Filed On 9/23/04 2:26pm ET ˇ SEC File 333-119206 ˇ Accession Number 1013762-4-1038
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
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]
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
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
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
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
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
See the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the Series B Convertible Preferred Stock.
7
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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