7
1
Basic loss per share – Fully diluted loss per share has not been calculated due to its anti-dilutive effect.
2
As of December 23, 2009, we split our share capital on the basis of five new shares for one old share. The weighted average number of shares outstanding and loss per share has been adjusted to reflect the consolidation.
Exchange Rates
Unless otherwise indicated, all monetary references herein are denominated in Canadian Dollars. References to “$” or “Dollars” are to Canadian Dollars and references to “US$” or “U.S. Dollars” are to United States Dollars.
The following table sets forth, for the periods indicated, the exchange rates based on the noon buying rate with the Federal Reserve Bank of New York for cable transfers in Canadian dollars. Such rates are the number of Canadian dollars per one (1) US dollar.
| | | | | |
Year Ended December 31, |
| 2009 | 2008 | 2007 | 2006 | 2005 |
Average for Period | $1.1411 | $1.0701 | $1.0784 | $1.1385 | $1.2163 |
The high and low exchange rates for each month during the previous six months are as follows:
| | | | | | |
| Month Ended |
| May | April | March | February | January | December |
| 2010 | 2010 | 2010 | 2010 | 2010 | 2009 |
High for Period | $1.0134 | $1.0199 | $1.0421 | $1.0735 | $1.0669 | $1.0713 |
Low for Period | $1.0776 | $0.9960 | $1.0110 | $1.0419 | $1.0260 | $1.0400 |
On December 31, 2009, the exchange rate was $1.0461 for US$1.00. As of June 11, 2010, the exchange rate was $1.0329for US$1.00.
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
In addition to other information and other risk factors set forth elsewhere in this Annual Report, the following risk factors should be carefully considered in evaluating our business because such factors currently may have a significant impact on our business, operating results and financial condition.
An investment in our securities is highly speculative and involves a high degree of risk and should only be made by investors who can afford to lose their entire investment.
Prior to making an investment decision, investors should consider the investment risks set forth below and those described elsewhere in this document, which are in addition to the usual risks associated with an investment in a business at an early stage of development. Our Directors consider the risks set forth below to be the most significant to potential investors in our company, but not all of the risks associated with an investment in securities of our company. If any of these risks materialize into actual events or circumstances or other possible additional risks and uncertainties of which the Directors are currently unaware or which they consider not to be material in connection with our business, actually occur, our assets, liabilities, financial condition, results of operations (including future results of operations), business and business prospects, are likely to be materially and adversely affected. In such circumstances, the price of our securities could de cline and investors may lose all or part of their investment.
8
Additional Capital Requirements
We have and may continue to have capital requirements in excess of our currently available resources. In the event our plans change, our assumptions change or prove inaccurate or our capital resources in addition to projected cash flow, if any, prove to be insufficient to fund operations, we could be required to seek additional financing sooner than currently anticipated. To the extent that any such financing involves the sale of our equity securities, the interests of our then existing shareholders could be substantially diluted. There can be no assurance that such financing will be available to us on terms acceptable to us, if at all.
Loss of any Directors or officers.
The loss of any Directors or officers would adversely affect our results. We are wholly dependent at present upon the personal efforts and abilities of our officers and Directors, who exercise control over our day-to-day affairs. The loss of any Director or officer could cause significant delays in our carrying on business or hinder our ability to continue carrying on our business.
Issuance of additional shares would dilute the interests of existing shareholders.
We are authorized to issue an unlimited number of common shares and an unlimited number of Class A Preferred shares. On December 31, 2009, we had 99,416,860common shares issued and outstanding. Our Board has the power to issue additional shares and may in the future issue shares to acquire products, equipment or properties, or for other corporate purposes. Any additional issuance by us from our authorized but unissued share capital would have the effect of diluting the interest of existing shareholders.
Officers and Directors may be indemnified against certain securities liabilities.
Under theBCBCA we can indemnify any Director, officer, agent and/or employee as to those liabilities and on those terms and conditions as are specified in theBCBCA. Further, we may purchase and maintain insurance on behalf of any such persons whether or not we have the power to indemnify such person against the liability insured. The foregoing could result in substantial expenditures by us and prevent any recovery from such officers, Directors, agents and employees for losses incurred by us as a result of their actions. We have been advised that in the opinion of the SEC, indemnification is against public policy as expressed in theU.S. Securities Act, and is, therefore, unenforceable.
Our Shares are considered penny stocks and are subject to the Penny Stock Rules
Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales practice and disclosure requirements on certain brokers-dealers who engage in certain transactions involving a “penny stock." Subject to certain exceptions, a penny stock generally includes any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than U.S.$5.00 per share. Our shares are expected to be deemed penny stock for the purposes of the Exchange Act. The additional sales practice and disclosure requirements imposed upon brokers-dealers may discourage broker-dealers from effecting transactions in our shares, which could severely limit the market liquidity of the shares and impede the sale of the shares in the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or "accredited investor" (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse in each of the two most recent fiscal years with a reasonable expectation of achieving such level in the current fiscal year) must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current quotations for the securities. Finally, a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer's account and information with respect to the limited market in penny stocks.
9
Enforcement of Civil Liabilities
We are incorporated under the laws of British Columbia, Canada and all of our Directors and officers are residents of Canada. Consequently, it may be difficult for United States investors to effect service of process within the United States upon us or upon those Directors or officers who are not residents of the United States, or to realize in the United States upon judgments of United States courts predicated upon civil liabilities under the United StatesSecurities Exchange Act of 1934. A judgment of a U.S. court predicated solely upon such civil liabilities may be enforceable in Canada by a Canadian court if the U.S. court in which the judgment was obtained had jurisdiction, as determined by the Canadian court, in the matter. There is substantial doubt whether an original action could be brought successfully in Canada against any of such persons or our company predicated solely upon such civil liabilities.
Conflict of Interest of Management
Certain of our Directors and officers are also directors and officers of other companies. Consequently, there exists the possibility for such Directors and officers to be in a position of conflict. Any decision made by any of such Directors and officers relating to our company will be made in accordance with their duties and obligations to deal fairly and in good faith with our company and such other companies.
Recent Disruptions in International Credit Markets and Other Financial Systems and Deterioration of Global Economic Conditions
Since 2007, the U.S. credit markets experienced serious disruption due to a deterioration in residential property values, defaults and delinquencies in the residential mortgage market and a decline in the value and credit quality of mortgage-backed securities. Other adverse events include delinquencies in non-mortgage consumer credit and a general decline in consumer confidence. These conditions worsened in 2008 and continued in 2009, contributing to reduced confidence in credit and financial markets around the world and the collapse of, and governmental intervention in, major financial institutions. Asset price volatility and solvency concerns have increased, and there has been less liquidity, a widening of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. Notwithstanding various government actions, concerns about the general condition of the capital markets, financial instruments and financial ins titutions persist, and stock markets have declined substantially.
These market disruptions have had a significant material adverse impact on companies in many sectors of the economy and have limited access to capital and credit. These disruptions could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, financing for our operations. Failure to raise capital when needed or on reasonable terms may have a material adverse effect on our business, financial condition and results of operations.
Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. If these factors continue, our operations could be adversely impacted and the trading price of our common shares may be adversely affected.
We are also exposed to liquidity risks in meeting our operating and capital expenditure requirements in instances where cash positions are unable to be maintained or appropriate financing is unavailable. These factors may impact our ability to obtain loans and other credit facilities in the future and on favourable terms. If these increased levels of volatility and market turmoil continue, our operations could be adversely impacted and the trading price of the common shares could be adversely affected.
The Market Price of our Common Shares May Be Subject to Wide Price Fluctuations
The market price of our common shares may be subject to wide fluctuations in response to many factors, including variations in our operating results, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, changes in our business prospects, general economic conditions, changes in mineral reserve or resource estimates, results of exploration, changes in results of mining operations, legislative changes and other events and factors outside of our control. In addition, stock markets from time to time have experienced extreme price and volume fluctuations, which, as well as general economic and political conditions, could adversely affect the market price for our common shares.
We are unable to predict whether substantial amounts of common shares will be sold in the open market. Any sales
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of substantial amounts of common shares in the public market or the perception that such sales might occur, could materially and adversely affect the market price of our common shares.
We may be a Passive Foreign Investment Company, which may result in material adverse U.S. federal income tax consequences to U.S. investors.
Investors in our common shares that are U.S. taxpayers should be aware that we may be a .passive foreign investment company. under Section 1297(a) of the U.S. Internal Revenue Code (a “PFIC”). If we are or become a PFIC, generally any gain recognized on the sale of our common shares and any .excess distributions. (as specifically defined) paid on our common shares must be ratably allocated to each day in a U.S. taxpayer’s holding period for our common shares. The amount of any such gain or excess distribution allocated to prior years of such U.S. taxpayer’s holding period for our common shares generally will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year, and the U.S. taxpayer will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year.
Alternatively, a U.S. taxpayer that makes a .qualified electing fund. (a “QEF”) election with respect to their investment generally will be subject to U.S. federal income tax on such U.S. taxpayer’s pro rata share of our .net capital gain. and .ordinary earnings, (as specifically defined and calculated under U.S. federal income tax rules), regardless of whether such amounts are actually distributed by us. U.S. taxpayers should be aware, however, that there can be no assurance that we will satisfy record keeping requirements under the QEF rules or that we will supply U.S. taxpayers with required information under the QEF rules, in the event that we are a PFIC and a U.S. taxpayer wishes to make a QEF election. As a second alternative, a U.S. taxpayer may make a .market-to-market election. if we are a PFIC and our common shares are .marketable stock (as specifically defined). A U.S. taxpayer that makes a market-to-market election generally wi ll include in gross income, for each taxable year in which we are a PFIC, an amount equal to the excess, if any, of (a) the fair market value of our common shares as of the close of such taxable year over (b) such U.S. taxpayer’s adjusted tax basis in our common shares.
No Dividends
The payment of dividends on our common shares is within the discretion of the Board and will depend upon our future earnings, our capital requirements, our financial condition, and other relevant factors. We do not currently intend to declare any dividends on our shares for the foreseeable future.
Acquisitions or other Business Transaction
We may, when and if the opportunity arises, acquire other products, technologies or businesses involved in activities, or having product lines, that are complementary to our business. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management’s attention from other business concerns, risks associated with entering markets or conducting operations with which we have no or limited direct prior experience and the potential loss of key employees of the acquired company. Moreover, there can be no assurance that any anticipated benefits of an acquisition will be realized. Future acquisitions by us could result in potentially dilutive issuances of equity securities, the use of cash, the incurrence of debt and contingent liabilities, and write-off of acquired research and development costs, all of which could materially and adversely affect our financial cond ition, results of operations and cash flows.
ITEM 4.
INFORMATION ON THE COMPANY
A.
History and Development of the Company
Our company was incorporated in British Columbia, Canada, by registration of our memorandum and articles under theBritish Columbia Company Act (since replaced by the BCBCA) on September 15, 1987, under the name “Grand Resources Inc.” We changed our name to “Bay Street Ventures Inc.” effective November 18, 1987. Subsequently, we changed our name to “Cenco Petroleum Ltd.” effective September 20, 1991. On August 7, 1996, we changed our name to “IGC Internet Gaming Corporation” and concurrently subdivided our share capital on the basis of one and one-half old shares for one new share.
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We changed our name to “IGN Internet Global Network Inc.” effective November 21, 1996 and on September 23, 2003 we changed our name to “AssistGlobal Technologies Corp.” and concurrently subdivided our share capital on the basis of three old shares for one new share.
On July 5, 2005, we changed our name to “Bassett Ventures Inc.” and concurrently consolidated our share capital on the basis of four old shares for one new share. On June 13, 2007 we changed our name to “Arris Resoures Inc.” and concurrently consolidated our share capital on the basis of five old shares for one new share.
On December 21, 2009 we changed our name to “RTN Stealth Software Inc.” and subsequently carried out a five-for-one share split of our common shares.
We have been trading on the CNSX since December 17, 2003. On December 21, 2009 our trading symbol was changed from “AAS” to “RTN” in conjunction with our name change and share split. We have been quoted for trading on the OTCBB since November 19, 1997. On December 21, 2009 our trading symbol was changed from “IGN-IF” to “RTNSF”.
Our principal executive office is located at Suite 200, 8338 120th Street, Surrey, BC, Canada V3W 3N4. Our registered and records office is 300 – 576 Seymour Street, Vancouver, BC, Canada V6B 3K1.
Real Estate Property
On May 4, 2009, we entered into a Property Contract of Purchase and Sale Agreement dated May 4, 2009, as amended on May 21, 2009, with Soraje Holdings Ltd., a private arm’s length company, to purchase a development property located at 8670, 158th Street, Surrey, British Columbia, and legally described as Lot C, Plan 15650, Section 26, Township 2, New Westminster Land District, PID-010-114-386, in Surrey, BC, Canada. The purchase price of the property was $677,000, with a non-refundable deposit of $10,000 to be made upon completion of a successful feasibility study of the property on or before August 4, 2009, which was subsequently extended to August 4, 2010 pursuant to the amended agreement dated May 21, 2009. The balance of $667,000 will be paid upon completion of the contract on or before May 4, 2010. The amended agreement also allows us to assign the Property Contract to another party.
Distribution Agreement – QMI Licensed Seismic Products
We entered into a Distribution Agreement dated September 28, 2009 with QMI Manufacturing Inc., a private British Columbia arm’s length company, whereby we were granted an exclusive license to distribute the QMI Licensed Seismic Products in India. The term of the agreement is for an initial ten years, which may be automatically renewed on the 10th anniversary for a successive ten year term, to a maximum of seven successive terms.
Plan of Arrangement with Incana Investments Inc.
On May 19, 2009, we entered into an Arrangement Agreement with InCana Investments Inc. (“InCana”), our former wholly-owned subsidiary, to proceed with a corporate restructuring by way of statutory plan to transfer cash of $100,000 and assign the Property Contract to InCana. The InCana Plan of Arrangement was approved by our shareholders on June 19, 2009.
The corporate restructuring, which was completed on October 2, 2009, was carried out as follows:
1)
transfer of $100,000 in cash and assignment of the Property Contract to InCana in exchange for 15,043,372 InCana shares (the“InCana Shares”).
2)
change in authorized share capital by:
(i)
altering the identifying name of the common shares to Class A common shares without par value (the“ARI Class A Shares”);
(ii)
creating a new class of common shares (the“New Shares”); and
(iii)
creating a class of Class A preferred shares without par value (the“ARI Class A Preferred Shares”).
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3)
Each ARI Class A Share exchanged for one New Share and one ARI Class A Preferred Share.
4)
Redemption of the issued ARI Class A Preferred Shares in exchange for the InCana Shares on a one for one basis.
Plan of Arrangement with Arris Holdings Inc., CLI Resources Inc. and QMI Seismic Inc.
On November 2, 2009, we entered into an Arrangement Agreement with three of our then wholly-owned subsidiaries, being Arris Holdings Inc. (“AHI”), CLI Resources Inc. (“CLI”) and QMI Seismic Inc. (“QMI”) whereby we agreed to transfer certain assets to each of AHI, CLI and QMI, and each such company subsequently became a reporting issuer in Canada. Our shareholders approved the November Plan of Arrangement on December 8, 2009 and approval of the Supreme Court of Canada was granted on December 11, 2009.
The terms of November Plan of Arrangement and assets to be transferred consisted of the following:
(1)
CLI – we transferred five mineral claims located 30 miles northeast of Atlin, British Columbia in the Atlin Mining District, in exchange of the issuance of 17,583,372 common shares in the capital stock of QMI, which shares were distributed to our shareholders on the basis of one QMI share for each share of our company held. .
(2)
QMI – we transferred all of our right, title and interest in and to the Distribution Agreement to market, sell and distribute the QMI Licensed Seismic Products, in exchange of the issuance of 17,583,372 common shares in the capital stock of QMI, which shares were distributed to our shareholders on the basis of one QMI share for each share of our company held.
(3)
AHI – we transferred all of our interest in our equity portfolio, having an aggregate value at that time of $1,334,000, in exchange for the issuance of 17,583,372 common shares in the capital stock of AHI, which shares were distributed to our shareholders on the basis of one AHI share for each share of our company held. Our equity portfolio consisted of (a) 300,000 common shares of Desert Gold Ventures Inc., a TSX.V listed company, (b) 440,000 common shares of MaxTech Ventures Inc., a TSX.V listed company; and (c) 2,798,000 common shares of Ona Power Corp. a CNSX listed company.
B.
Business Overview
On January 19, 2010, we entered into an agreement with Market Guiding Systems Inc. (“MGS”), an unrelated private company, whereby we acquired a fully supported exclusive perpetual license to the Market Navigation, Trade Execution and Market Timing Software (the “RTN-Stealth Software”) in consideration for the issuance of 5,000,000 Class B convertible preferred shares to the shareholders of MGS, which shares will be convertible into 50,000,000 common shares of our capital stock only when cumulative net revenues derived from the RTN-Stealth Software license reach a total of Cdn. $20,000,000. A transaction advisory fee of 250,000 special convertible preferred shares were issued to Tidalwave Capital Inc., a private company controlled by Nikolas Perrault, a member of our Board.
At the heart of the RTN-Stealth Software is a unique principle of presenting current market information using the flow rate of buy/sell orders placed in real time by all traders on the Exchange Electronic Trading Book. These orders are weighted by their proximity to inside bid/ask levels, their size and the time elapsed since the order origination.
All the weighted orders (called the “Traders’ Intent”) are then summed up creating respectively a weighted sum of bids and a weighted sum of asks. The simple ratio between the weighted sum of bids and weighted sum of asks is referred to as the “Trader’s Sentiment” and it is used to analyze the “built up pressure” to buy or sell a security.
Although the RTN-Stealth Software does not offer any trading advice nor create any trading recommendations it can serve an important analytical role in significantly compressing the real time information flow between the markets and a trader using the system. It also helps a trader to extract potentially valuable market behavioral patterns, thus enhancing the trader’s ability to assess current market situations.
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Overall the RTN-Stealth Software is the result of scientific integration in the fields of computing, bioengineering, neuroscience and finance under a unified framework. It has been designed using biological and human-computer interface principles. Its interface creates a cyclic interaction that has the computer handle all raw data analysis and filtering automatically, while final decision-making for executing any transaction is solely within the control of the end-user trader.
The RTN-Stealth Software has a built-in direct access execution platform with a state-of-the-art order placement technique that is unique in the industry. It is seamlessly integrated with the largest and the most efficient direct access electronic Brokerage house – Interactive Brokers (IB).
The RTN-Stealth Software does not require any external real-time data feed as it receives its data through the proprietary IB Application Programming Interface (API). This feature significantly reduces the costs of running the RTN-Stealth Software, which also passes on the savings to the end-user.
Our plan is to market the RTN-Stealth Software on a monthly subscription basis with a proposed monthly fee of $49.50 USD. The software will be distributed and supported via our website, which will also handle the customer’s payments, installation and software updates. The live, phone and on-line support is planned to be outsourced while all the software maintenance and further development will be handled directly by us.
The RTN-Stealth Software will be distributed in the form of a stand-alone Windows application that can be seamlessly connected to the IB API. We are also in a process of registering as an official third party developer for Interactive Brokers. Once we are registered, the RTN-Stealth Software will be included in the official list of the third party tools and will be featured on the IB website.
We have retained the exclusive services of Dr. Alex Bogdan as a strategic technical advisor. Dr. Bogdan led the scientific team that spent over nine years developing the RTN-Stealth Software.
On May 17, 2010 we entered into an agreement to acquire all of the assets of MGS in consideration for the issuance to MGS shareholders of 20,000,000 common shares in our capital stock, which shares will be subject to escrow restrictions, whereby the shares will be released in four equal tranches commencing six months from the issuance of the shares, then at nine months, twelve months and fifteen months thereafter, and our assumption of $2.45 million of liabilities is owed by MGS.
MGS is a privately held research and development company that developed the RTN-Stealth Software. MGS also developed a wide variety of proprietary automated trading systems, market indicators, trade execution platforms and money management software including a very unique robotic trading station that can support over 1,000 different securities.
MGS was evaluated by Lorovest Corp. as having a fair market value of $24 million, net of the value of the January 19, 2010 licensing agreement with us.
On May 17, 2010 we purchased the EMC-ALGO Software Suite from ENAJ Mercantile Corporation (“ENAJ”) in consideration for the issuance of 5,000,000 common shares in our capital stock, of which 2,500,000 shares were to be issued to ENAJ immediately and subject to escrow restrictions, whereby the shares would be released in four equal tranches at six, nine, twelve and fifteen months thereafter. The final 2,500,000 common shares were issued to ENAJ on May 17, 2010 and escrowed in three equal tranches at twelve, twenty-four and thirty-six months.
As part of the transaction, Michael Boulter accepted the position of President and Chief Operating Officer of our company for a minimum of three years. Mr. Boulter will operate out of the facility in Mississauga, Ontario, which is where MGS has its offices and fully equipped, state of the art trading and research and development centre. Mr. Boulter is the founder and Chief Technology Officer of ENAJ. He has been with ENAJ since it was formed in July of 2008.
ENAJ is a privately held proprietary futures trading company incorporated in Ontario, Canada. Using its own capital, ENAJ seeks returns based on pricing discrepancies and sudden marketplace changes that occur on an intra-day basis in the futures markets. ENAJ has developed trading algorithms that have produced strong results across four different futures markets: S&P 500 Index, NASDAQ 100 Index, Crude Oil and Gold.
14
Historical
We were previously engaged in the business of resource exploration.
In February, 2007 we entered into a purchase and sale agreement (the “Agreement”) with Arctos Petroleum Corp. (“Arctos”) whereby Arctos agreed to sell to us a 30% working interest in 64 gross Ha (19.2 Net Ha) of onshore P&NG rights and a 40% interest in an oil battery in Alexander, Alberta, located 75 kilometres northwest of Edmonton, Alberta. We did not contribute towards the project and were in a non-participation penalty position on both the well and the battery. As a result, we wrote down the investment to $1 for the year ended December 31, 2009.
In October 2008 we entered into an asset purchase and sale agreement to purchase from a British Columbia private company 22 mineral claims located approximately 30 miles northeast of Atlin, British Columbia in the Atlin Mining District. In September 2009 we completed an evaluation of the 22 mineral claims and determined that 17 claims had been allowed to lapse and, as a result, the mineral property was written down to $67,185 for the year ended December 31, 2009. On January 5, 2010 we transferred our interest in the remaining 5 mineral claims as part of our Plan of Arrangement with CLI.
C.
Organizational Structure
We have two wholly-owned subsidiaries., being (1) Arris Minerals Inc., a British Columbia company, which is currently inactive; and (2) Arris Oil and Gas Inc., a British Columbia company, which is currently inactive.
D.
Property, Plants and Equipment
Our principal executive offices and corporate offices are located at Suite 200, 8338 120th Street, Surrey, BC, Canada V3W 3N4. We rent our offices on an informal month-to-month lease. We also lease facilities in Ontario at a price of $7,450, which lease is for a term of three years.
ITEM 4A.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition, changes in financial condition and results of operations as at December 31, 2009, 2008 and 2007 should be read in conjunction with our audited consolidated financial statements and related notes included herein. Unless expressly stated otherwise, all references to dollar amounts in this section are Canadian dollars.
A reconciliation of our financial statements to U.S. GAAP is set forth in Note 13 of the audited financial statements as of December 31, 2009 included herein at Part IV – Item 17.
A.
Operating Results
A comparison of the results of operations for the fiscal years ended December 31, 2009, 2008, and 2007 are as follows:
Year Ended December 31, 2009 as compared to Year Ended December 31, 2008
We reported a net loss of $599,471 ($0.01 per share) for the year ended December 31, 2009 as compared to a net loss of $305,762 ($0.01 per share) for the year ended December 31, 2008. Significant changes between the 2009 and 2008 year leading to the increase of the net loss are, write down of mineral and oil and gas properties, the recovery of loss recorded on investment, increase in management and consulting fees, stock based compensation, trust and filing fees, and professional fees. Details are as follows:
Write down charge increased by $378,426 which is a result of writing down our mineral and oil and gas properties by $378,426 in current year (2008 - $Nil). In accordance with our accounting policies, investment is recorded at its fair market value at the year-end date. As a result we took a mark-to-market fair value adjustment (a loss) of
15
$188,333 for our sole short term investment (a convertible debenture) for the year ended December 31, 2008. This convertible debenture expired in 2009 and the principal plus accrued interest was repaid in 2009. As a result, we recorded a recovery (gain) of $188,333 in the current year accordingly. Management and consulting fees in 2009 increased by $28,300 from 2008. The increase is mainly a result of hiring more business consultant to explore addition business opportunities. We granted 6,250,000 stock options to various employees, Directors, and consultants during 2009 (2008 – Nil). As a result, we recorded a stock-based compensation of $47,360 in 2009 compared to $Nil in the last year. Trust and filing fees increased by $23,000 and professional fees increased by $70,800 as a result of incurring more expenses for the Incana Plan of Arrangement and November Plan of Arrangement.
Year Ended December 31, 2008 as compared to Year Ended December 31, 2007
We recorded a net loss for the year ended December 31, 2008 of $305,762 or $0.04 (pre-share split) per share as compared to a net loss of $23,333 or $0.01 (pre-share split) per share for the year ended December 31, 2007, being a 1,210% increase in net loss in the amount of $282,429. The increased loss in fiscal 2008 was the result of a write down of investment in fiscal 2008 in the amount of $188,333 and rent, research and property costs and management, consulting and administrative incurred in fiscal 2008, which were offset by a foreign exchange gain of $74,821. The general and administrative expenses incurred during fiscal 2008 primarily consisted of management, consulting and administrative of $83,931 (2007 - $Nil), foreign exchange loss (gain) of $(74,821) (2007 - $17,609), rent of $45,000 (2007 - $Nil), research and property costs of $36,410 (2007 - $Nil), trust and filing fees of $14,637 (2007 - $19,502), bank charges and interest of $25,097 (2007 - $1,096), profession al fees of $2,695 (2007 - $24,724), travel expenses of $6,033 (2007 - $387), and administrative expenses of $Nil (2007 - $3,785).
B.
Liquidity and Capital Resources
We do not generate revenues from operations. We rely on equity financing for our working capital requirements to fund our exploration, business development, investment, and administrative activities. At December 31, 2009, we had $379,284 in cash and cash equivalent (2008 – $99,366), marketable securities of $1,448,800 (2008-$Nil) and a positive working capital of $2,005,756 (2008 –$362,339). For the year ended December 31, 2009 operating expenditures were $438,906 compared to $142,135 in 2008.
We are not subject to external working capital requirement and do not have significant capital commitments that we are obligated to make. Under the November Plan of Arrangement and subsequent to the year ended December 31, 2009, we transferred our interest in five mineral claims in British Columbia, Canada, our rights to the Distribution Agreement to distribute the QMI Licensed Seismic Products in India and our marketable securities to three subsidiaries to complete the spin-off corporate restructuring. Excluding the marketable securities of $1,448,800 that would have been transferred out, we would have a working capital of $556,956 and accumulated a deficit of $3,018,127 as at December 31, 2009. To date, we have not generated any revenues from operations and will most likely require additional funds to meet our obligations and the costs of our operations. While we believe we will be able to raise the additional financing when required, the impacts of the current global economic d ownturn and uncertainty in the global capital market provide no guarantees that we can complete an equity or a debt financing when needed.
C.
Research and Development, Patents and Licenses, Etc.
Not applicable.
D.
Trend Information
We do not know of any other trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity either materially increasing or decreasing at present or in the foreseeable future.
E.
Off Balance Sheet Arrangements
We do not utilize off-balance sheet arrangements.
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F.
Tabular Disclosure of Contractual Obligations
We did not have any contractual obligations as at December 31, 2009.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The following is a list of our Directors and senior officers as at June 28, 2010, their municipalities of residence, their current positions with us and their principal occupations during the past five years.
(2)
Based on issued and outstanding share capital of 124,416,860 common shares as of June 28, 2010.
The computation of the number and percentage of common shares held in the United States is based upon the number of common shares held by record holders with United States addresses and by trusts, estates or accounts with United States addresses as disclosed to us following inquiry to all record holders known to us to be trustees, executors, guardians, custodians or other fiduciaries holding common shares for one or more trusts, estates or accounts. United States residents may beneficially own common shares held of record by non-United States residents.
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Control of the Corporation
We are a publicly owned Canadian company, the shares of which are owned by Canadian residents, U.S. residents and other foreign residents. To the best of our knowledge, we are not directly or indirectly owned or controlled by another corporation, any foreign governments or any other natural or legal person, jointly or severally.
Change in Control Arrangements
We are not aware of any arrangements the operation of which may at a subsequent date result in a change of control of our company.
B.
Related Party Transactions
Other than as disclosed in Item 6.B – “Directors, Senior Management and Employees – Compensation” and the transactions set forth below, there are no related party transactions or proposed transactions involving any insider, , or associate or affiliate of an insider, that have occurred during our two most recently completed fiscal. There are no debts owing directly or indirectly to us by any Director or officer, or by an associate of any Director or officer.
During the fiscal year ended December 31, 2009 and December 31, 2008, we entered into the following transactions with related parties:
(a)
During the year ended December 31, 2009, a company controlled by the CEO charged $61,750 in consulting and administrative fees (2008 - $45,000) and $60,000 in rental expenses (2008 - $45,000). Another company controlled by the CEO also charged $50,000 in property research charges. At December 31, 2008 we owed $Nil for these expenses.
(b)
During the year ended December 31, 2009, two companies related by a common Director charged $45,000 in management fees (2008 - $Nil) and $48,229 in finders’ fees (2008 - $Nil) as share issuance costs respectively.
(c)
During the year ended December 31, 2009, we paid a director’s fee of $3,000 to three Directors for a total of $9,000 (2008 - $Nil).
(d)
During the year ended December 31, 2009, we owed $Nil (2008 - $22,441) to a company controlled by our CEO’s spouse.
It is the opinion of management that the terms of these transactions are favourable to us and in our best interest. Management also believes that we could not have obtained, through arms-length negotiations, a more favourable arrangement from an unrelated third party.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
Financial Statements and Other Financial Information
Attached hereto are our audited financial statements, consisting of balance sheets as at December 31, 2009 and 2008, consolidated statements of operations and consolidated statements of shareholders’ cash flows for each of the years in the three-year period ended December 31, 2009 along with related notes and Auditor’s Report and Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Conflict. See Item 17 – “Financial Statements”.
Legal Proceedings
There are no material legal or arbitration proceedings to which we were a party or in respect of which our property is subject. Our management has no knowledge of any legal proceedings in which we may be involved or that are contemplated by governmental authorities or otherwise.
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Dividend Policy
No dividends have been paid on any class of our shares since the date of our incorporation and we are not contemplating that any dividends will be paid in the immediate or foreseeable future.
B.
Significant Changes
The following changes occurred subsequent to December 31, 2009:
·
On January 19, 2010, we entered into an agreement with Market Guidance Systems Inc. (“MGS”) pursuant to which we acquired a fully supported exclusive and perpetual license to the RTN-Stealth Software.
As consideration for the above, we issued 5,000,000 Class B convertible preferred shares (the “Class B Shares”) to the shareholders of MGS. The holders of the Class B Shares have the right to convert the Class B Shares into 50,000,000 common shares only when the cumulative net revenues derived from the license of the RTN-Stealth Software reach a total of C$20,000,000. In connection with this acquisition, we paid a transaction advisory fee of 250,000 Class B. Preferred Shares to a company controlled by a member of our Board.
·
On February 24, 2010, we awarded our Directors, officers, employees and consultants a total of 5,650,000 stock options at an exercise price of $0.32 with an expiry date of February 24, 2015.
·
On May 17, 2010, we signed a definitive agreement with MGS whereby, subject to regulatory approval, we will acquire all of the assets of MGS and assume $2.45 million of liabilities owed by MGS in consideration of the issuance of 20,000,000 common shares, which shares will be escrowed in four equal tranches at 6, 9, 12 and 15 months.
·
On May 17, 2010, we signed a definitive agreement with ENAJ Mercantile Corporation (“ENAJ”) to purchase its EMC-ALGO Software Suite in consideration of 5,000,000 common shares, subject to regulatory approval. Of these shares, 2,500,000 common shares which will be issued immediately and escrowed in four equal tranches at 6, 9, 12 and 15 months and 2,500,000 common shares will be issued and escrowed in three equal tranches at 12, 24 and 36 months.
ITEM 9.
THE OFFER AND LISTING
A.
Offer and Listing Details
We have been trading on the CNSX under the trading symbol “RTN” since January 8, 2010 and before that under the trading symbol “AAS” commencing December 17, 2003. CNSX is a stock market designed for trading the equity securities of emerging companies. Information regarding CNSX can be obtained from their website atwww.cnsx.ca. Our shares have been quoted on the OTCBB under the trading symbol “RTNSF” since January 27, 2010 and before that under the trading symbol “ARRRF” commencing July 16, 2007. Our shares have also been listed on the Frankfurt Stock Exchange under the trading symbol “IGN3.F” since July 18, 2007.
On December 31, 2009, 99,416,860 common shares were outstanding. The closing price of our common shares on the CNSX on December 31, 2009 was US$0.625.
The following summarizes the reported high and low prices for our shares on the CNSX for the periods indicated:
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| | |
| High | Low |
Monthly Stock Prices | C$ | C$ |
May 2010 | (1)0.40 | (1) 0.35 |
April 2010 | (1)0.35 | (1) 0.27 |
March 2010 | (1)0.40 | (1) 0.30 |
February 2010 | (1)0.32 | (1) 0.30 |
January 2010 | (1)0.27 | (1) 0.22 |
December 2009 | (1).16 | (1) .16 |
Quarterly Stock Prices | | |
Fiscal 2009 | $ | $ |
Fourth Quarter(1) | (1)1.10 | (1) .70 |
Third Quarter | (1)1.00 | (1) .24 |
Second Quarter | (1).13 | (1) .24 |
First Quarter | (1).13 | (1) .30 |
Quarterly Stock Prices | | |
Fiscal 2008 | $ | $ |
Fourth Quarter | (1)0.75 | (1)0.45 |
Third Quarter(1) | (1)0.90 | (1)0.75 |
Second Quarter | (1)0.73 | (1)0.55 |
First Quarter | 0.59 | 0.59 |
Annual Stock Prices | $ | $ |
Fiscal 2009 | (1)1.10 | (1).13 |
Fiscal 2008 | (1)0.90 | (1)0.45 |
Fiscal 2007(2) | (2)0.40 | (2)0.26 |
Fiscal 2006 | 0.39 | 0.11 |
Fiscal 2005(3) | (3)0.30 | (3)0.05 |
(1)
Effective April 27, 2008, trading our reporting currency changed from US dollars to Canadian dollars to better reflect our business activities.
(2)
Our shares were consolidated on the basis of five old shares for one new share on July 5, 2007.
(3)
Our shares were consolidated on the basis of four old shares for one new share on July 7, 2005.
B.
Plan of Distribution
Not applicable.
C.
Markets
Our common shares trade on the OTCBB Market under the trading symbol “RTNSF”, on the CNSX under the trading symbol “RTN”, and on the Frankfurt Stock Exchange under the trading symbol “IGN3.F”.
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D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
Securities Register
We maintain at Computershare Trust Company of Canada (“transfer agent”) a securities register in which we record the securities issued by us in registered form, showing with respect to each class or series of securities:
(a)
the names, alphabetically arranged and the latest known address of each person who is or has been a security holder;
(b)
the number of securities held by each security holder; and
(c)
the date and particulars of the issue and transfer of each security.
The transfer agent keeps information relating to a security holder that is entered in the securities register for at least seven years after the security holder ceases to be a security holder.
Registration
We were incorporated pursuant to theBritish Columbia Company Act (the predecessor statute to the BCBCA) by memorandum and articles filed with the British Columbia Registrar of Companies under incorporation number 333274. There are no restrictions on the type of business which may be carried out by us in our memorandum and articles and our objects and purposes are not set out in our memorandum and articles.
Powers of Directors
Approval and Voting
A Director or senior officer who holds a disclosable interest (as that term is used in the BCBCA) in a contract or transaction into which we have entered or propose to enter is:
-
liable to account to us for any profit that accrues to the Director or senior officer under or as a result of the contract or transaction only if and to the extent provided in the BCBCA.
-
not entitled to vote on any Directors’ resolution to approve that contract or transaction, unless all the Directors have a disclosable interest in that contract or transaction, in which case any or all of those Directors may vote on such resolution.
-
and who is present at the meeting of Directors at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or not the Director votes on any or all of the resolutions considered at the meeting.
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A Director or senior officer who holds any office or possesses any property, right or interest that could result, directly or indirectly, in the creation of a duty or interest that materially conflicts with that individual’s duty or interest as a Director or senior officer, must disclose the nature and extent of the conflict as required by the BCBCA.
Remuneration and Expenses
The Directors are entitled to the remuneration for acting as Directors, if any, as the Directors may from time to time determine. If the Directors so decide, the remuneration of the Directors, if any, will be determined by the shareholders. That remuneration may be in addition to any salary or other remuneration paid to any officer or employee as such, who is also a Director.
Borrowing
If authorized by the Directors, we may:
(1)
borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that we consider appropriate;
(2)
issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation or any other person and at such discounts or premiums and on such other terms as we consider appropriate;
(3)
guarantee the repayment of money by any other person or the performance of any obligation of any other person; and
(4)
mortgage, charge, whether by way of specific or floating charge, grant a security interest in, or give other security on, the whole or any part of our present and future assets and undertaking.
Any bonds, debentures or other debt obligations may be issued at a discount, premium or otherwise, and with any special privileges as to redemption, surrender, drawings, allotment of or conversion into or exchange for shares or other securities, attending and voting at our general meetings, appointment of Directors or otherwise and may by their terms be assignable free from any equities between us and the person to whom they were issued or any subsequent holder thereof, all as the Directors may determine.
Qualification
A Director is not required to hold a share in our capital as qualification for his or her office but must be qualified as required by the BCBCA to become, act or continue to act as a Director.
The BCBCA states that
(1)
A person must not become or act as a director of a company unless that person is an individual who is qualified to do so.
(2)
An individual is not qualified to become or act as a director of a company if that individual is
(a)
under the age of 18 years,
(b)
found by a court, in Canada or elsewhere, to be incapable of managing the individual’s own affairs,
(c)
an undischarged bankrupt, or
(d)
convicted in or out of British Columbia of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless
(i)
the court orders otherwise,
(ii)
5 years have elapsed since the last to occur of
27
(A)
the expiration of the period set for suspension of the passing of sentence without a sentence having been passed,
(B)
the imposition of a fine,
(C)
the conclusion of the term of any imprisonment, and
(D)
the conclusion of the term of any probation imposed, or
(iii) a pardon was granted or issued under the Criminal Records Act (Canada).
(3)
A director who ceases to be qualified to act as a director of a company must promptly resign.
Description of Securities
Common Shares
We are authorized to issue an unlimited number of common shares without nominal or par value of which, as at June 28, 2010, 124,416,860 common shares are issued and outstanding as fully paid and non-assessable. As at June 28, 2010, we had 5,650,000 common shares reserved under our stock option plan. These options are exercisable at a price of $0.32 per share and expire on February 24, 2015. At June 28, 2010 we did not have any share purchase warrants outstanding.
The holders of the common share are entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class of shares are entitled to vote, and on every poll taken at every such meeting, or adjourned meeting, every holder of common shares shall be entitled to one vote in respect of each common share held.
Class “B” Preferred Shares
We are authorized to issue an unlimited number of Class “B” preferred shares in series with no par value, which, as at June 28, 2010, 5,250,000 preferred shares are issued and outstanding as fully paid and non-assessable. Each Class B preferred share is convertible into ten common shares when the cumulative net revenues derived from the license of the RTN Stealth Software reach a total of $20,000,000.
The Class “B” preferred shares, as a class will rank in priority to the common shares with respect to the payment of dividends and any return on capital in the event of the liquidation, dissolution or winding up of the Company.
Special Rights and Restrictions Attached to the Class “B” preferred shares
Pursuant to the special rights and restrictions attached to the Class “B” preferred shares, we may, by directors' resolution or ordinary resolution, in each case as determined by the Directors: (a) determine the maximum number of shares of any of those series of Class “B” preferred shares that we are authorized to issue, determine that there is no such maximum number or alter any determination made in relation to a maximum number of those shares; (b) create an identifying name by which the shares of any of those series of Class “B” preferred shares may be identified or alter any identifying name created for those shares; and (c) attach special rights or restrictions to the shares of any of those series of Class “B” preferred shares or alter any special rights or restrictions attached to those shares, subject to the special rights and restrictions attached to the series of Class “B” preferred shares by our Articles. Where th ese alterations, determinations or authorizations are to be made in relation to a series of Class “B” preferred shares of which there are issued shares, such alteration must be made by special resolution of our shareholders and a separate special resolution of the holders of that series.
Annual and Extraordinary General Meetings
Unless an annual general meeting is deferred or waived in accordance with the BCBCA, we must hold an annual general meeting at least once in each calendar year and not more than 15 months after the last annual reference date at such time and place as may be determined by the Directors.
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Notice of Meetings
We must send notice of the date, time and location of any meeting of shareholders, in the manner provided in our Articles, or in such other manner, if any, as may be prescribed by directors’ resolution (whether previous notice of the resolution has been given or not), to each shareholder entitled to attend the meeting, to each Director and to our auditor, unless our Articles otherwise provide, at least the following number of days before the meeting:
(1)
if and for so long as we are a public company, 21 days;
(2)
otherwise, 10 days.
C.
Material Contracts
During the year ended December 31, 2009 and subsequent to that date we entered into the following material contracts:
1.
On May 4, 2009 we entered into a Purchase Agreement with Soraje Holdings Ltd., as amended on May 21, 2009, (the“Property Contract”) to purchase a development property located in Surrey, BC, Canada, for consideration of $677,000, with a non-refundable deposit of $10,000 to be made upon completion of a successful feasibility study of the property on or before August 4, 2010.
2.
On May 19, 2009 we entered into an Arrangement Agreement with InCana Investments Inc. ("InCana"), pursuant to which we transferred to InCana $100,000 and assigned to InCanada the Property Contract in exchange for 15,043,372 common shares of InCana, which was distributed pro-rata to our shareholders.
3.
On November 2, 2009, the we entered into an Arrangement Agreement with three of our wholly owned subsidiaries: Arris Holdings Inc. (“AHI”), CLI Resources Inc. (“CLI”) and QMI Seismic Inc. (“QMI”) whereby the three subsidiaries were spun-out from the parent company, each becoming a reporting issuer and each acquiring an asset from us in exchange for common shares of the respective subsidiary.
4.
On January 19, 2010 we entered a definitive agreement with Market Guidance Systems Inc. (“MGS”) whereby we acquired a fully supported exclusive and perpetual license to the RTN-Stealth Software in consideration of 5,000,000 Class B convertible preferred shares issued to the shareholders of MGS, which shares are convertible into 50,000,000 of our common shares only when cumulative net revenues derived from the license of the RTn-Stealth Software reach a total of US$ 20,000,000.
5.
On February 24, 2010 we entered into stock option agreements with our Directors, officers, employees and consultants, granting a total of 5,650,000 stock options at an exercise price of $0.32 with an expiry date of February 24, 2015.
6.
On May 17, 2010 we entered into an agreement to acquire all of the assets of MGS in consideration for issuing to the MGS shareholders 20,000,000 common shares escrowed in four equal tranches at 6, 9, 12 and 15 months and assuming $2.45 million of liabilities owed by MGS.
7.
On May 17, 2010 we purchased the EMC-ALGO Software Suite from ENAJ in consideration of the issuance of 5,000,000 common shares. Of these 5,000,000 common shares, 2,500,000 common shares will be issued to ENAJ immediately and escrowed in four equal tranches at 6, 9, 12 and 15 months. The final 2,500,000 common shares will be issued to ENAJ and escrowed in three equal tranches at 12, 24 and 36 months.
Copies of the material contract may be inspected at our office at Suite 200, 8338 120th Street, Vancouver, British Columbia, Canada V3W 3N4 during normal business hours.
D.
Exchange Controls
There are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of our common stock. See “Taxation” below.
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TheInvestment Canada Act requires a non-Canadian making an investment which would result in the acquisition of control of a Canadian business, the gross value of the assets of which exceed certain threshold levels or the business activity of which is related to Canada’s cultural heritage or national identity, to either notify, or file an application for review with, Investment Canada, the federal agency created by theInvestment Canada Act.
The notification procedure involves a brief statement of information about the investment on a prescribed form, which is required to be filed with Investment Canada by the investor at any time up to 30 days following implementation of the investment. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada’s cultural heritage and national identity.
If an investment is reviewable under the Act, an application for review in the form prescribed is normally required to be filed with Investment Canada prior to the investment taking place and the investment may not be implemented until the review has been completed and the Minister responsible for Investment Canada is satisfied that the investment is likely to be of net benefit to Canada. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian must not implement the investment or, if the investment has been implemented, must divest himself of control of the business that is the subject of the investment.
E.
Taxation
The following summary of the material Canadian federal income tax consequences generally applicable in respect of the common stock reflects our opinion. The discussion of Canadian federal income considerations is not exhaustive of all possible Canadian federal income tax considerations and does not take into account provincial, territorial or foreign tax considerations. It is not intended to be, nor should it be construed to be, legal or tax advice to any particular holder of common shares. Prospective purchasers of our common shares, including non-resident insurers carrying on business in Canada, are advised to consult with their advisors about the income tax consequences to them of an acquisition of common shares. The discussion of Canadian federal income considerations assumes that holders of common shares hold their common shares as capital property, deal at arm’s length with us, are not “financial institutions” as defined in theInco me Tax Act (Canada) (the “Tax Act” or “ITA”), and do not use or hold their common shares in, or in the course of, carrying on a business in Canada.
The discussion of Canadian federal income considerations is based on the current provisions of theIncome Tax Act and the regulations under theIncome Tax Act, all proposed amendments to theIncome Tax Act and theIncome Tax Act regulations announced by the Minister of Finance, Canada, the current administrative and assessing policies of the Canada Customs and Revenue Agency, and the provisions of the Canada-U.S. Income Tax Treaty (1980). It has been assumed that any proposed amendments to theIncome Tax Act and the Income Tax Act regulations will be enacted in substantially their present form.
The anticipated tax consequences may change, and any change may be retroactively effective. If so, this summary may be affected. Further, any variation or difference from the facts or representations recited here, for any reason, might affect the following discussion, perhaps in an adverse manner, and make this summary inapplicable.
Canadian Federal Income Tax Considerations
If a non-resident were to dispose of our common stock to another Canadian corporation which deals or is deemed to deal on a non-arm’s length basis with the non-resident and which, immediately after the disposition, is connected with us (i.e., which holds shares representing more than 10% of the voting power and more than 10% of the market value of all our issued and outstanding shares), the amount by which the fair market value of any consideration (other than any shares of the purchaser corporation) exceeds the paid-up capital of the common stock sold will be deemed to be taxable as a dividend paid by the purchasing corporation, either immediately or eventually by means of a deduction in computing the paid-up capital of the purchasing corporation, and subject to withholding taxes as described below.
Under the Tax Act, a gain from the sales of common stock by a non-resident will not be subject to Canadian tax, provided the shareholder (and/or persons who do not deal at arm’s length with the shareholder) have not held a “substantial interest” in our company (25% or more of the shares of any class of our stock) at any time in the five years preceding the disposition. Generally, the Tax Convention will exempt from Canadian taxation any capital gain realized by the resident of the United States, provided that the value of the common stock is not derived principally from real property situated in Canada.
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Dividends
In the case of any dividends paid to non-residents, the Canadian tax is withheld by us, only the net amount to the shareholder is remitted. By virtue of Article X of the Tax Convention, the rate of tax on dividends paid to residents of the United States is generally limited to 15% of the gross dividend (or 5% in the case of certain corporate shareholders owing at least 10% of our voting shares). In the absence of the treaty provisions, the rate of Canadian withholding tax imposed on non-residents is 25% of the gross dividend. Stock dividends received by non-residents from us are taxable by Canada as ordinary dividends.
Where a holder disposes of common stock to us (unless we acquired the common stock in the open market in the manner in which shares would normally be purchased by any member of the public) will result in a deemed dividend to the U.S. holder equal to the amount by which the consideration paid by us exceeds the paid-up capital of such stock, the amount of such dividend will be subject to withholding tax as described above.
Capital Gains
A non-resident of Canada is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of a share of a class that is listed on a prescribed stock exchange unless the share represents “taxable Canadian property” to the holder thereof. A common share of our company will be taxable Canadian property to a non-resident holder if, at any time during the period of five years immediately preceding the disposition, the non-resident holder, persons with whom the non-resident holder did not deal at arm’s length, or the non-resident holder and persons with whom he/she did not deal at arm’s length owned 25% or more of the issued shares of any class or series of our stock. In the case of a non-resident holder to whom our shares represent taxable Canadian property and who is resident in the United States, no Canadian tax will be payable on a capital gain realized on such shares by reason of the Canada-United States Income Tax Conv ention 1980 (the “Treaty”) unless the value of such shares is derived principally from real property situated in Canada or the non-resident holder previously held the share while resident in Canada. However, in such a case, certain transitional relief under the Treaty may be available.
Repurchase of Common Shares
If we repurchase our common shares from a holder of our common shares (other than a purchase of common shares on the open market in a manner in which shares would be purchased by any member of the public in the open market), the amount paid by us that exceeds the “paid-up capital” of the shares purchased will be deemed by theIncome Tax Act to be a dividend paid by us to the holder of our common shares. The paid-up capital of our common shares may be less than the holder’s cost of its common shares. The tax treatment of any dividend received by a holder of our common shares has been described above under “Dividends on Our Common Shares.”
A holder of our common shares will also be considered to have disposed of its common shares purchased by us for proceeds of disposition equal to the amount received or receivable by the holder on the purchase, less the amount of any dividend as described above. As a result, this holder of our common shares will generally realize a capital gain (or capital loss) equal to the amount by which the proceeds of disposition, net of any costs of disposition and adjusted for any deemed dividends, exceed (or are exceeded by) the adjusted cost base of these shares. The tax treatment of any capital gain or capital loss has been described above under “Disposition of the Company’s Common Shares.”
U.S. Federal Income Tax Consequences
The following is a general discussion of certain possible U.S. federal income tax consequences, under current law, generally applicable to a U.S. Holder (as hereinafter defined) of our shares. This discussion is of a general nature only and does not take into account the particular facts and circumstances, with respect to U.S. federal income tax issues, of any particular U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences.
The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (“Code”), Treasury Regulations, published Internal Revenue Service (“IRS”) rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time and which are subject to differing interpretations. This discussion does
31
not consider the potential effects, both adverse and beneficial, of any proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.
This discussion is for general information only and it is not intended to be, nor should it be construed to be, legal or tax advice to any U.S. Holder or prospective U.S. Holder of shares issued by us, and no opinion or representation with respect to the U.S. federal income tax consequences to any such U.S. Holder or prospective U.S. Holder is made. Accordingly, U.S. Holders and prospective U.S. Holders of common shares issued by us should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal, state, local and foreign tax consequences of purchasing, owning and disposing of shares issued by us.
U.S. Holders
As used herein, a “U.S. Holder” means a holder of common shares issued by us who is (i) a citizen or individual resident of the U.S., (ii) a corporation created or organized in or under the laws of the U.S. or of any political subdivision thereof, (iii) an estate whose income is taxable in the U.S. irrespective of source or (iv) a trust subject to the primary supervision of a court within the U.S. and control of a U.S. fiduciary as described Section 7701(a)(30) of the Code. If a partnership or other “pass-through” entity treated as a partnership for U.S. federal income tax purposes holds shares issued by us, the U.S. federal income tax treatment of the partners or owners of such partnership or other pass-through entity generally will depend on the status of such partners or owners and the activities of such partnership or pass-through entity.
Persons Not Covered
This summary does not address the U.S. federal income tax consequences to persons (including persons who are U.S. Holders) subject to special provisions of U.S. federal income tax law, including (i) persons who are tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, or brokers, dealers or traders in securities, (ii) persons who have a “functional currency” other than the U.S. dollar, (iii) persons subject to the alternative minimum tax, (xi) persons who own their common shares as part of a straddle, hedging, conversion transaction, constructive sale or other arrangement involving more than one position, (iv) persons who acquired their common shares through the exercise of employee stock options or otherwise as compensation for services, (v) persons that own an interest in an entity that owns common shares, (vi) persons who own, exercise or dispose of any options, warrants or other rights to acquire common shares, (vii) persons who are partners or owners of partnerships or other pass-through entities or (viii) persons who own their common shares other than as a capital asset within the meaning of Section 1221 of the Code.
Distributions Made by the Corporation to U.S. Holders
General Rules. U.S. Holders receiving distributions (including constructive distributions) with respect to common shares issued by us are required to include in gross income as a dividend for U.S. federal income tax purposes the gross amount of such distributions (without reduction for any Canadian income tax withheld from such distributions), equal to the U.S. dollar value of such distributions on the date of receipt (based on the exchange rate on such date), to the extent that we have current or accumulated earnings and profits. To the extent that distributions from us exceed our current and accumulated earnings and profits, such distributions will be treated first as a return of capital, to the extent of the U.S. Holder’s adjusted basis in the shares, and thereafter as gain from the sale or exchange of the shares. (See more detailed discussion at “Disposition of Shares” below). Any Canadian tax withheld from a distrib ution by us may be credited, subject to certain limitations, against the U.S. Holder’s U.S. federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder’s U.S. federal taxable income by those who itemize deductions. (See more detailed discussion at “Foreign Tax Credit” below).
Currency Gain or Loss. In the case of foreign currency received as a distribution that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss. However, an individual whose realized gain does not exceed $200 will not recognize that gain, to the extent that there are no expenses associated with the transaction that meet the requirements for deductibility as a trade or business expense (other than travel expenses in connection with a business trip) or as an expense for the production of income.
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Dividend may be Eligible for Reduced Tax Rate. For taxable years beginning after December 31, 2002 and before January 1, 2009, dividends received by U.S. Holders that are individuals, estates or trusts from “qualified foreign corporations,” as defined in Section 1(h)(11) of the Code, generally are taxed at the same preferential tax rates applicable to long-term capital gains. Although not free from doubt, it appears that we would be a “qualified foreign corporation,” as defined in Section 1(h)(11) of the Code pursuant to the U.S. Canada income tax treaty if we are not a Passive Foreign Investment Company (“PFIC”). A corporation that is properly described as a PFIC, Foreign Personal Holding Company (defined below), or a Foreign Investment Company (defined below) for its taxable year during which it pays a dividend, or for its immediately preceding taxable year, will not be treated as a “qualifying for eign corporation” and dividends received by U.S. Holders that are individuals, estates or trusts generally will be subject to U.S. federal income tax at ordinary income tax rates (and not at the preferential tax rates applicable to long-term capital gains).
Dividends not Eligible for Dividends Received Deduction. Dividends paid by us generally will not be eligible for the “dividends received deduction” allowed to corporate shareholders receiving dividends from certain U.S. corporations. Under certain circumstances, a U.S. Holder that is a corporation and that owns shares representing at least 10% of the total voting power and the total value of shares issued by us may be entitled to a 70% deduction of the “U.S. source” portion of dividends received from us (unless we qualify as a “Foreign Personal Holding Company” or a “PFIC” as defined below). The availability of the dividends received deduction is subject to several complex limitations that are beyond the scope of this discussion, and U.S. Holders of shares issued by us should consult their own financial advisor, legal counsel or accountant regarding the dividends received deduction .
Dividend Paid to Shareholder who Made QEF Election may be Exempt from Tax. Generally, shareholders are not subject to additional income taxation on distributions made by a PFIC to the extent of the shareholder’s basis in the corporation’s shares if a Qualified Electing Fund (“QEF”) election is in effect. (Please see the QEF election discussion below.) A shareholder’s basis in this situation is usually equal to the cost of purchasing the shares plus the amount of the corporation’s income that was reported on the shareholder’s return pursuant to the QEF election less any prior distributions made by the corporation to the shareholder. Again, these rules are subject to several exceptions that are beyond the scope of this discussion. U.S. Holders of shares issued by us should consult their own financial advisor, legal counsel or accountant regarding whether dividends paid by us to them will be exempt from federal income tax if a QEF election is made.
Disposition of Shares
General Rule. A U.S. Holder will recognize gain or loss upon the sale or other taxable disposition of shares issued by us equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholder’s tax basis in the shares. This gain or loss will be capital gain or loss if the common shares are a capital asset in the hands of the U.S. Holder, which will be long-term capital gain or loss if the shares are held for more than one year.
Reduced Tax Rate. Preferential tax rates apply to long-term capital gains of U.S. Holders that are individuals, estates or trusts. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a corporation (other than a corporation subject to Subchapter S of the Code). Deductions for net capital losses are subject to significant limitations. For U.S. Holders that are not corporations, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted. Sales of PFIC stock are not eligible for the reduced long-term capital gains rates that are usually applicable to sales of stock unless the shareholder made a QEF election regarding such shares.
The Corporation may be a Passive Foreign Investment Company
General Discussion. It is highly likely that we will be classified as a passive foreign investment company (“PFIC”) from time to time for U.S. federal income tax purposes. A non-U.S. corporation is classified as a PFIC whenever it satisfies either the asset test or the income test. This determination is not binding on U.S. Holders or the IRS and there can be no assurance that the IRS will not challenge this determination. A U.S. Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to numerous special U.S. federal income taxation rules and may elect to be taxed under two alternative tax regimes. The following is a discussion of these three sets of special rules applied to U.S. Holders of shares issued by us. In addition, special
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rules apply if a foreign corporation qualifies as both a PFIC and a “controlled foreign corporation” (as defined below) and a U.S. Holder owns, actually or constructively, 10 % or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation (See more detailed discussion at “Controlled Foreign Corporation” below).
Definition of PFIC. Section 1297 of the Code defines a PFIC as a corporation that is not formed in the U.S. and, for any taxable year, either (a) 75% or more of its gross income is “passive income” or (b) the average percentage, by fair market value (or, if the corporation is not publicly traded and either is a controlled foreign corporation or makes an election, by adjusted tax basis), of its assets that produce or are held for the production of “passive income” is 50% or more. “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. However, gains resulting from commodities transactions are generally excluded from the definition of passive income if “substantially all” of a merchant’s, producer’s or handler’s business is as an active merch ant, producer or handler of such commodities. For purposes of the PFIC income test and the assets test, if a foreign corporation owns (directly or indirectly) at least 25% by value of the stock of another corporation, such foreign corporation shall be treated as if it (a) held a proportionate share of the assets of such other corporation, and (b) received directly its proportionate share of the income of such other corporation. Also, for purposes of such PFIC tests, passive income does not include any interest, dividends, rents or royalties that are received or accrued from a “related” person to the extent such amount is properly allocable to the income of such related person which is not passive income. For these purposes, a person is related with respect to a foreign corporation if such person “controls” the foreign corporation or is controlled by the foreign corporation or by the same persons that control the foreign corporation. For these purposes, “con trol” means ownership, directly or indirectly, of stock possessing more than 50% of the total voting power of all classes of stock entitled to vote or of the total value of stock of a corporation
Generally Applicable PFIC Rules. If a U.S. Holder does not make a timely election to be taxed in conformity with the Mark-to-Market rules or the QEF rules during a year in which it holds (or is deemed to have held) shares issued by us while we are a PFIC (a “Non-Electing U.S. Holder”), then special taxation rules under Section 1291 of the Code will apply to (i) gains realized on the disposition (or deemed to be realized by reasons of a pledge) of his common shares and (ii) certain “excess distributions” (generally, distributions received in the current taxable year that are in excess of 125% of the average distributions received during the three preceding years or, if shorter, the U.S. Holder’s holding period) by us.
A Non-Electing U.S. Holder generally would be required to pro rate all gains realized on the disposition of his common shares and all excess distributions on his common shares over the entire holding period for the common shares. All gains or excess distributions allocated to prior years of the U.S. Holder would be taxed at the highest tax rate for each such prior year applicable to ordinary income. The Non-Electing U.S. Holder also would be liable for interest on the foregoing tax liability for each such prior year calculated as if such liability had been due with respect to each such prior year. A Non-Electing U.S. Holder that is not a corporation must treat this interest charge as “personal interest” which, as discussed above, is wholly non-deductible. The balance of the gain or the excess distribution will be treated as ordinary income in the year of the disposition or distribution, and no interest charge will be incurred with r espect to such balance.
If we are a PFIC for any taxable year during which a Non-Electing U.S. Holder holds shares issued by us, then we will continue to be treated as a PFIC with respect to such common shares, even if we cease meeting the definition of a PFIC. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules discussed above for Non-Electing U.S. Holders) as if such common shares had been sold on the last day of the last taxable year for which it was a PFIC.
Market-to-Market Election. U.S. Holders who hold, actually or constructively, marketable stock (as specifically defined in the Treasury Regulations) of a foreign corporation that qualifies as a PFIC may annually elect to mark such stock to the market (a “market-to-market election”). If such an election is made, such U.S. Holder will generally not be subject to the special taxation rules of Section 1291 discussed above. However, if the mark-to-market election is made by a Non-Electing U.S. Holder after the beginning of the holding period for the PFIC stock, then the Section 1291 rules will apply to certain dispositions of, distributions on and other amounts taxable with respect to our common shares. A U.S. Holder who makes the mark-to market election will include in income for the taxable year for which the election was made an amount equal to the excess, if any, of the fair market value of our common shares as of the c lose of such tax year over such U.S. Holder’s adjusted basis in such common shares. In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder’s adjusted tax basis in the common shares over the fair market value of such shares as of the close of the tax year, or
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(ii) the excess, if any, of (A) the mark-to-market gains for our shares included by such U.S. Holder for prior tax years, including any amount which would have been included for any prior tax year but for the Section 1291 interest on tax deferral rules discussed above with respect to Non-Electing U.S. Holders, over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years. A U.S. Holder’s adjusted tax basis in his shares will be adjusted to reflect the amount included in or deducted from income as a result of a mark-to-market election. A mark-to-market election applies to the taxable year in which the election is made and to each subsequent taxable year, unless the shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election.
QEF Election. A U.S. Holder who makes a timely QEF election (an “Electing U.S. Holder”) regarding his shares issued by us will be subject, under Section 1293 of the Code, to current U.S. federal income tax for any taxable year in which we qualify as a PFIC on his pro rata share of our (i) “net capital gain” (the excess of net long-term capital gain over net short-term capital loss), which will be taxed as long-term capital gain to the Electing U.S. Holder and (ii) “ordinary earnings” (the excess of earnings and profits over net capital gain), which will be taxed as ordinary income to the Electing U.S. Holder, in each case, for the shareholder’s taxable year in which (or with which) our taxable year ends, regardless of whether such amounts are actually distributed.
The effective QEF election also allows the Electing U.S. Holder to (i) generally treat any gain realized on the disposition of his common shares (or deemed to be realized on the pledge of his shares) as capital gain; (ii) treat his share of our net capital gain, if any, as long-term capital gain instead of ordinary income; and (iii) either avoid interest charges resulting from PFIC status altogether, or make an annual election, subject to certain limitations, to defer payment of current taxes on his share of our annual realized net capital gain and ordinary earnings subject, however, to an interest charge. If the Electing U.S. Holder is not a corporation, such an interest charge would be treated as “personal interest” that is not deductible.
The procedure a U.S. Holder must comply with in making an effective QEF election, and the U.S. federal income tax consequences of the QEF election, will depend on whether the year of the election is the first year in the U.S. Holder’s holding period in which we are a PFIC. If the U.S. Holder makes a QEF election in such first year,i.e., a timely QEF election, then the U.S. Holder may make the QEF election by simply filing the appropriate QEF election documents at the time the U.S. Holder files his tax return for such first year. However, if we qualified as a PFIC in a prior year, then in addition to filing the QEF election documents, the U.S. Holder must elect to recognize (i) under the rules of Section 1291 of the Code (discussed herein), any gain that he would otherwise recognize if the U.S. Holder sold his stock on the qualification date or (ii) if we are a controlled foreign corporation, the U.S. Holder’s pro rata share of our ea rnings and profits as of the qualification date. The qualification date is the first day of our first tax year in which we qualified as a QEF with respect to such U.S. Holder. The elections to recognize such gain or earnings and profits can only be made if such U.S. Holder’s holding period for the shares includes the qualification date. By electing to recognize such gain or earnings and profits, the U.S. Holder will be deemed to have made a timely QEF election. U.S. Holders are urged to consult a tax advisor regarding the availability of and procedure for electing to recognize gain or earnings and profits under the foregoing rules. In addition to the above rules, under very limited circumstances, a U.S. Holder may make a retroactive QEF election if such U.S. Holder failed to file the QEF election documents in a timely manner.
A QEF election, once made with respect to our company, applies to the tax year for which it was made and to all subsequent tax years, unless the election is invalidated or terminated, or the IRS consents to revocation of the election. If a QEF election is made by a U.S. Holder and we cease to qualify as a PFIC in a subsequent tax year, the QEF election will remain in effect, although not applicable, during those tax years in which we do not qualify as a PFIC. Therefore, if we again qualify as a PFIC in a subsequent tax year, the QEF election will be effective and the U.S. Holder will be subject to the rules described above for Electing U.S. Holders in such tax year and any subsequent tax years in which we qualify as a PFIC. In addition, the QEF election remains in effect, although not applicable, with respect to an Electing U.S. Holder even after such U.S. Holder disposes of all of his or its direct and indirect interest in our shares. Therefore, if such U.S. Holder reacquires an interest in our company, that U.S. Holder will be subject to the rules described above for Electing U.S. Holders for each tax year in which we qualify as a PFIC.
Generally, shareholders do not make a QEF election unless they have sufficient information to determine their proportionate shares of a corporation’s net capital gain and ordinary earnings. We have not calculated these amounts for any shareholder and do not anticipate making these calculations in the foreseeable future. Therefore, U.S. Holders of our common shares should consult their own financial advisor, legal counsel or accountant regarding the QEF election before making this election.
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Other PFIC Rules. Under Section 1291(f) of the Code, the IRS has issued Proposed Treasury Regulations that, subject to certain exceptions, would treat as taxable certain transfers of PFIC stock by Non-Electing U.S. Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. Generally, in such cases the basis of shares in the hands of the transferee and the basis of any property received in the exchange for those shares would be increased by the amount of gain recognized. However, the specific U.S. federal income tax consequences to the U.S. Holder and the transferee may vary based on the manner in which the common shares are transferred.
Certain special, generally adverse, rules will apply with respect to shares issued by us while we are a PFIC whether or not it is treated as a QEF. For example under Section 1298(b)(6) of the Code, a U.S. Holder who uses PFIC stock as security for a loan (including a margin loan) will, except as may be provided in regulations, be treated as having made a taxable disposition of such shares.
The PFIC rules are very complicated, and U.S. Holders should consult their own financial advisor, legal counsel or accountant regarding the PFIC rules, including the advisability of and procedure for making a QEF election or a mark-to-mark election, and how these rules may impact their U.S. federal income tax situation.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian or other foreign income tax with respect to the ownership of shares issued by us may be entitled, at the option of the U.S. Holder, to either receive a deduction or a tax credit for U.S. federal income tax purposes with respect to such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces U.S. federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from distributions to) the U.S. Holder during that year.
There are significant and complex limitations that apply to the foreign tax credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder’s U.S. income tax liability that the U.S. Holder’s “foreign source” income bears to his or its worldwide taxable income. In applying this limitation, the various items of income and deduction must be classified as either “foreign source” or “U.S. source.” Complex rules govern this classification process. In addition, this limitation is calculated separately with respect to specific classes of income such as “passive income,” “high withholding tax interest,” “financial services income,” “shipping income,” and certain other classifications of income. Dividends distributed by us will generally constitute “foreign source” income, an d will be classified as “passive income” or, in the case of certain U.S. Holders, “financial services income” for these purposes.
In addition, U.S. Holders that are corporations and that own 10% or more of our voting stock may be entitled to an “indirect” foreign tax credit under Section 902 of the Code with respect to the payment of dividends by us under certain circumstances and subject to complex rules and limitations. The availability of the foreign tax credit and the application of the limitations with respect to the foreign tax credit are fact specific, and each U.S. Holder of common shares issued by us should consult their own financial advisor, legal counsel or accountant regarding the foreign tax credit rules.
Information Reporting; Backup Withholding
Certain information reporting and backup withholding rules may apply with respect to certain payments related to shares issued by us. In particular, a payor or middleman within the U.S., or in certain cases outside the U.S., will be required to withhold 28% (which rate is scheduled for periodic adjustment) of any payments to a U.S. Holder regarding dividends paid by us, or proceeds from the sale of, such common shares within the U.S., if a U.S. Holder fails to furnish its correct taxpayer identification number (generally on Form W-9) or otherwise fails to comply with, or establish an exemption from, the backup withholding tax requirements. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder’s U.S. federal income tax liability, provided the required information is furnished to the IRS. U.S. Holders should consult their own financial advisor, legal counsel or accountant reg arding the information reporting and backup withholding rules applicable to our shares.
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Other Considerations for U.S. Holders
In the following circumstances, the above sections of this discussion may not describe the U.S. federal income tax consequences to U.S. Holders resulting from the ownership and disposition of shares issued by a foreign corporation.
Foreign Personal Holding Company. If at any time during a taxable year (a) more than 50% of the total voting power or the total value of outstanding shares issued by us is owned, directly or indirectly, by five or fewer individuals who are citizens or residents of the U.S. and (b) 60% (or 50% in certain cases) or more of our gross income for such year is “foreign personal holding company income” as defined in Section 553 of the Code (e.g., dividends, interest, royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions), we may be treated as a “Foreign Personal Holding Company” (“FPHC”) In that event, U.S. Holders of our common shares would be required to include in gross income for such year their allocable portions of such “foreign personal holding company income” to the extent we do not actually distribute such income.
We do not believe that we currently qualify as a FPHC. However, there can be no assurance that we will not be considered a FPHC for the current or any future taxable year.
Foreign Investment Company. If (a) 50% or more of the total voting power or the total value of our outstanding shares is owned, directly or indirectly, by citizens or residents of the U.S., U.S. partnerships or corporations, or U.S. estates or trusts (as defined by the Code Section 7701(a)(30)), and (b) we are found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, we may be treated as a “Foreign Investment Company” (“FIC”) as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging our common shares to be treated as ordinary income rather than capital gain.
We do not believe that we currently qualify as a FIC. However, there can be no assurance that we will not be considered a FIC for the current or any future taxable year.
Controlled Foreign Corporation. If more than 50% of the total voting power or the total value of our outstanding shares is owned, directly or indirectly, by citizens or residents of the U.S., U.S. partnerships or corporations, or U.S. estates or trusts (as defined by the Code Section 7701(a)(30)), each of which own, directly or indirectly, 10% or more of the total voting power of our outstanding shares (each a “10% Shareholder”), we could be treated as a “Controlled Foreign Corporation” (“CFC”) under Section 957 of the Code.
The classification of our company as a CFC would affect many complex results, including that 10% Shareholders would generally (i) be treated as having received a current distribution of our “Subpart F income” and (ii) would also be subject to current U.S. federal income tax on their pro rata shares of our earnings invested in “U.S. property.” The foreign tax credit may reduce the U.S. federal income tax on these amounts for such 10% Shareholders (See more detailed discussion at “Foreign Tax Credit” above). In addition, under Section 1248 of the Code, gain from the sale or other taxable disposition of our common shares by a U.S. Holder that is or was a 10% Shareholder at any time during the five-year period ending with the sale is treated as a dividend to the extent of our earnings and profits attributable to the common shares sold or exchanged.
If we are classified as both a PFIC and a CFC, we generally will not be treated as a PFIC with respect to 10% Shareholders. This rule generally will be effective for taxable years of 10% Shareholders beginning after 1997 and for its taxable years ending with or within such taxable years of 10% Shareholders.
We do not believe that we currently qualify as a CFC. However, there can be no assurance that we will not be considered a CFC for the current or any future taxable year.
The FPHC, FIC and CFC rules are very complicated, and U.S. Holders should consult their own financial advisor, legal counsel or accountant regarding the FPHC, FIC and CFC rules and how these rules may impact their U.S. federal income tax situation.
F.
Dividends and Paying Agents
Not applicable.
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G.
Statements by Experts
Our auditors for our financial statements for the year ended December 31, 2009 was ACAL Group, Chartered Accountants, of #1850, 1066 West Hastings Street, Vancouver, British Columbia, V6E 3X2, Canada. Our auditors for our financial statements for the year ended December 31, 2008 was Devisser Gray LLP, Chartered Accountants, of #401, 905 West Pender Street, Vancouver, British Columbia, V6C 1L6, Canada. Their audit report for the fiscal year ended December 31, 2008 and 2007 is included with the related financial statements in this Form 20-F Annual Report statement with their consent.
H.
Documents on Display
We have filed with the Securities and Exchange Commission this Annual Report on Form 20-F, including exhibits, under the Securities and Exchange Act with respect to our common shares.
Our registration statement may be inspected and copied, including exhibits and schedules, and the reports and other information as filed with the Securities and Exchange Commission in accordance with theSecurities Exchange Act of 1934 at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 100 F Street NE, Washington, D.C. 20549. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 100 F Street NE, Washington, D.C. 20549, at prescribed rates. Information may be obtained regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the Internet at its website athttp://www.sec.gov.
I.
Subsidiary Information
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There have been no defaults, dividends arrearages or delinquencies.
ITEM 14.
MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
There have been no material modifications to our common shares.
ITEM 15.
CONTROLS AND PROCEDURES
As at the end of the period covered by this Form 20-F, our management, with the participation of our Chief Executive officer and our Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that the material financial and non-financial information required to be disclosed by Rules 13a-15 and 15d-15 of the Exchange Act and filed with the Securities and Exchange Commission is recorded, processed, summarized and timely reported. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure.
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Management, including our CEO and CFO, does not expect that our disclosure controls and procedures or internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of tw o or more people, or by management override of control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management, including the CEO and CFO, directly supervises the preparation of all of the financial reports prepared by us and is directly involved in our financial record keeping and reporting. All accounting records and financial reports prepared by us are reviewed for accuracy by the CEO and CFO.
After evaluation of our disclosure controls and procedures as of the year end covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as a result of a weakness in the design of internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over the financial reporting of our company. Internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and affected by our Board, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with t he authorizations of management and our Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Management has concluded, based on their evaluation, that as of December 31, 2009, a weakness existed in the design of internal control over financial reporting caused by a lack of adequate segregation of duties in many cases. This weakness has the potential to result in material misstatements in our financial statements, and should also be considered a weakness in our disclosure controls and procedures. As a result of limited staffing due to the size of our business certain staff members carry out multiple responsibilities independently. However, we have now enacted a policy whereby all financial transactions are reviewed by two independent staff members in order to at least partially mitigate the risk. Because of the material weakness described, management believes that, as of December 31, 2009, our company’s internal control over financial report was not effective as of the Evaluation Date.
The Audit Committee has been provided information on the deficiency. Together, the Audit Committee, the Board and management continue to work to mitigate the risk of a material misstatement in our financial statements. Management will continue to identify certain areas where it can improve process controls and will incorporate these changes into the control over the financial reporting going forward.
During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
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ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
As at the date hereof, the Audit Committee is composed of Messrs. Sandeep Poonia, Parmjeet Johal and Harpreet Janda. The Board has determined that Mr. Janda is an “audit committee financial expert” as defined in Item 16.A of Form 20-F. Mr. Janda is not an “independent director” under Rule 4200(a)(15) of the National Association of Securities Dealers listing standards, as such standards may be amended and modified.
ITEM 16B.
CODE OF ETHICS
We have not yet adopted a written “code of ethics” that meets the new United States’ Sarbanes-Oxley standards. The Board believes that its existing standards and procedures are adequate for its purposes. We believe that our management structure and corporate culture effectively deter wrongdoing and promote honest and ethical conduct, full, fair and accurate, timely, and understandable disclosure in reports and documents, compliance with applicable governmental laws, rules and regulations, prompt internal reporting of unethical conduct and accountability for adherence to the conduct standards. We have no employees and our officers are also Directors, thus eliminating any split between our management and the Directors who are responsible to safeguard shareholder interests. As a result, we believe that the activities of our officers, employees and other agents can be easily monitored by our Directors, thus eliminating the need for a formal writ ten code of ethics.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Devisser Gray LLP, Chartered Accountants (“Devisser”) audited our financial statements for the year ended December 31, 2008 and subsequently, ACAL Group, Chartered Accountants (“ACAL”), were appointed as our auditors. Accordingly, ACAL audited our financial statements for the year ended December 31, 2009.
ACAL and Devisser performed the services listed below and were paid the corresponding fees for the fiscal years ended December 31, 2009 and December 31, 2008, respectively.
Audit Fees
Fees billed by ACAL for professional services for the year ended December 31, 2009 were $16,000. Fees billed by Devisser for professional services for the year ended December 31, 2008 were $13,000. Such fees were for the audit of our annual financial statements and for services in connection with statutory and regulatory filings for such fiscal years.
Tax Fees
Fees for tax services billed by ACAL, including tax compliance, tax advice and tax planning work for the year ended December 31, 2009, totaled $950. Fees for tax services billed by Devisser, including tax compliance, tax advice and tax planning work for the year ended December 31, 2008, totaled $900.
All Other Fees
All other fees billed by ACAL during the fiscal year ended December 31, 2009 were $3,000 for compilation reports on the pro forma financial statements and $Nil for Devisser for the fiscal year ended December 31, 2008.
Audit Committee Policies and Procedures
The audit and review services provided to us by ACAL and Devisser in the fiscal years ended December 31, 2009 and December 31, 2008, respectively, were pre-approved by our audit committee. Prior to engaging ACAL and Devisser, as the case may be, to perform audit and review services, our audit committee reviewed the service to be provided and the fee to be paid by us for such service and assessed the impact of the service on each of the auditor’s independence.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
40
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
No purchases of shares or any other units of any class of our equity securities have been made by or on our behalf , or any affiliated purchaser.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
By a Notice of Change of Auditor dated October 26, 2009, we advised that our former auditors, Devisser Gray LLP, Chartered Accountants (“Devisser”) had resigned as our auditor effective October 26, 2009. We concurrently appointed ACAL Group, Chartered Accountants (“ACAL”), as our auditors, effective October 26, 2009. Accordingly, ACAL, are our independent auditors and examined our financial statements for the fiscal year ended December 31, 2009. The financial statements as at December 31, 2008 were audited by Devisser whom we appointed as our auditors effective November 28, 2008. The financial statements as at December 31, 2007 and for the two year period then ended were audited by UHY LDMB Advisors Inc., whom resigned as our auditor concurrent with Devisser’s appointment.
Devisser’s audit report for the year ended December 31, 2008 did not contain an adverse option or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the audit committee. We have had no disagreements with Devisser on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
ITEM 16G.
CORPORATE GOVERNANCE
Not applicable.
PART III
ITEM 17.
FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with Canadian GAAP and are presented in Canadian dollars. There are material measurement differences between United States and Canadian GAAP. A reconciliation of the financial statements to United States GAAP is set forth in Note 13 to the consolidated financial statements.
Financial Statements
Auditors’ Report dated April 26, 2010.
Consolidated Balance Sheets at December 31, 2009 and 2008.
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007.
Notes to Financial Statements for the Years Ended December 31, 2009, 2008 and 2007.
Management Discussion and Analysis for the Year Ended December 31, 2009.
41
SUITE 1850
1066 WEST HASTINGS STREET
VANCOUVER, BC V6E 3X2
T:604.683.3850
F:604.688.8479
& nbsp;
AUDITORS’ REPORT
To:
the Shareholders of
RTN Stealth Software Inc.
(formerly Arris Resources Inc.)
We have audited the consolidated balance sheet of RTN Stealth Software Inc. (the “Company”) as at December 31, 2009 and the consolidated statements of operations, comprehensive income and deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards (“GAAS”) in Canada and the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2009 and the results of its operations and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.
The financial statements as at December 31, 2008 and for the two year period then ended were audited by other auditors who expressed an opinion without reservation on those statements in their report to the shareholders dated April 28, 2009 and April 21, 2008.
“ACAL GROUP”
Chartered Accountants
Vancouver, British Columbia
April 26, 2010
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA – U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by significant uncertainties and contingencies such as those referred to in note 1 to these consolidated financial statements. Although we conducted our audit in accordance with both Canadian GAAS and the standards of the PCAOB, our report to the shareholders dated April 26, 2010 is expressed in accordance with Canadian reporting standards which do not require a reference to such matters when the uncertainties are adequately disclosed in the consolidated financial statements.
“ACAL GROUP”
Chartered Accountants
Vancouver, British Columbia
April 26, 2010
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F-5
RTN STEALTH SOFRWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
1.
NATURE AND CONTINUANCE OF OPERATIONS
RTN Stealth Software Inc. (formerly known as Arris Resources Inc. hereafter refers to the “Company” or “RTN Stealth”) is a public company incorporated in the Province of British Columbia, Canada.
On December 21, 2009, the Company changed its name from Arris Resources Inc. to RTN Stealth Software Inc. At the same time, the Company changed its trading symbol to RTN. The Company is listed on Canadian National Stock Exchange. The Company holds an interest in an oil and gas project in Alberta, Canada and an interest in various mineral claims in the Atlin Mining District in Atlin, BC. Subsequent to the year ended December 31, 2009, the Company entered into the software business and executed a definitive agreement to acquire an exclusive and perpetual license to a security trading software: the Market Navigation, Trade Execution, and Market Timing Software (note 14).
Under the Plan of Arrangement dated November 5, 2009, and subsequent to the year end December 31, 2009, the Company transferred its interest in five mineral claims in British Columbia, Canada, its agreement with a British Columbia manufacturing company to distribute its earth quake sensor products in India and its marketable securities to its three subsidiaries to complete the spin-off. Excluding the marketable securities of $1,448,800 that would have been transferred out, the Company would have a working capital of $556,956 and accumulated a deficit of $3,018,127 as at December 31, 2009. As the Company had changed its business from resource exploration into the software business, it is unsure whether the Company may successfully change its business model and strategic direction. The ability of the Company to continue to operate as a going concern is dependent on its ability to ultimately operate its business at a profit. To date, the Company has not generated any revenues from operations and will most likely require additional funds to meet its obligations and the costs of its operations. As a result, further losses are anticipated prior to the generation of any profits.
The Company’s future capital requirements will depend on many factors, including the costs of operating the software business. The Company’s anticipated operating losses and increasing working capital requirements may require that it obtain additional capital to continue operations.
The Company will depend almost exclusively on outside capital. Such outside capital will include the sale of additional shares. There can be no assurance that capital will be available as necessary to meet these continuing operating costs or, if the capital is available, that it will be on terms acceptable to the Company. The issuances of additional equity securities by the Company may result in significant dilution to the equity interests of its current shareholders. Obtaining commercial loans, assuming those loans would be available, will increase the Company’s liabilities and future cash commitments. If the Company is unable to obtain financing in the amounts and on terms deemed acceptable, the business and future success may be adversely affected, thus giving rise to doubt about the Company’s ability to continue as a going concern. The financial statements do not reflect adjustments to the carrying values of assets, liabilities or reported results should the Company be unable to continue as a going concern.
2.
SUMMARY OF SIGNICANT ACCOUNTING POLICIES
(a)
Basis of Presentation and Principles of Consolidation
These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Note 13, reconciles the consolidated financial statements prepared in accordance with Canadian GAAP to financial statements prepared in accordance with United States generally accepted accounting principles (“US GAAP”).
These consolidated financial statements include the accounts of RTN Stealth Software Inc. and its wholly owned subsidiaries: Arris Holdings Inc. (“AHI”), Arris Minerals Inc. (“AMI”) (inactive), Arris Oil & Gas Inc. (“AOG”) (inactive), CLI Resources Inc. (“CLI”) and QMI Seismic Inc. (“QMI”).
F-6
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
2.
SUMMARY OF SIGNICANT ACCOUNTING POLICIES(continued)
All significant inter-company transactions and transactions have been eliminated upon consolidation.
(b)
Cash and cash equivalents
Cash and equivalents consist of cash and highly liquid investments, having maturity dates of three months or less from the date of acquisition, that are readily convertible to known amounts of cash.As at December 31, 2009, the Company had cash and cash equivalents of $379,284 (2008 - $99,366).
(c)
Financial Instruments
All financial instruments, including derivatives, are included on the Company’s balance sheet and measured either at fair value or amortized cost. Changes in fair value are recognized in the statements of operations or accumulated other comprehensive income, depending on the classification of the related instruments.
All financial assets and liabilities are recognized when the entity becomes a party to the contract creating the asset or liability. All financial instruments are classified into one of the following categories: held for trading, held-to-maturity, loans and receivables, available-for-sale financial assets, or other financial liabilities. Initial and subsequent measurement and recognition of changes in the value of financial instruments depends on their initial classification:
·
Held-to-maturity investments, loans and receivables, and other financial liabilities are initially measured at fair value and subsequently measured at amortized cost. Amortization of premiums or discounts and losses due to impairment are included in current period net earnings (loss).
·
Available-for-sale financial assets are measured at fair value. Changes in fair value are included in other comprehensive income (loss) until the gain or loss is recognized in net earnings (loss) or if impairment is determined to be other than temporary.
·
Held for trading financial instruments are measured at fair value. All changes in fair value are included in net earnings (loss) in the period in which they arise.
·
All derivative financial instruments are measured at fair value, even when they are part of a hedging relationship. Changes in fair value are included in net earnings (loss) in the period in which they arise, except for cash flow hedge transactions which qualify for hedge accounting treatment in which case gains and losses are recognized in other comprehensive income (loss).
The Company had classified its financial instruments as follows:
F-7
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
2.
SUMMARY OF SIGNICANT ACCOUNTING POLICIES(continued)
| | |
Financial Instrument | Classification | Measurement |
Cash and equivalents/ bank indebtedness | Held for Trading | Fair Value |
Marketable securities and investments (i) | Available for Sale | Fair Value |
Accounts receivable | Loans and Receivables | Amortized cost |
Advances to a related party | Loans and Receivables | Amortized cost |
Accounts payable and accrued liabilities | Other Financial Liability | Amortized cost |
Advances from a related party | Other Financial Liability | Amortized cost |
i.)
Marketable securities and investments are classified as available-for-sale securities and are measured at fair market value with unrealized gains or losses recorded in other comprehensive income (loss). At the time securities are sold or otherwise disposed of, gains or losses are included in net earnings (loss).
The Company also discloses quantitative and qualitative information that enable users to evaluate the significance of financial instruments on the Company’s financial performance, and the nature and extent of risks arising from financial instruments to which the Company is exposed during the year and at the balance sheet date. In addition, the Company discloses management’s objectives, policies and procedures for managing these risks. These disclosures are presented in note 4.
(d)
Basis of Amortization
Equipment is recorded and amortized on a declining-balance basis at an annual rate of 55% for computer equipment, 100% for software and 20% for office furniture.
(e)
Mineral Properties
The cost of unproven mineral rights and their related direct exploration costs are deferred until the properties are placed into production, sold or abandoned. These deferred costs will be amortized on the unit-of-production basis over the estimated useful life of the properties following the commencement of production, or written-off if the properties are sold, allowed to lapse or abandoned.
Cost includes any cash consideration and the fair market value of any shares issued on the acquisition of mineral right interests. Properties acquired under option agreements, whereby payments are made at the sole discretion of the Company, are recorded in the accounts when the payments are made. The recorded amounts of property acquisition costs and their related deferred exploration costs represent actual expenditures incurred and are not intended to reflect present or future values.
The Company reviews capitalized costs on its mineral rights on a periodic basis and will recognize impairment in value based upon current exploration results and upon management’s assessment of the future probability of profitable revenues from the property or from the sale of the property. Management’s assessment of the property’s estimated current fair market value is also based upon a review of other property transactions that have occurred in the same geographic area as that of the property under review. Administrative costs are expensed as incurred.
F-8
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
2.
SUMMARY OF SIGNICANT ACCOUNTING POLICIES(continued)
(f)
Oil and gas properties
Oil and natural gas properties are accounted for using the successful efforts method of accounting. Geological and geophysical costs are expensed in the period in which they are incurred and costs of drilling an unsuccessful well are expensed when it becomes known the well did not result in a discovery of proven reserves or where one year has elapsed since the completion of drilling and efforts to establish proved reserves are not practical. All other costs of exploring and developing proven reserves are capitalized as oil and gas properties.
Oil and gas properties are depleted using the unit-of-production method. Unit-of-production rates are based on proven developed reserves, which are reserves estimated to be recovered from existing facilities using current operating methods. Unproved properties are not subject to depletion.
Oil and gas properties are assessed, at least annually, for impairment to ensure that the carrying value of the property on the balance sheet is recoverable. If a property's carrying value exceeds the sum of undiscounted future cash flows resulting from its use and eventual disposition, its value is impaired. An impairment loss is recognized for the amount by which the carrying value exceeds its recoverable amount. This loss is charged to depletion expense.
(g)
Impairment of long-lived assets
Long-lived assets, including mineral property interests, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount and the fair value less costs to sell, and are no longer amortized.
(h)
Share capital
Share capital issued for non-monetary consideration is recorded at its fair market value based on its trading price on the TSX Venture Exchange on the date the agreement to issue the shares was entered into as determined by the Board of Directors of the Company. Costs incurred to issue shares are deducted from share capital.
(i)
Stock-based compensation
The Company records all stock-based payments using the fair value method. Under the fair value method, stock-based payments are measured at the fair value of the consideration received or the fair value of the equity instruments issued or liabilities incurred, whichever is more reliably measurable, and are charged to operations over the vesting period. The offset is credited to contributed surplus.
Consideration received on the exercise of stock options is recorded as share capital and the related contributed surplus is transferred to share capital.
F-9
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
2.
SUMMARY OF SIGNICANT ACCOUNTING POLICIES(continued)
(j)
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are computed based on differences between the carrying amounts of assets and liabilities on the balance sheet and their corresponding tax values, generally using the substantively enacted or enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Future income tax assets also result from unused loss carry forwards, resource-related pools, and other deductions. Future tax assets are recognized to the extent that they are considered more likely than not to be realized. The valuation of future income tax assets is adjusted, if necessary, by the use of a valuation allowance to reflect the estimated realizable amount.
(k)
Functional currency and foreign currency translations
The Company’s functional currency is the Canadian dollar as the Canadian dollar is the currency of the primary economic environment in which the Company operates. All of the business operations of the Company are located in Canada. The majority of the Company’s financings are in Canadian dollars.
Foreign currency monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Non-monetary assets, liabilities, revenues and expenses are translated into Canadian dollars at the rate of exchange prevailing on the respective dates of the transactions. Foreign exchange gains and losses are included in net earnings.
(l)
Earnings (loss) per common share
Loss per shareis calculated based on the weighted average number of common shares issued and outstanding during the year. The company follows the treasury stock method in the calculation of diluted earnings per share for the current year. Under this method, the weighted average number of common shares included the potential net issuance of common share of “in-the-money” options and warrants assuming the proceeds are used to repurchase common shares at the average market price during the period, if dilutive. The effect of potential issuances of shares under options and warrants would be anti-dilutive if a loss is reported and, therefore basic and diluted loss per share is same for the previous years.
(m)
Use of estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting year. Significant areas requiring the use of management estimates relate to the impairment of mineral properties, oil and gas properties, equipment, income taxes, valuation allowances for future income tax assets, depreciation and amortization, and the assumptions used in computing stock-based compensation. Actual results could differ from these estimates.
(n)
Segment disclosures
The Company operates in a single reportable operating segment, the exploration, development and operation of mineral property interests, within the geographic area of British Columbia, Canada.
F-10
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
2.
SUMMARY OF SIGNICANT ACCOUNTING POLICIES(continued)
(o)
Going Concern (Amendments to Section 1400)
Canadian GAAP requires management to make an assessment of the Company’s ability to continue as a going concern, and to disclose any material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.
In assessing the appropriateness of the going concern assumption, management is required to consider all available information about the future which is at least, but not limited to, twelve months from the balance sheet date and to disclose any material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.
Disclosure with regard to going concern has been included in note 1.
(p)
Comparative figures
Certain comparative figures have been reclassified to conform to the presentation adopted for the current period.
(q)
Flow-through shares
The Company may issue securities referred to as flow-through shares, whereby the investor may claim the tax deductions arising from the expenditure of the proceeds. When resource expenditures are renounced to the investors and the Company has reasonable assurance that the expenditures will be completed, future income tax liabilities are recognized (renounced expenditures multiplied by the effective corporate tax rate), and share capital is reduced. Previously unrecognized tax assets may then offset or eliminate the liability recorded.
(r)
Asset Retirement Obligation
The fair value of a liability for an asset retirement obligation is recognized on an undisclosed cash flow basis when a reasonable estimate of the fair value of the obligation can be made. The asset retirement obligation is recorded as a liability with corresponding increases to the carrying amount of the related long –lived asset. Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method and is adjusted to reflect period to period changes in the liability resulting from the passage of time and from revisions to either expected payment dates or the amounts comprising the original estimate of the obligation. As at December 31, 2009, the company does not have any asset retirement obligations.
(s)
Environmental expenditures
The operations of the Company have been, and may in the future be, affected from time to time in varying degree by changes in environmental regulations, including those for site restoration costs. The overall future impact of such regulations is neither determinable nor predicable at the present time. The Company’s policy is to meet or, if possible, surpass environmental standards set by relevant legislation by the application of technically proven and economically feasible measures.
Expenditures that relate to ongoing environmental and reclamation programs are charged against operations as incurred or capitalized and amortized depending on their expected future economic benefit. Estimated future removal and site restoration costs will be recognized when the ultimate liability is reasonably determinable, and will be charged against operations over the estimated remaining life of the related business operations, net of expected recoveries.
F-11
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
3.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2009, the Company adopted the following accounting standards issued by the Canadian Institute of Chartered Accountants (“CICA”). These new standards have been adopted with no restatement to the prior periods as follows:
(a)
Section 3064 – Goodwill and Intangibles
The Canadian Accounting Standards Board ("AcSB") issued CICA Handbook Section 3064 which replaces Section 3062,Goodwill and Other Intangible Assets, and Section 3450,Research and Development Costs. This new section establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The Company evaluated the impact of this new standard and concluded that this standard did not have a significant impact on the Company’s consolidated financial statements.
(b)
EIC 173 – Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
The AcSB issued EIC-173,Credit Risk and the Fair Value of Financial Assets and Financial Liabilities, which requires the Company to consider its own credit risk as well as the credit risk of its counterparties when determining the fair value of financial assets and liabilities, including derivative financial instruments. The standard is effective for the first quarter of fiscal 2009 and is required to be applied retrospectively without restatement of prior periods. The adoption of this standard did not have an impact on the valuation of financial assets or liabilities of the Company.
(c)
EIC 174 – Mining Exploration Costs
The AcSB issued EIC-174,Mining Exploration Costs, which provides guidance to mining enterprises related to the measurement of exploration costs and the conditions that a mining enterprise should consider when determining the need to perform an impairment review of such costs. The accounting treatments provided in EIC-174 have been applied in the preparation of these consolidated financial statements and did not have an impact on the valuation of the Company’s mineral properties.
(d)
Fair Value Hierarchy
During the year, CICA Handbook Section 3862,Financial Instruments – Disclosureswas amended to require enhanced disclosures about the relative reliability of the data, or “inputs”, thatan entity uses to measure the fair values of its financial instruments. It requires financial instruments measured at fair value to be classified into one of three levels in the “fair value hierarchy” according to the relative reliability of the inputs used to estimate the fair values. These disclosures are presented in note 4(b).
(e)
Amendments to CICA 3855
The CICA amended Handbook Section 3855,Financial Instruments – Recognition and Measurement to provide additional guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held-for-trading category, amend the definition of loans and receivables, amend the categories of financial assets into which debt instruments are required or permitted to be classified, amend the impairment guidance for held-to-maturity debt instruments and require reversal of impairment losses on available-for sale debt instruments when conditions have changed. These amendments were effective for fiscal years beginning on or after November 1, 2008. This amendment did not have a material impact on the Company’s consolidated financial statements.
F-12
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
3.
CHANGE IN ACCOUNTING POLICIES(continued)
(f)
New Accounting Standards Not Yet Adopted:
i)
International Financial Reporting Standards ("IFRS")
The AcSB has announced its decision to replace Canadian generally accepted accounting principles (“Canadian GAAP”) IFRS for all Canadian publicly-listed companies. The AcSB announced that the changeover date will commence for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date for the Company to changeover to IFRS will be January 1, 2010. Therefore, the IFRS adoption will require the restatement for comparative purposes of amounts reported by the Company for the year ending December 31, 2010. The Company has begun assessing the adoption of IFRS for 2011 and is considering the accounting policy choices under IFRS.
ii)
Business Combinations/Consolidated Financial Statements/Non-Controlling Interests
The AcSB issued CICA Sections 1582,Business Combinations, 1601,Consolidated Financial Statements, and 1602,Non-Controlling Interests, which superseded current Sections 1581,Business Combinations and 1600Consolidated Financial Statements. These new Sections replace existing guidance on business combinations and consolidated financial statements to harmonize Canadian accounting for business combinations with IFRS. These Sections will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Earlier adoption is permitted. If an entity applies these Sections before January 1, 2011, it is required to disclose that fact and apply each of the new sections concurrently. The Company is currently evaluating the impact of the adoption of these changes on its consolidated financial statements.
4.
CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS
(a)
Capital Management Objectives
The Company's primary objectives when managing capital are to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders, and to have sufficient liquidity available to fund suitable business opportunities as they arise.
The Company considers the components of shareholders' equity, as well as its cash and equivalents, marketable securities as capital. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue equity, sell assets, or return capital to shareholders as well as issue or repay debt.
The mining properties in which the Company currently has an interest are in the exploration stage; as such the Company has historically relied on the equity markets to fund its activities. The Company will continue to acquire an interest in additional mining properties and business projects other than mining if it feels there is sufficient economic potential and if it has adequate financial resources to do so.
In order to facilitate the management of its capital requirements, management reviews the requirement on an ongoing and regularly basis and believes that this approach, given the relative small size of the Company, is reasonable.
The Company’s investment policy is to invest its cash in highly liquid short-term interest-bearing investments, having maturity dates of three months or less from the date of acquisition and that are readily convertible to known amounts of cash.
There were no changes to the Company's approach to capital management during the year ended December
F-13
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
31, 2009.
4.
CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS(continued)
(b)
Carrying Amounts and Fair Values of Financial Instruments
The fair value of a financial instrument is the price at which a party would accept the rights and/or obligations of the financial instrument from an independent third party. Given the varying influencing factors, the reported fair values are only indicators of the prices that may actually be realized for these financial instruments.
Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:
·
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
·
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
·
Level 3 – Inputs that are not based on observable market data.
It is not practicable to determine the fair value of advances from amounts receivable because of the nature of such amounts and the absence of a secondary market for such instruments. The fair value of the promissory note is not readily determinable with sufficient reliability due to the uncertainty around the maturities and the future cash flows associated with the promissory note.
Aside from the financial instruments mentioned above, the following table illustrates the classification of the Company’s financial instruments recorded at fair value within the fair value hierarchy as at December 31, 2009:
| | | | | |
| Financial assets at fair value |
| Level 1 | Level 2 | Level 3 | December 31, 2009 | December 31, 2008 |
Cash and equivalents | $379,284 | $ - | $ - | $ 379,284 | $ 999,366 |
Held for trading | 379,284 | - | - | 379,284 | 999,366 |
Marketable securities (note 7) | 1,448,800 | - | - | 1,448,800 | 320,000 |
Available for sale financial assets | 1,448,800 | - | - | 1,448,800 | 320,000 |
Total financial assets at fair value | $1,828,084 | $ - | $ - | $ 1,828,084 | $ 419,366 |
| | | | | |
| Financial liabilities at fair value |
| Level 1 | Level 2 | Level 3 | December 31, 2009 | December 31, 2008 |
Total financial liabilities at fair value | $ - | $ - | $ - | $ - | $ - |
(c)
Financial Instrument Risk Exposure and Risk Management
The Company is exposed in varying degrees of financial instrument related risks. The Board approves and monitors the risk management processes, including treasury policies, counterparty limits, controlling and reporting structures. The types of risk exposure and the way in which such exposure is managed are provided as follows:
F-14
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
4.
CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS(continued)
(c)
Financial Instrument Risk Exposure and Risk Management (continued)
(i)
Credit Risk
The Company is exposed to credit risk with respect to its cash, cash equivalents and amounts receivable. Amounts receivable are primarily amounts owing from government agencies.
Concentration of credit risk exists with respect to the Company’s cash and cash equivalents as the majority of the amounts are held at several national financial institutions with strong investment-grade ratings by a primary rating agency. The Company’s concentration of credit risk and maximum exposure thereto is the Company’s cash and cash equivalents December 31, 2009 balance of $379,284 held at several national financial institutions.
(ii)
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity by maintaining sufficient cash balances.
The following are the principal contractual maturities of financial liabilities:
| | | | | |
As at December 31, 2009 | Contractual Obligations | 2010 | 2011 | 2012 | Over 3 years |
Accounts payable and accrued liabilities | $ 75,072 | $ 75,072 | $ – | $ – | $ – |
Total liabilities | $ 75,072 | $ 75,072 | $ – | $ – | $ – |
| | | | | |
As at December 31, 2008 | Contractual Obligations | 2009 | 2010 | 2011 | Over 3 years |
Accounts payable and accrued liabilities | $ 2,094 | $ 2,094 | $ – | $ – | $ – |
Amounts due to a related party | 74,941 | 74,941 | – | – | – |
Total liabilities | $ 77,035 | $ 77,035 | $ – | $ – | $ – |
(iii)
Market Risk
-
Commodity Price Risk
As at December 31, 2009, the Company was still in developmental stage with no revenue generating mineral or oil and gas assets; therefore, the Company is not exposed to any commodity price risk.
-
Foreign Exchange Risk
The Company’s foreign currency transactions make it subject to foreign currency fluctuations and inflationary pressures which may adversely affect the Company’s financial position, results of operations, and cash flows. The Company is affected by changes in exchange rates between the Canadian Dollar and US Dollar. During the fiscal year 2009, the Company attempts to transact its business predominantly in Canadian Dollar to mitigate the foreign exchange risk.
As at December 31, 2009, the financial assets of the Company were all held in Canadian dollars.
F-15
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
4.
CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS(continued)
(c)
Financial Instrument Risk Exposure and Risk Management (continued)
(iii)
Market Risk (continued)
-
Interest Rate Risk
Interest rate risk consists of two components:
i)
To the extent that payments made or received on the Company’s monetary assets and liabilities are affected by changes in the prevailing market interest rate, the Company is exposed to interest rate cash flow risk.
ii)
To the extent that changes in prevailing market interest rates differs from the interest rates the Company’s monetary assets and liabilities, the Company is exposed to interest rate price risk.
The Company is not exposed to significant interest rate risk due to the short-term maturity nature of its monetary assets. If the prevailing interest rate increases or decreases by 10%, the interest income would have been increased or decreased by $3,000.
5.
MARKETABLE SECURITIES AND SHORT TERM INVESTMENT
| | | |
| As at December 31, 2009 |
| Cost | Unrealized gain (loss) | Fair value |
Dessert Gold Ventures Inc. – common shares | $ 303,515 | $ (63,515) | $ 240,000 |
Maxtech Ventures Inc. – common shares | 220,515 | 8,285 | 228,800 |
Ona Power Corporation – security units (5b) | 420,000 | 560,000 | 980,000 |
| $ 944,030 | $ 504,770 | $ 1,448,800 |
| As at December 31, 2008 |
| Cost | Unrealized gain (loss) | Fair value |
Dessert Gold Ventures Inc. – convertible debenture (5a) | $ 508,333 | $ (188,333) | $ 320,000 |
| $ 508,333 | $ (188,333) | $ 320,000 |
(a)
On October 31, 2008, the Company subscribed for an unsecured convertible debenture of Desert Gold Ventures Inc. (“Desert Gold”), in the principal amount of $500,000. The debenture carries an interest rate of 10% per annum and matures on April 30, 2009. At any time prior to the maturity date, the Company will be able to convert all or parts of the principal amount and the unpaid interest into units of Desert Gold at a price of $0.50 per unit. Each unit consists of one common share and one common share purchase warrant. Each warrant allows the Company to purchase one common share of Desert Gold at a price of $0.60 for a period of 6 months from the date of the issuance of such warrants.
The debenture of Desert Gold is classified as short-term investment held-for-trading according to Section 3855 of the CICA Handbook, and has been adjusted to fair value in these financial statements based on the
F-16
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
5.
MARKETABLE SECURITIES AND SHORT TERM INVESTMENT(continued)
December 31, 2008 estimated fair value of 1,016,666 common shares of Desert Gold ($305,000) and 1,016,666 warrants of that company at a fair value, estimated utilizing the Black-Scholes valuation formula, of $15,000.
On April 30, 2009, the maturity date of the convertible feature of the convertible debenture, the Company did not convert the debenture into common shares of Dessert Gold. The debenture was therefore reclassified from held-for-trading short-term investment to held-to-maturity loan receivable on the same date in accordance with CICA Section 3855. The previous write-down of convertible debenture, $188,333, was recovered to reflect its carrying cost as at April 30, 2009. The debenture was fully repaid on July 2009.
The Company further advanced $25,000 to Dessert Gold on May 11, 2009, which was due on August 9, 2009. On July 31, 2009, Desert Gold made a payment of $562,756 to redeem the debenture and to fully repay the May 11, 2009 advance.
(b)
The Company subscribed 2,800,000 security units of Ona Power Corp. (“Ona”) through a private placement on August 20, 2009. Each security unit consists of one common share and one common share purchase warrant (the “Warrant”). Each Warrant entitles the Company to acquire one common share of Ona at a price of $0.20 per share for a period of two years.
The investment in Ona units is classified as marketable securities available-for-sale according to Section 3855 of the CICA Handbook, and has been adjusted to fair value in these consolidated financial statements as of December 31, 2009. The Company allocated $218,400 to Ona common shares and $201,600 to Ona warrants at date of acquisition. The allocation was calculated by valuing the common shares and warrants separately and adjusting the resulting amounts on a pro-rata basis so the sum of the amounts allocated to the common share and the warrants equal to the amount of cash investment. The assumptions used in valuing the fair value of the warrants by using the Black-Scholes Option Pricing Model are: Risk-free interest rate of 1.5%, dividend yield of 0%, expected volatility of 188% and expected life of 2 years. The fair value adjustments to the Ona common shares and the warrants as at December 31, 2009 were based on the same pro-rata basis as calc ulated on date of acquisition and resulted an adjustment to the common shares component of $291,200 and an adjustment to the warrants component of $268,800 for a total fair value adjustments of $560,000.
6.
EQUIPMENT
| | | | | |
| December 31, 2009 | December 31, 2008 | December 31, 2007 |
| Cost | Accumulated Amortization | Net | Net | Net |
Office furniture | $ 3,414 | $ 1,922 | $ 1,492 | $ 1,865 | $ 2,305 |
Computer equipment | 10,348 | 8,000 | 2,348 | 3,664 | 1,771 |
Computer software | 10,073 | 9,973 | 100 | 572 | - |
Leasehold improvements | 2,522 | 2,522 | - | 1,156 | 1,577 |
| | | | | |
| $ 26,357 | $ 22,417 | $ 3,940 | $ 7,257 | $ 5,653 |
| | | | | |
F-17
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
7.
MINERAL PROPERTY
Moly Project - Atlin, BC
In October 2008, the Company entered into an agreement with TJJ Holdings Inc., whereby TJJ Holdings Inc. agreed to sell to the Company all the interest in the mineral claims. Twenty two mineral claims cover approximately 15,000 acres that are located near Gladys Lake molybdenum occurrences were acquired for $295,612. On September 9, 2009, the Company utilized its consulting geologists and mining engineers to complete its evaluation of the twenty two mineral claims and determined the feasibility for further development of the claims. As a result, 17 molly claims previously acquired have been allowed to expire and the Company keeps the remained 5 claims. For the year ended December 31, 2009, the mineral claims have been written down to $67,185 accordingly.
Option Agreement in Guinea
On October 15, 2009, the Company entered into an option agreement, whereby the Company can earn up to an undivided 70% interest in the Forecariah Copper Concession (225 sq. Km). The Company decided not to proceed further and let the option agreement expires after the technical information in connection with the Concession was further reviewed by management.
8.
OIL AND GAS PROPERTY
Alexander Prospect, Alberta
In February 2007, the Company entered into an agreement with Arctos Petroleum Corp. (“Arctos”) whereby Arctos agreed to sell to the Company an interest in the Alexander property in consideration for $150,000.The Company holds a 30% working interest in 64 gross hectares (19.2 Net Ha) of rights in this property which includes the producing Ellerslie/Wabamun oil well at 6-7-57-1W5 and a 40% interest in an oil battery at 3-7-57-1W5. The Company did not contribute towards this project and is in a non-participation penalty position on both the well and battery. As a result the Company has written down the investment to $1 for the year ended December 31, 2009.
9.
ARRANGEMENT WITH INCANA INVESTMENTS INC.
a.
Interest in Real Estate Property
On May 4, 2009, the Company entered into a contract of purchase and sale agreement (the “Property Contract”) and an amended agreement dated May 21, 2009 to purchase a property located in Surrey, BC, Canada. The purchase price of the property was initially set at $677,000 with a non-refundable deposit of $10,000 to be made upon completion of a successful feasibility study of the property on or before August 4, 2009 subsequently extended to August 4, 2010 as part of the amended agreement dated May 21, 2009. The balance of $667,000 will be paid upon completion of the contract on or before May 4, 2010. The amended agreement also allows the Company to assign the Property Contract to another party.
b.
Plan of Arrangement
On May 19, 2009, the Company entered into an Arrangement Agreement with Incan Investments Inc. (“Incana”), its former wholly own subsidiary to proceed with a corporate restructuring by way of statutory plan to transfer cash of $100,000 and assign the Property Contract to Incana. The corporate restructuring was completed on October 2, 2009 with the sequence of events illustrated in a chronological order as follows:
F-18
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
9.
ARRANGEMENT WITH INCANA INVESTMENTS INC.(continued)
b.
Plan of Arrangement(continued)
i)
On May 21, 2009, the Company registered the Arrangement Agreement with the Supreme Court of British Columbia. Pursuant to the registered Arrangement Agreement, the following transactions would occur in chronological sequence:
1)
The Company would transfer $100,000 in cash and assign the Property Contract to Incana in exchange for 15,043,372 Incana Shares (the “Distributed Incana Shares”).
2)
The Company would change its authorized share capital by:
·
altering the identifying name of the Arris Resources shares to class A common shares without par value, being the “Arris Resources Class A Shares”;
·
creating a class consisting of an unlimited number of common shares without par value being the “New Shares”, and
·
creating a class consisting of an unlimited number of Class A preferred shares without par value, being the “Arris Resources Class A Preferred Shares”.
3)
Each issued Arris Resources Class A Shares would be exchanged for one New Shares and one Arris Resources Class A Preferred Shares.
4)
The Company would redeem the issued Arris Resources Class A Preferred Shares for consideration consisting solely of the Distributed Incana Shares such that each holder of Arris Resources Class A Preferred Shares will, subject to the rounding of fractions and the exercise of rights of dissent, receive that number of Incana Shares that is equal to the number of Arris Resources Class A Preferred Shares held by such holder multiplied by the Exchange Factor.
ii)
On June 19, 2009, the Arrangement Agreement was approved by the shareholders of the Company at annual special meeting.
iii)
On July 29, 2009, 40,000 (200,000 post-stock split) options were exercised.
iv)
On October 2, 2009, the Company issued 15,083,372 (75,416,860 post-stock split) New Shares which consists of [1] 15,043,372 (75,216,860 Post-stock split), the total number of the Company’s outstanding shares as at May 21, 2009, and [2] 40,000 (200,000 post-stock split), the number of shares issued from the options exercised in iii) and 15,083,372 (75,416,860 post-stock split) Arris Resources Class A Preferred Shares. The Company immediately redeemed all the preferred shares by transferring its ownership of 15,083,372 Distributed Incana Shares to the Company’s own shareholders.
In pursuant to the Plan of Arrangement Agreement, the costs relating to the Arrangement will be borne by the party incurring them. Prior to the spin-off of Incana, all expenses incurred by Incana were all related to the Arrangement and thus Incana was either liable for these expenses itself or had already reimbursed the Company for any expenses incurred by it on behalf of Incana. As a result, prior to the spin-off of Incana, there were no expenses or revenues necessary to be consolidated into the Company’s account.
F-19
RTN STEALTH SOFTWARE INC.
(Formerly known as Arris Resources Inc.)
Notes to Consolidated Financial Statements
For the year ended December 31, 2009, 2008 and 2007
(Expressed in Canadian dollars, unless stated otherwise)
10.
RELATED PARTY TRANSACTIONS
All transactions with related parties have occurred in the normal course of operations and management represents that they have occurred on a basis consistent with those involving unrelated parties, and accordingly that they are measured at fair value.
a)
During the year ended December 31, 2009, a company controlled by the President charged the Company $61,750 in consulting and administrative fees and $60,000 in rental expenses (2008 - 45,000; 2007 - nil). Another Company controlled by the President also charged the Company $50,000 in property research charges. At December 31, 2008 the Company owes $nil for these expenses (2008 - $52,500; 2007 - nil).
b)
During the year ended December 31, 2009, two companies related by common director charged the Company $45,000 management fees and $48,229 finders’ fees as share issuance costs respectively.
c)
During the year ended December 31, 2009, the Company also paid $3,000 directors fee to each of three directors for a total of $9,000.
d)
During the year ended December 31, 2009, the Company owed $nil (2008 - $22,441; 2007- $22,441) to the company controlled by the spouse of the Company’s president.
11.
SHARE CAPITAL
a)
Authorized and issued share capital:
-
Authorized Common Shares:
Unlimited
-
Authorized Class A Preferred Shares:
Unlimited