June 9, 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.
Amendment No. 1 to Registration Statement on
Form SB-2
Filed May 25, 2006
File No. 333-132308
Amendment No. 1 to Form 10-KSB for the
Fiscal Year Ended June 30, 2005
File No. 333-72230
Amendment No. 1 to the Form 10-QSB for the
Fiscal Quarter Ended March 31, 2006
File No. 333-72230
Dear Mr. Finn:
We have limited our review of your amended 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.
General
1. Please revise the accounting and disclosures in your
registration
statement to the extent necessary to comply with all applicable
comments written on your transitional and interim reports.
Similarly, any revisions to your transitional report should be
taken
into account when revising your subsequent interim reports to
ensure
that information is presented in your filings in a consistent
manner.
2. We suggest that you consult with us prior to amending your
periodic reports in response to comments in this letter to ensure
you
have properly made all necessary revisions to address the matters
we
have brought to your attention.
Exhibits, page 59
3. We are advising you on certain matters that may require changes
to
the audit opinions that are included along with your financial
statements. Please ensure that any revisions to dates of coverage
are considered when requesting updated consents from your
auditors,
as these have been referenced in the consents previously provided.
Form 10-KSB/A1 for the Transition Period from January 1, 2005 to
June
30, 2005
Explanatory Note
4. Please revise your note to state that you are amending your
Form
10-KSB for the transition period from January 1, 2005 to June 30,
2005, rather than the "fiscal year ended June 30, 2005," and that
you
have clarified that the acquisition of EEI was accounted for as an
acquisition of assets, because it was not a business.
Financial Statements
Reports of Independent Registered Public Accounting Firms, pages
F-1
and F-2
5. We note that in response to prior comment 5, you arranged for
your
current auditors, Malone & Bailey, PC, to revise the introductory
and
opinion paragraphs of their audit report to indicate that reliance
was placed on the work of your prior auditors, Beckstead and
Watts,
LLP, in rendering an audit opinion on the financial statements
covering the period from inception through December 31, 2005.
However, your auditors did not indicate similar reliance in the
scope
paragraph of the audit report as would ordinarily be required by
AU
Section 543.07, nor did they revise the opinion paragraph of their
audit report to specify the periods of your results of operations
and
cash flows that their opinion covered, as we had previously
advised
would be necessary to comply with Regulation S-X, Rule 2-02(c)(1).
We also note that while your current auditors are indicating
reliance
has been placed on the work of your prior auditors in extending
audit
covering the cumulative information, your prior auditors removed
from
their report the reference to their audit of your financial
statements for the period from October 17, 2000 (Date of
Inception)
to December 31, 2004. As we explained in prior comment 6, under
this
scenario language pertaining to the audit of the cumulative
information needs to be retained in the prior auditors` report,
provided they have agreed to reissue their audit opinion.
Until these matters are resolved, your filing would not be
appropriately regarded as compliant with the reporting required
under
Item 310(a) of Regulation S-B.
Note 3 - Stockholders` Equity, page F-9
6. We note that in response to prior comment 7, you revised your
disclosure to explain that you accounted for assets received in
the
EEI acquisition at the sellers` cost, although you also explain
that
value ascribed to the shares was determined based on an assessed
value that you and the sellers agreed upon, reasoning that at the
time of the sale, there was no market for your common stock.
As it appears that your common stock was quoted on the OTC
Bulletin
Board at $0.51 per share (pre-split) on the June 1, 2005 closing
date
of your Share Purchase Agreement, further disclosure covering the
basis for your assertion of there being no market would be
appropriate (e.g. if trading volume is a factor underlying this
view,
develop that point by quantifying both volume and the length of
time
the condition persisted).
Additionally, please clarify in your disclosure, where you removed
reference to the purchase method that suggested you had acquired a
business, to explain that you accounted for the EEI acquisition as
an
"asset" acquisition; and resolve the conflicting message about the
basis for your valuation (i.e. indicate whether you negotiated on
the
value of the shares, or simply assigned the sellers` cost), while
also clarifying how you determined that the agreed-upon value was
representative of fair value, as would be necessary to comply with
the guidance in paragraph 8 of SFAS 123.
Note 4 - Management Stock Bonus Plan, page F-9
7. We have read the disclosure you added in response to prior
comment
9, regarding the shares placed into escrow under your Management
Group Stock Pool Agreement, explaining that "while in escrow the
shares...were treated as part of the Company`s issued and
outstanding
shares with no change in accounting treatment." Please further
expand your disclosure to clarify how shares held in escrow are
handled in computing your measures of earnings per share,
sufficiently to understand how your accounting compares to that
required under paragraph 10 and footnote 5 of SFAS 128 for
contingently issuable shares.
Form 10-QSB/A1 for the Fiscal Quarter Ended March 31, 2006
Financial Statements
Note 2 - Stockholder`s Equity, page 8
Sale of Securities, page 8
8. We note your response to prior comment 12, explaining that
there
were no liquidated damage provisions related to the 739,000 units
issued in 2005, and that your obligations were limited to you
filing
a registration statement by March 14, 2006 and using your best
efforts to have the registration statement declared effective. As
such, you have concluded that the warrants issued in connection
with
these 2005 units are properly classified as equity instruments.
Please add this explanation to your disclosure. Additionally,
please
clarify whether the agreement specifies any circumstances under
which
net cash settlement is permitted or required if you can not
deliver
registered shares. If there is no such specification, clarify how
the agreement is settled if you can not deliver registered shares.
Additionally, we note that you continue to use the term "accepted
subscriptions" when referring to the 739,000 units, rather that
indicating units have been issued. Please expand your disclosure
to
clarify whether these units have been issued, and whether there
are
any provisions that would cause the proceeds you have received on
subscription to be subject to refund. We reissue prior comment
12.
9. We note your disclosure explaining that you account for the
warrants issued in your February 7, 2006 private placement as a
derivative liability. Please expand your disclosure to clarify
that
in recording your derivatives at fair value on each subsequent
balance sheet date, any change in the fair value of your
derivatives
will be recorded as a gain or loss in your statements of
operations.
Additionally, clarify that the resulting unrealized change in fair
value of $5.6 million from February 7, 2006 was recorded in the
"statement of operations as a loss on derivative liability,"
rather
than "statement of expenses derivative liability," to be
consistent
with your labeling of that information. Ensure that you have
provided disclosure addressing the balance of the $13,115,985
charge
in this line item.
Management Stock and Option Grants, page 10
10. We note your response to our prior comment 11, stating that
the
criteria for your CEO and CFO to earn the stock bonus were
determined
by the Board on February 27, 2006. However, you continue to
disclose
in the second paragraph under this heading that the criteria were
to
be determined at a later date. Clarify for us which statement is
true; revise your disclosure to discuss the criteria that the
company
must meet in order for your CEO and CFO to earn the stock bonus,
if
they have been determined.
Plan of Operations
Satisfaction of Cash Obligations for the Next 12 Months, page 17
11. We note that in response to prior comment 15, you added
disclosure about the circumstances under which you would make
lease
payments, royalty payments, or return the leases to the
leaseholder.
However, we continue to believe that you should also include
quantification of the lease payments required (e.g. the additional
lump sum amounts that would be necessary to extend the leases for
two
more years if you are not able to establish production in the
primary
term), and to provide the appropriate context for this
information,
such as the duration of the primary terms, beyond the date of your
report, and the royalty payment percentages you would pay if you
were
able to successfully commence production. We reissue prior
comment
15.
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.
June 9, 2006
page 7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE
MAIL STOP 7010