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Torrent Energy Corp ˇ SB-2 ˇ On 9/23/04

Filed On 9/23/04 2:26pm ET   ˇ   SEC File 333-119206   ˇ   Accession Number 1013762-4-1038

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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 9/23/04  Torrent Energy Corp               SB-2                   4:75                                     1013762

Registration of Securities by a Small-Business Issuer   ˇ   Form SB-2
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: SB-2        Registration of Securities by a Small-Business        71    372K 
                          Issuer                                                 
 2: EX-3        Articles of Incorporation/Organization or By-Laws      2      9K 
 3: EX-5        Opinion re: Legality                                   1      8K 
 4: EX-23       Consent of Experts or Counsel                          1      6K 


SB-2   ˇ   Registration of Securities by a Small-Business Issuer
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page
3Calculation of Registration Fee
5The Offering
8Risk Factors
14Use of proceeds
23Business
36Penny Stock
37Selling Stockholders
66Item 24. Indemnification of Directors and Officers
"Item 25. Other Expenses of Issuance and Distribution
67Item 26. Recent Sales of Unregistered Securities
69Item 27. Exhibits
70Item 28. Undertakings
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As filed with the Securities and Exchange Commission on September 23, 2004 An Exhibit List can be found on page II-[ ]. Registration No. 333- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ---------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------------- TORRENT ENERGY CORPORATION (Name of small business issuer in its charter) Colorado 5500 84-0503749 (State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Classification Code Number) Identification No.) Organization) 3400-666 Burrard Street Vancouver, BC V6C 2X8, Canada (604) 639-3118 (Address and telephone number of principal executive offices and principal place of business) Mark Gustafson, President TORRENT ENERGY CORPORATION 3400-666 Burrard Street Vancouver, BC V6C 2X8, Canada (604) 639-3118 (Name, address and telephone number of agent for service) Copies to: Gregory Sichenzia, Esq. Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas, 21st Flr. New York, New York 10018 (212) 930-9700 (212) 930-9725 (fax) APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after this Registration Statement becomes effective. If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X]
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If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. _________ 2
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ˇ Enlarge/Download Table CALCULATION OF REGISTRATION FEE ------------------------------- -------------------- ---------------- ------------------ -------------------- Title of each class of Amount to be Proposed Proposed Amount of securities to be registered (1) maximum maximum registration fee registered offering aggregate price per offering price share (2) ------------------------------- -------------------- ---------------- ------------------ -------------------- Common stock, $.001 par 5,000,000 (3) $.75 $3,750,000 $475.13 value issuable upon conversion of Series B Convertible Preferred Stock ------------------------------- -------------------- ---------------- ------------------ -------------------- Common stock, $.001 par value 3,602,930 $.75 $2,702,197.50 $342.37 ------------------------------- -------------------- ---------------- ------------------ -------------------- Common stock, $.001 par 1,942,930 $.75 $1,457,197.50 $184.63 value issuable upon exercise of warrants ------------------------------- -------------------- ---------------- ------------------ -------------------- Common stock, $.001 par 200,000 $1.00 $200,000 $25.34 value issuable upon exercise of options ------------------------------- -------------------- ---------------- ------------------ -------------------- Common stock, $.001 par 200,000 $2.00 $400,000 $50.68 value issuable upon exercise of options ------------------------------- -------------------- ---------------- ------------------ -------------------- Total 10,945,860 $8,509,395 $1,077.15 ------------------------------- -------------------- ---------------- ------------------ -------------------- (1) Includes shares of our common stock, par value $0.001 per share, which may be offered pursuant to this registration statement, which shares are issuable upon conversion of Series B Convertible Preferred Stock by the selling stockholders. In addition to the shares set forth in the table, the amount to be registered includes an indeterminate number of shares issuable upon conversion of the Series B Convertible Preferred Stock as such number may be adjusted as a result of stock splits, stock dividends and similar transactions in accordance with Rule 416. The number of shares of common stock registered hereunder represents a good faith estimate by us of the number of shares of common stock issuable upon conversion of the Series B Convertible Preferred Stock. For purposes of estimating the number of shares of common stock to be included in this registration statement, we calculated a good faith estimate of the number of shares of our common stock that we believe will be issuable upon conversion of the Series B Convertible Preferred Stock to account for market fluctuations, and antidilution and price protection adjustments, respectively. Should the conversion ratio result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary. In addition, should a decrease in the exercise price as a result of an issuance or sale of shares below the then current market price, result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary. (2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on September 20, 2004, which was $.75 per share. (3) Includes a good faith estimate of the shares underlying Series B Convertible Preferred Stock to account for market fluctuations. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. 3
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 2004 TORRENT ENERGY CORPORATION 10,945,860 SHARES OF COMMON STOCK This prospectus relates to the resale by the selling stockholders of up to 10,945,860 shares of our common stock, including 3,602,930 shares of common stock, up to 1,942,930 shares underlying warrants, 400,000 shares underlying options and up to 5,000,000 shares of common stock underlying Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock is convertible into our common stock, subject to a maximum cap of $250,000 worth of Series B Convertible Preferred Stock in any 30 day calendar period, into the number of our shares of common stock equal to the sum of (i) the liquidation amount of the Series B Convertible Preferred Stock, plus (ii) all accrued but unpaid dividends, which is then divided by the conversion price then in effect. The liquidation amount of the Series B Convertible Preferred Stock is equal to $1,000 per share of Series B Convertible Preferred Stock. The conversion price for the Series B Convertible Preferred Stock is the lesser of (i) $1.20 or 80% of the volume weighted average price of the common stock on a principal market for the 10 trading days before but not including the conversion date. The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The selling stockholders may be deemed underwriters of the shares of common stock which they are offering. We will pay the expenses of registering these shares. Our common stock is registered under Section 12(g) of the Securities Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the symbol "TREN". The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on September 20, 2004, was $.75. Investing in these securities involves significant risks. See "Risk Factors" beginning on page 4. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is September 23, 2004. The information in this Prospectus is not complete and may be changed. This Prospectus is included in the Registration Statement that was filed by Torrent Energy Corporation with the Securities and Exchange Commission. The selling stockholders may not sell these securities until the registration statement becomes effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted. 4
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PROSPECTUS SUMMARY The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the "risk factors" section, the financial statements and the secured convertible notes to the financial statements. TORRENT ENERGY CORPORATION We are an exploration stage company engaged in the exploration of coalbed methane in the Coos Bay region of Oregon. Through our wholly-owned subsidiary, Methane Energy Corp., we hold leases to approximately 60,000 acres of prospective coalbed methane lands in the Coos Bay region. Methane Energy operates the exploration project in the Coos Bay region. We changed our name from Scarab Systems, Inc. to Torrent Energy on July 13, 2004 to reflect the change in our business operations towards coalbed methane exploration. The change in our business operations occurred as a result of our entering into a Lease Purchase and Sale Agreement, through Methane Energy, on April 30, 2004. We were previously a web design and internet application developer. For the three months ended June 30, 2004, we generated no revenue and a net loss of $675,319. In addition, for the year ended March 31, 2004, we generated no revenue and a net loss of $374,606. As a result of recurring losses from operations and working capital deficiency, our auditors, in their report dated April 7, 2004, have expressed substantial doubt about our ability to continue as going concern. Our principal offices are located at 3400-666 Burrard Street, Vancouver, British Columbia V6C 2X8, Canada, and our telephone number is (604) 639-3118. We are a Colorado corporation. The Offering ˇ Enlarge/Download Table Common stock offered by selling stockholders......................Up to 10,945,860 shares, including the following: - up to 5,000,000 shares of common stock underlying Series B Convertible Preferred Stock (includes a good faith estimate of the shares underlying Series B Convertible Preferred Stock to account for market fluctuations antidilution and price protection adjustments, respectively); - 3,602,930 shares of common stock; - 1,942,930 shares underlying stock purchase warrants; and - 400,000 shares underlying options. This number represents 47.59% of our current outstanding stock. Common stock to be outstanding after the offering.................Up to 22,999,179 shares Use of proceeds................................................We will not receive any proceeds from the sale of the common stock. However, we will receive the sale price of any common stock we sell to the selling stockholder upon exercise of the warrants and options. We expect to use the proceeds 5
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received from the exercise of the warrants and options for general working capital purposes. We have received gross proceeds of $1,100,000 from the sale of the Series B Convertible Preferred Stock and the investors are obligated to provide us with an additional $1,100,000; $550,000 within five days following the filing of this registration statement and $550,000 within five days of this prospectus being declared effective. The proceeds received from the sale of the Series B Convertible Preferred Stock will be used for lease acquisitions, core drilling, marketing and public relations, working capital needs and payment of legal and professional fees. Over-The-Counter Bulletin Board Symbol........................... TREN
The above information regarding common stock to be outstanding after the offering is based on 15,656,249 shares of common stock outstanding as of September 10, 2004 and assumes the subsequent conversion of our issued Series B Convertible Preferred Stock and the exercise of the warrants and options. To obtain funding for our ongoing operations, we entered into an Investment Agreement with one accredited investor on August 27, 2004 for the sale of 2,200 shares of Series B Convertible Preferred Stock for $2,200,000. This prospectus relates to the resale of the common stock underlying this Series B Convertible Preferred Stock. The investor is obligated to provide us with an aggregate of $2,200,000 as follows: o $1,100,000 was disbursed on August 27, 2004; o $550,000 will be disbursed within five days of the filing of this registration statement; and o $550,000 will be disbursed within five days of the effectiveness of this prospectus. Accordingly, we have received a total of $1,100,000 pursuant to the Investment Agreement. The Series B Convertible Preferred Stock is entitled to cumulative dividends of 5% per annum and are convertible into our common stock, at the selling stockholders' option and subject to a maximum cap of $250,000 worth of Series B Convertible Preferred Stock in any 30 day calendar period, into the number of our shares of common stock equal to the sum of (i) the liquidation amount of the Series B Convertible Preferred Stock, plus (ii) all accrued but unpaid dividends, which is then divided by the conversion price then in effect. The liquidation amount of the Series B Convertible Preferred Stock is equal to $1,000 per share of Series B Convertible Preferred Stock. The conversion price for the Series B Convertible Preferred Stock is the lesser of (i) $1.20 or 80% of the volume weighted average price of the common stock on a principal market for the 10 trading days before but not including the conversion date. Accordingly, there is in fact no limit on the number of shares into which the Series B Convertible Preferred Stock may be converted. As of September 21, 2004, the volume weighted average price of the common stock on a principal market for the 10 trading days as reported on the Over-The-Counter Bulletin Board was $.758 and, therefore, the conversion price for the Series B Convertible Preferred Stock was $.6064. Based on this conversion price, the 2,200 shares of Series B Convertible Preferred Stock, excluding dividends, were convertible into 3,627,969 shares of our common stock. The selling stockholders have contractually agreed to restrict their ability to convert their Series B Convertible Preferred Stock and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion does not exceed 4.99% of the then issued and outstanding shares of common stock. 6
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See the "Selling Stockholders" and "Risk Factors" sections for a complete description of the Series B Convertible Preferred Stock. 7
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RISK FACTORS This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment. Risks Relating to Our Business: We Have a History Of Losses Which May Continue, Which May Negatively Impact Our Ability to Achieve Our Business Objectives. We incurred net losses of $374,606 for the year ended March 31, 2004 and $396,277 for the year ended March 31, 2003. For the three months ended June 30, 2004, we incurred a net loss of $675,319. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our revenue. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us. If We Are Unable to Obtain Additional Funding Our Business Operations Will be Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders May Suffer Substantial Dilution. We will require additional funds to sustain and expand our oil and gas exploration activities. We anticipate that we will require up to approximately $2,500,000 to fund our continued operations for the next twelve months, depending on revenue from operations. Additional capital will be required to effectively support the operations and to otherwise implement our overall business strategy. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and exploration plans and possibly cease our operations. Any additional equity financing may involve substantial dilution to our then existing shareholders. Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future Financing. In their report dated April 7, 2004, our independent auditors stated that our financial statements for the year ended March 31, 2004 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of recurring losses from operations and working capital deficiency. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increases the difficulty in meeting such goals and there can be no assurances that such methods will prove successful. We Have a Limited Operating History and if We are not Successful in Continuing to Grow Our Business, Then We may have to Scale Back or Even Cease Our Ongoing Business Operations. We have no history of revenues from operations and have no significant tangible assets. We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. Our company has a limited operating history and must be considered in the development stage. Our success is significantly dependent on a successful acquisition, drilling, completion and production program. Our operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company. 8
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If We Are Unable to Retain the Services of Mr. Gustafson or If We Are Unable to Successfully Recruit Qualified Managerial and Field Personnel Having Experience in Oil and Gas Exploration, We May Not Be Able to Continue Our Operations. Our success depends to a significant extent upon the continued service of Mr. Mark Gustafson, our President, Chief Financial Officer and a director. Loss of the services of Mr. Gustafson could have a material adverse effect on our growth, revenues, and prospective business. We do not maintain key-man insurance on the life of Mr. Gustafson. In addition, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial and field personnel having experience in the oil and gas exploration business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms. As Our Properties are in the Exploration and Development Stage, There Can be no Assurance That We Will Establish Commercial Discoveries on Our Properties. Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few properties that are explored are ultimately developed into producing oil and/or gas wells. Our properties are in the exploration and development stage only and are without proven reserves of oil and gas. We may not establish commercial discoveries on any of our properties. Property Defects We have not obtained title reports with respect to our oil and gas properties but believe our interests are valid and enforceable; however, our information does not guarantee title against all possible claims. The properties may be subject to prior unregistered agreements, native land claims or transfers which have not been recorded or detected through title research. We have not conducted thorough title searches and there may be claims to our properties that would have been evident if we had conducted title searches. Additionally, the land upon which we hold oil and gas leases may not have been surveyed; therefore, the precise area and location of such interests may be subject to challenge. Conflicts of Interest In addition to their interest in our company, our management currently engages, and intends to engage in the future, in the oil and gas business independently of our company. As a result, conflicts of interest between us and management of our company might arise. The Potential Profitability of Oil and Gas Ventures Depends Upon Factors Beyond the Control of Our Company. The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of 9
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these factors may result in our company not receiving an adequate return on invested capital. Competition In The Oil And Gas Industry Is Highly Competitive And There Is No Assurance That We Will Be Successful In Acquiring The Leases. The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed. Our budget anticipates our acquisition of additional acreage in the Coos Bay basin. This acreage may not become available or if it is available for leasing, that we may not be successful in acquiring the leases. There are other competitors that have operations in the Coos Bay basin and the presence of these competitors could adversely affect our ability to acquire additional leases. The Marketability of Natural Resources Will be Affected by Numerous Factors Beyond Our Control Which May Result in Us not Receiving an Adequate Return on Invested Capital to be Profitable or Viable. The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable. Oil and Gas Operations are Subject to Comprehensive Regulation Which May Cause Substantial Delays or Require Capital Outlays in Excess of Those Anticipated Causing an Adverse Effect on Our Company. Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which it may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations. Exploration and Production Activities are Subject to Certain Environmental Regulations Which May Prevent or Delay the Commencement or Continuance of Our Operations. In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry. We believe that our operations comply, in all material respects, with all applicable environmental regulations. 10
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Our operating partners maintain insurance coverage customary to the industry; however, we are not fully insured against all possible environmental risks. Exploratory Drilling Involves Many Risks and We May Become Liable for Pollution or Other Liabilities Which May Have an Adverse Effect on Our Financial Position. Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labor, and other risks are involved. We may become subject to liability for pollution or hazards against which it cannot adequately insure or which it may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations. Any Change to Government Regulation/Administrative Practices May Have a Negative Impact on Our Ability to Operate and Our Profitability. The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably. Risks Relating to Our Current Financing Arrangement: There Are a Large Number of Shares Underlying Our Series B Convertible Preferred Stock That May be Available for Future Sale and the Sale of These Shares May Depress the Market Price of Our Common Stock. As of September 10, 2004, we had 15,656,249 shares of common stock issued and outstanding and Series B Convertible Preferred Stock outstanding that may be converted into an estimated 1,928,472 shares of common stock at current market prices. Additionally, we have an obligation to sell Series B Convertible Preferred Stock that may be converted into an estimated 1,928,472 shares of common stock at current market prices in the near future. In addition, the number of shares of common stock issuable upon conversion of the outstanding Series B Convertible Preferred Stock may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the Series B Convertible Preferred Stock may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock. The Continuously Adjustable Conversion Price Feature of Our Series B Convertible Preferred Stock Could Require Us to Issue a Substantially Greater Number of Shares, Which Will Cause Dilution to Our Existing Stockholders. Our obligation to issue shares upon conversion of our Series B Convertible Preferred Stock is essentially limitless. The following is an example of the amount of shares of our common stock that are issuable, upon conversion of our Series B Convertible Preferred Stock (excluding accrued dividends), based on market prices 25%, 50% and 75% below the market price, as of September 15, 2004 of $0.75. Number % of % Below Price Per With Discount of Shares Outstanding Market Share at 20% Issuable Stock ------ ----- ------ -------- ----- 25% $.5625 $.45 4,888,889 23.80% 50% $ .375 $.30 7,333,334 31.90% 75% $.1875 $.15 14,666,667 48.37% As illustrated, the number of shares of common stock issuable upon conversion of our Series B Convertible Preferred Stock will increase if the market price of our stock declines, which will cause dilution to our existing 11
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stockholders. The Continuously Adjustable Conversion Price feature of our Series B Convertible Preferred Stock May Encourage Investors to Make Short Sales in Our Common Stock, Which Could Have a Depressive Effect on the Price of Our Common Stock. The Series B Convertible Preferred Stock is convertible into shares of our common stock at a 20% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The selling stockholder could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion of preferred stock, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock. The Issuance of Shares Upon Conversion of the Series B Convertible Preferred Stock May Cause Immediate and Substantial Dilution to Our Existing Stockholders. The issuance of shares upon conversion of the Series B Convertible Preferred Stock may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholders may not convert their Series B Convertible Preferred Stock if such conversion would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting some of their holdings and then converting the rest of their holdings. In this way, the selling stockholders could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering. In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated For Conversion Of The Series B Convertible Preferred Stock and Registered Pursuant To This Prospectus May Not Be Adequate And We May Be Required to File A Subsequent Registration Statement Covering Additional Shares. If The Shares We Have Allocated And Are Registering Herewith Are Not Adequate And We Are Required To File An Additional Registration Statement, We May Incur Substantial Costs In Connection Therewith. Based on our current market price and the potential decrease in our market price as a result of the issuance of shares upon conversion of the Series B Convertible Preferred Stock, we have made a good faith estimate as to the amount of shares of common stock that we are required to register and allocate for conversion of the Series B Convertible Preferred Stock. Accordingly, we have allocated and registered 5,000,000 shares to cover the conversion of the Series B Convertible Preferred Stock. In the event that our stock price decreases, the shares of common stock we have allocated for conversion of the Series B Convertible Preferred Stock and are registering hereunder may not be adequate. If the shares we have allocated to the registration statement are not adequate and we are required to file an additional registration statement, we may incur substantial costs in connection with the preparation and filing of such registration statement. Risks Relating to Our Common Stock: If We Fail to Remain Current in Our Reporting Requirements, We Could be Removed From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability of Stockholders to Sell Their Securities in the Secondary Market. Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and 12
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the ability of stockholders to sell their securities in the secondary market. Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the Trading Market in Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock. The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: o that a broker or dealer approve a person's account for transactions in penny stocks; and o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: o obtain financial information and investment experience objectives of the person; and o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: o sets forth the basis on which the broker or dealer made the suitability determination; and o that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. 13
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USE OF PROCEEDS This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. We have received gross proceeds of $1,100,000 from the sale of the Series B Convertible Preferred Stock and the investors are obligated to provide us with an additional $1,100,000; $550,000 within five days of the filing of this registration statement, and $550,000 within five days of this prospectus being declared effective. The proceeds received from the sale of the Series B Convertible Preferred Stock will be used for lease acquisitions, core drilling, marketing and public relations, working capital needs and payment of legal and professional fees. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the OTC Bulletin Board under the symbol "TREN". Prior to July 30, 2004, our common stock was quoted under the symbol "SBSY." Prior to March 24, 2003, our common stock was quoted under the symbol "IRVV." For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. High($) Low ($) ------ ------ 2003 First Quarter (1) $ 1.70 0.60 Second Quarter 0.90 0.10 Third Quarter 0.40 0.20 Fourth Quarter 0.30 0.10 2004 First Quarter 0.20 0.10 Second Quarter 0.20 0.10 Third Quarter 0.20 0.10 Fourth Quarter 0.51 0.05 2005 First Quarter 1.29 0.38 Second Quarter (2) 1.18 0.65 (1) All prices per share before January 20, 2004, take into account the one-for-ten share consolidation which has the effect of multiplying the pre-consolidated price per share by a factor of ten. (2) As of September 10, 2004. HOLDERS As of September 10, 2004, we had approximately 181 holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Computershare Trust Company, Inc., 350 Indiana Street, Suite 800, Golden, CO 80401. We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at 14
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the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant. Equity Compensation Plan Information 2004 Non-Qualified Stock Option Plan In February 2004, the Board of Directors authorized the 2004 Non-Qualified Stock Option Plan for our executive, employees and outside consultants and advisors. Under the 2004 Non-Qualified Stock Option Plan, executives, employees and outside consultants and advisors may receive awards of non-qualified stock options. A maximum of 1,800,000 shares of our common stock are subject to the 2004 Non-Qualified Stock Option Plan. As of September 15, 2004, 1,800,000 stock options have been granted to consultants under the Plan to purchase 1,800,000 shares of our common stock. The purpose of the 2004 Non-Qualified Stock Option Plan is to provide executives, employees and non-employee consultants and advisors with an increased incentive to make contributions to our company. As of September 15, 2004, there were 200,000 options to purchase shares of our common stock outstanding. The following table sets forth certain information concerning the granting of incentive stock options during the last completed fiscal year to each of the named executive officers and the terms of such options: Option/SAR Grants in the Last Fiscal Year Individual Grants ˇ Download Table Number of % of Total Securities Options/SARs Underlying Granted to Options/SARs Employees in Exercise or Base Expiration Name Granted (#) Fiscal Year Price ($/Share) Date ---------------- ----------- ------------- ---------------- ---------- Thomas E. Mills 0 n/a n/a n/a The following table sets forth certain information concerning the exercise of incentive stock options during the last completed fiscal year by each of the named executive officers and the fiscal year-end value of unexercised options on an aggregated basis: Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values ˇ Download Table Value of Number of Unexercised Unexercised In-the-Money Options/SARs Options/SAR Shares Value at FY-End(#) at FY-End($)(2) Acquired Realized(1) Exercisable/ Exercisable/ Name on Exercise(#) ($) Unexercisable Unexercisable --------------- -------------- ----------- ------------- ----------------- Thomas E. Mills -0- -0- 0/0 0/0 (1) Value Realized is determined by calculating the difference between the aggregate exercise price of the options and the aggregate fair market value of the Common Stock on the date the options are exercised. (2) The value of unexercised options is determined by calculating the difference between the fair market value of the securities underlying the options at fiscal year end and the exercise price of the options. 15
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS Some of the information in this Form SB-2 contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they: o discuss our future expectations; o contain projections of our future results of operations or of our financial condition; and o state other "forward-looking" information. We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this prospectus. See "Risk Factors." Overview Until June 22, 2004, when we closed on the purchase of certain oil and gas leases in the Coos Bay region, our business was to provide services to the e-commerce industry. Historically, these services have been comprised of marketing, e-commerce development and the sale and distribution of transaction processing and payment services. Since none of these services were sufficient to provide us with a sustainable foundation, we commenced reviewing opportunities in the resource sector in late fiscal 2004. Accordingly, the accumulated losses of $883,317 to March 31, 2004 reflect our past activities that have been either discontinued or abandoned. In addition, the results of operations discussed herein reflect our previous operations and not the financial results of our new business model. Our restructuring accelerated in the final quarter of fiscal 2004 (January 1 to March 31, 2004) and was finalized in the first quarter of fiscal 2005 (April 1 to June 30, 2004). We decided to investigate and pursue a number of conventional oil and gas opportunities as well as a number of unconventional (coalbed methane) acquisition candidates. Due diligence on a coalbed methane opportunity was completed in April and May of 2004, resulting in the May 20 announcement of the purchase of certain Oregon-based oil and gas lease assets from an independent company. Two private placements in this first quarter (April 1 to June 30, 2004) allowed us to complete the lease acquisitions and to commence leasing additional mineral rights under the land surrounding the existing oil and gas leases. We now have a coalbed methane exploration prospect in Oregon to focus on developing. Additional financings will be required to support further leasing activities and related drilling programs. Results of Operations For the Year Ended March 31, 2004 Compared to the Year Ended March 31, 2003 Operating Expenses from Continued Operations Operating expenses consisted of consulting fees, management fees, professional fees, stock based compensation and other general corporate expenses. Operating expenses were $411,651 for the year ended March 31, 2004, compared with $347,045 for the year ended March 31, 2003. The increase was a result of us recording $195,740 in stock based compensation for stock options granted to consultants during the year ended March 31, 2004, compared with no such expense for the year ended March 31, 2003. Excluding the stock based compensation charge of $195,740, the operating costs decreased by $131,134, or 38%, due to the curtailing of substantially all of our operating activities during the current year. Consulting fees were $169,059 for the year ended March 31, 2004, compared with $170,469 for the year ended March 31, 2003. During the current period, we recorded $100,000 in consulting services for restructuring efforts and the balance of $69,059 was related to consulting services for managing our operations and reporting requirements. During the comparative period in 2003, consultants were engaged to manage our operations. Professional fees were $65,780 for the year ended 16
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March 31, 2003, compared with no such fees for the year ended March 31, 2004. Professional fees incurred in fiscal year 2003 consisted of financial consulting fees for the negotiation of debt financing for our operations. Audit and legal fees were $14,924 for the year ended March 31, 2004 compared to $20,181 for the year ended March 31, 2003. Legal and accounting fees related to the costs associated with our audited statements and periodic reporting obligations. General office expenses were $21,501 for the year ended March 31, 2004, compared with $30,756 for the year ended March 31, 2003 when we were operating. Interest costs were $8,948 for the year ended March 31, 2004 compared with $7,621 for the year ended March 31, 2003. Gain on Settlement of Debt We recorded a gain on the settlement of debt of $37,045 for the year ended March 31, 2004 compared to no such gain during the year ended March 31, 2003. The gains were from negotiated settlements with creditors to our benefit. We also recorded gains on the settlement of related party debt in the amount of $110,527 for the year ended March 31, 2004. However, debt settlements with related parties are treated as contributed surpluses in the statement of stockholders' deficit instead of the statement of operations. Net Income from Discontinued Operations We ceased substantially all of our operating businesses during the fiscal year ended March 31, 2003 and, as a result, combined all operating revenues and expenses related to the previous business under discontinued operations. We recorded no net income from discontinued operations for the year ended March 31, 2004, compared with a net income of $21,082 for the year ended March 31, 2003. Net Loss for the Period We recorded a net loss of $374,606 for the year ended March 31, 2004, compared with a net loss of $396,277 for the year ended March 31, 2003. For the Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003 Operating Expenses Operating expenses rose considerably between the periods due to our increased activity. During the three months ended June 30, 2004, we concluded a financing and closed an agreement to acquire certain oil and gas lease assets for the Coos Bay Basin exploration prospect located onshore in the Coos Bay Basin of Oregon. Operating expenses consisted of consulting fees, investor relation's expenses, accounting and legal fees, stock based compensation and other general corporate expenses. Operating expenses were $675,319 for the three months ended June 30, 2004, compared with $28,590 for the three months ended June 30, 2003. A significant portion of the increase was attributable to the recording of $375,710 in stock based compensation during the three months ended June 30, 2004, compared with no such expense for the three months ended June 30, 2003. The stock based compensation expense consisted of a charge of $213,710 relating to the issuance of 540,000 stock options to consultants during the current period and a charge of $162,000 relating to the issuance of 300,000 shares of our common stock pursuant to an investor relations agreement to provide an investor awareness program for a period of one year. Consulting fees were $102,210 for the three months ended June 30, 2004, compared with $26,473 for the three months ended June 30, 2003. During the current period, we recorded $80,000 in consulting services for the final restructuring efforts and for purchase investigation services. The balance of the consulting fees of $22,210 related to technical and administrative consulting services for our Coos Bay project. During the comparative period in 2003, consultants were engaged to sustain our minimum operations. Insurance expenses were $46,569 for the three months ended June 30, 2004 compared to no such expense for the three months ended June 30, 2003. We were required to have pollution liability coverage in order to secure certain leases. Investor relation's expenses were $72,168 for the three months ended June 30, 2004 and shareholder relation's expenses were $37,153 for the three months ended June 30, 2004. Investor relations expenses consisted predominantly of a $70,000 payment to an investor relations firm for providing a shareholder awareness program for a period of one year. Shareholder relation expenses consisted of costs 17
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associated with disseminating press releases and the costs of designing and building of our website, www.torrentenergy.com. This compares with no such investor relations or shareholder relations expenses for the comparative period when we were inactive. Net Loss for the Period We recorded a net loss of $675,319 for the three months ended June 30, 2004, compared with a net loss of $28,590 for the three months ended June 30, 2003. Liquidity and Capital Resources Our cash on hand was $88,985 as at June 30, 2004 compared to $12,621 at March 31, 2004. Our working capital improved to $57,001 as at June 30, 2004, compared to a working capital deficit of $15,261 as at March 31, 2004. Our improved cash position and working capital was achieved though receipt of gross proceeds of $559,025 from the issuance of common stock and $40,000 in gross proceeds from a share subscription agreement which closed subsequent to the quarter end. This compares with no such proceeds during the three months ended June 30, 2003 when we were inactive. During the three months ended June 30, 2004, we expended cash of $227,154 on our Coos Bay project. This included $105,541 in acquisition costs, including the $100,000 cash payments to GHI, and $121,613 in lease costs to secure the oil and gas rights. During the comparative period last year, we made no such investments as we were inactive. We are not required to make any further lease payments pursuant to our oil and gas leases, until after our next year end of March 31, 2005. We will require additional financing in order to complete our stated plan of operations for the next twelve months. We believe that we will require an additional $2,500,000 to sustain minimum operations during the next twelve months. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. We currently have no firm commitments for any additional capital. To obtain funding for our ongoing operations, we entered into an Investment Agreement with one accredited investor on August 27, 2004 for the sale of 2,200 shares of Series B Convertible Preferred Stock for $2,200,000. This prospectus relates to the resale of the common stock underlying this Series B Convertible Preferred Stock. The investors are obligated to provide us with an aggregate of $2,200,000 as follows: o $1,100,000 was disbursed on August 27, 2004; o $550,000 will be disbursed within five days of the filing of this registration statement; and o $550,000 will be disbursed within five days of the effectiveness of this prospectus. Accordingly, we have received a total of $1,100,000 pursuant to the Investment Agreement. The funds from the sale of the Series B Convertible Preferred Stock will be used for business development purposes, business acquisitions, working capital needs, pre-payment of interest, payment of consulting and legal fees and borrowing repayment. The Series B Convertible Preferred Stock is entitled to cumulative dividends of 5% per annum and are convertible into our common stock, at the selling stockholders' option and subject to a maximum cap of $250,000 worth of Series B Convertible Preferred Stock in any 30 day calendar period, into the number of our shares of common stock equal to the sum of (i) the liquidation amount of the Series B Convertible Preferred Stock, plus (ii) all accrued but 18
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unpaid dividends, which is then divided by the conversion price then in effect. The liquidation amount of the Series B Convertible Preferred Stock is equal to $1,000 per share of Series B Convertible Preferred Stock. The conversion price for the Series B Convertible Preferred Stock is the lesser of (i) $1.20 or 80% of the volume weighted average price of the common stock on a principal market for the 10 trading days before but not including the conversion date. In addition, the conversion price of the Series B Convertible Preferred Stock will be adjusted in the event that we issue common stock at a price below the fixed conversion price, below market price, with the exception of any securities issued in connection with the Investment Agreement. The conversion price of the Series B Convertible Preferred Stock may be adjusted in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the selling stockholder's position. The selling stockholders have contractually agreed to restrict their ability to convert and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion does not exceed 4.99% of the then issued and outstanding shares of common stock. In addition, we have granted the investors a security interest in substantially all of our assets and intellectual property and registration rights. Since the conversion price will be less than the market price of the common stock at the time the Series B Convertible Preferred Stock is issued, we anticipate recognizing a charge relating to the beneficial conversion feature of the Series B Convertible Preferred Stock during the quarter in which they are issued, including the second quarter of fiscal 2005 when $1,100,000 of Series B Convertible Preferred Stock were issued. We will still need additional investments in order to continue operations to cash flow break even. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations again. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 does not have an impact on our financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 30, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 does not have an impact on our financial statements. In December 2003, the FASB Issued SFAS No. 132(R), a revision to SFAS No. 132, Employer's Disclosure about Pensions and Other Postretirement Benefits. SFAS No. 132(R) requires additional disclosure about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans, SFAS No. 132(R) is effective for the financials statements with fiscal years ending after December 15, 2003, with the exception of disclosure requirements related to foreign plans and estimated future benefit payments which are effective for the fiscal years ending after June 15, 2004. The adoption of SFAS No. 132(R) does not have an impact on our financial position or results of operations. 19
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In December, 2003 the American Institute of certified Public Accounts and the Securities and Exchange Commission ("SEC") expressed the opinion that rate-lock commitments represent written put options, and therefore be valued as a liability. The SEC expressed that they expect registrants to disclose the effect on the financial statement of recognizing the rate-lock commitments as written put options, for quarters commencing after march 15, 2004, Additionally, the SEC recently issued Staff Accounting Bulletin (SAB) No. 105. SAB No. 105 clarifies the SEC's position that the inclusion of cash flows from servicing or ancillary income in the determination of the fair value of interest rate lock commitments is not appropriate. We have not yet determined the impact on the financial statements of SAB No. 105, which must be implemented for loan commitments entered into on or after April 1, 2004. We are currently analyzing the impact of the SEC's position and will, if required, account for its loan origination commitments as prescribed. In January 2003, the FASB released FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires that all primary beneficiaries of variable interest entities consolidate that entity. FIN 46 is effective immediately for variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest it acquired before February 1, 2003. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, entities that do not have interests in structures that are commonly referred to as special purpose entities are required to apply the provisions of the interpretation in financial statements for periods ending after March 14, 2004. We did not create a variable interest entity after January 31, 2003 and does not have a variable interest entity as of December 31, 2003. We expect that the full adoption of FIN 46R in 2004 will not have a material impact on our financial position or results of operations. Application of Significant Accounting Policies Cash and Cash Equivalents Cash equivalents comprise certain highly liquid instruments with a maturity of three months or less when purchased. As at March 31, 2004 and 2003, cash and cash equivalents consist of cash only. Accounting Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. Concentration of Credit Risk We place our cash and cash equivalents with high credit quality financial institutions. As of March 31, 2004 we had no balance in a bank beyond insured limits. Foreign Currency Transactions We maintain our accounting records in U.S. Dollars, as follows: At the transaction date, each asset, liability, revenue and expense is translated into U.S. dollars by the use of the exchange rate in effect at that date. At the period end, monetary assets and liabilities are remeasured by using the exchange rate in effect at that date. The resulting foreign exchange gains and losses are included in operations. 20
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Fair Value of Financial Instruments Our financial instruments consist of cash and cash equivalents, accounts payable and accrued liabilities and promissory notes. The carrying amount of accounts payable and accrued liabilities approximates fair value due to the short-term nature of these items. The promissory notes also approximate fair value based on evaluations of market interest rates and short-term nature of the payable. Income Taxes We have adopted Statement of Financial Accounting Standards (SFAS") No. 109, "Accounting for Income Taxes", which requires us to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in our financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Comprehensive Income We adopted SFAS No. 130, "Reporting Comprehensive Income", which requires inclusion of foreign currency translation adjustments, reported separately in its Statement of Stockholders' Equity, in other comprehensive income. We had no other comprehensive income for the year ended March 31, 2004. Advertising Expenses We expense advertising costs as incurred. There were no advertising expenses incurred by us for the years ended March 31, 2004 and 2003. Loss Per Share Loss per share is computed using the weighted average number of shares outstanding during the year. We have adopted SFAS No. 128, "Earnings Per Share". Diluted loss per share is equivalent to basic loss per share as the stock options to acquire common shares as disclosed in the notes are anti-dilutive. Stock-based Compensation We have adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-based Compensation", as amended by SFAS No. 148 "Accounting for Stock-based Compensation - Transition and Disclosure - An amendment of SFAS No. 123". SFAS No. 123 encourages, but does not require, companies to adopt a fair value based method for determining expense related to stock-based compensation. We account for stock-based compensation issued to employees and directors using the intrinsic value method as prescribed under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. We initiated a 2004 Non-Qualified Stock Option Plan. During the year ended March 31, 2004, we granted 1,060,000 stock options to non-employees. Goodwill and Intangible Assets Goodwill represents the excess of cost over fair value of assets of business acquired. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at lest annually in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. 21
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Accounting for Derivative Instruments and Hedging Activities We have adopted Statement of Financial Accounting Standards No. 133 (SFAS 133) Accounting for Derivative and Hedging Activities, which requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain and loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. We have has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Long-Lived Assets Impairment Our long-term assets are reviewed when changes in circumstances require as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations (undiscounted and without interest charges). If impairment is deemed to exist, the assets will be written down to fair value. 22
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BUSINESS OVERVIEW We are an exploration stage company engaged in the exploration of coalbed methane in the Coos Bay region of Oregon. Through our wholly owned subsidiary, Methane Energy Corp., we hold leases to approximately 60,000 acres of prospective coalbed methane lands in the Coos Bay region. Methane Energy operates the exploration project in the Coos Bay region. Organizational/Historical Background We were formed by the merger of Scarab Systems, Inc., a Nevada corporation into iRV, Inc., a Colorado corporation. Scarab Systems, Inc. was a privately owned Nevada corporation that was incorporated on October 8, 2001. The effective date of the merger transaction between Scarab Systems, Inc. and iRV, Inc. was July 17, 2002. Subsequent to completion of the reorganization, Scarab Systems, Inc. transferred all its assets and liabilities to iRV, Inc. and ceased operations. The directors and executive officers of iRV, Inc. were subsequently reconstituted. iRV, Inc. and changed its name to Scarab Systems, Inc. on March 24, 2003. We were initially providing services to the e-commerce industry but ceased all activity in the e-commerce industry by the end of the fiscal year ended March 31, 2003. On January 30, 2002, we were given two options in fiscal year 2002 to acquire all the issued and outstanding shares of 485017 B.C. Ltd., a British Columbia company doing business as MarketEdge Direct, as security against a subscription receivable of $337,500 for 675,000 shares from the shareholders of MarketEdge Direct. MarketEdge Direct was in the business of providing a wide range of marketing products and services. Effective August 7, 2002, we exercised both of the options and acquired all the issued and outstanding shares of MarketEdge Direct. Due to disappointing financial results of MarketEdge Direct, on March 28, 2003, we entered into an agreement with the former shareholders of MarketEdge Direct to sell MarketEdge Direct back to them. As a result, all the issued and outstanding shares of MarketEdge Direct that we acquired were sold back to the former MarketEdge Direct shareholders for the return to treasury of 540,000 of our common shares. On March 28, 2003, we acquired all the issued and outstanding shares of Catalyst Technologies, Inc., a British Columbia corporation. Catalyst is a Vancouver based, web design and Internet application developer. Catalyst specializes in the development of web-sites and Internet software design, primarily for the Health and Nutraceutical industry. The acquisition of Catalyst was treated as a non-material business combination in the fiscal year 2003 and we abandoned Catalyst during the fiscal year ended March 31, 2004 due to a lack of working capital and disappointing financial results. On April 30, 2004, we incorporated an Oregon subsidiary company named Methane Energy Corp. in anticipation of acquiring oil and gas properties in the State of Oregon. On May 11, 2004, Methane Energy entered into a Lease Purchase and Sale Agreement with GeoTrends-Hampton International LLC to purchase GeoTrends-Hampton International's undivided working interest in certain oil and gas leases for the Coos Bay Basin prospect located onshore in the Coos Bay Basin of Oregon. To acquire these oil and gas leases, we paid a total of $300,000 in cash and will issue 1,800,000 restricted common shares in three performance-based tranches. The Lease and Sale Agreement closed on June 22, 2004. On closing, we paid $100,000 of the cash and 600,000 of our common shares. We have since paid the remaining $200,000 so that the cash consideration is fully paid. Pursuant to the GeoTrends-Hampton International Agreement, we acquired leases of certain properties in the Coos Bay area of Oregon which are prospective for oil and gas exploration. Leases were acquired from the State of Oregon and from property owners, and we have amassed approximately 60,000 acres under lease. We are pursuing the leasing of additional properties in the Coos Bay area. As a result of this change in the focus of the business and pursuant to shareholder approval on July 13, 2004, we changed our name from Scarab System, Inc. to Torrent Energy Corporation. 23
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New Business Plan We are an exploration stage company engaged in the exploration of coalbed methane in the Coos Bay region of Oregon. Through our wholly-owned subsidiary, Methane Energy Corp., we hold leases to approximately 60,000 acres of prospective coalbed methane lands in the Coos Bay region. Methane Energy operates the exploration project in the Coos Bay region. COOS BAY BASIN EXPLORATION PROSPECT The Coos Bay Basin is located along the Pacific coast in southwestern Oregon, approximately 200 miles south of the Columbia River and 80 miles north of the California border. The onshore portion of the Coos Bay Basin i