
Price
|
|
|
$0.00 – 0.05
|
|
78,195,000
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|
2.7
|
|
$0.05
|
|
78,195,000
|
|
$0.05
|
|
|
$0.05 – 0.10
|
|
11,900,000
|
|
3.0
|
|
$0.10
|
|
11,900,000
|
|
$0.10
|
|
|
$0.11 – 0.15
|
|
1,000,000
|
|
0.1
|
|
$0.11
|
|
1,000,000
|
|
$0.11
|
|
|
$0.16 – 0.20
|
|
10,000,000
|
|
2.3
|
|
$0.16
|
|
9,000,000
|
|
$0.16
|
|
|
$0.21 – 0.49
|
|
10,450,000
|
|
2.4
|
|
$0.22
|
|
10,450,000
|
|
$0.22
|
|
|
$0.50 – 0.80
|
|
515,000
|
|
0.3
|
|
$0.79
|
|
515,000
|
|
$0.79
|
|
|
|
|
112,060,000
|
|
2.7
|
|
$0.08
|
|
111,060,000
|
|
$0.08
|
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to Officers and Employees
In the three months ended March 31, 2010, the Company granted to employees an aggregate of 2,250,000 stock options, exercisable for five years at $0.10 per share. The stock options were fully vested at the grant date and have a combined value of $201,737 and were fully expensed.
In the three months ended March 31, 2010, the Company granted to two employees an aggregate of 2,000,000 stock appreciation rights, exercisable for five years at $0.10 per share. The stock appreciation rights were fully vested at the grant date and have a combined value at March 31, 2010 of $179,322 and were fully expensed. No shares of the Company’s common stock will be issued pursuant to the exercise of the stock appreciation rights and the associated liability is included in accounts payable.
Consultants
In the three months ended March 31, 2010, the Company granted to consultants an aggregate of 1,145,000 warrants with a total value of $99,249. The warrants were fully vested at the grant date and were fully expensed.
5.
RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2010, the Company repaid $44,888 to two officers for advances made in prior years.
In the Company’s previously filed 10-Q for the three months ended March 31, 2009, stock based compensation expense of $2,208,172 was reported. It was discovered during the audit of the December 31, 2009 financial statements that compensation expense was overstated by $1,756,474 for the three months ended March 31, 2009 due to errors in certain stock option valuations. As a result, compensation expense and accordingly the Company’s net loss have been reduced by this amount in the accompanying consolidated statement of operations for the three months ended March 31, 2009.
7.
PROMISSORY NOTES PAYABLE
In March 2008, the Company settled a lawsuit with Baker Hughes Oilfield Operations Inc. Pursuant to the terms of settlement, 1,000,000 common shares were cancelled in exchange for a promissory note due July 31, 2009 for $178,920 together with 12% interest from October 4, 2007. An additional $41,390 was added to the note during 2009. On November 6, 2009, the Company entered into an agreement with Baker Hughes setting forth a payment plan with respect to the debt, which calls for certain minimum monthly payments from service fee proceeds and an account receivable. During the three months ended March 31, 2010, the Company paid $55,000 on the note payable. The outstanding balance of this note was $152,110 as of March 31, 2010. The principal balance is due in November 2010.
In November 2009, the Company was loaned $15,000 by a third party, non-interest bearing and due on January 31, 2010. The loan was repaid in January of 2010.
TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.
SUBSEQUENT EVENTS
In April and May 2010, the Company sold to several accredited investors an aggregate of 39.145 units of the Company’s securities, with each unit consisting of 200,000 common shares and warrants, exercisable for five years at $0.05 per share, to purchase another 200,000 common shares, for gross proceeds of $391,450. For each unit sold, the Company paid placement agent fees of 8% of the unit purchase price and warrants, exercisable for three years at $0.05 per share, to purchase 10,000 shares of common stock.
Pursuant to a consulting arrangement for human resources services, on April 1, 2010, the Company issued to the consultant warrants to purchase 10,000 shares of common stock, exercisable for five years at $0.05 per share.
Pursuant to a consulting agreement with Arista Capital Group, Inc., dated as of August 20, 2009 and as amended December 1, 2009, on the first of each month for April and May 2010, the Company issued to the consultant options to purchase 50,000 shares of common stock, exercisable for five years at prices ranging from $0.09 to $0.10 per share.
Pursuant to a consulting arrangement effective as of December 8, 2009, for consulting services on a monthly basis until up to December 8, 2010, on each of April 10, 2010 and May 10, 2010, the Company issued to the consultant stock options to purchase 50,000 common shares, exercisable for three years at prices ranging from $0.07 to $0.11 per share.
In April 2010, the Company issued to a consultant 30,848 common shares for financial and accounting services.
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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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“Forward
-
Looking” Information
These management discussion and analysis contain forward-looking statements and information that are based on our management’s beliefs, as well as assumptions made by, and information currently available to our management. These forward-looking statements are based on many assumptions and factors, and are subject to many conditions, including our continuing ability to obtain additional financing, ability to attract new customers, competitive pricing for our services, any change in our business model from providing services to natural resources exploration companies to engaging in exploration activities, and demand for our products, which depends upon the condition of the oil industry. Except for the historical information contained in this report, all forward-looking information are estimates by our management and are subject to various risks, uncertainties and other factors that may be beyond our control and may cause results to differ from our management’s current expectations, which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
The following discussion of our financial condition and results of operations should be read in conjunction with the information set forth in our audited consolidated financial statements for the year ended December 31, 2009, and the related notes, included in our Annual Report on Form 10-K.
INTRODUCTORY NOTE
Operating Entities
Our business operations, prior to fiscal 2009, were conducted primarily through wholly-owned operating subsidiaries, Terra Insight Corporation through August 2008, and Terra Insight Services, Inc. since September 2008.
Our Operations and Plans
During fiscal 2009 and the current fiscal year, we focused on identifying new technologies for potential acquisition, marketing and promotion of services, and on obtaining additional investment capital to restart our service and exploration efforts, to restructure our operations to reduce our operating costs, and to create case studies demonstrating the value of our proprietary satellite-based sub-terrain prospecting (“STeP”) technology for locating natural resources. We intend to demonstrate the value of our STeP technology by pursuing a fee for service business model with exploration companies, which may include seeking royalties on the exploration project, as well as 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 minerals and hydrocarbon reserves and internally generating cash flow to support our cost of operations.
Our goal is to enter into services agreements whereby we provide our services, such as providing site location and depth locations, to natural resource exploration companies in exchange for service fees, with regard to a specific natural resource exploration property.
While we have oil exploration experience, we need substantial additional capital to conduct oil exploration activities alone. We continue to seek joint ventures to assist in our operations, including examining, drilling, operating and financing such activities. We will determine our plan for future leases we acquire based on our ability to fund such projects.
In the three months ended March 31, 2010, we provided analysis services to two customers pursuant to which we generated $84,975 in revenues.
Current Status of Operations
We have incurred large operating losses and have a large working capital deficit of approximately $1.03 million at March 31, 2009. As of March 31, 2010, we had cash of approximately $
24,854
. These factors raise substantial doubt about our ability to continue as a going concern.
Our source of revenue have been from providing mapping and analytic services to exploration, drilling and mining companies, using an integrated approach with proprietary attributes to gather, manage and interpret geologic and satellite data to improve the assessment of natural resources. We also seek to generate revenue from projects that we undertake through joint venture and similar relationships with third parties.
We generated approximately $5.7 million in revenues since inception in 2005 through fiscal 2009; however, due to significant capital expenditures requisite for drilling and mining operations, our revenues from our service business has not been sufficient to support our operational expenses and proposed business activities. Since inception through fiscal 2009, we have supported our operations primarily through the sale of preferred stock, common stock, and convertible debentures, and noncontrolling interests in drilling limited partnerships, including sales of common stock of $670,000 in fiscal 2009 and $520,000 in the three months ended March 31, 2010.
Our ability to continue as a going concern is dependent on our ability to obtain new capital and generate revenue from service operations. There can be no assurance that we will be successful in obtaining additional funding or, in the event it is successful, that the terms of such funding will be on terms advantageous to us.
CRITICAL ACCOUNTING POLICIES
Several of our accounting policies involve significant judgments and uncertainties. The policies with the greatest potential effect on our results of operations and financial position are our ability to estimate the degree of impairment to unproved oil and gas properties. For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends as well as the financial condition of the customer.
Revenue Recognition
Revenue is recognized when the survey is delivered to the customer and collectibility of the fee is reasonably assured. Amounts received in advance of performance and/or completion of such services are recorded as deferred revenue.
Accounts Receivable
For accounts receivable, if any, we estimate the net collectibility, considering both historical and anticipated trends as well as the financial condition of the customer.
RESULTS OF OPERATIONS
Revenues
For the three months ended March 31, 2010, revenues from services decreased by $1,915,025 to $84,975 from $2,000,000 in the three months ended March 31, 2009. During the three months ended March 31, 2010, we rendered mapping services pursuant to minor service contracts with two customers, whereas in the three months March 31, 2009 we had a significant contract with one customer. Generally, our services on a cash basis are pursuant to individual contracts for specific services to be performed over a short time frame, and are not a recurring source of revenues. The lack of significant revenue arose principally from our seeking to perform services for an ownership or royalty interest in projects or leaseholds rather than for a cash service fee. In addition, we were concentrating on seeking potential joint venture partners in exploiting our technology and other opportunities presented to us.
We anticipate that, subject to global economic conditions and willingness of potential clients to expand capital on exploration activities, during the next twelve months, if we achieve our capital raising goals of focusing on fee for service work, we will be engaged in joint ventures and internal resource projects. The purpose of focusing on internal resource projects is to generate reserves and to establish that the technology can increase the success rate in oil, gas and other mineral exploration projects. There can be no assurance that if we obtain the needed financing we will be successful in establishing the efficacy of our technology. We will also seek to find potential joint venture partners with whom the technology can be used to gain participation interests in projects as well as fee for service revenue. There can be no assurance that we will be successful in finding such joint venture partners. Until we negotiate and enter into definitive agreements for ownership or royalty interests as compensation, we have no basis for predicting when or how much revenue could be generated from such ownership or royalty interests, or from the exploitation of our land leases, if and when drilling is commenced. Negotiations in connection with ownership or royalty positions often take longer than the negotiations for fee for service arrangements.
Current economic conditions may cause a decline in business and in exploration related spending which could adversely affect our business and financial performance. Our business and operating results are impacted by the health of exploration companies, domestic and international, engaged in oil and gas and other exploration activities. Our business and financial performance may be adversely affected by current and future economic conditions, such as a reduction in research and development and other spending by exploration companies.
Cost of Revenues
Costs associated with revenue for the three months ended March 31, 2010 and 2009 were $3,768 and $1,355,000 respectively. Historically, our cost of revenues has consisted primarily of payments to the Institute for analysis services. Our fees payable to the Institute under our prior arrangement with the Institute were subject to negotiation on a per project basis and accordingly our costs varied on a project basis. On April 27, 2009, we terminated our license and services arrangement with the Institute and acquired certain of its technologies that we have utilized in our operations. Based on our historical activities, we anticipate that our costs of revenue will ordinarily be approximately 60% of revenue.
Operating Expenses
Operating expenses for the three months ended March 31, 2010 increased by $202,473, or 29%, to $891,317 from $688,844 in the three months ended March 31, 2009. Operating expenses for the three months ended March 31, 2010 and 2009 as a percentage of revenue were approximately 1,000% and 34%, respectively.
Operating expenses for the three months ended March 31, 2010 consisted primarily of professional fees of approximately $103,878, employee salaries and benefits of approximately $187,547, consulting fees of $92,398, stock based compensation of $491,422, and travel expenses of approximately $17,898. Operating expenses for the three months ended March 31, 2009 consisted primarily of professional fees of approximately $81,000, management salaries and benefits of approximately $529,526 (including $451,698 in stock based compensation), and travel expenses of approximately $39,000. The majority of the professional fees result from legal and accounting fees, and from the engagement of various consultants to assist us in marketing our business.
Our operating expenses decreased during the three months ended March 31, 2010 in comparison to the three months ended March 31, 2009 primarily due to a decrease in compensation expense. Excluding compensation expense, our operating expenses increased during the three months ended March 31, 2010 in comparison to the three months ended March 31, 2009 because in the later part of fiscal 2009 we established a Moscow technology office and hired technical personnel, and we have been concentrating on seeking potential joint venture partners in exploiting our technology and related marketing and promotion activities, which increased our operating costs. This has increased professional fees, employee salaries and benefits, consulting fees, stock based compensation, and travel expenses.
If we are successful in raising new capital or generating substantial service projects, we would expect our operating expenses to increase as we would have the capital to engage in various oil and gas and mining exploration projects. The increase in operating expenses could result from the hiring of geologists and other oil and gas professionals to assist us in carrying out the farm-in aspect of our business strategy. Travel related expenses could increase in the future, as many of our customers, and prospective customers and projects, and the territories for which our services are requested or utilized, are located in western United States and in foreign countries. Further, if sufficient funding were available, we would contemplate opening a Houston service center which would decrease travel related expenses but would increase office expenses significantly.
Our employee compensation expenses may increase if we are successful in raising new capital. The increase could result from the hiring of geologists, consultants and other oil and gas professionals to assist the Company in carrying out the farm-in aspect of our business strategy. Travel related expenses could increase in the future, as many of our customers, and prospective customers and projects, and the territories for which our services are requested or utilized, are located in western United States and in foreign countries. Alternatively, if sufficient funding were available, we would contemplate opening a Houston office which would decrease travel and entertainment expenses but would increase office expenses significantly.
Interest Expense
In the three months ended March 31, 2010 and 2009, we had net interest expense of $3,962 and $0, respectively. The increase in net interest expense is primarily due to an increase in interest expenses associated with loans.
Net Loss
The net losses for the three months ended March 31, 2010 and 2009 were $814,359 and $43,844, respectively. The increase in net loss during the three months ended March 31, 2010 compared to the three months ended March 31, 2009 principally resulted from increased compensation expenses, in addition to an increases in operating expenses. For the three months ended March 31, 2010 and 2009, our net loss per common share (basic and diluted) attributable to common shareholders was $0.01 and $0.00, respectively.
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, 2010, our cash increased by $6,912. Of the increase in cash, $337,402 was used in operating activities, $273 was used in investing activities and $344,587 was provided by financing activities.
Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance. Our operating results are impacted by the health of the North American economy as well as economies worldwide. Our business and financial performance may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession, and the reluctance of potential clients to engage in exploration activities in light of recent economic conditions. Additionally, we may experience difficulties in scaling our operations to react to such economic pressures.
Operating Activities
Cash flows from operating activities resulted in deficit cash flows of $337,402 for the three months ended March 31, 2010, as compared with deficit cash flows of $721,004 for the three months ended March 31, 2009.
For the three months ended March 31, 2010, cash flows from operating activities resulted in deficit cash flows of $337,402, primarily due to a net loss of $814,359, plus non-cash charges of $503,919, adjustments for an increase in prepaid expenses and other current assets of $8,204, an increase in accounts receivable of $56,854, an increase in accounts payable and accrued expenses of $38,455. The most significant drivers behind the decrease in our non-cash working capital were charges for stock based compensation of $491,422.
For the three months ended March 31, 2009, cash flows from operating activities resulted in deficit cash flows of primarily due to a net loss of $43,844, plus non-cash charges of $484,765, adjustments for a decrease in deferred costs of $600,000, an increase in accounts receivable of $544,100, an increase in accounts payable and accrued expenses of $265,197, and a decrease in deferred revenues of $1,455,900. The most significant drivers behind the decrease in our non-cash working capital were charges for amortization of consulting fees of $20,598 and charges for stock options issued to employees of $451,698.
Investing Activities
Cash used for investing activities for the three months ended March 31, 2010 and 2009 was $273 and $0, respectively..
For the three months ended March 31, 2010, cash flows from investing activities resulted in a deficit of $273, due to the purchase of fixed assets.
Depending on our available funds and other business needs, it is our intention to engage in fee for service activities, and engage in a farm-in strategy during the next twelve months in which we make small investments in the exploration projects of others. 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, 2010, cash provided by financing activities was $344,587, consisting of $460,310 from the sales of units of common stock and warrants to several investors, and repayments of loans in the amount of $115,723. For the three months ended March 31, 2009, cash provided by financing activities was $500,000, from the sales of common stock and warrants.
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 fiscal 2010 calls for us to perform our exploration technology services to other companies and to farm-in on eight to twelve prospects. This business plan calls for our company to raise approximately $7.1 million in fiscal 2010. If we are unable to raise such funding, we will not be able to act on our business plan as we currently intend. To the extent we raise a lesser amount, we will only be able to act on our business plan on a limited basis.
Under our business model, we do not anticipate incurring significant research and development expenditures during the next twelve months; however, subject to available capital, we may seek to acquire certain innovative exploration technologies and build geochemical facilities.
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 offices in Texas.
As of March 31, 2010, we had 20 employees (including employees of corporate subsidiaries), of which 7 persons worked on a full-time basis. Our future employment plans are uncertain given our working capital deficit and lack of revenues and are subject to available working capital.
We are seeking to raise approximately $7.1 million to pursue development efforts during the next twelve months. We plan to use this money to engage in several farm-in projects. 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 farm-in on oil and gas properties to create a holding of 8 to 12 natural resource interests in U.S. oil and gas prospects. We are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital.
There can be no assurance that we will be successful in obtaining such funding or, in the event we are successful, that the terms of such funding will be on terms advantageous to us. Any additional equity financing may be dilutive to stockholders 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.
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.
GOING CONCERN MATTERS
The reports of the independent registered public accounting firms on our December 31, 2009 and 2008 financial statements included in our Annual Reports for the years ended December 31, 2009 and 2008 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.
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 continue to experience net operating losses. During fiscal years 2009 and 2008, 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 has been actively pursuing additional financing through discussions with investment bankers, venture capital firms and private investors. There can be no assurance that we will be successful in our efforts to secure additional financing.
In fiscal 2009 and in the current fiscal year, 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, subject to the receipt of adequate financing. 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 success rates which are 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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Principal Financial Officer (“PFO”) of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the CEO and PFO concluded that our disclosure controls and procedures were not effective as of March 31, 2010 due to deficiencies in the staffing of our financial accounting department.
(b) Changes in Internal Controls Over Financial Reporting
There were no changes that occurred during the quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Each of the issuances and sales 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. Each purchaser is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) or an accredited investor (as defined in Rule 501 of Regulation D), and each received adequate information about the Company or had access to such information, through employment or other relationships, to such information.
In April and May 2010, the Company sold to several accredited investors an aggregate of 39.145 units of the Company’s securities, with each unit consisting of 200,000 shares of common stock and warrants, exercisable for five years at $0.05 per share, to purchase 200,000 shares of common stock, for gross proceeds of $391,450. For each unit sold, the Company paid placement agent fees of 8% of the unit purchase price and warrants, exercisable for three years at $0.05 per share, to purchase 10,000 shares of common stock. The Company applied the net proceeds to its working capital.
Pursuant to a consulting arrangement with Paramount Recruiting Inc. for human resources services, on April 1, 2010, the Company issued to the consultant warrants to purchase 10,000 shares of common stock, exercisable for five years at $0.05 per share.
Pursuant to a consulting arrangement entered on October 22, 2009, on April 1, 2010, the Company issued to the consultant 30,848 common shares for financial and accounting services.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. (REMOVED AND RESERVED)
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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Exhibit
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Description
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10.1+
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Form of Stock Options (incorporated by reference to Exhibit 10.13 of Form 10-K filed on April 14, 2010)
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10.2+
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Form of Stock Appreciation Rights (incorporated by reference to Exhibit 10.14 of Form 10-K filed on April 14, 2010)
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10.3
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Form of 2010 Subscription Agreement(incorporated by reference to Exhibit 10.24 of Form 10-K filed on April 14, 2010)
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10.4
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Form of Subscription Agreement for Units(incorporated by reference to Exhibit 10.25 of Form 10-K filed on April 14, 2010)
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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
+ Represents executive compensation plan or agreement
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 14, 2010
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By:
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/s/ Dmitry Vilbaum
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Dmitry Vilbaum
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Chief Executive Officer
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Dated: May 14, 2010
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By:
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/s/ Alexandre Agaian
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Alexandre Agaian
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Principal Financial Officer
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