Quantitative Alpha Trading (AGBTF) Inactive
Filed: 3 Sep 10, 12:00am
RTN Stealth Software Inc.
(Formerly Arris Resources Inc.)
Management’s Discussion
& Analysis
For the Three and Six Months
Ended
June 30, 2010
200-8338 120th Street
Surrey, BC
V3W 3N4
Tel: (604) 598-0093 / Fax: (604) 592-6882
Management’s Discussionand Analysis
The following Management Discussion & Analysis (“MD&A”) is intended to assist in the understanding
of the trends and significant changes in the financial condition and results of operations of RTN Stealth
Software Inc. (“RTN Stealth”, the “Company” or “we”) for the quarter ended June 30, 2010. The
MD&A should be read in conjunction with the audited consolidated financial statements for the year
ended December 31, 2009 and the unaudited interim consolidated financial statements for the period
ended June 30, 2010, which are available on www.sedar.com. This MD&A has been prepared effective
August 27, 2010. The Company’s functional currencyis the Canadiandollar.
FORWARD LOOKING STATEMENTS
The information set forth in this MD&A contains statements concerning future results, future
performance, intentions, objectives, plans and expectations that are, or may be deemed to be, forward-
looking statements. These forward looking statements may pertain to us specifically and to the software
and technology industry in general. These statements concerning our possible or assumed future results
of operations are preceded by, followed by or include the words ‘believes,’ ‘expects,’ ‘anticipates,’
‘estimates,’ ‘intends,’ ‘plans,’ ‘forecasts,’ or similar expressions. This MD&A discusses, among other
things, general market conditions for the software industry, the impact of rapid technological and
market change, future economic, competitive and market conditions, and business decisions that may
drive our growth prospects, opportunities within our target market, our working capital requirements
and the ability to raise funds to continue operations, market regulation, and exchange rate
considerations.
Forward-looking statements are not guarantees of future performance. These forward-looking
statements are based on current expectations that involve numerous risks and uncertainties, including,
but not limited to, those identified in the Risks & Uncertainties section. As assumptions relating to the
foregoing are difficult or impossible to predict accurately and though we consider these assumptions to
be reasonable, results may differ materially from those suggested in these statements. We believe that
these factors and assumptions include, but are not limited to, those described under “Risks and
Uncertainties” and the following:
� Our ability to manage our growth;
� Our ability to continue to generate sufficient working capital to meet our operating requirements;
� Our ability to respond to competition in our industry;
� Our ability to grow our brand;
� Our ability to achieve gross profit margins at which we can be profitable;
� Our ability to effectively manage our business;
� Our ability to obtain and maintain approvals from regulatory authorities on regulatory issues;
� Our ability to manage cash flow, possible foreign exchange risk and working capital.
These factors should be considered carefully, and readers should not place undue reliance on forward-
looking statements. The Company has no intention and undertakes no obligation to update or revise any
forward-looking statements, whether written or oral that may be made by or on the Company's behalf.
ABOUT THE COMPANY
RTN Stealth Software Inc. is in the business of providing “trading software” for both the retail and
institutional sectors.
RTN Stealth Software Inc. offers a unique, direct access trading decision support platform for active
traders. This trading decisions support tool is founded on established psychologically quantifiable
behaviour that measures trader sentiment and provides traders with insight into a security’s imminent
moves. The Stealth System is free to download, use and learn. It is available for real time performance
through the electronic broker, Interactive Brokers. Stealth is available by subscription for $49.50 a month.
Further information can be found at our website, www.rtnstealth.com.
2
RTN Stealth’s EMC-ALGO Software Suite (“EMC”), acquired from ENAJ Mercantile Corporation in May,
2010 (see “Overall Performance”) seeks returns based on pricing discrepancies and sudden marketplace
changes that occur on an intra-day basis in the futures markets. The company 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.
OVERALLPERFORMANCE
Corporate Restructuring
On November 2, 2009, the Company and its three former wholly owned subsidiaries, Arris Holdings
Inc. (“AHI”), CLI Resources Inc. (“CLI”) and QMI Seismic Inc. (“QMI”), collectively known as
the “Parties”, entered into a plan of arrangement (“Arrangement Agreement”) whereby the three
former subsidiaries would spin-out from the parent company, each becoming a reporting issuer and
each acquiring an asset from the Company in exchange for common shares (the “Common Shares”)
of the respective former subsidiary.
The change in corporate structure of the Company was effective on January 5, 2010 with the
sequence of events as summarized below:
I.
Altered the identifying name of the RTN Common Shares to Class A Common Shares
without par value, being the RTN ClassACommon Shares.
II.
Created a class consisting of an unlimited number of common shares without par value (the
“Common Shares”).
III.
Each issued RTN Class A Common Share was exchanged for one Common Share and one
RTN Class A Preferred Share (with no par value). The RTN Class A Common Share was
eliminated upon the completion of theArrangementAgreement.
IV.
The Company transferred its interest in:
a. five mineral claims inAtlin, British Columbia (the “Mineral Properties”) to CLI;
b. an agreement with a British Columbia manufacturing company to distribute its
earthquake sensor products in India (the “DistributionAgreement”) to QMI; and
c. all of the Company’s marketable securities (the “Equity Portfolio”) toAHI
in consideration for 17,583,372 common shares of each of CLI, QMI, and AHI (collectively
known as “Distributed Shares”) issued by the three former subsidiaries respectively. The
details of this transfer are discussed in the “Related Party Transactions” section of this
MD&A.
V.
The Company redeemed the issued RTN Class A Preferred Shares for consideration
consisting solely of the Distributed Shares. Each shareholder of record as of the close
business on November 5, 2009, being the share distribution record date, of the Company
received its pro-rata share of the Distributed Shares. The RTN Class A Preferred Shares
were eliminated upon the completion of theArrangementAgreement.
MineralProperties: Moly Project – Atlin,British Columbia
In 2008 the Company acquired 22 mineral claims covering approximately 15,000 acres which are located
near Gladys Lake molybdenum occurrence (discovered in late 1960s) for a consideration of $295,612.
The molybdenum occurrence is similar to the occurrence at Adanac’s Ruby Creek project; Adanac’s
project is located approximately 15 miles northeast of Atlin in northern BC. The claims are located
approximately 30 miles northeast of Atlin, British Columbia in the Atlin mining district.
On September 9, 2009, the Company announced that it utilized its consulting geologists and mining
engineers to complete its evaluation of the twenty two mineral claims and determined the feasibility for
3
further development of the claims. As a result, 17 molybdenum claims previously acquired were allowed to
lapse and the Company kept the remaining 5 claims. As a result, the mineral property has been written
down to $67,185 for the year ended December 31, 2009. On January 5, 2010, the Company transferred its
interest in the 5 mineral claims to its former subsidiary CLI Resources Inc. as part of its effort to
reconstruct the Company’s share capital which is discussed in the “Corporate Restructuring” section
above. The Company has not deferred and capitalized any exploration cost in connection with these
mineral properties.
Oil and Gas Properties:Alexander Prospect – Alberta
In February, 2007 the Company entered into a purchase and sale agreement (the “Agreement”)
with Arctos Petroleum Corp. (“Arctos”) whereby Arctos agreed to sell to the Company an interest
in the Alexander Area, Alberta propertyfor a consideration of $150,000.
The Company had a 30% working interest in 64 gross Ha (19.2 Net Ha) of onshore P&NG rights in
Alexander, Alberta. The property includes a producing Ellerslie/Wabamun oil well at 6-7-57-1W5 and a
40% interest in an oil battery at 3-7-57-1W5. As the Company did not contribute towards the exploration
work, the Company is in a non-participation penalty position on both the well and battery and does not
currently receive production or fee revenues from these assets. As a result, management decided to write
down this investment to $1 for the year end December 31, 2009. During the current quarter, management
decided to abandon this properties and has 100% written down the properties to $nil and recorded a write
off charge of $1. The Company has not deferred and capitalized any exploration or development cost in
connection with these oil and gas properties.
Change of Company’s Name and Acquisition of New Business Asset
The Company entered into the software business in January 2010. On January 19, 2010, the Company
executed a definitive agreement with privately owned Market Guidance Systems Inc. (“MGS”) whereby
the Company acquired a fully supported exclusive and perpetual license (“License”) to the Market
Navigation, Trade Execution and Market Timing Software (the “RTN-Stealth Software”). To better reflect
the Company’s new business direction we changed our name from Arris Resources Inc. to RTN Stealth
Software Inc. and changed our trading symbol to RTN on December 21, 2009.
As consideration for the above, the Company issued 5,000,000 Class B preferred shares (in the share
capital of $150,000) to the shareholders of MGS. In connection with the acquisition, the Company paid a
transaction advisory fee of 250,000 Class B Preferred Shares. This fee was paid to a company controlled by
a director of the Company. Each Class B Preferred share is convertible into ten common shares of the
Company when the cumulative net revenues derived from the license of the RTN-Stealth Software reach a
total of US$20,000,000.
On May 17, 2010, the Company executed two definitive agreements. In the first case the Company
acquired the RTN-Stealth Software from MGS, and in the second case the Company purchased the EMC-
ALGO Software Suite from ENAJ Mercantile Corporation (“ENAJ”).
MGS RTN-Stealth Software
In the first case, the Company issued, to MGS shareholders, twenty million common shares of the
Company, which are escrowed in four equal tranches at 6, 9, 12, and 15 months, and assumed four
promissory notes, in the amount totalling US$2,407,212 (C$ equivalent 2,503,500), owed by MGS as the
consideration for the acquisition. In addition, the License relating to the marketing RTN-Stealth Software
acquired in January 2010 was cancelled upon the completion of the acquisition of the RTN-Stealth
Software.
4
The details of the four promissory notes assumed are as follows:
Due date
Interest rate
Others
Four promissory notes
Principal and
Canadian
Senior to any and all other
with the principal
interest are due
business prime
shareholder loans and shall
totalling US$2,407,212 on May 15, 2012 rate + 1% per
be paid in full prior to
(C$ equivalent
annum compound repayment by the
2,503,500)
annually
Company to any and all
other shareholder loans
ENAJ
In the ENAJ case, the Company issued two million five hundred thousand (2,500,000) common shares as
consideration for the acquisition of the EMC-ALGO Software Suite from ENAJ. The 2.5 million common
shares were issued to ENAJ and are escrowed in four equal tranches at 6, 9, 12, and 15 months.
Details of the two software acquisitions are summarized as follows:
$
$
RTN-Stealth Software:
Issuance of 20 million common shares of RTN on May 17, 2010, each
5,000,000
share having a market value of $0.25,
Assumption of four promissory notes
2,503,500
Cancellation of the License for the marketing of RTN-Stealth Software
150,000
7,653,500
EMC-ALGO Software:
Issuance of 2.5 million common shares of RTN on May 17, 2010, each
share having a market value of $0.25
625,000
625,000
8,278,500
Appointment of the President and Chief Operation Officer
The Company entered into a management agreement with Mr. Michael Boulter, the founder and chief
technology officer of ENAJ in exchange for compensation of two million five hundred thousand
(2,500,000) common shares of the Company. The management agreement has a three (3) year term and
grants the titles of President and Chief Operating Officer of the Company. The 2.5 million common
shares of the Company are vested in three equal tranches at 12, 24, and 36 months from May 17, 2010.
As a result, the corresponding management fee is deferred and amortized as follows:
Expensed in the current quarter ended June 30, 2010
$
8,681
Deferred and amortized from July 2010 to June 2011
208,333
Deferred and amortized from July 2011 to May 2013(Long term)
407,986
$ 625,000
During the current quarter, the Company was in the preliminary stage of promoting the software acquired
and did not generate any revenue.
Proposed Private Placement
On July 30, 2010 the Company announced its intention to proceed with a private placement consisting
of up to 4,285,714 Units at a price of $0.35 per Unit to raise gross proceeds of up to $1,500,000. &nbs p; Each
Unit consists of one common share and one half common share purchase warrant of the Company.
Each share purchase warrant entitles the holder to acquire one common share of RTN at $0.40 per
share on or before July 30, 2011. This private placement is expected to close on or about August 31,
2010.
6
RESULTS OF OPERATIONS
Summary of Quarterly Results
The summaryof quarterlyresults has been prepared in accordance with Canadian GAAP.
For the three months
Revenue
Net Income
Net Income
ended
(Loss)
(Loss)
$
per share
June 30, 2010
-
(210,803)
(0.00)
March 31, 2010
-
(1,348,515)
(0.01)
December 31, 2009
-
(507,977)
(0.00)
September 30, 2009
-
160,220
0.00
June 30, 2009
-
(211,395)
(0.00)
March 31, 2009
-
(40,319)
(0.00)
December 31, 2008
-
(194,531)
(0.00)
September 30, 2008
-
(51,256)
(0.00)
For the six months ended June 30, 2010
The Company reported a net loss of $1,559,318 for the six months ended June 30, 2010 as compared to a
net loss of $251,175 for the same quarter in 2009. The Change was mainly due to increases in advertising
and promotion, management, consulting, and administrative fees, professional fees, stock-based
compensation expenses, and realized gain for the disposition of investments. Details are as follows:
Advertising and promotion costs increased to $50,923 from $ nil for the same period in 2009 as result
of the Company’s effort at promoting the acquired Software.
Management, consulting and administrative fees increased to $181,135 from $35,000 for the
comparable period in 2009. In the current 6-month period the Company engaged more consultants to
maintain and develop the trading software resulting in higher consulting fees.
Professional fees increased to $42,679 from $nil in the same period in 2009. This increase was a result
of the corporate restructuring in current 6-month period.
In February 2010, the Company awarded its 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. The fair
value of each option at the date of grant was estimated at $0.31 per option. The 5,650,000 granted
options had a fair value of $1,736,064 at the grant date and all the granted options were vested
immediately on issuance. The Company recognized $1,736,064 in stock-based compensation expense
for the current 6-month period. The stock-based compensation expense recorded in 2009 was $146,288.
As a result, stock-based compensation expense increased by $1,589,776 from the comparable period in
2009.
The Company recorded $504,770 to the account of accumulated other comprehensive income in 2009
to account for the unrealized gain earned from the appreciation in the market value of the Company’s
Equity Portfolio. The Company has reclassified the whole amount of $504,770 from “other
comprehensive income” to “release of unrealized gain in relation to the disposal of marketable
securities” in accordance with the Canadian generally accepted accounting principles when the Equity
Portfolio was transferred to AHI, its former subsidiary, upon the completion of the Arrangement
Agreement (discussed in the “Corporate Restructuring” section).
For the three months ended June 30, 2010
The Company reported a net loss of $210,823 for the three months ended June 30, 2010 as compared to a
net loss of $211,395 for the same quarter in 2009. The Change was mainly a combined result of an
increase in advertising and promotion; professional fees; management, consulting, and administrative
fees; and decrease in stock-based compensation expenses. Details are as follows:
7
Advertising and promotion increased to $28,291 from $ nil for the same quarter in 2009. The increase
was the result of the Company’s effort in promoting the RTN-Stealth Software acquired. Management,
consulting, and administrative fees increased to $147,535 from $15,000 in the same quarter in 2009.
The increase in consulting fees was related to engaging more consultants to maintain and develop the
trading software acquired in the current quarter. Stock-based compensation expenses decreased to $nil
from $146,288 in the comparable quarter in 2009 as the Company did not grant stock options or
recorded stock-based compensation in the current quarter.
On June 30, 2010, the Company had $ nil in marketable securities (2009 - $1,448,800), and no
mineral properties (2009 - $67,185). The decrease is a result of the corporate restructuring which
happened in January 2010 (discussed in the “Overall Performance” section), whereby the Company
transferred the marketable securities and mineral properties to its former subsidiaries. On June 30,
2010 the Company had license and software of $8,278,500 (2009 - $ nil) and long term notes payable
of $2,503,500 (2009-$nil). The increase in software and promissory notes is mainly a result of the
acquisition of RTN-Stealth Software and EMC-ALGO Software Suite discussed in the “Change of
Company’s Name and Acquisition of New Business Asset” section.
LIQUIDITY & CAPITAL RESOURCES
Financing of operations, business development, and investment in capital assets is achieved primarily by
equity financing. At June 30, 2010, the Company had cash and cash equivalent of $175,035, a short term
investment of $50,033, and a negative working capital of $120,118. The Company is in the process of
completing a proposed private placement to raise gross proceeds of $1,500,000 (see “Private Placement”
above) to maintain its operation.
The Company is not subject to external working capital requirement. The Company does not have
significant capital commitment that is obligated to make. Management believes that the Company will
have adequate liquidity and resources to maintain its operation and conduct its investment when needed.
While the Company believes it will be able to raise the additional financing when required, the impacts of
the current global economic downturn and uncertainty in the global capital market provide no guarantees
that the Company can complete equity or a debt financing when needed.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
RELATED PARTY TRANSACTIONS
Executive Officers and Directors
Paid To
Current Quarter
Comparable
2010
Quarter
For
2009
Larry Tsang 1
5,175
$0 Consulting and Accounting
CFO
Fees
Rana Vig
9,000
$0 Management Fees
Executive VP
Michael Boulter
2,500,000
$0 Fees for management services
President & Director
Common Shares2
provided in a three-year
period commencing May 17,
2010
ENAJ Mercantile Corp.
2,500,000
$0 Sales proceeds of the EMC-
(controlled by Michael Boulter)
Common Shares3
ALGO Software Suite
1The Company owed $1,475 to the CFO as at June 30, 2010.
2Escrowed and vested at 12, 24 and 36 months commencing May 17, 2010. $8,681 (2009 - $nil) of
management fees are expensed in the current quarter.
3 Escrowed at 6, 9, 12 and 15 months
8
These transactions 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 they
are measured at their fair values.
Change of Company’s Name and Acquisition of New Business Asset
Paid To
Compensation
For
Tidalwave Capital Inc.1
250,000
Transaction Advisory Fee
Preferred Shares
1A company controlled by Nikolas Perrault, a Director of the Company. Paid in the first quarter of
fiscal 2010
The Arrangement Agreement
The Arrangement Agreement (discussed in the “Corporate Restructuring” section of this MD&A)
envisioned the transfer of the Mineral Properties, the Distribution Agreement, and the Equity Portfolio
(collectively the “Transferred Assets’) from RTN Stealth to CLI, QMI, and AHI respectively. As
consideration for the transfer, the controlling interests in the common shares of CLI, QMI, and AHI
were immediately distributed to the shareholders of RTN Stealth. The shareholders of RTN Stealth at
the time of the transfer continued to collectively own the Transferred Assets. Consequently, there was
no substantive change in the beneficial ownership of the Transferred Assets at the time that the
Transferred Assets were vended to RTN Stealth. As such the transfer of the Mineral Properties,
Distribution Agreement, and the Equity Portfolio was recorded, in accordance with the Canadian
generally accepted accounting principles, at the carrying values of the Company as follows:
Value of the transfer being the carrying
value at RTN Stealth’s account on
Mineral Properties
January 5, 2010
five mineral claims in the areas located near Gladys
Lake Molybdenum occurrences in the Atlin Mining
District, British Columbia
$
67,185
Distribution Agreement
Distribution Agreement with a British Columbia
private company to distribute its seismic sensors in
India.
$
1
Value of the transfer being the
Number of
carrying value at RTN Stealth’s
Equity Portfolio
share
account on January 5, 2010
Publicly traded common shares
-Desert Gold Ventures Inc.
300,000
$
240,000
-Ona Power Corp.
2,800,000
509,600
-Maxtech Ventures Inc.
440,000
228,800
Share purchase warrants of publicly traded
shares
-Ona Power Corp.
2,800,000
470,400
$
1,448,800
PROPOSED TRANSACTIONS
There are no proposed transactions other than the proposed private placement discussed in the “Private
Placement” Section above, that could materially affect the performance of the Company.
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CRITICALACCOUNTINGPOLICIES
The Company’s complete accounting policies are described in Note 2 to the audited consolidated
financial statements for the year ended December 31, 2009. There were no changes of the accounting
policies in this quarter.
NEW ACCOUNTING PRONOUNCEMENTS
The new accounting pronouncements the Company has yet to adopt are disclosed in Note 3(i) to the
unaudited interim consolidated financial statements for the quarter ended June 30, 2010.
SHAREDATA
As at the date of this MD&A, the Company has 124,416,860 common shares, 5,250,000 Class B
Preferred shares that can be converted into 52,500,000 common shares, and 5,650,000 stock options
outstanding for a total of 182,566,860 fully diluted common shares outstanding.
RISKSAND UNCERTAINTIES
Ability to Adapt our Business Model
As we have changed our business from resource exploration to software, we need to successfully
change our business model and strategic direction. We may or may not be able to do this successfully.
Management must manage the changeover to a new business model that involves the inherent risks
associated with change in general such as learning about the new products, new expectations and
resistance to change, but more specifically we must identify with the new corporate objective and adapt
to the demands of our potential customer base by developing and marketing a product that meets their
needs.
Demand for our Software Solutions
There may be little demand for our new software solutions, and they may not be broadly accepted by the
investor market. If we do not derive any benefit from our efforts to market our software, our operating
results could be adversely affected. 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.
Competitive Environment
The Company currently faces competition from software providers and websites that also offer trading
tools. Our challenge is to successfully differentiate ourselves from our competitors; due to our limited
experience in this industry we do not know whether or not we can attract institutional investors to our
product that is based on psychologically quantifiable behaviour; however, none of the Company’s
competitors competes in this area.
The software industry is a rapidly changing environment with constant competition and many new product
introductions. The ability of the Company to achieve market success and a competitive advantage will
depend on its capability for ongoing research and development and the integration of any technological
advances into its products.
Current Economic Conditions
An economic slowdown could cause demand for our products to decline. Since trading in the securities
market is inherently risky, the current recession may exacerbate these risks in the minds of our potential
customers, causing them to delay or to decide against trying a new trading platform. It is impossible to
predict the impact current economic conditions will have on our future results, and we cannot know when
the economy will improve. In slow economic times competition can increase and prices may be reduced,
which could affect our ability to attract customers.
Furthermore, the economic crisis has made it more difficult to raise funds through equity issuance. While
it appears that the economy is recovering, we cannot be certain that this trend will continue or 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.
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Key Personnel
Our success is tied to the abilities and experience of our executive officers and other key employees. There
is strong competition for highly skilled management, technical, research and development and other key
persons in the software industry. We must work to retain our top personnel and executive officers, should
we lose any one of our key personnel the Company could be adversely affected.
Going Concern
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. 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 audited consolidated financial statements
for the year ended December 31, 2009 and unaudited interim consolidated financial statements for the
quarter ended June 30, 2010 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.
CONTROLS AND PROCEDURES
Venture issuers are not required to include representations relating to the establishment and maintenance
of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as
defined in National Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings
(“NI 52-109”). In particular, the Company’s certifying officers are not making any representations relating
to the establishment and maintenance of:
i)
controls and other procedures designed to provide reasonable assurance that information required
to be disclosed by the Company in its annual filings, interim filings or other reports filed or
submitted under securities legislation is recorded, processed, summarized and reported within the
time periods specified in securities legislation; and
ii)
a process to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with the Company’s
generally accepted accounting principles.
The Company’s certifying officers are responsible for ensuring that processes are in place to provide them
with sufficient knowledge to support the representations they make. Investors should be aware that
inherent limitations on the ability of the Company’s certifying officers to design and implement on a cost
effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality,
reliability, transparency and timeliness of interim and annual filings and other reports provided under
securities legislation.
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INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In February 2008, the Canadian Accounting Standards Board announced that 2011 is the changeover date
for publicly accountable profit-oriented enterprises to use IFRS, replacing Canadian GAAP for interim and
annual financial statements relating to fiscal years beginning on or after January 1, 2011. As a result, the
conversion from Canadian GAAP to IFRS will be applicable to the Company’s reporting for the first
quarter of fiscal 2011 for which current and comparative information will be prepared on an IFRS basis.
In light of these requirements, the Company has adopted a four phase approach to ensure successful
conversion to IFRS, including:
Phase 1 - diagnostic impact assessment:This phase is essentially completed.
Phase 2 - design and planning: to identify specific changes required to existing accounting policies,
information system, and business processes.This phase is essentially completed.
Phase 3 – solution development: Involves the selection of the Company’s accounting policies
among alternatives allowed under IFRS by senior management and the review by theAudit
Committee, the quantification of the impact of changes on the Company’s existing accounting
policies on the opening IFRS balance sheet and the development of the draft IFRS financial
statements. During the second quarter of fiscal 2010, management continued to review the choices
available under IFRS, First-timeAdoptionof IFRS. This phase is expected to be completed in the
third quarter.
Phase 4 – implementation– to execute the changes to information systems and business processes,
completing formal authorization processes to approve recommended accounting policies changes
and training programs across the Company’s finance and other staff, as needed.This phase is
ongoing and will continue for the reminder of the year.
Following areas are identified that may have impacts to the financial statements under IFRS:
Area
Canadian GAAP
IFRS
Analysis and preliminary
(as currently applied)
conclusion
Property,
1. PP&E is recorded at cost.
PP&E is initially recorded at
The existing accounting policy
plant, and
cost.
is likely to be maintained per
equipment
Subsequent measurement can
preliminary evaluation.
(“PP&E”)
be done either by cost method
or by revaluation method if
fair value of the PP&E can be
reliably measured.
2. Depreciation is taken based Depreciation is based on the
The Company does not have
on their useful lives.
useful lives of each significant significant PP&E as at the date
component within PP&E
of this MD&A. Management
will assess the impact when the
Company has acquired PP&E
with respect to the
componentization.
Impairment of 1. Impairment testing of long- Like Canadian GAAP,
No significant impact.
long-lived
lived assets is performed when impairment is considered when
assets
there is an indication the
there is an indicator of
carrying value may not be
impairment.
recoverable.
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2. The impairment test is a
The impairment test is a one-
Impairment tests under IFRS
two-step process.An asset
step process.
could generate a greater
(group) is first assessed as to
likelihood of write downs in the
whether impairment exists
An impairment loss is
future.
based on whether the asset’s
recognized if the asset’s
(group’s) carrying value
(group’s) carrying value
exceeds the undiscounted
exceeds its recoverable
future cash flow of the asset
amount, which is the greater of
(group).
fair value less costs to sell and
If an impairment exists, then
value in use (based on the net
the impairment loss is
present value of future cash
measured based on the excess
flow).
of carrying value over the fair
value of the asset (group)
3. Write downs to net
Write downs to net realizable
Potential increasing volatility in
realizable value are permanent. value can be reversed if the
profit and loss could arise as a
conditions of impairment cease result of the difference in the
to exist.
treatment of write downs in the
future.
Share-based
1. Share-based compensation
IFRS 2 requires both equity-
No impact- the Company’s
compensation
is determined using fair value
settled awards and cash-settled share-based payments are all
model for equity-settled
awards to be measured based
equity-settled payments.
awards and the intrinsic model on fair values.
for cash-settled awards
2. When a share-based award
When a share-based award
No impact- the Company has
vests in installments over the
vests in installments over the
not granted share-based awards
vesting period, the Company
vesting period, each
vesting in installments.
has an election to recognize
installment is accounted for a
the share-based compensation
separated arrangement for
on a straight-line basis or a
recognition of cost (graded
graded method which
method).
recognizes share-based
compensation faster than the
straight-line method
Income taxes
Deferred income tax assets are Deferred income tax assets are The term“Probable” is not
recognized to the extent that it recognized to the extent it is
defined in IAS 12. However,
is “more likely than not” that
“probable” that the taxable
entities have often used a
the deferred income tax assets profit will be realized.
definition of “more likely than
will be realized
not” similar to Canadian GAAP.
Accordingly, our preliminary is
that there is no significant
impact.
OTHER
To viewthe public documentsof the Company, pleasevisit the Company's profileon the SEDAR
website at www.sedar.com.
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