April 7, 2006
via U.S. mail
Lawrence J. Finn
Chief Executive Officer and Chief Financial Officer
Terax Energy, Inc.
13355 Noel Road
1370 One Galleria Tower
Dallas, Texas 75240
Re: Terax Energy, Inc.
Registration Statement on Form SB-2
Filed March 9, 2006
File No. 333-132308
Form 10-KSB for the Fiscal Year Ended June 30, 2005
File No. 333-72230
Form 10-QSB for the Fiscal Quarter Ended December 31,
2005
File No. 333-72230
Dear Mr. Finn:
We have limited our review of your filings to those issues
we
have addressed in our comments. Where indicated, we think you
should
revise your documents in response to these comments. If you
disagree, we will consider your explanation as to why our comment
is
inapplicable or a revision is unnecessary. Please be as detailed
as
necessary in your explanation. In some of our comments, we may
ask
you to provide us with supplemental information so we may better
understand your disclosure. After reviewing this information, we
may
raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your
filings.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form SB-2
General
1. For all comments issued below on your Forms SB-2, 10-KSB and
10-
QSB, please make parallel changes to the accounting and
disclosures
in all documents, where appropriate.
2. Please check the page numbers of your filing as there appear to
be
two sets, which are out of sequence; one set of page numbers will
suffice.
Selling Stockholders, page 34
3. Please identify any selling stockholders who are registered
broker-dealers or affiliates of registered broker-dealers. If you
determine that any selling stockholder is a registered broker-
dealer,
please revise your disclosure to indicate that such selling
stockholder is an underwriter, unless such selling stockholder
received its shares as compensation for underwriting activities.
With respect to any affiliate of a registered broker-dealer,
please
disclose, if true, that such selling stockholder acquired its
shares
in the ordinary course of business and at the time of the
acquisition
did not have any arrangements or understandings with any person to
distribute the securities. If not, you must indicate that such
selling stockholder is an underwriter.
Form 10-KSB
Description of Business, page 1
Introduction
4. Please expand your disclosure to elaborate on your
characterization of the company as a "managed risk" company.
Financial Statements
Reports of Independent Registered Public Accounting Firms, page F-
1
5. Please ask your auditors Malone & Bailey, PC to revise the
opinion
paragraph of their audit report to specify the periods of your
results of operations and cash flows that their opinion covered,
to
comply with the requirement of Regulation S-X, Rule 2-02(c)(1).
Refer
to AU Section 508.08 for further guidance and example. Also,
since
you have presented financial statements covering the period from
October 17, 2000 (Inception) to June 30, 2005, please ask Malone &
Bailey, PC to clarify whether or not they have audited your
cumulative amounts from inception to June 30, 2005, and if so,
whether they relied on the work of your prior auditors, Beckstead
and
Watts, LLP for the period from inception through December 31,
2004.
Your auditors may refer to the guidance in AU Sections 543.02
through
543.09 for further clarification.
6. We note that the audit report from your prior auditors,
Beckstead
and Watts, LLP, refers to the audit of your financial statements
for
the period from October 17, 2000 (Date of Inception) to December
31,
2004. As you have not presented financial statements for this
period
of time, unless your current auditors revise their opinion to
extend
audit coverage to the cumulative information through June 30,
2005,
and to express reliance on the work of your prior auditors for
coverage through June 30, 2004, this language will likely need to
be
removed from the opinion upon reissuance.
Note 3 - Stockholders` Equity, page F-9
7. We note your disclosure on page 2 indicating that you accounted
for your acquisition of Erath Energy, Inc. (EEI) using the
"purchase
method of accounting." Given that EEI had not conducted any
operations other than lease acquisitions, and therefore is not
considered a business, we believe your characterization of this
transaction as an asset acquisition on page F-5 is more
appropriate.
The purchase method of accounting is typically used to refer to an
acquisition of a business. Please revise your disclosures
accordingly. Additionally, please expand your disclosure to
discuss
how you determined the value of your EEI acquisition and the per
share price of the shares that you issued to the sellers as
consideration for the exchange. Finally, tell us the level of
ownership in your company held by the recipients of shares in this
transaction immediately before and after the transaction.
8. We see that you assigned a value of zero to the 99,650,000
shares
that you cancelled on June 13, 2005, which were previously held by
an
officer. Please expand your disclosure to also describe the
circumstances under which you issued these shares, the date of
issuance, and the accounting applied in recording that earlier
issuance. Further explain the reasons for and terms of
cancellation.
Note 4 - Management Stock Bonus Plan, page F-9
9. We note your disclosure on page 2 explaining that members of
management placed 5,500,000 shares of your common stock already
owned
by them into an escrow account where such shares would be held
until
determining whether "certain reserve and per day production
milestones" were met, whereas such shares would then be returned
to
those individuals, if the conditions were met, or would otherwise
revert to the company. Please expand the disclosure to discuss
how
you accounted for the common shares previously held by management
when they were placed into escrow, and the method to be utilized
when
they are again released to management, or returned to your
treasury.
Disclose the reasons these individuals relinquished ownership of
their shares.
Form 10-QSB/A for the Fiscal Quarter Ended December 31, 2005
General
10. Please number the pages of your filing, sequentially.
Financial Statements
Note 2 - Stockholder`s Equity
11. Please expand your disclosure to discuss the criteria that the
company must meet in order for your CEO and CFO to earn the stock
bonus.
12. We note your disclosure stating that you "accepted
subscriptions"
for 739,000 units that were issued from August 8, 2005 through
September 14, 2005. Please expand your disclosure to clarify
whether
these subscriptions are subject to refund; if they are, tell us
why
you believe your classification of these units as equity is
appropriate. Also, given your disclosure on page 3 of your Form
SB-
2, explaining that in the event the registration statement is not
filed or declared effective when due, you will be obligated to pay
the investors liquidated damages in the amount of 1.5% of the
purchase price for each month in which you are in default, please
tell us why you believe your classification of the warrants as
equity
is appropriate, based on the guidance of EITF 00-19 paragraphs 14
through 18, and 25. Ordinarily, when the registration of shares
underlying the warrants is outside of your control and/or when
unregistered shares are subject to significant liquidated damages,
such warrants are classified as liabilities and accounted for
based
on the guidance of EITF 00-19 paragraphs 9 and 10. It should be
clear how you determined that this guidance would not yield
different
accounting treatment than the one you have reported in your
financial
statements. Further guidance can be found in Section II.B.1. of
the
Current Accounting and Disclosure Issues in the Division of
Corporation Finance on our website at
http://www.sec.gov/divisions/corpfin/acctdis120105.pdf.
Note 5 - Note Payable
13. We note your disclosure explaining that your $5 million
promissory notes are due on demand after May 31, 2006. Please
expand
your disclosure to clarify whether this makes all of your
properties,
which secure the notes, subject to forfeiture after May 31, 2006.
Plan of Operations
Liquidity and Capital Resources
14. Please revise the disclosure of your working capital amount to
include the effect of the $4.1 million promissory notes due in May
2006, since current liability is part of the working capital
definition, or expand your disclosure to provide the information
required for non-GAAP measures under Item 10(h) of Regulation S-B.
This comment also applies to the corresponding disclosure
appearing
on page 16 of your Form SB-2.
Satisfaction of Cash Obligations for the Next 12 Months
15. We note your disclosure explaining that you are required to
make
certain lease payments, which are material obligations to you, to
maintain your rights to develop and drill for oil and gas. Since
these lease payments are material obligations to you, please
expand
your disclosure to include quantification of these lease payments.
Controls and Procedures
16. We note that you concluded that your disclosure controls and
procedures were not effective as of December 31, 2005, but that
they
were effective after you implemented new procedures subsequent to
December 31, 2005. However, we note that you concluded, in your
Form
10-QSB for the fiscal quarter ended September 30, 2005, that your
disclosure controls and procedures were effective after you
implemented new procedures subsequent to September 30, 2005.
Please clarify the date you implemented new procedures that led to
your effectiveness conclusion and revise your conclusion for
disclosure controls and procedures in the Form 10-QSB, as
appropriate, based on the wording used in the definition of
disclosure controls and procedures per Exchange Act Rule 13a-15(e)
or
15d-15(e).
Additionally, if you implemented new procedures with respect to
withdrawal and payment of your funds during the quarter ended
December 31, 2005, tell us how you concluded that there were no
changes in internal control over financial reporting occurring
during
such period that have materially affected, or are reasonably
likely
to affect, your internal control over financial reporting.
Closing Comments
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of an amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Lily Dang at (202) 551-3867 or in her
absence,
Karl Hiller, Accounting Branch Chief at (202) 551-3686 if you have
comments on the financial statements and related matters. Please
contact Mellissa Campbell Duru, at (202) 551-3757 or in her
absence,
Timothy Levenberg, Special Counsel at (202) 551-3707 with any
other
questions.
Sincerely,
H. Roger Schwall
Assistant Director
cc: via facsimile
Marcelle Balcombe, Esq.
Sichenzia Ross Friedman Ference LLP
(212) 930-9725
Mr. Lawrence Finn
Terax Energy, Inc.
April 7, 2006
page 7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0405
DIVISION OF
CORPORATION FINANCE
MAIL STOP 04-05