Revenues from services for the nine months ended September 30, 2009 and 2008 were $2,054,704 and $13,000, respectively. Revenues arose solely from performing service work.
In the fourth quarter of fiscal 2008, we entered into a service contract with Nurmunai Petrogaz, LLC, pursuant to which we are to provide geological analysis related to the exploration of hydrocarbons. The services are to be performed in two phases: (1) zoning of territories for potential hydrocarbon anomalies; and (2) gas-geochemical survey of the territory. The total fee for the two phases is to be $2.4 million under the agreement. As of March 31, 2009, the service work for the first phase was completed, and we also delivered to the client the recommendations to perform the second phase. In November and December 2008, the client pre-paid a retainer for the first phase in the amount of $1,455,900 with the balance of $544,100 due.
In the third quarter of fiscal 2008, we entered into a service contract from which we anticipate generating $299,250 in revenues, of which $49,875 was prepaid in the fourth quarter of fiscal 2008. Due to recent economic conditions, the client has suspended its operations on its licensed territories, and the client may seek to discontinue remaining services under the agreement.
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 it 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 a participation interest in a project 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.
Costs associated with revenue for the three months ended September 30, 2009 and 2008 were $0. Costs associated with revenue for the nine months ended September 30, 2009 and 2008 were $1,355,000 and $0, respectively. Our fees payable to the Institute under our prior arrangement with The Institute of Geoinformational Analysis of the Earth were subject to negotiation on a per project basis and accordingly our costs may vary on a project basis. On April 27, 2009, we terminated our license and services arrangement with the Institute. Historically, our cost of revenues has consisted primarily of payments to the Institute. Based on our historical activities, we anticipate that our costs of revenue will ordinarily be approximately 60% of revenue.
Operating expenses for the three months ended September 30, 2009 and 2008 were $406,850 and $994,269, respectively. Operating expenses for the three months ended September 30, 2009 and 2008 as a percentage of revenue were 15.1% and 1.3%, respectively.
Operating expenses for the three months ended September 30, 2009 consisted primarily of professional fees of approximately $30,000, management salaries and benefits of approximately $120,545, travel expenses of approximately $13,037, and stock based compensation of approximately $110,000. Operating expenses for the three months ended September 30, 2008 consisted primarily of professional fees of approximately $172,000, management salaries and benefits of $511,000, independent contractor fees of $18,000, and travel expenses of $29,000. 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.
Operating expenses during the three months ended September 30, 2009 decreased in comparison to the three months ended September 30, 2008, because during the period we have focused primarily on identifying new technologies for potential acquisition, marketing and promotion of services, and on the development of projects, which resulted in decreases in professional fees, management salaries and benefits, independent contractor fees, and travel expenses.
Operating expenses for the nine months ended September 30, 2009 and 2008 were $3,417,993 and $2,192,338, respectively. Operating expenses for the nine months ended September 30, 2009 and 2008 as a percentage of revenue were 60% and 0.6%, respectively. Operating expenses for the nine months ended September 30, 2009 and 2008 were $998,798 (excluding certain stock based compensation of $2,419,195) and $1,707,715 (excluding write-off of oil and gas properties of $484,623), respectively. Operating expenses, excluding certain stock based compensation of $2,419,195, as a percentage of revenue was approximately 207% for the nine months ended September 30, 2009. The $2,419,195 in stock based compensation includes $2,208,172 in expenses incurred during the three months ended March 31, 2009 related to stock options which were granted during the latter half of fiscal 2008 and which the executive elected to forfeit during the three months ended March 31, 2009.
Operating expenses for the nine months ended September 30, 2009 consisted primarily of professional fees of approximately $211,811, management salaries and benefits of approximately $395,486, and travel expenses of approximately $34,665, and stock based compensation of approximately $2,529,195. Operating expenses for the nine months ended September 30, 2008 consisted primarily of professional fees of approximately $606,000, management salaries and benefits of $724,000, independent contractor fees of $73,000, and travel expenses of $57,000.
Operating expenses for the nine months ended September 30, 2009 was significantly higher than the comparable period in 2008 primarily due to stock based compensation incurred in the nine months ended September 30, 2009. Operating expenses (excluding stock based compensation of $2,419,195) during the nine months ended September 30, 2009 decreased in comparison to the nine months ended September 30, 2008 because we have focused primarily on raising additional capital in the first half of fiscal 2009 and on the development of projects, which resulted in decreases in professional fees, management salaries and benefits, independent contractor fees, 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.
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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.
Write-off of Oil and Gas Properties
During the nine months ended September 30, 2008, we wrote-off an aggregate of $484,623 in soft development costs principally associated with the acquisition of the Bureau of Land Management land leases in Nevada of $1,662,571. A significant potion of these costs arose from previous payments to the Institute for its services.
Interest Expense
For the three months ended September 30, 2009 and 2008, the net interest expenses (income) were $4,860 and ($17,156), respectively. For the nine months ended September 30, 2009 and 2008, the net interest expenses were $7,770 and $6,627, respectively.
Net Loss
The net losses for the three months ended September 30, 2009 and 2008 were $331,301 and $964,113, respectively. The decrease in net loss principally resulted from a decrease in operating expenses during the three months ended September 30, 2009 compared to the same period in 2008. For the three month ended September 30, 2009, our net loss per common share (basic and diluted) attributable to common shareholders was $0.00.
The net losses for the nine months ended September 30, 2009 and 2008 were $2,700,354 (of which $2,419,195 relate to stock based compensation) and $2,172,711, respectively. The increase in net loss during the nine months ended September 30, 2009 compared to the same period in 2008 principally resulted from an increase in operating expenses due to stock compensation expenses. Excluding stock based compensation expenses of $2,419,195, we would have had net loss of $281,159 during the nine months ended September 30, 2009. For the nine month ended September 30, 2009, our net loss per common share (basic and diluted) attributable to common shareholders was $0.03.
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 nine months ended September 30, 2009, our cash decreased by $583,001 to $117,000. Of the decrease in cash, $1,183,001 was used by operating activities and $600,000 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 $1,183,001 for the nine months ended September 30, 2009, as compared with deficit cash flows of $892,662 for the nine months ended September 30, 2008.
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For the nine months ended September 30, 2009, cash flows from operating activities resulted in deficit cash flows of $1,183,001, primarily due to a net loss of $2,700,354, plus non-cash charges of $2,577,862, adjustments for a decrease in deferred costs of $600,000, an increase in accounts receivable of $572,364, an increase in prepaid expenses and other current assets of $1,636, an increase in property and equipment of $1,052, and a decrease in other assets of $42,551. The most significant drivers behind the decrease in our non-cash working capital were charges for common stock and options issued to consultants of $153,000, amortization of consulting fees of $41,196 and charges for stock options issued to employees of $2,355,597.
For the nine months ended September 30, 2008, cash flows from operating activities resulted in deficit cash flows of $892,662 primarily due to a net loss of $2,172,711, plus non-cash charges of $1,243,141, an increase in liabilities of $178,920, and a decrease in accounts payable of $137,941. The most significant drivers behind the decrease in our non-cash working capital were charges for common stock issued for services of $101,250, charges for stock options issued to an officer of $532,006, and $484,623 in write-offs of oil and gas properties.
Investing Activities
Cash used for investing activities for the nine months ended September 30, 2009 and 2008 was $0 and $12,996, respectively.
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 nine months ended September 30, 2009, cash provided by financing activities was $600,000, from the sales of common stock and warrants to four investors. For the nine months ended September 30, 2008, cash provided by financing activities was $498,888, comprised of a sale of preferred stock and warrants to an investor totaling $500,000, and repayment of a loan in the amount of $1,112.
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 2009 and 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 on our company to raise $3 to $6.3 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.
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.
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As of September 30, 2009, we had 19 employees, including 13 employees of corporate subsidiaries, of which two persons worked on a full-time basis. As of September 30, 2009, five employees were paid and others served without pay. In July 2009, in order to conserve capital, we ceased paying or paid reduced salaries to our employees based in New York. In July 2009, we retained the services of 13 persons in connection with the establishment of an office in Moscow. Our future employment plans are uncertain given our working capital deficit and lack of revenues.
We are seeking to raise $3 to $6.3 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. At September 30, 2009, we had no commitments for financing.
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 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, 2008 and 2007 financial statements included in our Annual Reports for the years ended December 31, 2008 and 2007 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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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 2008 and the first half of fiscal 2009, 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 pursing 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 effort to secure additional financing.
In fiscal 2008 and the first half of fiscal 2009, 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 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. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued and, in April 2009, amended a new business combinations standard codified within ASC 805, which changed the accounting for business acquisitions. Accounting for business combinations under this standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. The Company adopted the standard for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances and it had no immediate impact on the Company’s consolidated financial position or results of operations.
In April 2009, the FASB issued an accounting standard which provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The standard also amended certain disclosure provisions for fair value measurements and disclosures in ASC 820 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value as well as disclosure of the hierarchy of the source of underlying fair value information on a disaggregated basis by specific major category of investment. This standard was effective prospectively beginning April 1, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.
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In April 2009, the FASB issued an accounting standard which modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The standard also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the standard, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The standard further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. The standard requires entities to initially apply its provisions to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulate other comprehensive income. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.
In April 2009, the FASB issued an accounting standard regarding interim disclosures about fair value of financial instruments. The standard essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the standard requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.
In May 2009, the FASB issued a new accounting standard regarding subsequent events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new standard, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. For the Company, this standard was effective beginning April 1, 2009.
In June 2009, the FASB issued a new standard regarding the accounting for transfers of financial assets amending the existing guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be accounted for as a sale, and require significant additional disclosure. The standard is effective for new transfers of financial assets beginning January 1, 2010. The adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations or financial condition.
In June 2009, the FASB issued an accounting standard that revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a variable-interest entity. The standard is effective January 1, 2010. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
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In June 2009, the Financial Accounting Standards Board (FASB) issued a standard that established the FASB Accounting Standards Codification (ASC) and amended the hierarchy of generally accepted accounting principles (ASC) and amended the hierarchy of generally accepted accounting principles (GAAP) such that the ASC became the single source of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included in the ASC is considered non-authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This standard did not have an impact on the Company’s consolidated results of operations or financial condition. However, throughout the notes to the consolidated financial statements references that were previously made to various former authoritative U.S. GAAP pronouncements have been changed to coincide with the appropriate section of the ASC.
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, a entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
In September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC 820 to provide guidance on measuring the fair value of certain alternative investments such as hedge funds, private equity funds and venture capital funds. The ASU indicates that, under certain circumstance, the fair value of such investments may be determined using net asset value (NAV) as a practical expedient, unless it is probable the investment will be sold at something other than NAV. In those situations, the practical expedient cannot be used and disclosure of the remaining actions necessary to complete the sale is required. The ASU also requires additional disclosures of the attributes of all investments within the scope of the new guidance, regardless of whether an entity used the practical expedient to measure the fair value of any of its investments. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on its consolidated results of operations and financial condition.
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In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force, that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under the ASU, the following components would be excluded from the scope of software revenue recognition guidance: the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product’s essential functionality, and undelivered components that relate to software that is essential to the tangible product’s functionality. The ASU also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). The ASU is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on the Company’s consolidated results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. 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 to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to the Company's management, including its Chief Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act, that occurred during the quarter ended September 30, 2009, that has materially affected, or is 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
Not applicable.
ITEM 1A. RISK FACTORS
Not applicable.
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 August 12, 2009, the Company entered into a consulting agreement for business development and advisory services pursuant to which it issued the consultant 1,100,000 shares of common stock.
On August 20, 2009, the Company entered into a consulting agreement with Arista Capital Group, Inc. for business consulting services. The initial service period is through September 30, 2009 and thereafter the service term is renewable on a month to month basis. As compensation for an initial term, the Company issued to the consultant stock options to purchase 900,000 shares of common stock, exercisable at $0.05 per shares for a period of three years, subject to vesting in 50% increments on each of October 15, 2009 and November 1, 2009. As compensation for each subsequent month periods, the Company agreed to issue stock options to purchase 50,000 shares of common stock, exercisable for three years with an exercise price not less than the fair market value of the Company's common stock at the time of issuance. For services related to the months of October and November 2009, the Company issued an aggregate of 100,000 stock options, exercisable at prices ranging from $0.08 to $0.10 per share.
On September 29, 2009, the Company granted to each of Alexandre Agaian and Dmitry Vilbaum, stock options to purchase 4,500,000 shares of common stock, subject to vesting on October 29, 2009 and exercisable for three years at $0.10 per share.
On September 30, 2009, pursuant to a subscription agreement, dated as of September 21, 2009, with Arista Capital Group, Inc. the Company sold 2,000,000 shares of common stock and 4,000,000 common stock purchase warrants that are exercisable until September 30, 2012 at $0.05 per share, for the aggregate purchase price of $100,000. The Company applied the proceeds to its working capital.
On October 22, 2009, the Company entered into an agreement with McLan Accounting Services LLC, a financial and accounting consultant, pursuant to which the Company agreed to pay half of the fees due to the consultant through the issuance of shares of common stock, based on the average market bid price during the 30 day period preceding the applicable invoice date. In November 2009, the Company issued to the consultant 60,000 shares of common stock in exchange for $3,000 in financial and accounting services.
On November 10, 2009, the Company sold to an accredited investor 400,000 shares of common stock for $20,000. The Company applied the proceeds to its working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 5. OTHER INFORMATION
On July 5, 2009, the Company acquired a 90% in Terra Services, LLC, a company formed under the laws of the Russian Federation on April 23, 2009, for $300. The Company utilizes the Moscow-based company for technology and analysis purposes.
In November 2009, the Company entered into an agreement with Baker Hughes Oilfield Operations Inc. setting forth a payment plan with respect to a promissory note due July 31, 2009 in the amount of $178,920 together with 12% interest from October 4, 2007. The payment plan calls for certain minimum monthly payments from service fee proceeds and an account receivable.
ITEM 6. EXHIBITS
Exhibit No. | | Description of Exhibit |
10.1* | | Form of Subscription Agreement, September 2009 |
11 | | 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. |
31.1* | | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) |
31.2* | | Certification of Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) |
32.1* | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 |
32.2* | | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 |
* 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.
| TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. |
| |
Dated: November 20, 2009 | By: /s/ Dmitry Vilbaum |
| Dmitry Vilbaum |
| Chief Executive Officer |
| |
Dated: November 20, 2009 | By: /s/ Alexandre Agaian |
| Alexandre Agaian |
| Principal Financial Officer |
| |
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