As filed with the Securities and Exchange Commission on Decemeber 22, 2004
An Exhibit List can be found on page II-4.
Registration No. 333-119206
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
AMENDMENT NO. 2
TO
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
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 DECEMBER 22, 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 December 17, 2004, was
$0.96.
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 December 22, 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 September 30, 2004, we generated no revenue and
a net loss of $442,507. 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
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
November 5, 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 was disbursed on September 30, 2004; and
o $550,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $1,650,000 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 November 17, 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
$1.154 and, therefore, the conversion price for the Series B Convertible
Preferred Stock was $0.9232. Based on this conversion price, the 2,200 shares of
Series B Convertible Preferred Stock, excluding dividends, were convertible into
2,383,016 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 September
30, 2004, we incurred a net loss of $442,507. 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. 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.
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 obtain
necessary funding from outside sources, including obtaining additional funding
from the sale of our securities. 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.
It is Unlikely that We Will Discover and Establish a Profitable Coal Bed Methane
Gas Production in the Coos Bay Region.
Currently, there is no commercial production of coal in the state of
Oregon. Additionally, there are no coal reserves attributed to the state of
Oregon. Coal Bed Methane Gas only accounts for a small percentage of all natural
gas production in the United States, and the closest coal bed methane production
to the Coos Bay Region occurs in the state of Wyoming. As a result, it is
unlikely that we will discover any significant amount of coal bed methane in the
Coos Bay Region or be able to establish a well that will produce a profitable
amount of coal bed methane gas.
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. In addition, adverse
weather conditions can also hinder drilling operations. These changes and events
may materially affect our financial performance. These factors cannot be
accurately predicted and the combination of these factors may result in our
company not receiving an adequate return on invested capital.
9
Even if We are Able to Discover and Generate A Gas Well, There Can be no
Assurance the Well Will Become Profitable.
We have not yet make a discovery of coalbed methane gas or drilled a gas
well to capture any gas. Even if we are able to, 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. In addition, the marketability of oil and
gas which may be acquired or discovered will be affected by numerous factors,
including 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, all of which could result in
greater expenses than revenue generated by the well.
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.
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. 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.
10
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.
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.
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 November 5, 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 1,787,262 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 595,754 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.
11
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 November 16, 2004
of $1.08.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 20% Issuable Stock
------ ----- ------ -------- -----
25% $.81 $.648 3,395,062 17.82%
50% $.54 $.432 5,092,593 24.54%
75% $.27 $.216 10,185,186 39.41%
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
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
12
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
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 $1,650,000 from the sale of the Series B Convertible
Preferred Stock and the investors are obligated to provide us with an additional
$550,000 within five days of this prospectus being declared effective. The
proceeds received from the sale of the Series B Convertible Preferred Stock will
be used for lease acquisitions, core drilling, marketing and public relations,
working capital needs and payment of legal and professional fees.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"TREN". Prior to July 30, 2004, our common stock was quoted under the symbol
"SBSY." Prior to March 24, 2003, our common stock was quoted under the symbol
"IRVV."
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High($) 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 1.18 0.65
Third Quarter (2) 1.37 0.72
(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 December 21, 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.
14
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
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
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Share) Date
---------------- ----------- ------------- ---------------- ----------
Thomas E. Mills 0 n/a n/a n/a
The following table sets forth certain information concerning the exercise
of incentive stock options during the last completed fiscal year by each of the
named executive officers and the fiscal year-end value of unexercised options on
an aggregated basis:
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SAR
Shares Value at FY-End(#) at FY-End($)(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. Additional financings will be required to support further
leasing activities and related exploratory drilling programs.
Plan of Operations
Land Acquisition
We currently lease approximately 60,000 acres in the Coos Bay Basin and
have identified approximately 30,000 to 40,000 additional acres falling within
the Coos Bay Basin Prospect. Our objective is to achieve a land lease position
of over 100,000 acres before the end of 2004, although there is no assurance
that we can reach that goal.
Exploration of the Coos Bay Project
We are planning an aggressive drilling and exploration program in the Coos
Bay Basin. Based on existing raw data, which provides substantial subsurface
information, we believe we will begin a core hole drilling program before the
end of 2004. A total of four to six core holes will be drilled at depths ranging
from 1,000 to 4,000 feet. It is expected to take approximately two to three
weeks to drill each hole. If commercial gas resource estimates can be verified,
production testing should follow with full pilot test well programs in mid 2005.
16
Estimated timeline over the next twelve months
November - December 2004 -Bulk of additional land acquisitions
completed within the area of mutual interest
November 2004 -Commence corehole exploratory drilling
Summer 2005 -Commence pilot well drilling and testing
The continuation of our business is dependent upon obtaining further financing,
a successful program of acquisition, positive results of exploration, and,
finally, achieving a profitable level of operations. The issuance of additional
equity securities by us could result in a significant dilution in the equity
interests of our current stockholders. Obtaining commercial loans, assuming
those loans would be available, will increase our liabilities and future cash
commitments.
There are no assurances that we will be able to obtain further funds required
for our continued operations. As noted herein, we are pursuing various financing
alternatives to meet our immediate and long-term financial requirements. There
can be no assurance that additional financing will be available when needed or,
if available, that it can be obtained on commercially reasonable terms. If we
are not able to obtain the additional financing on a timely basis, we will be
unable to conduct our operations as planned, and we will not be able to meet our
other obligations as they become due. In such event, we will be forced to scale
down or perhaps even cease our operations. Further, there can be no assurance
that our exploration will result in any commercial findings of oil and gas, or
any findings at all.
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 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.
17
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 September 30, 2004 Compared to the Three Months Ended
September 30, 2003.
Operating Expenses
Operating expenses rose considerably between the periods due to our
increased activity compared to the prior period when we had no operations.
During the three months ended September 30, 2004, we concluded two financings
and acquired additional oil and gas leases 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 $442,670 for the three months ended September 30,
2004, compared with $33,072 for the three months ended September 30, 2003. A
significant portion of the increase in expenditures was due to investor
relation's expenses of $148,932 for the three months ended September 30, 2004
and shareholder relation's expenses of $43,293 for the three months ended
September 30, 2004. Investor relations expenses consisted of fees of $148,932
for a mail distribution pursuant to an agreement to provide a shareholder
awareness program. Shareholder relation expenses consisted of costs associated
with disseminating press releases and the costs of designing and maintaining of
our website, www.torrentenergy.com. This compares with no such investor
relations or shareholder relations expenses for the comparative period in 2003
when we were relatively inactive.
Consulting fees were $12,977 for the three months ended September 30, 2004,
compared with $19,566 for the three months ended September 30, 2003. During the
current period, the consulting services related to the ongoing administration of
our new office in Oregon for our Coos Bay project. During the comparative period
in 2003, consultants were engaged to sustain our minimum operations.
During the three months ended September 30, 2004, we investigated a
potential oil and gas property acquisition and made a $100,000 deposit and spent
$1,651 on technical due diligence. We have since decided not to purchase the
property and have written off the deposit for accounting purposes but continue
to seek repayment of our deposit.
Net Loss for the Period
We recorded a net loss of $442,507 for the three months ended September 30,
2004, compared with a net loss of $33,072 for the three months ended September
30, 2003.
Liquidity and Capital Resources
Our cash on hand was $1,149,571 as at September 30, 2004 compared to
$12,621 at March 31, 2004. Our working capital improved to $990,691 as at
September 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 net proceeds of $769,025 from the issuance of common stock and net proceeds
of $1,450,000 (gross proceeds of $1,650,000 less finders' fees of $165,000 and
legal fees of $35,000) from the issuance of our preferred stock. This compares
with no such capital proceeds during the six months ended September 30, 2003
when we were inactive.
During the six months ended September 30, 2004, we expended cash of
$556,583 on our Coos Bay project. This included $305,562 in acquisition costs,
including the $300,000 cash payments to GHI, $208,633 in lease costs to secure
the oil and gas rights and $42,388 for the purchase of existing seismic data in
Coos Bay. During the comparative period, we made no such investments as we were
inactive.
18
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 was disbursed on September 30, 2004; and
o $550,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $1,650,000 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
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 and the third quarter of fiscal 2005
when $550,000 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
19
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.
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.
20
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.
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
21
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.
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 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 is
elliptical in outline covering over 250 square miles. We estimate that up to
100,000 acres in the Coos Bay Basin are potentially prospective for coalbed
methane and conventional natural gas production. The leases we acquired include
oil and gas leases, lease option agreements or other exploration commitments
covering over 50,000 net mineral acres within the primary Coos Bay Basin
Exploration Prospect area of mutual interest. We are also exploring lease
commitments for additional acres and have identified specific leasehold
ownership falling within the Coos Bay Basin exploration prospect area, although
we currently do not have any contracts to lease additional acreage, nor are we
certain we will be able to do so. Access to virtually all areas in Coos County
is excellent year-round via logging and fire control roads maintained by the
Forest Service or the timber industry. Likewise, numerous potential drill-site
locations are already constructed as timber recovery staging areas and available
to be utilized in the initial testing phase of the drilling program. The Coos
Bay Basin is basically a structural basin formed by folding and faulting that
preserves a portion of coal-bearing sediments that were deposited in this swampy
coastal plain. The coal-bearing sandstones and siltstones of the Upper Eocene
Coaledo formation are estimated to form a section approximately 6,600 feet
thick.
On October 6, 2004, we signed a Drilling Services Agreement with a Utah
based drilling company which has extensive drilling and consulting experience in
coalbed methane in order to commence a six hole coring program on our leases.
The six hole coring program is expected to commence in November and take
approximately two to three weeks per hole in order to properly complete the
coring and sampling process. The analysis of the coring samples should be
complete within sixty days of the entire coring program being finished. The six
locations were chosen in order to further confirm and delineate the gas content
data in the Coos County coal beds and to assist us in determining the
positioning of our potential pilot test well programs anticipated next year.
Natural Gas Market
The port of Coos Bay is one of the largest population centers on the west
coast not currently served by natural gas. A project to bring natural gas into
the region via pipeline has been approved and funded by the County of Coos. The
pipeline is currently under construction. A local distribution company serving
this market has already constructed the mains and many services in this area.
Estimates of initial requirements are over 10 million cubic feet of gas per day,
approximately 20% of pipeline capacity.
Coos County is also likely to benefit from new industrial development when
natural gas becomes available. Expansion of the market is likely to bring
greater demand for and value to natural gas. Because of its west coast location,
Coos Bay market prices would be subject to NYMEX pricing standards for most of
the year. However, seasonal or critical gas demand fluctuations could cause
prices to exceed that price on a regular basis.
Exploration Objectives
The Coos Bay Basin is the southernmost of a series of sedimentary basins
that are present in western Oregon and Washington and southwestern British
Columbia west of the Cascade Range. The region containing this series of basins
is generally referred to as Puget-Willamette Trough. These basins preserve thick
sequences of predominantly non-marine, coal-bearing sedimentary rock sequences
that are correlative in age, closely related in genesis, and very similar in
most characteristics. In a hydrocarbon exploration sense, some of the most
relevant characteristics of individual basins within the Puget-Willamette Trough
include:
24
1.Commercial natural gas production from the Mist Gas Field in
northwestern Oregon operated by Northwest Natural Gas;
2.Underground natural gas storage in the Jackson Prairie Gas Storage
Field in southwestern Washington operated by Puget Sound Energy,
utility and pipeline interests; and
3.Ongoing coalbed methane exploration by major and independent
companies in western Washington and British Columbia.
PREVIOUS COALBED METHANE EXPLORATION WELLS IN COOS BAY REGION
The following sections contain data and information obtained from two
coalbed methane exploration wells drilled in late 1993 in the Coos Bay region.
These data and information are historical and isolated facts obtained from these
two exploration wells and are not indicative of such things as mineral resources
and reserves, the amount and nature of any coalbed methane resource; plans for
exploration and development; prices for mineral or coalbed methane products,
timing and amount of future production; operating and other costs, business
strategies and plans of management, and prospective development and
acquisitions. Variation of coalbed methane content and the degree of gas
saturation often varies across a coalbed methane prospect. The Coos Bay Basin
exploration prospect carries risks commensurate with an exploration play and
could require several years to reach commercial production, if the amount and
nature of the coalbed methane resources warrant such production. The success of
the Coos Bay Basin exploration prospect is subject to risks, uncertainties and
other factors. Please see "Risk Factors."
Coal Geology & Characteristics
Coalbeds in the Coos Bay Basin are contained in 2 major groups: the upper
member of the Coaledo formation where six important coal zones are spread over
intervals of 600 to 1,000 feet. The Beaver Hill coalbed is typical in the series
and is 6-8 feet thick; and the lower member of the Coaledo formation where at
least seven important coal zones are included. In October of 1993, two coalbed
methane exploration wells were drilled in the Coos Bay Basin: CCF 7-1 well and
WNS MT 32-1 well. The CCF 7-1 well penetrated 9 major coal zones totaling
approximately 76 net feet of coal. The WNS MT 32-1 well penetrated 6 major coal
zones with a total thickness of 46 net feet.
Indications of Permeability
Several positive indications of permeability were observed during the
drilling phase of the CCF 7-1 well. Drilled partially with air and completed
using cavitation techniques, several flow tests were conducted and yielded
estimated flow rates of 200 to 225 thousand cubic feet per day of natural gas
from intervals dominated by coal seams.
Initial Production Testing Results
A short period of production testing was conducted on both wells following
completion. Traditional pump jack and plunger pump configurations were set up on
both wells. Both wells produced gas and water throughout the testing with gas
rates estimated to be 25 to 100 thousand cubic feet per day, which is similar to
other initial tests in coalbed methane production areas elsewhere in the U.S.
Testing of the CCF 7-1 well was confined to several coal zones in the cased
portion of the well several hundred feet above the targeted coal zones. As a
result of an unstable downhole environment created by cavitation operations,
plugging of the production liner, and loss of a drilling assembly in the
targeted interval, the greater portion of the targeted section was not tested.
Water Disposal
Water produced from drilling and testing operations was of suitable quality
for surface discharge and was applied to forest lands.
25
Data Resources
The Coos Bay Basin has been the subject of geologic mapping and studies for
many years. Historically, the coal from the Coos Bay basin was mined and shipped
to San Francisco in the late 1800's and early 1900's. Since then several
companies such as Sumitomo, Shell and American Coal Company have done
feasability studies on the Coos Bay basin, however there are no active coal
mines in the area. There has also been approximately twenty exploratory oil
and/or gas wells done in the Coos Bay basin over the years from 1929 to 1993.
Most of the information from these wells and feasibility studies is available to
the public.
We have licensed proprietary seismic information, created in the late
1970's and early 1980's. We intend to reprocess this seismic data in order to
assist in our exploratory drilling plans.
Specific and detailed information and reports regarding the drilling,
completion, stimulation, testing, and subsequent analysis of the data generated
by the initial coalbed methane exploration operations have also been acquired by
us under the Purchase and Sale Agreement.
THE COALBED METHANE INDUSTRY
During the past two decades, coalbed methane has emerged as a viable source
of natural gas compared to the late 1980s when there was no significant
production outside of the still dominant San Juan Basin, in northwestern New
Mexico, and the Black Warrior Basin in Alabama and Mississippi. As noted in USGS
Fact Sheet FS-123-00 of October 2000, coalbed methane production accounted for
7% of US natural gas production or approximately 3.6 billion cubic feet (Bcf) of
gas per day or an annual 1.35 trillion cubic feet of gas from over 14,000
producing wells. However, none of this production of natural gas occurs in the
state of Oregon and the closest source of natural gas production to the Coos Bay
region is in Wyoming.
We believe the success of coalbed methane developments has been largely the
result of improved drilling and completion techniques, better hydraulic fracture
designs and significant cost reductions as a result of highly dependable gas
content and coalbed methane reservoir performance analysis. Also aiding this
sector's growth is the apparent shortage of quality domestic conventional
exploration and development projects. In comparison, according to USGS Fact
Sheet FS-123-00 of October 2000, total "unconventional" coalbed methane resource
across America's 25 basins (lower US) is estimated to be roughly 700 trillion
cubic feet of which 14% or 100 trillion cubic feet is considered technically
recoverable with existing technology. Technically recoverable gas volumes do not
necessarily qualify as proved reserves and we do not have any proved coalbed
methane reserves at this time. We also believe that propelling the coalbed
methane production growth is its relatively low finding and development costs.
Coalbed methane fields are often found where deeper conventional oil and gas
reservoirs have already been developed, therefore, considerable
exploration-cost-reducing geologic information is often readily available. This
available geological information, combined with coalbed methane reservoirs'
comparatively shallow locations, reduces finding and developing costs.
COALBED METHANE
Natural gas normally consists of 80% or more methane with the balance
comprising such hydrocarbons as butane, ethane and propane. In some cases it may
contain minute quantities of highly poisonous hydrogen sulfide, referred to as
sour gas. Coalbed methane is, generally, a sweet gas consisting of 95% methane
and thus is normally of pipeline quality. Coalbed methane is considered an
unconventional natural gas resource because it does not rely on conventional
trapping mechanisms, such as a fault or anticline, or stratigraphic traps.
Instead coalbed methane is absorbed or attached to the molecular structure of
the coals - an efficient storage mechanism as coalbed methane coals can contain
as much as seven times the amount of gas typically stored in a conventional
natural gas reservoir such as sandstone or shale. The absorbed coalbed methane
is kept in place as a result of a pressure equilibrium often from the presence
of water. Thus the production of coalbed methane in many cases requires the
26
dewatering of the coals to be exploited. This process usually requires the
drilling of adjacent wells and from 6 to 36 months to complete. Coalbed methane
production typically has a low rate of production decline and an economic life
typically from 10 to 20 years.
The principal sources of coalbed methane are either biogenic, producing a
dry gas which is generated from bacteria in organic matter, typically at depths
less than 1,000 feet, or thermogenic, which is a deeper wet gas, formed when
organic matter is broken down by temperature and pressure.
The three main factors that determine whether or not gas can be
economically recovered from coalbeds are: the gas content of the coals; the
permeability or flow characteristics of the coals; and, the thickness of the
coalbeds. Gas content is measured in terms of standard cubic feet per ton and
varies widely from 430 standard cubic feet per ton in the deep (2,000 to 3,500
feet) San Juan, New Mexico thermogenic coals, and only 60 standard cubic feet
per ton for the shallow (300 to 700 feet deep) Powder River, Wyoming biogenic
coals. The San Juan coals are considered to have the industry's highest
permeability. Relatively high permeability, which can affect the ability of gas
to easily travel to the borehole, is an important factor for the success of
coalbed methane well, but is not absolutely required. The thickness of coalbeds
from which coalbed methane is economically being produced varies from as little
as a few feet in some areas of the gas rich (300 standard cubic feet) Raton
Basin to as much as 75 net feet of coalbed thickness at the relatively gas poor
Powder River.
COMPETITORS
The three largest coalbed methane producers in the United States' lower 48
states are BP Amoco, Burlington Resources and Phillips Petroleum, all producing
most of their production from the now-in-decline San Juan basin. Even though it
ranks fourth in terms of natural gas production, a leading coalbed methane
participant in terms of growth and technology is Devon Energy. Devon Energy is
aggressively expanding coalbed methane production in the Powder River Basin
located in Wyoming and Montana and Raton Basin located in Colorado and has
coalbed methane production in the San Juan Basin located in New Mexico and Wind
River Basin located in Wyoming. Devon is also developing the coalbed methane
potential of southeastern Kansas where it has amassed over 400,000 acres. Its
project is centered in Cherokee Basin, that is the southern end of the coalbed
methane fairway.
Other companies are also active in the coalbed methane fairway, including
Anadarko Petroleum Corporation, JM Huber Corporation, Evergreen Resources, Inc.
and Whiting Petroleum. In addition, there are dozens of smaller public and
private companies engaging in exploratory drilling and testing for coalbed
methane.
GOVERNMENTAL REGULATIONS
Our oil and gas operations are subject to various United States federal,
state and local governmental regulations. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, and pooling of properties
and taxation. From time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and gas
wells below actual production capacity in order to conserve supplies of oil and
gas. The production, handling, storage, transportation and disposal of oil and
gas, by-products thereof, and other substances and materials produced or used in
connection with oil and gas operations are also subject to regulation under
federal, state, provincial and local laws and regulations relating primarily to
the protection of human health and the environment. To date, expenditures
related to complying with these laws, and for remediation of existing
environmental contamination, have not been significant in relation to the
results of operations of our company. The requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and we are
unable to predict the ultimate cost of compliance with these requirements or
their effect on our operations.
RESEARCH AND DEVELOPMENT
Our business plan is focused on a strategy for maximizing the long-term
exploration and development of our drilling and exploration in the Coos Bay,
Oregon region. To date, execution of our business plan has largely focused on
acquiring prospective Coalbed Methane leases from which we intend to establish a
going forward exploration and development plan.
27
EMPLOYEES
At September 14, 2004, we had one non-union, full time employee, who is an
executive. We consider our relations with our employee to be good.
DESCRIPTION OF PROPERTIES
We maintain our principal office at 3400-666 Burrard Street, Vancouver,
British Columbia V6C 2X8, Canada. Our telephone number at that office is (604)
639-3118 and our facsimile number is (604) 688-1320. Mark Gustafson, our
President, provides the office space, which is provided to us free of charge.
The office space consists of a single office of approximately 225 square feet.
In addition, our subsidiary leases an office at 271 North Baxter, Coquille,
Oregon 97423. The lease runs from July 1, 2004 through June 30, 2005 at a cost
of $700 per month. The Oregon office is approximately 4,000 square feet, and
consists of three offices, a conference room and storage space.
We believe that our current office space and facilities are sufficient to
meet our present needs and do not anticipate any difficulty securing alternative
or additional space, as needed, on terms acceptable to us.
Through our subsidiary, we lease approximately 60,000 acres in the Coos Bay
Region. 13,000 acres are leased from Menasha Development Corporation, 29,000
acres from Coos County, 11,000 acres from the State of Oregon, and approximately
7,000 acres from various individual landowners. The total annual lease payments
are approximately $73,000 per year. These leases typically have a five-year
lease term with an option for an additional 5 years. In addition, we have
granted the lease holders royalties, typically averaging 12.5%, on gross sales
resulting from the leases.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
28
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
--------------------------------------------------------------------------------
Mark Gustafson 44 President and Director
John D. Carlson 50 Director
George L. Hampton III 51 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are three seats on our board of directors.
Currently, our Directors are not compensated for their services, although
their expenses in attending meetings are reimbursed. Officers are elected by the
Board of Directors and serve until their successors are appointed by the Board
of Directors. Biographical resumes of each officer and director are set forth
below.
Mark Gustafson has been our President and a Director since September 2004.
Between April 1999 and August 2004, Mr. Gustafson has been President of MGG
Consulting, a private consulting firm. While at MGG Consulting, Mr. Gustafson
provided consulting services to investment banks, oil and gas companies, and was
a consultant Chief Financial Officer to several private companies. From August
1997 until March 1999, Mr. Gustafson was the President, Chief Executive Officer
and a Director of Total Energy Services Ltd., a Calgary-based oilfield rental
and gas compression company. Mr. Gustafson is a chartered accountant and
received a bachelor's degree in business administration from Wilfrid Laurier
University in 1981.
John D. Carlson has been a director since June 2004. From February 2004, to
July 2004, Mr. Carlson was the President and a Director of Pacific Rodera
Ventures Inc., a Calgary-based oil and gas exploration and development company.
From September 2003, Mr. Carlson has been the Vice President - Operations for
Pacific Rodera Ventures Inc. From September 2001 until December 2003, Mr.
Carlson was the President of Samson Oil and Gas Inc., a Hobbema, Alberta-based
oil and gas exploration and development company. Between January 2001 and August
2001, Mr. Carlson was the General Manager of Samson Oil and Gas Inc., a Hobbema,
Alberta-based oil and gas exploration and development company. Between 1984 and
2000, Mr. Carlson was an Associate and Senior Petroleum Engineer for Sproule
Associates, Ltd., Mr. Carlson is a registered professional engineer and received
a bachelor of science degree in civil engineering from the University of Calgary
in 1977.
George L. Hampton III has been a director since August 2004. Between 1994
and 1997, and from 2000 until the present, Mr. Hampton has been a partner in
Geo-Trends, Hampton International, LLC, a coalbed methane exploration company
based out of the Pacific Northwest. From 1998 until the present, Mr. Hampton has
been a member and geologic consultant for Hampton, Waechter & Associates, LLC, a
Denver, Colorado-based geological company. Since June 1986 until the present,
Mr. Hampton has been the President and Chief Geological Consultant for Hampton &
Associates, Inc., a Denver, Colorado-based coalbed methane exploration company.
Between April 1998 and April 1999, Mr. Hampton was the Project Manager and
Senior Geologist for Pennaco Energy Corporation, a Denver, Colorado-based
coalbed methane exploration company. Between 1996 and 1997, Mr. Hampton was the
Chief Geologist for Thermal Energy Corporation, a Tulsa, Oklahoma-based coalbed
methane exploration company. Between 1995 and 2001, Mr. Hampton was the founding
partner and technical manager of Cairn Point Publishing, Inc., a Denver,
Colorado-based publishing company that published International Coal Seam Gas
Directory (1996) and The International Coal Seam Gas Report (1997). Mr. Hampton
has written or co-written a half-dozen articles on coalbed methane exploration
and has provided testimony before several state oil and gas commissions. Mr.
Hampton received a bachelor of science degree in geology from Brigham Young
University in 1977 and a Masters degree in geology from Brigham Young University
in 1979.
29
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and
each of our most highly-compensated executive officers whose total annual salary
and bonus for the fiscal year ending March 31, 2004, 2003 and 2002 exceeded
$100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Thomas E. Mills 2004 0 0 19,804 (1) - - - -
President 2003 0 0 22,930 (1) - - - -
2002 0 0 25,830 (1) - - - -
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
(1) The other annual compensation represents consulting fees. In February 2004,
Mr. Mills released us of all debt resulting from the accrued consulting fees
during fiscal years 2003 and 2004.
Option/SAR Grants in Last Fiscal Year
During the fiscal year ended March 31, 2004, no stock or stock options were
granted.
Stock Option Plans
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 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 is subject to the Plan. As of September 15,
2004, 1,800,000 stock options have been granted to officers, directors and
consultants under the Plan to purchase 1,800,000 shares of our common stock. The
purpose of the Plan is to provide executives, employees and non- employee
consultants and advisors with an increased incentive to make contributions to
us.
Employment Agreements
None.
30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as disclosed below, there have been no transactions, or proposed
transactions, which have materially affected or will materially affect us in
which any director, executive officer or beneficial holder of more than 10% of
the outstanding common stock, or any of their respective relatives, spouses,
associates or affiliates, has had or will have any direct or material indirect
interest.
On March 15, 2003, we issued to our President, Thomas E. Mills, an
unsecured promissory note in the amount of $40,000 bearing interest at the rate
of twenty percent per year, that was due and payable on March 15, 2004. The note
was issued in respect of $40,000 advanced on behalf of us by Mr. Mills. The
Board of Directors convened to evaluate the fairness of the promissory note
without the benefit of advice from any third party or reference materials. It
was resolved by the Board of Directors (Mr. Mills abstaining) that the
promissory note was fair and further that we should issue the promissory note to
Mr. Mills. On February 2, 2004, the $40,000 unsecured promissory note, along
with $11,000 in accrued interest, was converted into 510,000 shares of our
common stock at a price per share of $0.10.
Over the year ended March 31, 2004, we incurred consulting fees in the
amount of $59,413. The consulting fees were charged to Thomas E. Mills, Lou
Hilford and John Allen, our directors and officers. During February 2004, all of
the aforementioned consulting fees, which were previously accrued, were released
by the respective individuals for the purpose of improving our working capital
position.
We have no policy regarding entering into transactions with affiliated
parties.
31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 10, 2004
o by each person who is known by us to beneficially own more than 5% of
our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
-----------------------------------------------------------------------------------------------------
Mark Gustafson Common Stock 377,500 2.41% 1.83%
528-666 Burrard Street
Vancouver, BC V6C 2X9 Canada
John D. Carlson Common Stock 61,250 (4) * *
528-666 Burrard Street
Vancouver, BC V6C 2X9 Canada
George L. Hampton III Common Stock 461,250 (5) 2.94% 2.23%
528-666 Burrard Street
Vancouver, BC V6C 2X9 Canada
All Officers and Directors Common Stock 900,000 (6) 5.94% 4.35%
As a Group (3 persons)
----------------------------
* Less than 1%.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of September 10, 2004 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 15,656,249 shares issued and outstanding on September 10, 2004.
(3) Percentage based on 20,656,249 shares of common stock outstanding.
(4) Includes 11,250 options currently exercisable.
(5) Includes 11,250 options currently exercisable and 450,000 shares owned by
GeoTrends Hampton International, LLC, of which Mr. Hampton is a 50% owner.
(6) Includes 22,500 options currently exercisable.
32
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 100,000,000 shares of common stock, par
value $.001. As of September 10, 2004, there were 15,656,249 shares of common
stock outstanding. Holders of the common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Computershare Trust Company, Inc., 350 Indiana Street,
Suite 800, Golden, Colorado, as independent transfer agent and registrar.
PREFERRED STOCK
We are authorized to issue up to 25,000,000 shares of Preferred Stock, par
value $.01. As of September 15, 2004, there were 1,100 shares of Series B
Convertible Preferred Stock issued and outstanding.
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 was disbursed on September 30, 2004; and
o $550,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $1,650,000 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. 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.
33
OPTIONS
There are 200,000 options issued and outstanding. The options were issued
on August 3, 2004 to officers, directors and consultants pursuant to our stock
option plan. The options have a term of five years and are exercisable at $0.50
per option. 25% of the options vested upon issuance, with an additional 25%
vesting on December 31, 2004, June 30, 2005 and December 31, 2005.
WARRANTS
We currently have 1,942,930 warrants issued and outstanding. 1,442,930
warrants are exercisable at $0.50 per share and 500,000 warrants are exercisable
at $0.55 per share.
CONVERTIBLE SECURITIES
None.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Colorado law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers
or persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
34
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
35
PENNY 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.
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.
36
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants unless the selling stockholders
exercise the warrants on a cashless basis. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
For the table set forth below, Michael Finkelstein and Elizabeth Leonard
are the control persons for Stonestreet Limited Partnership, Arthur Davis is the
control person for Ettinger Investment Corporation, Ben Casado is the control
person for BC Capital, Rogier Groen is the control person for Eclipse Ventures
Intl., Patrick Kephart is the control person for Liberty Management LLC Defined
Benefit Plan and Brian Sodi is the control person for Capital Financial Media
LLC.
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Series B Preferred Full Prospectus Before the Owned Before Offering Offering
Convertible Stock* Conversion Offering** Offering** (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Cornell Capital 2,383,016 13.21% Up to 822,278 (2) 4.99% -- --
Partners, L.P. (3) 5,000,000
101 Hudson Street shares of
Suite 3606 common stock
Jersey City, NJ 07302 (1)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Stonestreet LP -- -- Up to 1,142,858 (5) 7.04% -- --
1300-320 Bay Street 1,142,858
Toronto, Ontario shares of
M5H 4A6, Canada common stock
(5)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Paul Andreola -- -- Up to 143,000 (6) 0.91% -- --
4188 Citadel Court 143,000
North Vancouver shares of
British Columbia common stock
V7K 3C5, Canada (6)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Ettinger Investment -- -- Up to 1,392,860 (7) 8.45% -- --
Corporation 1,392,860
666 Burrard Street shares of
Suite 3400 common stock
Vancouver (7)
British Columbia
V6C 2X8, Canada
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
BC Capital -- -- Up to 457,142 (8) 2.88% -- --
79 Sprain Valley 457,142
Road shares of
Scarsdale, NY 10583 common stock
(8)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Barry Davis Roth IRA -- -- Up to 300,000 (9) 1.90% -- --
17281 Coral Cove Way 300,000
Boca Raton, FL 33496 shares of
common stock
(9)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
37
Nannette Goldberg -- -- Up to 200,000 (10) 1.27% -- --
2805 E. Long Ct. 200,000
Littleton, CO 80121 shares of
common stock
(10)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Astrid Lundrigan -- -- 700,000 700,000 4.47% -- --
109-10 Regency Park shares of
Drive common stock
Haifax, Nova Scotia
B3S 1P2
Canada
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Ray Gustafson -- -- 300,000 300,000 1.92% -- --
RR #2 shares of
Fort Frances common stock
Ontario, P9A 3M3
Canada
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Thomas Mills -- -- 510,000 510,000 3.26% -- --
2708-939 Homer St. shares of
Vancouver common stock
British Columbia
V6B 2W6 Canada
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Eclipse Ventures Intl -- -- 300,000 300,000 1.92% -- --
Keizersgracht 453 shares of
1017 DK, Amsterdam common stock
Netherlands
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Liberty Management LLC -- -- 100,000 100,000 0.64% -- --
Defined Benefit Plan shares of
424 E. Central Blvd. common stock
Orlando, FL 32801
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Capital Financial -- -- Up to 400,000 400,000 2.49% -- --
Media LLC shares of (11)
120 A NE 5th Ave. common stock
Delray Beach, FL 33483 (11)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
* This column represents an estimated number based on a conversion price as of a
recent date of November 16, 2004 of $.9232, divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion
of the Series B Convertible Preferred Stock, based on current market prices.
Because the number of shares of common stock issuable upon conversion of the
Series B Convertible Preferred Stock is dependent in part upon the market price
of the common stock prior to a conversion, the actual number of shares of common
stock that will be issued upon conversion will fluctuate daily and cannot be
determined at this time. Under the terms of the Series B Convertible Preferred
Stock, if the Series B Convertible Preferred Stock had actually been converted
on September 21, 2004, the conversion price would have been $.6064.
(2) The actual number of shares of common stock offered in this prospectus,
and included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
38
issuable upon conversion of the Series B Convertible Preferred Stock by reason
of any stock split, stock dividend or similar transaction involving the common
stock, in accordance with Rule 416 under the Securities Act of 1933. However 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 in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock as determined in
accordance with Section 13(d) of the Exchange Act. Accordingly, the number of
shares of common stock set forth in the table for the selling stockholders
exceeds the number of shares of common stock that the selling stockholders could
own beneficially at any given time through their ownership of the Series B
Convertible Preferred Stock. In that regard, the beneficial ownership of the
common stock by the selling stockholder set forth in the table is not determined
in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended.
(3) Cornell Capital Partners, L.P. is a private investment fund that is owned by
its investors and managed by its general partner, Yorkville Advisors, LLC.
Yorkville Advisors, LLC, of which Mr. Mark Angelo is the managing member, has
voting and investment control over the shares listed owned by Cornell Capital
Partners, L.P. We have been notified by the selling stockholder that it is not a
broker-dealer or affiliate of a broker-dealer and that it believes they are not
required to be a broker-dealer.
(4) Assumes that all securities registered will be sold.
(5) Includes 571,429 shares of common stock underlying warrants.
(6) Includes 71,500 shares of common stock underlying warrants.
(7) Includes 821,430 shares of common stock underlying warrants.
(8) Includes 228,571 shares of common stock underlying warrants.
(9) Includes 150,000 shares of common stock underlying warrants.
(10) Includes 100,000 shares of common stock underlying warrants.
(11) Includes 400,000 shares of common stock underlying options.
TERMS OF SERIES B CONVERTIBLE PREFERRED STOCK
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 was disbursed on September 30, 2004; and
o $550,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $1,650,000 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.
39
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 November 16, 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
$1.154 and, therefore, the conversion price for the Series B Convertible
Preferred Stock was $.9232. Based on this conversion price, the 2,200 Series B
Convertible Preferred Stock, excluding dividends, was convertible into 2,383,016
shares of our common stock.
In addition, we have granted the investors a security interest in
substantially all of our assets and intellectual property and registration
rights. In the event that we fail to timely file our registration statement or
have it declared effective by the Securities and Exchange Commission within 120
days of filing, fail to disclose such information as is necessary for sales to
be made pursuant to the registration statement, fail to register sufficient
shares of common stock or otherwise in addition to filing a new registration
statement or post effective amendment within 30 calendar days of determining
that there are insufficient shares of Common Stock registered, then we are
liable to pay liquidated damages in cash equal to two percent of the outstanding
liquidation amount of the Series B Convertible Preferred Stock per month plus
accrued and unpaid dividends.
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 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
in the aggregate and their affiliates after such conversion does not exceed
4.99% of the then issued and outstanding shares of common stock.
A complete copy of the Investment Agreement and related documents are filed
with the SEC as exhibits to our Form SB-2 relating to this prospectus.
Sample Conversion Calculation
The number of shares of common stock issuable upon conversion of the Series
B Convertible Preferred Stock is 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. For
example, assuming conversion of all 2,200 shares of Series B Convertible
Preferred Stock, excluding dividends, on November 16, 2004, a conversion price
of $0.9232, the number of shares issuable upon conversion would be:
2,200 shares * $1,000 = 2,200,000/$.9232 = 2,383,016 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of November 16, 2004 of $1.18.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 20% Issuable Stock
------ ----- ------ -------- -----
25% $.81 $.648 3,395,062 17.82%
50% $.54 $.432 5,092,593 24.54%
75% $.27 $.216 10,185,186 39.41%
40
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Moore Stephens Ellis Foster Ltd., Chartered Accountants, independent
registered public accounting firm, have audited, as set forth in their report
thereon appearing elsewhere herein, our financial statements at March 31, 2004
and 2003 and for the years then ended that appear in the prospectus. The
financial statements referred to above are included in this prospectus with
reliance upon the independent registered public accounting firm's opinion based
on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Torrent Energy Corporation, filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
41
INDEX TO FINANCIAL STATEMENTS
TORRENT ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2004 and March 31, 2003
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets F-2
Statement of Deficiency in Stockholders Equity F-3
Statement of Operations F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7 to
F-14
For the Six Months Ended September 30, 2004 and September 30, 2003
Consolidated Balance Sheets September 30, 2004 (Unaudited) and March 31, 2004 F-15
Consolidated Statement of Changes in Stockholders' Deficiency (Unaudited) F-16
Consolidated Statements of Operations (Unaudited) F-17
Consolidated Statements of Cash Flows (Unaudited) F-18
Notes to the Consolidated Financial Statements (Unaudited) F-19 to
F-23
42
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
Website: www.ellisfoster.com
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
SCARAB SYSTEMS, INC.
(A development stage enterprise)
We have audited the balance sheets of Scarab Systems, Inc. (the "Company") (a
development stage enterprise) as at March 31, 2004 and 2003, the related
statements of stockholders' deficit from October 8, 2001 (inception) to March
31, 2004 and the statements of operations and cash flows for the years ended
March 31, 2004, 2003 and from October 8, 2001 (inception) to March 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at March 31, 2004 and 2003
and the results of its operations and cash flows for the years ended March 31,
2004, 2003 and from October 8, 2001 (inception) to March 31, 2004 in conformity
with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not generated any revenue from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Vancouver, Canada /s/ MOORE STEPHENS ELLIS FOSTER LTD.
April 7, 2004 Chartered Accountants
F-1
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Balance Sheets
(Expressed in U.S. Dollars)
================================================================================
March 31 March 31
2004 2003
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 12,621 $ -
--------------------------------------------------------------------------------
Total current assets - -
Furniture, net of accumulated depreciation - 1,305
--------------------------------------------------------------------------------
Total assets $ 12,621 $ 1,305
================================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 27,882 $ 124,306
Promissory notes - 85,921
--------------------------------------------------------------------------------
Total current liabilities 27,882 210,227
Promissory notes - non current - 5,000
--------------------------------------------------------------------------------
Total liabilities 27,882 215,227
--------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIT
Share capital
Authorized: 100,000,000 common shares with a par value of $0.001 per share
Issued and outstanding: 12,173,319
Common shares
(March 31, 2003 - 9,166,299) $ 12,173 $ 9,166
Additional paid in capital 855,883 245,123
Share subscriptions received - 40,500
Deficit accumulated during
the development stage (883,317) (508,711)
--------------------------------------------------------------------------------
Total stockholders' deficit (15,261) (213,922)
--------------------------------------------------------------------------------
Total liabilities and
stockholders' (deficit) $ 12,621 $ 1,305
================================================================================
The accompanying notes are an integral part of these financial statements.
F-2
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Stockholders' Deficit
For the period from October 8, 2001 (inception) to March 31, 2004 (Expressed in
US Dollars)
==================================================================================================================================
Deficit
Share accumulated
Common stock Additional subscription during Total
--------- --------- Paid-in received/ development shareholders'
Shares Amount capital (receivable) stage deficit
----------------------------------------------------------------------------------------------------------------------------------
Stock issued for cash at $0.001 per share
in October, 2001 5,425,000 $ 5,425 $ - $ - $ - $ 5,425
Stock issued for intangible asset acquisition
at $0.001 per share in October,2001 200,000 200 - - - 200
Issued 1,440,000 common stock at
$0.001 per share in October, 2001 1,440,000 1,440 - (1,440) - -
Stock issued at $0.50 per share
in November, 2001 675,000 675 336,825 (337,500) - -
Stock issued for cash at $0.50 per share
in January, 2002 390,000 390 194,610 - - 195,000
Net (loss) for the period - - - - (112,434) (112,434)
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 8,130,000 $ 8,130 $ 531,435 $ (338,940) $ (112,434) $ 88,191
Stock issued for cash at $0.25 $0.50 per share
in April 2003 130,000 130 39,870 - - 40,000
Recapitalization to effect the acquisition
of iRV, Inc. 1,446,299 1,446 (1,446) - - -
Acquisition of MarketEdgeDirect - - - 337,500 - 337,500
Proceeds of share subscriptions 1,440 1,440
Return of stocks in connection of
disposal of MarketEdgeDirect (540,000) (540) (358,042) - - (358,582)
Proceeds of 96,000 share subscriptions
at $0.40 to $0.50 per share 40,500 40,500
241,020 Shares allotted for services
rendered at $0.10 to $0.40 per share 33,306 - 33,306
Net (loss) for the period - - - - (396,277) (396,277)
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 9,166,299 $ 9,166 $ 245,123 $ 40,500 $ (508,711) $ (213,922)
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-3
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Stockholders' Deficit
For the period from October 8, 2001 (inception) to March 31, 2004 (Expressed in
US Dollars)
===================================================================================================================================
Deficit
Share accumulated
Common stock Additional subscription during Total
--------- --------- Paid-in received/ development shareholders'
Shares Amount capital (receivable) stage deficit
-----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 9,166,299 $ 9,166 $ 245,123 $ 40,500 $ (508,711) $ (213,922)
Stocks issued for services rendered and
recorded in fiscal year 2003 241,020 241 (241) - - -
Stocks issued at $0.40 to $0.50 per share
in fiscal year 2003 96,000 96 40,404 (40,500) - -
Stocks issued for conversion of debt
at $0.10 per share in February 2004 510,000 510 50,490 - - 51,000
Stocks issued for cash at $0.10 per share
in February and March 2004 1,200,000 1,200 118,800 - 120,000
Stocks issued for exercise of stock options
at $0.10 per share in February and March 2004 960,000 960 95,040 - - 96,000
Issuance of stock options as compensation - - 195,740 - - 195,740
Forgiveness of debt - related party - - 110,527 - - 110,527
Net (loss) for the period - - - - (374,606) (374,606)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 12,173,319 $ 12,173 $ 855,883 $ - $ (883,317) $ (15,261)
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-4
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Operations
(Expressed in U.S. Dollars)
==========================================================================================
Cumulative Year Year
October 8, 2001 Ended Ended
(inception) to March 31, March 31, March
31, 2004 2004 2003
General and administrative expenses
Consulting $ 400,620 $ 169,059 $ 170,469
Interest expense on long term debt 16,569 8,948 7,621
Legal and accounting 55,478 14,924 20,181
Office and Miscellaneous 60,513 21,501 30,756
Professional fees 65,780 - 65,780
Rent 43,383 - 29,485
Stock based compensation 195,740 195,740 -
Telephone 16,594 232 15,252
Travel 16,453 1,247 7,501
-------------------------------------------------------------------------------------------
Operating (loss) (871,130) (411,651) (347,045)
Other income (expense)
Gain on settlement of debt 37,045 37,045 -
Write-off of goodwill (70,114) - (70,114)
Write-off of Smart-e-Card
Distribution Rights (200) - (200)
-------------------------------------------------------------------------------------------
Loss from continued operations (904,399) (374,606) (417,359)
Net income from discontinued operations 21,082 - 21,082
-------------------------------------------------------------------------------------------
Net loss for the period $ (883,317) $ (374,606) $ (396,277)
===========================================================================================
Basic and diluted earning (loss) per share,
Loss from continued operations $ (0.04) $ (0.05)
Net income from discontinued operations 0.00 0.00
-------------------------------------------------------------------------------------------
Net (loss) for the year $ (0.04) $ (0.05)
===========================================================================================
Weighted average number of
common shares outstanding 9,481,502 8,802,948
===========================================================================================
The accompanying notes are an integral part of these financial statements.
F-5
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Cash Flows
(Expressed in U.S. Dollars)
===========================================================================================
Cumulative Year Year
October 8, 2001 Ended Ended
(inception) to March 31, March 31,
March 31, 2004 2004 2003
Cash flows from (used in) operating activities
Net (loss) for the period $ (883,317) $ (374,606) $ (396,277)
Adjustment to reconcile net loss to
net cash used in operating activities:
- amortization 2,194 1,305 559
- stock based compensation 195,740 195,740 -
- foreign exchange (5,989) 2,688 -
- write-off of goodwill 70,114 - 70,114
- debt forgiven 103,140 103,140 -
- write-off of Smart-e-Card
Distribution Rights 200 - 200
- net income from the discontinued
operations (21,082) - (21,082)
- shares allotted for service rendered 33,306 - 33,306
Changes in non-cash working capital items:
- prepaid expenses and deposits - - 8,515
- accounts payable and accrued liabilities 35,269 (80,037) 116,877
-------------------------------------------------------------------------------------------
Net cash used in operating activities (470,425) (151,770) (187,788)
-------------------------------------------------------------------------------------------
Cash flows used in investing activities
Loan to Healthnet (Note 4) (62,684) - -
Acquisition of fixed assets (2,195) - -
-------------------------------------------------------------------------------------------
Net cash used in investing activities (64,879) - -
-------------------------------------------------------------------------------------------
Cash flows provided by financing activities
Proceeds from issuance of common stock 547,925 216,000 40,000
Proceeds from promissory notes - 7,500 90,921
Repayment of promissory notes - (59,109) -
Proceeds from share subscriptions - - 41,940
-------------------------------------------------------------------------------------------
Net cash provided by financing activities 547,925 164,391 172,861
-------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 12,621 12,621 (14,927)
-------------------------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period - - 14,927
-------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 12,621 $ 12,621 $ -
===========================================================================================
Interest expenses paid $ 5,513 $ 3,801 $ 1,712
===========================================================================================
The accompanying notes are an integral part of these financial statements.
F-6
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
1. Incorporation and Continuance of Operations
Scarab Systems, Inc. (formerly called iRV, Inc.) was incorporated in
Colorado on August 1, 1999.
The financial statements presented are those of Scarab Nevada (see
below).
The original Scarab Systems, Inc. ("Scarab Nevada") was incorporated
on October 8, 2001 under the laws of the State of Nevada. Scarab
Nevada was a development stage enterprise and was seeking business
opportunities.
On March 25, 2002, iRV, Inc. ("iRV") entered into an Agreement and
Plan of Reorganization with Scarab Nevada, whereby iRV issued
8,260,000 share of its common stock in exchange for all of the
outstanding common stock of Scarab Nevada. As part of the definitive
agreement and plan of reorganization, iRV transferred all its assets
and liabilities to its subsidiaries and then spun off the subsidiaries
and iRV became a non- operating shell company without any assets or
liabilities. Immediately prior to the Agreement and Plan of
Reorganization, iRV had 1,446,299 shares of common stock issued and
outstanding. The acquisition was accounted for as a recapitalization
of Scarab Nevada because the shareholders of Scarab Nevada controlled
iRV after the acquisition. Scarab Nevada was treated as the acquiring
entity for accounting purposes and iRV was the surviving entity for
legal purposes. The issued and outstanding common stock of Scarab
Nevada prior to the completion of acquisition was restated to reflect
the 8,260,000 common stock issued by iRV.
Subsequent to the completion of the reorganization, Scarab Nevada
transferred all its assets and liabilities to iRV and Scarab Nevada
ceased to exist, and iRV changed its name to Scarab Systems, Inc.
Accordingly, the financial statements are the continuation of Scarab
Nevada. The effective date of the Agreement and Plan of Reorganization
was July 17, 2002.
These financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going
concern, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. The Company has not generated any revenue and requires
additional funds to maintain its operations. Management's plans in
this regard are to raise equity financing as required.
These conditions raise substantial doubt about the Company's ability
to continue as a going concern. These financial statements do not
include any adjustments that might result from this uncertainty.
The Company has not generated any material operating revenues to date.
On March 15, 2004, the Company abandoned its only subsidiary, Catalyst
Technologies, Inc.
In fiscal year 2004, the Company consolidated its common stock by
issuing one new share for ten old shares. The financial statements
have been restated to reflect the stock consolidation.
2. Significant Accounting Policies
a) 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.
b) 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.
F-7
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
c) Furniture
Furniture is recorded at cost. Depreciation is based on the estimated
useful lives of the assets and is computed using the declining balance
method as follows:
Furniture and fixtures 30%
d) Concentration of Credit Risk
The Company places its cash and cash equivalents with high credit
quality financial institutions. As of March 31, 2004 the Company had
no balance in a bank beyond insured limits.
e) Foreign Currency Transactions
The Company maintains its 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.
f) Fair Value of Financial Instruments
The Company's 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.
g) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
(SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's 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.
h) Comprehensive Income
The Company 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. The Company had no other comprehensive income
for the year ended March 31, 2004.
i) Advertising Expenses
The Company expenses advertising costs as incurred. There were no
advertising expenses incurred by the Company for the years ended March
31, 2004 and 2003.
F-8
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
j) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the year. The Company has 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.
k) Stock-based Compensation
The Company has 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. The Company
accounts 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.
The Company initiated a 2004 Non-Qualified Stock Option Plan. During
the year ended March 31, 2004, the Company granted 1,060,000 stock
options to non-employees.
l) 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.
m) Accounting for Derivative Instruments and Hedging Activities
The Company has 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.
The Company has not entered into derivative contracts either to hedge
existing risks or for speculative purposes.
F-9
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
n) Long-Lived Assets Impairment
Long-term assets of the Company 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.
o) New 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 the Company's 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 the Company's 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
the Company's financial position or results of operations.
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. The Company has
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. The Company is currently analyzing the impact of
the SEC's position and will, if required, account for its loan
origination commitments as prescribed.
F-10
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
o) New Accounting Pronouncements (continued)
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. The
Company did not create a variable interest entity after January 31,
2003 and does not have a variable interest entity as of December 31,
2003. The Company expects that the full adoption of FIN 46R in 2004
will not have a material impact on the Company's financial position or
results of operations
3. Smart-e-Card Distribution Rights
In October 2001, the Company entered into an agreement with BentleyTel
USA Inc. ("Bentley"), pursuant to which the Company was granted a
perpetual worldwide exclusive agency to Bentley's Smart-e-Cards. The
Company issued 200,000 shares of its common stock at $0.001 each for
the distribution rights. In fiscal year 2003, the Company abandoned
Smart-e-Card sales and distribution operations and charged the cost to
operations.
4. Business Acquisition
In fiscal year 2002, the Company loaned the sum of $62,684 to
Healthnet International, Inc. ("Healthnet"). The loan bore interest at
15% per annum and was convertible into stocks in Healthnet at $0.50
per share (125,000 shares).
On March 28, 2003, Healthnet sold Catalyst Technologies, Inc.
("Catalyst") to the Company in satisfaction of the related debt owing.
Catalyst was incorporated under the law of the Province of British
Columbia, Canada, and is in the business of providing e-commerce
services to bricks and mortar retailers. The acquisition was accounted
for using the purchase method of accounting and accordingly, the
purchase price was allocated to the tangible and intangible net assets
acquired on the basis of their respective fair values on the
acquisition date.
The allocation of the purchase price was as follows:
----------------------------------------------------
Net liabilities acquired $ (7,430)
Consideration 62,684
----------------------------------------------------
Goodwill 70,114
Impairment of Goodwill (70,114)
----------------------------------------------------
Balance $ -
====================================================
In accordance with SFAS No. 142 and 144, the Company has written down
the goodwill arising from the acquisition of Catalyst to nil, being
the estimated fair value of the goodwill at year-end.
On March 15, 2004, the Company abandoned Catalyst. There was no effect
on the financials statements because the subsidiary had a nil carrying
value.
F-11
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
5. Discontinued Operations
Effective August 7, 2002, in connection with the 675,000 shares
subscription receivable, the Company exercised its option to acquire
all of the outstanding shares of 485017 B.C. Ltd., a Canadian company
involved in marketing and advertising services. On March 28, 2003, the
Company entered into an agreement with the former shareholders of
485017 B.C. Ltd. to sell 485017 B.C. Ltd. to the former shareholder
for the return of 540,000 shares of the Company which were valued at
the $358,582 (the original investment of $337,500 plus net income of
485017 B.C. Ltd. totalling $21,082 from the period of August 7, 2002
to March 28, 2003).
6. Promissory Notes
--------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------
Promissory notes - related party $ - $ 41,361
Promissory notes - convertible
at $0.05 to $0.075 per share - 16,531
Promissory notes - unrelated party - 33,029
--------------------------------------------------------------------
Total - 90,921
Less: Long-term portion - (5,000)
--------------------------------------------------------------------
$ - $ 85,921
====================================================================
Promissory notes are unsecured and bearing interest at 0% to 20% per
annum and repayable on maturity.
7. Share Issuances
In fiscal year 2004, the Company received $120,000 for the issuance of
1,200,000 shares at $0.10 per share.
8. Stock Options
a) On February 10, 2004, the Company's Board of Directors adopted the
2004 Non-Qualified Stock Option Plan (the "Plan"). The aggregate
number of shares of common stock that may be granted by the Company
under the Plan will not exceed a maximum of 1,800,000 shares during
the period of the Plan. The Plan shall terminate upon the earlier of
February 10, 2014 or the issuance of all shares granted under the
Plan. The option prices per share are determined by the Board of
Directors when the stock option is granted.
b) During the year, the Company granted 1,060,000 stock options to
consultants. These options have vesting periods ranging from
immediately to over seven months, expiring two (2) years from date of
grant. The Company charged $195,740 stock-based compensation expense
to operations for the options granted to the consultants using the
Black-Scholes option pricing model with the following weighted average
assumptions:
* Dividend yield of 0%, volatibility of 159%, risk-free interest rate
of 2.75% and expended life of two (2) years. The weighted average fair
value of the stock option granted in 2004 fiscal year was estimated at
$0.19.
F-12
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
8. Stock Options (continued)
As at March 31, 2004, the Company had 100,000 stock options
outstanding under the Plan with a weighted average exercise price of
$0.10. The weighted average remaining contractual life of the options
outstanding is 1.89 years.
----------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining
Stock Exercise Life
Options Price (yrs.)
Outstanding at April 1, 2003 and 2002 - $ - -
Granted 1,060,000 $ 0.10
Exercised (960,000) $ 0.10
----------------------------------------------------------------------
Outstanding at March 31, 2004 100,000 $ 0.10 1.89
Exercisable at March 31, 2004 25,000 $ 0.10 1.89
======================================================================
As required by SFAS 123, the Company will disclose pro-forma
information regarding its net income as if it has accounted for its
employee stock options granted under the fair value method. However,
the Company did not grant any stock options to officers, directors or
employees during the fiscal year 2004 and 2003 and as such, no pro
forma information has been provided.
9. Income Taxes
As at March 31, 2004, the Company has estimated tax losses
carryforward for tax purposes of $543,500. This amount may be applied
against future federal taxable income. The Company evaluates its
valuation allowance requirements on an annual basis based on projected
future operations. When circumstances change and this causes a change
in management's judgement about the realizability of deferred tax
assets, the impact of the change on the valuation allowance is
generally reflected in current income.
The tax effects of temporary differences that give rise to the
Company's deferred tax asset (liability) are as follows:
------------------------------------------------
2004 2003
------------------------------------------------
Loss carry forwards $ 190,000 $ 182,000
Valuation allowance (190,000) (182,000)
------------------------------------------------
$ - $ -
================================================
F-13
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements March 31, 2004 and 2003
(Expressed in U.S. Dollars)
10. Related Party Transactions
a) In fiscal year 2004, the Company accrued consulting fees of $59,413
(2003 - $84,516) to the directors and officers of the Company. In
fiscal year 2004, the related parties released the Company of $110,527
of accrued consulting fees and expenses and this was recorded as an
additional paid-in capital on the statement of stockholders'
deficiency.
b) Included in the accounts payable and promissory notes are $nil
(2003 - $50,600) and $nil (2003 - $41,361), respectively, payable to
the directors and officers of the Company.
c) On February 2, 2004, a $40,000 unsecured promissory note with an
officer of the Company, along with $11,000 in accrued interest, was
converted into 510,000 common shares of the Company at a price per
share of $0.10.
11. Non-cash Activities
a) In fiscal year 2004, the Company issued 510,000 common shares in
connection with the conversion of a $40,000 unsecured promissory note,
along with $11,000 of accrued interest, to a related party.
b) Pursuant to the grant of 1,060,000 stock options to consultants
during the fiscal year 2004, the Company recorded stock based
compensation charges of $195,740.
c) In fiscal year 2004, the amount totalling $110,527 owing to the
directors and officers of the Company was released.
12. Comparative Figure
Certain of the comparative figures have been reclassified to conform
to the current year's presentation.
F-14
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Consolidated Balance Sheets
(Unaudited and Prepared by Management)
-----------------------------------------------------------------------------------------------------------------------------
September 30, March 31,
2004 2004
-----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current
Cash and cash equivalents $ 1,149,571 $ 12,621
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 12,621
1,149,571
Oil and gas properties, unproven (Note 5) 784,583 -
Preferred stock discount (Note 8) 315,244 -
-----------------------------------------------------------------------------------------------------------------------------
Total assets $ $ 12,621
2,249,398
=============================================================================================================================
LIABILITIES
Current
Accounts payable and accrued liabilities $ 158,880 $ 27,882
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 158,880 27,882
-----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Share capital
Convertible Series B preferred stock, $0.01 par value, 5,000 shares authorized,
2,200 shares issued and outstanding
(March 31, 2004 - Nil) 22 -
Common stock, $0.001 par value, 100,000,000 shares authorized,
15,656,249 shares issued and outstanding
(March 31, 2004 - 12,173,319) 15,656 12,173
Additional paid in capital 4,570,983 855,883
Subscriptions receivable (Note 8) (495,000) -
Deficit accumulated during the exploration stage (2,001,143) (883,317)
-----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 2,090,518 (15,261)
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 2,249,398 $ 12,621
=============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
F-15
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Consolidated Statements of Operations
------------------------------------------------------------------------------------------------------------------------------
Cumulative
October Three Three Six Six
8, 2001 Months Months Months Months
(inception) to Ended Ended
Ended Ended September
September September
September September
30, 2003 30, 2004 30, 2003 30, 2004 30, 2004
-------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses
Consulting $ 515,807 $ 12,977 $ 19,566 $ 115,187 46,039
Insurance 46,569 - - 46,569 -
Interest expense 7,500 7,500 - 7,500 -
Interest expense on long term debt 16,569 - - - -
Investor relations 221,100 148,932 - 221,100 -
Legal and accounting 116,067 21,898 12,542 60,589 13,262
Office and Miscellaneous 70,824 8,172 275 10,311 775
Professional fees 65,780 - - - -
Purchase investigation costs 101,651 101,651 - 101,651 -
Rent 46,183 2,800 - 2,800 -
Shareholder relations 80,446 43,293 675 80,446 1,572
Stock based compensation 657,076 85,626 - 461,336 -
Telephone 16,594 - 14 - 14
Travel 26,953 9,821 - 10,500 -
-------------------------------------------------------------------------------------------------------------------------------
Operating (loss) (1,989,119) (442,670) (33,072) (1,117,989) (61,662)
Other income (expense)
Interest income 163 163 - 163 -
Gain on settlement of debt 37,045 - - - -
Write-off of goodwill (70,314) - - - -
-------------------------------------------------------------------------------------------------------------------------------
Loss from continued operations (2,022,225) (442,507) (33,072) (1,117,826) (61,662)
Net income from discontinued operations 21,082 - - - -
-------------------------------------------------------------------------------------------------------------------------------
Net loss for the period $ (2,001,143) $(442,507) $(33,072) $(1,117,826) $ (61,662)
===============================================================================================================================
$ (0.03) $ (0.00) $ (0.08) $ (0.01)
===============================================================================================================================
Weighted average number of
common shares outstanding 15,432,812 9,166,290 14,376,869 9,166,290
===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
F-16
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Consolidated Statements of Cash Flows
(Unaudited and Prepared by Management)
------------------------------------------------------------------------------------------------------------------------------
Cumulative
October Three Three Six Six
8, 2001 Months Months Months Months
(inception) to Ended Ended
Ended Ended September
September September
September September
30, 2003 30, 2004 30, 2003 30, 2004 30, 2004
-------------------------------------------------------------------------------------------------------------------------------
Cash flows used in operating activities
Net (loss) for the period $ (2,001,143) $(442,507) $(33,072) $(1,117,826) $(61,662)
Adjustment to reconcile net loss to
net cash used in operating activities:
- amortization 2,194 - - - -
- stock based compensation 657,076 85,626 - 461,336 -
- foreign exchange 1,398 - - - -
- write-off of goodwill 70,314 - - - -
- debt forgiven 103,140 - - - -
- net income from the discontinued operations (21,082) - - - -
- shares allotted for service rendered 33,306 - - - -
Changes in non-cash working capital items:
- accounts receivable - 21,000 - - -
- accounts payable and accrued liabilities 158,880 105,896 30,964 130,998 54,380
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (995,917) (229,985) (2,108) (525,492) (7,282)
------------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Oil and gas properties (556,583) (329,429) - (556,583) -
Loan to Healthnet (62,684) - - - -
Acquisition of fixed assets (2,195) - - - -
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (621,462) (329,429) - (556,583) -
------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by financing activities
Proceeds from issuance of common stock 1,316,950 170,000 - 769,025 -
Proceeds from issuance of Series B preferred stock 1,450,000 1,450,000 - 1,450,000 -
Proceeds from promissory notes - - - - 7,500
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,766,950 1,620,000 - 2,219,025 7,500
------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,149,571 1,060,586 (2,108) 1,136,950 218
Cash and cash equivalents, beginning of period - 88,985 2,326 12,621 -
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,149,571 $1,149,571 $ 218 $1,149,571 $ 218
==============================================================================================================================
Supplemental cash flow information:
Interest expenses paid $ 13,013 $ 7,500 $ - $ 7,500 $ -
Common stock issued for oil and gas property 228,000 - - 228,000 -
Common stock issued for investor relations 162,000 - - 162,000 -
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
F-17
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
1. Incorporation and Continuance of Operations
Torrent Energy Corporation (the "Company" or "Torrent") is an
exploration stage company that, pursuant to shareholder approval on
July 13, 2004, changed its name from Scarab System, Inc.
Torrent was formed by the merger of Scarab Systems, Inc., a Nevada
corporation into iRV, Inc., a Colorado corporation. Scarab Systems,
Inc. (Nevada) was a privately owned Nevada corporation that was
incorporated on October 8, 2001. The effective date of the merger
transaction between Scarab Systems, Inc. (Nevada) and iRV, Inc. was
July 17, 2002. Subsequent to completion of the reorganization, Scarab
Systems, Inc. (Nevada) 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. changed its
name to Scarab Systems, Inc. on March 24, 2003. The corporate charter
of Scarab Systems Inc. (Nevada) was revoked in 2002. The Company was
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, the Company was 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
("MED"), as security against a subscription receivable of $337,500 for
675,000 shares from the shareholders of MED. MED was in the business
of providing a wide range of marketing products and services.
Effective August 7, 2002, the Company exercised both of the options
and acquired all the issued and outstanding shares of MED. Due to
disappointing financial results of MED, on March 28, 2003, the Company
entered into an agreement with the former shareholders of MED to sell
MED back to them. As a result, all the issued and outstanding shares
of MED that the Company acquired were sold back to the former MED
shareholders for the return to treasury of 540,000 of its common
shares.
On March 28, 2003, the Company acquired all the issued and outstanding
shares of Catalyst Technologies, Inc., a British Columbia corporation
("Catalyst"). 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 the
Company 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, Torrent incorporated an Oregon subsidiary company
named Methane Energy Corp. ("Methane") in anticipation of acquiring
oil and gas properties in the State of Oregon.
On May 11, 2004, Methane entered into a Lease Purchase and Sale
Agreement (the "Agreement") with GeoTrends-Hampton International LLC
("GHI") to purchase GHI'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, the
Company paid a total of $300,000 in cash and will issue 1,800,000
restricted common shares in three performance based tranches. The
agreement closed on June 22, 2004. On closing, the Company paid
$100,000 of the cash and 600,000 of the common shares. During the
quarter ended September 30, 2004, the Company paid the remaining
$200,000 so that the cash consideration is fully paid.
Pursuant to the GHI Agreement, the Company acquired leases of certain
properties in the Coos Bay area of Oregon which are prospective for
oil and gas exploration and cover approximately 50,000 acres. On July
1, 2004, we leased an additional 10,400 acres within the Coos Bay
Basin in Oregon. With this additional acreage the total land position
held by us now exceeds 60,000 acres. The Company is pursuing the
leasing of additional properties in the Coos Bay area. TORRENT ENERGY
CORPORATION (formerly Scarab Systems, Inc.) (An exploration stage
enterprise)
F-18
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
On August 20, 2004, by unanimous consent of the board of directors,
the Company created a class of Series B Convertible Preferred Stock
(the "Series B Stock"). The Series B Stock consists of 5,000 shares
with a par value $0.01 per share and have certain special rights and
restrictions, including conversion to common stock at the lower of
$1.20 and the 10 day weighted average trading price of our common
stock. The Series B Stock became effective on August 24, 2004 with the
filing of Articles of Amendment with the Colorado Secretary of State.
We issued 2,200 Series B Stock on August 27, 2004, with effect from
August 24, 2004.
The consolidated financial statements presented are those of Torrent
and its wholly-owned subsidiary Methane. Collectively, they are
referred to herein as the "Company".
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company are
unaudited and include, in the opinion of management, all normal
recurring adjustments necessary to present fairly the consolidated
balance sheet as of September 30, 2004, and the related statements of
operations and cash flows for the periods presented. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. These
consolidated financials statements should be read in conjunction with
the Company's audited financial statements and the related notes
thereto included in the Company's Form 10-KSB filed with the
Securities and Exchange Commission.
Oil and Gas Properties
The Company utilizes the full cost method to account for its
investment in oil and gas properties. Accordingly, all costs
associated with acquisition, exploration and development of oil and
gas reserves, including such costs as leasehold acquisition costs,
capitalized interest costs relating to unproved properties, geological
expenditures, tangible and intangible development costs including
direct internal costs are capitalized to the full cost pool. As of
September 30, 2004, the Company has no properties with proven
reserves. When the Company obtains proven oil and gas reserves,
capitalized costs, including estimated future costs to develop the
reserves and estimated abandonment costs, net of salvage, will be
depleted on the units-of-production method using estimates of proved
reserves. Investments in unproved properties and major development
projects including capitalized interest, if any, are not amortized
until proved reserves associated with the projects can be determined.
If the future exploration of unproved properties are determined
uneconomical the amount of such properties are added to the
capitalized cost to be amortized. As of September 30, 2004, all of the
Company's oil and gas properties were unproved and were excluded from
amortization. At September 30, 2004, none of the Company's unproved
oil and gas properties were considered impaired.
The capitalized costs included in the full cost pool are subject to a
"ceiling test", which limits such costs to the aggregate of the
estimated present value, using a ten percent discount rate, of the
future net revenues from proved reserves, based on current economic
and operating conditions and estimated value of proven properties. No
impairment existed as of September 30, 2004.
Sales of proved and unproved properties are accounted for as
adjustments of capitalized costs with no gain or loss recognized,
unless such adjustments would significantly alter the relationship
between capitalized costs and proved reserves of oil and gas, in which
case the gain or loss is recognized in the statement of operations.
F-19
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
Stock Based Compensation
The Company has 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. The Company
accounts 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.
The Company initiated a 2004 Non-Qualified Stock Option Plan. Since
inception of the plan, the Company has granted 1,800,000 stock options
to non-employees and directors of the Company.
Recent Accounting Pronouncements
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141 and SFAS No. 142 to companies in the
extractive industries, including oil and gas companies. The issue is
whether SFAS No. 142 requires registrants to classify the costs of oil
and gas rights held under lease or other contractual arrangement
associated with extracting oil and gas as intangible assets in the
balance sheet, apart from other capitalized oil and gas property
costs, and provide specific footnote disclosures. Historically, the
Company has included the costs of such oil and gas rights associated
with extracting oil and gas as a component of oil and gas properties.
If it is ultimately determined that SFAS No. 142 requires oil and gas
companies to classify costs of oil and gas rights held under lease or
other contractual arrangement associated with extracting oil and gas
as a separate intangible assets line item on the balance sheet, the
Company would be required to reclassify approximately $784,583 at
September 30, 2004 and $nil at March 31, 2004 out of oil and gas
properties and into a separate intangible assets line item. The
Company's cash flows and results of operations would not be affected
since such intangible assets would continue to be depleted and
assessed for impairment in accordance with full-cost accounting rules.
3. Going Concern
These financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of
America applicable to a going concern which contemplates the
realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The general business
strategy of the Company is to explore its newly-acquired oil and gas
properties. The Company has incurred operating losses and requires
additional funds to meet its obligations and maintain its operations.
Management's plan in this regard is to raise equity financing as
required. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. These financial statements do
not include any adjustments that might result from this uncertainty.
September 30, 2004 March 31, 2004
------------------------ ------------------------
Deficit accumulated during the exploration stage $2,001,143 $883,317
Working capital (deficit) $ 990,691 $(15,261)
F-20
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
4. Related Party Transactions
During the six month period ended September 30, 2004, the Company paid
or accrued $88,600 in consulting fees to directors and officers of the
Company, as compared to $38,893 during the six months ended September
30, 2003. At September 30, 2004 and March 31, 2004, there was $9,948
and $nil, respectively, in accounts payable and accrued liabilities
that are owing to related parties.
5. Oil and Gas Properties, Unproven
The total costs incurred and excluded from amortization are summarized
as follows:
Acquisition costs Lease costs Seismic costs Total
----------------------------------- ---------------------- ------------------- ------------------ --------------------
Costs incurred during periods ended:
September 30, 2004 $ 533,562 $208,633 $42,388 $ 784,583
March 31, 2004 - - - -
----------------------------------- ---------------------- ------------------- ------------------ --------------------
Total $ 533,562 $208,633 $42,388 $ 784,583
----------------------------------- ---------------------- ------------------- ------------------ --------------------
At September 30, 2004, all of the Company's oil and gas properties are
considered unproven. Based on the status of the Company's exploration
activities, management has determined that no impairment has occurred.
6. Stock Options
As at September 30, 2004, the Company had 200,000 stock options
outstanding under the 2004 Non-Qualified Stock Option Plan (the
"Plan") with an exercise price of $0.50. The weighted average
remaining contractual life of the options outstanding is 4.83 years.
There are no further stocks options eligible to be granted under the
Plan.
------------------------------------------------------------- --------------- ------------------ ------------------
Weighted Average Weighted Average
Stock Exercise Remaining
Options Price Life (yrs.)
------------------------------------------------------------- --------------- ------------------ ------------------
Outstanding at April 1, 2004 100,000 $0.10 1.89
Granted 740,000 $0.20
Exercised (640,000) $0.10
------------------------------------------------------------- --------------- ------------------ ------------------
Outstanding at September 30, 2004 200,000 $0.50 4.83
Exercisable at September 30, 2004 50,000 $0.50 4.83
============================================================= =============== ================== ==================
During the six months ended September 30, 2004, compensation costs of
$299,336 were recorded in the statements of operations and deficit for
options granted by the Company. The compensation costs recorded were
calculated using the Black-Scholes option pricing model.
F-21
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
7. Warrants
In connection with the sale of common stock during the three months
ended June 30, 2004, the Company issued warrants to purchase 1,442,930
shares of common stock at $0.50 per share exercisable until May 19,
2006. Using the Black-Scholes valuation model, the fair value of these
warrants was estimated at $221,373 and has been included in additional
paid in capital.
In connection with the sale of common stock during the three months
ended September 30, 2004, the Company issued warrants to purchase
500,000 shares of common stock at $0.55 per share exercisable until
July 7, 2006. Using the Black-Scholes valuation model, the fair value
of these warrants was estimated at $128,347 and has been included in
additional paid in capital.
8. Series B Convertible Preferred Stock ("Series B Stock")
On August 27, 2004, the Company closed a private placement in its
Series B Stock for up to $2,200,000 in gross proceeds (the "Private
Placement"). The Series B Stock is convertible into common stock at
any time by dividing the dollar amount being converted by the lower of
$1.20 or 80% of the volume weighted average trading price per common
share of our Company for 10 trading days. The holder of the Series B
Stock may only convert up to $250,000 of Series B Stock into common
shares in any 30 day period. The Company may redeem the Series B Stock
by paying 120% of the invested amount together with any unpaid
dividends. As a condition of the Private Placement, the Company agreed
to file a registration statement registering up to 5,000,000 shares of
common stock (the "Registration Statement") in order to receive all of
the proceeds of the Private Placement.
Each share of Series B Stock will be automatically converted into
common stock immediately upon the consummation of the occurrence of a
stock acquisition, merger, consolidation, or reorganization of the
Company.
The gross proceeds of the Private Placement will be paid as follows:
(i) $1,100,000 was paid on closing (received); (ii) $550,000
on the fifth business day following the filing date of the
Registration Statement (received); and (iii) $550,000 on the
fifth business day following the effective date of the
Registration Statement. There are no assurances that the
Company's Registration Statement will become effective and
the Company will receive the last payment of $495,000, net
of the 10% finders' fee.
Net proceeds received as of September 30, 2004, was $1,450,000 after
payment of $165,000 in finders' fees (10% of gross proceeds) and
$35,000 in legal fees. The transaction resulted in a beneficial
conversion feature calculation in accordance with EITF 98-5
"Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios", of $315,244
which will be accreted over nine months commencing October 1, 2004. No
accretion was recorded for the six months ended September 30, 2004.
On receipt of the last payment of $550,000, the Company will also pay
$55,000 in finders' fees for net proceeds of $495,000.
F-22
TORRENT ENERGY CORPORATION
(formerly Scarab Systems, Inc.)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
9. Commitments
On September 9, 2004, the Company entered into a Mail Distribution
Agreement with a third party in an effort to enhance and expand public
awareness of the Company's business opportunity. Pursuant to the Mail
Distribution Agreement, the Company is to make the following payments:
(a) an initial non-refundable deposit of $100,000 to be paid on the
signing of the Agreement (paid);
(b) $50,000 payable on or before September 23, 2004 (accrued at
September 30, 2004 and paid subsequent);
(c) $150,000 payable on or before October 6, 2004 (paid subsequent);
(d) $250,000 payable on or before October 14, 2004, which must be
received by Capital at least three (3) days prior to the first mailing
of the initial distribution of the Mailing Package (paid subsequent);
and
(e) $50,000 on or before October 25, 2004 (paid subsequent).
Subsequent to September 30, 2004, the Company granted the third party
the option to purchase 200,000 common shares at $1.00 per share and
another 200,000 common shares at $2.00 per share from the date of
distribution of at least 500,000 mailing packages. The packages were
distributed on November 2, 2004
10. Subsequent Events
On October 1, 2004, the Company entered into a consulting agreement
for public and investor relations with a third party. The Company will
pay $5,000 per month for the service and has granted the consultant
the option to purchase 200,000 common shares at $0.83 per share.
Twenty-five percent of the options vest immediately and twenty-five
percent vest every quarter thereafter. Either party may terminate the
agreement with thirty days written notice.
On October 6, 2004, the Company signed a Drilling Services Agreement
with a Utah based drilling company which has extensive drilling and
consulting experience in coalbed methane in order to commence a six
hole coring program on the Company's oil and gas properties in Oregon.
F-23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Colorado law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,077.15
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 3,922.85
-----------
TOTAL $50,000.00*
===========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On September 10, 2002, we sold 750,000 shares to an accredited investor at
a price of $0.04 per share. In connection with such sale, we relied on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. The investor represented in writing that he was purchasing the shares for
investment purposes and, in addition, the certificate representing the shares
will bear a restrictive securities legend.
On September 15, 2002, we issued 100,000 shares of our common stock to a
foreign investor at a price of $0.04 per share as consideration for all the
issued and outstanding shares of Excelsior Ventures, Ltd., an inactive Barbados
corporation having no assets, liabilities, income or debts. The certificate
representing the shares will bear a restrictive securities legend.
On September 15, 2002, we issued 1,877,000 shares of its common stock to a
foreign investor to secure a loan of $40,000 by the foreign investor to us,
pursuant to a secured promissory note dated September 15, 2002. Under the terms
of the secured promissory note, we had one year to redeem the shares by paying
the principal plus accrued interest at the rate of 20 percent per annum. In
connection with such sale, we relied on the exemption from registration provided
by Regulation S promulgated under the Securities Act of 1933. The investor
represented in writing that it was not a U.S. person and, in addition, the
certificates representing the shares will bear a restrictive securities legend.
On March 14, 2003, our President, Thomas Mills, personally repaid the foreign
investor and received an assignment of the debt. In February, 2004, we issued
510,000 shares of common stock upon the conversion of the debt in the amount of
$51,000 (including accrued interest in the amount of $11,000) to Mr. Mills. Mr.
Mills is a non-U.S. person and the shares were issued in reliance on Regulation
S under the Securities Act of 1933.
In February, 2004, we issued 1,200,000 shares of common stock pursuant to a
private placement in exchange for aggregate cash payments of $120,000. We issued
750,000 of the common shares to two non-U.S. persons for aggregate payments of
$75,000 and in reliance on Regulation S under the Securities Act of 1933. We
also issued 450,000 of the common shares to two U.S. persons for aggregate cash
payments of $45,000 and in reliance on Section 4(2) under the Securities Act of
1933.
In May of 2004, we issued 1,442,930 shares of our common stock and
1,442,930 warrants to purchase our common stock at an exercise price of $0.50
pursuant to a private placement in exchange for aggregate cash payments of
$505,025. We issued 300,071 of our common shares to two non-U.S. persons or
entities for aggregate payments of $105,025 in reliance on Regulation S under
the Securities Act of 1933. We also issued 1,142,859 of our common shares to two
U.S. persons or entities for aggregate cash payments of $400,000 and in reliance
on Regulation D under the Securities Act of 1933. Certain registration rights
were granted to investors pursuant to this financing.
In June 2004, we issued 600,000 shares of our common stock pursuant to the
Lease Purchase and Sale Agreement. These shares were issued in reliance on
Regulation D under the Securities Act of 1933.
In June 2004, we issued 300,000 shares of our common stock pursuant to an
investor relation's agreement. These shares were issued in reliance on
Regulation S under the Securities Act of 1933.
In June 2004, we issued 500,000 shares of our common stock and 500,000
warrants to purchase our common stock at an exercise price of $0.55 pursuant to
a private placement in exchange for aggregate cash payments of $200,000. These
shares were issued in reliance on Regulation D under the Securities Act of 1933.
Certain registration rights were granted to investors pursuant to this
financing.
In July of 2004, we issued 500,000 shares of our common stock pursuant to a
private placement in exchange for aggregate cash payments of $200,000. The
common shares were issued to three U.S. persons or entities in reliance on
Regulation D under the Securities Act of 1933. Certain registration rights were
granted to investors pursuant to this financing.
To obtain funding for its ongoing operations, we entered into an Investment
Agreement with the selling stockholders on August 27, 2004 for the sale of 2,200
shares of Series B Convertible Preferred Stock for $2,200,000.
II-2
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 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. In
addition, we have granted the investors a security interest in substantially all
of our assets and intellectual property and registration rights.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Torrent Energy or executive
officers of Torrent Energy, and transfer was restricted by Torrent Energy in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
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ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Torrent Energy Corporation, a
Colorado corporation.
Exhibit No. Description
3.1 Restated Articles of Incorporation, incorporated by reference from the
Company's annual report on Form 10-KSB/A, filed with the Commission on
February 11, 2004.
3.2 Articles of Amendment to the Restated Articles of Incorporation,
changing the name to Torrent Energy Corporation.
3.3 Articles of Amendment to the Restated Articles of Incorporation,
creating Series B Convertible Preferred Stock, incorporated by
reference from the Company's Current Report on Form 8-K, filed with
the Commission on September 1, 2004.
3.4 Bylaws of the Company, incorporated by reference from the Company's
annual report on Form 10-KSB/A, filed with the Commission on February
11, 2004.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent, incorporated
by reference from the Company's registration statement on Form SB-2,
filed with the Commission on September 23, 2004.
10.1 Lease Purchase and Sale Agreement between the Company, Methane Energy
Corp. and Geotrends Hampton International LLC dated May 11, 2004,
incorporated by reference to the Company's current report on Form 8-K
filed with the Commission on May 20, 2004.
10.2 Amending Agreement to Lease Purchase and Sale Agreement dated May 19,
2004, incorporated by reference to the Company's current report on
Form 8-K filed with the Commission on June 23, 2004.
10.3 Second Amending Agreement to Lease Purchase and Sale Agreement dated
June 11, 2004, incorporated by reference to the Company's current
report on Form 8-K filed with the Commission on June 23, 2004.
10.4 Investor Relations Agreement between Scarab Systems Inc. and Eclips
Ventures International dated June 11, 2004, incorporated by reference
to the Company's current report on Form 8-K filed with the Commission
on June 23, 2004.
10.5 Scarab Systems, Inc. 2004 Non-Qualified Stock Option Plan,
incorporated by reference from the Company's registration statement on
Form S-8 filed with the Commission on February 19, 2004.
10.6 Investment Rights Agreement, dated as of August 27, 2004, by and
between the Company and Cornell Capital Partners, L.P., incorporated
by reference from the Company's Current Report on Form 8-K, filed with
the Commission on September 1, 2004.
10.7 Registration Rights Agreement, dated as of August 27, 2004, by and
between the Company and Cornell Capital Partners, L.P., incorporated
by reference from the Company's Current Report on Form 8-K, filed with
the Commission on September 1, 2004.
14.1 Code of Ethics for Senior Financial Officers, incorporated by
reference from the Company's annual report on Form 10-KSB, filed with
the Commission on April 30, 2004.
23.1 Consent of Moore Stephens Ellis Foster Ltd., Chartered Accountants
(filed herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
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ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of
Vancouver, Providence of British Columbia, Canada, on December 22, 2004.
TORRENT ENERGY CORPORATION
By:/s/ MARK GUSTAFSON
------------------
Mark Gustafson, President, Principal Executive Officer,
Principal Accounting Officer and Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ MARK GUSTAFSON President and Director December 22, 2004
-------------------------
Mark Gustafson
/s/ JOHN D. CARLSON Director December 22, 2004
-------------------------
John D. Carlson
Director December 22, 2004
-------------------------
George L. Hampton III