TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	exhibit321.htm
EX-32.2 - EXHIBIT 32.2 - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	exhibit322.htm
EX-31.2 - EXHIBIT 31.2 - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________ to ___________.

Commission file number: 333-90272

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE		56-1940918
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

99 Park Avenue, 16th Floor, New York, NY		10016
(Address of principal executive offices)		(Zip Code)

(212) 286-9197
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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):

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

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 23, 2011, we had 126,246,684 shares of common stock issued and outstanding.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets
	as of March 31, 2011 (Unaudited) and December 31, 2010	3
	Consolidated Statements of Operations
	for the Three Months Ended March 31, 2011 and 2010 (Unaudited)	4
	Consolidated Statements of Cash Flows
	for the Three Months Ended March 31, 2011 and 2010 (Unaudited)	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	(Removed and Reserved)	19
Item 5.	Other Information	19
Item 6.	Exhibits	20

Signatures		21

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31,			December 31,
	2011			2010
ASSETS

CURRENT ASSETS
Cash	$	–		$	61,107
Accounts Receivable, Net		51,320			63,319
Prepaid Expenses and Other Current Assets		363			114
TOTAL CURRENT ASSETS		51,683			124,540

OTHER ASSETS
Property and Equipment, Net of Accumulated Depreciation of $43,513 and $40,680, respectively		37,130			39,791
TOTAL OTHER ASSETS		37,130			39,791

TOTAL ASSETS	$	88,813		$	164,331

LIABILITIES AND SHAREHOLDERS’ DEFICIT

CURRENT LIABILITIES
Accounts Payable and Accrued Expenses	$	743,446		$	508,068
Stock-Based Liability		79,947			79,947
Short Term Debt		238,792			238,792
Loans Payable – Related Parties		105,765			105,765
Derivative Liabilities		397,841			–
Customer Deposits		126,000			111,900
TOTAL CURRENT LIABILITIES		1,691,791			1,044,472

SHAREHOLDERS’ DEFICIT
Preferred Stock: $.0001 Par Value, Shares Authorized 25,000,000 Shares Issued and Outstanding: 0 at December 31, 2010 and 2009, respectively		–			–
Common Stock; $.0001 Par Value Shares Authorized 500,000,000 Shares Issued and Outstanding: 126,126,684 and 126,026,684 at March 31, 2011 and December 31, 2010, respectively		12,613			12,603
Additional Paid In Capital		24,864,010			24,536,226
Accumulated Deficit		(26,479,601	)		(25,428,970	)
TOTAL SHAREHOLDERS’ DEFICIT		(1,602,978	)		(880,141	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	88,813		$	164,331

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended March 31,
	2011			2010

REVENUES	$	–		$	84,975

COST OF REVENUES		46,002			44,831

GROSS PROFIT		(46,002	)		40,144

OPERATING EXPENSES
Selling, General and Administrative		681,284			321,349
Compensation Expense		271,078			529,192
TOTAL OPERATING EXPENSES		952,362			850,541

OPERATING LOSS BEFORE OTHER INCOME		(998,364	)		(810,397	)

OTHER INCOME (EXPENSE)
Interest Expense		(2,128	)		(4,318	)
Other Income (Expense)		(765	)		356
(Gain) Loss on derivative liability		(49,374	)		–
TOTAL OTHER INCOME (EXPENSE)		(52,267	)		(3,962	)

NET LOSS	$	(1,050,631	)	$	(814,359	)

NET LOSS PER COMMON SHARE – BASIC AND DILUTED	$	(0.01	)	$	(0.01	)

WEIGHTED AVERAGE PER COMMON SHARES OUTSTANDING – BASIC AND DILUTED		126,120,017			108,019,774

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,050,631	)	$	(814,359	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non Cash Items:
Depreciation		2,833			6,497
Stock Based Compensation		671,261			491,422
Loss on Derivative Liability		49,374			–
Stock Issued for Services		–			6,000
Changes in Operating Assets and Liabilities:
Accounts Receivable		12,000			(56,854	)
Prepaid Expenses and Other Current Assets		(250	)		(8,086	)
Customer Deposits		14,100			–
Accounts Payable and Accrued Expenses		235,378			38,455
NET CASH USED IN OPERATING ACTIVITES		(65,935	)		(336,925	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of fixed assets		(172	)		(750	)
NET CASH USED IN INVESTING ACTIVITIES		(172	)		(750	)

NET CASH FROM FINANCING ACTIVITIES:
Issuance of Common Stock for cash, net of offering costs		5,000			460,310
Payments on Loans from Third Parties		–			(70,000	)
Payments on Loans from Officers		–			(45,723	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		5,000			344,587


NET INCREASE/(DECREASE) IN CASH		(61,107	)		6,912

CASH - BEGINNING OF YEAR		61,107			17,942

CASH – END OF PERIOD	$	–		$	24,854

SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	917		$	–
Cash paid for income taxes	$	–		$	–

NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of preferred stock to common stock	$	–		$	–
Common stock and warrants issued for settlement of debt	$	–		$	–

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 sheets of Terra Energy & Resource Technologies, Inc. (“Terra”), a Delaware corporation, and its 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, 2010, 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 months ended March 31, 2011 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, 2010, filed on April 15, 2011. Certain prior period amounts have been reclassified to conform with current period presentation.

Fair Value Measurements

As defined in ASC 820 “Fair Value Measurements”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2011. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	March 31, 2011
	Level 1		Level 2		Level 3		Total
Stock Based Liability		—		—	$	79,947	$	79,947
Derivative Liability		—		—	$	397,841	$	397,841

The derivatives listed above are carried at fair value. The fair value amounts in current period earnings associated with the Company’s derivatives resulted from Level 3 fair value methodologies; that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments. This observable data includes the quoted market prices and estimated volatility factors.

Recent Accounting Pronouncements

The Company does not expect any recently issued accounting pronouncements to have a significant impact on our consolidated results of operations, financial position or cash flow.

2.	GOING CONCERN

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, 2011. 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. TRANSACTION RELATING TO COMMON STOCK

In the three months ended March 31, 2011, the Company sold 0.5 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 200,000 common shares, for gross proceeds of $5,000. 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 common shares.

In the three months ended March 31, 2011, the Company sold for $250 an option to purchase 250,000 shares of common stock, exercisable for five years at $0.05 per share.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. STOCK BASED COMPENSATION

In accordance with the standard “Share-Based Payment,” rules 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:

	March 31, 2011
Risk-free rate		1.24%
Dividend yield		0.00%
Volatility factor		268%-275%
Expected term	3-5 years

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. As of March 31, 2011, the options and warrants outstanding had an intrinsic value of $113,165

	Number of Options/Warrants			Weighted Average Exercise Price
Balance outstanding at December 31, 2010		139,580,120		$	0.07
Granted		15,604,000			0.05
Exercised		–			–
Cancelled/forfeited		(15,000	)		(0.50	)
Balance outstanding at March 31, 2011		155,169,120		$	0.07

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The stock options and warrants outstanding and exercisable at March 31, 2011 were in the following exercise price ranges:

		At March 31, 2011
		Outstanding						Exercisable
Range of Exercise Prices		Number of Options/Warrants		Weighted Average Remaining Years of Contractual Life		Weighted Average Exercise Price		Number of Options/Warrants		Weighted Average Exercise Price
$	0.00 – 0.049		17,155,000		4.6	$	0.03		17,155,000	$	0.03
$	0.05 – 0.10		127,613,120		2.6	$	0.05		117,613,120	$	0.06
$	0.11 – 0.15		50,000		2.0	$	0.11		50,000	$	0.11
$	0.16 – 0.20		10,000,000		1.3	$	0.16		10,000,000	$	0.16
$	0.21 – 0.49		10,450,000		1.4	$	0.22		10,450,000	$	0.22

			165,268,120		2.7	$	0.07		155,268,120	$	0.07

Options to Officers and Employees

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. The stock appreciation rights are revalued at the end of each reporting period as required by ASC-718 at which time the liability and compensation expense are adjusted. 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. As of March 31, 2011, the rights have a combined value of $79,947.

In the three months ended March 31, 2011, the Company granted to employees an aggregate of 4,000,000 stock options, exercisable for five years at $0.04 per share. The stock options were fully vested at the grant date and have a combined value of $159,476 and were fully expensed.

Options to Consultants

In the three months ended March 31, 2011, the Company granted to consultants stock options and warrants to purchase an aggregate of 1,603,000 common shares with a total value of $64,927. The options were fully vested on the date of grant and were fully expensed during the three months ended March 31, 2011.

On March 7, 2011, the Company entered into an agreement for financing of a prospective exploration project and issued warrants to purchase 10,000,000 shares, exercisable for five years at $0.05 and a warrant to purchase 10,000,000 shares, exercisable, subject to exercisability upon attainment of a license for prospective exploration project, for five years at $0.05 per share. The Company agreed to file a registration statement covering the shares underlying the warrants and may incur penalty if the registration statement is not effective within six months. The warrants may be exercised on a cashless basis if the warrant shares are unable to be sold in reliance on an effective registration statement and carry full ratchet anti-dilution protection. The anti-dilution provision calls for the exercise price of the warrants to be reduced if the Company sells common stock in the future at a price below $0.05. The Company reserved 20,000,000 shares in escrow in support of the exercise of the warrants.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The first tranche of 10,000,000 of the warrants above were fully vested and non-forfeitable on the date of the agreement and had a fair value of $348,467. These warrants were expensed during the three months ended March 31, 2011. In addition, due to the anti-dilution provision described above, these warrants are required to be classified as liabilities at inception under ASC 815-40 “Derivatives and Hedging”. See Note 6.

The second tranche of 10,000,000 warrants above were not earned by the consultant as of March 31, 2011. The Company expects they will be earned in June of 2011. The estimated fair value of these warrants of $397,841 as of March 31, 2011 is being amortized over the estimated performance period. During the three months ended March 31, 2011, $98,391 was amortized to expense related to these warrants. These warrants will be revalued at the end of each reporting period until performance has been completed and the total expense will be adjusted based on the final fair value on the date performance is complete. In addition, on the date performance is complete, the fair value of these warrants will be re-classified from equity to liabilities as a result of the anti-dilution provision discussed above.

5. RELATED PARTY TRANSACTIONS

As of March 31, 2011, the Company owed Ivan Raylyan, a former officer and director of the Company, $105,765 for advances previously received in 2007. The advances are non-interest bearing, unsecured and due on demand.

6. DERIVATIVE LIABILITIES

As discussed in Note 4, the Company granted 10,000,000 warrants during the three months ended March 31, 2011 that contain an anti-dilution provision which causes them to be classified as liabilities under AS 815-40 “Derivatives and Hedging”. These liabilities will be re-measured and the end of each reporting period and the change in fair value will be reported in earnings.

At inception, these warrants had a fair value of $348,467. The fair value of these warrants as of March 31, 2011 was $397,841 and the change in fair value of $49,374 was recorded as a loss on derivative liabilities for the three months ended March 31, 2011.

7. SUBSEQUENT EVENTS

In April and May 2011, pursuant to a one-year consulting agreement with The Virtual E.A., Inc. effective as of June 1, 2010, the Company issued an aggregate of 4,000 options, exercisable for five years at $0.05 per share.

In April and May 2011, pursuant to a one-year consulting agreement with Ivan Raylyan effective as of January 1, 2011, the Company issued an aggregate of 100,000 options, exercisable for five years at $0.05 per share.

In May 2011, pursuant to a consulting arrangement for financial and accounting services 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 fiscal quarter, but no less than at the rate of $0.05 per share, the Company issued to SMC International Group, Ltd. an aggregate of 120,000 shares of common stock in exchange for $6,000 in financial and accounting services.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

“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 and gas and natural resources industries. 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, 2010, and the related notes, included in our Annual Report on Form 10-K.

INTRODUCTORY NOTE

Our Operations and Plans

During fiscal 2010 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. We need substantial additional capital to conduct or participate in oil exploration activities. We continue to seek joint ventures or partners for exploration activities, including examining, drilling, operating and financing of such activities. We will determine our plans for such exploration activities, including farm-ins, based on our ability to fund such projects. Our source of revenue have been from providing mapping and analytic services to exploration, drilling and mining companies. In fiscal 2010, we provided analysis services to four customers pursuant to which we generated $266,932 in revenues.

Current Status of Operations

We have incurred large operating losses and have a large working capital deficit of approximately $1.64 million and $0.92 million at March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011 and December 31, 2010, we had cash of approximately $0 and $61,000, respectively. These factors raise substantial doubt about our ability to continue as a going concern.

While we generated approximately $6 million in revenues since 2005, 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 2005 through fiscal 2010, we have supported our operations primarily through the sale of preferred stock, common stock, and convertible debentures, and non-controlling interests in drilling limited partnerships, including sales of common stock of $670,000 in fiscal 2009 and $1,034,720 in fiscal 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 we are successful in obtaining additional funding, 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, 2011, revenues from services decreased by $84,975 to $0 from $84,975 in the three months ended March 31, 2010. During the three months ended March 31, 2011, we were primarily in negotiations with international mineral and oil companies and foreign natural resource agencies to render services. We rendered mapping services pursuant to minor service contracts during the three months ended March 31, 2010. 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 decrease in 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, while we were engaged in negotiations to render services. 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, 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, 2011 and 2010 were $46,002 and $44,831, 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, 2011 increased by $101,821, or 12%, to $952,362 from $850,541 in the three months ended March 31, 2010. Operating expenses for the three months ended March 31, 2010 as a percentage of revenue were approximately 1,000%.

Operating expenses for the three months ended March 31, 2011 consisted primarily of professional expenses of approximately $106,475, consulting fees of $516,785, employee salaries and benefits of approximately $111,602, rent expenses of $7,500, travel expenses of approximately $11,152, and stock based compensation of approximately $159,476. 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, travel expenses of approximately $17,898, and stock based compensation of $570,255.

Our operating expenses increased during the three months ended March 31, 2011 in comparison to the three months ended March 31, 2010 because we were engaged in more significant prospective service projects in 2011. This has increased selling, general and administrative expenses, offset by a decrease in compensation 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, 2011 and 2010, we had net interest expense of $2,128 and $3,962, respectively. The decrease in net interest expense is primarily due to a decrease in interest expenses associated with loans.

Net Loss

The net losses for the three months ended March 31, 2011 and 2010 were $1,050,631 and $814,359, respectively. The increase in net loss during the three months ended March 31, 2011 compared to the three months ended March 31, 2010 principally resulted from an increase in selling, general and administrative expenses, offset by a decrease in compensation expense. For the three months ended March 31, 2011 and 2010, our net loss per common share (basic and diluted) attributable to common shareholders was $0.01 and $0.01, 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, short-term loans, and sales of non-controlling interests in limited partnerships. During the three months ended March 31, 2011, our cash decreased by $61,107. Of the decrease in cash, $65,935 was used in operating activities, $172 was used in investing activities and $5,000 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 $65,935 for the three months ended March 31, 2011, as compared with deficit cash flows of $336,925 for the three months ended March 31, 2010.

For the three months ended March 31, 2011, cash flows from operating activities resulted in deficit cash flows of $65,935, primarily due to a net loss of $1,050,631,plus non-cash charges of $984,696, adjustments for a decrease in accounts receivable of $12,000, an increase in prepaid expenses and other current assets of $250, an increase in customer deposits of $14,100, an increase in derivatives liabilities of 49,374, and an increase accounts payable and accrued expenses of $235,378. The most significant driver behind our non-cash working capital was charges for stock based compensation of $671,261.

For the three months ended March 31, 2010, cash flows from operating activities resulted in deficit cash flows of $336,925, primarily due to a net loss of $814,359, plus non-cash charges of $503,919, adjustments for an increase in accounts receivable of $56,854, an increase in prepaid expenses and other current assets of $8,086, and an increase in accounts payable and accrued expenses of $38,455. The most significant driver behind the decrease in our non-cash working capital was charges for stock based compensation of $491,422.

Investing Activities

For the three months ended March 31, 2011 and 2010, cash flows from investing activities resulted in a deficit of $172 and $750, respectively, 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, 2011, cash provided by financing activities was $5,000 from the sales of units of common stock and warrants and the sale of options to an investor. 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.

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 the next twelve months 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 the next twelve months. 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, 2011, we had 19 employees (including employees of corporate subsidiaries), of which 6 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 eight to twelve 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, 2010 and 2009 financial statements included in our Annual Reports for the years ended December 31, 2010 and 2009 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 2010 and 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 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 2010, 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.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company does not expect any recent accounting pronouncements to have a material impact to its financial position or result of operations.

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 and Principal Financial Officer of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2011. Based on such evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, because of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures are not 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.

(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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. (REMOVED AND RESERVED)

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibit		Description
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

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: May 23, 2011	By:	/s/ Dmitry Vilbaum
		Dmitry Vilbaum
		Chief Executive Officer

Dated: May 23, 2011	By:	/s/ Alexandre Agaian
		Alexandre Agaian
		Principal Financial Officer

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. - FORM 10-Q - May 23, 2011

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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. Reports