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United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-31483
TERRA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
UTAH
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(State or other jurisdiction of incorporation or organization
87-0476073
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(I.R.S. Employer Identification No.)
7001 South 900 East, Ste 260, Midvale, Utah 84047
(Address of principal executive offices)
5912 West 11600 South, Payson, Utah 84651
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(Prior Address)
(801) 208-1289
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to section 12(g) of the Exchange Act: Common,
$0.001 par value
Check 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.
(1) Yes _X__ No ___ (2) Yes __X__ No ____
Indicate by check mark whether the registrant is a large 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.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Common Stock, $0.001 par value Outstanding as of May 15, 2008: 55,236,806
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). ___ Yes _X__ No
Terra Systems, Inc.
Form 10-Q
For The Quarter Ending March 31, 2008
Part I. Financial Information Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2008, and December 31, 2007
(Unaudited) 2
Condensed Consolidated Statements of
Operations for the Three Months ended
March 31, 2008 and 2007, and for the
Cumulative Period February 17, 1996
(Date of Inception), through March 31,
2008 (Unaudited) 3
Condensed Consolidated Statements of Cash
Flows for the Three Months ended March 31,
2008 and 2007 and for the Cumulative
Period February 17, 1996 (Date of Inception),
through March 31, 2008 (Unaudited) 4
Notes to the Unaudited Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Plan of Operation 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 11
Item 4. Controls and Procedures 11
Part II. Other Information
Item 1. Legal Proceedings 11
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security
Holders 12
Item 5. Other Information 12
Item 6. Exhibits 12
Signatures 13
1
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2008 2007
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ASSETS
Current Assets
Cash $ 26,807 $ 30,692
Stock subscription receivable 200,000 -
Other current assets 9,879 13,894
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Total Current Assets 236,686 44,586
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Property and Equipment
Furniture and equipment 582,407 582,407
Software 10,380 10,380
Less: Accumulated depreciation (484,792) (482,659)
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Net Property and Equipment 107,995 110,128
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Investment in joint venture 392,251 392,251
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Total Assets $ 736,932 $ 546,965
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 429,705 $ 431,857
Bank line of credit 52,930 43,805
Deferred grant revenue 109,000 -
Accounts payable to related parties 105,242 105,242
Accrued liabilities 295,952 285,263
Accrued interest to related parties 264,073 243,956
Notes payable to stockholders 804,680 804,680
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Total Current Liabilities 2,061,582 1,914,803
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Stockholders' Deficit
Common stock - $0.001 par value;
100,000,000 shares authorized;
55,236,806 and 53,111,806 issued
and outstanding, respectively 55,234 53,109
Additional paid-in capital 23,200,022 22,602,376
Deficit accumulated during development
stage (24,579,906) (24,023,323)
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Total Stockholders' Deficit (1,324,650) (1,367,838)
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Total Liabilities and Stockholders' Deficit $ 736,932 $ 546,965
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See accompanying notes to condensed consolidated financial statements.
2
TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
From
Inception
of the
Development
Stage on
February 17,
1996
For the Three Months Through
Ended March 31, March 31,
2008 2007 2008
------------- -------------- --------------
Revenues $ - $ 56,639 $ 768,136
Cost of revenues - 40,429 564,904
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Gross Profit - 16,210 203,232
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Operating Expenses
Research and development 22,869 - 2,086,865
General and administrative 510,266 1,022,261 20,257,752
Depreciation and amortization 2,133 2,133 805,765
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Total Operating Expenses 535,268 1,024,394 23,150,382
Loss from Operations (535,268) (1,008,184) (22,947,150)
Nonoperating Income/(Expenses)
Other Income - - 87,446
Interest expense (21,315) (34,117) (1,553,195)
Interest income - - 1,709
Gain from relief of debt - - 64,284
Loss on sale of securities - - (99,000)
Gain (loss) on sale of assets - - (134,000)
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Net Nonoperating Expenses (21,315) (34,117) (1,632,756)
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Net Loss $ (556,583) $ (1,042,301) $ (24,579,906)
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Basic and Diluted Loss
Per Share $ (0.01) $ (0.02)
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Weighted Average Shares
Outstanding 53,179,114 44,358,226
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See accompanying notes to condensed consolidated financial statements.
3
TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
From
Inception
of the
Development
Stage on
February 17,
1996
For the Three Months Through
Ended March 31, March 31,
2008 2007 2008
------------- -------------- --------------
Cash Flows from Operating
Activities:
Net loss $ (556,583) $ (1,042,301) $ (24,579,906)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization 2,133 2,133 805,765
Gain from debt relief - - (64,284)
Loss on sale of investment
securities - - 99,000
(Gain) Loss on disposal
of assets - - 139,000
Stock compensation 387,271 978,001 13,832,950
Write off of stock
subscription - - 22,750
Common stock issued for
financing fees - 14,000 529,203
Changes in current assets
and liabilities:
Accounts receivable - (21,639) -
Other current assets 4,015 (2,676) (9,879)
Accounts payable (2,152) (32,777) 926,462
Accounts payable -
related party - - 608,330
Accrued liabilities 10,689 (25,738) 1,660,109
Accrued legal settlement
expense - - 44,967
Accrued interest payable 20,117 20,117 807,694
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Net Cash Used in Operating
Activities (134,510) (110,880) (5,177,839)
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Cash Flows from Investing
Activities:
Purchase of equipment and land - - (1,003,049)
Advances to related party - - (290,328)
Organization costs paid - - (4,755)
Proceeds from sale of assets - - 367,715
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Net Cash Used in Investing
Activities - - (930,417)
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Cash Flows from Financing
Activities:
Proceeds from bank line of
credit 9,125 - 52,930
Proceeds from grant 109,000 - 109,000
Proceeds from borrowings -
stockholders - - 1,690,111
Payments on borrowings -
stockholders - - (385,730)
Proceeds from stock issuance
and subscriptions 12,500 100,001 4,854,392
Payments on capital leases - - (185,640)
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Net Cash Provided by
(Used in) Financing
Activities 130,625 100,001 6,135,063
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Net Increase (Decrease) in Cash (3,885) (10,879) 26,807
Cash at Beginning of Period 30,692 52,091 -
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Cash at End of Period $ 26,807 $ 41,212 $ 26,807
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Supplemental Cash Flow
Information:
Cash paid for interest $ 1,098 $ -
Non Cash Investing and Financing
Activities:
Conversion of liabilities to
equity $ - $ 684,222
Shares issued as a
subscription receivable $ 200,000
See accompanying notes to condensed consolidated financial statements.
4
TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by Terra
Systems, Inc., and its subsidiaries (collectively the Company), and are
unaudited. In the opinion of management, the accompanying unaudited financial
statements contain all necessary adjustments for fair presentation, consisting
of normal recurring adjustments except as disclosed herein.
The accompanying unaudited interim financial statements have been
condensed pursuant to the rules and regulations of the Securities and Exchange
Commission; therefore, certain information and disclosures generally included in
financial statements have been condensed or omitted. These financial statements
should be read in connection with the Company's annual financial statements
included in the Company's annual report on Form 10-KSB as of December 31, 2007.
The financial position and results of operations of the interim periods
presented are not necessarily indicative of the results to be expected for the
year ended December 31, 2008.
NOTE 2 - BUSINESS CONDITION
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. During the three-month period
ended March 31, 2008, the Company incurred net loss of $556,583. As of March 31,
2008, the Company's losses accumulated from inception totaled $24,579,906. These
factors, among others, indicate that the Company may be unable to continue as a
going concern for a reasonable period of time. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing as may be required, and ultimately to
attain successful operations.
The Company is in the process of negotiating various agreements to
perform research on and the development of pneumatic conveyance systems to
handle materials in a bulk state in industrial research and processing.
Management also intends to use capital and debt financing as needed to
supplement the cash flows that potentially could be generated through the
successful negotiation of agreements. In addition, the Company is in the process
of demonstrating "clean coke" technology that it has licensed and developing
production scale projects based on that technology.
NOTE 3 - LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss applicable to
common shareholders by the weighted-average number of shares outstanding during
the period. Dilutive loss per share reflects the potential dilution that could
occur if all contracts to issue common stock were converted into common stock
except for those that are anti-dilutive.
For the three months ending March 31, 2008, the Company had 12,500,000
stock options and 6,294,014 of warrants that were not included in the
computation of diluted net loss per common share as their effect would have been
anti-dilutive, thereby decreasing the net loss per common share.
For the three months ending March 31, 2007, the Company had 4,000,000
stock options and 812,867 warrants that that were not included in the
computation of diluted net loss per common share as their effect would have been
anti-dilutive, thereby decreasing the net loss per common share.
NOTE 4 - STOCK BASED COMPENSATION
The Company had no stock option grants during the three months ended
March 31, 2008. For the three months ended March 31, 2008 and 2007, the Company
calculated compensation expense of $387,271 and $76,501 respectively, related to
stock options.
A summary of stock option activity for the three months ended March 31,
2008, is presented below:
5
TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Weighted
Weighted Average
Shares Average Remaining Aggregate
Under Exercise Contractual Intrinsic
Option Price Life Value
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Outstanding at
December 31, 2007 12,500,000 $ 0.30
Granted -
Exercised -
Forfeited -
Expired -
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Outstanding at
March 31, 2008 12,500,000 $ 0.30 7.14 years $ 665,000
============
Exercisable at
March 31, 2008 4,690,478 $ 0.26 6.07 years $ 458,333
============
As of March 31, 2008, there was approximately $927,644 of unrecognized
compensation cost related to stock options that will be recognized over a
weighted average period of 1.7 years.
Stock Warrants
A summary of stock warrants at March 31, 2008 is presented below
Weighted
Weighted Average
Shares Average Remaining
Under Exercise Contractual
Warrants Price Life
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Outstanding at December 31,
2007 3,244,381 $ 0.61
Granted 3,187,500 0.67
Exercised -
Forfeited -
Expired (137,867) $ 0.30
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Outstanding at March 31, 2008 6,294,014 $ 0.64 1.86 years
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Exercisable at March 31, 2008 1,306,514 $ 0.54 4.5 years
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NOTE 5 - RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Company have from time to time
settled operating expenses on behalf of the Company. As of March 31, 2008, the
Company owed these officers $105,242. All amounts are due on demand and bear no
interest.
The Company has notes payable to shareholders and officers. These notes
bear interest at 10% and are currently due. As of March 31, 2008, the amount due
under these notes payable was $804,860. During the three months ended March 31,
2008, the Company accrued interest on the notes of $20,117. As of March 31,
2008, the accrued interest due was $264,073.
6
TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - BANK LINE OF CREDIT
The Company entered into a $500,000 line of credit with US Bank N.A.
(the "Bank") on November 1, 2007. The line of credit is guaranteed by two
directors (the "Guarantors"). The Guarantors are indemnified by each of the
other Directors and officers of the Company serving on the Board of Directors.
The line of credit bears interest at Bank prime plus 50 basis points and expires
on April 30, 2009. The credit agreement includes a limitation on other
indebtedness and guarantees. As of March 31, 2008 the Company had drawn $52,930
on the line of credit
NOTE 7 - STOCKHOLDERS' DEFICIT
Common Stock Issued for Cash - During the three months ended March 31,
2008, the Company issued 125,000 shares of common stock and 187,500 warrants to
purchase common stock, with an exercise price ranging from $0.50 to $1.00 per
share for proceeds of $12,500; 125,000 warrants vest in July 2008 and expire in
January 2009; 62,500 warrants vest in January 2009 and expire in January 2010.
The proceeds were allocated $8,541 to common stock and $3,959 to the warrants,
based on their relative fair values on the date of issuance. The fair value of
the warrants was determined by the Black-Scholes option pricing model using the
following assumptions: estimated volatility of 118.08% estimated risk-free
interest rate of 2.27% estimated yield of 0% and estimated term of 1.33 years.
Common Stock Issued for Stock Subscription - During the three months
ended March 31, 2008, the Company issued 2,000,000 shares of common stock and
3,000,000 warrants to purchase common stock, with exercise prices ranging from
$0.50 to $1.00 per share for $200,000 subscription receivable; 2,000,000
warrants which vest in September 2008 and expire in March 2009 and 1,000,000
warrants which vest in March 2009 and expire in March 2010. The proceeds were
allocated $64,089 to common stock and $ 135,911 to the warrants, based on their
relative fair values on the date of issuance. The fair value of the warrants was
determined by the Black-Scholes option pricing model using the following
assumptions: estimated volatility of 127.7% estimated risk-free interest rate of
1.57% estimated yield of 0% and estimated term of 1.33 years. Cash for the stock
issued was received in April 2008.
NOTE 8 - GRANTS
On March 19, 2008, the Company received from the Federal Center of
Excellence a grant for the amount of $109,000. The funds are to be used to
develop the process controls for the system at its clean coke pilot plant.
NOTE 9 - SUBSEQUENT EVENTS
On April 24, 2008 the Company borrowed $45,500 under the bank line of
credit and purchased various equipment for use at the Company's Hiawatha coal
recovery project.
7
Item 2. Management's Discussion and Plan of Operation
Special Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements about our
business, financial condition, and prospects that reflect our assumptions and
beliefs based on information currently available. We can give no assurance that
the expectations indicated by these forward-looking statements will be realized.
If any of our assumptions should prove incorrect, or if any of the risks and
uncertainties underlying those expectations should materialize, our actual
results may differ materially from those indicated by the forward-looking
statements.
The key factors that are not within our control and that may have a
direct bearing on operating results include, but are not limited to, acceptance
of our products or services, our ability to expand our customer base, our
ability to raise capital in the future, the retention of key employees, and
changes in the regulation of our industry.
There may be other risks and circumstances that we are unable to
predict. When used in this Quarterly Report, the words "believes," "expects,"
"intends," "plans," "anticipates," "estimates" and similar expressions are
intended to identify forward-looking statements, although there may be some
forward-looking statements not accompanied by these expressions. Additionally,
statements concerning our projections, projected business strategies, projected
revenues or performance, or future results may also constitute forward-looking
statements. All forward-looking statements are intended to be covered by the
safe harbor created by Section 21E of the Securities Exchange Act of 1934. We
disclaim any obligation or intention to update any forward-looking statements.
General
Terra Systems was incorporated in Utah on February 17, 1996, and is a
development-stage company. We are pursuing three primary businesses. The first
of these is the development and commercialization of our patented pneumatic
accelerator. This device is a gas linear particle accelerator that conveys and
processes bulk materials at high velocity in a particle isolate state, using air
as the medium of movement. The traditional and more costly medium for processing
bulk materials is water. Our technology operates efficiently at ambient
temperatures and at low pressures and does not use water. We believe that most
if not all-organic and inorganic bulk materials used in basic industries (such
as coal, gypsum, black sands, corn, rice, and wheat) can be more economically
separated and classified by our dry-process technology. This capability
facilitates a number of associated procedures, including: drying,
micropulverizing, mixing, forming, conveying, and loading. In addition, bulk
materials can be beneficiated in important ways including moisture reduction,
ash reduction, and electro-customization. Our system can perform multiple tasks,
needs less maintenance, requires no chemical additives, and can improve the
surrounding environmental quality.
The second business we are pursuing is clean coke technology. We have
obtained the worldwide license to Combustion Resources LLC's ("Combustion
Resources") clean coke technology. We believe that the carbon coke product
produced by this process qualifies for tax credits under IRC Section 45K. The
Energy Policy Act of 2005 (the "Energy Act") Section 1321 extended the date that
facilities placed in service will qualify for this tax credit. We worked with
the College of Eastern Utah to apply for and obtain an award of a Federal Center
of Excellence grant under Section 404 of the Energy Act. This award will be used
to further our development of this technology.
The third business we are pursuing is the agglomeration of carbon
products. The material agglomerated may or may not be previously processed
8
utilizing our patented pneumatic accelerator technology. Initially, we are
agglomerating carbon black, a very fine-sized material that poses significant
material handling issues in its unagglomerated state.
Our success and ability to compete will be dependent in part on the
protection of our existing and potential patents, trademarks, trade names,
service marks, trade secrets, and other proprietary rights. Thus, a majority of
our research and development efforts have been focused on product development,
testing, and patent application.
We seek to continue developing our products internally through research
and development, or if appropriate, through strategic partnerships. We expect,
however, that if we can purchase or license products, services, or technologies
from third parties at a reasonable cost, we will do so in order to avoid the
time and expense involved in developing these products, services, or
technologies.
Results of Operations
Three months ended March 31, 2008, compared to the three months ended March 31,
2007:
From inception through March 31, 2008, we have incurred losses totaling
$24,579,906 and generated revenues of $768,136 from operations. During the three
months ended March 31, 2008, we had no sales revenues. This factor, among
others, raises substantial doubt concerning our ability to continue as a going
concern. We intend to use capital and debt financing as needed to supplement the
cash flows that we expect will be provided by licensing agreements. Our primary
source of capital historically has been through the sale of our securities.
Realization of sales of our products and services is vital to
operations. We may not be able to continue as a going concern without generating
and realizing additional sales or raising additional capital. We cannot
guarantee that we will be able to compete successfully or that the competitive
pressures we may face will not have a material adverse effect on our business,
results of operations and financial condition. Additionally, a superior
competitive product could force us out of business.
While we have been able to generate some testing and product
development revenues since inception, we have been limited in the scope of
potential clients that could be contacted until our patent application was
approved. In January 2001, we received notification that we had been awarded a
patent on our Pneumatic Accelerator. Since then we have been pursuing project
development contracts and refining our design of the Pneumatic Accelerator. We
have relocated our single Pneumatic Accelerator System to the Hiawatha coal
recovery project site, located in Carbon county, Utah, and expect to begin
operations thereof in the second quarter of 2008.
In addition, we were able to license the "Clean Coke Technology" of
Combustion Resources LLC ("Combustion Resources"). The license agreement
requires that the Company begin paying a $300,000 per year minimum royalty
beginning in the year 2010. The royalty is set as a fixed percentage of the net
operating profit realized from the licensed Clean Coke Technology, subject to a
cap of $3 million in any one year. The Company believes that the Clean Coke
Technology can be utilized to produce coke that qualify under IRC Section 45K
for the tax credit from alternative fuels, provided a plant utilizing the Clean
Coke Technology is built and placed in service by December 31, 2009. The Section
45K credit is subject to reduction as the Federal reference price of oil
increases.
Combustion Resources, the College of Eastern Utah's Western Energy
Training Center, and the Company were successful in obtaining a Federal Center
of Excellence grant to develop the process controls for the system at its pilot
plant (see below) in Price, Utah.
Also during the prior year, we were contracted by Combustion Resources,
and worked with them to build and operate a pilot briquetting plant in Price,
Utah. The pilot plant has a theoretical capacity of 2 tons per hour. The plant
has been used to agglomerate carbon black. Carbon black is a very fine-sized
material that is difficult to handle in its unagglomerated state. The plant has
9
produced 162 tons of agglomerated carbon black to-date, all of which has been
shipped to a major industrial customer for testing at its production plant. The
Company's revenue for the prior year was generated from this activity. Until the
results of the test are known, the pilot plant will be utilized to develop the
Clean Coke Technology process controls mentioned above. We have recently
completed several modifications that were necessary to enable us to utilize the
plant for the production of clean coke. The most substantial of these
modifications was the addition of a calcining oven. Which is used in the process
to produce Clean Coke. We expect that the modified pilot plant will begin to run
Clean Coke material near the end of the second quarter or the beginning of the
third quarter. We anticipate that the modified plant will run Clean Coke
material that will be used by various parties for testing in their production
scale facilities.
Our net loss for the three months ended March 31, 2008, was $556,583,
compared to a net loss for the three months ended March 31, 2007, of $1,042,301.
Our expenses for the three months ended March 31, 2008, were $556,583 of which
approximately 92% were general and administrative. Our expenses for the three
months ended March 31, 2007, were $1,058,511 of which approximately 97% were
general and administrative. For the three months ended March 31, 2008,
depreciation and amortization expense was $2,133 compared to depreciation and
amortization expense of $2,133 for the three months ended March 31, 2007.
Since inception, we have realized minimal revenues while incurring
normal fixed overhead and debt service costs. This operating trend is projected
to continue for at least the remaining period of fiscal 2008.
Future Business
We see opportunities for our technology and business in an array of
large industries, including power generation, agriculture, mining,
environmental, construction, ceramics, and materials transportation. We
anticipate that we will generate revenues through the sale of our proprietary
equipment, products, fees, royalties, and profit sharing from licensing of our
technology.
Besides the three primary businesses noted above, the Company is also
pursuing potential energy projects through its subsidiary Mountain Island
Energy, LLC, and its joint venture with United Fund Advisors, LLC, in Soda
Springs, Idaho. Wind resource data is being collected at this site as part of
the process of determining the feasibility of an approximate ten megawatt wind
energy project.
Liquidity and Capital Resources
Given our current negative cash flows, it will be difficult for Terra
Systems to continue as a going concern. While the issuance of a patent for our
Pneumatic Accelerator Sysyem and the licensing of the Clean Coke technology
should allow us to more aggressively pursue revenue, and cash generating
contracts and opportunities, it will be necessary to raise additional funds or
reduce cash expenditures. Funds could be generated through the issuance of
additional stock or through the sale of existing plant and office equipment.
Cash expenditures could be eased through a reduction in overhead costs,
including but not limited to labor and associated employee benefits.
As mentioned in our audited financial statements included with our
annual report on Form 10-KSB, for the year ended December 31, 2007, our audited
consolidated financial statements have been prepared on the assumption that we
will continue as a going concern. Our product line is limited and it has been
necessary to rely upon financing from the sale of our equity securities to
sustain operations. Additional financing will be required if we are to continue
as a going concern. If additional financing cannot be obtained, we may be
required to scale back or discontinue operations. Even if additional financing
is available there can be no assurance that it will be on terms favorable to us.
In any event, this additional financing will result in immediate and possible
substantial dilution to existing shareholders.
10
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
The Company maintains a set of disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 (the "Exchange Act") Rules
13a-15(e) or 15d-15(e)) designed to ensure that information required to be
disclosed by the Company in the reports filed under the Securities Exchange Act,
is recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms. Disclosure controls are also designed
with the objective of ensuring that this information is accumulated and
communicated to the Company's management, including the Company's chief
executive officer and a consultant performing services for the Company commonly
performed by a chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Based upon their evaluation as of the end of the period covered by this
report, the Company's chief executive officer and a consultant performing
services for the Company commonly performed by a chief financial officer
concluded that the Company's disclosure controls and procedures were not
effective to ensure that information required to be included in the Company's
periodic SEC filings is recorded, processed, summarized, and reported within the
time periods specified in the SEC rules and forms.
The Company was advised by Hansen, Barnett & Maxwell, P.C., the
Company's independent registered public accounting firm, that during their
performance of audit procedures for fiscal year 2007, Hansen, Barnett & Maxwell,
P.C. identified a material weakness as defined by the Public Company Accounting
Oversight Board.
This deficiency consisted primarily of inadequate staffing and
supervision that led to the untimely identification and resolution of accounting
and disclosure matters and failure to perform timely and effective reviews.
However, the size of the Company prevents it from being able to employ
sufficient resources to enable the Company to have adequate segregation of
duties within its internal control system. Management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Changes in Internal Controls over Financial Reporting.
In order to address the deficiency of inadequate staffing and
supervision, management has implemented tighter cash flow controls and has
set-up a centralized computer system to maintain the accounting records.
Management will continue to monitor and review these remediation efforts.
Certifications of the Chief Executive Officer and the consultant
performing services for the Company commonly performed by a chief financial
officer regarding, among other items, disclosure controls and procedures are
included immediately after the signature section of this Form 10-Q.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2008, the Company issued
125,000 shares of common stock for proceeds of $12,500 at a price of $0.10 per
share and 2,000,000 shares of common stock for a subscription receivable of
$200,000 at a price of $0.10 per share.
The sales of shares to the buyers were made in reliance on Section 4(2)
of the 1933 Act, and rules and regulations promulgated there under, as a
transaction not involving any public offering. No advertising or general
solicitation was employed in the issuance of the securities.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Consultant performing certain
services for the Company commonly performed by a Chief
Financial Officer
32.1 Section 1350 Certification
32.2 Section 1350 Certification
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Terra Systems, Inc.
By: /s/ Clayton Timothy
--------------------------------------
Clayton Timothy
CEO
Date: May 15. 2008
By: /s/ Mark Faerber
--------------------------------------
Mark Faerber
Consultant performing certain services
for the Company commonly performed by
a Chief Financial Officer
Date: May 15, 2008
13
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